Order Granting Motion to Reopen Case. The Debtor moved to reopen his chapter 7 case nearly four years after it was closed in order to file motions to avoid judicial liens under 11 U.S.C. § 522(f). One of the lienholders (the “Creditor”) objected to the motion, arguing it would be unfairly prejudiced given the Debtor’s long delay in moving to reopen as well as the additional expenses it accrued pursuing the judgment since the case was closed.
Initially, the Debtor had to establish cause to reopen the case under 11 U.S.C. § 350(b) and courts have routinely held that avoidance of a judicial lien constitutes such cause. However, while courts generally take a permissive approach to motions to reopen cases to avoid judicial liens, and the Bankruptcy Code does not contain deadlines to seek such relief, they have also incorporated a defense akin to laches, meaning “a debtor may reopen the bankruptcy case to avoid a lien absent a finding of prejudice to the creditor.” In re Bianucci, 4 F.3d 526, 528 (7th Cir. 1993). A party asserting laches carries the burden of proving “(1) lack of diligence by the party against whom the defense is asserted… and (2) prejudice to the party asserting the defense.” Miller v. Hooks, 749 Fed. Appx. 154, 161 (4th Cir. 2018) (quoting Costello v. United States, 365 U.S. 265, 282 (1961)). Therefore, in addressing the Creditor’s laches-based objection to reopening, the Court balanced the length and reason for the Debtor’s delay against the alleged prejudice to the Creditor.
The Court first observed that the four-year gap between the closing of the case and the filing of the motion to reopen was substantial and the Debtor had knowledge of the judicial liens when he filed his petition and schedules. The Court also found that the Creditor had come forward with a sufficient showing of prejudice. Specifically, the Court observed that the Creditor had incurred unnecessary fees and costs pursuing its judgment since the Debtor’s case was closed and may also face additional, delay-related expenses in defending against the expected motion to avoid lien. Nevertheless, despite a showing of laches, courts retain great discretion in fashioning the appropriate equitable remedy and frequently opt to reopen closed cases where the prejudice is monetary and curable. Citing that guidance, the Court granted the motion to reopen the case, but conditioned its consideration of a motion to avoid the Creditor’s lien on the Debtor’s reimbursement of the reasonable fees and costs the Creditor incurred as a result of the delay.
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(Judge: Lena M. James)
(Judge: Lena M. James)
Order Overruling in Part and Sustaining in Part Objection to Expert Reports. Defendant objected to the admission and consideration of the Plaintiff’s expert reports, arguing that the opinions and proposed testimony failed to satisfy the reliability and relevancy requirements of Federal Rules of Evidence 401 and 702 and should be excluded from consideration on summary judgment.
The Court conducted the reliability and helpfulness analysis mandated by Rule 702, specifically addressing the four main points of objection raised by the Defendant. First, the Court found that the expert’s opinion would be helpful to determining the applicable healthcare industry standard contained within the parties’ contract. Second, the Court found the Plaintiff’s expert had the qualifications and knowledge necessary to testify under Rule 702 and the Defendant’s assertion that her experience was insufficiently related to the specific circumstances of the proceeding went to the credibility of the expert’s testimony, not its admissibility. Third, the Court found that the majority of the report and proposed testimony was firmly within the realm of permissible ultimate-issue testimony, but determined it would strike and disregard any statements or opinions that ventured too close to impermissible legal conclusions. Fourth, the Court found that, although there were no authoritative, published industry standards that could be directly applied, the expert’s extensive knowledge and training in the healthcare field provided a sufficiently reliable basis under Rule 702 for forming opinions on the contract’s performance standard. The Court further found that the expert adequately based her opinions on depositions and other documentary evidence in the record; the Defendant’s challenges to any of the expert’s assumptions went to the credibility of her testimony and could be addressed through cross-examination at trial.
The Court, therefore, overruled in part and sustained in part the Defendant’s objection, allowing the expert reports and proposed testimony while excluding those statements constituting legal conclusions as to the Defendant’s responsibilities under the contract or its alleged breaches.
(Judge: Lena M. James)
Memorandum Opinion and Order Granting in Part and Denying in Part the Defendant’s Motion for Partial Summary Judgment and Denying the Plaintiff’s Motion for Partial Summary Judgment. The Court considered cross-motions for summary judgment on three claims: breach of contract, breach of the implied covenant of good faith and fair dealing, and unfair or deceptive acts or practices. All three claims in this matter arose from the Defendant’s alleged conduct as required under the Management Service Agreement (the “MSA”) between the two parties.
