In re Devonshire PGA Holdings LLC
In re Devonshire PGA Holdings LLC
Opinion of the Court
Introduction
ELP West Palm, LLC (“ELF”), is successor to the Reorganized Debtors. Potter Anderson & Corroon, LLP (“PotteF’) jointly represented three of the Debtors and a non-Debtor, CA Capital, LLC, in two Delaware Chancery proceedings in 2013. Potter timely submitted claims for payment against the Debtors it represented. ELP does not dispute that Potter actually represented the Debtors, but nonetheless requests that this Court enter summaiy judgment disallowing Potter’s claims under 11 U.S.C. § 502(b)(1).
Section 502(b)(1) instructs the Court to disallow claims “to the extent that such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured.’’ ELP therefore carries two burdens. First, ELP must point to specific law(s) that would render Potter’s claim unenforceable. Second, ELP must demonstrate that the facts of this case make that law applicable. Because ELP is the movant for summary judgment, ELP must further show that Potter may not genuinely dispute that: (1) the law ELP cites is applicable; (2) the cited law renders Potter’s claim unenforceable; and (3) Potter has no defense that would prevent application of the cited law.
ELP argues that four sources of applicable law or agreement render Potter’s claim unenforceable. First, ELP argues that Potter was not validly engaged to represent the Debtors under state contract law. Second, ELP appears to make an argument on equitable principles that Potter may not enforce its claims against the Debtors because the Debtors did not benefit from Potter’s representation. Third, ELP argues that Potter was “conflicted” under the Delaware Lawyers’ Rules of Professional Conduct in representing the Debtors and because the record contains no written waiver of this conflict, Potter’s claim against the Debtors is unenforceable. Finally, ELP argues that the 2013 Settlement Agreement approved by this Court bars Potter’s claims.
The Court will deny ELP’s motion for summary judgment. First, ELP has failed to supply this Court with proof that any applicable principle of contract law or equity would render Potter’s claim unenforceable. Potter’s claims are prima facie valid; for the Court to disallow those claims, ELP must specifically point to an applicable state or federal law which ivould render those claims unenforceable. Not only has ELP has failed to carry its burden upon summaiy judgment, it has simply failed to point to any specific applicable law. Broad generalizations ¡about what is “right,” “fair,” or “logical” are not a basis for disallowance under § 502(b)(1).
Second, ELFs argument that Potter was conflicted in representing the Debtors presents a legal basis for disallowance. However, Potter has pointed to evidence in the record sufficient to create a genuine dispute of material fact on whether Potter was conflicted. Because the record does not allow the Court to conclude that Potter was conflicted, summary judgment may not be granted to ELP on this theory. Finally, ELP has failed to demonstrate
Jurisdiction
The United States Bankruptcy Court for the District of Delaware (the “Court”) has subject matter jurisdiction over this contested matter pursuant to 28 U.S.C. § 1334(b). This contested matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Venue is proper in the Bankruptcy Court pursuant to 28 U.S.C. § 1409(a). This action is a contested matter pursuant to Federal Rule of Bankruptcy Procedure 9014.
Undisputed Facts
The Debtors
The Debtors’ LLC Agreements specify that the sole member of each company holds the exclusive power to appoint a Manager for that company.
On May 1, 2007, the Operating Debtors entered into a credit and security agreement in exchange for a term loan of $155,220,000 and a $6,400,000 revolving line of credit (the “Senior Credit Agreement”).
GE Business Financial Services Inc. (“GE”) later succeeded Merrill as Senior Agent. On May 24, 2011, GE filed a lawsuit in the Delaware Court of Chancery (the “GE Action”) against multiple defendants, including the Debtors.
Trimont Real Estate Advisors, Inc. (“Trimont”) later succeeded GE as Senior Agent. On May 12, 2012, Trimont issued a Notice of Default to the Debtors.
On July 2, 2013, Trimont sent notice to the Debtors that it was replacing CA Capital as Manager of the Operating Debtors and appointing DPGA as Manager.
Anderson, again through his control of both CA Capital and the Debtors, retained Potter to represent CA Capital and the Debtors in the DE Chancery Actions.
Both sides continued to submit briefings on the Proposed Status Quo Order and the motion to dismiss or stay, and the Chancery Court set an expedited hearing on these issues for July 30, 2013.
