In re Medlin
| Decision Date | 17 December 1998 |
| Docket Number | Adversary No. L-98-00057-8-AP.,Bankruptcy No. 95-03491-8-JRL |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | In re Rickey D. MEDLIN, Cyllene M. Medlin, Debtors. Randy D. Doub, Plaintiff, v. Hartford Fire Insurance Company, Defendant. |
Randy D. Doub, Greenville, NC, for Plaintiff.
L. Franklin Elmore, G. Scott Humphrey, Greenville, SC, for Defendant.
This adversary proceeding is before the court on cross-motions for summary judgment. The parties have agreed that these matters are appropriate for decision without a hearing. For the reasons stated below, the defendant's motion is granted and this case is dismissed.
The chapter 7 trustee filed this action to determine the validity and priority of a lien asserted by Hartford Fire Insurance Company against property of the estate. This is a core proceeding as that term is defined in 28 U.S.C. § 157(b)(2)(F) and (K). Accordingly, this court has the power to enter a final judgment on the trustee's complaint pursuant to 28 U.S.C. § 157(b)(1), § 1334(a), and the general order of reference in this district.
"Summary judgment is proper `if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law."' Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). In making this determination, conflicts are resolved by viewing all facts and inferences to be drawn from the facts in the light most favorable to the nonmoving party. United States v. Diebold, Inc., 369 U.S. 654, 82 S.Ct. 993, 8 L.Ed.2d 176 (1962). Summary judgment should not be granted unless the moving party establishes his right to judgment "with such clarity as to leave no room for controversy. . . ." Portis v. Folk Construction Co., 694 F.2d 520, 522 (8th Cir.1982).
On June 26, 1991, Leader Construction Company ("Leader") and its principals Rick and Cyllene Medlin (the "Medlins") entered into a General Indemnity Agreement ("GIA") with Hartford Fire Insurance Company ("Hartford").1 In the GIA, Leader and the Medlins jointly and severally agreed to indemnify Hartford for any loss occasioned by Hartford's issuance of performance bonds in connection with Leader's construction work. In July of 1992, Leader contracted with the County of Buncombe, North Carolina to construct the Buncombe County Detention Center in Asheville, North Carolina. In reliance on the GIA, Hartford issued Performance and Payment Bonds for Leader covering the Buncombe County project and five other government funded construction projects.
In 1993, Hartford received substantial claims on the bonds issued on Leader's behalf and made an unsuccessful demand on Leader and the Medlins for indemnification under the GIA. On October 6, 1993, Hartford filed Civil Action No. 93-104-CV-7-BR in the United States District Court for the Eastern District of North Carolina, seeking two forms of relief from the district court. First, Hartford asked the court for a declaratory judgment determining its obligations under the performance bond issued on the Buncombe County Detention Center. Second, it sought specific performance of the GIA by requiring Leader and the Medlins to pay more than $4,000,000 to Hartford.
On January 21, 1994, the district court issued a temporary restraining order restricting the Medlins' transfer of assets during the pendency of the litigation. In his order, the Honorable W. Earl Britt found that the Medlins had "engaged in a sequence of activities in which they have transferred and encumbered certain of their real property and have refused and resisted the disclosure of assets in their possession or control." (Tab 3 to Stipulations at 3-4.) Judge Britt went on to find that the timing and number of these transactions evidenced "a pattern by Richard D. Medlin and Cyllene M. Medlin to divest themselves of assets and to avoid their obligations under the General Indemnity Agreement." (Id. at 4.)
Although Leader and the Medlins had appeared in the district court action, the court entered an order on June 6, 1994 directing that a default judgment be entered against all three defendants on the issue of liability. (Exhibit C to Hartford's Motion for Summary Judgment.) The issue of damages was reserved for later decision.
Concerned that the Medlins were transferring assets, Hartford obtained an Order of Attachment in New Hanover, Onslow, and Pender Counties and, on June 14, 1994, levied on 194.7 acres in Pender County and on two other properties known as the Centura Bank Building and the Plaza Hanover Building. (Exhibit D to Hartford's Motion for Summary Judgment.) On August 8, 1994, Hartford amended its district court complaint, asking the court to set aside certain transfers of real property originally titled in the names of Rick and Cyllene Medlin. The following month, on September 19 and 20, 1994, Hartford filed notices of lis pendens on each parcel of real estate affected by its fraudulent conveyance cause of action, specifically including the 194.7 acres in Pender County, the Centura Bank Building, and the Plaza Hanover Building.
