May v. Lobo Land, L.L.C. et al

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
LOBO LAND, LLC,
Debtor. 	No. 7-05-10262 SS
OMER MAY,
Plaintiff,
v. 	Adv. No. 07-1125 S
LOBO LAND, LLC and
CAROL CAGAN aka Cappy Cagan,
Defendants.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
AFTER TRIAL ON THE MERITS
This matter came before the Court for trial on the merits of
Plaintiff’s complaint. 	Plaintiff appeared through his attorney
Sutin, Thayer & Browne (Jay D. Hertz). 	After the filing of this
adversary proceeding and upon Plaintiff’s Motion, the Lobo Land,
LLC bankruptcy was converted from a Chapter 11 to a Chapter 7 and
Yvette Gonzales was appointed Trustee. 	Ms. Gonzales appeared at
the trial through her attorney James A. Askew. 	Also after the
filing of this adversary proceeding Carol Cagan filed a Chapter
13 petition with this Court. 	The trial of this adversary
proceeding therefore did not attempt to assess any liability as
to Ms. Cagan. 	Nor should this Memorandum Opinion be construed in
any fashion as res judicata or collateral estoppel as to Ms.
Cagan, who did not participate in the trial.
FACTS
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1The “May Land” is defined in ¶ 1.3.2 as the tract of 24
acres of undeveloped land near Angel Fire, NM.
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The Court makes the following findings of fact from the
admissions in the pleadings and judicial notice of this adversary
case file and the main bankruptcy case file for Lobo Land, LLC.
1. 	In 2003, Plaintiff filed a foreclosure against Lobo Land,
LLC in Colfax County, New Mexico. 	See Lobo Land case, doc 1,
Statement of Financial Affairs, Question 4.
2. 	Lobo Land, LLC filed a Chapter 11 proceeding on January 14,
2005. 	The voluntary petition was signed by Carol Platt Cagan.
Lobo Land case, doc 1.
3. 	The K-1's attached to Lobo Land, LLC’s tax returns submitted
as part of the initial report suggest that Carol Cagan was a 75%
owner of the Debtor. 	Lobo Land case, doc 8, page 37.
4. 	Lobo Land, LLC filed a plan on October 11, 2005 and a First
Modification on November 21, 2005. 	Lobo Land case, docs 73 and
75. 	The Plan ¶ 3.3 defines secured claims classes. 	Class III A
is the claim of Plaintiff, secured by a first lien on “the May
Land. 1” 	Plan ¶ 6.3.1 sets out the treatment of the May claim:
6.3.1. Class III A: The allowed claim of May, secured
by a first lien on the May Land, shall be satisfied as
follows:
6.3.1.1. The allowed amount of the claim with interest
accruing from the Effective Date at the rate of 8% per
annum shall be paid in monthly installments of
$2400.00, which will be applied first to interest
accrued on the unpaid principal, then to principal,
with a balloon payment of all principal and interest
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coming due at the time of the sixtieth monthly
installment.
6.3.1.2. For purposes of this Plan, the principal and
interest portion of the allowed amount of the May claim
shall be $238,473.34, as of January 14, 2005, with
interest accruing thereon until the Effective Date at
the rate of $44.61 per diem, subject to the possible
reduction of those calculated amounts in the event that
Debtor presents proof of any payment which was not
credited to the debt or proof of a miscalculation of
the debt.
6.3.1.3. Debtor shall pay to May one or more lump sum
payments totaling $40,000.00 from the proceeds of sales
of the residential lots as such funds become
unrestricted by order of the Court if such funds are
not available prior to the Effective Date. 	Lobo Land
shall promptly file such adversary proceedings as may
be necessary to determine the validity of any adverse
lien, claim or interest against the proceeds of the
residential lot sales or against the residential lots
in order to make such proceeds available to May.
6.3.1.4. Notwithstanding any provision to the contrary
above, the May claims shall be paid in full upon the
sale of the Ranch if the Ranch is sold prior to
completion payments set out herein to satisfy the May
claim.
6.3.1.5. May shall retain the liens securing his claim
until such claim has been paid in full as set out
herein.
6.3.1.6. Notwithstanding any provision herein to the
contrary, May shall be paid no less than one-half of
the net proceeds of the sale of the Snowflake property,
upon closing of such sale, with such obligation to be
evidenced by an “assignment of proceeds” executed by
Carol Cagan in form satisfactory to May or approved by
the Court, which instrument shall be tendered by Cagan
prior to Confirmation of this Plan, and shall be
effective only upon confirmation of this Plan.
6.3.1.7. Notwithstanding any provision herein to the
contrary, the automatic stay shall terminate upon
default in payment of any installment called for herein
on the May claim, so as to allow May to avail himself
of all remedies under his pre-petition note and
mortgage.
