Court: United States Bankruptcy Court, D. Maine; October 20, 1998; Us Bankruptcy; United States Bankruptcy Court
The Court, presided over by Bankruptcy Judge James A. Goodman, addressed several motions from Bank Boston on September 15, 1998, in the adversary proceeding involving JBI Associates Limited Partnership. The Court granted Bank Boston's Motion to Dismiss JBI Associates' Counterclaim and struck their Affirmative Defenses. Additionally, Bank Boston's Motion for Summary Judgment was granted, while the request for sanctions against JBI Associates was denied without prejudice.
Key parties in the case include:
- **Running Hill Associates Limited Partnership**: Owner of the land in South Portland, Maine.
- **JBI Associates Limited Partnership**: Leases the property from Running Hill and developed it into a psychiatric hospital.
- **Jackson Brook Institute, Inc.**: The Debtor, a Maine Corporation that leases and operates the hospital, claiming a 32% partnership interest in JBI Associates, which is disputed.
- **Community Care Systems, Inc.**: Parent corporation of the Institute, previously a general partner in JBI Associates.
- **Frederick Thacher**: President of CCSI and controlling figure for all involved entities.
- **Robert Cserr and Elia Lipton**: General partners in Associates, with a dispute over Lipton's status currently litigated in Massachusetts.
- **Casco Bank and Trust Company**: Provided original financing for the hospital, now succeeded by Casco Northern Bank, N.A.
- **BancBoston Real Estate Capital Corporation**: Assignee of Casco Northern’s financing interests.
The financing arrangement included a Commitment Letter that restricted fund withdrawals by Jackson Brook Institute or JBI Associates without prior written consent from Casco, emphasizing the need for financial oversight in transactions involving the hospital and affiliated entities.
On January 27, 1983, Thacher, representing the Institute, Associates, and CCSI, clarified the Commitment Letter with Casco, specifying that the prohibition on up-streaming funds aims to control withdrawals from the Institute and Associates once the hospital becomes operational. In May 1988, Associates entered a Lease and Sublease Agreement for the hospital land with the Institute, with CCSI guaranteeing the Institute's lease obligations. Under the lease terms, by 1999, the Institute must offer to sell the leased premises to Associates for $10 million or its fair market value, whichever is greater. On May 11, 1983, Casco provided a $5.6 million loan to Associates, who, alongside Running Hill, granted a mortgage and security interest in the hospital to Casco and assigned the lease and CCSI’s guaranty to it. Thacher executed all related documents as president of CCSI and a general partner of Associates and Running Hill. On May 12, 1983, an amendment was made to the Commitment Letter, binding all parties to its terms.
In 1993, Casco discovered that the Institute had up-streamed over $3 million to CCSI, violating the Commitment Letter. Consequently, on November 24, 1993, Casco Northern filed suit against Associates, Institute, and CCSI in Maine Superior Court, seeking to enforce the up-streaming prohibition. Institute denied being bound by the prohibition, and Associates filed a crossclaim for injunctive relief. The litigation faced delays, particularly when Institute moved to disqualify Associates' legal counsel due to prior representation of the Institute, a motion granted on February 1, 1995. Associates appealed this decision, obtaining a stay of the litigation on February 17, 1995, which was extended multiple times under the pretext of ongoing settlement discussions. The litigation remained stalled for nearly three years until December 8, 1997, and notably, on October 14, 1997, Associates’ new counsel withdrew from the case before the final stay expired.
On October 29, 1997, BancBoston initiated a foreclosure action in Maine Superior Court against Running Hill, Associates, Institute, and other parties, claiming that Associates defaulted on several obligations, including missed payments and failure to pay real estate taxes. In response, Associates filed an Answer with four affirmative defenses and a four-count Counterclaim, asserting that BancBoston did not adequately pursue related litigation, which led to financial difficulties for Associates. The affirmative defenses included claims of estoppel against BancBoston’s foreclosure, breach of good faith and fair dealing, breach of fiduciary duty, and liability for lease obligations. The Counterclaim echoed these themes, alleging similar breaches and asserting that BancBoston was liable for rent and other obligations.
