Pat J. Herlan, WV Real Estate Broker, Inc.

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF WEST VIRGINIA
IN RE: )
)
PAT J. HERLAN, WV REAL ESTATE ) Case No. 09-2665
BROKER, INC., )
)
Debtor. ) Chapter 11
MEMORANDUM OPINION
Timberline Four Seasons Resorts, Inc. (“Timberline”), and Long Run Realty, Inc. (“Long
Run”), request that this court hold Pat J. Herlan, WV Real Estate Broker, Inc. (the “Debtor”), in
contempt of this court’s order of January 6, 2010, as clarified by the court on January 29, 2010.
Specifically, Timberline and Long Run complain that the Debtor has failed to turnover 39 vacation
home rental contracts, the keys to those properties, and associated rental information concerning the
individual vacation homes. The Debtor states that it is not in contempt of this court’s orders on the
basis that the individual homeowners for each of the 39 properties have terminated their contracts;
thus, nothing exists to turnover.
For the reasons stated herein, the court concludes that Timberline and/or Long Run has failed
to demonstrate contempt by clear and convincing evidence.
I. BACKGROUND
The relevant facts of this case are set forth in the court’s Memorandum Opinion of January
6, 2006, and will not be repeated here. In re Herlan, No. 09-2665, 2010 Bankr. LEXIS 7 (Bankr.
N.D.W. Va. Jan. 6, 2010). As a result of the court’s decision, it granted the motion of Timberline
and/or Long Run pursuant to 11 U.S.C. § 541(d) to turn over what the court believed to be 72
vacation home rental contracts to Timberline and/or Long Run on the basis that the Debtor held mere
legal title to those contracts and Timberline and/or Long Run held the equitable interest in those
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contracts. The court’s conclusion was based on a decision by the Supreme Court of Appeals of West
Virginia that determined that Pat Herlan was an agent of Timberline when the contracts came into
existence, and she wrongfully took those contracts with her when Timberline terminated her agency
relationship. Timberline Four Seasons Resort Mgmt. Co. v. Herlan, 679 S.E.2d 329 (W. Va. 2009).
Before Ms. Herlan filed her personal bankruptcy on November 16, 2009, she transferred all
the vacation home rental contacts to the Debtor. The Debtor filed this Chapter 11 case on November
23, 2009.
This court imposed a constructive trust on those contracts that Ms. Herlan took when she left
Timberline, and that were still in existence through annual renewal contracts, when the court entered
its January 6, 2010 order. Because the parties disputed what the court intended when it “granted”
the motion of Timberline and/or Long Run to turnover the vacation home rental contracts, the court
clarified its January 6, 2010 order on January 29, 2010. Pursuant to that order the Debtor was
obligated to turnover the following items:
All homeowner contracts, customer (renter) information, banking and accounting
records, mailing and marketing lists, vendor records and information, and all the
historical records of account, including all computer records of any nature. All rental
contracts with lessors who were the customers of lessors of Timberline in June 2007,
and that are currently in the name of Pat J. Herlan, and/or Timberline Realty, Inc.
and/or Timberline Resort Realty, Inc. and/or Almost Heaven West Virginia Realty
and/or any Herlan associate, along with any deposits accompanying said contracts for
the 2009-10 season currently deposited in account and all contracts currently had
with renters for the 2009-10 ski season to which the deposits attach, and all keys and
or other items necessary to grant Timberline Four Seasons and/or Long Run Realty
access to such units.
(Document No. 105).
The Debtor unsuccessfully sought a stay of this court’s order pending appeal in both this
court and in the district court. In arguing for the imposition of a stay, the Debtor contended that there
were 64 vacation home contracts remaining by the time of the hearing on January 27, 2010 – not 72
– and if the Debtor lost those 64 contracts it would suffer severe economic harm. At hearing on the
motion to stay, the Debtor never mentioned that it believed 39 of the 64 contracts would be
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terminated by the end of the month or soon thereafter.1
Following a denial of the Debtor’s motion to stay in the district court on February 16, 2010,
Timberline and/or Long Run requested delivery of its contracts. On February 18, 2010, the Debtor
partially complied by delivering 25 of the 64 contracts, but it contended that the remaining 39 had
been terminated by the contract counter parties. In support of this contention, the Debtor submitted
the letters from homeowners – which Ms. Herlan swore under oath that she had no part in soliciting
– that purport to either terminate the contract based on a 90-day no-fault provision, or a 30-day
default provision. Ms. Herlan stated that she construed the 30-day default notices to be 90-day no-
fault termination notices because she did not believe that the Debtor was in default under the
contracts. In any event, the 90-day period had expired by the time the district court had denied the
Debtor’s request for a stay pending an appeal of this court’s January 6, 2010 order.
