In re Blue

• Decision Date: 07 May 2021
• Docket Number: Case No. 21-80059
• Citation: 630 B.R. 179
• Court: U.S. Bankruptcy Court — Middle District of North Carolina
• Parties: IN RE: Gwendolyn Charlene BLUE, Debtor.

630 B.R. 179

IN RE: Gwendolyn Charlene BLUE, Debtor.

Case No. 21-80059

United States Bankruptcy Court, M.D. North Carolina.

Signed May 07, 2021

Richard M. Hutson, II, Trustee, Durham, NC, for Trustee.

Robert Lewis, Jr., The Lewis Law Firm, Raleigh, NC, for Debtor.

MEMORANDUM ORDER OVERRULING BANKRUPTCY ADMINISTRATOR'S OBJECTION TO DEBTOR'S SUBCHAPTER V ELECTION

BENJAMIN A. KAHN, UNITED STATES BANKRUPTCY JUDGE

This case is before the Court on the Bankruptcy Administrator's Objection to Debtor's Subchapter V Election (the "Objection") [ECF No. 28]. Richard M. Hutson II, as subchapter V trustee ("Trustee") joined in the Objection. For the reasons set forth herein, the Court will overrule the Objection, and Debtor's case shall proceed as a case under subchapter V of chapter 11.¹

I. Jurisdiction and Authority

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. § 1334. Under 28 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 statutorily core proceeding under 28 U.S.C. § 157(b)(1) and (b)(2)(A) and (O). The Court has constitutional authority to enter this order.

II. Findings of Fact

Debtor's Employment

Debtor previously was the sole owner and president of Wirecentric, Inc. ("Wirecentric"). Through Wirecentric, Debtor provided information transport ("IT") consulting services. Such services included installing wiring, equipment, and other infrastructure to enable data transport for its customers' businesses. Wirecentric ceased operations in May 2019 and has no assets. Debtor has no intention of reinstating Wirecentric.

Since August of 2020, Debtor has worked full-time at Lanier Law Group as a Registered Communications Distributions Designer, for which she is a salaried, W-2 employee. In addition to her employment with the Lanier Law Group, Debtor works as an IT consultant for two different entities as an independent contractor, Roxboro Housing Authority ("RHA") and Technology Express.² She does not hire additional personnel to assist with her work for either RHA or Technology Express.³

Debtor has worked with RHA since 2000. Debtor builds and designs RHA's servers, inputs VPNs in RHA employee laptops, and is the project designer implementing Wi-Fi in Roxboro neighborhoods. Debtor also negotiates contracts on behalf of RHA to install hardware.⁴ RHA compensates Debtor hourly at a rate of $50.00 for her design services, and through a flat monthly fee to handle service problems. Debtor estimated she receives 3 to 4 service calls per week, which last anywhere from 5 to 15 minutes long. She has also spent twenty-nine hours in total to complete the Wi-Fi project. Debtor receives a Form 1099 from RHA. For her work for RHA, Debtor uses her office space in her residence, personal cell phone and computers, and personal printers. RHA does not reimburse Debtor for any travel expenses, however RHA pays for all hardware expenses during repairs.

Debtor has provided troubleshooting assistance, VPN and telephone services, and fiber design for Technology Express factories since the end of 2019. Debtor is compensated at an hourly rate of $50.00. Debtor estimates she earns between $1,000 and $2,000 per month and works approximately 20 hours per week for Technology Express. If Debtor makes repairs, Technology Express pays for any necessary equipment. Debtor is reimbursed for travel expense for trips over 25 miles away. Debtor receives a Form 1099 from Technology express. The activities in which Debtor is engaged as an independent contractor for RHA and Technology Express are similar, if not identical, to those previously performed by her through Wirecentric. Debtor pays taxes on an annual basis, and files a Schedule C in connection with her consulting work.

Post-Bankruptcy Events

Debtor commenced this case on February 16, 2021 by filing a voluntary petition under chapter 11. ECF No. 1 (the "Petition"). On the Petition, Debtor stated she is a "debtor" as defined in 11 U.S.C. § 1182(1) and elected to proceed under subchapter V of chapter 11. Id. at 4. On February 17, 2021, the BA filed a notice of appointment of the Trustee. ECF No. 8. The Court entered an order setting a status conference under 11 U.S.C. § 1188 for March 9, 2021 and directing Debtor to file a status report as required by § 1188(c) on Local Form NCMB-1105. ECF No. 10. On February 23, 2021, the Debtor filed a status conference report (the " Section 1188(c) Report"). ECF No. 20.

