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.
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(Judge: Lena M. James)
(Judge: Lena M. James)
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.
(Judge: Lena M. James)
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.
(Judge: Lena M. James)
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).
(Judge: Lena M. James)
Order Denying Trustee’s Motion to Extend Time to Object to Discharge. The Chapter 7 Trustee moved under Federal Rule of Bankruptcy Procedure 4004(b) for an extension of the applicable deadline by which he must file a complaint objecting to the Debtor’s discharge. The Debtor objected to the motion, arguing the Trustee failed to make the requisite showing of cause to extend the deadline.
As the moving party, the Trustee had the burden of demonstrating cause to extend the deadline. “Cause” under Rule 4004(b) is narrowly construed and courts have considered several factors in determining if the movant has met the required burden. Of these factors, the most significant is whether the movant has demonstrated diligence in pursuing the information necessary to object to discharge. “Knowledge of the deadline coupled with the failure to diligently seek discovery is, absent unusual circumstances, fatal to an extension motion.” In re Nowinski, 291 B.R. 302, 306 (Bankr. S.D.N.Y. 2003).
The Court found the Trustee failed to satisfy his burden of demonstrating cause to extend the deadline under Rule 4004(b). The Trustee had ample notice of the deadline and made no assertion that the Debtor has been unresponsive to any of his questions or requests. Outside of a single email to the Debtor’s counsel, the Trustee failed to take any steps to acquire the information regarding the Debtor’s assets and liabilities he now says he need more time to obtain. While the Trustee filed a motion for Rule 2004 examination of the Debtor, he did not do so until after the deadline expired. The Trustee also did not come forward with any evidence of unusual circumstances that would overcome the lack of diligence. Accordingly, the Court sustained the Debtor’s objection and denied the Trustee’s motion to extend time.
(Judge: Lena M. James)
Opinion and Order Granting in Part and Denying in Part Plaintiff's Motion for Summary Judgment and Denying Defendant's Motion for Summary Judgment. The Court considered cross motions for summary judgment from the Plaintiff, Lent Christopher Carr, II, and the Defendant, County of Hoke. The dispute prompting the adversary proceeding involves the Defendant’s secured claim for 2015, 2016, and 2017 real property taxes. After the Plaintiff remitted a check to the Defendant to pay the taxes, the Defendant allegedly issued a tax receipt noting all the taxes as paid in full and issued a satisfaction of judgment marking the 2015 and 2016 taxes as paid in full. The check was later returned unpaid by the issuing bank. The Plaintiff filed the adversary proceeding to object to the Defendant’s claim under 11 U.S.C. § 502(b)(1), arguing that the tax claim is unenforceable under North Carolina law because the tax receipt and the satisfaction of judgment were never revoked and the appropriate records reflect that the taxes were paid.
The Court considered North Carolina statutes and case law regarding the payment of county taxes, particularly when they are marked as paid but the remitted check is not honored by the issuer. In this situation, North Carolina law requires that the county tax collector promptly notify the taxpayer to request a return of the tax receipt and correct the appropriate records before it can resume collection of the unpaid taxes. See N.C. Gen. Stat. § 105-357(b); Miller v. Neal, 23 S.E.2d 852, 854–55 (N.C. 1943). With respect to the 2015 and 2016 taxes, the Defendant neither corrected the appropriate records as required by § 105-357(b) nor revoked the satisfaction of judgment to show the fact of nonpayment. Under these circumstances, the Defendant cannot collect on the 2015 and 2016 taxes.
However, the Court determined there is a material factual dispute surrounding the 2017 taxes—for which a judgment was not obtained—that prevents a finding that either party is entitled to judgment as a matter of law. Specifically, the parties set forth competing assertions that create doubt as to whether the tax receipt issued to the Plaintiff referenced full payment of the 2017 taxes, which would trigger the procedural requirements of § 105-357(b). Neither party produced a copy of the document for the Court’s review. The Court also rejected the Plaintiff’s alternative basis for summary judgment, finding the Plaintiff does not qualify as a good faith purchaser because he was charged with notice that the 2017 taxes would become due after the property was conveyed to him and had actual knowledge that the check was returned unpaid.
Accordingly, the Court granted partial summary judgment for the Plaintiff with respect to the 2015 and 2016 taxes, and denied both cross-motions for summary judgment with respect to the 2017 taxes because of the material fact in dispute.
