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Capano v. Lockwood

Superior Court of Delaware

May 2, 2017

LOUIS J. CAPANO, III, Plaintiff and Counterclaim Defendant,
v.
DARIN A. LOCKWOOD and DON A. LOCKWOOD, jointly and severally, Defendants, and DON A. LOCKWOOD, Third-Party Plaintiff and Counterclaim Defendant,
v.
LOUIS J. CAPANO, JR., Third-Party Defendant and Counterclaim Plaintiff.

          Submitted: October 20, 2016

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

          William C. Carpenter, Jr., Judge

         The Court held a three-day bench trial beginning August 16, 2016. Subsequently the parties filed Proposed Findings of Fact and Conclusions of Law. The Court has since reviewed the parties' submissions, as well as the transcript of the bench trial. Based upon this review and the evidence presented at trial, the Court makes the following findings:

         A. FINDINGS OF FACT

         1. There is very little overall dispute regarding the facts of this case. In 2004, Defendants Don ("Don") and Darin ("Darin") Lockwood ("the Lockwoods"), together with Wayne Hudson ("Hudson"), purchased interest in two large parcels of farmland outside of Milton, Delaware. The 227 contiguous acres, generally known as "the Rust Farm, " were half-owned by the Rust family (or their heirs) with the other half having been donated by the family to the Salvation Army. The purchase price of the Rust family portion of the property was 5.1 million dollars and the Salvation Army parcel was priced at 5.7 million dollars. The sale contracts gave the Lockwoods and Hudson a 120 day due diligence period to study the feasibility of using the property for residential housing. This period was extended several times upon the payment of additional non-refundable deposits. Hudson subsequently withdrew from participating in the purchase, but his farmland, which is located adjacent to the Rust Farm, remained part of the overall land the parties intended to use for their commercial and residential housing project, known as the "Elizabethtown Project." Hudson's withdrawal nevertheless placed all of the financial burden to complete the sale on the Lockwoods who had not previously developed a project of this magnitude.

         2. While there is some dispute as to the exact date, sometime in late fall of 2004, Eugene Bayard, Esquire ("Mr. Bayard") contacted Louis Capano, III ("Louis III") to inquire whether he had an interest in participating with the Lockwoods to purchase a large parcel of land outside of Milton, Delaware. The idea proposed was to purchase the land, annex it into the town of Milton, and at least from Louis Ill's viewpoint, flip the property at that time. While Louis III and his father, Louis J. Capano, Jr. ("Louis Jr.") ("the Capanos"), had some limited business contact with Darin, they were unfamiliar with Don. However, based upon the recommendation of Mr. Bayard, they agreed to participate in financing the deal.

         3. To facilitate the transaction, the Lockwoods created an LLC, Lockwood Brothers II, LLC ("LB II, LLC"), with Don and Darin each being a 50% member. The Capanos created Milton Investments, LLC ("MI, LLC") with Louis III and Louis Jr. as equal partners. These two LLCs then became parties in a subsequently formed LLC, North Milton Development Group, LLC ("NMDG"). NMDG would be the entity that would purchase the property and manage its development. The NMDG Agreement called for each member to enter into an Acquisition Loan to purchase the property and further indicated that the two-member LLCs and their principals would serve as guarantors on the Acquisition Loan. Subsequently a 7.13 million dollar Acquisition Loan was made by Wilmington Trust Company with the balance of the purchase price obtained by equal capital contributions by the parties.

         4. Execution of the Acquisition Loan documentation and property closing occurred on December 17, 2013. The Rust family, together with Don and Darin Lockwood, were in attendance in addition to Art Lodge ("Mr. Lodge"), the loan officer for Wilmington Trust. The closing documents were executed at the law office of George Smith, Esquire, counsel for the Lockwoods, and were then transported by Mr. Lodge to the Capanos to sign. Louis III executed the documents on behalf of MI, LLC. The 7.13 million dollar promissory note was signed by Don and Darin Lockwood on behalf of LB II, LLC. Louis III signed the note on behalf of MI, LLC. The evidence introduced at trial also reflected that Don, Darin, and Louis III executed Wilmington Trust personal guarantees for the loan.

         5. Around the time of the settlement, counsel for the Capanos, Robert Krapf, Esquire, raised the issue of whether there should be a Contribution Agreement between the guarantors of the Acquisition Loan. While the Lockwoods believed it was signed on the date of the closing, emails and communication between counsel for the parties would indicate that it was executed after the settlement and backdated to the settlement date. The Contribution Agreement was signed by the Lockwoods and Louis III. While Louis Jr. did not execute the document, the terms set forth in the Contribution Agreement reflected that he was a guarantor of the Acquisition Loan and the Lockwoods had a right of contribution against him. Testimony also clearly reflects that, unlike the Lockwoods, Louis Jr. and his son conduct and manage all of their joint business ventures as a single corporate entity. As such, both Capanos testified that when they jointly participated in a project, the representations and commitments made by Louis III would have been equally applicable to Louis Jr. In other words, as long as the transaction related to a Capano business venture that both the father and son were involved in, the documents executed by one would be equally binding upon the other. There was no separation of the businesses or of the funds used to support them. In addition, it was only because the bank was satisfied by the strength of the financial status of Louis III, that the bank did not require that Louis Jr. also execute a personal guarantee. This circumstance had no relationship to the land deal, nor did it change the obligations clearly set forth in the NMDG Agreement.

