In re Parker

IN RE: WILLIAM DOUGLAS PARKER, JR. DIANA LYNNE PARKER DEBTORS

CASE NO. 12-03128-8-SWH

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NORTH CAROLINA RALEIGH DIVISION

June 22, 2018

CHAPTER 11

ORDER DETERMINING SCOPE OF REMAND

A hearing was conducted on March 13, 2018 in Raleigh, North Carolina on the application for attorney's fees filed by Georgia Capital, LLC ("GCAP"), D.E. 957. The sole issue before the court is whether matters raised by an objection filed on behalf of the bankruptcy estate remain subject to decision by this court or have been precluded by an order issued in this case on September 17, 2015 by the United States District Court for the Eastern District of North Carolina, D.E. 706 (the "District Court Order").

BACKGROUND

William Douglas Parker, Jr. and Diana Lynne Parker filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on April 25, 2012.¹ Two companion cases were already pending: Gregory & Parker, Inc., Case No. 12-01382-8-SWH, and Parker-Seaboard, LLC, CaseNo. 12-01383-SWH, both filed on February 22, 2012 (the "Corporate Cases"). The Corporate Cases were administratively consolidated on April 3, 2012.

GCAP filed a proof of claim in this case on June 8, 2012 in the amount of $4,186,317.33 (the "Claim"). Claim No. 4-1.² The Claim is based on two promissory notes in the original principal amounts of $2,550,000 and $1,440,000, respectively, secured by several parcels of real property. The Claim further included $352,847.78 of accrued interest less $116,530.95 of reserves held. On March 11, 2013, the Parkers objected to the Claim, D.E. 192, incorporating by reference the objections to the related claims filed in the Corporate Cases.³ Among other things, the stated bases for objecting to the Claim included: (1) an objection to the assessment of a default rate of interest as not reflecting the costs for monitoring and administering the loan; (2) inability to determine the date on which GCAP began assessing default interest; and (3) a contention that the collection of default interest was a disguised attempt to recover penalties. See D.E. 192, Ex. A.

An amended objection was filed on May 2, 2013, D.E. 233, incorporating by reference an amended objection filed in the Corporate Cases (the "Claim Objection"). See D.E. 233, Ex. A. The amended objection included additional bases challenging the default rate of interest, including the difference between the default rate and pre-default contract rate as unreasonable and the relative lack of sophistication of the debtors, as well as a contention that the pre-default rate was much higher than the prevailing market rate. Id. On May 14, 2014, the Parkers submitted a brief insupport of their objection, detailing the equitable grounds on which they objected to the assessment of default interest. D.E. 443.

A hearing on the objection to the Claim as it related to the assessment of default interest was conducted on September 30, 2014 and October 1, 2014, and this court issued an order sustaining the objection dated November 19, 2014, D.E. 537 (the "2014 Order"). In the 2014 Order, the court found that GCAP was not entitled to recover prepetition default interest under 11 U.S.C. § 502 or postpetition default interest under 11 U.S.C. § 506 because the default interest functioned as a penalty. In so finding, the court considered whether:

(1) the creditor faced a significant risk that the debt will not be paid;

(2) the lower non-default rate of interest was the prevailing market rate;

(3) the difference between the default and non-default rate was reasonable; and

(4) the purpose of the default rate was to compensate the creditor for losses sustained as a result of the default or whether it was simply a disguised penalty.

2014 Order at 6 (citing In re Deep River Warehouse, Inc., No. 04-52749, 2005 WL 1513123, at *3 (Bankr. M.D.N.C. June 22, 2005)).

GCAP appealed the 2014 Order to the United States District Court, which reversed that portion of the 2014 Order disallowing prepetition default interest and affirmed that portion of the 2014 Order disallowing postpetition default interest. Specifically with respect to the prepetition default interest, the District Court Order provided:

. . . While the Court does not hold that equitable principles can never apply to claims for pre-petition interest, the language of section 502, as it currently stands, does not leave room for courts to exercise their equitable powers. Section 502 provides the exceptions that will allow a court to deny pre-petition interest. The only other exception is if the pre-petition default interest is not allowable under North Carolina law. None of those conditions apply here.

