Democracy Capital Corporation v. McDermott et al

OCR transcription for search; preserved printed pages are authoritative

Case 1:25-cv-01654-BAH Document 23 Filed 02/13/26 Page 1 of 10

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

ve

DEMOCRACY CAPITAL CORPORATION,

Plaintiff,
*
.v.
* Civil No. 25-1654-BAH
ROBERT F. MCDERMOTT, JR., ET AL.,
*
Defendants.
*
* bd * * * * * * * * * * * *,

MEMORANDUM OPINION

Defendants Robert F. McDermott, Jr. (“Robert McDermott”), MCDJR-TESSE, LLC
(MCDJR”), Peter McDermott, and PMCDTESSE, LLC (“PMCD”) (collectively “Defendants”)
removed this action from the Circuit Court of Maryland for Baltimore City to this Court. See ECF
1 (notice of removal). The case concerns “loans and other credit accommodations” Defendants ;
extended to a separate company, Tessemae’s LLC (“Tessemae’s”), which Plaintiff Democracy
Capital Corporation (“Plaintiff’ or “Demooracy”) and Defendants agreed to subordinate to loans
and credit accommodations Democracy had extended to Tessemae’s, and Defendants’ acceptance
of payments from Tessemae’s that Democracy asserts should have been paid to it “as the senior
lender.” See ECF 7 (state court complaint), at 1-2 {| 14. Democracy brings five counts total,

. four for conduct before Tessemae’s filed for Chapter 11 bankruptcy in February 2023 (which was

resolved in summer 2024) and one for conduct after. See id. at 13-14 Tf] 58-60, at 23-30 Ff 98-

AUTHENTICATED
U.S. GOYERNMENT
INFORMATION

GPO

Case 1:25-cv-01654-BAH Document 23 _ Filed 02/13/26 Page 2 of 10

125. The two pending motions concern only Count V, which alleges breach of contract for post-
bankruptcy payments.’ Jd. at 28-30 (J 121-25.

The pending motions include a motion to stay, ECF 10, and a motion to dismiss, ECF 11,
both filed by Defendants. Defendants seek a stay of this action “pending the adjudication [in the
Bankruptcy Court for the District of Maryland] of Defendants’ Motion to Interpret Chapter 11
Plan of Liquidation and to Enforce the Resulting Settlement Agreement (Bankr. ECF 421)
(‘Motion to Interpret’) filed in Jn re Tessemae’s LLC, Case No. 23-10675 (NVA) (‘Bankruptcy
Case’).” ECF 10, at 1. Defendants contend that “[i]f the Bankruptcy Court grants the Motion to
Interpret, Plaintiff will be precluded from pursuing Count V.” Jd. at 3.

Defendants also argue that dismissal of Count V is warranted because the plan of
liquidation confirmed by the Bankruptoy Court in August 2024 forecloses Democracy’s claims to
the distributions from Tessemae’s under principles of res judicata. See ECF. 11, at 5-11.
Democracy filed oppositions to both motions. ECF 16 (opposition to motion to dismiss); ECF 17
(opposition to motion to stay). Defendants filed replies. ECF 18 (reply regarding motion to stay); -
ECF 19 (reply regarding motion to dismiss). Democracy filed a “supplemental opposition,” ECF
- 21, which included an order from the Bankruptcy Court staying the bankruptcy proceeding
pending “signal[ from this Court] that the District Court intends for [the Bankruptcy] Court to
resolve the matters pending before it.” ECF 21-1, at 3. A copy of that Bankruptcy Court order

was also entered by the Clerk. ECF 21.

1 The four counts based on improper pre-bankruptcy payments include: breach of contract (Count
I), ECF 7, at 21-23 {| 93-97; conversion (Count II), id. at 23-24 {fj 98-106; breach of fiduciary
duty (Count IID), id. at 24-26 {] 107-14; and fraudulent concealment (Count IV), id. at 26-28 {ff
115-20. ,

Case 1:25-cv-01654-BAH Document 23 Filed 02/13/26 Page 3 of 10

| The Court has reviewed all relevant filings and finds that no hearing is necessary. See Loc.
~ R. 105.6 (D. Md. 2025). For the following reasons, the Court will GRANT IN PART the motion
to stay and stay only Count V pending adjudication of the Motion to Interpret by the Bankruptcy
Court. The Court will deny the motion to dismiss without prejudice to be raised again following

the Bankruptcy Court’s decision on the Motion to Interpret.