On March 2, 2021, the BA filed a timely objection under Revised Interim Rule 1020(b)⁵ to Debtor's subchapter V election (the "Objection"). ECF No. 28. The Court set the BA's Objection for hearing on March 10, 2021 and rescheduled the § 1188 status conference for the same date. ECF Nos. 29 and 30. On March 9, 2021, Debtor responded to the BA's Objection ("the Response"). ECF No. 37.

On March 10, 2021, the Court held the § 1188 status conference⁶ and an evidentiary hearing on the BA's Objection. During the hearing, the BA, Trustee, and Debtor's counsel questioned the Debtor to ascertain which debts arose from the commercial or business activities of Debtor as contemplated by § 1182(1)(A). At the conclusion of Debtor's testimony, the BA, Trustee, and Debtor's counsel disagreed about the classification of two categories of debt.

The first disputed category of debt relates to Debtor's real property located in Fayetteville, North Carolina (the "real property" or "former residence"). The real property originally served as Debtor's personal residence until 2002 when she purchased her current residence. Instead of selling her former residence, she began renting it. In July of 2015, Debtor refinanced her original mortgage on her former residence.⁷ She currently owes $58,158.50 under the refinanced mortgage.⁸ Debtor rented the real property steadily from 2002 until 2018, but she evicted the tenant in 2018 for non-payment of rent. The tenant also caused substantial damages to the residence. In an attempt to return the property to rentable condition, Debtor incurred debt with GreenSky Credit, Lowes, and Wells Fargo ("home repair debts" or "home repair creditors"). Debtor contends that the repairs all were necessitated by the actions of her tenant. According to the filed proofs of claim, Debtor owes a total of $38,271.31 to the home repair creditors. For the past three years, Debtor neither has rented out the real property, nor sought another tenant because she has been unable to afford all the renovations necessary to make the house rentable. Nevertheless, Debtor contends the mortgage and the home repair debts should be considered business debt (collectively, the "real property debts") because Debtor previously rented the property, the damages were caused by that rental, and she intends to rent it again in the future. Debtor does not have any current agreement to rent the property and is not currently seeking a tenant because of the condition of the property.

In response, the BA asserts that the real property debts should not be classified as debts arising from the commercial or business activities of the Debtor, because the original mortgage on the real property was taken out for personal, non-business, reasons, and the real property was used by Debtor as her home residence and only temporarily rented. Further, at the time Debtor incurred the home repair debts, no tenant resided there, and Debtor has neither rented the property since she incurred the repair and renovation costs, nor sought any tenant.

The second category of disputed debt relates to Debtor's liability on a $60,000.00 U.S. Small Business Administration loan listed in Section 4 of Schedule E/F of the Petition (the "SBA Loan"). At the hearing, Debtor testified that she was not personally liable on the SBA Loan. In response, the Court expressed concern about certain inconsistencies between Debtor's testimony and schedules with respect to Debtor's putative liability on the SBA Loan. Therefore, the Court gave Debtor's counsel through and including March 17, 2021 to supplement the record with a declaration from Debtor and supporting documents showing the extent Debtor is personally responsible for the SBA Obligation. The Court also gave the BA or the Trustee three business days after any supplementation submitted by Debtor to give notice of any desire to be heard further. The Court permitted Debtor to supplement the record solely with respect to the liability for the SBA Obligation. At the end of the hearing, the Court took the matter under advisement.

On March 11, 2021, contrary to her testimony at the hearing, Debtor filed a Declaration stating that she was "personally obligated on the Note" and "signed the Note as a borrower." ECF No. 39 at ¶ 5. Debtor contends that she is personally liable because of a provision in the Note that " ‘all individuals and entities signing this note are Jointly and Severally liable’. (See attached Note)." Id. While Debtor did not initially attach the note to the Declaration, the following day, Debtor filed a copy of the note ("SBA Note"). ECF No. 42. The SBA Note provides that the borrower is Wirecentric. Debtor did not sign the SBA Note in her name, but only in her capacity as the president of Wirecentric. Debtor did not provide any evidence of a personal guaranty of the SBA Note.

Thereafter, Trustee filed a response to the Declaration and Exhibit. ECF No. 45. In his response, Trustee stated that the SBA Note does not substantiate that Debtor is personally obligated because the SBA Note provides that (1) the borrower is Wirecentric; and (2) Debtor signed in her capacity as president of Wirecentric and not individually. Trustee did not wish to be heard further under the Order to Supplement the Record. The following day, the Bankruptcy Administrator ("BA") joined in Trustee's response. ECF No. 46. The evidence is now closed, and the matter is ripe for decision.

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