II. DISCUSSION
On February 19, 2010, Timberline and/or Long Run filed a motion for contempt arguing that
the Debtor’s failure to turnover 39 vacation home rental contracts violated this court’s order of
January 6, 2010, as clarified on January 29, 2010.
To establish civil contempt, a party must show, by clear and convincing evidence:
(1) the existence of a valid decree of which the alleged contemnor had actual or
constructive knowledge; (2) . .. that the decree was in the movant's "favor"; (3) . . .
that the alleged contemnor by its conduct violated the terms of the decree, and had
knowledge (at least constructive knowledge) of such violations; and (4) . . . that [the]
movant suffered harm as a result.
Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4 Cir. 2000) (quoting Colonial Williamsburg Found.th
v. The Kittinger Co., 792 F. Supp. 1397, 1405-6 (E.D. Va. 1992), aff'd, 38 F.3d 133, 136 (4 Cir.th
The Debtor could have, and should have, brought this termination issue to the court’s1
attention in conjunction with one or both of the hearings that were conducted by the court on
December 17, 2009 and January 27, 2009. The fact that it did not is disturbing to the court. By
waiting to raise the issue until after the compliance date of February 18, 2010, the Debtor
generated the need for judicial intervention that, perhaps, could have been avoided. The court is
also very concerned that, despite the recent claims of termination, the Debtor, when it was to its
advantage at the hearing to stay the court’s January 6, 2010 decision, treated the contracts as
alive and well and not subject to imminent termination.
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1994)).
In this case, elements 1, 2, are met by clear and convincing evidence. The Debtor had actual
knowledge of the court’s orders of January 6, 2010 and January 29, 2010, having appeared at the
hearings to contest entry of those orders, and those orders celarly were granted on terms favorable
to Timberline and Long Run.
However, for Timberline and/or Long Run to be harmed, the Debtor argues, they must have
been deprived of the benefit of an existing contract. Considering its view that none of the 39
vacation home rental contracts existed following the district court’s decision to deny a stay pending
appeal, the Debtor asserts that Timberline and/or Long Run could not be harmed by failing to
turnover non-existent contracts. The Debtor claims that it complied with the court’s orders by
turning over a copy of the contract along with the homeowner’s termination/cancellation notice.
Each of the homeowner vacation home rental contracts have identical provisions that detail
termination and/or cancellation:
1. This agreement will run from May 1 , 2009 until April 30 , 2010, and replacesst th
all prior Rental Agreements for this unit. This contract may be cancelled by either
party 90 DAYS after written letter of cancellation is received in the Timberline
Resort Realty Office . . . .
. . . .
26. Default: In the event either party defaults in the performance of any of its
obligations under this Agreement, in addition to any other remedies provided herein
or by applicable law . . . the non-defaulting party shall have the right to terminate this
Agreement if within 30 days after providing the defaulting party with notice of the
default and the intent to terminate, the default remains uncured.
(Ex. 1).
To varying degrees, the exhibits submitted by the Debtor purporting to be contract
termination notices reference Paragraph 1, Paragraph 26, both, or just state that the homeowner
desires to terminate and/or cancel the vacation home rental contract. (Exhibit 2). Importantly, none
of the homeowner parties are before the court. The homeowners are indispensable in adjudicating
any contract termination rights between them and Timberline and/or Long Run, and the court is not,
and cannot, adjudicate contract rights between Timberline and the homeowners when those
homeowners are not party to this litigation. Based on the court’s earlier ruling, however, the
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contractual rights and obligations of the rental management company belong to Timberline and/or
Long Run; the Debtor is the interloper, and it is not for it to decide what constitutes a termination
on behalf of Timberline and/or Long Run.
