Edwards Family Partnership, et al v. Johnson

Case Type:
Business
Case Status:
Affirmed in part and Reversed in part
Citation:
20-61011 (5th Circuit, Apr 27,2022) Published
Tag(s):
Ruling:
A second review appeal and cross-appeal from the decisions of the U.S. Bankruptcy and District Courts for the Southern District of Mississippi (BC and DC) in which each party raised four issues, the U.S. Court of Appeals for the Fifth Circuit (Circuit) affirmed and reversed in part, remanding the case for reconsideration of issues related to the valuation of two mortgage portfolios (##1 and 2) and collections of a third (#7).
Procedural context:
From October 30, 2017, through November 2, 2017, and on November 27, 2017, the BC conducted a consolidated trial consisting of three adversary proceedings and five related contested matters in the chapter 11 case of Community Home Financial Services Corporation (CHFS), a company managed by William D. Dickson (Dickson) prepetition and administered by a trustee, Kristina Johnson (TR or Johnson), due to Dickson’s misconduct. At the root of this mess were the financial entanglements of Dickson and Doctor Charles C. Edwards and two of his companies—Behr Holdings Trust (BHT) and the Edwards Family Partnership (EFP) (collectively, Edward Entities). In particular, proceedings centered on two disputes between this duo—(1) the initial home improvement loans from Edwards to CHFS in 2006, subsequently assigned to the appellants, as amended (Home Improvement Line Loans), and (2) a subsequent arrangement of seven mortgage portfolios of subprime loans (the Mortgage Portfolios) purchased, in Edwards’ view, as “joint ventures” between himself and CHFS—and the post-petition efforts of Edwards to locate the assets of CHFS, secreted away in Costa Rica by a fleeing Dickson in clear violation of the Code and despite his removal from any position of power over its affairs, without Johnson’s notice—and his failure to turn over a CD containing much of that information, provided by one of Dickson’s associates, during the same timeframe. The BC’s decision included a number of conclusions. As to the Mortgage Portfolios, it ruled that: (1) the loans to CHFS to purchase Mortgage Portfolios ## 3-6 were barred by the statute of frauds and, therefore, were unenforceable against the estate; (2) the Edwards Entities were entitled (in 2018) to $788,611 for their secured claim on the loans for Mortgage Portfolio ## 1-2; and (3) Johnson was not required to return collections from Mortgage Portfolio # 7 to the Edwards Entities. As to the Home Improvement Lone Loans, it held that Johnson was entitled to a judgment that their assignment by Edwards to the Edward Entities in 2010 was invalid. As to the tracing of assets, it determined that EFP/BHT were not entitled to a judgment declaring that they have a security interest in any of the stolen funds recovered or intercepted by Johnson. And as to the post-petition conduct by Edwards, it deemed that Johnson was entitled to: (1) a judgment against Edwards and EFP/BHT, jointly and severally, for the conversion of the original CD; and (2) damages against Edwards and EFP/BHT, jointly and severally, for violations of the automatic stay. The DC diverged in part. It affirmed the BC’s rulings on the Mortgage Portfolios. However, it reversed the BC’s decisions as to the invalidity of the 2010 assignment and Johnson’s conversion claim. Furthermore, it vacated the BC’s award of damages, but recognized the BC’s authority to re-award the same fees so long as clear factual explanations accompanied any such award. Both Johnson and the Edwards Entities appealed. The Edwards Entities asked the Circuit to overturn the BC’s and DC’s conclusions regarding the statute of frauds, the valuation of their interest in Mortgage Portfolio ## 1-2, and its disallowance of their claim as to Mortgage Portfolio # 7. Johnson essentially asked the Circuit to endorse the BC’s approach in toto.