In addressing the breach of contract claim, the Court first considered the scope of duties and performance standard under the MSA. Based on the language of the MSA, the Court found that the Defendant must perform the responsibilities listed in Section 3 of the MSA in a manner “consistent with the standards of the healthcare industry for an independent management company contracting on an arm’s length basis to provide comprehensive management services….” Despite being defined within the MSA, the Court determined that, due to its ambiguity and reference to technical benchmarks, the meaning of the performance standard required further factual development at trial.
Next, the Court addressed the Defendant’s assertion that Randolph Health waived the Defendant’s obligations. The Court found that, because the Randolph CEOs and COOs were the Defendant’s employees and subagents under the MSA, their acts or communications, standing alone, failed to satisfy the requisite intent by Randolph Health to waive the Defendant’s duties. The Court was unable to determine whether Randolph Health, through its Board of Directors, knowingly and intentionally waived potential breaches or the Defendant’s ongoing obligations when it continued to pay the Defendant’s management fees and other expenses without sending a notice of default.
The Defendant also sought judgment as a matter of law on nine of twelve specifically alleged breaches of the MSA. After review of the evidence, the Court found in favor of the Defendant for two of the nine alleged breaches – pertaining to Sections 3(a) and (e) – but was unable to determine the remaining seven alleged breaches – pertaining to Sections 3(b), (c), (g), (h), (i), (k), (n) – as the Court found that the Plaintiff produced sufficient evidence to create genuine issues of material fact.
The Court next evaluated the alleged breach of the implied covenant of good faith and fair dealing. Depending on the ultimate determination of disputed material facts at trial, the Court determined it was possible to find that the Defendant’s conduct breached the implied covenant by wrongfully recruiting vulnerable physicians it knew Randolph Health expressed interest in, thereby undercutting Randolph Health’s attempts to implement the recruitment plan and obtain benefits owed under the MSA. However, at summary judgment, the Court was unable to make credibility determinations regarding the Defendant’s intentions in recruiting physicians and denied both summary judgment motions with respect to the breach of the implied covenant claim.
The Court then assessed whether the Defendant violated the North Carolina Unfair and Deceptive Act or Practice statute (the “UDP”). Although North Carolina permits a plaintiff to assert a breach of contract claim and a UDP claim, the “plaintiff must allege substantial aggravating circumstances.” In re Charlotte Com. Grp., Inc., No. 01-52684C-11W, 2003 WL 1790882, at *3 (M.D.N.C. Mar. 13, 2003). The Court found that, despite the Plaintiff’s claims that the Defendant was misleading or secretive, its conduct was too bound up with its rights and duties under the MSA and was not attended by sufficiently egregious or aggravating circumstances to warrant a finding that such conduct was unfair or deceptive under the UDP.
Although not raised by the Defendant, the Court also observed that the Plaintiff’s claim was likely barred by the learned profession exemption. The UDP prohibits “[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce.” N.C. Gen. Stat.§ 75-1.1(a). Although “commerce” under the UDP “includes all business activities,” it “does not include professional services rendered by a member of a learned profession.” N.C. Gen. Stat.§ 75-1.1(b). The Court first found that, as an operating hospital, the Defendant qualified as a “medical professional” for purposes of the learned profession exemption. The Court further found that the Defendant’s physician recruitment efforts and its allegedly anticompetitive conduct related to the provision of medical services in Randolph County and fell squarely within the learned profession exemption. As such, the Court granted the Defendant’s motion for summary judgment as to the Plaintiff’s UDP claim.
(Judge: Benjamin A. Kahn)
Order Granting Trustee's Motion to Modify Plan to Require Turnover of Funds and to Increase Liquidation Requirement. Where Debtor's plan did not contemplate a sale of real property and provided that the real property would remain property of the estate, and Debtor's interest in the real property represented a substantial portion of the liquidation requirement in the Plan, trustee's motion to modify the plan after Debtor's post-confirmation sale of the real property at an appreciated value in order to increase the liquidation requirement and require turnover of proceeds over and above Debtor's statutory exemption was proper under 11 U.S.C. § 1329(b)(1).
(Judge: Benjamin A. Kahn)
Memorandum opinion and order granting creditor defendants' motions to dismiss debtor's amended complaint (asserting state law lender liability claims) for failure to state a claim and insufficient process, and denying default judgment and dismissing claims for failure to state a claim.
(Judge: Lena M. James)
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.
(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: Benjamin A. Kahn)
Order sustaining Chapter 13 Trustee’s Objection to Debtor’s Claim for a Property Exemption in a life insurance policy and determining that the policy, with declared beneficiaries being two of debtor’s children and a third party business, does not qualify for an exemption under N.C.G.S. § 1C-1601(a)(6) and art. X, § 5 of the N.C. Const., as the policy does not insure the life of a person “for the sole use and benefit of that person’s spouse or children.”
(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).
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