The Chancery Court heard arguments on the competing motions on July 30, 2013. .The Court declined to enter the Proposed Status Quo Order and reserved judgment on all pending motions, effectively staying the case until the Court came to a decision on the motion to dismiss or stay,
The Chancery Court never issued a decision on the pending motions.
On September 19, 2013, the Debtors filed their voluntary Chapter 11 petitions in this Court. The following day, Anderson, CA Capital, ELP, the Debtors and a number of other parties entered into a settlement agreement (the “Settlement Agreement”).
On March 14, 2014, the Debtors amended their schedules and listed Potter’s claim as disputed.
Discussion
I. Adjudication of Claim Objections on Summary Judgment
a. Summary Judgment Standard
Fed.R.Bank.P. 9014 governs contested matters, and provides that Fed. R.Bank.P. 7056 applies in contested matters before the Court. Fed.R.Bank.P. 7056, in turn, makes Fed.R.Civ.P. 56 (Summary Judgment) applicable to contested matters. Summary judgment is designed “to avoid trial or extensive discovery if facts are settled and dispute turns on issue of law.”
Applying this standard is a three-step process: (1) the Court must determine “the matter or matters in dispute;” (2) the Court must ascertain “the law governing such matters;” and (3) the Court must use that law to “gauge the materiality of any factual issues” to “refine and resolve the legal issues.”
b. Claim Objections
11 U.S.C. § 502(a) provides that “a claim or interest, proof of which is filed ... is deemed allowed, unless a party in interest ... objects.” ELP has objected to Potter’s claim under 11 U.S.C. § 502(b)(1), which empowers the Court to disallow a claim to the extent that “such claim is unenforceable ...” In the absence of overruling federal law, the Court will look to state law to determine if a claim is enforceable.
In adjudicating a claim objection, the Court applies a burden-shifting framework.
ELP does not dispute that Potter actually represented the Debtors in the DE Chancery Actions. Potter has submitted invoices in support of its claims. As a result, Potter’s claims are prima facie valid. At trial, ELP would .therefore bear the burden of producing evidence sufficient to negate the prima facie validity of Potter’s claim.
ELP, however, is moving for summary judgment and must demonstrate it is entitled to judgment as a matter of law. As a result, ELP may not simply counter Potter’s prima facie case; ELP must demonstrate that Potter could not prove the validity of its claim, at trial, by a preponderance of the evidence. On summary judgment, ELP must prove that there is no genuine dispute that applicable law renders Potter’s claim unenforceable. ELP therefore bears the burden of demonstrating that: (1) the law ELP cites is applicable; (2) the cited law renders Potter’s claim unenforceable; and (3) Potter has no defense that would prevent application of the cited law.
II. ELP has Failed to Demonstrate that it is Entitled to Summary Judgment
As the movant for summary judgment, ELP bears the burden of demonstrating that there is no genuine dispute of material fact and that ELP is entitled to judgment as a matter of law. ELP has failed to carry this burden.
a. ELP has failed to show that Potter was not validly engaged to represent the Debtors in the DE Chancery Actions.
ELP first argues that Potter and its clients conceded in the DE DPGA Action that the Debtors had defaulted under the Senior Credit Agreement and, therefore, Anderson lacked the authority to retain Potter to represent the Debtors.
ELP’s second argument is straightforward. ■ ELP claims that (1) the 2013 Settlement Agreement established that an Event of Default occurred in April 2012 and (2) the Pledge Agreements unambiguously entitled the Agent to appoint a new Manager following an Event of Default;
This argument fails for two reasons. First, the record demonstrates that even if an Event of Default occurred in April 2012, that default may have been excused by law or equitable principles. As a result, the Court cannot conclude that Trimont validly removed CA Capital as manager of the Debtors on July 2, 2013.
In both the FL Action and the DE DPGA Action, the defendants to those actions argued that (1) no Event of Default had occurred and (2) if an Event of Default had occurred, it was excusable because it was caused by the misconduct and bad faith of the Senior Lenders and GE Financial—Trimont’s predecessor as Agent.