6.3.1.8. Lobo Land shall continue all efforts to
refinance the May land, shall continue to list the May
Land for sale pursuant to the arrangements agreed to by
Debtor and May prior to confirmation of this Plan (as
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2Plan ¶ 3.4 states that the claims of Angel Fire Resort
Operations, LLC for membership fees, dues and other charges
arising from or attributable to the residential lots are secured
by liens “against any assets of the Debtor.” 	The Plan is silent
as to whether the liens are against the May Land.
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such arrangements may be set out in any order of the
Court or in any other form between Debtor and May), and
shall continue all efforts to reach agreement with the
Village of Angel Fire for the development, subdivision
and sale of the May Land.
The First Modification added a ¶ 6.3.1.9:
Notwithstanding any other provision of this plan, the
dismissal of the foreclosure proceeding pending pre-
petition by May against Lobo Land shall be without
prejudice, and any applicable statute of limitation
with respect to the May claims shall begin to run anew
from the later of (1) the failure of the Debtor to
perform any obligation owed to May under this plan, or
(2) such other date as may be controlled by applicable
law.
5. 	The Plan, as modified by the First Modification, was
confirmed on March 8, 2006. 	Lobo Land case, doc 85.
6. 	After confirmation, Lobo Land, LLC sold some of the May
property and the proceeds were deposited at CU Title. 	See
Plaintiff’s Trial exhibit 3.
7. 	On July 9, 2007, Lobo Land, LLC filed a “Stipulated Motion
to Release Monies in Escrow” (“Motion”), submitted by Donald A.
Walcott for Scheuer, Yost & Patterson (Debtor’s attorney), and
approved by Walter L. Reardon (Attorney for Angel Fire Resort
Operations 2). 	See Plaintiff’s Trial exhibit 2. 	The entire
motion states: “Debtor Lobo Land, LLC and Creditor Angel Fire
Resort Operations, by and through their undersigned attorneys,
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hereby request that the Court enter the Order to Release Monies
in Escrow submitted herewith.” 	The Motion does not state Angel
Fire Resort Operations’ relation to the May Land or proceeds, nor
does the Motion indicate Plaintiff’s approval. 	The Motion’s
Certificate of Mailing does not indicate that Plaintiff received
notice of the Motion.
8. 	On July 9, 2007, the Court entered the “Order to Release
Monies in Escrow.” 	It states: “All monies held in escrow by CU
Title shall be released immediately and payable to Lobo Land,
LLC.” 	See Plaintiff’s Trial exhibit 3. 	The Order was submitted
by Donald A. Wolcott and approved only by Walter L. Reardon. 	No
notice of the Order was given to Plaintiff.
9. 	Sometime after July 9, 2007, Plaintiff discovered that some
of the May Land had sold and he did not receive the proceeds. 	He
promptly filed this adversary proceeding on September 17, 2007
seeking damages and punitive damages.
10. 	On September 26, 2007, Plaintiff filed a Motion to Convert
the bankruptcy case to chapter 7. 	Lobo Land case, doc 128.
11. 	Plaintiff also sought and obtained stay relief on November
2, 2007 to enable him to continue his foreclosure on the May
Land. 	Lobo Land case, docs 124 and 136.
12. 	On January 3, 2008 the Court converted the bankruptcy case
from Chapter 11 to Chapter 7. 	Lobo Land case, doc 144.
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The parties also stipulated to several facts immediately
before the trial:
13. 	Plaintiff’s Exhibits 1 through 6 and Trustee’s Exhibits C
and D were admitted into evidence through stipulation.
14. 	Plaintiff’s claim in this adversary is for $32,369.96, which
is the amount released from escrow. 	See also Exhibit C.
15. 	The parties agreed that the $32,369.96 remains a secured
claim, secured by the May Land consisting of four remaining lots
worth in excess of the claim.
16. 	The parties agreed that any punitive damage claim would be
unsecured and subordinated to the unsecured creditors’ claims.
See also 11 U.S.C. § 726(a)(4).
17. 	The parties agreed that any punitive damage claim would fit
under 11 U.S.C. § 348(d) and be treated for all purposes as a
prepetition claim.
18. 	The parties agreed that the funds in question were in fact
payable to Plaintiff and were instead paid to Cagan by Lobo Land,
LLC.
The Court also makes the following findings based on
testimony and exhibits from the trial:
19. 	The Trustee intended to list the May Land for sale at
$720,000.
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20. 	If the May Land were to sell for $720,000, all claims and
expenses would be paid in full, with assets being available for
the equity holders of Lobo Land, LLC.
21. 	Cagan was the managing member of Lobo Land, LLC. 	Lobo Land,
LLC had two members in total, Cagan and Cross. 	Cagan has a law
degree.
