ORDER DENYING MOTION TO DISMISS
Stephani W. Humrickhouse, United States Bankruptcy Judge.
The
matter before the court is the Motion to Dismiss filed by the
defendants on February 11, 2021. Dkt. 9. The defendants filed
a Memorandum in Support of the Motion to Dismiss
contemporaneously with the Motion to Dismiss. Dkt. 10. The
plaintiff filed a Response in Opposition to the Motion to
Dismiss on March 3, 2021. Dkt. 13. A hearing was held on
March 9, 2021 in Wilmington, North Carolina. At the
conclusion of the hearing, the court took the matter under
advisement and invited the parties to file post-hearing
briefs.
The
plaintiff filed a post-hearing memorandum on March 23, 2021.
Dkt. 15. The defendants filed a post-hearing memorandum on
March 24, 2021. Dkt. 16. The matter is now ripe for
determination.
Michael
Gene Musselwhite (the "debtor" or
"Musselwhite") filed a voluntary petition under
chapter 13 of the Bankruptcy Code on March 3, 2020. Joseph A
Bledsoe, III (the "trustee" or the
"plaintiff") filed this adversary proceeding on
December 13, 2020 against Flamingo Properties, LLC
("Flamingo Properties"), Flamingo South, LLC
("Flamingo South"), and L. Brian Cheshire
("Cheshire") (collectively, the
"defendants"). The following causes of action are
set forth in the complaint:
(1) Turnover of debt that is property of the estate pursuant
to 11 U.S.C. § 542(b) against Flamingo Properties and
Flamingo South,
(2) Avoidance of fraudulent transfers within 6 years of the
petition date pursuant to 11 U.S.C. § 544(b)(1), using
28 U.S.C. §§ 3304(a)(1), 3306(a) of the Federal
Debt Collection Practices Act ("FDCPA") as
applicable law, against Flamingo Properties,
(3) Avoidance of fraudulent transfers within 6 years of the
petition date pursuant to 11 U.S.C. § 544(b)(1), using
28 U.S.C. §§ 3304(a)(1), 3306(a) of the FDCPA as
applicable law, against Flamingo South,
(4) Avoidance of fraudulent transfers within 10 years of the
petition date pursuant to 11 U.S.C. § 544(b)(1), using
26 U.S.C. §§ 6502(a)(1), 6901(a)(1)(A) of the
Internal Revenue Code ("IRC") and N.C. Gen. Stat
§ 39-23.5(a) of the North Carolina Uniform Voidable
Transactions Act ("NC UVTA") as applicable law
against Flamingo Properties,
(5) Avoidance of fraudulent transfers within 10 years of the
petition date pursuant to 11 U.S.C. § 544(b)(1), using
26 U.S.C. §§ 6502(a)(1), 6901(a)(1)(A) of the IRC
and N.C. Gen. Stat. § 39-23.5(a) of the NC UVTA as
applicable law, against Flamingo South,
(6) Recovery of avoided transfers pursuant to 11 U.S.C
§ 550(a)(1) against Flamingo Properties, Flamingo South,
and Cheshire,
(7) Recovery of avoided transfers pursuant to 11 U.S.C.
§ 550(a)(2) against Cheshire, and
(8) Objection to claim of Cheshire pursuant to 11 U.S.C.
§ 502(d). The defendants filed a Motion to Dismiss on
February 11, 2021 seeking dismissal with prejudice of the
plaintiff's claims for avoidance and recovery of
fraudulent transfers-the second, third, fourth, fifth, sixth,
and seventh claims for relief.
The
underlying facts of the transfers at issue have been recited
by the Fourth Circuit Court of Appeals[1] as follows:
From 2000 to 2014, Musselwhite ran four Smithfield's
Chicken 'N Bar-B-Q restaurants in North Carolina's
New Hanover County with his business partner, Brian Cheshire.
To do this, Musselwhite and Cheshire created two sets of
corporate entities, each of which they initially owned in
equal shares: one set owned the Smithfield's franchises
themselves; another set owned the properties on which the
restaurants operated. The entities that owned the
Smithfield's franchises were Whiteshire Foods, Inc.
(Whiteshire); Leland-Hwy 17, Inc. (Leland); Shallotte-Hwy 17,
Inc. (Shallotte); and Wilmington-17th Street, Inc.
(Wilmington). For each of these respective entities,
Musselwhite and Cheshire entered into Franchise Agreements
with MARC [Mid-Atlantic Restaurant Corporation]. And the
entities that owned the properties were Flamingo Properties,
LLC, which owned the Whiteshire and Wilmington properties,
and Flamingo South, LLC, which owned the Shallotte and Leland
properties (collectively, the "Flamingo
Companies"). For both of these, Musselwhite and Cheshire
entered into ownership agreements with each other. In short,
Whiteshire, Leland, Shallotte, and Wilmington rented their
restaurants' physical spaces from the Flamingo Companies.
