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.
Opinions:
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(Judge: Lena M. James)
(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.
(Judge: Lena M. James)
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.
(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.
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