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Lain v. Erickson

United States District Court, D. Maryland, Northern Division

December 3, 2014

DAN LAIN, TRUSTEE, Plaintiff,
v.
JOHN C. ERICKSON, et al. Defendants.

MEMORANDUM OPINION

WILLIAM D. QUARLES, Jr., District Judge.

Dan Lain (the "Trustee"), the appointed trustee of the Liquidating Creditor Trust of Erickson Retirement Communities, LLC (the "Liquidating Trust"), sued Paul L. Erickson and Cynthia A. Plungis (the "GST Trustees"), as trustees of the 2002 Nancy A. Erickson GST Trust and the 2002 John C. Erickson GST Trust (the "GST Trusts"), and others[1] for breach of contract and other claims. ECF No. 33. Pending are the Trustee's motion for summary judgment for breach of contract, ECF No. 189, and the GST Trustees' motion for leave to file a surreply, ECF No. 194. No hearing is necessary. Local Rule 105.6 (D. Md. 2014).[2] For the following reasons, the GST Trustees' motion for leave to file a surreply will be granted, and the Trustee's motion for summary judgment will be granted.

I. Background[3]

A. Facts

Erickson Group, LLC ("EG") was a holding company. ECF No. 33 at 9. Its only asset was its 100% membership interest in Erickson Retirement Communities, LLC ("ERC"). Id. ERC was a privately-owned entity that developed and managed retirement communities. Id. at 8-9. John Erickson was the President of EG and had a controlling interest. Id. at 12. Several members of his family, including his wife Nancy, served as directors and officers of EG and ERC. Id. at 11-12.

From 1996 to 2000, John and Nancy Erickson (together, "the Ericksons") made contributions of cash or ownership interest in EG to the Erickson Foundation ("EF"). ECF No. 192-1 at 3. However, legal restrictions on EF maintaining an ownership interest in EG while John Erickson controlled EG led the Ericksons to establish the GST Trusts as charitable remainder trusts that expired five years from the date of creation. See ECF Nos. 192-1 at 3-4; ECF No.192-4 ¶¶ 6-7. Both trusts held ownership interests in EG. See id.

Before their expiration, the GST Trusts sold their EG interests to the Baltimore Community Foundation ("BCF"). ECF Nos. 189-2 at 3; 192-4 ¶¶ 17-18.[4] In 2005, EG sought to buy-back the ownership interests from the BCF at their fair market value of $55 million. ECF Nos. 189-2 at 3; 192-4 ¶ 19. EG lent the money to the GST Trusts; on May 4, 2005, the GST Trusts issued a promissory note to EG (the "Note"); and the GST Trusts purchased the EG interests from the BCF. See ECF Nos. 189-2 at 3-4; 192-1 at 4-5; 192-3 ¶¶ 9-12.[5]

The Note provided for discretionary late charges when scheduled payments were not made within 15 days of the due date, and for collection costs to be paid by the borrowers. ECF No. 189-9 ¶¶ 3, 6. The Note also included a default and acceleration clause, providing that "[u]pon the occurrence of an Event of Default, [6] the unpaid principal with interest and all other sums evidenced by this Note shall, at the option of Creditor and in Creditor's sole discretion, become immediately due and payable." Id. ¶ 7. The first payment (of interest only) was due on May 4, 2006, with interest payments due on each May 4th thereafter "until the entire principal and interest... has been repaid." ECF No. 189-9 ¶ 1(a). On April 1, 2010, the Note fully matured, and all unpaid principal and interest became due. Id. ¶ 1(b). The GST Trusts never made any payments on the Note. ECF Nos. 33 at 17; 189-2 at 2; 192-1 at 5-6.

The parties dispute why payments were never made on the Note. The Trustee asserts that the Ericksons "extracted" the loan from EG to "line[] their own pockets, " never intending to pay it back or use the funds for EG purposes. See ECF No. 189-2 at 4. The GST Trustees contend that EG never intended the GST Trusts to make payments on the Note, EG's creditors knew about the transaction, the Note was created for tax planning purposes, and future distributions from ERC would be used to repay the loan. ECF No. 192-1 at 5.[7] The 2008 financial crisis resulted in ERC being "unable to make a future distribution to finalize the Note transaction as intended." ECF Nos. 192-1 at 6; 192-3 ¶ 15.

On October 19, 2009, ERC, EG, and several subsidiaries of those companies (collectively "the debtors") sought protection under Chapter 11 of Title 11 of the United States Code ("Chapter 11") in the Bankruptcy Court for the Northern District of Texas. ECF No. 33 at 1 n.1, 2, 8. On April 16, 2010, a reorganization plan was confirmed (the "Plan"), which created the Liquidating Trust to prosecute certain claims on behalf of specified unsecured creditor beneficiaries. Id. at 8; ECF Nos. 189-2 at 4; 194-1 at 2-3. The Plan assigned to the Liquidating Trust any claims associated with the Note, including the right to enforce the Note. See ECF Nos. 189-2 at 5; 194-1 at 46: ¶ 6.4.7.[8] Lain was appointed Trustee of the Liquidating Trust. ECF No. 189-2 at 5.

Under Section 6.4.1 of the Plan,

[t]he Plan, the confirmation of the Plan, and any agreements consummated pursuant to the Plan, shall be without prejudice to any parties' defenses, affirmative defenses, or defensive offsets, and any other defenses under applicable bankruptcy law, nonbankruptcy law, or both to such potential claims as may be reserved under the Plan, including without limitation any... Estate Assigned Claims, and any such defenses shall be fully preserved and are not precluded (whether by res judicata, collateral estoppel, judicial estoppel, or otherwise) by confirmation of the Plan.

ECF No. 194-1 at 45: ¶ 6.4.1. "Estate Assigned Claim" includes the "GST Collection Claim, " which is defined as EG's right to collect on this Note. See id. at 3, 136.[9]

B. Procedural History

On June 2, 2011, the Trustee filed in the Texas Bankruptcy Court a 13-count complaint alleging, inter alia, that the Erickson family and the GST Trusts had siphoned off the debtors' assets for the Erickson family's personal use. See, e.g., ECF No. 33 at 11. The Complaint alleged nine counts under the Maryland Code or Maryland common law (counts 1-9), three counts of fraudulent transfers (counts 10-12), under 11 U.S.C. §§ 544-551, and one count of avoidable preferences, under 11 U.S.C. §§ 547, 550 (count 13). ECF No. 33.[10]

On October 12, 2011, the Texas Bankruptcy Court transferred the adversary action to the District of Maryland. ECF No. 1-1 at 10. Under Local Rule 402, the action was automatically referred to the Bankruptcy Court for the District of Maryland. Id. at 11. On May 31, 2012, this ...


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