LeCann v. Cobham (In re Cobham)

• Decision Date: 07 December 2015
• Docket Number: NO. 5:15–CV–137–FL,5:15–CV–137–FL
• Citation: 551 B.R. 181
• Court: U.S. District Court — Eastern District of North Carolina
• Parties: In re : Sharon J. Cobham, Debtor, Nicole LeCann and Joint Entities, LLC, Plaintiffs-Appellees, v. Sharon J. Cobham, Defendant-Appellant.

551 B.R. 181

In re : Sharon J. Cobham, Debtor

Nicole LeCann and Joint Entities, LLC, Plaintiffs-Appellees

v.Sharon J. Cobham, Defendant-Appellant.¹

NO. 5:15–CV–137–FL

United States District Court, E.D. North Carolina, Western Division.

Signed December 7, 2015

Filed January 5, 2016

Jason L. Hendren, Rebecca F. Redwine, Hendren & Malone, PLLC, Robert E. Fields, III, Samuel Pinero, II, Oak City Law LLP, Raleigh, NC, for Plaintiffs-Appellees.

Erik Mosby Harvey, Ivey, McClellan, Gatton & Siegmund, LLP, Joshua H. Bennett, Bennett & Guthrie, PLLC, Winston-Salem, NC, for Defendant-Appellant.

ORDER

LOUISE W. FLANAGAN

, United States District Judge

This matter is before the court on appeal by defendant-debtor (“defendant”) of a final order of the United States Bankruptcy Court for the Eastern District of North Carolina granting summary judgment in favor plaintiffs-appellees (“plaintiffs”) on a claim of nondischargeability, under 11 U.S.C. § 523(a)(6)

. See generally

LeCann v. Cobham (In re Cobham), 528 B.R. 283 (Bankr.E.D.N.C.2015) (“LeCann III ”). The issues raised have been briefed fully, and in this posture are ripe for ruling. For the reasons that follow, the judgment of the bankruptcy court is affirmed.

BACKGROUND

Plaintiff Nicole LeCann (“LeCann”) is a dentist practicing in Raleigh, North Carolina. Plaintiff LeCann and defendant previously were classmates at the University of North Carolina School of Dentistry and, thereafter, business partners. In the course of their partnership, they jointly owned and operated five dental practices throughout North Carolina: Sharon Cobham, D.D.S. & Nicole LeCann, D.D.S. IV, P.A. (the “North Hills” practice); Sharon Cobham, D.D.S. & Nicole LeCann, D.D.S. V, P.A. (the “Durham” practice); Sharon J. Cobham, D.D.S. & Nicole LeCann, D.D.S., P.A. (the “Burlington” practice); Sharon Jovanna Cobham, D.D.S. & Nicole Lecann, D.D.S. & Associates, P.A. (the “Apex” practice); and Sharon Cobham, D.D.S. & Nicole LeCann D.D.S. II, P.A. (the “Winston–Salem II” practice) (collectively, the “Practices”). The Practices were professional corporations, formed pursuant to the North Carolina Professional Corporations Act, N.C. Gen.Stat. § 55B–1 et seq.

, which subsequently have been dissolved. Plaintiff Joint Entities, LLC (“Joint Entities”) is a North Carolina limited liability company of which plaintiff LeCann is the only member. Plaintiff Joint Entitles also is the holder of a judgment rendered against defendant and in favor plaintiff LeCann in a derivative capacity for the benefit of the North Hills, Durham, Burlington, and Apex practices by the North Carolina Business Court (the “Business Court”).

Plaintiff LeCann and defendant were the only officers, shareholders, and directors of the Practices. From 1999 to 2007, they operated the Practices amicably through an informal arrangement. That arrangement established defendant as the president of the Practices, in charge of overall direction and leadership, with the power to transfer money, hire and fire personnel, pursue expansion concepts, and otherwise exert managerial authority. Plaintiff LeCann managed the details of the Practices, which included daily accounting, reimbursements for services, and other details of day-to-day operation.

Beginning in 2007, defendant began a series of surreptitious conflict-of-interest transactions. To accomplish these transfers, defendant either made unauthorized loans, or issued unauthorized distributions and reimbursements, to herself from the accounts of the North Hills, Durham, Burlington, and Apex practices. In addition, she also made loans to another dental practice in Winston–Salem, North Carolina, of which she was the sole owner (the “Winston–Salem I” practice). All the transfers were initiated by defendant, or by one of her family members at her direction, and few were approved by plaintiff. Defendant commingled the assets and monies of the various Practices and her solely-owned Winston–Salem I practice. Over time, the Winston–Salem II practice was absorbed into the Winston–Salem I practice.

