Order Overruling Trustee's Objection to Exemption. The Chapter 7 Trustee objected to the Debtor’s claimed exemption in her interest in her former husband’s 401(k) retirement account. In concluding her prepetition divorce, the state court had entered a consent equitable distribution order (the “Consent Order”) that provided for the Debtor to receive a distributive award of $22,677.31 to be paid from her ex-spouse’s 401(k) account through a Qualified Domestic Relations Order (QDRO). The Debtor asserted that the interest was fully exempt under N.C. Gen. Stat. § 1C-1601(a)(9) and 11 U.S.C. § 522(b)(3). The Trustee, however, argued that the Debtor’s exemption claim failed for several reasons: (1) the Debtor did not own the distributive award or the retirement plan that was to be the source of the payment; (2) any potential ownership interest that the state court may have awarded to the Debtor would be ineffective without a QDRO; and (3) even if the Debtor had an effective ownership interest in the $22,677.31, the funds were nevertheless property of the estate and could not be exempted under 11 U.S.C. § 522(b)(3) or N.C. Gen. Stat. § 1C-1601(a)(9) because they were not “retirement funds.” See Clark v. Rameker, 573 U.S. 122, 127 (2014).
The Court first found that the Consent Order vested the Debtor’s interest in the sum of $22,677.31 located in the ex-spouse’s 401(k) account. Generally, upon separation, each spouse is limited to a claim to an equitable distribution of marital and divisible property. A final order resolving an equitable distribution proceeding, however, fixes the parties’ rights and transforms the more general right to equitable distribution into concrete interests in specific property. Here, the Court found that the language and context of the Consent Order, which closely connected the distributive award to the division and distribution of the parties’ retirement accounts, established the Debtor’s specific, vested property interest in the amount of $22,677.31 in the ex-spouse’s 401(k) account.
The Court next determined that the absence of a QDRO did not impact the Debtor’s $22,677.31 interest in the 401(k) account because that interest already vested in the Consent Order. North Carolina courts and federal courts applying North Carolina law have recognized that a QDRO is unnecessary to establish a spouse’s right to retirement benefits where the underlying equitable distribution order or divorce decree has already done so. Those courts adhere to the general rule in modern practice that a DRO or QDRO is not a substantive order at all but is instead a procedural device for implementing the terms of the underlying equitable distribution order. Here, the parties to the divorce envisioned a second order – a QDRO – that, if approved by the plan administrator as such, would implement the Debtor’s rights established and recognized under the Consent Order. As such, the Court found the absence of an executed QDRO did not impact the Debtor’s $22,677.31 interest in the 401(k) retirement account.
The Court then considered whether Debtor’s interest was part of her bankruptcy estate and, if so, whether it was exempt under either or both North Carolina law and the Bankruptcy Code. The Court observed that the sum awarded to the Debtor from her ex-spouse’s 401(k) plan had not yet been distributed and thus remained held in trust by an ERISA plan. As such, the Debtor’s interest in the undistributed funds of an ERISA-qualified plan was not property of her bankruptcy estate. See Patterson v. Shumate, 504 U.S. 753 (1992); Nelson v. Ramette (In re Nelson), 322 F.3d 541 (8th Cir. 2003). Because the Debtor’s interest was excluded from the bankruptcy estate altogether, the Court did not need to consider whether it was exemptible from the estate under federal or state law. For those reasons, the Court overruled the Trustee’s objection, finding that the Debtor had an ownership interest in the sum of $22,677.31 within her ex-spouse’s 401(k) retirement account that was excluded from her bankruptcy estate and not subject to the Court’s jurisdiction.
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(Judge: Lena M. James)
(Judge: Lena M. James)
Order Overruling Objection to Claim. The Debtors objected to the secured claim filed by U.S. Bank for a debt which arose out of a home equity line of credit ("HELOC"). The HELOC was secured by a deed of trust on the Debtors' residential real property. The Debtors contended that the claim amount did not accurately reflect all the Debtors' payments to U.S. Bank from November 2008 through June 2013, and showed an improper application of payments made between 2013 and 2022 because there was only a negligible decrease in the principal balance in that period.