Subsequently, in November 1997, Associates filed a lawsuit against Institute, CCSI, and Thacher to recover overdue rents and challenge transfers as fraudulent conveyances, while acknowledging its own default to BancBoston. BancBoston sought to intervene in this lawsuit due to its rights under the Assignment of Leases, and the court granted this request, denying Associates' motions for a receiver and pre-judgment attachment on the grounds that BancBoston might be the real party in interest.
On March 27, 1998, Institute filed for Chapter 11 bankruptcy, and the court ordered it to pay rents directly to BancBoston. BancBoston's motion for Relief from Stay to continue the foreclosure proceedings was granted, and on June 8, 1998, Institute removed the foreclosure case to federal court.
BancBoston supported the removal of the case and asserted that it constituted a core proceeding under 28 U.S.C. 157(b)(2)(A, N, and O). Associates challenged the court's jurisdiction and filed a Motion to Abstain or Remand. After a hearing on July 15, 1998, the court determined it had jurisdiction under 28 U.S.C. 1334(b) and classified the matter as core under 28 U.S.C. 157(b)(2). This ruling is currently under appeal in the United States District Court, with no stay pending.
Prior to the case's removal, BancBoston had filed several motions in the foreclosure litigation, including a Motion to Dismiss Associates' counterclaim, a Motion for Summary Judgment, and a Motion for Sanctions under Maine Civil Procedure Rule 11. Associates responded, and oral arguments were heard on September 15, 1998, making the motions ready for decision.
The excerpt emphasizes the court's jurisdiction over the removed action, governed by 28 U.S.C. 1452(a), which allows removal to a district court with jurisdiction under section 1334. Section 1334(b) grants district courts original jurisdiction over civil proceedings related to bankruptcy cases. The District Court for the District of Maine has referred bankruptcy jurisdiction to the bankruptcy court, and the extent of the court's authority to adjudicate depends on whether the matter is core or non-core.
Key assets at issue include the Institute’s lease of the Hospital, a potential 32% partnership interest in Associates, and the option to purchase the Hospital. BancBoston, claiming priority in its mortgage interest through an assignment, seeks a court ruling on the priority of various interests in the Hospital property. Under the Subordination Agreement from 1983, BancBoston is obligated to respect the lease terms if the Institute is not in default.
The Institute can cure its lease defaults and assume the lease under Title 11, which is crucial for its reorganization efforts. Proceeding with the foreclosure in state court could undermine the Institute's rights under bankruptcy law. The court concludes that this matter arises under Title 11 and is a core proceeding.
The Motion to Dismiss the Associates' counterclaims is analyzed under Fed. R. Civ. P. 12(b)(6), which allows dismissal for failure to state a claim. The court must accept the allegations in the complaint as true and can only dismiss if it is clear that no facts could support the claim for relief. Additionally, a motion to strike affirmative defenses falls under Fed. R. Civ. P. 12(f), which permits stricken defenses if they are legally insufficient and unlikely to prevail.
Counts 1-3 of the Associates’ Counterclaims, along with all affirmative defenses, are based on the incorrect premise that BancBoston inadequately pursued the 1993 Up-streaming Litigation against the Institute. Associates claim that BancBoston's delays caused them financial harm, but evidence shows that Associates were primarily responsible for the delays, having sought multiple stays and extensions that prolonged the litigation. The court notes that Associates' own actions, including obtaining a lengthy stay and withdrawing counsel shortly before the stay ended, contradict their claims of harm from BancBoston's alleged delays.
As a result, the court concludes that Associates are judicially estopped from making claims contrary to their prior admissions and evidence. Given the lack of factual support for Counts 1-3 and the insufficiency of the affirmative defenses, the court finds that these claims fail to state a claim upon which relief can be granted.