Within this scheme, Musselwhite managed the restaurants'
day-to-day operations, while Cheshire managed their finances.
Musselwhite and Cheshire ran these restaurants without
incident until 2015. Early that year, David Harris, a MARC
executive, informed them that MARC wished to operate their
franchises itself. Musselwhite and Cheshire agreed with this
proposal and so executed four agreements on behalf of
Whiteshire, Leland, Shallotte, and Wilmington with MARC on
February 27, 2015.
A few particulars of these agreements merit mention. First,
all four agreements contained broad release clauses. Among
other things, these clauses' workaday language released
MARC from claims that Whiteshire, Leland, Shallotte, and
Wilmington may have had against it if they accrued on or
before February 27, 2015.
These agreements also transformed the companies'
relationships with each other. As for Shallotte and Leland,
they chose to terminate their existing franchisor/franchisee
relationship with MARC when they executed their
"Termination Agreement and Mutual Release"
agreements (collectively, the "Termination
Agreements"). J.A. 334, 340. Yet Whiteshire and
Wilmington took a different tack. They executed
"Franchise Agreement Amendment" agreements that
only modified-not terminated-their existing Franchise
Agreements with MARC (collectively, the "Amendment
Agreements"), extending their franchisor/franchisee
relationship until December 31, 2017, about a year and a half
longer than originally planned. J.A. 346, 352.
And the Amendment Agreements worked one other noteworthy
change. Under these agreements, Whiteshire and Wilmington
would retain their franchise rights until August 2015, when
they would turn them over to MARC. In exchange, MARC would
continue to lease the physical space from the Flamingo
Companies for a few years. Once these leases were up, MARC
could choose to buy the properties themselves from Whiteshire
and Wilmington for a substantial sum. Put otherwise, these
Amendment Agreements were lucrative for Whiteshire and
Wilmington, and thus for Musselwhite and Cheshire, twice
over-offering both a lucrative income stream and an even more
lucrative potential payout.
But around when these changes were made, Musselwhite and
MARC's relationship deteriorated. As MARC puts it,
Musselwhite mismanaged the restaurants, resulting in not only
declining sales but also unsanitary conditions. In fact,
Musselwhite's behavior prompted the four agreements, MARC
says. Tensions boiled over around May 23, 2015, when
Musselwhite and Harris fought at the Whiteshire restaurant.
Harris, who Musselwhite says stands at over six feet tall and
regularly carries a pistol, arrived at that restaurant and
began disparaging Musselwhite's managerial acumen and
threatening to terminate both the Whiteshire and Wilmington
Franchise Agreements-and ultimately physically barred
Musselwhite from the restaurant's premises. And
Harris's threat apparently came to pass: A few days
later, on May 26, 2015, MARC terminated its Franchise
Agreements with Whiteshire and Wilmington by letters. In
these letters, MARC cited the restaurants'
unprofitability, their unsanitary conditions, and other
operational deficiencies as its reasons for terminating the
agreements.
This fracas irreparably changed Musselwhite and
Cheshire's relationship too. As Musselwhite tells it,
Harris began pressuring Cheshire to end his business
ventures-that is, his co-ownership of Whiteshire and
Wilmington-with Musselwhite, claiming that Musselwhite
ineptly managed those restaurants. What's more, MARC also
claimed that the Amendment Agreements-and their benefits-
would not survive if Musselwhite remained a co-owner of the
Flamingo Companies. Cheshire then spoke to Musselwhite and
explained that they would receive "nothing" unless
Musselwhite divested himself from the Flamingo Companies
"on paper." J.A. 19. So, three days after MARC
ended its relationship with Whiteshire and Wilmington,
Cheshire bought out Musselwhite's share in the Flamingo
Companies for $375, 000 (hereinafter, the "Buyout
Agreement").
Musselwhite v. Mid-Atl. Rest. Corp., 809 Fed.Appx.
122, 123-25 (4th Cir. 2020) (unpublished) (per curiam).
The
plaintiff alleges that in the agreements dated March 29,
2015, the debtor transferred all of his membership interests
in Flamingo Properties and Flamingo South back to the
respective LLCs. As a result of these assignments, Cheshire
became the 100% owner and single member of the Flamingo
Companies. The plaintiff contends that the assignment of the
debtor's membership interest in Flamingo Properties (the
"Flamingo Properties Transfer") and the assignment
of the debtor's membership interest in Flamingo South
(the "Flamingo South Transfer") are avoidable
pursuant to 11 U.S.C. § 544(b)(1) and seeks a monetary
judgment against the defendants in the amount of the value of
the avoided transfers, plus pre-judgment interest.
Musselwhite
and the defendants have been involved in other litigation
relating to the same underlying facts of these causes of
action. On January 26, 2016, Musselwhite filed an action in
the Superior...
