Porters Neck Ltd. v. Porters Neck Country Club, Inc. (In re Porters Neck Country Club, Inc.)

628 B.R. 495

IN RE: PORTERS NECK COUNTRY CLUB, INC., Debtor.

Porters Neck Limited, LLC, Plaintiff,

v.Porters Neck Country Club, Inc., Defendant.

Case No. 19-04309-5-SWH

AP No. 20-00002-5-SWH

United States Bankruptcy Court, E.D. North Carolina.

Signed February 19, 2021.

Randolph M. James, Randolph M. James, P.C., James C. Lanik, Thomas W. Waldrep, Jr., Waldrep Wall Babcock & Bailey PLLC, Winston-Salem, NC, George M. Oliver, The Law Offices of Oliver & Cheek, PLLC, New Bern, NC, for Plaintiff.

Alexander C. Dale, Jenna F. Butler, Ward and Smith, P.A., Wilmington, NC, Jason L. Hendren, Rebecca F. Redwine, Benjamin E.F.B. Waller, Hendren Redwine & Malone, PLLC, Raleigh, NC, for Defendant.

ORDER REGARDING MOTION TO DISMISS

Stephani W. Humrickhouse, United States Bankruptcy Judge

The matter before the court in this adversary proceeding is the motion to dismiss filed by the defendant, Porters Neck Country Club, Inc. ("PNCC"), to which plaintiff Porters Neck Limited, LLC ("PNL") filed a response in opposition. A hearing on the motion took place in Wilmington, North Carolina on November 10, 2020, but did not conclude on that date due to a series of unexpected logistical challenges. The hearing was reconvened by video conference on November 12, 2020. At the conclusion of the video hearing, the court dismissed two of the five counts in the complaint: Count 1, based on the Rooker-Feldman doctrine, and Count 5, asserting a claim of constructive trust. The court took the remaining aspects of the motion under advisement. For the reasons that follow, the court will allow the motion to dismiss as to Count 2 (funds not part of the estate) and Count 3 (constructive fraud). The court will conditionally deny the motion to dismiss as to Count 4, which asserts a claim for embezzlement, subject to further briefing by the parties, as is set out below.

PROCEDURAL HISTORY

PNCC filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on September 19, 2019. On Schedule E/F, PNCC listed a disputed debt in an unknown amount arising out of a lawsuit filed by PNL against PNCC on August 4, 2014, in New Hanover County Superior Court. Dkt. 24. At issue in that lawsuit (the "State Court Action") were PNL's claims for breach of contract, recovery of property, injunctive relief, unfair and deceptive trade practices, and punitive damages, arising from what PNL alleges to be PNCC's unlawful retention of PNL's share of the proceeds from PNCC's sale of PNL's memberships in Porters Neck Country Club.

In its complaint, PNL alleges that "[i]n blatant violation of the 2004 Turnover Agreement and subsequent amendments thereto, Defendant unilaterally stopped paying Plaintiff for the sale of Plaintiff's memberships in the Club. At the time of doing so, Defendant told Plaintiff that Defendant was escrowing Plaintiff's proceeds in the law firm trust account of Gary Shipman of Shipman & Wright, LLP." Complaint, ¶ 22 (Dkt. 1). PNL goes on to recount the nature of the numerous hearings conducted and discovery undertaken in the State Court Action, as well as the specifics of certain particularly significant orders entered by the state court judges. Id. at ¶¶ 23-28 & Exs. D-J. These include but are not limited to the order entered by Judge Gorham on August 20, 2019 (the "Sanctions Order"), which granted sanctions against PNCC for, among other things, violations of the court's discovery orders. As PNL recites in its complaint:

Those sanctions included the extraordinary remedy of: (i) dismissing with prejudice and striking Defendant's Answer, Affirmative Defenses, and Counterclaim; (ii) granting judgment as to liability on Plaintiff's claims in favor of Plaintiff; (iii) ordering "all of the subject escrowed funds held by Defendant" to be immediately released and paid to Defendant within thirty days of entry of the order; (iv) leaving issues related to any and all claims of recovery by Plaintiff for trial including all damages, sanctions, interest, and/or attorneys' fees and costs that Plaintiff may be entitled [sic]; and (v) retaining ‘jurisdiction to determine future matters and preside over all aspects of this action as the undersigned deems warranted.’

Id. ¶ 25d. PNCC moved for reconsideration of the Sanctions Order, which was denied in an order entered on August 27, 2019 (the "Second Sanctions Order"). In the Second Sanctions Order, Judge Gorham wrote that "[t]he Sanctions Order appropriately granted judgment as to liability on Plaintiff's claims. Accordingly, those funds being escrowed by Defendant have been determined as a matter of law to belong to Plaintiff, and Defendant was afforded all necessary and appropriate due process related thereto." Id . (Complaint, Ex. J at 5-6). PNCC appealed both the Sanctions Order and the Second Sanctions Order on September 13, 2019, and it filed its chapter 11 bankruptcy petition on September 19, 2019. Id . ¶¶ 26-29.

