Order Granting Bankruptcy Administrator’s Motion to Dismiss. The Bankruptcy Administrator filed a motion to dismiss the Debtor’s case or convert to chapter 7 under 11 U.S.C. § 1112(b)(1). The Debtor did not object to the motion. First, the Court determined that cause existed to dismiss or convert under each of the § 1112(b)(4) grounds asserted by the BA. For example, there was continuing and substantial loss to the estate based on the uncontested allegations that the Debtor operated at break-even level since the petition date and failed to pay required expenses. There was also evidence of gross mismanagement of the estate, as the Debtor’s management failed to fix operational problems and was unable to reasonably estimate revenues or adequately identify expenses.
Second, although the BA announced that he had reached an agreement with the Debtor to dismiss the case with conditions, the Court conducted its own analysis to determine whether dismissal or conversion was in the best interest of creditors and the estate under § 1112(b)(1). The Court exercised its discretion to consider various “best interest” factors, such as: the low likelihood that a chapter 7 trustee could reach the Debtor’s assets; the small benefit of pursuing avoidable transfers due to potentially high administrative costs; and the support for dismissal from the Debtor’s biggest secured creditor. In exercising its discretion, the Court determined that dismissal, rather than conversion, was appropriate.
Third, the Court considered whether it would allow the parties’ agreement to dismiss the case with the condition that the Debtor pay the subchapter V trustee’s fees, including fees incurred in preparing a report under § 1183(b)(2), and income-based taxes that had accrued post-petition. The Court classified this agreement as a structured dismissal, which cannot be approved unless, at a minimum, any required distributions are made in accordance with the Bankruptcy Code’s priority scheme. See Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 978 (2017). The Court did not approve the structured dismissal because it was not shown that the contemplated payments complied with the priority rules of § 507.
Opinions:
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(Judge: Lena M. James)
(Judge: Lena M. James)
Order Denying Trustee’s Motion for Public Auction Sales of Real Property. The chapter 7 trustee moved under 11 U.S.C. § 363(f) to conduct online public auctions of five parcels of real property and sell them free and clear of all liens, encumbrances, and other claims of interest. Although the Debtor agreed in principle that the properties could be sold, he objected to the proposed procedures for the sale. Donald Green, a co-owner and the Debtor’s brother, also objected to the sale, arguing that one of the properties should be sold to a family member and that the benefit to the estate of any sale of that property would not outweigh the detriment to Mr. Green, in contravention of § 363(h)(3).
The Court overruled the Debtor’s objection for lack of standing, as the record indicates that he would not have a pecuniary interest in the distribution of assets; there was no possibility of a surplus returning to the Debtor because he did not claim a homestead exemption on any of the properties and there was little chance they would be sold for a price higher than the value of the liens. See In re Hamilton Road Realty, Inc., No. 8-19-72596, 2021 WL 1620046, at *3 (Bankr. E.D.N.Y. Apr. 26, 2021). The Court also overruled Mr. Green’s objection with respect to the comparative determination of benefit to the estate vs. detriment to the co-owner under principles of res judicata, because the Court had already found in a related adversary proceeding that the benefit to the estate of a sale of the property would outweigh any detriment to Mr. Green.
On the merits of the motion, the Court found that the overwhelming weight of authority holds that courts, in exercising their independent duty to review proposed sales, should not authorize a trustee’s sale of fully encumbered assets. See, e.g., In re Bird, 577 B.R. 365, 377-78 (B.A.P. 10th Cir. 2017). Here, the parties conceded that the properties were overencumbered by Palm Avenue Hialeah Trust’s claim and none of the proceeds would be available to pay general unsecured creditors. The only carve-outs allowed by Palm Avenue were for expenses related to the proposed sale, including compensation to the trustee and his professionals. Payment of these priority unsecured claims did not justify sale of the properties by the trustee.
Accordingly, the Court determined that the motion should not be granted because the trustee failed to demonstrate that sale of the properties would have a discernible benefit to general unsecured creditors.
