United States District Court, E.D. Virginia, Alexandria Division
IN RE: GORDON PROPERTIES, LLC, Debtor.
GORDON PROPERTIES, LLC, Appellee. FIRST OWNERS' ASSOCIATION OF FORTY SIX HUNDRED CONDOMINIUM, INC., Appellant,
LEONIE M. BRINKEMA, District Judge.
Before the Court is an appeal from a bankruptcy court decision disallowing appellant's proof of claim. For the reasons that follow, the decision will be reversed and the matter remanded in light of this Memorandum Opinion.
The instant appeal of an extremely contentious bankruptcy proceeding concerns a mixed-use condominium located at 4600 Duke Street in Alexandria, Virginia, known as the Forty Six Hundred Condominium (the "Condominium"). The dominant Condominium structure is a high-rise building that contains 396 residential units and 54 commercial units. The remainder of the Condominium consists of two adjacent street-front commercial units, one occupied by a gas station and the other by a restaurant. These three distinct physical structures were administratively merged in 1975 by the filing of official documents creating the Condominium in its present form.
The parties to this matter are hardly strangers to the Court. Appellant First Owners' Association of Forty Six Hundred, Inc. ("FOA" or "the Association") is a Virginia nonstock corporation formed to oversee the management of the Condominium pursuant to the Virginia Condominium Act. See Va. Code Ann. § 55-79.39, et seq. Each person, group of persons, corporation, or other legal entity that owns a unit at the Condominium is a member of the Association, which, in turn, is governed by a seven-person Board of Directors (the "Board"), each of whom is elected by FOA members at annual meetings for two-year terms. The members' relative voting shares are a function of ownership: the 396 residential units each control 0.188% of the vote, the 54 commercial units each control 0.191% of the vote, the street-front restaurant unit controls 11.32% of the vote, and the street-front gas station unit controls the remaining 3.47% of the vote. Appellee Gordon Properties, LLC ("Gordon Properties") is a Virginia limited liability company that at last count owns 38 of the commercial units, including the street-front restaurant unit. As a result of this ownership, Gordon Properties is entitled to approximately 19% of the total votes. The Condominium's Declaration and Bylaws require every FOA member to pay an annual assessment, representing the member's proportionate share of FOA's common expenses.
FOA and Gordon Properties have been at war since 2006, when FOA terminated Condominium Services, Inc. ("CSI"), a wholly owned subsidiary of Gordon Properties, which had been FOA's management agent for years. Gordon Properties responded by suing FOA in Alexandria Circuit Court over the decision to terminate CSI. The state court granted summary judgment in favor of FOA, ruling that the Bylaws and the contract between the parties authorized the disputed termination. FOA subsequently determined that the street-front restaurant unit had been under-assessed for its proportionate share of FOA's common expenses during and immediately after the period in which CSI had managed the Condominium, setting the stage for further litigation, including the matter currently before this Court.
In 2008, Gordon Properties again sued FOA in Alexandria State Court, this time seeking a declaratory judgment that would, among other forms of relief, prohibit FOA from levying any assessment for common expenses against the street-front restaurant unit. FOA counterclaimed for an accounting and for breach of contract based on Gordon Properties' alleged failure to pay "$96, 000 in assessments which it diverted to CSI and never paid [FOA]." FOA also sought a declaration that the street-front restaurant unit had to pay a share of the Condominium's operation and management expenses proportionate to its number of votes. Neither party ultimately prevailed: Gordon Properties' eight claims were either stricken by the state court or rejected by the jury. The same jury found for Gordon Properties on FOA's counterclaim for breach of contract, and the court struck FOA's request for an accounting. On the issue of common expenses, however, FOA earned a partial victory. The state court ruled that FOA was authorized to assess the street-front restaurant unit for 11.32W of the "common expenses relating to the operation and management of [FOA], " leading FOA to issue a "corrective assessment" for the period from 2003 to 2009 in the amount of $315, 673.36 inclusive of late charges and interest. Gordon Properties appealed the state court's decision to the Supreme Court of Virginia, but its petition was denied. To date, Gordon Properties has refused to pay the disputed assessment against the street-front restaurant unit. That assessment formed the basis of FOA's proof of claim when Gordon Properties later entered bankruptcy.
