UTSA Apartments, L.L.C. v. UTSA Apartments 8, L.L.C.

The distributive share to co-owners is not fixed as of the filing date under Section 363(j).

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Case Type:
Case Status:
Reversed and Remanded
No. 17-50893 (5th Circuit, Mar 27,2018) Published
REVERSE the bankruptcy court’s decision to reduce UTSA’s share of the net proceeds and AFFIRM its decision to reduce Woodlark’s proof of claims. REMAND for further proceedings consistent with it's opinion.
Procedural context:
On December 2, 2015, fifteen9 of the TICs filed voluntary petitions for Chapter 11 bankruptcy. Subsequently, four additional TICs joined. The now nineteen cases (corresponding to each of the Debtor TICs) were jointly administered before the United States Bankruptcy Court for the Western District of Texas under Case No. 15-52941. The same day, the Debtor TICs removed the State Court Suit, which included their contract, negligence, and breach of fiduciary duty claims against Woodlark, to the bankruptcy court, which was docketed as Adv. No. 15-5093 (“Breach of Duty Adversary”). The bankruptcy court set the following matters for a consolidated bench trial to begin in January of 2017: (1) the Breach of Duty Adversary, (2) the Claims Adversary, (3) the UTSA Distribution Motion, and (4) the Debtor TIC Surcharge Motion. On January 23–26 and February 7, 2017, the bankruptcy court held a trial and considered testimony and evidence regarding these four matters. Following the trial, the court entered final judgment in the bankruptcy case disallowing all of Woodlark’s claims against the Debtor TICs and the bankruptcy estate, except for $410,097.78 representing “cash advances made by [Woodlark] pre-petition.” The judgment also provided that the Debtor TICs would be awarded a distribution of 96.86% of the net remaining amount of the estate and UTSA would be awarded a distribution of 3.14% of the net remaining amount. Additionally, consistent with its oral rulings, the court entered an order granting in part and denying in part the UTSA Distribution Motion, and it entered an order denying the Debtor TIC Surcharge Motion. District Court Appeal In March 2017, UTSA and Woodlark filed notices of appeal of the bankruptcy court’s final judgments and order distributing funds. While the three appeals were docketed as separate matters in the United States District Court for the Western District of Texas, the cases were consolidated under cause number SA-17-CV-285-FB. On October 4, 2017, after the parties filed briefs, the district court issued an order affirming the bankruptcy court. Instant Appeal On October 5, 2017, Woodlark and UTSA (collectively, “Appellants”) jointly filed a notice of appeal from the district court’s judgment affirming the bankruptcy court. Appellants moved for a stay of the district court’s judgment pending its appeal to this Court. This Court granted a stay and expedited the appeal to the next available calendar.
Appellees are nineteen Delaware limited liability companies (“Debtor TICs”)2 that—with Appellant UTSA and other limited liability companies that are not parties to this appeal (“Non-Debtor TICs”)—owned undivided tenancy- in-common interests (“TICs”) in The Reserve, an off-campus student housing project in San Antonio, Texas (the “Property”). Appellant Woodlark was the Property’s asset manager. In addition, Woodlark was the Property’s property manager, except for the period from February 2012 to April 2015.3 Woodlark and UTSA are separate LLCs, but they are commonly owned by Harold Rosenblum through Woodlark Capital, LLC. In 2008, the TICs (the Debtor TICs, Non-Debtor TICs, and UTSA) purchased undivided tenancy-in-common interests in the Property for approximately $45 million. The Property was governed by three agreements: (1) the Declaration of Tenants in Common Agreement (the “Declaration”), (2) the Asset Management Agreement (the “AMA”), and (3) the Declaration of Call Agreement (the “Call Agreement”). While Woodlark, the Debtor TICs, and Non-Debtor TICs, signed and executed all three agreements, UTSA only signed and executed the Declaration and AMA. Despite being listed as a party to the Call Agreement, UTSA did not sign the Call Agreement. In conjunction with the AMA, the Declaration made Woodlark, as asset manager, “the agent of the [TICs] with respect to overseeing and supervising the management, operation, maintenance and leasing of the Property, and for purposes of interfacing with the Lender.” The Declaration also permitted Woodlark to “employ a Third Party Property Manager,” as