Palczuk v. Conway (In re Palczuk)

IN RE: JOHN JEROME PALCZUK and KAREN ELIZABETH PALCZUK, DEBTORS

JOHN JEROME PALCZUK and KAREN ELIZABETH PALCZUK, Plaintiffs, v. STEVE CONWAY, LORI CONWAY, LORCON, LLC#1, and LORCON, LLC #4, Defendants

CASE NO. 11-04017-8-SWH

ADVERSARY PROCEEDING NO. 19-00001-8-SWH

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NORTH CAROLINA RALEIGH DIVISION

September 25, 2020

CHAPTER 11

ORDER REGARDING CROSS-MOTIONS FOR SUMMARY JUDGMENT

The matters before the court in this adversary proceeding are the plaintiffs' motion for summary judgment on both of their causes of action, filed on February 13, 2020, and defendants' cross-motion for summary judgment, which was filed on March 5, 2020. A hearing was held in Raleigh, North Carolina, on April 16, 2020, after which the court took the matter under advisement. For the reasons that follow, plaintiffs' motion will allowed, and defendants' motion will be denied.

PROCEDURAL HISTORY

On May 25, 2011, John and Karen Palczuk filed a voluntary petition under chapter 11 of the Bankruptcy Code. Bkcy. Dkt. 1. The Palczuks listed defendants Steve and Lori Conway as "codebtors" on Schedule H of the petition and included them on the creditor matrix. Per routine notices and scheduling protocols, the court set August 26, 2011 as the deadline for filing complaints to determine dischargeability, and September 26, 2011, as the proof of claim deadline. The defendants did not file a dischargeability complaint, and did not file a proof of claim.¹

Plaintiffs filed their chapter 11 plan and disclosure statement on September 22, 2011, both of which were conditionally approved the following day. A hearing on confirmation was set for November 8, 2011, with the previous day (November 7, 2011) set as the deadline for filing objections to the disclosure statement and voting on the plan. Defendants did not object, and did not vote. The plan was confirmed on January 5, 2012, and provided for a discharge pursuant to 11 U.S.C. § 1141(d)(5)(A). In addition, Article XV of the plan included the following provision:

15.1 Waiver against and Release of Debtors. Confirmation shall constitute waiver and release of the right to pursue litigation and causes of action against the Debtors, which release is supported by the requirements of this Plan and covenants contained herein.

Bkcy. Dkt. 70 at 8. Upon plaintiffs' completion of plan payments, a discharge was entered by order dated November 29, 2012. The case was closed on January 30, 2013.

Subsequent to this, defendants engaged in state court litigation and in other actions against plaintiffs as discussed more specifically below. Plaintiffs moved to reopen their case on November 8, 2018, and the motion was allowed by order entered on February 5, 2019. Plaintiffs initiated this adversary proceeding against defendants on April 4, 2019, seeking to have the court declare that no nondischargeable debts exist and that the court sanction defendants for their post-confirmation and post-discharge conduct. On May 6, 2019, defendants filed a motion to dismiss the proceeding for lack of subject matter jurisdiction, or in the alternative to stay the proceeding. That motion was denied by an interim order entered on July 25, 2019, which later was supplemented, on September 5, 2019, by entry of an order setting out the court's reasoning in more detail. Dkt. Nos. 13, 22.

On August 23, 2019, the court entered an order directing the defendants to answer or otherwise respond to the complaint, which they did on October 30, 2019. Defendants subsequently filed a motion to stay the proceeding, to which the plaintiffs responded with a memorandum in opposition. A hearing was held on January 14, 2020, during which the motion to stay was denied and plaintiffs were directed to file their motion for summary judgment within 30 days. Plaintiffs' motion and accompanying memorandum were filed on February 13, 2020. Dkt. Nos. 47, 48. In response, on March 5, 2020, defendants filed an objection to the motion. Dkt. 53. Defendants filed their own motion for summary judgment that same day, and filed a supporting memorandum on March 9, 2020. Dkt. Nos. 54, 57. Plaintiffs responded to the defendants' motion on March 26, 2020. Dkt. 58. A hearing was held on April 16, 2020, after which the court took the motions under advisement, and upon which it now rules.

FACTUAL BACKGROUND

This case is the most recent installment in over a decade of litigation between the parties, the genesis of which was a failed 2004 investment between plaintiffs, defendants Steve and Lori Conway, and various LLCs in which the Palczuks and the Conways held ownership interests. In 2004, plaintiffs John and Karen Palczuk formed Johns Folly Ocean Villas, LLC ("JFOV"), a real estate development company, with another couple, Richard and Jennifer Heyl ("the Heyls"). JFOV planned to construct and then rent luxury, high-end villas on an oceanfront lot in St. Johns, United States Virgin Islands. Defendants also invested in JFOV in 2004. In 2007, defendants invested in Heyl Partners Station Plaza ("HPSP"), a company owned by Richard Heyl; they later transferred that interest from HPSP to JFOV. Defendants also fulfilled multiple JFOV capital calls in addition to these two investments. Eventually, JFOV failed, and defendants' lost investment in that company forms the basis of their many claims against plaintiffs.