The 2013 Settlement Agreement only established that an Event of Default had occurred in 2012; it did not establish whether this default was legally excusable. Even if “the plain and unambiguous terms of the Pledge Agreements permitted Trimont to remove CA Capital as manager”
Furthermore, ELP has failed to prove that applicable law would disallow Potter’s claims in any event. ELP assumes, without citation to legal authority, that the settlement of a corporate control dispute retrospectively voids the decisions of the removed manager. ELP further assumes, without citation to legal authority, that the defenses and counterclaims raised by the Debtors in the Florida Action and the DE Chancery Actions are irrelevant to this proceeding. This Court may not grant summary judgment unless ELP has provided specific legal authority in support of these positions.
Finally, Potter has raised a credible argument that even if the Settlement Agreement retroactively established that CA Capital lacked actual authority to hire Potter to retain the Debtors, Potter’s claims against the Debtors are still enforceable.
ELP curtly argues that the Court should ignore Potter’s argument because it only cites analogous law.
b. ELP has failed to show that the Debtors did not benefit from Potter’s representation.
ELP next argues that the Debtors received no benefit from Potter’s representation in the DE Chancery Actions and, therefore, Potter fees should be disallowed. This theory fails for two reasons.
First, the record clearly shows a genuine dispute of fact as to whether the Debtors received a benefit from Potter’s representation. The briefings from the DE DPGA Action plausibly argue that in order for the Delaware Chancery Court to issue declaratory judgment validating the Agent’s replacement of CA Capital, the Chancery Court would necessarily need to determine whether an inexcusable Event of Default had occurred under the Senior Creditor Agreement.
Second, ELP has the burden of showing it is entitled to judgment as a matter of law. But ELP has failed to show a proper legal basis for why a lack of benefit to the Debtors justifies the disallowance of Potter’s fees. In their initial brief, ELP re
ELP, in its reply brief,
c. ELP has failed to identify a conflict of interest that necessitates a written retention agreement.
ELP’s third theory for disallowance is straightforward. ELP argues that Potter, by representing both the Debtors and CA Capital in the DE Chancery Actions, was “conflicted” under the Delaware Lawyers’ Rules of Professional Conduct (the “DLRPC”).
The Court first notes the contradictory nature of ELP’s theories. ELP argues that the Debtors had no interest in the DE Chancery Actions. Yet ELP also asserts that Potter had a conflict of interest in representing both CA Capital and the Debtors in those actions. Under the
The Court must deny summary judgment under this theory because there is a genuine dispute as to whether Potter was conflicted by representing CA Capital and the Debtors. First, ELP’s argument that a conflict of interest existed is based on a presumption that CA Capital was validly removed as manager by Trimont on July 2, 2013;
No. As ELP has repeatedly emphasized, the Agent’s power to replace CA Capital as manager of the Debtors was contingent solely upon an Event of Default by the Debtors. As ELP sees it, under the Pledge Agreements, as soon an inexcusable Event of Default occurred, the Agent was entitled to remove CA Capital and CA Capital’s only defense on the merits to the DE DPGA Action would have been to deny that an inexcusable Event of Default had occurred. Thus, CA Capital would necessarily have to vindicate the Debtors’ interests in order to vindicate its own. Nor could the Debtors vindicate their interests without vindicating CA Capital’s interests.
Third, ELP identifies only one specific conflict of interest; ELP asserts that it was “adverse to the Debtors’ interest to allow CA Capital to cause the Debtors to spend approximately $230,000 [in attorneys’ fees] to simply delay the inevitable.”
Finally, the Court could interpret ELF’s argument another way; ELP might believe that CA Capital benefited far more from Potter’s representation and therefore the Debtors should not be held jointly and severally liable for Potter’s fees. Even if this were true, this fact would not create a conflict of interest under the DLRPC. As a result, the DLRPC would not render Potter’s claim unenforceable. ELP .would need to demonstrate that a different appli
d. ELP has failed to show that the Settlement Agreement bars Potter’s claims.
Finally, ELP argues that the 2013 Settlement Agreement approved by this Court bars Potter’s claims against the Operating Debtors.