(Judge: Benjamin A. Kahn)
Memorandum Opinion Denying Plaintiff’s Motion for Temporary Restraining Order, or in the Alternative, for a Preliminary Injunction. The Court found that Plaintiff-Creditor (“Creditor”) did not carry its burden with respect to the standard for preliminary injunction and the standards for constructive trust and other theories of equitable title. Creditor did not become an owner of certain goods in possession of Debtor on a pre-petition contract theory. The earmarking doctrine did not apply. Plaintiff did not stablish that it was entitled to imposition of a resulting or constructive trust. The doctrines of equitable lien and equitable title did not apply. Creditor did not meet the standards for a preliminary injunction at that stage of the litigation: likelihood of success on the merits, balance of equities, irreparable harm in the absence of an injunction, and public interest.
(Judge: Lena M. James)
Order Granting Debtor’s Motion to Convert Case and Denying Joint Motion to Vacate Discharge. The Debtor filed a motion to convert her chapter 7 case to one under chapter 13 of the Bankruptcy Code. Over the course of the case, and through the chapter 7 trustee’s investigation, the Debtor learned her residence had a higher-than-expected value beyond what was listed in the schedules, which could in turn result in substantial non-exempt equity to be administered by the trustee. The Debtor sought to convert the case to chapter 13 to retain the residence and pay any non-exempt equity over time through a confirmed plan. The Bankruptcy Administrator objected to the motion to convert, asserting that a number of courts, including the Bankruptcy Court for the Middle District of North Carolina, see In re Godwin, No. 06-50150, 2007 WL 4191729 (Bankr. M.D.N.C. Nov. 21, 2007), have refused to allow post-discharge conversion absent a debtor seeking to vacate the prior discharge order. Based on that reasoning, the Debtor and the Bankruptcy Administrator jointly filed a motion to vacate the discharge.
The Court first denied the motion to vacate on three grounds. First, because the Code expressly provides the bases and time limits for seeking to revoke a discharge, the Court could not use the equity provisions under 11 USC § 105(a) to bypass or override those mandates. Second, the erroneous value of the property listed in the schedules was not the type of “mistake,” “inadvertence,” or “newly discovered evidence” that would warrant relief under Rule 60(b). Third, the Court found the BA offered no factual support to revoke the discharge under 11 USC § 727(d).
In turning to the motion to convert, the Court found the language of § 706 provided that a debtor may convert the case “at any time” provided the debtor was eligible and the case had not been previously converted. The Court found no blanket prohibition on a debtor who has received a chapter 7 discharge from exercising the right to convert contained in § 706(a). The Court was also not persuaded by the Bankruptcy Administrator’s argument that leaving the discharge intact leaves a debtor with no debts to be repaid in chapter 13. Nothing in the Bankruptcy Code suggests that a discharge eliminates a creditor’s claim against the bankruptcy estate; rather, the Court observed that conversion does not constitute the commencement of a new case, but merely represents a change in the statutory chapter pursuant to which the case could proceed. Creditors would still have the ability to file claims against the estate and there were numerous protections in place to prevent any attempts at manipulation or potential prejudice to creditors. The Court, therefore, granted the Debtor’s motion to convert the case to chapter 13.
(Judge: Benjamin A. Kahn)
Order Granting Plaintiff’s Motion to Amend Complaint as to All Defendants. Overall, finding that Plaintiff-Debtor should be granted leave from the Court under Fed. R. Civ. P. 15(a)(2) to amend his complaint. Defendants would not be prejudiced by the amendment.
(Judge: Fourth Circuit Court of Appeals)
On appeal, the Fourth Circuit Court of Appeals (Per Curiam) affirmed the rulings of the Bankruptcy Court and the District Court for the Middle District of North Carolina granting First Citizen Bank & Trust Co.'s and Mortgage Electronic Registration Systems, Inc.'s motions to dismiss the chapter 7 trustee's adversary complaint under Federal Rule of Civil Procedure 12(b)(6). The Fourth Circuit concluded "that the bankruptcy court correctly applied North Carolina law to determine that the notarial certificate at issue substantially complied with the law, the [chapter 7 trustee] failed to overcome the presumption of regularity, and thus [the trustee] could not avoid the lien." As such, it affirmed the rulings of the lower courts that dismissed the chapter 7 trustee's complaint.
