In re Carolina Constructors & Invs., LLC

IN RE: Carolina Constructors & Investments, LLC, Alleged Debtor(s).

C/A No. 20-02040-HB

UNITED STATES BANKRUPTCY COURT DISTRICT OF SOUTH CAROLINA

June 26, 2020

Involuntary Chapter 7

ORDER:

1. DENYING MOTION TO DISMISS INVOLUNTARY PETITION

2. DENYING REQUEST FOR DAMAGES AGAINST PETITIONING CREDITORS

3. REGARDING MOTION TO DEPOSIT FUNDS

THIS MATTER is before the Court for consideration of the Motion to Dismiss Involuntary Petition and Pursuant to Fed. R. Civ. P. 12(b)(6) and Request for Damages Against Petitioning Creditors, or in the Alternative Motion for Abstention pursuant to 11 U.S.C. § 305 filed by Alleged Debtor Carolina Constructors & Investments, LLC ("CCI").¹ Petitioning Creditors Daniel Proper and Rick Farwell objected.² CCI argues: (1) Petitioning Creditors are not eligible to file this involuntary petition under 11 U.S.C. § 303(b) because their claims are the subject of a bona fide dispute; (2) Petitioning Creditors are not entitled to relief under § 303(h)(1) because at the time of filing, CCI was paying its debts as they became;³ (3) Petitioning Creditors filed the Involuntary Petition in bad faith; (4) in the event the involuntary petition is dismissed, CCI should be awarded damages under § 303(i); and (5) if the involuntary petition is not dismissed, abstention is appropriateunder § 305(a). CCI also filed a Motion to Deposit Funds,⁴ requesting that $51,200.00 currently held in escrow by counsel for CCI be deposited with the Court pursuant to Fed. R. Bankr. P. 7067 to apply to Petitioning Creditors' claims, less any amounts owed by Petitioning Creditors to CCI.

CCI's Motion to Dismiss under Fed. R. Civ. P. 12(b)(6) challenges the legal sufficiency of the involuntary petition. See Fed. R. Bankr. P. 1011(b) (providing the alleged debtor may contest an involuntary petition and defenses and objections must be presented in the manner prescribed by Fed. R. Civ. P. 12(b)). Fed. R. Civ. P. 12(b)(6) "applies in a contested involuntary situation just as it does generally; the motion challenges the sufficiency of the allegations in the involuntary petition 'may be based on either a lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory.'" In re QDOS, Inc., 607 B.R. 338, 345 (B.A.P. 9th Cir. 2019) (quoting Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1121 (9th Cir. 2008)). Pursuant to Fed. R. Civ. P. 12(b)(6), the Court must accept as true all factual allegations contained in the involuntary petition and draw reasonable inferences in the nonmoving party's favor. See id. at 346 ("As noted, a Civil Rule 12(b)(6) motion assumes the truth of the allegations in the operative documents, here the involuntary petition."); E.I. du Pont de Nemours and Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011) (citations omitted).

Pursuant to Fed. R. Civ. P. 12(c), when matters outside the pleadings are considered by the Court, a motion under Fed. R. Civ. P. 12(b)(6) must be treated as a motion for summary judgment under Fed. R. Civ. P. 56.

Because FRBP 1011(b) requires an alleged debtor to present defenses to an involuntary petition "in the manner prescribed by Civil Rule 12," and Civil Rule 12(b) requires its enumerated defenses to be presented by motionbefore an answer is filed, the limitations in Official Form 205 commonly result in a motion to dismiss an involuntary petition under Civil Rule 12(b)(6) being converted to a summary judgment motion governed by Civil Rule 56.

In re EB Holdings II, Inc., 589 B.R. 704, 725 n.68 (Bankr. D. Nev. 2017). Under Fed. R. Civ. P. 56(a), summary judgment may be granted only if the movant shows there is no genuine dispute of material fact and the movant is entitled to judgment as a matter of law.

Fed. R. Bankr. P. 1013(a) directs the Court to "determine the issues of a contested petition at the earliest practicable time and forthwith enter an order for relief, dismiss the petition, or enter any other appropriate order." "In effect, Federal Rule of Bankruptcy Procedure 1013(a) recognizes that the interests of both the debtor and the creditors are best served by prompt resolution of the issues raised by an involuntary bankruptcy petition." 9 Collier on Bankruptcy ¶ 1013.02 (16th 2020).

