Levin v. Province Grande Olde Liberty, LLC (In re Province Grande Olde Liberty, LLC)
| Decision Date | 05 December 2014 |
| Docket Number | CASE NUMBER: 13-01563-8-RDD,ADVERSARY PROCEEDING NUMBER:13-00122-8-RDD |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | IN RE: PROVINCE GRANDE OLDE LIBERTY, LLC, DEBTOR ERIC M. LEVIN; AND HOWARD SHAREFF, PLAINTIFFS, v. PROVINCE GRANDE OLDE LIBERTY, LLC; AND PEM ENTITIES, LLC. DEFENDANTS. |
Pending before the Court is the Plaintiffs' Motion for Summary Judgment, the Brief in Support of Plaintiffs' Motion for Summary Judgment and the Supplement to the Motion for Summary Judgment filed by the Eric M. Levin and Howard Shareff (the "Plaintiffs") on September15, 2014, the Response of PEM Entities, LLC to Plaintiffs' Motion for Summary Judgment filled by PEM Entities, LLC ("PEM") on October 9, 2014, and the Response in Opposition to Motion for Summary Judgment filed by Province Grande Olde Liberty, LLC (the "Debtor") on October 9, 2014. The Court conducted a hearing in Greenville, North Carolina on November 3, 2014, to consider these matters.
On March 11, 2013, the Debtor filed a petition for relief under Chapter 11 of the United States Bankruptcy Code (the "Code") and is a debtor in possession. The Plaintiffs filed the Complaint in this adversary proceeding on July 25, 2013 in which they asserted claims of equitable subordination and recharacterization of the claim of PEM, pursuant to 11 U.S.C. §§ 105(a) and 510©. The Complaint also includes a cause of action for avoidance and recovery of alleged fraudulent transfer pursuant to 11 U.S.C. §§ 544, 548(a)(1), 550, 551, and the North Carolina Uniform Fraudulent Transfer Act, N.C. Gen. Stat. § 39-23.1 et seq; N.C. Gen. Stat. § 44A-4(g).
On September 15, 2014, the Plaintiffs moved the Court pursuant to Rule 56 of the Federal Rules of Civil Procedure, as made applicable by Rule 7056 of the Federal Rules of Bankruptcy Procedure, for summary judgment on the ground that there are no genuine issues as to any material facts. The Plaintiffs state they are entitled to a judgment as a matter of law on their claims for recharacterization of PEM's debt to equity, equitable subordination of PEM's debt and the claim for recovery of fraudulent transfers from the Debtor to PEM. PEM moves the Court to enter summary judgment in favor of PEM on all claims asserted by the Plaintiffs. The Plaintiffs, PEM, and the Debtor take the position that there are no genuine issues of material fact and this matter is ripe for decision.
Howard Jacobson, the principal of the Debtor, formed Lakebound Fixed Return Fund, LLC ("Lakebound"). The Plaintiffs invested one million dollars into Lakebound. The Debtor obtained funds from Lakebound in the amount of $ 188,000.00 in order to close the purchase of the Debtor's principal asset.
As of the date of the petition, the Debtor's principal asset consisted of developed and undeveloped land, divided into lots, in the Olde Liberty Golf and Country Club (the "Olde Liberty Club"), a golf and single-family home development project in Franklin County, North Carolina. In order to purchase the Olde Liberty Club, the Debtor borrowed $6,465,000.00 from Paragon Commercial Bank ("Paragon" and the "Debtor's Paragon Loan"). The Debtor also obtained $188,000.00 from Lakebound for the remainder of the purchase price (the "Lakebound Funds"). In 2010, the Debtor defaulted on the Debtor's Paragon Loan. In 2011, Paragon began foreclosure proceedings on the note securing the Debtor's Paragon Loan.
On March 2, 2012, the Debtor, Howard Jacobson, Richard Wolf, CLIPS Acquisition, LLC ("CLIPS") and Paragon entered into a settlement agreement resolving the Debtor's Paragon Loan and a loan from Paragon to CLIPS, an entity which is also controlled by Howard Jacobson (the "Settlement Agreement"). The loan from Paragon to CLIPS was also secured by a number of lots of the Olde Liberty Club, the Debtor's principal asset.