The Court first reviewed the procedural rules and evidentiary principles involved in resolving claim objections. Under Federal Rule of Bankruptcy Procedure 3001(f), a proof of claim filed in accordance with the requirements of Rule 3001 is treated as prima facie evidence of the validity and amount of the claim. Among these requirements, the proof of claim must be filed in writing and conform to the Official Form, as well as include certain specific documentation depending on the type of claim. While the holder of the claim has the ultimate burden of proof respecting its allowance, a claim to which the presumption of validity has attached shifts the burden of production to the objecting party, who must “produce evidence sufficient to negate the prima facie validity and amount of the claim.” In re Wright, 438 B.R. 550, 553 (Bankr. M.D.N.C. 2010). The amount of evidence necessary to rebut a presumption will vary depending on such factors as the policy reasons for favoring the presumption and the strength of the evidence supporting the presumption, but in all cases, the objector must produce actual evidence, not mere allegations without evidentiary support. Bankruptcy Evidence Manual § 301:4 (2022 ed.); In re F-Squared Inv. Mgmt., LLC, 546 B.R. 538, 544 (Bankr. D. Del. 2016). A debtor’s testimony on its own may be enough to defeat a claim that lacks presumptive validity; however, where a claim is treated as presumptively valid, objections relying solely upon testimony from debtors without additional documentation and evidentiary support are less likely to find success.
The Court determined that U.S. Bank’s claim and its attachments contained all the information required by Rule 3001 and was presumptively valid, shifting the burden to the Debtors to rebut the presumption. The Debtors, however, only introduced evidence in the form of the male Debtor’s unsupported testimony. With respect to payments made between 2008 and 2013, the parties did not dispute that the Debtors made regular monthly payments during that period. However, the Debtor’s testimony was not sufficient to rebut the presumption that the principal balance asserted at the end of that period was correct because of the HELOC’s repayment provisions, which created a separate “draw period” and “repayment period.” With respect to payments made between 2013 and 2022, the Court again found the Debtor’s testimony was insufficient to rebut the presumption that the payments were applied properly to interest and fees rather than principal. These payments were made through the Debtors’ two prior bankruptcy cases, which were both dismissed and “return[ed] the parties to the positions they were in before the case was initiated.” Wells Fargo Bank, N.A. v. Oparaji (In re Oparaji), 698 F.3d 231, 238 (5th Cir. 2012). Thus, U.S. Bank was allowed to recalculate the payments received in accordance with the original mortgage contract, as if the bankruptcy cases had not occurred. In re Carlton, 437 B.R. 412, 418 n.7 (Bankr. N.D. Ala. 2010). The Debtors did not provide evidence sufficient to rebut the presumption that the payments, when recalculated, were applied properly under the contract’s provisions.
Accordingly, the Court overruled the Debtors’ objection to U.S. Bank’s claim and allowed the claim as filed.
(Judge: Lena M. James)
The Chapter 7 Trustee and the Bankruptcy Administrator filed a complaint requesting that the Debtors’ discharges be denied under 11 U.S.C. § 727(a) for multiple misstatements and omissions, in both the schedules and at the § 341 meeting, regarding the validity and amount of a secured debt owed to the probate estate of the male Debtor’s deceased mother. The mother had loaned $144,723 to the Debtors to put towards the purchase of their residence and obtained a third-priority deed of trust securing that debt. The Debtors did not list the debt as disputed in their bankruptcy schedules; they also indicated that the Debtor’s mother had intended to forgive the obligation but was unable to do so prior to her death. After the Trustee marketed and sold the property, however, and shortly before payment of the obligation owing to the probate estate, the Debtors produced, for the first time, a purported loan forgiveness document executed by the mother. The Trustee and the Bankruptcy Administrator argued that, by first admitting the validity of the debt owed to the probate estate, and then months later identifying and proffering the alleged forgiveness document, the Debtors knowingly and fraudulently made a false oath or account, warranting denial of discharge under § 727(a).
