Bledsoe v. Flamingo Props. (In re Musselwhite)

IN RE: MICHAEL GENE MUSSELWHITE, DEBTOR.

JOSEPH A. BLEDSOE III, TRUSTEE, PLAINTIFF, v. FLAMINGO PROPERTIES, LLC, FLAMINGO SOUTH, LLC, and L. BRIAN CHESHIRE, DEFENDANTS.

No. 20-00928-5-SWH

Adversary Proceeding No. 20-00142-5-SWH

United States Bankruptcy Court, E.D. North Carolina, Wilmington Division

September 23, 2021

ORDER DENYING MOTION TO DISMISS

Stephani W. Humrickhouse, United States Bankruptcy Judge.

The matter before the court is the Motion to Dismiss filed by the defendants on February 11, 2021. Dkt. 9. The defendants filed a Memorandum in Support of the Motion to Dismiss contemporaneously with the Motion to Dismiss. Dkt. 10. The plaintiff filed a Response in Opposition to the Motion to Dismiss on March 3, 2021. Dkt. 13. A hearing was held on March 9, 2021 in Wilmington, North Carolina. At the conclusion of the hearing, the court took the matter under advisement and invited the parties to file post-hearing briefs.

The plaintiff filed a post-hearing memorandum on March 23, 2021. Dkt. 15. The defendants filed a post-hearing memorandum on March 24, 2021. Dkt. 16. The matter is now ripe for determination.

BACKGROUND

Michael Gene Musselwhite (the "debtor" or "Musselwhite") filed a voluntary petition under chapter 13 of the Bankruptcy Code on March 3, 2020. Joseph A Bledsoe, III (the "trustee" or the "plaintiff") filed this adversary proceeding on December 13, 2020 against Flamingo Properties, LLC ("Flamingo Properties"), Flamingo South, LLC ("Flamingo South"), and L. Brian Cheshire ("Cheshire") (collectively, the "defendants"). The following causes of action are set forth in the complaint:

(1) Turnover of debt that is property of the estate pursuant to 11 U.S.C. § 542(b) against Flamingo Properties and Flamingo South,

(2) Avoidance of fraudulent transfers within 6 years of the petition date pursuant to 11 U.S.C. § 544(b)(1), using 28 U.S.C. §§ 3304(a)(1), 3306(a) of the Federal Debt Collection Practices Act ("FDCPA") as applicable law, against Flamingo Properties,

(3) Avoidance of fraudulent transfers within 6 years of the petition date pursuant to 11 U.S.C. § 544(b)(1), using 28 U.S.C. §§ 3304(a)(1), 3306(a) of the FDCPA as applicable law, against Flamingo South,

(4) Avoidance of fraudulent transfers within 10 years of the petition date pursuant to 11 U.S.C. § 544(b)(1), using 26 U.S.C. §§ 6502(a)(1), 6901(a)(1)(A) of the Internal Revenue Code ("IRC") and N.C. Gen. Stat § 39-23.5(a) of the North Carolina Uniform Voidable Transactions Act ("NC UVTA") as applicable law against Flamingo Properties,

(5) Avoidance of fraudulent transfers within 10 years of the petition date pursuant to 11 U.S.C. § 544(b)(1), using 26 U.S.C. §§ 6502(a)(1), 6901(a)(1)(A) of the IRC and N.C. Gen. Stat. § 39-23.5(a) of the NC UVTA as applicable law, against Flamingo South,

(6) Recovery of avoided transfers pursuant to 11 U.S.C § 550(a)(1) against Flamingo Properties, Flamingo South, and Cheshire,

(7) Recovery of avoided transfers pursuant to 11 U.S.C. § 550(a)(2) against Cheshire, and

(8) Objection to claim of Cheshire pursuant to 11 U.S.C. § 502(d). The defendants filed a Motion to Dismiss on February 11, 2021 seeking dismissal with prejudice of the plaintiff's claims for avoidance and recovery of fraudulent transfers-the second, third, fourth, fifth, sixth, and seventh claims for relief.

The underlying facts of the transfers at issue have been recited by the Fourth Circuit Court of Appeals^[1] as follows:

From 2000 to 2014, Musselwhite ran four Smithfield's Chicken 'N Bar-B-Q restaurants in North Carolina's New Hanover County with his business partner, Brian Cheshire. To do this, Musselwhite and Cheshire created two sets of corporate entities, each of which they initially owned in equal shares: one set owned the Smithfield's franchises themselves; another set owned the properties on which the restaurants operated. The entities that owned the Smithfield's franchises were Whiteshire Foods, Inc. (Whiteshire); Leland-Hwy 17, Inc. (Leland); Shallotte-Hwy 17, Inc. (Shallotte); and Wilmington-17th Street, Inc. (Wilmington). For each of these respective entities, Musselwhite and Cheshire entered into Franchise Agreements with MARC [Mid-Atlantic Restaurant Corporation]. And the entities that owned the properties were Flamingo Properties, LLC, which owned the Whiteshire and Wilmington properties, and Flamingo South, LLC, which owned the Shallotte and Leland properties (collectively, the "Flamingo Companies"). For both of these, Musselwhite and Cheshire entered into ownership agreements with each other. In short, Whiteshire, Leland, Shallotte, and Wilmington rented their restaurants' physical spaces from the Flamingo Companies. Within this scheme, Musselwhite managed the restaurants' day-to-day operations, while Cheshire managed their finances.