BancBoston's motions to strike the affirmative defenses and to dismiss Counts 1-3 of the counterclaim have been granted. The court finds no legal basis for Associates’ counterclaim or affirmative defenses presented in response to the foreclosure complaint. Specifically, Count I and the second affirmative defense claim that BancBoston's failure to diligently pursue the Up-Streaming Litigation breached a contractual duty of good faith and fair dealing. However, the court concludes that the loan documents and related agreements do not explicitly impose such a duty. While BancBoston references an implied duty under Maine’s Uniform Commercial Code (UCC), the court notes that this duty has not been extended beyond its statutory scope to impose a higher standard of objective good faith. The court distinguishes the cited case, Top of the Track Assoc. v. Lewiston Raceways, Inc., stating that it pertains to a different context involving an operator-investor relationship, rather than a borrower-lender relationship. The court asserts that an expansive duty of good faith is not required under Maine law in this context and that no dishonesty in fact has been alleged against BancBoston or Casco in relation to the Up-Streaming Litigation.
The Law Court's ruling in Diversified Foods limits the implied duty of good faith in banking relationships, indicating that silence in Top of the Track does not imply an extension of this duty. Associates failed to provide facts demonstrating that BancBoston or Casco acted dishonestly regarding the Up-streaming Litigation, leading to the dismissal of Count I of the Counterclaim and the striking of the second Affirmative Defense. Count II alleges a breach of fiduciary duty due to BancBoston's and Casco's lack of diligence in pursuing litigation. However, without a confidential relationship between the parties, no fiduciary duty exists, and Associates did not present specific facts to support such a relationship. Consequently, Count II and the third Affirmative Defense are dismissed. Count III claims liability for BancBoston and Casco based on their control over the Institute's financial actions, but since the Institute is not a borrower and there was no evidence they exerted complete control, this claim lacks legal merit. The fourth Affirmative Defense similarly fails for the same reasons. Associates' suggestion of an agency/fiduciary relationship is dismissed as previously addressed. Count IV of the Counterclaim asserts that BancBoston's actions to collect rent from the Institute were intended to harm Associates rather than for legitimate commercial purposes.
Associates claims that BancBoston breached its duty to them; however, the court found no implied duty exists, leading to the dismissal of this claim as it does not present a viable cause for relief. Under the Assignment of Leases, BancBoston was entitled to collect rents directly from the Institute after Associates defaulted on the Casco Note, which Associates acknowledged in its litigation against the Institute. BancBoston's actions were deemed within its contractual rights, including its intervention in Associates’ litigation, which was sanctioned by the State Court. The court expressed that BancBoston was entitled to enforce rights under the lease, and failing to act could have been considered commercially unreasonable. Consequently, the court determined that Count IV lacked merit.
Regarding the motion for summary judgment, it adheres to Federal Rules governing bankruptcy proceedings, stating that judgment must be granted if there’s no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. The burden shifts to the non-moving party to present specific facts demonstrating a genuine issue for trial. A genuine dispute exists when reasonable jury deliberation could favor the non-moving party, and material facts are those that could significantly impact the lawsuit’s outcome. BancBoston's motion for summary judgment relies on Associates’ verified complaint from 1997 against the Institute and an affidavit from Christopher Smith, asserting that Associates’ admission of inability to meet obligations under the Note constitutes a default. This, along with Smith's affidavit detailing the Note's terms and defaults, supports BancBoston's request for summary judgment in its foreclosure complaint.
Associates filed an Objection lacking supporting affidavits, relying on arguments from its Counterclaim and Affirmative Defenses, which have previously been resolved against them. Key points raised by Associates include: 1) a claim that failing to provide financial statements constitutes a material breach under the Mortgage; 2) the existence of genuine issues of material fact regarding potential transfers of interests in Associates; 3) whether BancBoston waived foreclosure by accepting payments from the Institute; and 4) whether the attorney fees claimed by BancBoston are reasonable. While it is acknowledged that disputed facts exist concerning material transfers and technical defaults, these are deemed irrelevant to the legal issue at hand.
BancBoston's Complaint alleges a payment default occurred on August 1, 1997, supported by the unrefuted Smith Affidavit and Associates' own admissions in its 1997 Complaint regarding its inability to meet obligations to BancBoston. A general denial of payment default would not suffice to counter BancBoston’s summary judgment request. Associates' strongest argument revolves around the potential waiver of foreclosure under 14 M.R.S.A. 6204 due to accepted payments from the Institute. However, the statute indicates that a mortgagee can accept income from the mortgaged premises without waiving foreclosure rights, provided proper procedures are followed. BancBoston had a Collateral Assignment of Leases, and Associates admitted to being in default under the Note and Mortgage. BancBoston notified the Institute's Corporate Clerk on December 24, 1997, regarding the exercise of its rights under the Assignment of Lease, instructing future rental payments to be directed to BancBoston.
