Conti v. Coastal Warranty, LLC (In re NC & Va Warranty Co.)

556 B.R. 182

In re: NC & VA Warranty Company, Inc. dba 1st Choice Mechanical Breakdown Coverage, Debtor.

Sara A. Conti, Trustee, Plaintiff,

v.Coastal Warranty, LLC, Defendant.

CASE NO. 15-80016

ADV. PRO. NO. A-15-9035

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

Signed August 18, 2016

Filed August 19, 2016

Sara A. Conti, Carrboro, NC, for Plaintiff.

Pamela P. Keenan, Raleigh, NC, for Defendant.

MEMORANDUM OPINION GRANTING TRUSTEE'S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

BENJAMIN A. KAHN, UNITED STATES BANKRUPTCY JUDGE

This adversary proceeding is before the Court on cross motions for summary judgment. Defendant Coastal Warranty, LLC (“Coastal Warranty” or “Defendant”) filed a Motion for Summary Judgment on April 29, 2016 [Doc. # 24] (“Defendant's Motion for Summary Judgment”), Robert C. Belda's Affidavit in Support of Motion for Summary Judgment [Doc. # 25] (“Belda Affidavit”), and Defendant's Memorandum in Support of Defendant's Motion for Summary Judgment [Doc. # 26] (“Defendant's Principal Brief”). The Plaintiff Sara A. Conti (“Trustee” or “Plaintiff”), as Trustee for NC & VA Warranty Company, Inc. dba 1st Choice Mechanical Breakdown Coverage (“NCVA”), filed a Motion for Summary Judgment on April 29, 2016 [Doc. # 27] (“Plaintiff's Motion for Summary Judgment”), and a Brief and Memorandum in Support of Plaintiff's Motion for Summary Judgment [Doc. # 28] (“Plaintiff's Principal Brief”) and Exhibit thereto [Doc. # 29]. The Plaintiff filed a Response in Opposition to Defendant's Motion for Summary Judgment on May 19, 2016 [Doc. # 30] (“Plaintiff's Opposition Memorandum”). The Defendant filed a Response in Opposition to the Plaintiff's Motion for Summary Judgment on May 20, 2016 [Doc. # 31] (“Defendant's Opposition Memorandum”), a further Affidavit by Robert C. Belda [Doc. # 32] (“Second Belda Affidavit”), and an Affidavit by George E. Loizou [Doc. # 33] (“Loizou Affidavit”). Finally, on June 2, 2016, Defendant filed its Reply Brief [Doc. # 34] (“Defendant's Reply Brief”). For the reasons that follow, Trustee's motion for summary judgment is granted, and the Defendant's motion for summary judgment is denied.

PROCEDURAL BACKGROUND

On September 4, 2015, the Trustee commenced this adversary proceeding against Coastal Warranty by filing a complaint against Coastal Warranty, seeking the avoidance of two transfers of $80,000 each from the Debtor to the Defendant pursuant to 11 U.S.C. § 547(b).

The Defendant filed an Answer and Counterclaim on October 8, 2015. The Answer asserts the following defenses: (1) there is no debtor-creditor relationship between Debtor and Defendant and, therefore, the Complaint fails to state a claim upon which relief may be granted; (2) the Defendant at all times held equitable title to the Reserves and, therefore, NCVA's estate holds no beneficial interest in the money pursuant to 11 U.S.C. § 541(d) ; and (3) the Reserves were held by NCVA in a constructive trust such that they are only properly distributed to the Defendant and not any other creditors or claimants in this action or in NCVA's underlying bankruptcy case. The Answer further asserts Counterclaims against the estate and a Third-Party Claim against the Debtor for: (1) conversion; (2) breach of contract; and (3) breach of fiduciary duty. The prayer for relief requests: (A) that the Court order the Debtor to provide an accounting; (B) that the Court order the Debtor to turn over all monies received by NCVA for Coastal Warranty's referred contracts; and (C) that Coastal Warranty be allowed an unsecured claim in the Debtor's bankruptcy case. On October 8, 2015, the Trustee filed her answer to the Counterclaims.

On November 3, 2015, Coastal Warranty filed a withdrawal of its Third Party Complaint under Rule 41(a) of the Federal Rules of Civil Procedure. It is unclear whether this withdrawal also was intended to withdraw the Counterclaims against the estate.¹ Plaintiff filed this adversary proceeding on September 4, 2015. The Complaint was amended on September 8, 2015 [Doc. # 3] (the “Complaint”). In the Complaint, the Trustee seeks to avoid the transfer of a total of $160,000 transferred by the Debtor to the Defendant six days prior to the petition date pursuant to 11 U.S.C. § 547(b). The Defendant filed an Answer and Counterclaim on October 8, 2015 [Doc. # 6] (the “Answer”).

JURISDICTION AND AUTHORITY

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 157 and 1334, and Local Rule 83.11 of the United States District Court for the Middle District of North Carolina. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F). The parties have consented to this Court entering final judgment as to all matters raised in the pleadings, see Joint Scheduling Memorandum ¶ 10(b) [Doc. # 10], and this Court has constitutional authority to enter final judgments herein.