Eventually, plaintiff LeCann learned of the transfers and confronted defendant. Plaintiff LeCann sent defendant multiple emails expressing her disapproval and demanding defendant return the funds to the appropriate Practice. Plaintiff LeCann and defendant eventually reached an impasse. On July 12, 2010, plaintiff LeCann filed complaint against defendant in Business Court.² Plaintiff LeCann asserted claims both in her individual capacity and derivatively, on behalf of the Practices. In her individual capacity, plaintiff LeCann asserted common law claims for breach of fiduciary duty, tortious interference with contract, and tortious interference with prospective economic advantage, as well as a statutory claim for violation of the North Carolina Unfair and Deceptive Practices Act (“UDPA”), N.C. Gen.Stat. § 75–1.1 et seq.

In her derivative capacity, plaintiff LeCann asserted common law claims for breach of fiduciary duty grounded in defendant's commission of constructive fraud where she entered into numerous conflict of interest transactions; conversion; tortious interference with contract; and tortious interference with prospective economic advantage, as well as statutory claims for violation of the UDPA, N.C. Gen.Stat. § 75–1.1 et seq.

, and seeking recovery for numerous unfair self-dealing and conflict-of-interest transactions, pursuant to N.C. Gen.Stat. § 55–8–31.

On September 17, 2010, plaintiff LeCann filed in the Business Court a motion for partial summary judgment, wherein she moved for dissolution of the Practices, pursuant to N.C. Gen.Stat. § 55–14–30

and for the appointment of a receiver. In addition, plaintiff LeCann moved the court for an order allowing her to prosecute the Practices's claims on behalf of the corporation derivatively, rather than requiring said claims be prosecuted by the receiver. Defendant opposed plaintiff's motion as it related to derivative prosecution of the Practices's claims, and contended that plaintiff had failed to make demand, as is required by N.C. Gen. Stat § 55–7–42.³ On September 29, 2010, the Business Court entered order dissolving the Practices and appointing a receiver. Later, on October 6, 2010, defendant filed a motion for summary judgment. Therein, defendant contended that plaintiff LeCann's individual claims failed because, as a general matter, shareholders cannot recover for injuries sustained by a corporation and, in addition, plaintiff LeCann failed to satisfy any of the exceptions to that general rule established under North Carolina law. Defendant also contended that plaintiff LeCann had failed to make the statutorily required demand and could not prosecute the Practices's claims derivatively.

By order entered August 2, 2011, the Business Court granted plaintiff's motion as it related to her ability to prosecute the Practices's claims derivatively, denied as moot plaintiff's motion inasmuch as it requested dissolution, and denied defendant's motion for summary judgment. See generally LeCann v. Cobham, 2011 NCBC 29, 2011 WL 3329317 (N.C.Super.Ct. Aug. 2, 2011)

. By stipulation of the parties, the Business Court then set the matter for bench trial.

Trial was held before a North Carolina Superior Court judge on August 15, 2011. The Business Court's judgment entered November 7, 2012. See generally LeCann v. Cobham, 2012 NCBC 56, 2012 WL 5456095 (N.C.Super.Ct. Nov. 7, 2012)

(“LeCann II ”). In its judgment, the Business Court made 33 findings of fact consistent with the facts discussed above. The Business Court also made a number of legal conclusions. As relevant here, it concluded that defendant engaged in multiple conflict-of-interest transactions that were unfair to the practices and that she breached her fiduciary duty by committing constructive fraud on the Practices. Id. at *7–8. It also concluded that defendant's conflict of interest transactions were intentional and in knowing violation of her duty of loyalty owed to the Practices. See id. The Business Court awarded to the receiver compensatory damages in the amount of $234,240.00 on behalf of the North Hills practice; $174,969.00 on behalf of the Durham practice; $74,879.00 on behalf of the Burlington practice; and $75,800.00 on behalf of the Apex practice, representing a total award of $559,888.00 in compensatory damages. Id. at *4–5. In addition, based on its conclusion as to defendant's mental state, the Business Court awarded to the receiver punitive damages on behalf of each Practice by trebling the compensatory damage award made to each, pursuant to N.C. Gen.Stat. § 1D–15

. The Business Court grounded its award of punitive damages in defendant's “willful or wanton conduct,” as that term is defined by N.C. Gen.Stat. § 1D–5(7). Id. at *4–5, 7–8. The trebling of the compensatory damages awarded on behalf of the Practices resulted in a total punitive damages award of $1,679,664.00. The total amount of the Business Court's judgment resulted in a debt of $2,239,552.00 owed by defendant to the receiver. Defendant did not appeal the Business Court's judgment.

On July 26, 2013, the receiver provisionally entered into an agreement with plaintiff Joint Entities to transfer the judgment rendered in favor of the receiver on behalf of the Practices to plaintiff Joint Entities. On August 13, 2013, the receiver filed with the Business Court a motion seeking permission to transfer the judgment. On October 7, 2013, the court entered order approving the transfer.

At the same time, pending the Business Court's approval of the receiver's proposed transfer of judgment, plaintiff Joint Entities executed upon the judgment and the sheriff conducted a sale of the stock representing defendant's ownership in the Practices. Defendant appeared at the sheriff's sale, placed a bid on the stock certificates, and was the highest bidder. Defendant paid to plaintiff Joint Entities $9,000.00, which resulted in a reduction of the total amount required to...