Musselwhite and Cheshire ran these restaurants without incident until 2015. Early that year, David Harris, a MARC executive, informed them that MARC wished to operate their franchises itself. Musselwhite and Cheshire agreed with this proposal and so executed four agreements on behalf of Whiteshire, Leland, Shallotte, and Wilmington with MARC on February 27, 2015.

A few particulars of these agreements merit mention. First, all four agreements contained broad release clauses. Among other things, these clauses' workaday language released MARC from claims that Whiteshire, Leland, Shallotte, and Wilmington may have had against it if they accrued on or before February 27, 2015.

These agreements also transformed the companies' relationships with each other. As for Shallotte and Leland, they chose to terminate their existing franchisor/franchisee relationship with MARC when they executed their "Termination Agreement and Mutual Release" agreements (collectively, the "Termination Agreements"). J.A. 334, 340. Yet Whiteshire and Wilmington took a different tack. They executed "Franchise Agreement Amendment" agreements that only modified-not terminated-their existing Franchise Agreements with MARC (collectively, the "Amendment Agreements"), extending their franchisor/franchisee relationship until December 31, 2017, about a year and a half longer than originally planned. J.A. 346, 352.

And the Amendment Agreements worked one other noteworthy change. Under these agreements, Whiteshire and Wilmington would retain their franchise rights until August 2015, when they would turn them over to MARC. In exchange, MARC would continue to lease the physical space from the Flamingo Companies for a few years. Once these leases were up, MARC could choose to buy the properties themselves from Whiteshire and Wilmington for a substantial sum. Put otherwise, these Amendment Agreements were lucrative for Whiteshire and Wilmington, and thus for Musselwhite and Cheshire, twice over-offering both a lucrative income stream and an even more lucrative potential payout.

But around when these changes were made, Musselwhite and MARC's relationship deteriorated. As MARC puts it, Musselwhite mismanaged the restaurants, resulting in not only declining sales but also unsanitary conditions. In fact, Musselwhite's behavior prompted the four agreements, MARC says. Tensions boiled over around May 23, 2015, when Musselwhite and Harris fought at the Whiteshire restaurant. Harris, who Musselwhite says stands at over six feet tall and regularly carries a pistol, arrived at that restaurant and began disparaging Musselwhite's managerial acumen and threatening to terminate both the Whiteshire and Wilmington Franchise Agreements-and ultimately physically barred Musselwhite from the restaurant's premises. And Harris's threat apparently came to pass: A few days later, on May 26, 2015, MARC terminated its Franchise Agreements with Whiteshire and Wilmington by letters. In these letters, MARC cited the restaurants' unprofitability, their unsanitary conditions, and other operational deficiencies as its reasons for terminating the agreements.

This fracas irreparably changed Musselwhite and Cheshire's relationship too. As Musselwhite tells it, Harris began pressuring Cheshire to end his business ventures-that is, his co-ownership of Whiteshire and Wilmington-with Musselwhite, claiming that Musselwhite ineptly managed those restaurants. What's more, MARC also claimed that the Amendment Agreements-and their benefits- would not survive if Musselwhite remained a co-owner of the Flamingo Companies. Cheshire then spoke to Musselwhite and explained that they would receive "nothing" unless Musselwhite divested himself from the Flamingo Companies "on paper." J.A. 19. So, three days after MARC ended its relationship with Whiteshire and Wilmington, Cheshire bought out Musselwhite's share in the Flamingo Companies for $375, 000 (hereinafter, the "Buyout Agreement").

Musselwhite v. Mid-Atl. Rest. Corp., 809 Fed.Appx. 122, 123-25 (4th Cir. 2020) (unpublished) (per curiam).

The plaintiff alleges that in the agreements dated March 29, 2015, the debtor transferred all of his membership interests in Flamingo Properties and Flamingo South back to the respective LLCs. As a result of these assignments, Cheshire became the 100% owner and single member of the Flamingo Companies. The plaintiff contends that the assignment of the debtor's membership interest in Flamingo Properties (the "Flamingo Properties Transfer") and the assignment of the debtor's membership interest in Flamingo South (the "Flamingo South Transfer") are avoidable pursuant to 11 U.S.C. § 544(b)(1) and seeks a monetary judgment against the defendants in the amount of the value of the avoided transfers, plus pre-judgment interest.

Musselwhite and the defendants have been involved in other litigation relating to the same underlying facts of these causes of action. On January 26, 2016, Musselwhite filed an action in the Superior...