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     The Chapter 7 Trustee filed an objection to the Debtor's claim for property exemptions under N.C. Gen. Stat. § 1C-1601(a)(8). The Trustee objected to the portion of a monetary settlement reached between the Debtor and her former employer for lost wages, arguing that the payment does not constitute “compensation for personal injury” as required by § 1C-1601(a)(8).
     Section 1C-1601(a)(8) does not provide a definition for “compensation for personal injury” and the North Carolina judiciary has not directly considered the scope of the available exemption. The Court looked to pertinent bankruptcy decisions examining the statute to conclude that, for compensation to be exempted under § 1C-1601(a)(8), it must be linked or attributable to personal injury. The Court also looked to the analytical approach employed by the United States Supreme Court, which considered similarly worded legislation. See Comm’r v. Schleier, 515 U.S. 323 (1995) and O’Gilvie v. United States, 519 U.S. 79 (1996). The Court found that the analytical approach employed in Schleier and O’Gilvie, which is applicable to the comparable phrasing within § 1C-1601(a)(8), clarifies and connects the underlying reasoning of those bankruptcy court decisions considering the scope of the North Carolina personal injury exemption.
     In applying this approach to § 1C-1601(a)(8), the Court found the portion of the Debtor’s settlement directed to lost wages does not constitute “compensation for personal injury” as the lost wages were not attributable to, and were wholly independent of, any alleged personal injury to the Debtor.

Exemptions, Published No

     The Court considered cross motions for summary judgment from the Plaintiffs, City of Winston-Salem and Forsyth County, and the Defendant, Northwest Child Development Centers, Inc. The dispute prompting the adversary proceeding involved the Defendant’s use of real property conveyed to it by the Plaintiffs for a certain use, i.e., for “not-for-profit child day care and related purposes.” The property’s deed included this use restriction and provided the Plaintiffs the opportunity to reclaim the property in the event of a non-conforming use. The Plaintiffs filed the adversary proceeding after the Defendant ceased operation of its daycare facility at that location and limited its use of the property to storage of childcare equipment and technology.
     The Court considered the range of permissible uses granted in the deed and whether storage of childcare equipment and technology was included in the definition of “not-for-profit child day care and related purposes.” With guidance from North Carolina caselaw and through application of traditional tools of interpretation, the Court determined the use restriction to be unambiguous and that the Defendant’s use of the property for storage was not within the scope of “related purposes.” The Defendant’s use of the property as a storage location for its sole remaining childcare facility, which was located in a different county, was at best a tangential or incidental connection to “not-for-profit child day care” and was not a sufficiently “related purpose” to satisfy the deed’s use restriction.
     Moreover, even if the phrase “related purposes” was ambiguous and the circumstances surrounding the transaction favored the Defendant’s view of the parties’ intention, the Court could not adopt a construction that places the parties’ intention in direct conflict with a fixed rule of law, specifically N.C. Gen. Stat. § 160A-279(a), which required that the Plaintiffs attach conditions to the deed to assure the property was used for a public purpose. Because use of the property for storage was not a public use for purposes of § 160A-279(a), the Court could not adopt the Defendant’s interpretation of the use restriction.
     Accordingly, the Court found there were no material facts in dispute and the Plaintiffs were entitled to judgment as a matter of law.

Property of the Estate, Published Yes

Memorandum Opinion denying Defendant’s motion under Fed. R. Civ. P.  Rules 12(b)(1) and (6).   First, finding that a debtor has standing to enforce the codebtor stay and that a trustee has standing to avoid a lien.  Second, finding that the Rooker-Feldman doctrine does not bar enforcing the codebtor stay or avoiding an unperfected lien because the Court is not rectifying an injury caused by a prior foreclosure judgement or being asked to reverse the decision of the state court.  Third, finding that North Carolina principles of collateral estoppel and res judicata do not bar the claims because recording a deed of trust is not a prerequisite to foreclosure under North Carolina law.  Fourth, finding that plaintiff stated a plausible claim for relief that recording a deed of trust against the codebtor’s property violated the codebtor stay.  Fifth, finding that the affirmative defenses of laches, waiver, and estoppel do not sufficiently appear on the face of the complaint to be resolved in connection with a motion under Rule 12(b)(6).  Sixth, finding that a transfer of property is not necessary to a trustee’s avoidance action under 11 U.S.C. § 544(a).

