CASE PROFILE: MV Realty Holdings files for bankruptcy after states launch litigation alleging telemarking violations, ‘deceptive’ trade practices

Legal Analysis 25 September

CASE PROFILE: MV Realty Holdings files for bankruptcy after states launch litigation alleging telemarking violations, ‘deceptive’ trade practices

By Taylor Harrison, Sara Tapinekis, Shirley Williams and Jayjeet Sharma

MV Realty Holdings, LLC has entered Chapter 11 protection after facing several actions filed by various states that accuse the debtors of allegations ranging from telemarketing violations to “unfair or deceptive” trade practices.

MV Realty Holdings is the sole owner of lead debtor MV Realty PBC, LLC, which in turn owns other debtor subsidiaries. The company filed for bankruptcy on Friday (22 September) in the US Bankruptcy Court for the Southern District of Florida and more substantive documents, including a motion seeking to use cash collateral to fund the case, hit the docket on Sunday (24 September). According to court documents, the debtors dispute the allegations being made against them.

Judge Erik Kimball has not yet scheduled a first day hearing in the Chapter 11 case.

Debtwire Dockets: MV Realty Holdings

The company

MV Realty PBC is the servicing entity and was founded in 2014 – initially to operate as a traditional real estate brokerage firm, according to the company’s motion to use cash collateral. In October 2018, MV Realty PBC started focusing on developing and marketing a “unique” product for residential homeowners, which was called a “homeowner benefit program.” As part of that, the company’s subsidiaries entered homeowner benefit agreements (HBAs) with homeowners. The HBAs are forward listing contracts under which the subsidiaries pay an upfront cash payment to homeowners in exchange for the exclusive right to list a homeowner’s house when a homeowner decides to sell. The term of the agreement is 40 years, subject to early termination events. Under an HBA, a homeowner lists their home with the applicable MV Realty subsidiary, which then lists and sells it for a standard commission, including any broker commission. If the home does not sell within six months, the homeowner may terminate the HBA at no cost, without penalty.

If a homeowner breaches the HBA – leading to an early termination – the company’s subsidiaries are entitled to a termination fee of 3% of the greater of the fair market value of the home at the time the HBA is executed, and the fair market value at the time of breach or early termination.

As of now, the subsidiaries are party to about 34,000 HBAs, according to the cash collateral motion.

The debt

Under the company’s current capital structure, lender Monroe Capital is owed about USD 40m. Meanwhile, Goodwood Fund affiliates Goodwood I and Goodwood II are owed about USD 7.4m and USD 4.46m, respectively.

The company also has multiple notes with debt outstanding.

The descent

Since 29 November 2022, the states of Florida, Pennsylvania, Massachusetts, Ohio, North Carolina, New Jersey, and Indiana filed actions against MV Realty’s subsidiaries. MV Realty PBC is a named defendant in the actions filed by Florida, Pennsylvania, New Jersey, North Carolina, Massachusetts, and Indiana. Individual officers and licensed real estate brokers working in connection with the HBAs are named in nearly all the state actions. According to court documents, the allegations in the actions range from telemarketing violations to “unfair or deceptive” trade practices. The debtors refute these allegations.

In several cases, the actions allege that the debtors made improper telephone solicitations to prospective customers. The debtors have not yet had a “meaningful” chance to present in court the “vast number” of lawfully obtained consents from prospective homeowners, which authorized the solicitation, according to the cash collateral motion.

It has also been alleged that MV Realty’s sales and marketing practices “prey” on customers who are elderly or “of diminished financial means,” according to the motion. But the debtors disagree with those allegations, saying they are not supported by the facts. According to the debtors, a typical homeowner owns a house with an average value of more than USD 300,000, and the average age of homeowners under the HBAs is 55 years old, while 72% of homeowners are under 65. By comparison, the American Housing Survey 2021, based on US Census Bureau data, indicates that only 67.3% of homeowners in the country are under the age of 65. Therefore, the homeowners under the HBAs are younger than a typical cross-section of homeowners in the US overall, the debtors said.

The actions launched by the states allege or imply that a significant amount of the customers are “aggrieved” and have complained to state consumer protection authorities, according to the debtors' motion. But the debtors say that is inaccurate. For example, in North Carolina, over the 16 months before the state action was filed there, the state consumer protection authorities told the debtors about only 12 consumer complaints – out of a total of 2,100 HBAs in North Carolina – over the “allegedly deceptive” conduct. The complaints came mostly from customers who alleged deception or unfairness only after the homeowner breached the HBA, the debtors said in their motion.

On the other hand, the debtors said, in the 45-day period after the filing of the state action in North Carolina, they got at least 250 sworn statements from homeowners attesting that they understood the terms of the HBAs. The debtors said it is also worth noting that they engaged national and local law firms before implementing the HBAs in each state, who provided advice on compliance with state and other applicable laws.

The Chapter 11 case

MV Realty has filed the cash collateral motion in order to fund its case, alongside other typical first day motions. The debtors are also seeking approval of motions to continue using their cash management system and to pay employee wages. Prepetition lenders Goodwood and Monroe have interests in the cash collateral.