22. 	Donald Wolcott, attorney for Debtor, who drafted the Motion
and Order that released the funds, was aware of Plan ¶ 6.3.1.3.
Wolcott took his directions from Cagan. 	Wolcott never contacted
Plaintiff or his attorney Jay Hertz for consent or approval to
release funds from escrow. 	Wolcott never gave notice of the
proposed Motion or Order to any creditor except Walter Reardon.
Wolcott acted with the knowledge of Cagan and through her, Lobo
Land, LLC.
CONCLUSIONS OF LAW
1. 	A confirmed chapter 11 plan is a contract and an order of
the Court. 	General Elec. Capital Corp. v. Dial Business Forms,
Inc. (In re Dial Business Forms), 341 F.3d 738, 744 (8 th Cir.
2003). 	See also U.S. Brass Corp. v. Travelers Ins. Gp., Inc. (In
re U.S. Brass Corp.), 301 F.3d 296, 307 n. 40 (5 th Cir. 2002).
As a contract, it must be interpreted according to the general
rules for contractual interpretation. 	Connolly v. City of
Houston, Texas (In re Western Integrated Networks, LLC), 322 B.R.
156, 160-61 (Bankr. D. Colo. 2005).
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2. 	A contract is deemed ambiguous only if it is reasonably and
fairly susceptible to different constructions. 	Levenson v.
Mobley, 106 N.M. 399, 401, 744 P.2d 174, 176 (1987). 	In this
case the Plan provisions regarding Plaintiff are clear and
unambiguous. 	“Debtor shall pay to May one or more lump sum
payments totaling $40,000.00 from the proceeds of sales of the
residential lots as such funds become unrestricted by order of
the Court if such funds are not available prior to the Effective
Date.” 	Plan ¶ 6.3.1.3.
3. 	Lobo Land LLC breached this contract when it failed to pay
the $32,369.96 in escrow to Plaintiff. 	See also Finding of Fact
18 above.
4. 	“Every breach of contract gives the injured party a right to
damages against the party in breach.” 	Angel Fire Resort
Operations, LLC v. Corda, 138 N.M. 50, 54, 116 P.3d 841, 845 (Ct.
App.), cert. denied, 138 N.M. 145, 117 P.3d 951 (2005). 	The
purpose of contract law is to compensate the nonbreaching party
for damages caused by the breaching party’s nonperformance. 	Paiz
v. State Farm Fire and Casualty Co., 118 N.M. 203, 212, 880 P.2d
300, 309 (1994)(citing Romero v. Mervyn’s, 109 N.M. 249, 257, 784
P.2d 992, 1000 (1989)).
“It is a fundamental tenet of the law of contract
remedies that, regardless of the character of the
breach, an injured party should not be put in a better
position than had the contract been performed.”
Farnsworth [on Contracts] § 12.8, at 189-90; see also 3
Arthur L. Corbin, Corbin on Contracts § 606, at 647-48
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3 The Court is not minimizing Plaintiff’s complaint. 	Lobo
Land, LLC not only breached its contract with Plaintiff, but
violated a Court order when it paid the funds to Carol Cagan.
Lobo Land, LLC has received some punishment already, by being
(continued...)
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(1960) (“[O]ne is held responsible for harm to others
if it is caused by his ‘folly’ or his negligent
mistake, but his responsibility need not be carried so
far as to permit others to profit by reason of his
mistake.”).
Id. 	See also Hood v. Fulkerson, 102 N.M. 677, 680, 699 P.2d 608,
611 (1985)(The general theory of damages is to make the injured
party whole. 	Duplication of damages or double recovery for
injuries received is not permissible.)(Citations and quotation
marks omitted.) 	In this case, Plaintiff should therefore be able
to recover his damages, but not in excess of his actual losses.
5. 	A plaintiff has the burden of proving damages with
reasonable certainty. 	Bourgeous v. Horizon Healthcare Corp., 117
N.M. 434, 439, 872 P.2d 852, 857 (1994).
6. 	It might be argued that Plaintiff has not proved any damages
at all. 	For example, even after the funds were misdirected from
the escrow, Plaintiff still has a fully secured claim with a
first lien position that bears interest under the Plan ¶ 6.3.1.1
at the rate of 8%. 	And all evidence demonstrates Plaintiff will
be paid in full. 	See Finding of Fact 15 above. 	His only real
complaint is that he did not receive the $32,369.96 earlier;
however, the delay in payment is being compensated with
interest. 3 	Nevertheless, the simple facts remain: Plaintiff was
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3(...continued)
involuntarily converted to Chapter 7 and having the automatic
stay terminated on the May Land. 	Further punishment, if any,
will come from the United States Attorney’s office, to which this
case is being referred for possible violation of bankruptcy
crimes. 	See 18 U.S.C. 152, 153. 	See also, e.g. United States v.