I. RELEVANT FACTUAL. BACKGROUND

The Court recites here only the facts relevant to Count V. Democracy and Defendants
executed the subordination agreements on April 10, 2018, after Democracy agreed to refinance
other loans upon which Tessemae’s had defaulted (the “Democracy Loan”). ECF 7, at 4-5 | 16—
19, at 6 [J 22-23, at 7-9 Jf] 27-34, at 9-11 1] 35-42, at 11-12 943-50. Between 2019 and 2020,
Tessemae’s defaulted on the Democracy Loan, and the loan matured on April 10, 2020. See id. at
12 4 54.

On February 1, 2023, Tessemae’s filed a voluntary Chapter 1] bankruptcy petition in the
United States Bankruptcy Court for the District of Maryland. Jd. at 13 58 (citing Bankr. No. 23-:
10675). On January 25, 2024, ina separate proceeding in the Circuit Court of Maryland for
Baltimore County, Democracy obtained a judgment against Tessemae’s and the guarantors of the
Democracy Loan, Gregory and Genevieve Vetter (the “Vetters’’), in the amount of $8,706,250.00.
See id. {J 56-57 (citing Case No. C-03-CV-20-004048 (Cir. Ct. Balt. Cnty.)). The Bankruptcy
Court approved a plan of liquidation in August 2024 (“Approved Bankruptey Plan” or the “Plan”),

which included a claim by Democracy against Tessemae’s in the amount of $16,23 3,760.77.2 Id.

* Democracy refers to the Plan as a “plan of reorganization.” ECF 7, at 14 § 60. However, the
Approved Bankruptcy Plan is titled “Order Confirming Third Amended Plan of Liguidation Under
. Chapter 11 of the United States Bankruptcy Code Proposed by the Debtor and Debtor-In-
Possession.” See ECF 389 in Bankr. No. 23-10675 (entered Aug. 16, 2024) (emphasis added).

3

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at 144 60; see ECF 376 in Bankr. No. 23-10675 (Third Amended Plan: of Liquidation); ECF 389
in Bankr. No. 23-1 0675 (Order Confirming Third Amended Plan of Liquidation).

Democracy alleges that three post-bankruptcy payments violate the subordination
agreements: (1) $200,000 Defendants received in September 2024 as a distribution of the
bankruptcy estate, ECF 7, at 18 {| 76; (2) $550,000 which the Vetters paid to Defendants in July
2024 as part of an agreement separate from the Approved Bankruptcy Plan and which Democracy
. alleges was retained personally by Robert and Peter McDermott, id. at 18-19 9 77-78; and (3)°
$675,000 paid to Defendants as a repayment for a debtor-in-possession loan (“DIP Loan”)
Tessemae’s borrowed in February 2023, id. at 19-20 9 81-89. | |

Defendants filed the Motion to Interpret in the Bankruptcy Court on March 24, 2025. See
ECF 421 in Bankr. No. 23-10675. Plaintiff filed the instant suit in the Circuit Court of Maryland
for Baltimore City on April 23, 2025. See ECF 7. Defendants removed the action to this Court
on May 23, 2025. See ECF 1.

TL MOTION TO STAY

Defendants move to stay this action in its entirety pending the Bankruptcy Court’s
adjudication of the Motion to Interpret. See ECF 10. They argue that a stay promotes judicial

economy, id. at 4-5, that denying a stay would cause hardship to Defendants, id. at 5—6, and that

Defendants also note in their reply that “the Plan is a liquidation plan, not a plan of
reorganization[.]” ECF 18, at 6. .