Conclusion
As set forth above, the Court will deny ELP’s request for summary judgment. The, record demonstrates that multiple material issues of fact exist on whether Potter was validly retained to represent the Debtors and whether the Debtors benefited from this representation'. Moreover, ELP has failed to specify and support a contractual or equitable basis for disallowance. ELP has therefore failed to demonstrate that applicable law would render Potter’s claims unenforceable. The record also shows a genuine dispute of material fact as to whether Potter was conflicted by jointly representing CA Capital and the Debtors. Finally, ELP has not presented a legal basis for its belief that the 2013 Settlement Agreement binds Potter. Regardless of who “should” have to pay Potter’s claims, the 2013 Settlement Agreement provides no legal basis for disallowance. Because ELP has not shown that any applicable law renders Potter’s claims unenforceable, the Court must deny the request for summary judgment.
, The Court hereby makes the following findings of fact and conclusions of law pursuant to Fed. R. Bank. P. 7052, which is applicable to this matter by virtue of Fed. R. Bankr.P. 9014. To the extent any findings of fact constitute conclusions of law, they are adopted as such. To the extent any conclusions or law constitute findings of fact, they are adopted as such.
. Devonshire PGA Holding, LLC (“Holdings”) is a holding company and was the sole member of Devonshire at PGA National, LLC (“Devonshire"), which owned the land on which the retirement community operates. Devonshire, in turn, was the sole member of Chatsworth at PGA National, LLC and Chats-worth PGA Properties, LLC, who owned and operated, respectively, an independent living facility and a healthcare facility on this land (together, excluding Holdings, the “Operating Debtors”). Potter MSJ Response, D.I. 414, p. 4.
. ELP MSJ Memorandum, D.I. 397, p. 11,11 5.
. Potter MSJ Response at p. 4.
. Id.
. ELP MSJ Memorandum at Ex, 4.
. Id.
. Id.
. Potter MSJ Response at p. 4.
. Id.
. Id.
. Id. atp. 5 (citing Ex. 12).
. Id. atp. 5.
. Id. (citing Ex. 8).
. Id. atp.6.
. Id. at p. 6 (citing Dudderar Decl. Ex. C, ¶ 29).
. Id. at p. 6.
. Id. at p. 6 (citing Dudderar Decl. Ex. D ¶ 28); ELP MSJ Memorandum at Ex. 10, p. 13-18.
. ELP MSJ Memorandum at Ex. 10, p. 15-17.
. Id. atp. 13-15.
. Potter MSJ Response at p. 7.
. Id.
; ELP MSJ Memorandum at p. 11.
. Id.
. Id.
. Id. at p. 12.
. Potter MSJ Response at p. 8-9.
. Id.
. Id. at p. 9 (citing Ex. 9).
. Potter MSJ Response at Ex. E, p. 12.
. Potter MSJ Response at p. 9.
. Id.
. ELP MSJ Memorandum at p. 13.
. ELP MSJ Memorandum at Ex. 26, p. 68.
. Potter MSJ Response at p. 10.
. Id. at p. 11.
. ELP MSJ Memorandum at p. 10 (citing Ex. 11).
. Potter MSJ Response at p. 11 (citing Ex. F).
. Id.
. ELP MSJ Memorandum at p. 14 (citing Ex. 27).
. Potter MSJ Response at p. 11.
. ELP MSJ Memorandum at p. 14.
. D.I.95.
. ELP MSJ Memorandum at p. 15.
. ELP MSJ Memorandum at Ex. 29.
. D.I.205.
. ELP MSJ Memorandum at Ex. 30.
. Id. at Ex. 31.
. ELP Claims Objection, D.I. 343.
. Potter Claims Objection Response, D.I. 364.
. 11-56 MOORE’S FEDERAL PRACTICE, § 56.02 (Matthew Bender 3d ed.).
. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986).
. Mesnick v. General Electric Co., 950 F.2d 816, 822 (1st Cir. 1991).
. See Mesnick, 950 F.2d at 822. See also Leonard v. General Motors Corp. (In re Headquarters Dodge), 13 F.3d 674, 679 (3d Cir. 1993); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
. See Celotex Corp., 477 U.S. at 323-325, 106 S.Ct. 2548.
. See Leonard, 13 F.3d at 679; Matsushita, 475 U.S. at 586-87, 106 S.Ct. 1348.
. Walker v. Chrysler Corp., 601 F.Supp. 1358, 1360 (D.Del. 1985) (affd, 780 F.2d 1017 (3d Cir. 1985)).