(Judge: District Court)
On appeal, the District Court for the Middle District of North Carolina (Biggs, J.) affirmed the ruling of the Bankruptcy Court sustaining the Chapter 7 Trustee’s objection to the Debtor’s claimed exemptions. The question presented on appeal was whether the Debtor may exempt entireties property from the bankruptcy estate with respect to a debt owed solely by the Debtor to the Internal Revenue Service (“IRS”) where the IRS is a priority and general unsecured claimant in the Debtor’s bankruptcy case. The District Court reviewed the Bankruptcy Court’s application of the law de novo and its findings of fact for clear error.
In adopting and affirming the Bankruptcy Court’s order, the District Court agreed that, while North Carolina law exempts entireties property from the claims of non-joint creditors, such property is not exempt under the U.S. Tax Code. The District Court found that, absent bankruptcy, the IRS would have been able to obtain a lien against the Debtor’s interest in the entireties property under applicable nonbankruptcy law and, therefore, the Bankruptcy Court was correct to disallow the exemption under 11 U.S.C. § 522(b)(3)(b) with respect to the IRS debt. While there was no evidence in the record that the IRS issued the demand necessary to establish a lien, Section 522(b)(3)(B) does not require a creditor to have established a lien in order to prevent a debtor from exempting the property from the bankruptcy estate. The District Court also rejected the Debtor’s contention that the Trustee lacked authority to assume the collection powers of the IRS under 11 U.S.C. § 544(a), noting that nothing in Section 544(a) exempts otherwise nonexempt property from the bankruptcy estate or limits the power of a trustee to collect and reduce to money the nonexempt property of the estate to pay actual creditors.
(Judge: Lena M. James)
Memorandum Opinion Granting in Part and Denying in Part Defendants’ Motion to Dismiss Complaint, and Granting Plaintiff’s Motion for Leave to Amend Complaint. The Defendants Moses H. Cone Memorial Hospital Operating Corp. (“Cone Health”) and Moses Cone Physician Services, Inc. (“MCPS”) filed a motion to dismiss numerous claims in the Plaintiff’s complaint regarding (1) the avoidance of transfers under provisions of the Bankruptcy Code and the North Carolina Uniform Voidable Transactions Act (“UVTA”) and (2) damages stemming from breach of fiduciary duty, constructive fraud by a fiduciary, and unfair and deceptive trade practices. The Plaintiff presented several arguments against dismissal of these claims and requested, in the alternative, that leave be granted to amend the Complaint.
In dismissing several claims for avoidance of preferential transfers and fraudulent conveyances, the Court found that the Plaintiff did not adequately plead that the debtor, Randolph Health, was insolvent at the time of the alleged transfers under the Bankruptcy Code or the UVTA. Under both regimes, a debtor is defined as insolvent when the sum of its debts is greater than all of its property, at a fair valuation (commonly referred to as the “balance sheet test”). See 11 U.S.C. § 101(32)(A); N.C. Gen. Stat. § 39-23.2(a). The Plaintiff’s allegations did not lead to an inference that Randolph Health was insolvent because he alleged that Randolph Health had net assets, according to book values, of at least $31 million at all applicable times.
Nevertheless, the Court granted the Plaintiff a presumption of insolvency under 11 U.S.C. § 547(f) for the 90-day period before the petition date and a presumption of insolvency for the two claims under N.C. Gen. Stat. § 39-23.5(a) for alleged transfers made on or before February 27, 2017. During this latter period, the Plaintiff sufficiently alleged that Randolph Health had defaulted and was unable to make payments on a substantial loan. See N.C. Gen. Stat. § 39-23.2(b) (presuming insolvency if debtor is generally not paying its debts as they become due other than as a result of a bona fide dispute). However, the Court dismissed the Eighth Cause of Action with respect to MCPS only because it was not sufficiently alleged that Randolph Health received less than reasonably equivalent value in exchange for the transfers it made to MCPS. Specifically, the Plaintiff made no factual allegations from which the Court could compare the value of the transfers to the value of the services rendered by MCPS.