3 Democracy alleges that the DIP Loan nominally came from a new entity, Tesse DIP, but that “all
funds used to make the’ loan were personally provided by Robert McDermott and/or Peter
McDermott.” ECF 7, at 19 9] 82-83. The Bankruptcy Court approved the DIP Loan, secured by
Tessemae’s assets, and ‘noted that it was subordinate to the Democracy Loan. /d at 20 4 84.
Democracy alleges that .Tessemae’s repaid $25,000 of the DIP Loan during the pendency of the
bankruptcy case and that $650,000 was distributed to Tesse DIP in September 2024 under the
Approved Bankruptcy Plan. /d {| 85-86. Democracy alleges that Robert McDermott personally
received and retained all of these payments. Id.

Case 1:25-cv-01654-BAH Document 23 Filed 02/13/26 Page 5 of 10

a stay will not prejudice Democracy, id. at 6-7. In opposition, Democracy asserts that Defendants
improperly seek to stay the whole action, which will not promote judicial economy because the
result of the Motion to Interpret will not affect Counts I through IV. ECF 17, at4-5. Democracy
refers to its opposition to the Motion to Interpret in arguing that the motion is “procedurally
improper and substantively without merit.” Jd. at 5. Democracy points to the fact that a ruling by.
the Bankruptcy Court would be-subject to appeal! in this Court as a factor weighing against the
interests of judicial economy. /d. at 6. Democracy further asserts that it will be prejudiced by a
stay of the entire case, and that “[a]t minimum, Democracy should be entitled to proceed with
litigation on the claims asserted in Counts I through IV of its Complaint.” Jd. at 7. Democracy
contends that denying a stay will not impose a significant hardship on Defendants. Id at 8-9. In
reply, Defendants assert that “[t]he more practical, orderly, and economical approach is for this
Court to stay this case to allow the Bankruptcy Court to adjudicate the first-filed and fully briefed
Motion to Interpret.” ECF 18, at 2.
A. Legal Standard
District courts have discretion to stay proceedings under their inherent authority “to control
the disposition of the causes on its docket with economy of time and effort for itself, for counsel,
and for litigants.” Landis v. N. Am. Co., 299 U.S. 248, 254 (1936). Whether to issue a stay is a
. case-specific inquiry. Id. at 254-55; see also Maryland y. Universal Elections, Ine., 729 F.3d 370,
375 (4th Cir. 2013) (“The grant or denial of a request to stay proceedings calls for an exercise of
the district court’s judgment ‘to balance the various factors relevant to the expeditious and

339

comprehensive disposition of the causes of action on the court’s docket.’” (quoting United States
v. Ga. Pac. Corp., 562 F.2d 294, 296 (4th Cir. 1977))). On a motion to stay, “a district court should

consider three factors: ‘(1) the interests of judicial economy; (2) hardship and equity to the moving

Case 1:25-cv-01654-BAH Document 23 Filed 02/13/26 Page 6 of 10

party if the action is not stayed; [and,] (3) potential prejudice to the non-moving party.’” Gibbs v.
Plain Green, LLC, 331 F. Supp. 3d 518, 525 (E.D. Va. 2018) (alteration in original) (quoting
Buzzell v. JP Morgan Chase Bank, No. 3:13-CV -668, 2015 WL 5254768, at *2 (E.D. Va. Sept. 9,
2015)). |

B. Analysis

Whether a stay serves judicial economy depends on the unique factors at play in this case,
where the motion to dismiss presents the same question of interpretation pending before the very
‘ court that entered the order to be. interpreted. “A bankruptcy court’s order of confirmation is

treated as a final judgment with res judicata effect.” In re Varat Enters., Inc., 81 F.3d 1310, 1315

(4th Cir. 1996) (citing e.g., Stoll v. Gottlieb, 305 U.S. 165, 170-71 (1938)). But “[t]he res judicata

effect of a confirmed plan is limited by the language of the plan.” Inre Russo-Chestnut; 522 B.R.
148, 157-58 (Bankr. D.S.C. 2014) (citing Jn re Hazelwood, 513 B.R. 323, 330-31 (Bankr. W. D.
Ky. 2014). “Some courts have taken the view that ifa plan does not expressly retain a claim that
could have or should have been addressed at confirmation, the parties are barred by res judicata
from later asserting those claims.” Jn re Railworks Corp., 325 B.R. 709, 716 (Bankr. D. Md. 2005)
(citations omitted), .