Based on the evidence offered at trial, including the testimony of the Trustee and the male Debtor, the Court found the Trustee and Bankruptcy Administrator met their burden and demonstrated the required elements necessary to deny the Debtors’ discharges under § 727(a)(4)(A), which provides that a court should not grant a debtor’s discharge if “the debtor knowingly and fraudulently, in or in connection with the case . . . made a false oath or account.” To prove a violation § 727(a)(4), the plaintiff must show a debtor “made a statement under oath which he knew to be false, must have made the statement willfully, with intent to defraud, and the statement must have related to a material matter.” Van Robinson v. Worley, 849 F.3d 577, 583 (4th Cir. 2017). A debtor’s intent may be established in one of two ways: first fraudulent intent may be established by circumstantial evidence, or by inferences drawn from a course of conduct; second, fraudulent intent can be shown through reckless indifference to the truth, which constitutes the functional equivalent of fraud. Id. at 585.
The Court found the Debtors’ statements in the schedules and at the § 341 meeting as to the amount and validity of the debt owed to the probate estate, as well as their omission of any reference to a forgiveness document, qualified as false statements for purposes of § 727(a)(4)(A). The Court found these statements were material and relevant to the bankruptcy estate. The Court also found it could reasonably infer the Debtors’ fraudulent intent based on several grounds. First, the Court found the male Debtor’s testimony at trial and his observable lack of candor strongly supported a finding of fraudulent intent. Second, the Court found the Debtors’ course of conduct in the bankruptcy proceeding further demonstrated fraudulent intent. Specifically, the Debtors’ decision to schedule the debt as valid and undisputed, combined with their asserted homestead exemptions and two senior mortgages, appeared to be an attempt to persuade the Trustee that it was a “no asset” bankruptcy case with no equity to administer on behalf of unsecured creditors. Only after the Trustee attempted to sell the Property and satisfy the debt owed to the Proctor Estate did the Debtors “rediscover” the forgiveness document and assert its validity. Third, the Debtors’ pattern of repeatedly making false statements and omissions bolstered a finding of fraudulent intent.
Based on the evidence presented, the Court entered judgment denying the Debtors’ discharges under § 727(a)(4)(A).
(Judge: Lena M. James)
Memorandum Opinion and Order Granting in Part and Denying in Part Defendant’s Motion for Summary Judgment and Denying Plaintiff’s Motion for Summary Judgment. The Court considered cross-motions for summary judgment in a dispute arising from the Defendant’s handling of insurance claims against the Debtor for his liability in a two-car automobile accident. The Plaintiff-Trustee sought damages for (1) violations of the North Carolina unfair and deceptive practices statute, N.C. Gen. Stat. § 75-1.1 (the “UDP”), (2) breach of contract, (3) breach of the implied covenant of good faith and fair dealing, (4) bad faith failure to settle, and (5) negligence and gross negligence.
First, the Plaintiff argued that the Defendant violated the UDP by engaging in unfair claim settlement practices as defined by N.C. Gen. Stat. § 58-63-15(11) and intentionally concealing its bad faith failure to settle the claims. See Guessford v. Pa. Nat’l Mut. Cas. Ins. Co., 983 F. Supp. 2d 652, 660 (M.D.N.C. 2013). Among other things, the Plaintiff alleged that the Defendant failed to timely respond to a time-limited demand and misrepresented to the Debtor that it had a continuing duty to defend him—even after all claims had been resolved and the Debtor’s interests no longer aligned with those of the Defendant. The Plaintiff also argued that the Defendant intentionally sought to conceal its bad faith failure to settle the claims. The Court denied both summary judgment motions on the majority of the Plaintiff’s bases under N.C. Gen. Stat. § 58-63-15(11), allowing the claims to proceed to trial. However, the Court granted summary judgment to the Defendant with respect to the Plaintiff’s allegations that it misrepresented (1) that it would timely inform the Debtor of settlement demands and (2) the insurance policy’s applicable coverages.