Co-debtor Stay, Published No

     Creditors filed a joint motion requesting a stay of further proceedings in the bankruptcy case, pursuant to Federal Bankruptcy Rule 8007, until a determination is made on the appeal of the order sustaining an objection to the Creditors’ claims and denying the Creditors’ motion to allow late-filed claims. In that underlying order, the Court had determined that the factors necessary to a finding of excusable neglect, see Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380 (1993), did not weigh in favor of the Creditors. Critically, the Court found that the Creditors failed to provide a valid explanation for why the claims were filed late and why the delay was not entirely within the Creditors’ control, which numerous courts, including the Fourth Circuit Court of Appeals, have found to be the most critical factor in determining excusable neglect.
     To determine whether the Creditors’ request for a stay pending appeal was warranted, the Court employed the traditional four-factor test set forth by the Supreme Court in Nken v. Holder, 556 U.S. 418, 434 (2009). Although a balancing approach is applied to the factors, the first two factors—likelihood of success on the merits and irreparable injury absent a stay—are the most important in assessing the motion.
     The Court found the Creditors fell well short of the required “strong showing” of likelihood of success on appeal. In the motion for stay pending appeal, the Creditors did not offer any clear answer for why the claims were filed five days after the bar deadline and did not attempt to demonstrate that the delay was outside of their control. The single, out-of-circuit case relied upon by the Creditors for the argument that excusable neglect can still be found where no reason for the delay is proffered runs directly contrary to Fourth Circuit jurisprudence and emerging excusable neglect caselaw. The Court also found the Creditors’ asserted irreparable injury —lost time and costs associated with pursuing disgorgement actions — fails to satisfy the second factor because the Fourth Circuit has emphasized that irreparable injury must be more than monetary loss. Regarding the third factor, the Court found that further delaying plan payments to creditors, which were the product of extensive negotiations, would constitute substantial harm if the stay were granted. On the final factor, the Court found that the public interest in the issuance of a stay was minimal or non-existent and, in any event, tilted more toward denial of the Creditors’ motion.
     Having found that all four factors weighed against the Creditors, the Court denied the motion for stay pending appeal.

Appeals, Published Yes

Order overruling Bankruptcy Administrator's objection under Rule 1020 to the debtor's subchapter V designation and determining that the plain language of 11 U.S.C. § 1182(1)(A) does not mandate that the debtor’s scheduled business debts be related to her current business activities.  Further finding that the debtor is engaged in commercial or business activities and at least 50 percent of her debts arose from her commercial or business activities.

Subchapter V, Published Yes

Plaintiff filed a complaint containing three claims for relief: (1) violation of the discharge injunction, (2) violation of the automatic stay, and (3) violation of Bankruptcy Rule 3002.1(c). Defendant CitiMortgage Inc., a former holder/servicer of Plaintiff’s mortgage, requested dismissal of the complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted on all three causes of action. The Plaintiff alleged that the Defendant violated the § 524(i) discharge injunction with misapplication of payments and an inflated account payoff balance. Following In re Williams, 612 B.R. 682 (Bankr. M.D.N.C. 2020), the Court determined that the Plaintiff’s allegations that CitiMortgage transferred Plaintiff’s mortgage account with an inflated balance due to misapplied payments is sufficient to constitute an act to collect for the purposes of withstanding a motion to dismiss under Rule 12(b)(6). The Court also found that the Plaintiff plausibly pled the elements required for violation of the automatic stay under § 362(k) and for violation of Bankruptcy Rule 3002.1(c).

Dismissal, Published No

Memorandum Opinion explaining Court’s decision to grant Debtor’s motion to convert from chapter 13 to chapter 11, determining chapter 11 is not necessarily futile due to failure to meet deadlines to conduct a status conference under § 1188 or to file a plan under § 1189, and explaining Court’s decision to deny Debtor’s motion to extend the deadlines under §§ 1188 and 1189.

