Order Denying Plaintiff’s Motion for Partial Summary Judgment. The Chapter 7 trustee for Enova Textiles, LLC (the “Debtor”) moved for partial summary judgment against Apex Funding Source, LLC and BMF Advance, LLC, seeking a declaration that the Defendants had no valid liens against any assets of the bankruptcy estate. The trustee argued that the Defendants could not establish the validity of their security interests in the Debtor’s property and that, as a result, their interests should be extinguished. The Court denied the Motion because the trustee’s argument raised a new, unpleaded claim challenging the validity of the Defendants’ liens that was not properly before the Court at the summary judgment stage.

In the adversary proceeding, the trustee asserted two claims against the Defendants: a claim of unfair and deceptive trade practices in violation of North Carolina law (the “UDTPA Claim”), seeking rescission of the funding agreements, and a claim for equitable subordination under 11 U.S.C. § 510. Both claims alleged that the Defendants engaged in inequitable or predatory lending practices and sought to eliminate or subordinate their interests in the bankruptcy estate. In his Motion for Partial Summary Judgment, however, the trustee did not seek judgment on either pleaded claim. Instead, he argued that the Defendants bore the burden of proving the validity of their liens and that their failure to establish valid security interests entitled the trustee to a declaration that they had no liens against estate property. The trustee maintained that this relief was permissible as partial summary judgment under Federal Rule of Civil Procedure 56(a), because the Amended Complaint had requested a declaration that the Defendants had no interest in estate assets.

The Court concluded that the Motion sought relief based on a theory that the trustee had not pleaded. Rule 56 permits summary judgment on an entire claim or part of a claim, but it does not allow a party to introduce a new claim through a summary judgment motion. The Court explained that the trustee’s existing claims assumed the Defendants held valid security interests that could be rescinded or equitably subordinated. The UDTPA Claim concerned allegedly unfair or deceptive lending practices, while the equitable subordination claim sought to alter the priority of the Defendants’ claims based on inequitable conduct. Neither claim challenged the technical validity of the Defendants’ liens or required the Defendants to prove that their security interests were valid. The Court further rejected the trustee’s argument that 11 U.S.C. § 363(p)(2) imposed such a burden because that provision applies to hearings under § 363, and the adversary proceeding was not such a hearing. Although a party asserting a security interest generally bears the burden of proof when its validity is properly placed at issue, that principle did not apply where the trustee’s pleaded claims presumed the existence of the interests in question.

Accordingly, the Court denied the Motion for Partial Summary Judgment without determining whether the Defendants actually held valid security interests or whether any genuine dispute of material fact existed concerning those interests. In sum, the Court emphasized that the trustee was bound by the claims asserted in the Amended Complaint and could not use a summary judgment motion to introduce a new challenge to the validity of the Defendants’ liens.