The defendant PEM, is a Delaware limited liability company that was formed in December 2011 by Stanley Jacobson, Howard Jacobson's father. Stanley Jacobson was the sole member of PEM at the time of the execution of the Settlement Agreement. Stanley Jacobson and PEM are insiders of the Debtor pursuant to 11 U.S.C. § 101(31). The members of the Debtor include, but arenot limited to Howard Jacobson as AJHRLT Holdings, LLC, Robert B. Conaty, Stanley and Rhoda Jacobson, Richard Wolfe and several others. Under the Settlement Agreement, Paragon would transfer to PEM the Debtor's Paragon Loan, which was in the principal amount of $6,465,000.00, for the discounted price of $1,242,000.00. In order to fund the settlement of the Debtor's Paragon Loan, PEM borrowed $292,000.00 from Paragon ("PEM's Paragon Loan"). The settlement of the Debtor's Paragon Loan was funded by two deeds of trust pledged by the Debtor against its principal asset, Olde Liberty Club, for the benefit of PEM. The first deed of trust, in the amount of $292,000.00 for PEM's Paragon loan, secures a zero-percent loan from Paragon to PEM (the "First Deed of Trust"). The Debtor also entered into a second deed of trust, pledging additional property in Olde Liberty Club to secure an additional loan for funds that PEM used to settle the Debtor's Paragon Loan. The second deed of trust states that PEM is indebted to Joseph Degomini ("Deglomini") and Joseph Simone ("Simone") in the amount of $650,000.00 (the "Degomini-Simone Deed of Trust"). Deglomini and Simone required the Debtor to pledge a number of lots in the Debtor's principal asset, the Olde Liberty Club, and required subordination of the Debtor's Paragon Loan as a condition of Deglomini and Simone making the $650,000.00 loan.
PEM's claim for the purchase of the Debtor's Paragon Loan was designated by the Debtor in the Debtor's schedules as a secured claim in the amount of $7,000,000.00. The Debtor's schedules also reflect that Lakebound has a general unsecured claim in the amount of $188,000.00 for the Lakebound Funds. On July 3, 2013, each Plaintiff filed a claim in the Debtor's bankruptcy proceeding in the amount of $500,000.00.
The Plaintiffs and the Defendants have all moved for summary judgment and are in agreement that no genuine issue of material facts exist in this case. "[S]ummary 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 judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986) (internal quotations omitted). In making this determination, conflicts are resolved by viewing all facts and all reasonable inferences in the light most favorable to the non-moving party. United States v. Diebold, Inc., 369 U.S. 654, 655 (1962). "Only disputes between the parties over facts that might affect the outcome of the case properly preclude the entry of summary judgment." Nationwide Mut. Ins. Co. v. McMahon, 365 F. Supp. 2d 671, 674 (M.D.N.C. 2005) (citing Anderson v. Liberty Lobby, Inc. 477 U.S. 242, 247-48 (1986)). Accordingly, the court must examine "both the materiality and the genuineness of the alleged fact issues" in ruling on this motion. Id. (citing Faircloth v. United States, 837 F. Supp. 123, 125 (E.D.N.C. 1993)).
The Fourth Circuit has recognized the affirmative obligation of the "trial judge to prevent 'factually unsupported claims and defenses' from proceeding to trial." Felty v. Gres-Humphreys Co., 818 F.2d 1126, 1128 (4th Cir. 1987) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 2553, 91 L.Ed. 2d 265 (1986)). "[T]here is no issue for trial unless there is sufficient evidence favoring the non-moving party for a jury to return a verdict for that party . . . If the evidence is merely colorable . . . or is not significantly probative, summary judgment may be granted." Glover v. Lockheed Corp., 772 F. Supp. 898, 904 (D. S.C. 1991) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986)).
PEM contributed $300,000.00 to fund the purchase of the Debtor's Paragon Loan (the "PEM Contribution''). The Plaintiffs contend that this PEM Contribution should be recharacterized from a debt in the Debtor's bankruptcy case to an equity contribution. The $300,000.00 was contributed by several entities including: Stanley Jacobson in the amount of $130,000.00 as a capital contribution; Robert B. Conaty in the amount of $100,000.00 as a capital contribution; and a $70,000.00 capital contribution from AIHL. AIHL is a trust established for the benefit of Stanley Jacobson's grandchildren. Stanley's middle son, Andrew Jacobson, is the trustee of the trusts that owns AIHL. Stanley L. Jacobson Affidavit, ¶ 17. AIHL was not at any time a member of the Debtor.
This Court has the authority to recharacterize a claim from a debt to an equity contribution when an analysis of the circumstances reveals that the contribution is more appropriately an equity contribution. A bankruptcy court's equitable powers have long included the ability to look beyond form to substance. In re Official Committee of Unsecured Creditors for Dornier Aviation(North America), Inc., 453 F.3d 225, 231(4th Cir.2006); See Pepper v. Litton, 308 U. S. 295, 305; 60 S.Ct. 238, 84 L.Ed.281(1939). Further, "the Courts exercise of this power to recharacterize is essential to the implementation of the Code's mandate that creditors have a higher priority in bankruptcy than those with an equity interest." Dornier Aviation, 453 F.3d at 233.
According to the Fourth Circuit in Dornier Aviation, this Court should look to certain enumerated factors to determine whether the Court should recharacterize debt to equity. These factors include: (1) the names given to the instruments, if any, evidencing the indebtedness; (2) the presence or absence of a fixed maturity date and schedule of payments; (3) the presence or absence...
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