Lanik v. Smith (In re Cox Motor Express of Greensboro, Inc.)

In re: Cox Motor Express of Greensboro, Inc., Debtor.

James C. Lanik Plaintiff, v. James W. Smith, Jr., Defendant.

Case No. 14-10468

Adversary No. 15-02023

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF NORTH CAROLINA GREENSBORO DIVISION

January 27, 2017

MEMORANDUM OPINION

THIS ADVERSARY PROCEEDING came before the Court for trial on December 5, 2016. Also before the Court is the amended motion for sanctions [Doc. #'s 74 and 79] (as amended, the "Motion for Sanctions") filed by Plaintiff, on which the Court deferred ruling until trial. James C. Lanik appeared as chapter 7 trustee ("Trustee") for the debtor, Cox Motor Express of Greensboro, Inc. ("Debtor"). Andrew D. Irby appeared as counsel for Plaintiff. Norman B. Smith appeared as counsel for James W. Smith, Jr. ("Defendant"). For the reasons stated herein: (1) judgment will be entered in favor of Plaintiff and against Defendant for the avoidance of certain net preferential transfers in the amount of $97, 600, and the recovery of the value of these transfers under 11 U.S.C. § 550; and (2) Plaintiff's Motion for Sanctions will be denied.

I. PROCEDURAL HISTORY¹

Trustee commenced this adversary proceeding by filing a complaint [Doc. #1] (the "Complaint") against Defendant on May 22, 2015. The Complaint alleges that the transfers from Debtor to Defendant during the period between April 30, 2013, and April 30, 2014, constitute preferential transfers pursuant to 11 U.S.C. § 547 and therefore Plaintiff is entitled to recover these transfers pursuant to 11 U.S.C. § 550(a).² Defendant filed his Answer to Complaint [Doc. #16] (the "Answer") on July 27, 2015.

On March 14, 2016, Plaintiff filed his Motion for Summary Judgment [Doc. #32]. In opposition to the Trustee's motion for summary judgment, Defendant filed the Affidavit of James W. Smith Jr. [Doc. #33] (the "Defendant's Affidavit"). In his affidavit, Defendant attempted to submit evidence that contradicted the schedules to which he had averred, and which would have been responsive to Trustee's outstanding discovery requests, but which previously had not been produced. Defendant further denied ever receiving a payment of $50,000 on March 12, 2014, or any part of it, and claimed therefore that Plaintiff's preference claim was overstated by that amount.

On August 9, 2016, the Court entered its Memorandum Opinion on Summary Judgment [Doc. #43] (the "Summary Judgment Opinion") and Order on Summary Judgment [Doc. #44]. The Summary Judgment Opinion granted partial summary judgment in favor of Plaintiff. Specifically the Court entered judgment (1) granting Trustee's Motion to Strike Defendant's Affidavit [Doc. #37];³ (2) granting partial summary judgment under the elements of 11 U.S.C. §547(b)(1), (2), (4), and (5), with respect to all transfers reflected in the Transfer Table except the Marquette Transfer; (3) granting partial summary judgment on the issue of 11 U.S.C. § 547(c)(2), finding that Defendant cannot establish the ordinary course of business defense; and (4) denying summary judgment with regard to all remaining issues. The ruling in the Summary Judgment Opinion left four issues for trial: (1) whether Debtor was insolvent under 11 U.S.C. § 547(b)(3) at the time of the preferential transfers; (2) whether the transfer of $50,000 allegedly made to Defendant on March 12, 2014,⁴ occurred, and, if so, whether it constituted a transfer of property of the debtor on account of an antecedent debt under 11 U.S.C. § 547(b) and (b)(2); (3) whether two alleged loans made from Defendant to Debtor on May 1, 2013, and December 18, 2013, occurred and constitute new value under 11 U.S.C. § 547(c)(4); and (4) the extent of any new value defense.

Prior to trial, Trustee filed two motions in limine [Doc. #64 and 65] (collectively, the "Motions in Limine") under Fed. R. Civ. P. 37, made applicable to this adversary proceeding by Fed. R. Bankr. P. 7037, requesting that the Court: (1) exclude any evidence offered by Defendant regarding the solvency or insolvency of Debtor to the extent that such evidence was notincluded in Defendant's responses to discovery; and (2) establish any non-disputed loans and repayments as facts for trial and exclude any evidence offered by Defendant regarding the disputed loans which had not been previously disclosed in discovery. On November 4, 2016, the Court entered its Memorandum Opinion [Doc. #70] (the "Limine Opinion") and Order Granting Motion in Limine [Doc. #71] (the "Limine Order") granting the Motions in Limine. In the Limine Order, the Court: (1) excluded for trial any evidence offered by Defendant of Debtor's solvency, including evidence of value, to the extent such evidence contradicts or supplements Debtor's schedules filed in this case; (2) established as facts for purposes of trial all loans and loan repayments reflected in Defendant's Exhibit 1 ("Transfer Table"), as supplemented by Defendant prior to summary judgment, not labeled "disputed;" and (3) excluded any expert testimony offered by Defendant at trial.

