SouthTrust Bank N.A. v. Jackson (In Re Dur Jac Ltd.)

Citations: 254 B.R. 279; 44 Collier Bankr. Cas. 2d 1774; 2000 Bankr. LEXIS 1235Docket: 19-03008

Court: United States Bankruptcy Court, M.D. Alabama; August 14, 2000; Us Bankruptcy; United States Bankruptcy Court

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In the case of In re Dur Jac Ltd., the United States Bankruptcy Court for the Middle District of Alabama conducted an evidentiary hearing regarding SouthTrust Bank's motions for leave to initiate an adversary proceeding to recover property of the estate and for a preliminary injunction. Dur Jac, Ltd., an Alabama limited partnership and the debtor, opposed both motions. The debtor filed for Chapter 11 bankruptcy on July 22, 1999, and has been operating as a debtor in possession without a trustee or examiner appointed. Competing Chapter 11 Plans by both Dur Jac and SouthTrust are set for confirmation hearing on August 24, 2000.

Dur Jac's primary assets include stock in AutoNation, an interest in Cane Brake Development, two beach front condominiums, first mortgages on the homes of four adult children of the Jacksons, a business condominium, and a promissory note. The AutoNation stock has been liquidated for approximately $5.1 million, which has been applied to the debt owed to SouthTrust. Similarly, the Cane Brake Development interest has been liquidated, reducing its debt to AmSouth Bank to about $350,000. SouthTrust anticipates an unsecured deficiency claim of approximately $2.1 million after these transactions.

SouthTrust is initiating an adversary proceeding to recover four mortgages secured by the residences of the children of Durward and Linda Jackson, which it claims are part of the bankrupt estate. In contrast, Dur Jackson contends these mortgages belong to a Trust. The mortgages in question include: 

1. A mortgage from Durward W. Jackson III and Marcia Jackson to Durward W. Jackson, II, dated October 31, 1996, for $183,000 in Glynn County, Georgia.
2. A mortgage from Byron C. Russell, Jr. and Kelly Coley Russell to Durward Jackson, II, dated January 22, 1996, for $207,500 and $48,133.62 in Fulton County, Georgia.
3. A mortgage from Karen Coley Keene and John Walter Keene to Durward W. Jackson, II, dated May 1, 1996, for $220,000 in Montgomery County, Alabama.
4. A mortgage from Katherine C. Adams and Charles Adams to Durward Jackson, II, dated October 14, 1994, for $140,000 in Montgomery County, Alabama.

In August 1998, SouthTrust provided a $2,000,000 bridge loan to Canebrake Properties, L.L.C., owned by Durward Jackson, II, intended as interim financing for real estate development. This loan was secured by multiple collateral items, including the aforementioned four mortgages. The loan was fully repaid between August 4, 1998, and July 8, 1999, prior to the Chapter 11 petition. 

Durward Jackson, II assigned the mortgages to Dur Jac through three unrecorded documents dated August 3 and 4, 1998, which were then transferred to SouthTrust via three additional unrecorded 'Collateral Assignment of Note and Mortgage' documents. The legal dispute centers on the implications of these assignments in relation to the bridge loan repayment.

Mortgages were assigned from Mr. Jackson to Dur Jac, and subsequently from Dur Jac to SouthTrust, on August 3 or 4, 1998. SouthTrust argues that the assignment became ineffective upon satisfaction of a bridge loan, returning the mortgages to Dur Jac. Conversely, Dur Jac and the Trust assert that all assignments ceased to be effective post-loan satisfaction, reverting ownership to Durward Jackson, II. On July 8, 1999, shortly before a bankruptcy filing, three assignment documents were executed to assign the mortgages back to Durward and Linda Jackson as co-trustees of their Charitable Remainder Trust, which were recorded, while prior assignments to Dur Jac and SouthTrust were not. Durward Jackson, II testified that the initial assignments were intended solely to secure the bridge loan and were to be void after its satisfaction. No payment was made to him by Dur Jac for the assignment, suggesting that the assignment was meant to be ineffective after the loan's satisfaction. He provided evidence of ownership through tax returns showing interest income from the mortgages and IRS Forms 1098 for 1999. Although SouthTrust presented accounting records indicating Dur Jac received mortgage payments from the Jackson children, the accountant clarified that these payments were treated as a capital contribution from Mr. Jackson. A letter from SouthTrust to a law firm on July 15, 1998, outlined actions regarding the bridge loan and assignments, all prepared simultaneously for that purpose. During the evidentiary hearing, SouthTrust's attorneys claimed that the assignment from Dur Jac to SouthTrust terminated upon loan satisfaction, while the assignment from Mr. Jackson to Dur Jac did not have similar terms. However, the more logical interpretation of the evidence suggests that all assignments became ineffective upon satisfaction of the bridge loan, leaving the mortgages with Durward Jackson, II.

The SouthTrust letter to Kaufman, Rothfeder raises questions regarding Mr. Jackson's longstanding relationship with the firm, which he claims managed extensive records for him and his business entities, including Dur Jac. While the Court does not assess any potential misconduct by Kaufman, Rothfeder, it determines that the assignment documents in question were created based on SouthTrust's instructions, leading to any ambiguities being resolved against SouthTrust. Dur Jac presented three unexecuted UCC-1 financing statements, which, if executed, could have established SouthTrust's security interest in the mortgages. Mr. Jackson testified that he rejected these statements, viewing them as contrary to his agreement with the Bank and as inappropriate. SouthTrust contended that Dur Jac, identified as the Debtor, was the legitimate owner of the mortgages as of May 12, 1999. Although the financing statements do not provide definitive proof, they support the Defendants' stance. The Court concludes that the mortgage assignments aimed to secure a bridge loan that was subsequently paid off, rendering the assignments ineffective and affirming that Durward Jackson, II owned the mortgages post-payment.

