The NCMB offers a database of opinions for the years 2000 onward, listed by year and judge. For a more detailed search, enter the keyword or case number in the search box above.

     On appeal, the District Court for the Middle District of North Carolina (Biggs, J.) affirmed the ruling of the Bankruptcy Court sustaining the Chapter 7 Trustee’s objection to the Debtor’s claimed exemptions. The question presented on appeal was whether the Debtor may exempt entireties property from the bankruptcy estate with respect to a debt owed solely by the Debtor to the Internal Revenue Service (“IRS”) where the IRS is a priority and general unsecured claimant in the Debtor’s bankruptcy case. The District Court reviewed the Bankruptcy Court’s application of the law de novo and its findings of fact for clear error. 
     In adopting and affirming the Bankruptcy Court’s order, the District Court agreed that, while North Carolina law exempts entireties property from the claims of non-joint creditors, such property is not exempt under the U.S. Tax Code. The District Court found that, absent bankruptcy, the IRS would have been able to obtain a lien against the Debtor’s interest in the entireties property under applicable nonbankruptcy law and, therefore, the Bankruptcy Court was correct to disallow the exemption under 11 U.S.C. § 522(b)(3)(b) with respect to the IRS debt. While there was no evidence in the record that the IRS issued the demand necessary to establish a lien, Section 522(b)(3)(B) does not require a creditor to have established a lien in order to prevent a debtor from exempting the property from the bankruptcy estate. The District Court also rejected the Debtor’s contention that the Trustee lacked authority to assume the collection powers of the IRS under 11 U.S.C. § 544(a), noting that nothing in Section 544(a) exempts otherwise nonexempt property from the bankruptcy estate or limits the power of a trustee to collect and reduce to money the nonexempt property of the estate to pay actual creditors.

Appeals, Published No

Memorandum Opinion Granting in Part and Denying in Part Defendants’ Motion to Dismiss Complaint, and Granting Plaintiff’s Motion for Leave to Amend Complaint. The Defendants Moses H. Cone Memorial Hospital Operating Corp. (“Cone Health”) and Moses Cone Physician Services, Inc. (“MCPS”) filed a motion to dismiss numerous claims in the Plaintiff’s complaint regarding (1) the avoidance of transfers under provisions of the Bankruptcy Code and the North Carolina Uniform Voidable Transactions Act (“UVTA”) and (2) damages stemming from breach of fiduciary duty, constructive fraud by a fiduciary, and unfair and deceptive trade practices. The Plaintiff presented several arguments against dismissal of these claims and requested, in the alternative, that leave be granted to amend the Complaint.

In dismissing several claims for avoidance of preferential transfers and fraudulent conveyances, the Court found that the Plaintiff did not adequately plead that the debtor, Randolph Health, was insolvent at the time of the alleged transfers under the Bankruptcy Code or the UVTA. Under both regimes, a debtor is defined as insolvent when the sum of its debts is greater than all of its property, at a fair valuation (commonly referred to as the “balance sheet test”). See 11 U.S.C. § 101(32)(A); N.C. Gen. Stat. § 39-23.2(a). The Plaintiff’s allegations did not lead to an inference that Randolph Health was insolvent because he alleged that Randolph Health had net assets, according to book values, of at least $31 million at all applicable times.

Nevertheless, the Court granted the Plaintiff a presumption of insolvency under 11 U.S.C. § 547(f) for the 90-day period before the petition date and a presumption of insolvency for the two claims under N.C. Gen. Stat. § 39-23.5(a) for alleged transfers made on or before February 27, 2017. During this latter period, the Plaintiff sufficiently alleged that Randolph Health had defaulted and was unable to make payments on a substantial loan. See N.C. Gen. Stat. § 39-23.2(b) (presuming insolvency if debtor is generally not paying its debts as they become due other than as a result of a bona fide dispute). However, the Court dismissed the Eighth Cause of Action with respect to MCPS only because it was not sufficiently alleged that Randolph Health received less than reasonably equivalent value in exchange for the transfers it made to MCPS. Specifically, the Plaintiff made no factual allegations from which the Court could compare the value of the transfers to the value of the services rendered by MCPS.

The claims under N.C. Gen. Stat. § 39-23.4(a)(2) were dismissed because the Court found the Plaintiff failed to adequately plead the undercapitalization element. The Plaintiff’s allegations did not lead to an inference that Randolph Health was unable to sustain operations or pay debts as they became due within the 2-year lookback period of that provision.

The Court also dismissed the Plaintiff’s state law claims for breach of fiduciary duty and constructive fraud by a fiduciary because the Plaintiff failed to adequately plead that Cone Health had a fiduciary relationship with Randolph Health. Under North Carolina caselaw, the existence of such a relationship is successfully pleaded by alleging that a party had “control and domination” over another or the party “held all the cards.” Courts are especially reluctant to extend the protections of fiduciary obligations to parties whose relationship is established and defined by contract. Here, the Plaintiff relied solely on contractual obligations to allege that Cone Health had a fiduciary duty to Randolph Health. And the Plaintiff did not sufficiently allege that Cone Health held all the cards or was in a position of overwhelming superiority and influence over Randolph Health.