The Bankruptcy Court erred by applying equitable principles to GCAP's claim for prepetition default interest without considering whether that application would dissolve GCAP's statutory rights. GCAP is entitled to the default rate of interest under 11 U.S.C. § 502. Accordingly, the Bankruptcy Court's holding that Georgia Capital was not entitled to prepetition default interest is REVERSED.

District Court Order at 6-7. "This matter is REMANDED to the bankruptcy court for further proceedings consistent with this opinion." Id. at 9.

On January 25, 2018, GCAP filed an application for reimbursement of legal fees, costs and expenses pursuant to 11 U.S.C. § 506(b), D.E. 957 (the "Fee Application"). The Parkers filed an objection, D.E. 968 (the "Fee Objection"), requesting the court to "conduct a hearing to conclude the Debtors' previously undecided Objection concerning the Movant's request for allowance of prepetition default interest." In the Fee Objection, the Parkers maintain that the Claim Objection raised two arguments that had never been ruled upon: first, "that the allowance of default interest under the terms of the Loan Agreement would be unconscionable under applicable North Carolina state law and, therefore, should be denied," and second, "that to obtain interest prepetition under state law, the loan had to be noticed to the obligor that it was in default and that the balance was due and payable and no competent evidence was ever presented to the Court to show in fact that the loan had been properly called into default and notice of the same given to the appropriate parties." D.E. 968 at 3.

GCAP responded to the Fee Objection, first challenging the procedural vehicle for raising the default interest issue in response to an application for attorneys' fees, and second contending that all issues related to prepetition default interest were conclusively determined by the district court in the appeal. D.E. 994 at 2.

At the hearing on March 13, 2018, the parties agreed that the issue for the court to determine is whether the District Court Order, in remanding the matter to this court, left any argument open with respect to whether GCAP is entitled to prepetition default interest, or if the remand was solely to direct GCAP to amend the Claim to account for the disallowance ofpostpetition default interest. The Parkers further contend that if this court were to find the loan to be unconscionable under North Carolina law, then GCAP is not entitled to any further attorneys' fees. Should the court find that there are any further issues for determination, the parties requested an opportunity for further briefing based on the evidentiary record already established.

DISCUSSION

Reversal vs. Remand

The District Court Order remanded this matter to this court "for further proceedings consistent with this opinion," without further instructions. Had the District Court Order simply "reversed" this court, it might have suggested that the matter was over. The fact that it remanded "for further proceedings" suggests that there is something more for this court to do. See Atlantic Coast Line Railroad Co. v. St. Joe Paper Co., 216 F.2d 832, 833 (5th Cir. 1954) (distinguishing between reversal and remand in Supreme Court's mandate). Indeed, the remand for further proceedings prevented the District Court Order from being a final, appealable order. See Village Sav. Bank v. Willey (In re Willey), 808 F.2d 836 (4th Cir. 1986) (unpublished) ("A district court decision remanding a case to a bankruptcy judge for further proceedings generally will not be considered final, unless only a 'ministerial' task remains to be done on remand.") (citing In re Fox, 762 F.2d 54, 55 (7th Cir.1985)).

In Atlantic Coast Line, the Fifth Circuit was charged with determining the scope of remand from the Supreme Court after a district court order dismissing a bankruptcy proceeding was appealed, reversed by the court of appeals, and reversed and remanded "for further proceedings in accordance with the opinion of the Supreme Court." 216 F.2d at 833. The matter resumed in the district court, which again dismissed the proceeding, and an appeal returned to the Fifth Circuit. The appellee sought dismissal of the appeal, and the Fifth Circuit considered the issue as follows:

The motion to dismiss should be overruled because this appeal involves entirely new issues, which were not decided or considered by the Supreme Court, and not disposed of by its reasoning or judgment, when this case was before it. 345 U.S. 948, 73 S. Ct. 866; 347 U.S. 298, 74 S. Ct. 574. The Supreme Court reversed the judgment of the Court of Appeals, and remanded the case to the District Court for further proceedings in accordance with its opinion; but it did not give any particular directions to the District Court and did not reinstate the latter's judgment which had been reversed by the judgment of the Court of Appeals. 5 Cir., 201 F.2d 325, 330. To reverse a judgment, according to Webster's dictionary, means to overthrow it by a contrary decision, to make it void, to undo or annul it for error. The mandate of the Supreme Court directed that the judgment of this court be reversed, with costs, and that this cause be remanded to the District Court for further proceedings in accordance with the

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