The Approved Bankruptcy Plan incorporates a “Senior Secured Creditors Settlement
Agreement,” and includes a reservation of rights provision that states in relevant part:

By entering into the Senior Secured Creditors Settlement Agreement and

consenting to the terms of the Plan, the Settling Parties [including Democracy and

Defendants] do not release or waive any claims or rights which may exist against

any of the Settling Parties or any other person or entity other than (1) the Debtor

(which release is subject to the terms of this Plan), and (11) the Vetters, to the extent

that any Settling Party has released the Vettérs per separate agreement or as
expressly set forth in this Plan. All other rights and claims are expressly reserved.

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ECF 376 in Bankr. No. 23-10675, at 14 § 1.71; see also id, at 23 4 6.2 (‘After extensive
negotiations between the Class | fincluding Defendants] and Class 3 [including Democracy]
creditors, as well as the Vetters, the terms of the Senior Secured Creditors Settlement were reached
and incorporated into this Plan, thus allowing this case to. be resolved on a consensual basis.”).
Democracy argues that this reservation of rights provision expressly permits recovery under the
subordination agreements of the payments implicated in Count V. See ECF 16, at 11. Defendants
argue that “[b]y entering into the Settlement Agreement and accepting the Plan, Plaintiff gave up
any right to claim distributions the Plan provides to Defendants.” ECF 11, at 8.

In the context of whether a bankruptcy order bars a debtor from seeking to discharge
remaining debts, the Fourth Circuit has expressly “defer[red] to the bankruptcy court’s .
interpretation of its own order” when “the order at issue [] is ambiguous.” In re Tomlin, 105 F.3d
933, 935 (4th Cir. 1997). Of import to the Fourth Circuit was the fact that the “bankruptcy court
‘was directly.engaged’ in the earlier proceedings and thus had the ‘better vantage point’ to make »
a determination on its earlier order.” /d. at 941 (citing Monarch Life Ins. Co. v. Ropes & Gray, 65
F.3d 973, 983 (Ist Cir. 1995)). The same principle applies here, and a stay of Count V in this
action would permit the Bankruptcy Court to rule on the Motion to Interpret its own prior order.

Further, Defendants filed the Motion to Interpret before Democracy filed the instant suit.
Under the “first filed” rule, “the first suit should have priority, absent the showing of balance of
convenience in favor of the second action|,]”. when two suits involve the same factual issues,
parties, and possible available relief. MVP Grp. Int'l, Inc. v. Smith Mountain Indus., Inc., No. .
2:11-CV-2608, 2012 WL 425010, at *1 (D.S.C. Feb. 9, 2012) (quoting EHlicott Mach. Corp. v.

_ Modern Welding Co., 502 F.2d 178, 180 n.2 (4th Cir. 1974)) (citing Volvo Constr. Equip. N. Am.,

Case 1:25-cv-01654-BAH Document 23 Filed 02/13/26 Page 8:of 10

Inc. v. CLM Equip., 386 F.3d 581, 594-95 (4th Cir. 2004)). While the Motion to Interpret is not
a separate swift in the traditional sense, it does involve the same parties, facts, and issues. : |

The Court understands Democracy’s argument that the Bankruptcy Court is a division of
the District Court. While true, this contention ignores the expertise of the Bankruptcy Court and
a decision by the Bankruptcy Court on the Motion to Interpret will certainly clarify the issues on
the motion to dismiss. Though the Bankruptcy Court’s decision on the Motion to Interpret will be
subject to review in this Court, the Bankruptcy Court, from its “better vantage point” after “direct[]
engage[ment]” on this very subject, is in a better position to interpret what is and is not precluded
by the Plan in the’ first instance. See In re Tomlin, 105 F.3d at 941. To the extent Democracy
asserts that the Bankruptcy Court does not have subject matter jurisdiction to interpret the Plan,
see ECF 17, at 5, this Court will leave that question to the Bankruptcy Court’s capable
consideration.‘

Applying the second two Gibbs factors, prejudice and hardship, however, does not counsel
in favor of staying this action in its entirety. Both pending motions concern specifically Count V.

