Gully Brook Revocable Trust & Tasha's Way Revocable Trust v. Cook (In re Cook)

In re: David G. Cook, Debtor.

Gully Brook Revocable Trustand Tasha's Way Revocable Trust, Plaintiffs, v. David G. Cook, Defendant.

Case No. 15-81220

Adversary No. 16-09015

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF NORTH CAROLINA DURHAM DIVISION

February 9, 2017

MEMORANDUM ORDER DENYING MOTION FOR SUMMARY JUDGMENT

This adversary proceeding came before the Court for hearing on November 22, 2016 (the "Summary Judgment Hearing") on the Motion for Summary Judgment [Doc. # 14] ("Motion for Summary Judgment"), filed on October 7, 2016, by Plaintiffs Gully Brook Revocable Trust and Tasha's Way Revocable Trust ("Plaintiffs"). Jonathan Keeler appeared on behalf of Plaintiffs and Stephanie Osborne appeared on behalf of Defendant. The Court has considered the record, the arguments of counsel, the Affidavit of Matthew Flyer [Doc. # 14-1] ("Flyer Affidavit"), Plaintiffs' Brief in Support of Motion for Summary Judgment [Doc. # 14-2] ("Plaintiffs' Brief"), the Response and Memorandum of Law in Opposition to Motion for Summary Judgment [Doc. # 15] ("Defendant's Response" or "Defendant's Brief") filed by David G. Cook ("Defendant"), and the Affidavit of David G. Cook in Response to Motion for Summary Judgment [Doc. # 15-3] ("Cook Affidavit"). For the reasons set forth herein, the Court will deny the Motion for Summary Judgment.

I. Background¹

Pre-petition, Plaintiffs entered into two written contracts (the "Contracts") with MCF Builders of Chatham County, LLC ("MCF") for two new building construction projects (the "Projects") where MCF acted as the builder and general contractor. Defendant is the sole member, sole manager, and sole bookkeeper of MCF. [Doc. # 1, ¶ 8; Doc. # 8, ¶ 8]. The Projects consisted of the construction of a residence and apottery studio. Each of the Contracts contained different amounts for costs and materials, based on the nature of each building, but the remaining material terms of both Contracts were identical. Paragraph 10 in the Residence Contract for Building Construction [Doc. # 1-1, Ex. A] ("Residence Contract") and Paragraph 10 in the Pottery Studio Contract for Building Construction [Doc. # 1-1, Ex. B] ("Studio Contract") each provides that: "Funds shall be disbursed in monthly payments according to the payment schedule provided by the draw schedule."

Between January 30 and June 1, 2015, Plaintiffs signed and delivered five (5) checks in the aggregate amount of $266,088.00 (collectively, the "Funds") to Defendant as payments for construction of the Projects. [Doc. # 1-1, pp. 51-55]. Plaintiffs made each check payable to "MCF Builders." Id. Defendant personally made each payment request to Plaintiffs, processed each payment on behalf of MCF, and deposited each check into MCF's bank account at Branch Banking and Trust ("BB&T"). [Doc. # 1, ¶ 14; Doc. # 8, ¶¶ 14-19]. The first two payments made by Plaintiffs were deposits of 10% of the total contract amounts for the Projects. [Doc. # 1-1, pp. 51-52]. Defendant deposited the first check ("Check One"), in the amount of $37,960.00 into MCF's BB&T account on January 30, 2015, and the second check ("Check Two"), in the amount of $12,300.00, onFebruary 9, 2015. Id., pp. 51-52. Defendant requested the remaining three payments, for the months of March, April, and May of 2015, through email. See Plaintiffs' Ex. 2, 4, 6.

On Wednesday, March 11, 2015 at 1:38 p.m., Defendant stated in an email to Matthew Flyer, "Hey, if we can get our March draw that would be great. It will only be 5% for each project-clearing and permits. If you have time tomorrow we can look at how much more to clear." Plaintiffs' Ex. 6. Plaintiffs complied with this request, and Defendant deposited the third check ("Check Three"), in the amount of $25,698.00, on March 13, 2015. [Doc. # 1-1, p. 53]. On Sunday, April 12, 2015 at 3:02 p.m., Defendant requested another payment for the Projects, stating, "If I can get a draw for April that would be great, I was hoping to be able to get more than just foundations done but I think I should just say 5% for this month." Plaintiffs' Ex. 8. Defendant deposited the fourth check ("Check Four"), in the amount of $25,130.00, on April 16, 2015. [Doc. # 1-1, p. 54].