On August 31, 2009, the Heyls filed a chapter 7 bankruptcy petition in the United States Bankruptcy Court for the Eastern District of Missouri ("the Missouri Bankruptcy Court"). Defendants filed an adversary proceeding in that case, seeking to have debts related to the JFOV investment declared nondischargeable. The Missouri Bankruptcy Court entered judgment for the Heyls, after which a series of appeals ensued. Conway v. Heyl, 464 B.R. 867 (Bankr. E.D. Mo. 2012), appeal dismissed, 502 B.R. 337 (B.A.P. 8th Cir. 2013), appeal dismissed, 770 F.3d 729 (8th Cir. 2014). Having failed to prevail at any level, defendants also filed motions to reconsider the decisions of both appellate courts, both of which were denied.²

On August 14, 2017, defendants filed a complaint against the Heyls and plaintiffs in the United States District Court for the Eastern District of Missouri ("2017 District Court Action"), seeking to have the court declare the debt nondischargeable under 11 U.S.C. § 523(a)(19). In their complaint in the 2017 District Court Action, defendants acknowledge the Palczuks' 2011 bankruptcy petition filed in this court, and state further that Palczuks "acknowledged and listed their debt to [the Conways, Lorcon, LLC #1, and Lorcon, LLC #4]." Dkt. 1, Ex. 6 (2017 District Court Action Complaint at ¶ 16. With respect to defendants' claims against the Heyls, the matter was referred to the Missouri bankruptcy court; as to the Palczuks, the claims were dismissed by the district court, with that court specifically noting this bankruptcy court's continuing jurisdiction over the plaintiffs' closed bankruptcy case. Conway v. Heyl, No. 4:17CV2254 (RLW), 2018 U.S. Dist. LEXIS 136133, 2018 WL 3845952, at *3-5 (E.D. Mo. 2018), decision reached on appeal sub nom Conway v. Heyl (In re Heyl), 590 B.R. 898 (B.A.P. 8th Cir. 2018).

Addressing defendants' claims against plaintiffs, the Missouri district court explained that

the Court finds that dismissal of this action as to the Defendants the Palczuks is appropriate. In their motion, the Palczuks assert that an adversary proceeding to determine dischargeability of a debt is a core proceeding falling within the Bankruptcy Court's jurisdiction. Further, they contend that the Bankruptcy Court in the Eastern District of North Carolina retains jurisdiction over the Palczuks' bankruptcy case, and thus the present cause of action is not properly before this court. The [Conways'] response, aside from being untimely, is nonsensical.

Here, [the Conways] admittedly raise a nondischargeability claim related to core bankruptcy proceedings which took place in the Eastern District of North Carolina. Further, closing the bankruptcy case does not deprive the bankruptcy court of jurisdiction, as "[i]t is well established that bankruptcy courts retain jurisdiction after a case has been dismissed or closed to interpret or enforce previously enteredorders." In re AFY, Inc., 571 B.R. 825, 835 (B.A.P. 8 th Cir. 2017). Thus, the Court finds that it lacks jurisdiction over [the Conways'] claims against the Palczuks and will dismiss those claims accordingly.

Id. at *2 (footnote omitted) (emphasis added).

The Missouri bankruptcy court ultimately dismissed defendants' claims against the Heyls. Defendants filed a motion to reconsider the dismissal of these claims against the Heyls, which was denied. Defendants appealed the dismissal to the Bankruptcy Appellate Panel for the Eight Circuit, which affirmed the Missouri bankruptcy court's ruling.³ Conway v. Heyl (In re Heyl), 590 B.R. 898 (B.A.P. 8th Cir. 2018). Defendants again petitioned the panel for a rehearing, which was again denied. Conway v. Heyl (In re Heyl), No. 19-1512, 2019 U.S. App. LEXIS 18157 (8th Cir. 2019).

Meanwhile, back in North Carolina, in 2017 the Conways filed a complaint against plaintiffs with the North Carolina Secretary of State regarding the defendants' investment in JFOV, which ultimately resulted in each plaintiff entering an Alford Plea. Each plaintiff pled guilty to one charge of selling unregistered securities. Defendants sought to ensure that plaintiffs were both charged with and convicted of felony security fraud, and sentenced to pay restitution, in hopes of improving their position. To this end, they opposed the Palczuks' entry of the Alford Pleas and, in their victim impact statement dated July 27, 2018 and presented to Wake County District Court Judge Monica Bousman prior to sentencing, expressed their position as follows:

We don't believe that the current plea here holds the Palczuk's [sic] accountable for their felony crimes, fraudulent actions and illegal behavior.

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