Second, the Plaintiff asserted that the Defendant breached the express provisions of the insurance policy. However, the Court found the undisputed facts demonstrated the Defendant ultimately complied with its contractual obligations to pay damages for bodily injury or property damage and paid compensatory damages for which the Debtor was legally entitled. Accordingly, the Court granted summary judgment for the Defendant on this claim.
Third, the Court considered the Plaintiff’s two claims for breach of the implied covenant of good faith and fair dealing and bad faith failure to settle together, as they share the same elements. See Michael Borovsky Goldsmith LLC v. Jewelers Mut. Ins. Co., 359 F. Supp. 3d 306, 315 (E.D.N.C. 2019). The Court found the Plaintiff forecasted sufficient evidence that the Defendant refused in bad faith to settle claims against the Debtor for the policy limit when presented with the opportunity to do so, but the evidence could also support a finding that there was a reasonable, good-faith basis for not accepting certain settlement offers. The Court found there were also genuine issues of material fact as to the aggravated conduct element of the claims. Thus, the Court denied both summary judgment motions with respect to these claims.
Fourth, the Court granted summary judgment for the Defendant on the negligence and gross negligence claims, determining that the negligent conduct cited by the Plaintiff related entirely to the Defendant’s performance under the Policy and, under the “economic loss rule,” could not support the claim. See Wilkie Amica Mut. Ins. Co., No. 1:17CV314, 2018 WL 2326130, at *3 (W.D.N.C. Apr. 30, 2018).
Lastly, the Court determined that the Plaintiff’s claims were non-core proceedings related to the underlying bankruptcy case under 28 U.S.C. § 157(c) and that the Court had authority to issue a final order because of the Defendant’s implied consent. The Court found that the Defendant’s post-judgment conduct and that of the counsel it retained on the Debtor’s behalf, including facilitating the Debtor’s bankruptcy filing, was indicative of the knowing and voluntary consent described in Wellness Int’l Network Ltd. v. Sharif, 575 U.S. 665, 686 (2015).
(Judge: Lena M. James)
Order Granting Bankruptcy Administrator’s Motion to Dismiss. The Bankruptcy Administrator filed a motion to dismiss the Debtor’s case or convert to chapter 7 under 11 U.S.C. § 1112(b)(1). The Debtor did not object to the motion. First, the Court determined that cause existed to dismiss or convert under each of the § 1112(b)(4) grounds asserted by the BA. For example, there was continuing and substantial loss to the estate based on the uncontested allegations that the Debtor operated at break-even level since the petition date and failed to pay required expenses. There was also evidence of gross mismanagement of the estate, as the Debtor’s management failed to fix operational problems and was unable to reasonably estimate revenues or adequately identify expenses.
Second, although the BA announced that he had reached an agreement with the Debtor to dismiss the case with conditions, the Court conducted its own analysis to determine whether dismissal or conversion was in the best interest of creditors and the estate under § 1112(b)(1). The Court exercised its discretion to consider various “best interest” factors, such as: the low likelihood that a chapter 7 trustee could reach the Debtor’s assets; the small benefit of pursuing avoidable transfers due to potentially high administrative costs; and the support for dismissal from the Debtor’s biggest secured creditor. In exercising its discretion, the Court determined that dismissal, rather than conversion, was appropriate.
Third, the Court considered whether it would allow the parties’ agreement to dismiss the case with the condition that the Debtor pay the subchapter V trustee’s fees, including fees incurred in preparing a report under § 1183(b)(2), and income-based taxes that had accrued post-petition. The Court classified this agreement as a structured dismissal, which cannot be approved unless, at a minimum, any required distributions are made in accordance with the Bankruptcy Code’s priority scheme. See Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 978 (2017). The Court did not approve the structured dismissal because it was not shown that the contemplated payments complied with the priority rules of § 507.