Facts:
This dispute, like the others between these parties, arose out of the business relationship between Edwards, an orthopedic surgeon from Maryland, and Dickson, a business owner from Mississippi who operated multiple family businesses over the preceding sixteen plus years. The two men had been introduced by a broker, hired by Dickson, to find a replacement lender for Dickson’s former company, CHFS, which purchased discounted mortgage loan portfolios from third parties and serviced those loans as well as serviced other loans from affiliated entities. Sometime after Edwards’ daughter visited Dickson’s headquarters in the summer of 2006, a visit preceded by the two principals’ first meeting in July 2006, Edwards and Dickson finalized their first business deal: a credit facility of $10 million to fund the purchase of home improvement loans. An employee of CHFS, a disbarred attorney, drafted the loan documents, relying almost entirely on the versions prepared by CHFS’ former lender. Though she was not an accountant, Edwards relied on his daughter to review these reports, calculate the principal balance and interest due on the promissory notes each month, and determine “eligible receivables.” “Although the financial entanglements of Edwards and Dickson contained many elements,” only two mattered below and on appeal. The first arrangement at issue eventually involved nearly 2,000 home improvement loans. Edwards loaned that $10 million to CHFS through the Rainbow Group (RG), one of his many companies. CHFS serviced the purchased mortgages and sent RG the interest it owed. As empowered by the parties’ original agreement, Edwards, acting on RG’s behalf, assigned and reassigned its rights and duties to Behr Holdings Limited (BHL), a British Virign Islands company that Edwards acquired for the purpose of the assignment orchestrated between BHL and the RG, in 2007 and the Edward Entities in 2010. These assignment did not “fundamentally” change the Edwards-Dickson relationship. What did, however, was an amendment, struck several years after the initial 2006 agreement, that resulted in a $4 million commercial note and line of credit between CHFS and EFP, as well as a $12 million commercial note and line of credit between CHFS and BHT. The second relevant endeavor came about as a result of the Great Recession, circa 2008. Because of this nationwide financial crisis, Dickson believed that CHFS could purchase subprime loan portfolios at a favorable price. Accordingly, Dickson approached Edwards about providing roughly $9 million through various entities to CHFS to purchase the Mortgage Portfolios. Eventually, Edwards, acting on behalf of EFP and BHT, finalized agreements with CHFS to purchase the Mortgage Portfolios between January 2008 and March 2011. While the parties did not dispute that the Edwards entities funded the purchase of the Mortgage Portfolios, the Edwards Entities maintained that Edwards did not intend for these transactions to be considered loans but rather “joint ventures” between the Edwards entities and CHFS. Certain differences between Mortgage Portfolios ## 1-6 and # 7 loomed larger as time passed. The parties to Mortgage Portfolios #1-6 are CHFS and EFP, but the parties to Mortgage Portfolio #7 are CHFS and BHT. Only Mortgage Portfolios ## 1, 2, and 7 are documented in writing. All portfolio purchase agreements were between CHFS and the portfolio seller, but for Mortgage Portfolios ## 1-6, these sellers assigned the loans to CHFS. The original notes and assignments comprising the consumer loans in this six are in EFP’s possession as “collateral.” Mortgage Portfolio # 7 contains materially different terms than the preceding six. In addition, The parties to the agreement decided the original notes and assignments in Mortgage Portfolio # 7 would not be held by CHFS, Dickson, Edwards, or BHT, but rather by a third party. At the time of this appeal, the custodial documents for Mortgage Portfolio # 7 were missing. In 2012, roughly two years after their relationship’s deterioration began, prepetition litigation opened. In February 2012, CHFS and Dickson filed suit against Edwards in Mississippi state court. On April 11, 2012, Edwards and EFP/BHT removed the original state court lawsuit to the DC. Shortly thereafter, EFP/BHT filed an emergency motion for immediate appointment of a receiver for CHFS. Just as the trial in the matter of the receivership as about to conclude, CHFS voluntarily filed a Chapter 11 petition for relief, which stayed all proceedings against CHFS in the receivership action. As of the Petition Date, CHFS owed the Edwards Entities $17.8 million under the initial home improvement loans, and the Edwards Entities had yet recouped $11,780,451 of their investment in the Mortgage Portfolios. Things somehow got stranger-and so much more acrimonious and convoluted-post-petition. In 2012, EFP/BHT filed a Motion to Appoint Chapter 11 Trustee for CHFS based on the alleged misconduct of CHFS and Dickson. Then, sometime in 2013, Dickson absconded to Costa Rica to establish “rogue” operations of the CHFS business outside of the United States. Undisputed by the parties, Dickson stole nearly $10 million from CHFS bank accounts while in South America and even shipped various pieces of office equipment, several computer servers, and many of CHFS’s loan records to Costa Rica. (Later, Dickson was returned to the United States in federal custody, arrested for bank fraud, and indicted on April 9, 2014.) Ultimately, with 2013 winding down, the BC court entered an Order Granting United States Trustee’s Emergency Motion for Order for the Appointment of a Chapter 11 Trustee in December 2013. Over the objection of the Edwards Entities, the BC appointed Johnson as the trustee on January 21, 2014. Despite this appointment, Dickson, though bereft of any decision-making authority for CHFS, continued with his “illicit activities” until his federal arrest. Meanwhile, after he had been contacted by a business associate of Dickson’s in Costa Rica, Mike James Meehan (Meehan), in September 2014, Edwards and Meehan corresponded for roughly five months, with the latter sending over information and computer data from CHFS’ Costa Rico hideout. While Meehan would later reach out to Johnson, albeit “roughly five months after contacting Edwards,” until he did so, she was unaware of the location of CHFS’s computers, books, and records in Costa Rica and had no knowledge of the financial affairs of CHFS in South America. In response to this seemingly deliberate opacity, Johnson filed an Amended Complaint against Edwards and the Edwards Entities alleging violations of the automatic stay.
Judge(s):
Stephen A. Higginson; James L. Dennis; and Gregg J. Costa

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