. See United States v. Gen. Instrument Corp., 87 F.Supp. 157, 165 (D.N.J. 1949). See also Green v. Dep’t of Pub. Welfare of State of Del., 270 F.Supp. 173, 176 (D.Del. 1967).
. See Travelers Cas. & Sur. Co. of Am. v. Pac. Gas & Elec. Co., 549 U.S. 443, 450-51, 127 S.Ct. 1199, 1204-05, 167 L.Ed.2d 178 (2007). See also Matter of Celeste Court Apartments, Inc., 47 B.R. 470, 473 (D.Del. 1985).
. See In re Allegheny Int’l, Inc., 954 F.2d 167, 173-74 (3d Cir. 1992).
. Id. at 173.
. Id.
. Id. at 173-174 (citing In re Holm, 931 F.2d 620, 623 (9th Cir. 1991)).
. Id. at 174.
. ELP MSJ Brief at p. 17.
. Id.
. ELP MSJ Reply, D.I. 417, at Ex, 2, p. 2.
. Id. atp. 5.
. Potter MSJ Response at p. 6 (citing Ex. D, ¶ 27-28, 63-104).
. ELP MSJ Reply at Ex. 2, p. 9.
. ELP MSJ Reply atp. 5.
. Potter MSJ Response at p. 21-22.
. Id. at n, 10.
. See President & Fellows of Harvard Coll. v. Glancy, 2003 WL 21026784,. at *17 (Del.Ch. Mar. 21, 2003); Prickett v. Am. Steel & Pump Corp., 253 A.2d 86, 88-89 (Del.Ch. 1969); Levin v. Metro-Goldwyn-Mayer, Inc., 221 A.2d 499, 503 (Del.Ch. 1966).
. ELP MSJ Reply at p. 8, n. 9. A puzzling argument, given that ELP relies on argument by analogy in a portion of its own briefing. See ELP MSJ Brief at p. 21.
. ELP MSJ Reply at p. 8.
. Even if Potter had not demonstrated that its retention would be valid in an analogous context, ELP would not be entitled to summary judgment. It is ELP who bears the burden of showing applicable law renders ELP’s claim unenforceable. ELP cannot simply assume that the law is what ELP wishes it to be.
. Nor may ELP rest on its laurels and force the Court to ascertain the applicable law on manager controlled LLCs. Because Potter’s claim is prima facie valid, ELP must at least identify the specific applicable law it believes to render Potter’s claim unenforceable.
. Potter MSJ Response at Ex. E, p. 12.
. ELP MSJ Brief at p. 21-22.
. Potter MSJ Response at p. 29.
. ELP MSJ Reply at p. 13-14.
. ELP Claim Objection at p. 6 (requesting relief solely under 11 U.S.C. § 502(b)(1)).
. ELP did reserve its right to object under § 502(b)(4). ELP Claim Objection at p. 9, ¶ 4. If ELP wishes to amend its claim objection "to add an objection under § 502(b)(4), it may do so. It may not, however, raise the issue for the first time in its reply brief upon summary judgment.
. ELP MSJ Reply at p. 14 (stating, without any further citation or development, that "far from providing any value to the Operating Debtors, Potter’s services likely caused the Operating Debtors harm”).
. ELP MSJ Brief atp. 19.
. See Matter of Katz, 981 A.2d 1133, 1141 (Del. 2009).
. ELP MSJ Brief atp. 20.
. Del. R. Prof. C„ Rule 1.7(a).
. ELP MSI Reply at p. 9.
.Id. at p. 11-12.
. ELP MSJ Brief at p. 22-23.
. Potter MSJ Response at p. 31 (citing Am. Homepatient, Inc. v. Collier, 2006 WL 1134170, at *2 (Del.Ch. Apr 19, 2006); EEOC v. Waffle House, Inc., 534 U.S. 279, 294, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002); Kuroda v. SPJS Holdings, L.L.C., 2010 WL 4880659, at *3 (Del.Ch. Nov. 30, 2010)).
.ELP MSI Reply atp. 15.
Reference
- Full Case Name
- IN RE: DEVONSHIRE PGA HOLDINGS LLC, Debtors
- Cited By
- 1 case
- Status
- Published