(Judge: Lena M. James)
Order Denying Trustee’s Motion for Public Auction Sales of Real Property. The chapter 7 trustee moved under 11 U.S.C. § 363(f) to conduct online public auctions of five parcels of real property and sell them free and clear of all liens, encumbrances, and other claims of interest. Although the Debtor agreed in principle that the properties could be sold, he objected to the proposed procedures for the sale. Donald Green, a co-owner and the Debtor’s brother, also objected to the sale, arguing that one of the properties should be sold to a family member and that the benefit to the estate of any sale of that property would not outweigh the detriment to Mr. Green, in contravention of § 363(h)(3).
The Court overruled the Debtor’s objection for lack of standing, as the record indicates that he would not have a pecuniary interest in the distribution of assets; there was no possibility of a surplus returning to the Debtor because he did not claim a homestead exemption on any of the properties and there was little chance they would be sold for a price higher than the value of the liens. See In re Hamilton Road Realty, Inc., No. 8-19-72596, 2021 WL 1620046, at *3 (Bankr. E.D.N.Y. Apr. 26, 2021). The Court also overruled Mr. Green’s objection with respect to the comparative determination of benefit to the estate vs. detriment to the co-owner under principles of res judicata, because the Court had already found in a related adversary proceeding that the benefit to the estate of a sale of the property would outweigh any detriment to Mr. Green.
On the merits of the motion, the Court found that the overwhelming weight of authority holds that courts, in exercising their independent duty to review proposed sales, should not authorize a trustee’s sale of fully encumbered assets. See, e.g., In re Bird, 577 B.R. 365, 377-78 (B.A.P. 10th Cir. 2017). Here, the parties conceded that the properties were overencumbered by Palm Avenue Hialeah Trust’s claim and none of the proceeds would be available to pay general unsecured creditors. The only carve-outs allowed by Palm Avenue were for expenses related to the proposed sale, including compensation to the trustee and his professionals. Payment of these priority unsecured claims did not justify sale of the properties by the trustee.
Accordingly, the Court determined that the motion should not be granted because the trustee failed to demonstrate that sale of the properties would have a discernible benefit to general unsecured creditors.
(Judge: Lena M. James)
Order Granting Debtor’s Motion to Convert Case and Denying Joint Motion to Vacate Discharge. The Debtor filed a motion to convert her chapter 7 case to one under chapter 13 of the Bankruptcy Code. Over the course of the case, and through the chapter 7 trustee’s investigation, the Debtor learned her residence had a higher-than-expected value beyond what was listed in the schedules, which could in turn result in substantial non-exempt equity to be administered by the trustee. The Debtor sought to convert the case to chapter 13 to retain the residence and pay any non-exempt equity over time through a confirmed plan. The Bankruptcy Administrator objected to the motion to convert, asserting that a number of courts, including the Bankruptcy Court for the Middle District of North Carolina, see In re Godwin, No. 06-50150, 2007 WL 4191729 (Bankr. M.D.N.C. Nov. 21, 2007), have refused to allow post-discharge conversion absent a debtor seeking to vacate the prior discharge order. Based on that reasoning, the Debtor and the Bankruptcy Administrator jointly filed a motion to vacate the discharge.
The Court first denied the motion to vacate on three grounds. First, because the Code expressly provides the bases and time limits for seeking to revoke a discharge, the Court could not use the equity provisions under 11 USC § 105(a) to bypass or override those mandates. Second, the erroneous value of the property listed in the schedules was not the type of “mistake,” “inadvertence,” or “newly discovered evidence” that would warrant relief under Rule 60(b). Third, the Court found the BA offered no factual support to revoke the discharge under 11 USC § 727(d).
In turning to the motion to convert, the Court found the language of § 706 provided that a debtor may convert the case “at any time” provided the debtor was eligible and the case had not been previously converted. The Court found no blanket prohibition on a debtor who has received a chapter 7 discharge from exercising the right to convert contained in § 706(a). The Court was also not persuaded by the Bankruptcy Administrator’s argument that leaving the discharge intact leaves a debtor with no debts to be repaid in chapter 13. Nothing in the Bankruptcy Code suggests that a discharge eliminates a creditor’s claim against the bankruptcy estate; rather, the Court observed that conversion does not constitute the commencement of a new case, but merely represents a change in the statutory chapter pursuant to which the case could proceed. Creditors would still have the ability to file claims against the estate and there were numerous protections in place to prevent any attempts at manipulation or potential prejudice to creditors. The Court, therefore, granted the Debtor’s motion to convert the case to chapter 13.