For its part, Timberline and/or Long Run argues that the purported cancellations or
terminations are “absurd” on the grounds that, at the time they were given, the Debtor was
administering the contracts. In its view, “Timberline had no contractual relationship with these
homeowners that could be ‘cancelled.’” Timberline’s argument, however, is contrary to the court’s
holding that Timberline and/or Long Run was, at all times, the equitable owner of the rental
manager’s rights and obligations under the contracts. Accordingly, any notice of termination or
cancellation, validly given, would be effective against Timberline even though the contracts were
still in the physical possession of the Debtor. Therefore, as the true counter party to the contracts,
Timberline would be bound by any valid notice of termination/cancellation.2
Consequently, the court will afford Timberline a period of ten days after entry of this
Memorandum Opinion and accompanying order to review the 39 purported termination/default
notices to decide if it will honor them. As soon as Timberline and/or Long Run has completed its
review, it is to supply the list of contracts it believes are still in existence and the Debtor must then
turnover the original contract, any keys still in its possession, the rental history information for the
individual vacation home, and any associated rental contracts for that vacation home. The court has
already determined that Timberline and/or Long Run is the equitable owner of the rights and
obligations of the rental management company under the contracts, and compelling turnover is no
Ms. Herlan, on behalf of the Debtor, swore that she had no part in instigating the2
purported cancellation/termination of the 39 vacation home rental contracts. The extent to which,
if any, Ms. Herlan may have interfered with Timberline’s and/or Long Run’s rights under the
contracts is not before the court at this time.
Ms. Herlan’s counsel did indicate that Ms. Herlan had executed new contracts with at
least some of homeowners who had submitted the cancellation/termination notices. It is not clear
to the court when these new contracts were executed, or how many were executed. Consequently,
the court will order that the Debtor file a list regarding the 39 contracts at issue and state whether
the Debtor executed a new contract with any of the homeowners relevant to those contracts,
provide the date that any new contract was executed, and file a copy of the new contract with the
court.
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more than recognizing this equitable right.3
III. CONCLUSION
Importantly, the only parties before the court are the Debtor and Timberline / Long Run. No
homeowner counter party to the vacation home rental contracts is before the court. The court is –
in no way – adjudicating the contract rights between the homeowners and their rental management
company. The court has already determined that these contracts are not property of the Debtor’s
bankruptcy estate, and any dispute between the homeowners and the rental management company
belongs in state court.
What the court has done is to determine the rights between the Debtor and Timberline and/or
Long Run. As a consequence of that determination, the court has found that Pat Herlan, while
working as an agent of Timberline, wrongfully took the vacation home rental contracts from her
principal, Timberline, when Timberline terminated her employment. The court has restored
Timberline to its position as the equitable owner of the rental manager’s rights and obligations under
the vacation home rental contracts.
Regarding Timberline’s and/or Long Run’s motion for contempt, the court cannot, at this
time, make a determination as to whether Timberline and/or Long Run has been harmed by the
Debtor’s conduct until such time as Timberline and/or Long Run affirmatively state that they do not
recognize the effectiveness of the individual homeowner termination/cancellation notices, and wish
to pursue their rights under the contracts against those homeowners. Should Timberline fail to
recognize such termination/cancellation rights, it very well may subject itself to potential liability
under the rental management contract in another forum. That dispute, however, should it
materialize, does not belong in this court inasmuch as it involves contract rights between non-debtor
parties over property that is not property of the Debtor’s bankruptcy estate. In sum, because
Timberline and/or Long Run have not shown harm by clear and convincing evidence, the court will
At the hearing on the motion for contempt, Timberline asserted that it wanted the3
original contracts and the keys so that it could then have a meaningful conversation with the
homeowners regarding what Timberline could do for them in its future performance of the
vacation home rental contracts. Its counsel stated that in the event the homeowner absolutely did
not want to do business with it, Timberline would likely allow the homeowner to walk away
from the contracts without further liability.
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deny, without prejudice, their motion for contempt.
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