The Court did not dismiss the claim for unfair and deceptive trade practices because the Plaintiff alleged facts leading to a plausible inference that Cone Health used its managerial role and “position of power” to unfairly compete with Randolph Health from within. The Plaintiff sufficiently alleged that such competition adversely impacted the healthcare services provided to local patients.

Lastly, the Court granted the Plaintiff’s request for leave to amend the complaint because he had not amended before and amendment was not futile. The Court noted that the complaint’s issues were of a factual, rather than legal, nature and could potentially be cured with more adequate factual pleading.

Preferences, Published No

      Order Granting Motion to Distribute Sale Proceeds in Satisfaction of the Secured Claim of the Estate of Betty Proctor. The Chapter 7 Trustee filed a motion (1) asking the Court to find that the Proctor Estate has an allowed secured claim of $144,723 and (2) seeking authority to pay the Proctor Estate its full claim amount out of the proceeds generated from the sale of the Debtors’ real property. The Proctor Estate had held a promissory note secured by a deed of trust on the Debtors’ property and filed a proof of claim in bankruptcy case, asserting a secured claim in the amount of $144,723. As one of two surviving heirs, however, the male Debtor held a 50 percent intestacy interest in the Proctor Estate ensuring, the Trustee argued, that some portion of the proceeds sent to the Proctor Estate would be returned to the Debtors’ bankruptcy estate. The Debtors objected to the motion, challenging the Court’s jurisdiction to grant the relief requested and asserting that any amount allegedly owed to the Proctor Estate was forgiven prior to Ms. Proctor’s death.
      The Court found that the “probate exception” did not bar bankruptcy court jurisdiction over the relief requested because the motion did not fall into one of the specifically enumerated categories of cases in which the exception would apply. See Marshall v. Marshall, 547 U.S. 293 (2006). The Court found the motion did not require it to probate or annul a will or administer any portion of the Proctor Estate. The motion also did not require the Court to dispose of property in the custody of a state probate court because the Trustee already had possession of the sale proceeds to satisfy the Proctor Estate’s claim. Moreover, determining the allowance and amount of the Proctor Estate’s secured claim was within the Court’s core jurisdiction. Accordingly, the Court found the probate exception did not preclude bankruptcy court jurisdiction over the matters raised, or relief sought, within the Trustee’s motion.
       While the Debtors also asserted that the promissory note was forgiven by Ms. Proctor, their substantive challenge to the amount of the Proctor Estate’s proof of claim was procedurally deficient. The Debtors objected to the Trustee’s Motion and amended their schedules to show the Proctor Estate’s claim as disputed, but they had not filed an objection to claim. Therefore, the Court granted the Trustee’s Motion but allowed the Debtors a reasonable period in which to file an objection to claim on proper notice to the Proctor Estate.

Jurisdiction, Published No

      Order Denying SECU’s Motion to Dismiss and Granting the Alternative Motion for Change of Venue. One of the Debtor’s creditors, SECU, moved under 28 U.S.C. § 1406(a) to dismiss the case, alleging that venue was improper in the Middle District of North Carolina. SECU noted that the Debtor stated in the petition that she lived in Bumcombe County, within the bounds of the Western District of North Carolina. Alternatively, SECU requested that the case be transferred to the Western District. The Debtor conceded that venue was improper under § 1408 but requested that the case be transferred rather than dismissed.
     The Court considered caselaw surrounding § 1406(a), under which a court may only dismiss an improperly venued case or, if it be in the interest of justice, transfer the case to the proper venue, and found that the overwhelming preference among Fourth Circuit courts is to transfer rather than dismiss. In conducting an interest of justice analysis, the Court found that justice would be served by transferring the case, as the Western District was familiar with the Debtor’s previous filings, the Debtor’s assets were located entirely within the Western District, and transferring would save the Debtor time and money required to file a new petition. Further supporting transfer rather than dismissal was the Debtor’s credible testimony that her decision to file in the Middle District was prompted by a desire to work with an attorney based in this jurisdiction. The Court also found that SECU’s insinuations that the Debtor filed her case in the Middle District not in good faith — while a potential factor in the interest of justice analysis that would weigh against transfer — did not amount to formal allegations and were not properly before the Court.
     Accordingly, the Court denied the request to dismiss but granted the alternative relief by ordering that the case be transferred to the Western District.