(Judge: Lena M. James)
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.
(Judge: Lena M. James)
Order Granting in Part and Denying in Part Debtors' Motion for Sanctions. The Debtors filed a motion for sanctions against an insurance company seeking compensatory and punitive damages relating to its failure to timely comply with the Bankruptcy Court’s order granting motion to substitute collateral, which required that “the insurance proceeds shall be paid forthwith to the trust account of the Debtors’ attorney.” The testimony of the Debtor and her attorney established that, despite numerous telephone calls and emails, the insurance company did not successfully deliver the proceeds to the intended party until 49 days after the substitution order was entered. The Debtors sought compensation for rental car charges incurred during that period as well as an unspecified amount of attorney’s fees. The Debtors also sought punitive damages of $5,000 to ensure the insurance company’s compliance with similar substitution orders.
The Court applied the “fair ground of doubt” standard established in Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019) to determine whether the insurance company was in contempt of the substitution order. In applying that standard, the movant must demonstrate the following elements: (1) the party violated a definite and specific order of the court requiring him to perform or refrain from performing a particular act or acts; (2) the party did so with knowledge of the court’s order; and (3) there is no fair ground of doubt as to whether the order barred the party’s conduct — i.e., no objectively reasonable basis for concluding that the party’s conduct might be lawful. In re Carnegie, 621 B.R. 392, 410 (Bankr. M.D.N.C. 2020). The Court found the insurance company had violated a definite and specific order of the Court by not timely complying with the requirement to pay the insurance proceeds “forthwith” to the Debtors’ attorney’s trust account. The company had knowledge of the substitution order, as it was served with a copy by first-class mail as well as by email from the Debtors’ attorney. The Court found there was no fair ground of doubt that the insurance company’s actions were barred by the substitution order.
Finding the insurance company in contempt, the Court awarded compensatory sanctions to the Debtors in the form of rental car charges and attorney’s fees incurred in ultimately bringing the company into compliance with the substitution order. The Court, however, declined to award the requested $5,000 in punitive damages. The Debtors did not claim that the requested amount was intended to compensate for any harm suffered, nor would such a punitive sanction coerce compliance with the Court’s orders, as the insurance company had already complied with the substitution order. The Debtors also did not come forward with any evidence that the company acted with the requisite degree of bad faith to warrant the imposition of punitive sanctions under the Court’s inherent power.
(Judge: Lena M. James)
Order Denying Motion for Entry of Order Tolling the Statute of Limitations. The Liquidation Trustee moved for entry of an order extending by 120 days the statutory deadline to file chapter 5 causes of action against certain of the Debtors’ healthcare providers. The Liquidation Trustee requested to equitably toll the pertinent limitations periods under 11 U.S.C. §§ 108 and 546 and extend the filing deadlines to allow additional time to commence avoidance actions. The Bankruptcy Administrator objected, alleging that the requested extension was not supported by the Federal Rules of Bankruptcy Procedure and that any equitable tolling of the pertinent statutes of limitations would be premature as no adversary proceedings had yet been filed.
The Court denied the Liquidation Trustee’s motion, first finding that Federal Rule of Bankruptcy Procedure 9006(b) may not be used to extend statutory deadlines such as those established under §§ 108 and 546. While acknowledging that the limitations periods contained in those sections are subject to equitable tolling, the Court found that the preemptive finding the Liquidation Trustee sought was premature given there were no identified defendants and no adversary proceedings filed. Given that procedural posture, the Court found a trustee “cannot win the argument of whether equitable tolling applies in advance and without notice and opportunity for the defendant to resist application of the doctrine.” In re Cramer, 636 B.R. 830 (Bankr. C.D. Cal. 2022). The Court denied the motion without prejudice and without making findings on the applicability of equitable tolling.
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