Conversion, Published No

     The Plaintiff-Trustee requested that the Court issue an order (1) requiring the Defendant insurance company to turn over a Microsoft Word Document compiled by the Defendant’s employee, (2) allowing the Plaintiff to reopen the deposition of said employee, and (3) awarding reasonable costs and attorney’s fees to Plaintiff pursuant to Federal Bankruptcy Rule 7037(a)(5).
     The Court first found the Defendant did not waive any privilege or work product claims simply through the presence of the Word Document at the employee’s deposition. Looking to Federal Rule of Evidence 612, the Court found the Plaintiff did not meet his burden of establishing that the employee used the Word Document to refresh his memory at, or in advance of, the deposition.
     Second, the Court found that the Defendant did not waive its claims of privilege and work product by its delayed inclusion of the Word Document on a supplemental privilege log. The Court stated that there was no indication of an unjustified delay, inexcusable conduct, or bad faith to warrant a waiver of any privilege or work product claims.
     Third, the Court rejected the Plaintiff’s assertion that the entirety of the Word Document contained discoverable communications within the tripartite relationship. The Court found that attorney-client privilege protected the Defendant’s communications with its in-house counsel, as well as outside counsel retained solely to represent the Defendant, but that the privilege does not extend to circumstances where the Defendant’s counsel was joined in conversations by the state-court attorneys retained to defend the insured. Accordingly, the Court ordered turnover of the portion of the Word Document that was unprotected by privilege or work product claims and allowed the Plaintiff to reopen the employee’s deposition.
     Lastly, the Court found the circumstances prompting the Plaintiff to file the motion supported the awarding of reasonable expenses under Rule 7037(a)(5).

Discovery, Published No

         The Debtor filed an amended application seeking approval of compensation for its special counsel McGuireWoods LLP, including fees and expenses incurred prior to the special counsel’s effective date of employment. The Debtor filed an application to employ special counsel on March 4, 2020, which served as the effective date of employment, but special counsel had already performed the bulk of its compensable services prior to that date.
          The Court first found that, given the Supreme Court’s decision in Roman Catholic Archdiocese of San Juan v. Acevedo Feliciano, 140 S. Ct. 696 (2020), the use of nunc pro tunc employment orders to backdate a professional’s effective employment date under 11 U.S.C. § 327 no longer appears to be a permissible exercise of a bankruptcy court’s inherent powers or authority under 11 U.S.C. § 105(a).  While Acevedo may have eliminated nunc pro tunc employment orders, courts are not, however, prohibited from compensating professionals under 11 U.S.C. § 330 for work performed prior to an effective date of employment.
           As part of determining whether a professional’s compensation is reasonable, the Court will consider, as an additional factor under 11 U.S.C. § 330(a)(3), whether all or some of the fees and expenses sought are for work performed prior to a professional’s effective date of employment and, if so, whether the professional has provided a reasonable justification for why services were performed prior to the employment effective date. In determining whether a reasonable justification exists, the Court will consider, inter alia, factors such as the reason for the delay in filing an application to employ, whether the applicant was under pressure to begin service without approval, and the extent to which compensation to the applicant will prejudice third parties. The Court will view with skepticism any explanation that amounts to negligence or inadvertence.
          Applying this standard to the context of this application, the Court found that special counsel’s pre-employment services were of an unexpected and emergency nature. The Court also found that there would be no prejudice to creditors by awarding pre-employment compensation in this case. While the Court found cause to award pre-employment compensation to special counsel, the Court reduced that compensation by 10 percent due to the Debtor’s failure, on at least two occasions, to notify the Court and all interested parties that special counsel had provided extensive services prior to filing an application to employ and would seek fees for those services.

Fees/Compensation, Published Yes

Creditor Ford Motor Credit Company LLC and the pro se Debtor filed a reaffirmation agreement seeking to reaffirm the Debtor’s lease of a vehicle. Given the uncertain status of the Debtor’s current expenditures (both in her original schedules and the revised, but unsupported, figures within the reaffirmation agreement), the lack of any cushion in the Debtor’s budget for unexpected expenses, and the additional fees and charges within the lease agreement beyond the monthly payments, the Court was unable to make a finding that the proposed reaffirmation agreement would not impose an undue hardship and was in the best interest of the Debtor. Moreover, the Debtor and the Creditor used the wrong procedural mechanism to continue the lease agreement. The parties would have been better served by assuming the lease through the separate procedures of 11 U.S.C. § 365(p) rather than seeking to reaffirm through 11 U.S.C. § 524(c). For those reasons, the Court disapproved the reaffirmation agreement. 

Reaffirmation, Published No


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