In Re Bostic Construction Inc.

435 B.R. 46

In re BOSTIC CONSTRUCTION, INC., Debtor.

No. 05-11199.

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

June 25, 2010.

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Richard M. Hutson, II, Durham, NC, Robert H. Waldchmidt, Howell & Fisher, Nashville, TN, for Debtor.

Joseph P. Rusnak, Tune Entrekin & White PC, John Hayden Rowland, Baker Donelson Bearman et al., Thomas Larry Edmondson, Sr., Nashville, TN, Timothy H. Nichols, Kirksey & McNamee PLC, Brentwood, TN, Gerald A. Pell, Greensboro, NC, for Petitioning Creditors.

Gerald S. Schafer, Greensboro, NC, Trustee.

C. Edwin Allman, III, R. Bradford Leggett, Karen Beth Malay, Allman Spry Leggett & Crumpler, P.A., Winston-Salem, NC, for Trustee.

MEMORANDUM OPINION

THOMAS W. WALDREP JR., Bankruptcy Judge.

This matter came before the Court on February 25, 2010 upon the Motion to Interpret and If Necessary, Enforce This Court's Order Approving Settlement (the “Motion to Interpret”), filed by Jeffrey L. Bostic, Joe E. Bostic, Jr., Melvin E. Morris, and Tyler Morris (the “Movants”) on January 21, 2010, and the objection of Yates Construction Co., Inc. (“Yates”) and American Mechanical, Inc. (“American”) (collectively the “Respondents”) to the Motion to Interpret (the “Objection”), filed by the Respondents on February 21, 2010. At the hearing, Christine L. Myatt and Benjamin A. Kahn appeared on behalf of Jeffrey and Joe Bostic, Edwin R. Gatton and Charles M. Ivey, III appeared on behalf of Melvin and Tyler Morris, David F. Meschan and Zeyland G. McKinney, Jr. appeared on behalf of the Respondents, Robert E. Price, Jr. appeared on behalf of the United States Bankruptcy Administrator, and Gerald S. Schafer appeared in his capacity as Chapter 7 Trustee.

The Motion to Interpret requests the Court to interpret its Order of April 25, 2007 (the “Settlement Order”), which approved, over the objection of Yates, the settlement of any claims that the Trustee could assert on behalf of the corporate debtor against the Movants. The Respondents have now sued the Movants in state court. The Movants assert that the state court action maintains causes of action that were settled by the Trustee and may not now be maintained by the Respondents. After consideration of the Motion to Interpret, the Objection, the arguments of counsel, and the relevant law, the Court will interpret the Settlement Order and, in so doing, will conclude that the Respondents maintain individual causes of action against the Movants in state court, which are separate from the corporate causes of action settled by the Trustee. Therefore, the settlement between the Movants and the Trustee does not prevent the state court actions from proceeding.

I. JURISDICTION

The Court has jurisdiction over the subject matter of this proceeding pursuant to 28 U.S.C. §§ 151, 157 and 1334, and the General Order of Reference entered by the United States District Court for the Middle District of North Carolina on August 15, 1984. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(A) and (O), which this Court has the jurisdiction to hear and determine.

II. FACTS

On January 17, 2005, an involuntary petition was filed against the above-referenced debtor (the “Debtor”) in the United States Bankruptcy Court for the Middle District of Tennessee. On March 29, 2005, the case was transferred to this Court. On May 2, 2005, an Order for Relief was entered.

A. The Trustee's Complaint

The Trustee conducted an investigation into the Debtor's financial affairs and the events leading to the Debtor's bankruptcy. Based on the investigation, the Trustee prepared but did not file a complaint (the “Trustee's Complaint”) against Jeff Bostic and Melvin Morris based on the following causes of action: (1) breach of fiduciary duty, (2) unjust enrichment, (3) unfair and deceptive trade practices, (4) aiding and abetting and wrongful distribution of limited liability company assets to members, and (5) punitive damages. The Trustee's Complaint made specific allegations that are relevant here. A summary of those allegations follows.

The Debtor was incorporated in 1991 as Bostic Brothers Construction, Inc. and was originally owned by Jeff Bostic and his brother, Joe Bostic. The Debtor was conceived as a construction company focusing on the construction of multi-family housing units. (Trustee Compl. ¶ 7.) The Debtor never maintained construction workers or employees, relying instead upon various sub-contractors to provide the necessary construction materials and services. (Trustee Compl. ¶ 8.) In 1992, Melvin Morris joined the Debtor, undertaking primary responsibility for the day-to-day management of the Debtor's specific construction projects. (Trustee Compl. ¶ 9.) For a number of years, the Debtor operated profitably. The Debtor developed a good reputation for quality, reliability, and efficiency, based in part on the good name and reputation of Jeff Bostic, Joe Bostic, and Melvin Morris and the dedication and expertise of Melvin Morris in overseeing projects and bringing them to completion. (Trustee Compl. ¶ 10.)

