Tonthat Inv. Grp., LLC v. Peugh (In re Peugh)

662 B.R. 261

IN RE, Warren Taylor PEUGH, Debtor(s).

Tonthat Investment Group, LLC., Plaintiff(s), v. Warren Taylor Peugh, Defendant(s).

C/A No. 23-02443-EG

Adv. Pro. No. 23-80057-EG

United States Bankruptcy Court, D. South Carolina

Signed September 17, 2024

Jackson Turner-Vaught, Turner Vaught Bankruptcy, LLC, Myrtle Beach, SC, for Debtor.

Michael M. Beal, Beal, LLC, Columbia, SC, for Plaintiff.

ORDER GRANTING MOTION TO RECONSIDER

Elisabetta G. M. Gasparini, United States Bankruptcy Judge.

THIS MATTER is before the Court on the Motion to Reconsider Dismissal of the above captioned adversary proceeding (the "Motion to Reconsider") filed by Tonthat Investment Group, LLC ("Plaintiff") against Warren Taylor Peugh ("Defendant" or "Debtor").¹ Defendant filed a response to the Motion to Reconsider (the "Response"),² to which Plaintiff replied (the "Reply").³ The Court held a hearing on the Motion to Reconsider, after which the Court took the matter under advisement.

The question presented is straightforward: Should the Court reinstate the adversary proceeding after it was dismissed due to the parties' failure to abide to the scheduling order and inquiries of the Court? The particular facts of this case, however, render the decision more difficult. Despite Plaintiff's counsel acknowledging that they "dropped the ball," had Defendant alerted the Court to the settlement that had been reached between the parties—instead of sitting idly by and watching the proceeding derail to its advantage —the Court would not have dismissed the adversary proceeding. Accordingly, under the facts of this case, the Court will not allow its order dismissing the proceeding to stand.

This Court has jurisdiction of this proceeding under 28 U.S.C. §§ 1334 and 157, and the parties previously agreed that the Court has authority to enter a final order or judgment in connection with the proceeding.⁴ Based upon the record before the Court, the arguments of the parties at the hearing, and the pleadings filed, the Court grants the Motion to Reconsider and makes the following findings of fact and conclusions of law:

FACTUAL BACKGROUND

This adversary proceeding arises from a civil judgment granted in Plaintiff's favor against Defendant in relation to fraudulent conduct and other causes of action that may provide grounds for an exception to discharge under 11 U.S.C. § 523. On May 2, 2022, Plaintiff filed a civil action against Defendant and Defendant's business, JBJS, LLC ("JBJS"), after Defendant obtained a business loan from Plaintiff, defaulted on the loan, and sold the collateral securing the loan without turning over the sale proceeds to Plaintiff.⁵ Plaintiff asserted several causes of action against Defendant, including breach of contract, fraud, and unfair and deceptive trade practices. On April 25, 2023, the General Court of Justice for the Superior Court of Mecklenburg County, North Carolina, entered summary judgment on all claims against Defendant after he failed to respond and awarded Plaintiff treble compensatory damages in the amount of $210,600.00 plus post-judgment interest at a rate of 8%.⁶

Defendant filed for Chapter 7 bankruptcy on August 16, 2023, commencing the above-captioned main bankruptcy case. In his Schedule E/F filed with the Chapter 7 voluntary petition, Defendant lists Plaintiff among the creditors with nonpriority unsecured claims against him.⁷

On December 4, 2023, Plaintiff's local counsel ("Local Counsel") filed a motion for Plaintiff's lead counsel ("Lead Counsel") to appear in Defendant's bankruptcy case pro hac vice, which the Court granted on December 11, 2023.⁸ Plaintiff also initiated this adversary proceeding against Defendant on December 4, 2023.⁹ Local counsel was advised by the Clerk's Office that Lead Counsel would need to file notices of appearance in both the main bankruptcy case and the adversary proceeding for him to receive CM/ECF electronic notices of filings in both cases. Local Counsel subsequently filed a notice of appearance and request for notice for Lead Counsel in the main bankruptcy case but not the adversary proceeding.¹⁰

Plaintiff's complaint, as amended on December 15, 2023 (the "Complaint"), sought an exception to discharge for Plaintiff's judgment claim pursuant to 11 U.S.C. § 523(a)(2), (a)(4) and/or (a)(6).¹¹ The Complaint argued that Plaintiff's claim should be excepted from Defendant's § 727 discharge because the underlying debt is for funds obtained by false pretenses, false representation, and actual fraud while Defendant was acting in a fiduciary capacity, causing willful and malicious injury to Plaintiff.¹² Defendant filed an answer to the Complaint on January 4, 2024.¹³ The Court issued its Initial Adversary Proceeding Case Management Order on January 8, 2024, requiring the parties to file an Adversary Proceeding Report, which the parties submitted jointly on January 25, 2024.¹⁴ That same day, the Court entered a Scheduling Order outlining various deadlines for pleadings and discovery, which provided, among other things:¹⁵

To the extent that the parties do not proceed with mediation or to the extent that mediation does not lead to a settlement of all issues in this adversary proceeding and no motions are filed, the parties are hereby Ordered to prepare and file no later than 5:00 PM on June 28, 2024, a Joint Pretrial Order, approved by counsel in writing .... Failure to submit timely a Joint Pretrial Order or Pretrial Order and exhibits may result in the Court's striking the proceeding from its calendar or considering appropriate sanctions.