FACTUAL BACKGROUND

Prior to the petition date, NCVA was in the business of selling warranty contracts and vehicle service contracts for motor vehicles to consumers through automobile dealers Complaint, Doc. # 3, ¶ 5. NCVA contracted with Dealers Assurance Company, a corporation organized under the laws of Ohio (“Dealers Assurance”), to have Dealers Assurance act as a re-insurer of NCVA's obligations to customers in the event that NCVA was unable to fulfill those obligations (the “Assurance Agreement”). Id. at ¶ 8.

The Service Agreement

Coastal Warranty was formed to engage in the business of selling warranty contracts to consumers (“Coverage Agreements”) through the dealership Select Imports (“Select Imports”). Defendant's Principal Brief, ¶¶ 4-7. On May 18, 2010, NCVA and Defendant entered into a contract titled “Administrative Service Agreement” (the “Service Agreement”). Complaint, Ex. 1; Answer, ¶ 7. The Service Agreement provided that NCVA would serve as the “Administrator” for all of Coastal Warranty's Coverage Agreements, using NCVA's reinsurance through Dealers Assurance. Service Agreement, ¶ 1. Coastal Warranty agreed to pay NCVA $125.00 for each Coverage Agreement in exchange for NCVA administering the Coverage Agreements and providing reinsurance through its relationship with Dealers Assurance. Id., ¶ 2.

Coastal Warranty entered into the Service Agreement because NCVA had “a long-standing relationship with Dealers Assurance ... and [Dealers] has represented that it [would] provide reinsurance for [Coastal Warranty] so long as [NCVA] is [was] custodian of reserves,” and provided all administrative, technical, and other support for the warranties including monitoring “payment of claims pursuant to said warranties and evaluation of the profitability of certain warranty programs, and pays such claims as are necessary.” Service Agreement, p. 1. See also Defendant's Principal Brief, ¶ 8 (“[p]art of the incentive for Coastal [Warranty] entering into the [Service Agreement] was the relationship between NCVA and Dealers [Assurance], from which Coastal [Warranty] hoped to benefit”). The Service Agreement makes clear Coastal Warranty was contracting to “use [NCVA]'s expertise, experience and staff and to satisfy the reinsurance requirements of [Dealers]. Service Agreement, p.1. The Service Agreement specifically required NCVA to maintain sufficient reserves to satisfy the requirements of Dealers Assurance. Service Agreement, ¶ 1.i.

Coastal Warranty sold the Coverage Agreements indirectly to customers through the sales staff of Select Imports in connection with automobile sales. Second Belda Affidavit, ¶¶ 20-22]. NCVA provided the form of the Coverage Agreements to Coastal Warranty, and Coastal Warranty provided those forms to Select Imports. Id., ¶ 19. After the sale of a Coverage Agreement by Select Imports, Select Imports sent sufficient funds directly to NCVA to cover the amount of the administrative fee and the reserves required by NCVA's agreement with Dealers Assurance. Id., ¶ 22. The Service Agreement requires that all other operations pursuant to the warranty contracts were performed by and through NCVA. Service Agreement, ¶¶ 1a.-j. Coastal Warranty agreed to “satisfy any additional requirements for [Dealers Assurance] as [Dealers Assurance] may reasonably request.” Id., ¶ 2h.

The Service Agreement required NCVA to establish a separate account in the name of Coastal Warranty to hold the Reserves “for [NCVA] to pay claims and reimburse funds for cancellations.” Id., ¶ 1, j. The Service Agreement did not require that the account be held in trust, and did not grant Coastal Warranty a lien in the account. Instead, the parties agreed only that the “Reserves established by [NCVA] shall be the sole and complete property of [Coastal Warranty] upon expiration of warranty, with the exception of claims, any expenses incurred relating to claims, and cancellation refunds issued by [NCVA] within 60 days.” Id., ¶ 3 (emphasis added). Termination of the Service Agreement did not alter the nature of the reserve account or the funds on deposit in it. Instead, the agreement provided that, upon termination of the Service Agreement by either party, the existing Reserves “will continue to be used in the same manner as before.” Id., ¶ 11.

The Service Agreement provided for reciprocal obligations by Coastal Warranty and NCVA to indemnify and hold the other “harmless for any negligence of intentional acts by” employees or agents. Id., p. 3.

The Coverage Agreements

The Coverage Agreements provided that each agreement was between the customer and Coastal Warranty. Coverage Agreement, p. 1. Nevertheless, the Coverage Agreements also provided that they were administered by NCVA and insured by Dealer's Assurance. Id. The agreements specifically informed the customers that, if any claim is not paid within 60 days of filing proof of loss with NCVA, they may file a claim with Dealers Assurance under its policy of insurance in favor of NCVA. Id. The Coverage Agreements further assured the customer that “[t]his...