With regard to the "escrowed funds," PNL alleged in its complaint that during the debtor's section 341 creditors' meeting on October 24, 2019, PNL learned for the first time that notwithstanding multiple and repeated "representations and assurances to the New Hanover County Superior Court and Plaintiff," in fact, the debtor had "not fully escrowed the proceeds from the sales of Plaintiff's memberships." Instead, PNL alleges,

[a]fter Defendant filed the underlying bankruptcy case, Plaintiff also learned (during the aforementioned 341 meeting) that Defendant took the funds that were in the trust account of Shipman & Wright, LLP – approximately $518,614.99 – and deposited them into Defendant's operating account on or about April 15, 2019. The aforementioned escrowed funds were used for Defendant's general business operations. The withdrawal and spending of the funds held in the Shipman & Wright, LLP firm trust account was done without the knowledge or consent of Plaintiff, nor with any notice whatsoever to the Plaintiff or the Court in the Breach Lawsuit and in direct contravention of the countless representations by the Defendant, its agents, officers, deponents and attorneys.

On or about August 27, 2019, Defendant re-deposited $518,614.99 into the Shipman & Wright, LLP firm trust account.

Id. ¶¶ 31-33 (internal paragraph numbering omitted). In other words, PNL contends that at the time the Sanctions Order was entered, there were no sales proceeds in the Shipman & Wright, LLC trust account, having been withdrawn months before and used by PNCC for general business operations. Again according to PNL, PNCC subsequently made a deposit¹ into the trust account in an amount equal to the sum it previously had withdrawn, which it did on or around the date the Second Sanctions Order was entered.

In its bankruptcy case, on October 2. 2019, PNCC filed a Notice of Disputed Claim related to PNL's claim arising from the sanctions order in the State Court Action. Bkcy. Dkt. 22. On January 2, 2020, PNL initiated this adversary proceeding, asserting five claims for relief:

Count 1: The Sales Proceeds From the Sale of Plaintiff's Memberships Are Not Property of Defendant's Bankruptcy Estate (Rooker-Feldman doctrine)

Count 2: The Sales Proceeds From the Sale of Plaintiff's Memberships Are Not Property of Defendant's Bankruptcy Estate ( 11 U.S.C. § 541 )

Count 3: Constructive Fraud

Count 4: Embezzlement ( N.C. Gen. Stat. § 14-90 )

Count 5: Constructive Trust

In its motion to dismiss the complaint, PNCC seeks dismissal of all five counts for failure to state a claim upon which relief may be granted pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable here by Federal Rule of Bankruptcy Procedure 7012. The court turns now to the merits of the motion.

DISCUSSION

In ruling on a motion to dismiss for failure to state a claim, the court accepts as true the factual allegations in the plaintiff's complaint, and construes those facts in the light most favorable to the plaintiff. Dismissal of a cause of action is appropriate "only if it appears beyond doubt that the plaintiff ... can prove no set of facts in support of [the] claim that would entitle [plaintiff] to relief." Jackson v. Blue Dolphin Commc'ns of N.C. , 226 F. Supp. 2d 785, 788-89 (W.D.N.C. 2002). Put another way, "[t]o survive a motion under Fed. R. Civ. P. 12(b)(6), a complaint need only outline a recognized legal or equitable claim which sufficiently pinpoints the time, place, and circumstances of the alleged occurrence and which, if proven, will justify some form of relief." Id. at 789. The complaint "should not be dismissed unless it clearly appears that plaintiff can show no set of facts which would entitle him to relief." DirecTV, Inc. v. Tolson , 498 F. Supp. 2d 784, 800 (E.D.N.C. 2007).

That standard does not extend, however, so far as to require the court to "accept the legal conclusions drawn from the facts [or] ... unwarranted inferences, unreasonable conclusions, or arguments." Id. (quoting Eastern Shore Mkts., Inc. v. J.D. Assocs. Ltd. P'ship , 213 F.3d 175, 180 (4th Cir. 2000) ). Instead, the court may "eliminate actions that are fatally flawed in their legal premises." Id . (quoting Parham v. Pepsico, Inc ., 927 F. Supp. 177, 178 (E.D.N.C. 1995) ). And, in construing claims that arise under state law, it is well established that the court applies North Carolina substantive law. The " ‘basic federal rule’ in bankruptcy is that state law governs the substance of claims."

Raleigh v. Illinois Dept. of Revenue , 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) ; see also Butner v. United States , 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979) (noting that property interests "are created and defined by state law"). The court will address each of the five claims in turn.

I. Count 1: The Sales Proceeds From the Sale of Plaintiff's Memberships Are Not Property of Defendant's Bankruptcy Estate (Rooker-Feldman doctrine)

PNL argues that this court has no jurisdiction to determine the liability of the debtor to PNL under the Subscription...