The district court scheduled a hearing on the issue of damages in Hartford's case for July 18, 1995. On July 13, 1995, Cyllene Medlin filed a petition for bankruptcy relief in the Northern District of Georgia, staying the district court action as to her. Accordingly, on July 18, 1995, the district court entered judgment for Hartford in the amount of $8,511,903 against Rick Medlin only. Although this judgment resolved only part of the lawsuit, the district court directed the entry of a final judgment pursuant to Fed. R.Civ.P. 54(b). Hartford docketed this judgment in New Hanover County on August 29, 1995 and in Pender County on September 1, 1995.
On October 2, 1995, Rick Medlin filed a petition in this district seeking relief under chapter 7 of the Bankruptcy Code. Cyllene Medlin filed a bankruptcy petition in this district on November 30, 1995, and the two cases were eventually consolidated for joint administration. On February 1, 1996, Judge Britt withdrew the reference in both cases and lifted all stays relating to Hartford's action against Leader and the Medlins. The district court case then proceeded and, on July 11, 1997, Hartford obtained a judgment against Cyllene Medlin in the amount on $10,026,414.68. This judgment was docketed in New Hanover County on February 19, 1998 and in Pender County on April 15, 1998.
On May 2, 1997, Judge Britt entered an order setting aside Rick and Cyllene Medlins' conveyances of the Plaza Hanover Building and of the Centura Bank Building. These properties were subsequently sold by the bankruptcy trustee who now holds the proceeds from the sales. The Pender County acreage has also been recovered by the trustee and has been, or shortly will be, sold. The net proceeds from these sales is expected to total approximately $650,000. All three of these properties were held by the Medlins as tenants by the entireties.
The trustee filed this complaint on May 13, 1998 asking the court to find that the docketing of the district court judgments in New Hanover County did not cause a judgment lien to attach to property held by the Medlins as tenants by the entireties. On August 4, 1998, the trustee amended his complaint to extend this claim to the Pender County property, and to allege that the $8.5 million judgment against Rick Medlin is an avoidable preferential transfer. The parties have settled the trustee's final claim, agreeing that the judgment lien arising from an April 29, 1994 state court judgment in the amount of $4,723.32 is a preference. (Stipulations, ¶ 4.)
These facts give rise to a series of novel legal issues. Hartford contends that the judgments entered by Judge Britt against Rick and Cyllene Medlin in the district court case merged to form a joint judgment that, when docketed, attached as a lien to the debtors' entireties property. The trustee, on the other hand, argues that the two judgments are separate, cannot merge, and do not attach to entireties property. In the alternative, he contends that the judgment against Rick Medlin is an avoidable preference, making it impossible for the two judgments to merge. Hartford counters that this judgment is not avoidable because it relates back to the notices of lis pendens filed in September of 1994 or, in the alternative, because this lawsuit was filed outside the two year period provided by § 546.
Hartford's judgment against Rick Medlin was entered within 90 days of the filing of the petition. It is undisputed that Hartford was a creditor of the debtor, that the judgment was entered on account of an antecedent debt, while the debtor was insolvent, and enables Hartford to receive more than would be available for its claim had the judgment not been entered. Thus, on its face, any lien arising from this judgment would appear to be avoidable as a preference under § 547(b), which allows the trustee to avoid "any transfer of an interest of the debtor in property" that meets these requirements.
However, as Hartford points out, it obtained orders of attachment and filed notices of lis pendens well before the 90 day period. Hartford contends that its judgment relates back to these earlier events, making them the transfer or transfers for purposes of § 547(b). Thus, the preference issue turns on whether the transfer to be avoided is considered to be the judgment, the order of attachment, or the notice of lis pendens.
Federal law determines what constitutes a transfer and when it is complete. Barnhill v. Johnson, 503 U.S. 393, 112...
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