Neither side argues that the pre-bankruptcy payments at issue in the other four counts are

4 There appears to be good reason to believe the Bankruptcy Court does have subject matter
jurisdiction to interpret the Plan it entered. See Travelers Indem. Co. v. Bailey, 557 U.S. 137, 151,
(2009) (finding that “the Bankruptcy Court plainly had jurisdiction to interpret and enforce its own
prior orders”). Moreover, even if the Bankruptcy Court were to find on a more fulsome analysis
that it does not have jurisdiction to entertain the Motion to Interpret, see ECF 17, at 5 (disputing
the Bankruptcy Court’s “jurisdiction to opine on the issues raised in the Motion to Interpret”); ECF
18, at 4-5 (arguing that the Bankruptcy Court does have jurisdiction “to interpret the confirmed
Plan and enforce the Settlement Agreement”), such a decision by the Bankruptcy Court would stil!
serve to clarify the issues by consolidating the open questions currently pending before this Court
and the Bankruptcy Court. See Waterproofing Specialties, Inc. v. Weaver Cooke Constr., LLC,
564 B.R. 276, 283 (E.D.N.C. 2017) (finding “bankruptcy court is in a better position to address
... in the first instance” an issue of how. and whether the bankruptcy court’s prior analysis on
certain claims should extend to other claims); Jn re Baltimore Marine Indus., 476 F.3d 238, 243
(4th Cir. 2007) (noting that questions “involving rights and equities under the Bankruptcy Code []
are best determined in the first instance by the bankruptcy’court).

8

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implicated by the Motion to Interpret. As such, discovery may proceed on Counts I through IV
with little disruption, as different pre-bankruptcy payments form the basis for those claims. See
Franklin v. Cleo Al Inc., Civ, No. 24-00146-JMC, 2024 WL 5007366, at *3 (D. Md. Dec. 6, 2024)
(granting a partial stay but permitting discovery on some claims). Democracy’s concerns about
_ prejudice are alleviated by staying only Count ¥V. Further, the delay caused by the stay will likely
be relatively brief, as the Motion to Interpret is ripe in the Bankruptcy Court. The Court therefore
determines that a stay limited to Count V is warranted here.°

Ill. -MOTION TO DISMISS

Because the Court grants the stay as to Count V, it will deny the motion to dismiss, which

also pertains to Count V; without prejudice. OT, LLC v. Harford Cuty., Maryland, Civ. No. GLR-

17-2812, 2019 WL 4598010, at *7 (D. Md. Sept. 23, 2019) (granting a stay and denying without |

prejudice related motions to dismiss and for judgment on the pleadings implicated by the stay).
Once the Motion to Interpret has been decided, and any appeal resolved, Deféndant may raise the

motion to dismiss again, if appropriate.

> Democracy contends that the Motion to Interpret “only pertain[s] to a portion of the Improper

Post-Bankruptcy Payments that are the subject of Democracy’s claim in Count V.” ECF 17, at 3 °

n.l. The Vetter Settlement Payments (amounting to $550,000), which is part of Count V, is
separate and apart from the Plan. Jd Defendants do not address this issue in reply. See generally
ECF 18. However, because the Motion to Interpret discusses this payment as being part of
Defendants’ Class 1 claims under the Plan, see ECF 521-1 in Bankr. No. 23-10675, at 5, 7, the
Court finds that staying this “sub-claim,” such as it is, would likely confuse the issues more than
clarify them.

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IV. CONCLUSION

For the foregoing reasons, the motion to stay, ECF 10, is GRANTED IN. PART AND
‘DENIED IN PART. Count V is stayed, but the case will progress as to Counts I through IV. The
motion to dismiss, ECF 11, is DENIED WITHOUT PREJUDICE to be raised again after the

Bankruptcy Court rules on the Motion to Interpret. A separate implementing order will issue.

Dated: February 13.2026 , /s/
. Brendan A. Hurson.
United States District Judge

10