CCI's Motion to Dismiss attached the Affidavit of Eric Gutierrez, which included nine exhibits. After Petitioning Creditors objected, the parties filed with the Court the documentary evidence they intended to offer at the hearing, which included six exhibits from CCI and eight exhibits, with subparts, from Petitioning Creditors. Prior to the hearing, the parties participated in some discovery, including CCI's Rule 2004 examinations of Randy Bettilyon and Daniel Proper. At the hearing, Randy Bettilyon, Rick Farwell, Daniel Proper, and Eric Gutierrez testified, exhibits and arguments were presented, and given the range of Motions before the Court, the evidence extended far beyond the scope of Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 56. Nevertheless, at the end of the evidence, CCI argued that if its Motion to Dismiss was denied, it must be afforded an opportunity to answer the involuntary petition pursuant to 11 U.S.C. § 303(d).

Considering CCI's Motion to Dismiss under the standards of Fed. R. Civ. P. 12(b)(6) and 56, the Motion must be denied, and after considering the evidence, no pending relief requested by CCI will be granted.

FACTS

1. CCI is a limited liability company formed in 2014 by Eric Gutierrez (51% owner) and Randy Bettilyon (49% owner). CCI is a contractor and builder of commercial and residential projects in an around Spartanburg County, South Carolina. Its operations have included purchasing, remodeling, and selling residential properties. Bettilyon assumed CCI's recordkeeping responsibilities while Gutierrez worked in the field.

2. In August 2016, Daniel Proper loaned a total of $15,000.00 to CCI for its business operations. In April 2017, CCI sold a condominium and instead of receiving payment of his loan from the proceeds, Proper instructed CCI to reinvest the funds for its continued operations. The parties memorialized this arrangement in an "Investment Agreement" dated April 20, 2017. The Agreement provides the "investment" of $15,000.00 is for "Construction Projects current and future" and Proper is owed 8% annual interest to be paid at 4% every six months from the date of the contract. There is no maturity date; instead, the Agreement requires Proper "give an advanced notice of 60 days prior to withdrawing the investment in which payment must be made."

3. In June 2017, Rick Farwell entered into a similar Investment Agreement with CCI for his "investment" loan of $15,000.00, with 8% annual interest to be paid at 4% every six months from the date of the contract. It also does not include a maturity date and requires Farwell "give an advanced notice of 60 days prior to withdrawing the investment in which payment must be made." Farwell has not received any interestpayments and never made a demand for payment of this loan before coming to this Court for relief.

4. On June 26, 2018, Proper loaned an additional $20,000.00 to CCI for the purchase of real property located at 4533 Parris Bridge Road, Lot 83 (the "Parris Bridge Property"). The Loan Agreement provides it is "secured" by an interest in the Parris Bridge Property; however, any such interest was not recorded in any public record. It states that Proper is to receive a single interest payment of $3,000.00. The Agreement does not have a maturity date or deadline for the interest payment, but provides the "[l]oan is repayable within 30 day(s) of the Lender providing the Borrower with written notice of demand."

5. Proper last received an interest payment on his 2017 "investment" in April 2019, and has not received any payment on his 2018 loan. Proper never made a demand for payment of the principal or interest owed on either loan before coming to this Court for relief.

6. On April 17, 2019, Bettilyon formed a new South Carolina limited liability company, Carolina Constructors, LLC ("Carolina Constructors"), to operate as a contractor for commercial projects. Proper is listed as the registered agent for Carolina Constructors. CCI asserts, through the testimony of Gutierrez, that this new company was formed by Bettilyon to compete with CCI and usurp its business opportunities.

7. After learning in June 2019 that Bettilyon formed Carolina Constructors, Gutierrez transferred CCI's assets. In July 2019, Gutierrez transferred three parcels of real property from CCI into his name. This transfer included property located at 220 West Clark Road, Inman, South Carolina (the "West Clark Property") and was in exchange forconsideration of $10.00. The West Clark Property is encumbered by a mortgage in favor of First Citizens Bank, personally guaranteed by Gutierrez.

8. Of the three properties transferred, Gutierrez still owns the West Park Road Property. In September 2019, he transferred two of the properties from his name to Hitek Construction, LLC, a company he owns, in exchange for consideration of $10.00.

9. In December 2019, Gutierrez transferred an additional three parcels of real property from CCI to Carolina Developers, LLC, another company he owns individually, in exchange for consideration of $10.00.

10. Gutierrez also transferred CCI's vehicles and equipment to himself for no consideration.

11. Bettilyon and the Petitioning Creditors were not aware that Gutierrez transferred CCI's assets at the time the transfers took place.

12. Gutierrez testified that he transferred these assets to protect CCI until he and Bettilyon could reach an agreement to divide CCI's assets and dissolve the company.

13. Prior to the transfers, Gutierrez discovered Proper was residing in the West Clark Property owned by CCI. After Gutierrez transferred this property to himself, he informed Proper to pay the rent to him personally and not CCI. Proper refused to do so, instead placing the rent...