Conti v. Fid. Bank (In re NC & VA Warranty Co.)
| Decision Date | 27 September 2018 |
| Docket Number | Case No. 15-80016,Adversary No. 15-09032 |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Middle District of North Carolina |
| Parties | IN RE: NC & VA WARRANTY COMPANY, INC., dba 1st Choice Mechanical Breakdown Coverage, Debtor. Sara A. Conti, Trustee for NC & VA Warranty Company, Inc., dba 1st Choice Mechanical Breakdown Coverage, Plaintiff, v. The Fidelity Bank and Dealers Assurance Company, Defendants. |
J. Alexander S. Barrett, Hagan Barrett & Langley PLLC, Greensboro, NC, for Debtor.
Holmes P. Harden, Williams Mullen, Raleigh, NC, Michael S. Kolman, D. Wesley Newhouse, Newhouse, Prophater, Kolman & Hogan, LLC, Columbus, OH, William L. Esser, IV, Parker Poe Adams & Bernstein, L.L.P., Charlotte, NC, John Paul H. Cournoyer, Northen Blue, LLP, Chapel Hill, NC, for Defendants.
CSC-Lawyers Incorporating Service, pro se.
This Adversary Proceeding is before the Court on the Motion for Summary Judgment and Memorandum in Support, ECF No. 178 ("Fidelity's Brief"), filed by Defendant Fidelity Bank ("Fidelity") and the Motion for Summary Judgment, ECF No. 184 ("Dealers' Motion for Summary Judgment"), filed by Defendant Dealers Assurance Company ("Dealers") (collectively, the "Motions for Summary Judgment"), Dealers' Memorandum of Law in Support of Motion for Summary Judgment, ECF No. 185 ("Dealers' Brief"), Fidelity's Reply in Support of Summary Judgment, ECF No. 196 (Fidelity's Reply), and Dealers' Reply Memorandum in Support of Motion for Summary Judgment, ECF No. 197 (Dealers' Reply). For the reasons set forth herein, the Motions for Summary Judgment will be denied.
The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. Under 11 U.S.C. § 157(a), the United States District Court for the Middle District of North Carolina has referred this case and this proceeding to this Court by its Local Rule 83.11. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B), (C), or (O ), in which this Court has statutory authority to enter final judgments. The parties have consented to this Court entering final judgments on all matters. See Revised Joint Scheduling Mem., ECF No. 126. The Court has constitutional authority to enter final judgments in this adversary proceeding. Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 1947, 191 L.Ed.2d 911 (2015).
NC & VA Warranty Co., Inc. ("NCVA" or "Debtor") commenced the underlying bankruptcy case by filing a voluntary petition for relief under chapter 7 on January 7, 2015. Plaintiff serves as the duly appointed chapter 7 trustee under 11 U.S.C. §§ 701(a) and 702(d). Sara A. Conti, as chapter 7 trustee of Debtor ("Plaintiff") commenced this adversary proceeding against Fidelity on August 3, 2015. Compl., ECF No. 1. In response, Fidelity filed its answer and counterclaim, ECF No. 5, and a third party complaint against Dealers. ECF No. 6. Plaintiff timely filed her answer to the counterclaim. ECF No. 33. Plaintiff subsequently filed her motion to amend the complaint, seeking to add Dealers as a party defendant and to assert various claims against Dealers. ECF No. 63.1 The Court allowed the amendment in part and denied it in part by Memorandum Opinion ("Amendment Opinion") and Order. ECF Nos. 84, 85. Plaintiff filed her consolidated Amended Complaint, ECF No. 88, against both Fidelity and Dealers. The Amended Complaint asserts a claim against Dealers for breach of contract,2 and asserts claims against Fidelity for conspiracy, breach of contract, breach of fiduciary duty, negligence, constructive and actual fraud, unfair and deceptive trade practices, aiding and abetting conversion, and unjust enrichment.3 Both Defendants filed motions to dismiss the Amended Complaint, which the Court denied in its second Memorandum Opinion and Order ("Dismissal Opinion"). ECF No. 122.
Fidelity raises several defenses, including that Debtor, as grantor of the trust, could not have suffered any damages because the trust funds that Fidelity represented it originally received were misappropriated long before Fidelity became trustee. Fidelity further contends that Debtor authorized all of the actions that it undertook through express authority given to the bank on behalf of Debtor by the principal of the fraud and Debtor's agent, Tray Thomas. Finally, Fidelity argues that any claims in tort are barred by North Carolina's economic loss rule.