Venue, Published No

      Order Overruling Trustee’s Objection to Exemption. The Chapter 7 Trustee objected to the Debtor’s claimed homestead exemption under Federal Rule of Bankruptcy Procedure 4003(b)(2), alleging that the Debtor fraudulently asserted the exemption claim. The timing of the Debtor’s conversion of his chapter 13 case to one under chapter 7, which occurred more than one year after his chapter 13 plan was confirmed, rendered the Trustee’s initial objection to exemption under Rule 4003(b)(1) untimely. The Trustee instead filed an objection under Rule 4003(b)(2), which allows an exception for a trustee to the limited timeframe in which an objection to exemption must be filed. Under subparagraph (b)(2), the trustee may file an objection “at any time prior to one year after the closing of the case” but only if the debtor “fraudulently asserted the claim of exemption.” The Trustee argued that the Debtor fraudulently stated in his bankruptcy schedules that he resided at the subject property in order to wrongfully obtain the homestead exemption.
      While the Debtor did not respond to the Trustee’s objection and did not appear at the hearing, the Court found the Trustee did not meet the heightened burden set by Rule 4003(b)(2). For the Court to sustain the objection, the Trustee must satisfy both the general burden set by Rule 4003(c) in proving that the exemption is not properly claimed, as well as the heightened burden set by Rule 4003(b)(2) of proving the Debtor fraudulently asserted the exemption claim. The Trustee would have to do more than show that the facts do not support the claim of exemption; he must also show the Debtor knew, at the time he claimed the exemption, that the facts did not support that claim, and that he intended to deceive the Trustee and creditors who read the schedules. Whatley v. Stijakovich-Santilli (In re Stijakovich-Santilli), 542 B.R. 245, 256 (B.A.P. 9th Cir. 2015).
      The Court found the evidence provided by the Trustee fell short of meeting the necessary burden under Rule 4003(b)(2). First, the Trustee did not meet the initial burden of showing the Debtor improperly claimed his homestead exemption. Second, even if the Court found the Debtor’s homestead exemption to be improperly claimed, the evidence provided by the Trustee did not satisfy his burden of proving the Debtor fraudulently claimed that exemption. The Court, therefore, overruled the Trustee’s objection and allowed the Debtor’s homestead exemption as filed.

Exemptions, Published No

The Defendant filed a Motion to Quash Subpoenas or Issue Protective Order pursuant to Federal Rules of Civil Procedure 26 and 45. While the Defendant presented the motion as one for a protective order, the principal objection raised to the requested bank records was a purported lack of relevancy to the claims and defenses in the adversary proceeding. Therefore, the Court separately treated the Defendant’s objection based on relevance as a motion to limit discovery under Rule 26(b)(2)(C) and considered it after first evaluating the Defendant’s request for a protective order under Rule 26(c).
On the Defendant’s motion for a protective order, the Court first noted the movant’s burden of showing good cause by a particular and specific demonstration of fact. The Court found the Defendant had not met her burden of showing good cause for entry of a protective order. Specifically, the Court found the Defendant failed to provide a basis or explanation for her objections that the subpoenas were overly broad, burdensome, or oppressive. Moreover, the Defendant provided no legal basis for her general claim of a right to privacy over the subpoenaed bank records. 
The Court next considered the Defendant’s objection based on relevancy. The scope of discovery under Rule 26 is broadly construed to encompass any possibility that information sought may be relevant to the claim or defense of any party and the Court has wide discretion in determining relevance for discovery purposes.  The Court observed that the Plaintiff was required to prove both the direct elements of a nondischargeability cause of action under 11 U.S.C. § 523(a) as well as the underlying debt under state law. After considering the pleadings and the controlling substantive law, the Court found the entirety of the requested bank records to be relevant to the claims and defenses at issue and within the broad scope of relevance described under Rule 26(b)(1). Therefore, the Court denied the Defendant’s motion to the extent it sought to limit discovery under Rule 26(b)(2)(C).

Discovery, Published No

Opinion and Order Denying Summary Judgment. Summary judgment was not appropriate due to there being genuine issues of material fact.

Summary Judgment, Published No

      On appeal, the District Court for the Middle District of North Carolina (Eagles, J.) affirmed the ruling of the Bankruptcy Court granting the Defendants’ motion to dismiss and denying the Plaintiff’s motion for summary judgment. The question presented on appeal was whether the omission of the debtor’s name from the notary’s acknowledgment of a deed trust results in an instrument that is effective for recordation and registration. As there were no material facts at issue, the District Court reviewed the Bankruptcy Court’s legal determination regarding the notarial certificate de novo.  In adopting and affirming the Bankruptcy Court’s order, the District Court agreed that the notarial acknowledgment at issue substantially complied with applicable North Carolina law and the deed of trust was not avoidable. The District Court found the notarial certificate contained language showing the debtor, as signor of underlying document, acknowledged or subscribed to the deed of trust and the Plaintiff did not point to any evidence of fraud or misconduct by the notary that would overcome the presumption of regularity afforded the notarial act. The District Court also found the Bankruptcy Court fully explained why cases from other jurisdictions are of limited utility and persuasive value to determining an issue arising under North Carolina law.

Appeals, Published No
Subscribe to Opinions