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Oklahoma Department of Securities ex rel. Faught v. Seabrooke Investments, LLC

Court of Appeals of Oklahoma, Division II

August 17, 2017

OKLAHOMA DEPARTMENT OF SECURITIES EX REL. IRVING L. FAUGHT, ADMINISTRATOR, Plaintiff/Appellee,
v.
SEABROOKE INVESTMENTS, LLC, an Oklahoma limited liability company; SEABROOKE REALTY LLC, an Oklahoma limited liability company; OAKBROOKE HOMES LLC, an Oklahoma limited liability company; BRICKTOWN CAPITAL LLC, an Oklahoma limited liability company; KAT PROPERTIES LLC, an Oklahoma limited liability company; CHERRY HILL LLC, an Oklahoma limited liability company; CHERRY HILL APARTMENTS; TOM W. SEABROOKE, individually and as trustee of the TOM SEABROOKE 2007 REVOCABLE TRUST AND J. KARYN SEABROOKE 2007 REVOCABLE TRUST; JUDITH KARYN SEABROOKE, individually and as trustee of the TOM SEABROOKE 2007 REVOCABLE TRUST AND J. KARYN SEABROOKE 2007 REVOCABLE TRUST, Defendants, and RYAN LEONARD, Court Appointed Receiver/Appellee, and WAYNE DOYLE, Intervenor/Appellant.

          Mandate Issued: 09/20/2017

         APPEAL FROM THE DISTRICT COURT OF OKLAHOMA COUNTY, OKLAHOMA HONORABLE PATRICIA PARRISH, TRIAL JUDGE, AFFIRMED

          Patricia A. Labarthe, Jennifer Shaw, OKLAHOMA DEPARTMENT OF SECURITIES, Oklahoma City, Oklahoma, for Plaintiff

          Mark A. Robertson, Michael Paul Kirschner, ROBERTSON & WILLIAMS, Oklahoma City, Oklahoma, and Jim W. Lee, LEE & KISNER, Oklahoma City, Oklahoma, for Defendants

          Robert D. Edinger, ROBERT EDINGER PLLC, Oklahoma City, Oklahoma, for Receiver

          Edward O. Lee, William M. Lewis, LEE, GOODWIN, LEE, LEWIS & DOBSON, Edmond, Oklahoma, for Intervenor

          KEITH RAPP, JUDGE

         ¶1 The trial court intervenor, Wayne Doyle (Doyle), appeals the Order And Judgment Approving Receiver's Report On Claims And Authorizing Receiver's Distribution To Creditors, insofar as it denied his claim. The other parties to this appeal, as appellees, are the plaintiff, State of Oklahoma Department of Securities (DOS), ex rel. Irving L. Faught, Administrator, and Ryan Leonard, Court Appointed Receiver (Receiver).

         BACKGROUND

         ¶2 The history of this case begins with Doyle's investments with another person, Tom Seabrooke (Seabrooke). Bricktown Capital, LLC is the investment of interest here. This entity owned the Bricktown Hotel (Hotel) as its principal asset. Doyle and Seabrooke managed Bricktown Capital as if they were the only owners; however, Seabrooke had taken investments in Bricktown Capital from at least five other persons. Doyle was aware of one of them.

         ¶3 Bricktown Capital had serious financial issues, including mortgages, liens, cash flow, and operations losses. Doyle agreed to be personally liable for a secured loan to the bank and he contributed funds to pay bills, payroll, and the bank loan. In 2012, Doyle received $228, 894.00, as a distribution from Bricktown Capital. The hotel sustained substantial storm damages. Partial insurance proceeds from an insurance payment for the storm damages to the Hotel provided the source of the money for the distribution. Repairs were not made, causing portions of the hotel to be closed and thereby adversely affecting revenues.

         ¶4 On April 9, 2014, Doyle caused Bricktown Capital to deliver a note and mortgage to him to evidence a loan. He arrived at the amount by summing the sundry investments he had made with Seabrooke, both Bricktown Capital and others, plus payments on the bank loan and other expenditures. As a result, Doyle's ownership in Bricktown became 85%, a part of which was a collateral ownership.

         ¶5 DOS investigated Seabrooke's activities and filed this action. [1] The trial court appointed Receiver. The trial court established a process for filing claims. Among other actions, Receiver applied to the court for permission to remove the Bricktown Hotel from the receivership because it was a financial burden. The trial court granted the request with the condition that any proceeds of a sale of the Bricktown Hotel in excess of the indebtedness against it would become a part of the Receiver's assets. The Bricktown Hotel did sell for $187, 858.00 more than the indebtedness. Receiver took possession of the funds remaining after payment of the Bricktown Hotel's debt.

         ¶6 A number of claims were filed with Receiver. The claims totaled in excess of $15, 000, 000.00, and the assets available to pay claims amounted to $1, 735, 929.00. Doyle filed a claim for $3, 288, 489.38. He based his claim on the April 2014 note and mortgage and the sum total of sundry payments and expenditures relating to Bricktown Capital, but he included payments made to Seabrooke individually and to other entities.

         ¶7 Doyle sought to have the $187, 858.00 excess sale proceeds paid to him. After a hearing in August 2015, the trial court reduced Doyle's claim to $2, 355, 200.00, and found that $681, 577.00 had been paid.

