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In re Highland Construction Management Services, LP

United States District Court, E.D. Virginia, Alexandria Division

March 20, 2017



          Leome M. Brinkema United States District Judge

         Before the Court is Highland Construction Management Services and Joseph Lee Bane, Jr.'s (collectively "appellants") appeal from a bankruptcy court order granting summary judgment in favor of Wells Fargo Bank NA f/b/o Jerome Guyant IRA ("appellee") [Dkt. No. 1] in an adversary proceeding contesting the appellee's claim for $1, 396, 657.52 pursuant to a judgment order from a Virginia state court. The bankruptcy court determined that the state court judgment regarding the debt owed by appellants was res judicata and therefore that appellants' could not challenge the nature and scope of that obligation. For the reasons that follow, the bankruptcy court's order will be affirmed.

         I. BACKGROUND

         Highland Construction Management Services ("Highland") is a limited partnership which owns interests in entities that invest in and develop real estate. Appellants Br. at 8. Joseph Lee Bane, Jr. ("Bane") is a trustee for the irrevocable trust that serves as the general partner of Highland. Id. Jerome Guyant ("Mr. Guyant") was a member of most of the limited liability companies in which Highland held an interest. Id. The Guyant Individual Retirement Account ("the Guyant IRA"), of which Wells Fargo is the trustee, served as Highland's principal lender before Highland's bankruptcy. Id.[1] Based on the terms of the loans, the Guyant IRA was a lender of "last resort, " charging loan origination fees of twenty percent and interest of twenty percent. JA 353.

         On December 22, 2005, Highland executed a promissory note for $650, 000 in favor of the Guyant IRA to secure a revolving credit line. JA 165. That note was modified by an allonge on October 13, 2006, which increased the amount of credit to $850, 000. JA 166. A second allonge, effective as of July 1, 2007, stated that the outstanding principal balance on the note was $850, 000 and the outstanding interest was $177, 750. JA 173-74. The second allonge extended the due date for repayment of the loan and made changes to the interest rates and other terms. JA 079. The third allonge, executed in November 2008, increased the amount of credit to $1.4 million and extended the payment date for all unpaid principal and interest until December 1, 2008. JA 080, 180-81. In the third allonge, the parties agreed that, as of September 30, 2008, the outstanding principal balance was $981, 822.08, which included $81, 822.08 in unpaid interest and an additional loan fee of $50, 000. JA 181. Highland defaulted on the note when it failed to pay the principal and interest due by December 1, 2008. JA 080. At that time, the principal amount due on the loan was $1, 082, 000. Id, The debt owed by Highland to the Guyant IRA has been the subject of two state court cases and three prior disputes before the bankruptcy court. The history of these proceedings is summarized below.

         Efforts to collect the debt began in the Circuit Court for Loudoun County on March 24, 2010 with the filing of Wells Fargo Bank. N.A. f/b/o Jerome Guvant IRA v. Highland Construction Management Services. LP. in which the Guyant IRA sued Highland, and Bane as guarantor, for $1, 082, 000 in outstanding principal and $257, 595.56 in interest, as well as for a declaratory judgment as to the perfected status of the Guyant IRA's security interest in the debt. JA 062. Following a bench trial, Judge James H. Chamblin awarded the Guyant IRA a $1, 082, 000 judgment against Highland and Bane, along with interest, attorney's fees, and costs. JA 035-37. The Judgment Order also declared that the Guyant IRA had a perfected security interest in certain assets of Highland to secure payment of the judgment. Id.

         In rendering his decision, Judge Chamblin walked through the lending history between appellants, Mr. Guyant, and the Guyant IRA, from the original note to the default in 2008. J A 160-92. A focal point of debate between the parties was the significance of a December 2006 transfer of interest in Ashbury Hillsides, LLC ("Ashbury"), which owned real estate near Hillsboro, Virginia. JA 0003. As of December 2006, Highland held a 47% interest in Ashbury. Appellants Br. at 9. On December 13, 2006, Highland conveyed a 42% interest to Mr. Guyant, who wanted to acquire tax credits held by Ashbury. JA 200.[2] According to the Assignment of Interest, the assignment was based on a purchase agreement between Highland and Mr. Guyant and the first installment of the purchase agreement was a $400, 000 wire transfer from Mr. Guyant to Highland on December 13, 2006. Id. No additional consideration is identified in the assignment document and no written purchase agreement appears to have been created; instead the parties formed an oral agreement. JA 333.

         Based on the evidence presented at trial, Judge Chamblin found that the terms of the oral agreement were as follows: Highland agreed to transfer to Mr. Guyant a 42% interest, along with the associated tax benefits. JA 170-72. In exchange, the parties agreed that Mr. Guyant would lend Highland $400, 000 and waive the $80, 000 origination fee for that loan. Id. In addition, Mr. Guyant would apply any proceeds realized from the 42% interest in Ashbury first to repay Mr. Guyant for the $400, 000 loan to Highland and then to reduce Highland's debt to the Guyant IRA. Id.[3] In other words, the beneficial interest from the 42% ownership stake in Ashbury remained with Highland. JA 316. Judge Chamblin concluded that Mr. Guyant performed his obligations by crediting proceeds received from Ashbury's sale of property ($176, 400 on April 9, 2007) and the sale of tax credits ($470, 400 on October 7, 2007) to Highland's $400, 000 debt to him and then to the Guyant IRA. JA 172, 175-76. Both of these credits were incorporated into Judge Chamblin's calculation regarding the outstanding debt. JA 176-77.