The legal issue revolves around whether SouthTrust, as a creditor, can initiate an adversary proceeding to reclaim estate property for its benefit. SouthTrust requests a declaratory judgment asserting that the mortgages belong to Dur Jac and seeks an injunction to ensure proceeds are directed to the estate. Under Chapter 11, a debtor typically acts as their own trustee (debtor in possession), responsible for collecting and liquidating estate property. If a creditor believes the debtor in possession is not fulfilling their duties, they may pursue appointing a trustee, converting to a Chapter 7 case, or dismissing the case, none of which SouthTrust has sought. Relevant case law, specifically In re Xonics Photochemical, Inc., establishes that the rights to invoke certain bankruptcy provisions belong to the trustee or debtor in possession, not to individual unsecured creditors.

Mitsui could potentially seek permission from the bankruptcy court to file a derivative suit in the debtor's name, contingent upon demonstrating that the debtor is neglecting statutory duties. Relevant case law indicates that creditors' committees may hold standing to sue the debtor’s officers and directors due to clear conflicts of interest. Individual creditors may also have standing to act when a trustee is unwilling or unable to do so. The Fifth Circuit outlines three requirements for standing: a colorable claim, unjustified refusal by the debtor-in-possession to pursue the claim, and court approval to proceed. Additionally, a recent Sixth Circuit decision allows a creditor to initiate a fraudulent conveyance suit under specific conditions, including a colorable claim that benefits the estate, a demand on the debtor that was unjustifiably refused, and the debtor's fiduciary duty violations. The court in this case finds a colorable claim exists regarding the transfer of four mortgages to a trust shortly before bankruptcy, involving closely-related parties. Despite no impropriety identified concerning the estate, the existence of a colorable claim is acknowledged.

The Court finds that the elements of demand and refusal necessary for the case are satisfied, despite conflicting evidence. SouthTrust did not formally demand that Dur Jac initiate a lawsuit, and Dur Jac has actively defended against the suit, disputing the ownership of the mortgages in question. SouthTrust argues that it would be futile to demand that Durward Jackson, representing Dur Jac, sue his own family members. This situation illustrates the inherent conflict of interest when a debtor in possession must consider litigation against family. Although a formal demand from SouthTrust would typically be required, the Court believes such a demand would have been futile in this context.

The Court concludes that Dur Jac's refusal to sue is justified, based on findings that the mortgages belonged to Durward Jackson, II after the bridge loan was satisfied. Durward Jackson, II, who holds multiple roles including trustee and familial relations to the mortgagors, had adequate information to ascertain the ownership of the mortgages.

SouthTrust challenges the admissibility of certain evidence based on the parol evidence rule, arguing that the written agreements are clear and should not be altered by external evidence. However, the Court asserts that the rule does not apply when the contract terms are ambiguous, necessitating clarification through evidence. The question of contract ambiguity is a legal determination for the Court.

Evidence shows that the assignments to Dur Jac and SouthTrust were not rescinded by subsequent documents. SouthTrust claims that its assignment was automatically reverted upon the bridge loan's satisfaction. The assignments contain provisions indicating they remain effective as long as the Note is unpaid, but they lack clarity regarding the implications of the Note's satisfaction. The Court identifies three interpretations of the assignment's status post-payment, suggesting differing levels of effectiveness for the assignments to SouthTrust and Dur Jac.

The Court finds that the assignments related to the mortgages are ambiguous and require extrinsic evidence for clarification. The primary interpretation suggests that none of the assignments take effect after the payment of the bridge loan, which aligns with the explicit language in Paragraph 1 of the assignment. Paragraph 4 appears redundant unless interpreted to suggest that the assignment ceases upon payment of the Note, a construction not supported by the Bank's arguments. The Court emphasizes that the assignments, prepared by Kaufman, Rothfeder at SouthTrust's direction, should be read collectively, indicating that all assignments became ineffective once the bridge loan was settled, returning the mortgages to Durward Jackson, II unencumbered.

SouthTrust's claims of a fraudulent transfer or insider preference are dismissed as they were not pleaded in its complaint, and the evidence does not support these theories. The conclusion drawn is that the assignments were rendered ineffective following the loan payment, irrespective of how SouthTrust characterizes the circumstances of that outcome. The argument that only certain assignments were undone does not hold, as the larger context of the transaction must be considered.

The analysis of the assignment documents and bridge note leads to the conclusion that the six assignments were ineffective following the satisfaction of the bridge note. Courts have consistently ruled that, in Chapter 7 bankruptcy cases, only the trustee or debtor in possession has standing to initiate lawsuits on behalf of the estate, as evidenced by National American Insurance Company v. Ruppert Landscaping Company, Inc. The court denies SouthTrust's request for leave to bring an adversary proceeding seeking declaratory and injunctive relief, affirming that Dur Jac's choice not to sue the Jacksons' children was justified. Consequently, the motion for a preliminary injunction is deemed moot. SouthTrust's application for leave to initiate Adversary Proceeding No. 00-30 is also dismissed. The court will issue separate orders regarding these motions and the dismissal of the adversary proceeding. Additionally, the documents show that the assignments were likely intended as security interests rather than absolute transfers, with Mr. Jackson retaining rights to mortgage payments as long as the bridge note was not in default. This interpretation counters the Bank's claim of absolute transfer of mortgages to Dur Jac. SouthTrust's position, claiming to stand in Dur Jac's shoes, does not allow them to benefit from ambiguities created by their legal counsel. The discussion also touches on the complexities of perfecting security interests in mortgages and references a Supreme Court decision indicating that creditors cannot utilize Section 506(c), which is limited to the trustee. The identical language of the three Collateral Assignment documents is noted.