(Judge: Lena M. James)
Order Sustaining Trustee's Objection to Exemption. The Chapter 7 Trustee objected to the Debtor’s claimed exemption of real property held as a tenancy by entirety with his non-filing spouse. Specifically, the Court considered whether the Debtor may exempt entireties property when the Internal Revenue Service holds a valid tax lien against that property and is a priority and general unsecured claimant in the Debtor’s bankruptcy case. Existing caselaw has established that the bankruptcy estate includes interests in entireties property even where only one spouse has filed. While the Debtor may exempt his tenancy by entirety interest in real property pursuant to 11 U.S.C. § 522(b)(3)(B), and thereby prevent the Trustee from distributing it to satisfy creditors, the Debtor may do so only to the extent that the Debtor’s interest “is exempt from process under applicable nonbankruptcy law.” Nonbankruptcy law includes state law and, under North Carolina law, the Debtor may exempt tenancy by entirety interests from the claims of non-joint creditors. Applicable nonbankruptcy law, however, also includes federal law, including the United States Tax Code. Under federal tax law, as interpreted by the United States Supreme Court in United States v. Craft, 535 U.S. 274 (2002), a federal tax lien attaches to the spouse’s interest in entireties property despite the existence of state law limitations on debts held by non-joint creditors. Therefore, the IRS debt for which the Debtor was liable prepetition is not immune or exempt from process under applicable nonbankruptcy law. Accordingly, the Court sustained the Trustee’s objection and the Debtor’s exemption was denied to the extent of the IRS tax lien and any debts held by joint-creditors of the Debtor and his non-filing spouse.
(Judge: Lena M. James)
Order and Opinion Granting in Part and Denying in Part Defendants' Motion to Dismiss Complaint.The Defendants filed a motion to dismiss the entirety of the Plaintiff’s complaint, which objected to the related proof of claim in the underlying bankruptcy case, sought damages for violations of (1) the discharge injunction, (2) the automatic stay, (3) the Fair Debt Collection Act Practices Act (“FDCPA”), (4) the Real Estate Settlement Procedures Act (“RESPA”), and (5) N.C. Gen. Stat. § 45, as well as damages stemming from (6) breach of contract and (7) tortious interference with contract. The Defendants presented four arguments for dismissing the entirety of the Plaintiff’s complaint.
The Defendants first argued that the Plaintiff failed to state a claim for relief under 11 U.S.C. § 524(i) because the mortgage debt at issue was not discharged, the complaint demonstrated that the Plaintiff failed to make all payments required by the confirmed plan in the Plaintiff’s previous bankruptcy case, and the Defendants correctly applied all tendered payments. The Court first rejected the first assertion, finding that § 524(i) applies, and indeed was designed for long-term debts that are not discharged at the end of a chapter 13 plan. The Court further found, because of the combination of the Defendants’ representations in the previous case that the Plaintiff was then current on payments and the Plaintiff’s pleadings in the complaint that all subsequent payments were made, that the Plaintiff had stated a claim for relief under § 524(i).
Second, the Defendants argued that the complaint fails to state a claim under 11 U.S.C. § 362 because the facts as alleged do not include an act to collect the mortgage loan by the Defendants prior to entry of discharge in the Plaintiff’s prior bankruptcy case. The Court agreed with the Defendants, finding the Plaintiff failed to allege an act to collect occurred prior to discharge. The Court thus granted the motion to dismiss as to the Plaintiff’s claim for violations of the automatic stay.
Third, the Defendants argued the objection to claim fails because the Plaintiff has not come forward with plausible facts or evidence to rebut the presumptive validity of the proof of claim. The Court found the Defendants’ motion to dismiss to be premature as to the objection to claim. The Court found the complaint, for purposes of a Rule 12(b)(6) motion to dismiss, stated sufficient facts to make a plausible showing of entitlement to relief in the objection to proof of claim.
Fourth, the Defendants urged the Court to dismiss the Plaintiff’s remaining non-bankruptcy claims for breach of contract, tortious interference with contract, vicarious liability, and violations of the FDCPA, RESPA, and N.C. Gen. Stat. § 45, under two rationales: (a) the Court does not have jurisdiction to hear the claims because those claims did not arise in and were not related to the Plaintiff’s bankruptcy case and, alternatively, (b) the Plaintiff fails to allege specific damages she sustained as a result of the purported violations. The Court first found it possessed “related-to” jurisdiction over the claims at issue because those claims arose before the petition date in the Plaintiff’s current bankruptcy case and are, therefore, property of the current estate. The Court also found the complaint sufficiently pleaded actual damages as to each of the non-bankruptcy claims.
Accordingly, the Court granted the Defendants’ motion to dismiss as to count two of the complaint for violations of the automatic stay and denied the motion to dismiss as to all remaining counts.