In the Motion for Sanctions, Trustee seeks additional sanctions pursuant to Fed. R. Civ. P. 37 and 11 U.S.C. § 105 against Defendant and his attorney, Norman B. Smith. Trustee contends that Defendant and his counsel: (1) made misrepresentations to Trustee and the Court in regard to the disputed $50,000 payment from Marquette; (2) concealed certain real property owned in part by Defendant and previously undisclosed; and (3) defamed Trustee and his counsel inDefendant's response to the Motions in Limine by criticizing Trustee and characterizing his actions as an attempt to "churn" the case to provide a higher fee for himself. At the hearing on the Motion for Sanctions, the Court took the Motion for Sanctions under advisement, and deferred ruling on the motion until trial.

II. 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, p. 3 [Doc. # 23], and this Court has constitutional authority to enter final judgments herein.

III. FACTS

Debtor filed a voluntary petition under chapter 7 of the United States Bankruptcy Code on April 30, 2014 (the "Petition Date"), Bankr. Case No. 14-10468 (the "Main Case"). Plaintiff-Trustee initiated this adversary proceeding on May 22, 2015. Plaintiff seeks to avoid a number of alleged preferential transfers made to Defendant within the one year prior to the Petition Date pursuant to 11 U.S.C. § 547, and to recover thosefunds for the benefit of the estate pursuant to 11 U.S.C. § 550(a).

Debtor, Cox Motor Express of Greensboro, Inc., was a trucking company. James W. Smith Jr., Defendant, was the President of Debtor on the Petition Date and executed Debtor's bankruptcy petition and schedules under penalty of perjury in his capacity as President. For the past 15 years, Defendant has also been the general manager of Debtor and responsible for all of its day-to-day activities. Defendant is married to Pamela C. Smith, an officer and shareholder of Debtor. Defendant has been married to Pamela Smith at all relevant times to this adversary proceeding.

A. Disputed Loans and Repayments

One of the issues left for trial was the determination of whether certain loans and repayments had occurred. The disputed items were: (1) a purported loan of $8,000 from Defendant to Debtor on October 30, 2013; (2) a purported loan of $8,000 from Defendant to Debtor on December 18, 2013; and (3) a purported transfer of $50,000 from Debtor to Defendant on March 12, 2014. From Defendant's testimony, it is clear that the two $8,000 loans did not occur. The agreement between Defendant and Debtor was that for every $1,000 Defendant loaned, Debtor would owe interest of $200. Therefore, the loans in the amount of $40,000 that occurred on October 30 and December 18, 2013, resulted inflat interest owed of $8,000 each. These interest charges were recorded separately on the ledger between the parties. Defendant's testimony corroborated this agreement. No additional funds were advanced by Defendant to Debtor beyond the $40,000 principal of each loan. The $8,000 entries merely reflected the flat amount of interest to which the parties agreed.

The parties also dispute the existence of a purported $50,000 transfer in March 2014 (the "Tamen Transfer"). Defendant's account statement from State Employee's Credit Union confirms that Defendant received a wire transfer in the amount of $50,000 from Tamen Funding, LLC ("Tamen") on March 7, 2014. See Tr. Ex. 47.⁵ These funds were the proceeds from a loan transaction between Debtor and Tamen. The loan transaction is formalized in a loan agreement, promissory note, and security agreement between Debtor and Tamen. See Tr. Ex. 2. Despite Defendant's prior positions at summary judgment, and in contrast to arguments by his counsel that continued through trial, Defendant conceded in his testimony that the transfer of $50,000 into his personal account was from the loan proceeds thatotherwise were payable to Debtor. Instead of paying these loan proceeds to Debtor, Tamen transferred the proceeds directly to Defendant, which he applied as repayment for prior advances to Debtor.

In response to Trustee's most recent motion for sanctions, Defendant and his counsel contended that "[o]n March 10, 2014, out of the same personal checking account of defendant, the sum of $30,000 was paid to Cox Motor Express, Inc., payroll account. This payment is indicated on defendant's bank account statement dated April 2, 2014, a copy of which is attached as Exhibit 1."⁶ Defendant's Response to Plaintiff's Motion for Sanctions [Doc. # 80] ("Defendant's Response to Motion to Sanctions"), ¶ 1.b. Contrary to...