         ¶8 The trial court also reclassified Doyle's entire claim as expenditures constituting capital contributions to Bricktown Capital. Doyle's appeal does not challenge this ruling and it is, therefore, final. As a result, Doyle is not a general creditor of Bricktown Capital and cannot claim, as a creditor, any distribution from Receiver. Doyle claimed the $1.67 million dollar balance as an owner.

         ¶9 Receiver filed a final report. In that report, Receiver denied Doyle's entire claim. Doyle objected. After a hearing, the trial court entered extensive findings of fact and conclusions of law. The trial court confirmed the previous ruling that Doyle's claim constituted contributions to capital. Along with nine other claimants, this placed him in the class of claimants whose claim was deemed to be contributions to capital and their claims became secondary to the payment of Bricktown Capital's obligations.

         ¶10 Next, the trial court reviewed and applied the doctrine of equitable subordination. The trial court found that Doyle was an "insider" as to Bricktown Capital. In its ruling, the trial court specified actions by Doyle and found that these actions constituted inequitable conduct. The trial court concluded that "Doyle's conduct was sufficiently inequitable and unfair to justify subordinating his claims to all other general creditors." Continuing, the trial court found that Doyle's "conduct resulted in substantial harm to other investors." [2] The trial court denied Doyle's entire claim.

         ¶11 Doyle appeals. Here, "Doyle requests that this Court determine he is entitled to share pro-rata with other members of the same class i.e., capital contributors." [3] He maintains that the trial court's ruling is not supported by the evidence in general, or, alternatively, that the decision failed to determine the amount of harm to other investors.

         ¶12 Doyle also contends that a portion of his claim represented funds expended before he could be considered an "insider." [4] He listed three expenditures totaling $1.1 million dollars made to entities other than Bricktown Capital and to Seabrooke, individually.

         ¶13 Receiver and DOS dispute Doyle's characterization of the evidence. They argue it is sufficient to merit the trial court's decision, including equitably subrogating his claim and denying it.

         STANDARD OF REVIEW

         ¶14 This receivership is an equitable proceeding. Morris v. Pierce, 1940 OK 405, Syl. 2, 110 P.2d 294, Syl. 2 ("A hearing of exceptions filed to the report of a receiver of the sale of receivership property is of equitable cognizance, and a judgment therein will not be reversed on appeal unless it is against the clear weight of the evidence."). In actions of equitable cognizance, the judgment made by the trial court will be reversed if it is clearly contrary to the weight of the evidence or contrary to accepted principles of equity or rules of law. In re Estate of Eversole, 1994 OK 114, ¶ 7, 885 P.2d 657, 661. The case of Hitt v. Hitt, 1953 OK 391, 258 P.2d 599, held that it is for the trial court in a case of equitable cognizance to determine the credibility of the witnesses and the weight and value to be given to the testimony. Where the evidence is in conflict, the trial court's determination will not be set aside unless the determination is clearly against the weight of the evidence.

         ¶15 The Appellate Court reviews rulings on issues of law by a de novo standard without deference to the trial court. Glasco v. State ex rel. Oklahoma Dept. of Corrections, 2008 OK 65, 188 P.3d 177.

         ANALYSIS AND REVIEW

         ¶16 In order to ultimately deny Doyle's claim, the trial court first reclassified his claim from creditor to contribution to capital. This ruling is now final and it placed Doyle in a subordinate category regarding distributions from Receiver. [5]

         ¶17 Next, the trial court utilized the doctrine of equitable subordination as a remedy to subordinate Doyle's entire claim to the claims of all other creditors, including the other claims who were capital contributors. It appears that the available assets were exhausted in payment of the priority claims and Receiver's report was approved. Thus, the trial court denied Doyle's entire claim.

         ¶18 Here, Doyle seeks to have his claim, or at least a portion of the claim, treated in the category of all capital contributors and share, pro rata, with that class of claimants. In order to reach this result, one or both, of two results must be reached; the doctrine of equitable subrogation is not applicable to these facts, or, if it is a part of Oklahoma jurisprudence as an equitable remedy under the Oklahoma Uniform Securities Act of 2004, 71 O.S.2011, § 1-101, and following, the evidence does not support the application of the doctrine here. [6]

         A. Equitable Subrogation: Origin and Definition

         ¶19 Reclassification of a debt as a capital contribution is distinct from application of equitable subrogation. Reclassification examines the transaction for its true nature to conclude that what is called a "debt" is truly a capital contribution under the facts. Equitable subrogation examines the creditor's conduct and, where the creditor is guilty of inequitable conduct, that creditor's claim will be subordinated to the other claims in the matter under consideration. Hedged-Investments Associates, Inc., 380 F.3d at 1297 [citing In re Autoplastics, Inc., 269 F.3d 726 (6th Cir. 2001)].

         ¶20 Equitable subrogation has its origin in bankruptcy and the general bankruptcy principle of fairness and equity among creditors. [7] The United States Supreme Court set out the principles of equitable subrogation in Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238 (1939). Describing bankruptcy courts as courts of equity, the Court ruled that the bankruptcy court has the equitable power to subordinate a creditor's claim when the facts and circumstances reflect inequitable conduct on the part of the creditor.

         ¶21 The generally accepted rule is that there are three constituents to the standard for establishing equitable subordination in the bankruptcy setting.

(1) the claimant must have engaged in some type of inequitable conduct;
(2) the misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant; and
(3) equitable subordination of the claim must not be inconsistent with the provisions ...

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