Scheduling Order ¶¶ 6, 8 (emphasis added).

Although no motions, discovery requests, Joint Pretrial Order, or other pleadings were filed by the deadlines stated in the Scheduling Order, email correspondence filed with Plaintiff's Motion to Reconsider and Defendant's Response shows that the parties were in communication about the case during the time between when the Scheduling Order was issued and when the Joint Pretrial Order was due. According to the emails submitted to the Court, on March 15, 2024, an associate of Plaintiff's Lead Counsel ("Associate") reached out to Defendant's counsel ("Defense Counsel") to discuss the adversary proceeding and indicated that he had an initial settlement offer to convey on Plaintiff's behalf.¹⁶ The Associate followed up with Defense Counsel on April 16, 2024 and provided the terms of Plaintiff's initial offer for a non-dischargeable debt amount that Plaintiff would accept to settle its claim against Defendant.¹⁷ Defense Counsel responded to the Associate on April 22, 2024, rejecting Plaintiff's offer and providing a counteroffer.¹⁸ On May 10, 2024, the Associate countered Defendant's proposal, advised Defense Counsel that he was leaving Lead Counsel's law firm, and asked that future correspondence be directed to Lead Counsel.¹⁹

On May 20, 2024, Defense Counsel emailed Lead Counsel to convey another counteroffer from his client, stating that "[Defendant] is willing to settle this adversary proceeding by agreeing that $80,000 of [Plaintiff's] claim is non-dischargeable and would survive the bankruptcy. The remainder of any claims would be subject to the discharge order."²⁰ On June 12, 2024, Lead Counsel accepted Defendant's May 20th counteroffer by responding: "We have a deal. I will prepare the motion for settlement and settlement agreement for everyone's review."²¹

Uninformed that the parties had reached a settlement, the Court issued an order on July 1, 2024 (the "July 1, 2024 Order") noting the parties' failure to timely file a Joint Pretrial Order by June 28, 2024, as previously ordered, and providing as follows:

[B]y no later than July 9, 2024 at 10:00 a.m., the Plaintiff and Defendant shall file an explanation for the absence of a Joint Pretrial Order, a settlement order concluding this proceeding, or a voluntary dismissal pursuant to Fed. R. Civ. P. 41(a)(1) as made applicable by Fed. R. Bank. P. 7041. To the extent the matter has not been settled, the parties shall also file a Joint Pretrial Order at their earliest convenience, and in no event later than July 9, 2024 at 10:00 a.m., and the Court will then schedule a pre-trial conference at which time it will also address the untimeliness of the Joint Pretrial Order. Upon the failure to comply with this Order, an order dismissing the action will be entered by the Court.²²

(emphasis added). The July 1, 2024 Order was served on Plaintiff by mail, on Defendant by email, and on Local Counsel and Defense Counsel by email CM/ECF notification.²³ On July 2, 2024, Defense Counsel's office emailed Lead Counsel and an associate of Local Counsel inquiring about the settlement documents that Lead Counsel said he would prepare.²⁴ The email also referenced the Court's July 1, 2024 Order. On July 5, 2024, Defense Counsel sent a proposed consent order (the "Consent Order") to Lead Counsel and Local Counsel's associate for review and approval to file with the Court.²⁵ Lead Counsel responded the same day, thanking him and requesting a Word version of the document, which Defense Counsel subsequently provided.²⁶ On July 8, 2024, Defense Counsel followed up with Lead Counsel and Local Counsel's associate, asking when he could expect to receive Plaintiff's approval to file Consent Order with Lead Counsel's typed signature included.²⁷ According to Defendant's Response, Defense Counsel made further attempts to follow up with Lead Counsel before the deadline provided in the Court's July 1, 2024 Order.

Receiving no filings or communication from the parties to chambers by July 9, 2024, the Court entered an order dismissing this adversary proceeding on July 12, 2024 (the "Dismissal Order").²⁸ On the same day the Court entered the Dismissal Order, Plaintiff filed the Motion to Reconsider, which was later amended on July 22, 2024.²⁹ The Motion to Reconsider informed the Court that Defendant and Plaintiff had reached a settlement agreement on June 12, 2024, and were prepared to...