Atiyeh, 330 F.Supp.2d 499 (E.D. Pa. 2004)(controlling shareholder
of debtor in possession charged with embezzlement and fraudulent
concealment of funds under 18 U.S.C. 152 and 153).
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entitled to receive $32,369.96 when those funds were generated,
but did not receive them. 	Plaintiff therefore has been deprived
of the timely receipt of those funds, regardless of whether he
can expect to be fully paid at a later date. 	An analogous
situation would be that of a mortgagee owed a periodic payment
under the terms of a mortgage note. 	The fact that repayment of
the note at a fully adequate interest rate is assured would not
be grounds for refusing to grant a judgment for the failure to
make the periodic payment timely.
7. 	Plaintiff also seeks attorney fees as part of his damages.
But, under the American Rule litigants are responsible for their
own attorney fees. 	New Mexico Right to Choose/Naral v. Johnson,
127 N.M. 654, 657, 986 P.2d 450, 453 (1999). 	It is true that New
Mexico has recognized three categories where an exception might
be made to the American Rule. 	Id. at 659, 986 P.2d at 455.
Those are: “(1) exceptions arising from a court's inherent powers
to sanction the bad faith conduct of litigants and attorneys, (2)
exceptions arising from certain exercises of a court's equitable
powers, and (3) exceptions arising simultaneously from judicial
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and legislative powers.” 	Id. 	The first, the “inherent powers”,
are those described as the power of a court to impose sanctions
on litigants and attorneys “in order to regulate their docket,
promote judicial efficiency, and deter frivolous filings.” 	Id.
(Citation omitted). 	What Lobo Land, LLC did in this case is
unrelated to the Court’s regulation of its docket, promoting
judicial efficiency, or deterring frivolous filings. 	It was an
intentional and willful breach of contract outside of the
presence of the Court. 	Exception 1 does not apply.
The second, the “equitable powers”, are those described as
the power of a court arising from its equitable jurisdiction.
Id. at 660, 986 P.2d at 456. 	Exception 2 does not apply because
the Court is not exercising its equitable jurisdiction in ruling
on Lobo Land, LLC’s breach of contract action.
The third, the “judicial and legislative powers” exception
also does not apply. 	This exception only comes into play in
“contexts traditionally viewed as equitable” and each is
traceable to a statute or court rule. 	Id. at 661, 986 P.2d at
457. 	Lobo Land, LLC’s breach does not fall into this category.
Therefore, in sum, the Court finds no basis for awarding
Plaintiff any attorney’s fees in this case.
8. 	Finally, Plaintiff seeks punitive damages, alleging
outrageous behavior of Lobo Land, LLC. 	Having acted through its
managing member, Ms. Cagan, arguably Lobo Land, LLC ought to be
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4 To repeat, this finding/conclusion is not in any way
binding on Ms. Cagan as to her personal liability.
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punished for deliberately delivering to its managing member a
substantial sum of funds which were to go to Plaintiff. 4 	The
problem with assessing punitive damages against Lobo Land LLC
however, is that an award of such damages to Plaintiff may
conceivably result in a diminution of what other creditors
receive in the case. 	For example, Lobo Land’s Summary of
Schedules shows total assets of $4,402,000.00 and total
liabilities of $5,831,577.00. 	Lobo Land case, doc 1. 	While the
claims register suggests that the claims against the estate are
much lower than the Summary of Schedules indicates, the process
of adjudicating claims and of monetizing and distributing the
assets of the estate is not complete. 	And §726(a) specifies that
an allowed claim for punitive damages has priority over payment
of interest on any allowed claim. 	Thus an unconditional award of
punitive damages at this stage of the administration of the main
case may effectively serve to punish other creditors rather than
only the debtor. 	In consequence, the Court will award punitive
damages, in a maximum amount of $16,000.00, only to the extent
that such an award will not diminish payment of all other claims
owed by the estate (including the $32,369.96 awarded by this
judgment) including any applicable interest.
CONCLUSION
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For the reasons set forth above, the Court will enter a
Judgment for Plaintiff Omer May in the amount of the $32,369.96
plus interest at the rate of 8% per annum against Defendant Lobo
Land, LLC. 	The Court will further award punitive damages of
$16,000 plus interest at the rate of 8% per annum in favor of
Plaintiff Omer May and against Lobo Land LLC, but only out of
whatever funds are left over after all other claims are paid in
full with interest but before any payment goes to Lobo Land LLC.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date Entered on Docket: 	October 15, 2008
copies to:
Jay D Hertz
PO Box 1945
Albuquerque, NM 87103-1945
James A Askew
PO Box 1988
Albuquerque, NM 87103-1888
Office of the United States Trustee
PO Box 608
Albuquerque, NM 87103-0608
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