In 2009, FOA sued CSI (but not Gordon Properties) for conversion and breach of the management agreement arising from events in the pre-2006 period. A jury trial ensued, and FOA obtained a judgment against CSI for $91, 125 in compensatory damages, $275, 000 in punitive damages, and $11, 390 in interest, which was affirmed by the Supreme Court of Virginia. See Condominium Servs., Inc. v. First Owners' Ass'n of Forty Six Hundred Condominium, Inc. , 709 S.E.2d 163 (Va. 2011). FOA has not received any of that judgment as a consequence of CSI's insolvency.
On October 2, 2009, Gordon Properties filed a Chapter 11 bankruptcy petition,  scheduling four creditors, including FOA. On January 29, 2010, FOA filed a proof of claim in the amount of $315, 673.36 based on a corrective assessment taking into account Gordon Properties' failure to pay a proportionate share of common expenses as owner of the street-front restaurant unit for the period from 2003 to 2009. Gordon Properties objected to the proof of claim on several grounds, principally arguing that the retroactive assessments were invalid and that FOA improperly apportioned the assessments. FOA responded by filing a motion for partial summary judgment on Gordon Properties' objection, arguing in principal part that the Alexandria Circuit Court had already decided these issues, thus precluding any attempt to revisit them before the bankruptcy court. On February 27, 2012, the bankruptcy court began a multi-day evidentiary hearing on FOA's claim.
On August 23, 2012, the bankruptcy court issued a Memorandum Opinion disallowing FOA's claim. See In re Gordon Props., LLC, No. 09-18086-RGM , 2012 WL 3644788 (Bankr. E.D. Va. Aug. 23, 2012). The bankruptcy court began by "determin[ing] what the state court had decided and the extent that res judicata or collateral estoppel affect[ed] the [present] litigation." Id. at *7. After reviewing relevant orders and letter opinions issued in the 2008 litigation between Gordon Properties and FOA, the bankruptcy court determined that the state court had decided the issue of FOA's authority to assess the street-front restaurant unit for 11.321 of the Condominium's common expenses, "preclud[ing]" the bankruptcy court from revisiting that issue by virtue of collateral estoppel. Id. at *9. At the same time, however, the bankruptcy court determined that the state court "did not directly address the allocation of common expenses" - that is, the state court failed to address "the methodology" by which such an allocation was to be made among all of the Condominium's units. Id . The bankruptcy court then chose to apply a methodology "enunciated" by the state court for the allocation of reserves to determine the appropriate allocation of common expenses. Following this approach, championed by Gordon Properties and its expert, the bankruptcy court parsed each line item of operation and management expenses from the annual budgets to see which unit or units benefited directly. See id. at *12.
This task was the primary subject of the four-day evidentiary hearing. The bankruptcy court found credible the testimony of Gordon Properties' expert that only 20% of each line item constituted a common expense assessable against all Condominium units, whereas the remaining 80% constituted limited common expenses for which the street-front restaurant unit should not bear responsibility because it did not share in the benefit. See id. at *16-*18. Likewise, the bankruptcy court found that FOA's expert had not sufficiently distinguished between common expenses and limited common expenses in explaining how FOA arrived at the amount of the corrective assessment. See id. at *15-*17, *19. Having determined that Gordon Properties carried its burden of overcoming the prima facie validity of FOA's proof of claim, the bankruptcy court considered whether FOA had proven its claim by a preponderance of the evidence. The bankruptcy court found that the evidence adduced at the hearing and in the record was inconclusive as to "how much [Gordon Properties] owes [FOA] for properly assessed condominium fees for 2003 through 2009, " and that it "[did] not have sufficient information to review each line item and prorate it among the applicable categories" of common elements and limited common elements. Id. at *19. Unable to determine whether Gordon Properties was assessed too much or too little, the bankruptcy court disallowed FOA's entire claim. Id. at *19*20.
FOA has appealed the bankruptcy court's decision on two grounds. First, FOA argues that the bankruptcy court erroneously allowed Gordon Properties to relitigate the issue of assessments against the street-front restaurant unit, including for which expenses and in what amount, contrary to the principles of res judicata. Second, FOA argues that the ...