Dealers argues that it is entitled to summary judgment on Plaintiff's breach of contract claim because Plaintiff's claim is barred by the statute of limitations and there is no evidence it breached the contracts or caused Debtor any damages. Dealers also seeks summary judgment on its affirmative claims against the estate for Debtor's breach of those same contracts, or alternatively, unjust enrichment. In the Court's prior Amendment Opinion, the Court denied Dealers' motion to dismiss the remaining breach of contract claim. Amendment Op. 28-33. Applying the standards under Rule 12(b)(6), the Court denied Dealers' motion because the Court previously permitted Plaintiff to amend the Complaint over Dealers' objection that the amendment was futile and because the allegations in the Amended Complaint were sufficient to invoke equitable estoppel against Dealers' assertion of the statute of limitations for purposes of the motion to dismiss. Dealers now argues that the record at summary judgment establishes that its defense based on the statute of limitations is not subject to equitable estoppel, and that Plaintiff's breach of contract claim is time barred.
Plaintiff timely responded to the Motions for Summary Judgment. ECF Nos. 191, 192. The Court conducted a hearing on the Motions and took the matters under advisement. The Motions are ripe for determination.
Fidelity Bank, as trustee, agreed to take possession of over four million dollars in trust to ensure the payment of warranty claims by NCVA's customers or reimbursement of Dealers, and to return the balance of funds to NCVA. Fidelity represented to Dealers and NCVA that it had received those funds, and over the next three years issued ongoing statements reflecting its receipt of the original funds and its continued receipt of further funds into trust that it did not in fact receive, all while failing to disclose to NCVA that it did not hold any trust funds in custody, and charging NCVA fees for fiduciary custodial services that it did not provide. Among other claims for relief, Plaintiff alleges that Fidelity's actions and inactions as a fiduciary abdicated its responsibilities as trustee, breached its contract, breached its fiduciary duties, and facilitated the concealment and continued perpetration of a fraud against Debtor.
Ronnie Thomas was the president and sole shareholder of NCVA.5 Fidelity's Br. ¶ 5. His son, Tray Thomas, owned and controlled Marbury Advisors ("Marbury"), an unregistered investment adviser. Id.; Dep. Ex. 325, at 1. NCVA provided vehicle service contracts and warranty programs to purchasers of motor vehicles, and was responsible for paying claims under these agreements directly to the insured consumer. Dealers' Br. ¶ 1. Dealers was in the business of re-insuring motor vehicle warranty obligations of the issuers of such warranties, like NCVA. Id. ¶ 3.
NCVA and Dealers entered into an Insurance Agreement, ECF No. 88-2, on August 9, 2001. Id. ¶ 1. The Insurance Agreement provided that Dealers would insure NCVA's warranty obligations whereby if NCVA were unable to meet such obligations, Dealers would pay the claims directly to NCVA's customers. Insurance Agreement, ¶ 7(b).
As a condition to providing re-insurance, the Insurance Agreement required NCVA to maintain a letter of credit or a trust account for the benefit of Dealers. Id. ¶ 6(b). On November 15, 2005, NCVA established the trust account contemplated by the Insurance Agreement by entering a Trust Agreement ("US Bank Trust Agreement") between and among NCVA, Dealers, and US Bank's predecessor in interest, Wachovia Bank.6 Amended Compl. ¶ 14; Fidelity's Br. ¶ 8; Dep. Exs. 2. The US Bank Trust Agreement provided that US Bank would administer the Trust Account ("US Bank Trust Account") in its name for the sole use and benefit of Dealers, and that funds placed in the US Bank Trust Account by NCVA could not be withdrawn for any purpose other than to pay claims to NCVA's customers or to indemnify Dealers for any claims Dealers paid directly to customers. US Bank Trust Agreement §§ 1.(a), 3. Under certain conditions, NCVA was entitled to the interest, dividends, and income generated by the trust assets. Id. § 5. With the exception of the interest, dividends, and income generated as contemplated by section 5 of the agreement, Dealers was the only entity given authority to withdraw assets from the US Bank Trust Account under the US Bank Trust Agreement. Id. § 2. Upon termination of the US Bank Trust Agreement, US Bank was required to distribute all remaining assets in the account to NCVA on the written consent of Dealers.
Id. §§ 3, 10; Insurance Agreement § 20. NCVA deposited into the US Bank Trust Account at least $4,460,000.00 (the "Trust Funds") between December 15, 2005 and September 1, 2006. Shumpert Dep. vol. 1, at 44.
From its inception, and despite the terms of the US Bank Trust Agreement, US Bank began authorizing wire transfers out of the Trust Account into Marbury's account at Interactive Brokers. Dealers' Br. ¶ 7. Despite having permitted the transfer of trust funds out of the trust account since its inception, NCVA, US Bank, and Marbury did not enter into a Control Agreement ("Control Agreement") until March 31, 2009. Dep. Exs. 3. The Control Agreement permitted Marbury to hold the Trust Funds on behalf of US Bank as trustee in a segregated account in the name of "U.S. Bank National Association, as Trustee fo...
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