BancBoston has been receiving rent payments from the Institute, which continues post-petition. The court finds that BancBoston retains possession of the premises and that rental income does not waive its rights under the applicable statute. Citing relevant case law, the court notes that a mortgagee can claim rents upon default through actual or constructive possession. The Collateral Assignment of Lease stipulates that BancBoston's receipt of rents does not waive its rights to foreclose or accelerate mortgage payments. Associates, by agreeing to this language, has effectively waived its defense under Section 6204. Payments made by the Institute were authorized by a court order that preserved BancBoston's rights concerning the lease and foreclosure. The court concludes there are no genuine material facts at issue, as Associates is in default. Consequently, BancBoston's motion for summary judgment is granted, ordering foreclosure in its favor. BancBoston must submit a judgment form, while the request for attorney fees is deferred. Associates is entitled to a detailed breakdown of fees, and if they find them unreasonable, they must file a specific objection within 15 days, supported by admissible evidence.
An evidentiary hearing will be held if an objection is filed, focusing on the reasonableness of fees and costs. The Court notes Institute's silence may indicate collaboration with BaneBoston to enhance Hospital asset value. According to the Non-Disturbance, Attornment, and Agreement from May 11, 1983, Institute's rights under the Lease cannot be disturbed upon foreclosure if it is not in default. Through Chapter 11 proceedings, Institute aims to address prepetition defaults and retain Lease benefits, despite BancBoston's foreclosure.
BancBoston's request for sanctions under Me. R. Civ. P. 11 has not been adequately addressed, nor has it included relevant federal provisions from Fed. R. Bankr. P. 9011. Despite Associates' unsatisfactory conduct, the Court denies the sanctions request without prejudice, recognizing the importance of the psychiatric hospital. Associates' litigation tactics are viewed as attempts to gain an unfair advantage in reorganization negotiations. Concerns arise from Counsel Christopher Taintor's representation of divergent interests of Cserr and Associates, leading to a warning that future actions will be scrutinized for compliance with Fed. R. Bankr. P. 9011.
Associates acknowledges its interest but disputes Institute's claim to it. The fee simple interest in the property is held by Running Hill, with Associates having entered a ground lease with Running Hill and subsequently subleasing to Institute. Given Associates' status as a lessee, the ability to convey fee interest to Institute is questionable, although Associates is obligated to make a purchase offer for the property from Running Hill in 1999, as per the Ground Lease Agreement.
The Ground Lease stipulates that if Associates accepts a mandatory offer from the Institute under its Sublease, Running Hill must accept Associates' purchase offer, contingent upon the Institute completing its purchase under the Sublease. Associates' defense against foreclosure hinges on BancBoston's alleged failure to pursue the Up-streaming Litigation, despite Associates’ crossclaim seeking identical relief. Proceedings "arising under" Title 11 of the Bankruptcy Code involve causes of action created by the statute, while those "arising in" a bankruptcy case exist solely because of the bankruptcy context. "Related to" jurisdiction covers state law issues not central to the bankruptcy's core functions. Associates claims to be an intended beneficiary of a fund-upstreaming prohibition but did not pursue remedies when the agreement was breached and instead delayed litigation. As the Lessor of the Hospital and primary obligor under the Note and Mortgage to Casco, Associates was aware of the risks posed by fund upstreaming but failed to act. BancBoston submitted an affidavit detailing incurred fees and disbursements totaling $28,355 as of March 9, 1998. Under Federal Rule of Civil Procedure 56(e), an adverse party must provide specific facts to contest a motion for summary judgment or risk judgment against them. The safe harbor provision requires that a motion for sanctions cannot be filed until 21 days after the challenged claim is addressed, except in cases violating specific bankruptcy rules. At oral argument, when asked about Associates' identity, Mr. Taintor expressed uncertainty due to ongoing litigation in Massachusetts regarding the general partnership, raising questions about Associates' legal standing and the authority of its counsel.
