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: Benjamin A. Kahn)
Memorandum Opinion Granting Plaintiff’s Summary Judgment. Plaintiff sought the Court to determine that the equitable distribution claim against Debtor is non-dischargeable under §§ 523(a)(3)(A) and 1328(a)(2). Plaintiff was married to James Griffin, and the equitable distribution arose prepetition. Plaintiff did not have knowledge nor received notice of the bankruptcy case, and Debtor failed to list the equitable distribution action in his schedules. Plaintiff was entitled to judgment as a matter of law because there is no genuine dispute as to any material fact that Plaintiff did not receive notice or have knowledge of the bankruptcy case.
(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: Benjamin A. Kahn)
Memorandum Opinion Denying Motions to Dismiss. Bankruptcy Administrator commenced this adversary proceeding against Defendant because Defendant acted as a bankruptcy petition preparer. 11 U.S.C. § 110 does not violate the right to contract under the United States Constitution because Congress did not act arbitrarily when it enacted that section. Further, section 110 does not arbitrarily infringe on Defendant’s right to contract because Defendant prepared official forms, and there are safeguards, which Defendant did not take, that professionals must adhere to when completing forms on behalf of debtors. The Complaint includes sufficient facts to support claim for relief under § 110 because Defendant acted as a typist and freelance writer in connection with preparing bankruptcy petitions. Therefore, the Court denied both Motions to Dismiss.
(Judge: Benjamin A. Kahn)
Memorandum Opinion Granting Defendant’s Summary Judgment. The issue is whether the Bankruptcy Code prohibits the perfection of a lien against a codebtor’s property without lifting the codebtor stay. The court held that recording a lien against property that is not property of the estate is not necessarily an act to collect a debt, and therefore is not a per se violation of the codebtor stay. However, recording a lien against a codebtor’s property can constitute a violation of the codebtor stay if the act creates any direct or indirect pressure on the debtor to repay the loan. After the recoding of the lien, Defendant took no action to collect from Debtor. Both Debtor and his mother testified that they did not feel pressure to repay the loan. Thus, based on the circumstances, the recording of the deed of trust was not a violation of the codebtor stay.
(Judge: Benjamin A. Kahn)
Memorandum Opinion Denying Petition for Reconsideration. This Court does not supplemental jurisdiction because “bankruptcy courts lack statutory authority to exercise supplemental jurisdiction under 28 U.S.C. § 1367.” In re Gaitor, AP No. 14-9059, 2015 WL 4611183, *7 (Bankr. M.D.N.C. July 13, 2015). Furthermore, judicial economy and efficiency cannot create jurisdiction for this Court to hear the claims. Defendant failed to assert a Bivens claim because this case presents a new Bivens context and there are special factors, such as available alternative remedies, that prohibit this Court from recognizing a Bivens claim for a due process violation under the Fifth Amendment. Therefore, there is no clear error of law to be corrected and the Motion for Reconsideration was denied.
(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).
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