A bank’s efforts to recover accrued interest and attorneys’ fees in the latest round of a long-running dispute with a storage facility owner proved fruitless as the US Bankruptcy Court for the Middle District of Florida ruled for the debtor. A ruling strongly in favor of the debtor in a previous foreclosure action proved to be a key factor in persuading the bankruptcy court that the creditor should not recover the additional amounts as part of an adversary action in the storage facility owner’s Chapter 11 case.
The debtor was Kraz LLC, which owned Causeway Self Storage, a storage facility and flex commercial space in Tampa. In order to develop its storage facility, Kraz took out a $5.2 million mortgage loan from Colonial Bank. The Kraz loan was eventually sold to Branch Bank & Trust. In early 2010, BB&T launched a foreclosure action in state court, claiming Kraz was in default on the mortgage. The trial judge ruled entirely for Kraz, reinstating the loan as of June 30, 2009. After a largely unsuccessful appeal by BB&T and a return to the trial court, the new maturity date for the loan was set at April 28, 2015.
April 28 came and went, and Kraz did not pay the loan in full. Two days later, the bank launched another foreclosure action, this time in federal court. Kraz filed a Chapter 11 bankruptcy to stop the foreclosure. The bank asked the bankruptcy court to dismiss Kraz’s bankruptcy filing for being submitted in bad faith. Kraz’s bankruptcy filing, the bank claimed, was much like another debtor’s bankruptcy filing in a 1988 case from the Middle District, In re Phoenix-Piccadilly Ltd., in which the bankruptcy court tossed the debtor’s petition for being in bad faith.
In this case, though, the bankruptcy court decided that the debtor was not acting in bad faith and was in a different situation than the debtor in the Phoenix case had been. In Phoenix, the debtor had contested a foreclosure action and had lost. Having lost the foreclosure case, the debtor then went to the bankruptcy court “on the eve of foreclosure to thwart its lender from exercising” its rights under the successful foreclosure judgment. In Kraz’s case, the debtor was victorious in the foreclosure action and, unlike the debtor in Phoenix, had consistently acted to advance its bankruptcy case toward conclusion, rather than working to drag it out as long as possible.
Having refused to throw out the Chapter 11 filing on that ground, the court also addressed the issue of the total amount of the bank’s claim. Although the principal amount outstanding as of June 30, 2009 was undisputed at $4.75 million, the bank argued that it should be allowed to recover several elements of damages that would push its total amount to in excess of $7.19 million. These damages included accrued interest from June 2009 to April 2015 and attorneys’ fees. The bank was unsuccessful in both of these areas. The bank had no claim to accrued interest because of the language used in the state court order resolving the original foreclosure action. That order expressly stated that, since there had been no default, there were “no accrued principal and interest payments due.”
That state court action also thwarted the bank’s attorneys’ fees claims. The judge in that case had ruled that BB&T orchestrated Kraz’s default in order to accelerate the loan and foreclose. Given that the underlying root cause was the bank’s own “inequitable conduct,…it would be improper to award BB&T the fees incurred enforcing its note.”
Any decision to file a Chapter 11 bankruptcy is a difficult and serious one. This is even more true when you must also deal with adversary proceedings. For reliable and diligent representation to protect you, talk to the Florida bankruptcy attorneys at Stok Folk + Kon. Our bankruptcy attorneys can help you navigate the process of Chapter 11 and protect your interests along the way.
Contact us online or by calling (954) 237-1777 to schedule your consultation.
More blog posts:
Federal Appeals Court Approves Florida Debtor’s Chapter 11 Reorganization with Third-Party Releases, Florida Business Lawyers Blog, Nov. 20, 2015
Absence of Acceleration Provision Cuts Recovery for Florida Creditor, Florida Business Lawyers Blog, Sept. 18, 2015