Plaintiffs made the fifth and final payment ("Check Five") to Defendant following a series of email communications that occurred on May 31, 2015. In these emails, Defendant requested that the Plaintiff deliver a check for $165,000.00. He explained his need for the funds in two emails. In the first email at 12:39 p.m., Defendant stated, "Can I pick up a check tomorrow, I am anxious to get deposits to framers, electricians,plumbers and geo guys." Plaintiffs' Ex. 2. Robyn Flyer² responded to this email saying, "I THINK HE HAS A CASH FLOW PROBLEM." Id. Ms. Flyer continues by pointing out that, if Plaintiffs paid the requested draw, they would have paid more than half the price of the house with little to show for it. Id. Defendant responded to Ms. Flyer's email as follows:

In a way you are right that there is always a cash flow issue. We currently have 6 projects going valued at around 2 million. I do not have enough to prepay for all the expenses and keep everything moving. I based this draw on what I see getting done in the next month. I would like to put down deposits as soon as I can on the items mentioned below. I know things have moved slowly from both my side and the county's and would like to speed things up.

Id. Subsequently, at 2:42 p.m., Defendant sent another email listing materials and labor MCF required to continue construction on the projects including, inter alia, framing materials, windows, cabinets, and various subcontractors.³ Id. In response to Robin Flyer's inquiry into the approximate costs of some of the items listed above, Defendant sent another email, at 2:59 p.m., assigning dollar amounts to windows, doors, anHVAC system, plumbers, electricians, and metal roofing material.⁴ Id. Following these communications, Plaintiffs delivered Check Five in the amount of $165,000.00 to Defendant on June 1, 2015, which Defendant deposited in MCF's BB&T account that same day. [Doc. # 1-1, p. 55].

In his testimony at a 2004 Examination taken prior to the commencement of this adversary proceeding, Defendant confirmed a number of deposits and withdrawals on MCF's BB&T account immediately following this deposit. See Defendant's 2004 Examination [Doc. # 14-2] (the "2004 Examination"), pp. 69-95. The funds from Check Three became available in MCF's BB&T account on March 13, 2015. Id., p. 93. That day, Defendant wrote checks addressed to multiple third parties, including Tysor Plumbing, DQ Electric, ASE, Gulick Excavating, Lance Greene, and Goldston Clearing, for at least $21,210.00. Id., pp. 91-92. When asked whether these payments made on March 13, 2015, related to the Projects, Defendant either conceded that the disbursements were for other projects, or that he did not know the purpose of the withdrawal but doubted that it was foreither of the Projects. Id. Defendant also confirmed that by March of 2015 he had received approximately $75,000.00 from Plaintiffs through Checks One, Two, and Three, but estimated that less than $10,000.00 had been spent on the Projects. Id., pp. 95-96. On April 15, 2015, following the delivery of Check Four, Defendant wrote checks to Mozier Builders, Lauren Rivers Agency, Hugo Sanchez, Eric Pugh Concrete, Luis Enterprise, and himself. Id., pp. 99-102. Like the transactions following the March Email and Check Three, Defendant repeatedly testified that the payments made out of MCF's account on April 15 were not related to the Projects. Id. Defendant confirmed that by the time the funds in Check Four were available in MCF's account in April, Plaintiffs had paid MCF in excess of $100,000.00 for work on the Projects, of which Defendant testified "very, very little" was used to fund work on the Projects. Id., p. 102. On June 1, 2015, Plaintiffs delivered Check Five to Defendant. That same day, Defendant wrote checks to over a dozen third party entities for payments totaling at least $90,000.00. Id., pp. 70-77. Again, like the transactions following the March and April Emails, Defendant testified that many of the payments disbursed were not related to the Projects. Id.

Although Plaintiffs did not make any further payments to MCF under the Contracts after June 1, 2015, the parties dispute when work on the Projects ceased. Plaintiffs allege MCFabandoned work on the pottery studio on August 21, 2015, and the residence on September 11, 2015; Defendant asserts work continued on the Projects through October of 2015. [Doc. # 1, ¶ 12; Doc. # 15, p. 8].

On October 22, 2015, Plaintiffs filed an action against MCF and Defendant in the North Carolina General Court of Justice, Superior Court Division, Chatham County, North Carolina (the "State Court"), styled Gully Brook Revocable Trust, et al. v. MCF Builders of Chatham County, LLC, et al., No. 15-CVS-816, [Doc. # 1-1, pp. 1-5] (the "State Court Action"). In the State Court Action, Plaintiffs moved for injunctive relief in the form of a temporary restraining order to freeze Defendant's accounts in the amount of $266, 088.00. Id., pp. 56-59. The State Court entered an order granting a temporary restraining order for that amount, pending a hearing on November 5, 2015. Id., pp. 60-62. Neither MCF nor Defendant filed responsive pleadings in the State Court Action prior to filing their respective bankruptcy petitions. [Doc. # 1, ¶ 22; Doc. # 8, ¶ 27].

MCF filed a voluntary chapter 7 petition on October 29, 2015 [Case No. 15-81189, Doc. # 1]; Defendant filed likewise on November 4, 2015 [Case No. 15-81220, Doc. # 1]. Defendant listed Plaintiffs on Schedule F of his petition as holders of an unsecured, nonpriority, contingent, unliquidated, and disputed claim in the amount of $266,088.00.

Plaintiffs commenced this adversary proceeding by filing a Complaint [Doc. # 1] ("Complaint") on June 2, 2016, seeking a monetary judgment against De...