LTF Real Estate Co v. Expert South Tulsa, LLC (In re Expert South Tulsa, LLC)

In re Expert South Tulsa, LLC, 2014 WL 6845675 (10th Cir. BAP December 4, 2014)
Escrow fund established pre-petition to guarantee completion of site improvements on real estate was not included in property of the estate, but bankruptcy court erred in sua sponte dismissal of debtor's avoidance claims. Affirmed in part and reversed in part.
Procedural context:
Bankruptcy court entered summary judgment for real estate developer prior to discovery. Debtor filed a motion to alter or amend the judgment. The court denied the motion and subsequently entered an order sua sponte dismissing the debtor's avoidance counterclaims. On appeal, the BAP held that the bankruptcy court did not abuse its discretion in granting partial summary judgment prior to commencement of discovery and the judgment as to the status of an escrow fund as property of the estate was proper. However, the court should not have sua sponte dismissed the debtor's avoidance claims.
Prior to its bankruptcy, the debtor engaged in development and sale of commercial properties. A developer agreed to purchase property from the debtor. The agreement required the debtor to construct certain improvements on the property at its sole expense, and to escrow an amount equal to 120% of the estimated costs pending completion. The funds were placed in an escrow account. The agreement further provided that if the debtor failed to commence or complete the improvements, the developer could complete the improvements and obtain reimbursement from the escrow. Work was commenced but was discontinued before the debtor reached any of the three contractual stages that permitted a disbursement from the escrow. After another creditor filed an involuntary chapter 7 petition against the debtor, the debtor voluntarily converted the case to chapter 11. In the chapter 11, the developer filed an adversary proceeding to obtain a declaratory judgment as to the status of the escrow funds as property of the estate. The developer moved for summary judgment, and the debtor objected, arguing that it would develop certain issues during discovery. The bankruptcy court ruled that the escrow funds were not property of the estate and entered partial summary judgment in favor of the developer. The debtor sought to amend the judgment and filed additional counterclaims. The motion to amend the judgment was denied and the court subsequently sua sponte entered an order dismissing the amended counterclaims for failure to state a claim upon which relief could be granted. The debtor appealed. The 10th Circuit BAP found that the bankruptcy court did not err in granting partial summary judgment prior to discovery because the debtor did not provide any information required under Fed. R. Civ. P. 56(d) as to how additional time would enable discovery of evidence of a genuine issue of material fact. The bankruptcy court also properly concluded that the escrow funds were not property of the estate because as of the petition date the debtor did not have a present, vested interest in the funds; its only claim was contingent upon future performance and only the debtor's right to that claim was property of the estate. However, the bankruptcy court's decision to sua sponte dismiss the avoidance counterclaims was in error as the debtor was not afforded notice or an opportunity to amend, and it was not patently obvious that the debtor could not prevail or that an opportunity to amend the complaint would be futile. Affirmed in part and reversed in part.
Thurman, Romero, Jacobvitz

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