In 2000, Bostic Development, LLC, formerly Bostic Brothers Development, LLC (“BDL”), was formed. BDL was owned initially by Jeff Bostic, Joe Bostic, Melvin Morris, Mike Hartnett, and Tyler Morris. The purpose of BDL was to find and develop multi-unit housing projects for a limited liability company (the “LLC”), which would be formed and owned by an outside investor, namely Jeff Bostic, Joe Bostic and Melvin Morris or designees of Melvin Morris. The outside investor would typically contribute real estate or capital to the LLC in exchange for its interest in the LLC, with Jeff Bostic, Joe Bostic, and Melvin Morris making no capital contribution, but often personally guaranteeing the construction loan. (Trustee Compl. ¶ 11.)

During 2000 and 2004, the Debtor transitioned from doing most of its work for unrelated third parties to doing substantially all of its work for LLCs substantially owned and controlled by Jeff Bostic, Joe Bostic, and Melvin Morris or Morris-related entities. Melvin Morris customarily arranged for his interest in the LLC to be owned by members of his immediate family or an entity consisting of members of his immediate family (the “Morris Family Entities”). (Trustee Compl. ¶ 12.) As the Debtor's business grew, Jeff Bostic, Joe Bostic, Melvin Morris, and the Morris Family Entities formed a number of other entities including but not limited to Carolina Apartment Products, Inc. (“CAP”), Carolina Apartment Interiors, LLC (“CAI”), and Carolina Apartment Stairs, LLC (“CAS”). These entities were typically formed with no initial capitalization, and their purpose was to provide materials and, in some cases, labor, to the Debtor for a profit. With respect to customers of CAP, CAI, and CAS, the Debtor represented substantially all of their business. (Trustee Compl. ¶ 13.)

On or about January 1, 2003, Joe Bostic resigned from all offices of the Debtor and BDL. The Debtor redeemed his stock and, following his resignation, Jeff Bostic and Melvin Morris remained as the sole shareholders and directors of the Debtor. Melvin Morris served as president of the Debtor and Jeff Bostic served as vice president. (Trustee Compl. ¶ 14.) At the time of Joe Bostic's resignation, the financial statements of the Debtor indicated a profit in 2002 and that the Debtor had a positive net worth of nearly $3.0 million. (Trustee Compl. ¶ 15.)

During 2003 and 2004, the financial condition of the Debtor deteriorated. During that time, the Debtor entered into a number of construction contracts which proved to be ill-conceived and unprofitable. For the most part these contracts were with LLCs owned in part by Jeff Bostic, Joe Bostic, and the Morris Family Entities. (Trustee Compl. ¶ 16.) During this period, the directors and owners of the Debtor became less concerned with the profitability of the Debtor and more focused on the profitability and value created in the LLCs. Based on an analysis performed by BDL, certain construction projects were projected to generate equity to Jeff Bostic, Joe Bostic, and one of the Morris Family Entities in excess of $35.0 million. (Trustee Compl. ¶ 17.)

Little or no influence was exerted by Jeff Bostic and Melvin Morris to ensure that the contracts between the Debtor and the various LLCs were profitable to the Debtor, the decisions concerning contract terms and pricing being largely deferred to representatives of BDL. In connection with the formation and capitalization of each LLC, budgets were prepared and presented to the respective outside investors and the lenders from which construction loans were to be obtained. These budgets indicated that the investor capital contributions and the proceeds from the construction loans would fully and adequately fund the projects. Although Jeff Bostic and Melvin Morris contributed no capital to the LLCs, they represented that they would provide competent and effective management services to the LLCs, and they represented that the Debtor would be able to construct the projects at the budgeted price. The construction budgets were consistently too low. Consequently, the contracts between the Debtor and the project LLC did not cover construction costs, much less provide for project profitability to the Debtor. (Trustee Compl. ¶ 18.)

As the various construction projects progressed, the Debtor was often required by BDL to provide additional labor and materials without a change order or any of the additional compensation that would normally and naturally flow to the Debtor as a result of such extra services and materials. During both the contract formation stage and the actual contract performance stage, the Debtor's officers and directors did not exercise care to ensure that the Debtor's interests were adequately protected. (Trustee Compl. ¶ 19.)

By the end of 2003,...