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Appointment of Receiver Appropriate Pending Debt-Collection Action Where Defendants Operated Several Inter-Related, Family-Owned Businesses

LNV Corp. v. Harrison Family Business, LLC, et al.
No. ELH-14-03778 (United States District Court for the District of Maryland, September 18, 2015)
by Caroline E. Willsey, Law Clerk
Semmes, Bowen & Semmes (www.semmes.com)

Available at: http://www.mdd.uscourts.gov/Opinions/Opinions/14-cv-3778_LNV-Harrison%20-Memo_Appt%20Receiver.pdf

In LNV Corp. v. Harrison Family Business, LLC, et al., LNV Corporation (“LNV”), the successor in interest to the Bank of Eastern Shore (“BOES”), filed suit against Harrison Family Business (“HFB”), alleging that it had defaulted on two commercial loans, totaling $2.7 million. The loans were initially issued by BOES in February 2010 and were each secured by a Deed of Trust to real property and a Preferred Ship Mortgage on the vessel, “Captain Buddy.” Plaintiff also named several members of the Harrison family as individuals.

The Harrison family has operated a dining and fishing business, located at Harrison’s Country Inn (the “Inn”) on the Eastern Shore of Maryland since 1898. Guests can charter fishing cruises on numerous vessels owned by independent contractors. Captain Buddy, a thirty-six ton fishing boat, owned by Levin F. Harrison, IV (“Harrison IV”) and the Estate of Levin F. Harrison, III (“Harrison III”), was the flagship vessel. In May 1983, the Harrisons formed Harrison’s Country Inn and Sport Fishing Center, Inc. (“HCI”), an S-Corporation, designed to operate the family’s inn, restaurant, and charter fishing facility. In February 2010, when the loans in question were secured, Harrison III, Harrison IV, and Harrison III’s wife, Roberta Harrison (“Roberta”) each held a one-third interest in HCI. The Harrison family established HFB in 2003 to own, operate and manage the Inn, to which the family already held title. Harrison III and Roberta each held a fifty (50%) percent interest in HFB. Between 2003 and 2010, Harrison III and Roberta transferred the Inn and two (2) smaller properties on the Eastern Shore to HFB.

HCI managed all aspects of the Inn’s operations, including renting out rooms, operating the restaurant, chartering fishing boats, managing Captain Buddy, and paying expenses. HCI rents or owns most of the Inn’s furnishings and kitchen equipment. HCI employs between thirty (30) and fifty (50) full and part-time employees at the height of the summer season.

Prior to February 2010, the Harrison family debt, including personal debt, was approximately $2.5 million. In the fall of 2009, Harrison III, Roberta and Harrison IV entered into discussions with BOES about consolidating and refinancing various loans, and about borrowing an additional $200,000. On February 16, 2010, BOES extended two commercial loans to HFB – the first for $2.6 million and the second for $100,000. Harrison III, Roberta and Harrison IV signed deeds of trust as members of HFB. Harrison IV was not a member of HFB at the time. HFB executed an Assignment of Rents and Leases for each loan, which Harrison III, Roberta, and Harrison IV signed, transferring to BOES and its successors, HFB’s right, title, and interest in leases relating to the three properties it owned. The problem was that HFB never leased out its properties nor collected any rent – that was HCI’s business. Harrison III, Roberta, Harrison IV, Leslie Harrison (Harrison IV’s wife), and HCI executed personal guaranty agreements for the loans. Harrison III and Harrison IV also provided BOES with a Preferred Ship Mortgage on Captain Buddy. Of import was the fact that both deeds of trust permitted the lender to appoint a receiver upon default of the loans.

In April 2012, the Maryland Commissioner of Financial Regulation closed BOES and the FDIC was appointed BOES’s receiver. In 2013, HFB began to miss payments on the loans. In August 2014, the FDIC assigned to LNV the deeds of trust that HFB had executed to secure its loans from BOES. In November 2014, LNV, as BOES’s successor in interest, demanded that HFB and the loan’s guarantors come up to date on the payments. LNV filed suit after HFB failed to make a payment. Contemporaneous with the filing of the lawsuit, LNV filed a Motion for Appointment of Receiver and Injunctive Relief, requesting that the Court appoint a receiver as to HFB and Captain Buddy.

The Court began by noting that neither the Supreme Court nor the Fourth Circuit has provided a concrete list of factors for courts to weigh in considering whether appointment of a receivership is appropriate. Here, one of the loan documents executed by HFB provided for appointment of a receiver by the lender upon default. The Court noted that there was a split of authority as to whether the existence of such contract language was dispositive as to appointment of a receiver. The Court elected to consider the provisions in the loan documents and Preferred Ship Mortgage that called for a receiver, along with other equitable factors. The Court concluded that equitable considerations favored appointment of a receiver for HFB, but against appointment of a receiver for Captain Buddy.

In addition to the provision in the loan documents, the Court considered (1) fraud, (2) the diminished value of LNV’s interest in HFB, (3) the inadequacy of other legal remedies, and (4) the quality of the proposed receiver in reaching its decision to appoint a receiver for HFB. First, the Court noted the allegation that Harrison IV fraudulently executed the 2010 loan documents by signing as a member of HFB, when in fact he was not a member. The Court also reflected on LNV’s contention that the Harrisons dissipated assets from HFB in the form of “advances” to members of the Harrison family, and other entities that the family controlled. Second, the Court focused extensively on the diminished value of HFB as a result of the fact that HFB allowed HCI to use its property for several years without paying rent. Neither HFB nor the Harrisons could identify any lease agreements between HFB and HCI or any “rent” payments from HCI to HFB in the form of a money transfer. In spite of this, HCI was using and financially benefitting from the use of HFB’s property. The Court concluded that HCI had intentionally withheld funds from HFB, and instead chosen to use its proceeds to pay vendors and keep the Inn operable. Third, the Court noted that the initiation of foreclosure proceedings against HFB and pursuit of the instant litigation – the only remedies available to LNV at law – were inadequate. Neither remedy was “quick” and neither could ensure that HFB’s assets were not wasted, hidden, or misappropriated in the interim. Given that HCI and HFB were inter-related entities, all owned by Harrison family members, the Court concluded that there would be little incentive for HCI to pay rent to HFB for the Inn. Finally, the Court concluded that LNV’s proposed receiver, a Maryland attorney with more than thirty (30) years’ experience in lending, loan recovery, and receivership and who also had experience managing restaurants, was qualified to serve as a receiver for HFB.

As for Captain Buddy, the Court found that equitable factors disfavored appointment of a receiver. It was enough, the Court concluded, that Captain Buddy was collateral on the loans made to HFB, pursuant to the Preferred Ship Mortgage. The Court reasoned that LNV had not provided evidence that Captain Buddy was being mismanaged, or that it was in imminent danger of diminution of value. Further, there was no evidence regarding any relationship between Captain Buddy and HCI. The Court also concluded that LNV had not demonstrated that the appointment of the proposed receiver would do more good than harm, given that the proposed receiver admittedly had no experience serving as a receiver for a charter boat.

The Court, therefore, granted LNV’s Motion for Appointment of a Receiver, in part, and denied it in part. The Court appointed LNV a proposed receiver for HFB, but not for Captain Buddy.