         6. The Contribution Agreement granted the principals of NMDG the right to seek contribution from one another for monies that they had paid to the bank in excess of their equitable share. While the Lockwoods place significant emphasis on Louis Jr.'s failure to sign the Contribution Agreement, the NMDG Agreement made all principals, including Louis Jr., guarantors of the Acquisition Loan. So the only potential harm to the Lockwoods if they made excessive payments on the loan beyond their equitable interest was that they might be limited to seeking contribution against Louis III and not his father. From the evidence presented, however, it is clear the Lockwoods never made excess contributions that would have implicated their rights under the Contribution Agreement. It appears the only reason the Contribution Agreement was even considered by counsel was that, near the settlement date, Wilmington Trust Company insisted that the Acquisition Loan be a single loan to the LLC and not two separate loans to the Lockwoods and Capanos.

         7. After closing, the parties agreed that the monthly interest-only payments on the Acquisition Loan would be paid by capital contributions in the form of cash by MI, LLC and this would be matched by capital contributions by the Lockwoods through Darin's engineering firm, Meridian Enterprises. The accounting of these contributions was done by the Capanos' accountant and this practice continued until 2007. By 2007, the annexation of the property into the town of Milton had failed, but the necessary rezoning had been approved by Sussex County. In the four years since the loan was executed, the contribution to the capital account by the Capanos had exceeded the services provided by the Lockwoods' engineering firm by more than $400, 000. To rectify this situation, the parties, through their representative LLCs, borrowed an additional one million dollar working capital loan ("Working Capital Loan"). From the Working Capital Loan, the Capano entities were repaid $400, 000 to balance the capital contributions and the remaining portion was used to pay interest on both the original Acquisition Loan and the Working Capital Loan, which was approximately $30, 000 a month. The interest payments on both loans continued to be made through the Working Capital Loan until the funds were exhausted in July of 2008. However, the parties continued to pay their share of the interest, with the Lockwoods making cash payments through Meridian Enterprises, and Louis III making the Capanos' payments from his personal banking accounts. This arrangement continued into late summer of 2010. Beginning in August of 2010, the Lockwoods stopped making any payments toward the loans. All payments made thereafter came from accounts maintained by Louis III, up until April 2011. The payments for the Acquisition Loan from September 2010 to April 2011, were as follows:

Bill Date

Due Date

Loan 9001

Paid Date

L3 Check

08/20/10

09/01/10

24, 558.79

09/29/10

24, 558.79

09/20/10

10/01/10

23, 766.57

10/29/10

23, 766.57

10/21/10

11/01/10

24, 558.78

11/10/10

24, 558.78

11/19/10

12/01/10

23, 766.57

12/10/10

23, 766.57

12/21/10

01/01/11

24, 558.79

01/13/11

24, 558.79

01/21/11

02/01/11

24, 558.78

02/10/11

24, 558.78

02/18/11

03/01/11

22, 182.13

03/10/11

22, 182.13

03/24/11

04/01/11

24.558.79

4/14/11

24, 558.78

$192, 509.20

$192, 509.20

         9. From the summer of 2010 to the spring of 2011, there was no formal default or demand initiated by the bank. However, the evidence established that the loan officers at Wilmington Trust Company were under a great deal of pressure during this time to keep loans current since the bank was being investigated by the Federal Reserve. This resulted in regular contact by Jeremy J. Abelson ("Mr. Abelson"), the then-loan manager for NMDG to make interest payments when they were late. These requests were made directly to the Capanos as Mr. Abelson was also the primary loan manager for the Capano entities. The Capanos considered the loan manager's request a demand, which, if not honored, would jeopardize the status of the loans. The evidence also reflects that during the time frame in which Mr. Abelson was making these demands, no payments were made by either Don or Darin Lockwood on the loans.

         10. In October of 2011, NMDG agreed to sell the Rust Farm to J. Carlton Wells & Sons, Inc. for 2.6 million dollars. M&T Bank, which had, by that point, purchased Wilmington Trust, agreed to the sale which resulted in an overall loan deficiency of $5, 529, 929. Testimony revealed that Louis III executed a note for 50% of the deficiency in the amount of $2, 923, 536.57. Don Lockwood negotiated with the bank for a global settlement of various loans that appears to have resulted in M&T forgiving the deficiency as to his equity interest. There was no testimony as to the status of the loan deficiency with ...


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