The claims under N.C. Gen. Stat. § 39-23.4(a)(2) were dismissed because the Court found the Plaintiff failed to adequately plead the undercapitalization element. The Plaintiff’s allegations did not lead to an inference that Randolph Health was unable to sustain operations or pay debts as they became due within the 2-year lookback period of that provision.
The Court also dismissed the Plaintiff’s state law claims for breach of fiduciary duty and constructive fraud by a fiduciary because the Plaintiff failed to adequately plead that Cone Health had a fiduciary relationship with Randolph Health. Under North Carolina caselaw, the existence of such a relationship is successfully pleaded by alleging that a party had “control and domination” over another or the party “held all the cards.” Courts are especially reluctant to extend the protections of fiduciary obligations to parties whose relationship is established and defined by contract. Here, the Plaintiff relied solely on contractual obligations to allege that Cone Health had a fiduciary duty to Randolph Health. And the Plaintiff did not sufficiently allege that Cone Health held all the cards or was in a position of overwhelming superiority and influence over Randolph Health.
The Court did not dismiss the claim for unfair and deceptive trade practices because the Plaintiff alleged facts leading to a plausible inference that Cone Health used its managerial role and “position of power” to unfairly compete with Randolph Health from within. The Plaintiff sufficiently alleged that such competition adversely impacted the healthcare services provided to local patients.
Lastly, the Court granted the Plaintiff’s request for leave to amend the complaint because he had not amended before and amendment was not futile. The Court noted that the complaint’s issues were of a factual, rather than legal, nature and could potentially be cured with more adequate factual pleading.
(Judge: Lena M. James)
Order Granting in Part and Denying in Part Debtors' Motion for Sanctions. The Debtors filed a motion for sanctions against an insurance company seeking compensatory and punitive damages relating to its failure to timely comply with the Bankruptcy Court’s order granting motion to substitute collateral, which required that “the insurance proceeds shall be paid forthwith to the trust account of the Debtors’ attorney.” The testimony of the Debtor and her attorney established that, despite numerous telephone calls and emails, the insurance company did not successfully deliver the proceeds to the intended party until 49 days after the substitution order was entered. The Debtors sought compensation for rental car charges incurred during that period as well as an unspecified amount of attorney’s fees. The Debtors also sought punitive damages of $5,000 to ensure the insurance company’s compliance with similar substitution orders.
The Court applied the “fair ground of doubt” standard established in Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019) to determine whether the insurance company was in contempt of the substitution order. In applying that standard, the movant must demonstrate the following elements: (1) the party violated a definite and specific order of the court requiring him to perform or refrain from performing a particular act or acts; (2) the party did so with knowledge of the court’s order; and (3) there is no fair ground of doubt as to whether the order barred the party’s conduct — i.e., no objectively reasonable basis for concluding that the party’s conduct might be lawful. In re Carnegie, 621 B.R. 392, 410 (Bankr. M.D.N.C. 2020). The Court found the insurance company had violated a definite and specific order of the Court by not timely complying with the requirement to pay the insurance proceeds “forthwith” to the Debtors’ attorney’s trust account. The company had knowledge of the substitution order, as it was served with a copy by first-class mail as well as by email from the Debtors’ attorney. The Court found there was no fair ground of doubt that the insurance company’s actions were barred by the substitution order.
Finding the insurance company in contempt, the Court awarded compensatory sanctions to the Debtors in the form of rental car charges and attorney’s fees incurred in ultimately bringing the company into compliance with the substitution order. The Court, however, declined to award the requested $5,000 in punitive damages. The Debtors did not claim that the requested amount was intended to compensate for any harm suffered, nor would such a punitive sanction coerce compliance with the Court’s orders, as the insurance company had already complied with the substitution order. The Debtors also did not come forward with any evidence that the company acted with the requisite degree of bad faith to warrant the imposition of punitive sanctions under the Court’s inherent power.
(Judge: 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.
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