         In their affirmative defenses, Highland and Bane argued that "Highland [was] entitled to a setoff and/or recoupment in connection with Plaintiffs purported purchase of 42% interest in Ashbury [] in an amount to be determined." JA 136. Highland characterized the $400, 000 payment not as a loan but as a down payment for the 42% interest. JA 169-70. Consistent with its affirmative defense, Highland argued that all the proceeds from these two transactions (the sale of land and sale of tax credits) should have been applied against Highland's debt to the Guyant IRA. JA 143-44. The court rejected these contentions, finding that the Guyant IRA's explanation was consistent with the transaction history, and in its October 5, 2010 order entered a judgment against Highland and Bane, jointly and severally, for $1, 082, 000 in principal, $82, 435.13 in unpaid interest, $45, 068.06 in attorney's fees and costs, and $5, 000 in expert witness fees. JA 035-37. On February 28, 2011, Highland filed a voluntary petition for Chapter 11 bankruptcy relief in the bankruptcy court for the Eastern District of Virginia, Alexandria Division. See In re Highland Construction Management Services, LP, Case No. 11-11413.

         While the first state case was pending, on May 10, 2010, Highland filed its own civil action against Mr. Guyant in the same court, Highland Construction Management Services, LP v. Jerome Guyant, [4] asserting in Count I that Mr. Guyant had breached the agreement to buy the 42% Ashbury interest for $1, 737, 345.00 ($1.7 million was the appraised value of the Ashbury property) and that the $400, 000 from Mr. Guyant to Highland was a down payment so Mr, Guyant still owed Highland $1, 337, 345. JA 195-96. Alternatively, Count II asserted Quantum Meruit/Unjust Enrichment under the theory that Mr. Guyant was unjustly enriched by receiving extensive tax deductions available to him as a result of the transaction. According to Highland, the value of the interest conveyed was $2, 225, 217 which, after crediting Mr. Guyant for the $400, 000 wire transfer, reduced Mr. Guyant's debt to Highland to $1, 825, 217. JA 196-97. Highland removed the action to the bankruptcy court, but it was subsequently remanded back to the Circuit Court. Appellee Br. at 8. In his defense in that proceeding, Mr. Guyant asserted collateral estoppel and res judicata, citing the prior state case's holding regarding the terms of the Ashbury transaction. JA 205.

         Judge Chamblin presided over the second state court case in which he reached the same conclusion as he had in the first case: that the $400, 000 represented a loan from Mr. Guyant to Highland, who received the benefit of the $80, 000 loan fee being waived, and, in exchange, Mr. Guyant received the benefit of the tax deductions that were of no value to Highland and agreed to apply the proceeds from the 42% interest in Ashbury first to reduce the $400, 000 loan from Mr. Guyant and then to reduce Highland's debt to the Guyant IRA. JA 209. As to the breach of contract claim alleged in Count I, the court found that Highland was unable to carry its burden of proving that the terms of the agreement were as it alleged. J A 208. With respect to Count II, the court found that there was adequate consideration and quantum meruit did not apply. JA 209. Highland filed a Motion for Reconsideration and a Motion for a New Trial. Following a hearing, both motions were denied. JA 214-27.[5]

         During the course of the second litigation, Highland presented evidence and argument regarding a quasi-estoppel theory as to the tax deductions. Id. Judge Chamblin stated that the tax issues were "very interesting" but concluded that they were not dispositive and instead focused on the terms of the transfer of interest in Ashbury. JA 207-09. Although Judge Chamblin asked Highland about the sources of the quasi-estoppel cases cited in its briefs, he never stated that he would not apply the doctrine because the Virginia Supreme Court had yet to rule on it, id.; instead he concluded that quasi-estoppel was not relevant to the case, JA 223-24.[6] Highland appealed Judge Chamblin's decision to the Supreme Court of Virginia, which found that there was no reversible error and refused the petition for appeal. JA 270

         After Highland filed its Chapter 11 petition, Wells Fargo timely filed a Proof of Claim on behalf of the Guyant IRA, citing the Virginia state court judgment. JA 032-33. Since that filing, the parties have litigated three disputes in the bankruptcy court about the Guyant IRA's claim. The first dispute, which arose as an objection, not in an adversary proceeding, dealt with whether the Guyant IRA's claim was secured or, as Highland argued, an unsecured debt subservient to the debtor's status as a judicial lien creditor. The bankruptcy court rejected Highland's argument and was affirmed by both this court, JA 272-74, and the Fourth Circuit, JA 275-76. In the second dispute, which arose in the context of an adversary proceeding, Highland attacked the prejudgment attachment of proceeds from an investment that served as a security for its debt to the Guyant IRA. See Highland Construction Management Services, LP v. Wells Fargo Bank, NA, f/b/o Jerome Guyant, IRA, Adv. Proc. No. 13-1055. Highland ultimately dismissed that proceeding with prejudice. JA 401. In the third dispute, also an adversary proceeding, Highland challenged the Guyant IRA's status as a secured creditor with respect to the note, asserting that financing statement did not create a valid security interest. See Highland Construction Management Services. LP v. Wells Fargo Bank. NA. f/b/o Jerome Guyant. IRA, Adv. Proc. No. 13-1289. The bankruptcy court entered judgment against Highland, finding that the issue was res judicata because Highland had the opportunity to litigate that issue in the first state court case. JA 438.

         The instant adversary proceeding arises out of a appellants' complaint filed on February 2, 2015, in which they sought in Count I to recharacterize the Guyant IRA's $1, 396, 657.52 claim "as equity obtained by Mr. Guyant when he received [42%] membership interest in Ashbury." JA 009. Count II sought equitable subordination of the debt to claims of unsecured creditors and Count III sought determination of an alleged credit due to Highland. JA 009-13. The Guyant IRA filed a motion for summary judgment, asserting that all three claims were barred by res judicata and collateral estoppel. JA 059-76. In an order dated October 25, 2016, ...

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