(Judge: Lena M. James)
Order Granting in Part and Denying in Part Plaintiff's Motion to Compel. The Plaintiff filed a motion for discovery sanctions after learning that the claim history report disclosed by the Defendant omitted electronically stored information (“ESI”) that could have been included. The dispute centered on the capabilities of, and information within, Defendant Allstate’s claims handling software, known as NextGen. Testimony from an Allstate claims handling professional revealed that NextGen can produce different forms of a claim history report that include, or filter out, tasks, events, file notes, and digital attachments.
The Court found the Defendant unjustifiably failed to comply with its discovery obligations and withheld certain information from the claim history report based on its unilateral relevance determination. The Court further found the Defendant failed to offer a compelling reason why Allstate typically provides only a condensed version of a claim history report to outside legal counsel. The Court ordered the Defendant to turn over the additional ESI sought by the Plaintiff, rejecting the Defendant’s contention that such an obligation would be overly burdensome. In granting the motion, the Court also awarded the Plaintiff his reasonable expenses and attorney fees incurred in making the motion and attending the hearing, but denied the Plaintiff’s request to strike the Defendant’s answer and enter default judgment. The Court reserved any determination on the remaining sanctions sought by the Plaintiff and continued the hearing to allow the Plaintiff time to review the ESI and determine whether expert reports required revision and whether depositions would need to be reopened.
(Judge: Lena M. James)
Order and Opinion Granting Defendants' Motion to Dismiss and Denying Plaintiff's Motion for Summary Judgment. The adversary proceeding centered on the Plaintiff-Trustee’s request for a finding under 11 U.S.C. § 544(a) that the acknowledgment in the Debtor’s deed of trust contained a tally defective notarial certificate. Specifically, the notary omitted the Debtor’s name from the blank space provided within the acknowledgment. The Plaintiff asserted that the defective certificate rendered the recordation of the deed of trust invalid as against the property interests of the Plaintiff and the Debtor’s bankruptcy estate. The Plaintiff requested that, to the extent the Defendants’ lien under the deed of trust is avoidable, that he be entitled to obtain and retain any avoidance or recovery for the benefit of the bankruptcy estate pursuant to 11 U.S.C. § 550 and 551.
Because the Trustee’s ability to avoid a given lien is dependent upon state law, the Court found decisions from other jurisdictions to be of limited utility to determining the validity of the acknowledgment at issue in this proceeding. Under North Carolina law, N.C. Gen. Stat. § 10B-99 ensures that the “presumption of regularity” created by the doctrine of substantial compliance shall apply to all notarial acts. If an acknowledgment is found to substantially comply with the requirements of the Notary Public Act, a presumption of regularity will apply to that notarial act. The party challenging the acknowledgment would then need to rebut the presumption by proving factual allegations of irregularity such as forgery, fraud, or a knowing and deliberate violation on the part of the notary.
While there is no brightline understanding of the substantial compliance standard, the North Carolina Supreme Court has provided examples of acknowledgments that may be technically deficient but otherwise substantially comply with the law. Two noteworthy cases provide key principles that the Court applied to the facts of this case. In Freeman v. Morrison, 199 S.E. 12 (N.C. 1938), the North Carolina Supreme Court adopted a “liberal construction” toward certificates of acknowledgment. In Freeman, the acknowledgment of a lease did not state the name of the lessor, but the court reasoned that the acknowledgment was nevertheless in substantial conformity with the statute and valid. In Manufacturers’ Finance Co. v. Amazon Cotton Mills Co., 109 S.E. 67 (N.C. 1921), the North Carolina Supreme Court found an acknowledgement that omitted the name of the grantor was still in substantial compliance and thus valid.
Based on the guidance in Freeman and Amazon Cotton, the Court here found the deed of trust to be in substantial compliance. First, the acknowledgment included all elements required under the statute save for the name of the grantor and was much closer to the model form than those found in Freeman and Amazon Cotton. Second, the Debtor’s name and signature appear on and refer to the same instrument referenced in the acknowledgment. Third, there are no open questions about which signatory appeared before the notary and acknowledged the security instrument because the Debtor was the only signatory to the deed of trust. The Court found the finding to be bolstered by considering the effect of a notary’s certification under N.C. Gen. Stat. § 10B-40.
Accordingly, the Court found the acknowledgment to be substantially compliant with the Notary Public Act and, because the complaint did not allege facts that would rebut the presumption of regularity, there was no basis for invalidating the deed of trust and no basis for awarding the Trustee relief under 11 U.S.C. § 544(a). The Court, therefore, granted the Defendants’ motion to dismiss and denied the Trustee’s motion for summary judgment as moot.
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