its agent “pursuant to the [AMA], to manage, operate, maintain and lease the Property.” Additionally, in the Declaration, each of the TICs agreed to be responsible for paying their pro rata share of “Property Expenses” to be determined by Woodlark as asset manager. The Declaration provided a process for Woodlark to notify TICs that payment of pro rata expenses was due through payment requests, also known as cash calls. If payment was not made in response to a cash call as specified in the Declaration, “the other Tenants in Common and [Woodlark] [had] the right to purchase the Delinquent Tenant in Common’s interest in the Property in accordance with the terms of the Call Agreement.” The Call Agreement governed the terms under which the Delinquent Tenant in Common’s interest in the Property could be purchased through “Call Rights,” which could “be exercised only by the Asset Manager [Woodlark].” Once exercised, however, the other TICs (the non-delinquent and non- dissenting TICs) had the option of purchasing a portion of the delinquent or dissenting TIC’s interest “on a pro rata basis according to their Interests” after providing the required notice. Any interest of the defaulting or dissenting TIC not purchased by the other TICs could “be purchased by the Asset Manager [Woodlark].” Turmoil at The Reserve As both Appellants and Appellees concede, Woodlark and the TICs had a very contentious and adversarial relationship. After informing the TICs of the Property’s deteriorating financial performance on December 3, 2014, Woodlark sent the first of three requests for funds, or cash calls, to the TICs on December 15, 2014, pursuant to the terms of the Declaration. Woodlark made a second cash call on February 4, 2015, and a third cash call on July 15, 2015. Only two of the TICs, UTSA and TIC11, responded to all three cash calls. On September 22, 2015, Woodlark sent the TICs another request for funds within two business days pursuant to paragraph 4.2(b) of the Declaration. In this cash call, Woodlark sought payment for both the projected cash shortfall and delinquent funds. One week later, on September 29, 2015, Woodlark informed the non-paying TICs that their “failure to pay [their] corresponding pro-rata share of deficit in expenses” in response to the July and September cash calls had rendered them “Defaulting” TICs, also known as “Selling” TICs. Further, Woodlark stated that it was exercising its “Call Rights” pursuant to the Call Agreement and that it intended to purchase the TICs’ ownership interests in the Property. As prescribed by the Call Agreement, any non-defaulting TIC that also intended to purchase the Defaulting TICs’ interests was given 30 days to notify Woodlark of its intention to purchase the Defaulting TICs’ interests. Only UTSA provided written notice of its intent to purchase the interests of the Defaulting TICs. On November 4, 2015, Woodlark notified the TICs that only UTSA had provided notice of intent to purchase the Defaulting TICs’ interests and that UTSA had “opted to purchase the entire interests in default” (the “November 4th Letter”). Pursuant to the Call Agreement’s provisions for determining the value of selling interests, Woodlark computed that the value of each of the Defaulting TICs’ interests was “less than zero” with a deficiency owed to Woodlark. Furthermore, Woodlark stated that “[t]he fair market value of the Property . . . based on an appraisal performed a few days ago by a prospective capital partner” was $28.1 million (the “CBRE Appraisal”). Given this appraisal, the outstanding loan balance, the Property’s payables balance, and the total amount of loans/advances provided by Woodlark, Woodlark maintained that no further payment was due to the Defaulting TICs for their ownership interests. Woodlark stated that the closing would take place on November 20, 2015. If the Selling TICs refused to execute the deed transferring ownership, Woodlark made clear that it would exercise the Call Agreement’s “power of attorney” provision5 to execute the deeds on their behalf, transferring ownership to UTSA. The Call Agreement granted Woodlark, as asset manager: a special and limited power of attorney as the attorney-in-fact . . . for each Selling Tenant in Common, with power and authority to act in the name and on behalf of each such Selling Tenant in Common to (i) upon exercise of the Call Rights, vote the Interests of any Selling Tenant in Common in [Woodlark’s] sole discretion until completion of the sale of the Interests of such 

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