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In re Webb Mtn

February 8, 2008

IN RE: WEBB MTN, LLC, DEBTOR.
WEBB MTN, LLC, APPELLANT,
v.
KENNETH WHALEY, GREENBRIER DEVELOPERS, LLC, M&A ENTERPRISES, INC., EXECUTIVE REALTY PARTNERSHIP, L.P., AND GERALD FRANKLIN, TRUSTEE, APPELLEES.



The opinion of the court was delivered by: Leon Jordan United States District Judge

MEMORANDUM OPINION

Debtor Webb Mtn, LLC ("Debtor") appeals the bankruptcy court's dismissal of its Chapter 11 bankruptcy as a bad faith filing under 11 U.S.C. § 1112(b). For the reasons that follow, the judgment of the bankruptcy court will be reversed.

I. Background

The facts underlying this case are well-summarized in the bankruptcy court's memorandum opinion and are not contested by the parties. In material part,

On October 5, 2005, Jack Collier, the Debtor's sole member, entered into a First Agreement for Purchase and Sale (Contract) with the [Appellees] for the purchase of approximately 1,865.60 acres of real property known as Webb Mountain . . . [in] Sevier County, Tennessee (Webb Mountain Property), for a purchase price of $27,975,000.00 . . . . Collier assigned the Contract to the Debtor and, as evidenced by five General Warranty Deeds recorded with the Register of Deeds for Sevier County, Tennessee, the Debtor purchased the Webb Mountain Property from the [Appellees] on March 24, 2006. . . .

The Debtor financed $26,225,000.00 of the purchase price as evidenced by its execution of the following promissory notes (collectively, Notes) and Deeds of Trust: (1) Promissory Note to Kenneth Whaley, Greenbrier Developers, LLC, M & A Enterprises, Inc., and Gerald Franklin, Trustee, in the principal amount of $4,790,000.00, secured by a Deed of Trust on 71.21 acres; (2) Promissory Note to Executive Realty Partnership, L.P., in the principal amount of $990,000.00, secured by a Deed of Trust on 21 acres; (3) Promissory Note to Greenbrier Developers, LLC, in the principal amount of $10,465,000.00, secured by a Deed of Trust on 195.39 acres; (4) Promissory Note to Gerald Franklin, Trustee, in the principal amount of $8,980,000.00, secured by a Deed of Trust on approximately 1,440 acres; and (5) Promissory Note to M & A Enterprises, Inc., in the principal amount of $1,000,000.00, secured by a Deed of Trust on 131.56 acres. . . . Each Note called for a partial payment of principal and interest within ninety (90) days, with the unpaid principal balance and accrued interest due on January 3, 2007.

As required under the terms of the Notes, the Debtor made . . . partial payments, totaling $3,250,000.00, on June 23, 2006 . . . . The Debtor paid the Note to M & A Enterprises, Inc., in full on December 8, 2006, and the Deed of Trust encumbering the 131.56 acre tract was released.

The four remaining Notes were not paid as required on January 3, 2007, and the [Appellees] subsequently commenced foreclosure proceedings against the remainder of the Webb Mountain Property. In addition, on March 9, 2007, two Notices of Lien Claim were recorded against the Webb Mountain Property for services performed for but not paid by the Debtor. The first was recorded by Whaley & Sons, Inc. . . . to secure a $421,015.50 claim against the Debtor. . . . The second was recorded by Southern Design Group, Inc. . . . to secure a $450,103.62 claim against the Debtor. . . .

In an effort to work out the default and prevent the Webb Mountain Property from being foreclosed, the parties entered into a Conditional Extension of Borrowers' [sic] Obligation Under Promissory Notes (Conditional Extension Agreement) on March 27, 2007 . . . . Under the terms of the Conditional Extension Agreement, the foreclosure sales were adjourned to a date after June 25, 2007, upon execution by the Debtor of Quit Claim Deeds transferring the Webb Mountain Property back to the [Appellees] to be held in escrow until June 26, 2007, at which time, if the Notes were not fully paid, the Escrow Agent was to "immediately" record the Quit Claim Deeds thereby transferring the Debtor's interest in the four remaining tracts to the [Appellees]. . . .

On March 27, 2007, the Debtor also executed an Agreement (Release Agreement) with Whaley & Sons, Inc., and Southern Design Group, Inc., under the terms of which those two entities agreed to each "immediately" execute and record a Full Release of Lien and Notice of Nonpayment, fully releasing their liens encumbering the Webb Mountain Property. . . . As consideration, the Debtor acknowledged its indebtedness to Whaley & Sons, Inc., and Southern Design Group, Inc., in the collective amount of $450,000.00, and agreed to pay this amount by July 5, 2007. In the event payment was not made as agreed upon, both Whaley & Sons, Inc., and Southern Design Group retained the right to re-file their liens on or after July 6, 2007. [Doc. 1, ex. 27, p. 2-5].

The Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code on June 25, 2007. [Doc. 1, ex. 1]. On August 10, 2007, the Appellees filed a motion to dismiss. The bankruptcy court conducted an evidentiary hearing on September 11, 2007. The following week, the bankruptcy court issued a memorandum opinion and order dismissing the Chapter 11 bankruptcy as a bad faith filing. One day later, the Appellees recorded their four quit claim deeds.

II. Standard of Review

A bankruptcy court's finding of bad faith is a factual determination reviewed for clear error. See Trident Assocs. Ltd. P'ship v. Metro. Life Ins. Co. (In re Trident Assocs. Ltd. P'ship), 52 F.3d 127, 132 (6th Cir. 1995). "[A]n appellate court may reverse a lower forum's factual finding for clear error when, even though the record contains some evidence in support of the finding, consideration of the overall evidence leaves the reviewing court with the definite and firm conviction that a mistake has been ...


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