Court Opinion

ID: 4023954
Source: CourtListenerOpinion
Date Created: 2016-08-12 19:00:54.940302+00
Date Added: 2024-06-11T07:45:03.953992
License: Public Domain

UNPUBLISHED

                    UNITED STATES COURT OF APPEALS
                        FOR THE FOURTH CIRCUIT

                              No. 15-1669

In Re: PROVINCE GRANDE OLDE LIBERTY,         LLC,   a/k/a   Silver
Deer Olde Liberty AA Lots, LLC,

                 Debtor.

------------------------------

PEM ENTITIES LLC,

                 Appellant,

           v.

PROVINCE GRANDE OLDE LIBERTY, LLC,

                 Defendant,

           and

ERIC M. LEVIN; HOWARD SHAREFF,

                 Creditors - Appellees.

Appeal from the United States District Court for the Eastern
District of North Carolina, at Raleigh.     James C. Dever III,
Chief District Judge. (5:14-cv-00889-D; 8:13-01563; 8:13-00122)

Argued:   May 10, 2016                      Decided:   August 12, 2016

Before GREGORY, Chief Judge, TRAXLER, Circuit Judge, and Joseph
F. ANDERSON, Jr., Senior United States District Judge for the
District of South Carolina, sitting by designation.
Affirmed by unpublished per curiam opinion.

ARGUED: John Arlington Northen, NORTHEN BLUE, LLP, Chapel Hill,
North Carolina, for Appellant.    James C. White, LAW OFFICE OF
JAMES C. WHITE, P.C., Chapel Hill, North Carolina, for
Appellees. ON BRIEF: Vicki L. Parrott, John Paul H. Cournoyer,
NORTHEN BLUE, LLP, Chapel Hill, North Carolina, for Appellant.
Michelle M. Walker, LAW OFFICE OF JAMES C. WHITE, P.C., Chapel
Hill, North Carolina, for Appellees.

Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:

        PEM    Entities,       LLC    (“PEM”)         appeals       the    district       court’s

order affirming the bankruptcy court’s grant of summary judgment

in    favor    of   Eric     M.     Levin    and       Howard       Shareff      (“Appellees”).

Specifically,            PEM         contests            the         bankruptcy           court’s

recharacterization             of    certain          debt      into      equity.      For     the

following reasons, we affirm the decision of the district court.

                                                 I.

       This case arises out of several North Carolina real estate

investments         involving        Howard       Jacobsen          (“Howard”).       Lakebound

Fixed    Return      Fund,     LLC    (“Lakebound”)            is    a    company     formed    to

invest in real estate and provide a fixed, high-yield return to

its     investors.       Lakebound          is       managed        by    Howard.     Appellees

invested $500,000.00 each into Lakebound. Province Grande Olde

Liberty, LLC (“Debtor”) is an entity formed by Howard for the

purpose       of   acquiring        the   Olde       Liberty     Golf      and    Country    Club

(“Golf Club”), a golf and residential real estate development in

Franklin       County,     North      Carolina.         Debtor’s         membership      included

Howard, his parents—Stanley and Rhonda Jacobsen—and Robert B.

Conaty.

       To     finance      the      acquisition         of     the       Golf    Club,     Debtor

obtained $188,000.00 from Lakebound and borrowed $6,465,000.00

from     Paragon      Commercial          Bank        (“Paragon”).         The    transfer      of

$188,000.00 from Lakebound to Debtor is the subject of ongoing

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litigation in North Carolina state court and provides a basis

for Appellees claims in the underlying bankruptcy proceeding.

Specifically,         Appellees          contend          that        this     transfer        was    a

misappropriation         of       Lakebound’s        funds.          The     $6,465,000.00          loan

from    Paragon       was    an     arms-length           transaction          evidenced         by   a

promissory note and secured by a deed of trust on the Golf Club

property.

       In     2010,    Debtor        defaulted            on     the       Paragon       loan.       The

following year, Paragon initiated foreclosure proceedings on the

real    estate    security.         In     an   effort          to    resolve      the    loans       to

Debtor and other entities, Howard, Debtor, and several other

related       entities       entered       into       a    settlement             agreement         with

Paragon.      Under     that       agreement,         Paragon          agreed       to    sell       its

$6,465,000.00 loan to a new company, PEM, for the discounted

price    of    $1,242,000.00.            PEM    is   a     Delaware          company,     owned       by

Stanley Jacobsen – Howard’s father, Robert B. Conaty, and an

entity owned by trusts established by Stanley Jacobsen for the

benefit of his grandchildren (“the Trust”).

        Importantly, PEM’s members did not negotiate the settlement

agreement.       Rather,           Debtor’s          principals,             including         Howard

Jacobsen,      negotiated          the    agreement            that    purported         to    be    “in

settlement       of    the        Loan.”       Paragon         understood          that       Debtor’s

principals       had        the    authority          to       bind        PEM.    Further,          the

settlement agreement bound Paragon to sell the loan to PEM for a

                                                 4
fixed price and even included an outline of the financing of the

loan’s     purchase.         PEM,        however,        was     not    a     signor        of    the

settlement agreement.

     To     fund      the    loan        purchase       provision       of      the   settlement

agreement, PEM used both equity contributions from its members

as   well        as    outside           debt.         Stanley     Jacobsen           contributed

$130,000.00,          Conaty     contributed            $100,000.00,          and     the        Trust

contributed        $70,000.00.           Together,         these       three      contributions

totaled $300,000.00.

     PEM     relied         on   financing         to     assemble        the     remainder        of

purchase    price.       Two     individuals,            Joseph    Deglomini          and    Joseph

Simone      (collectively                “D&S”),          loaned        PEM         $650,000.00.

Additionally, Paragon agreed to loan PEM the final $292,000.00,

interest free, needed to complete the settlement. Both loans

were secured by Golf Club real estate owned not by PEM, but by

Debtor. Finally, PEM agreed to subordinate its position in the

security to the loans from both D&S and Paragon.

     After the completion of the settlement agreement, Debtor

sold some of its property for $462,146.15. From those funds,

Debtor paid $240,120.00 directly to Paragon and D&S in partial

payment     of     the      loans        those     entities        made      to     PEM.     Debtor

transferred       $202,087.71            to    PEM.     Shortly    thereafter,          PEM       “re-

advanced”        $50,000.00         to        Debtor     for     miscellaneous         operating

expenses. At no time did PEM or Debtor maintain any ledger or

                                                  5
account of the Paragon loan. Several other cash transfers went

between Debtor and PEM and Howard sometimes called “loans” and

other times “readvances.”

       Debtor filed its bankruptcy petition on March 11, 2013. In

that filing, it listed PEM’s claim at $7,000,000, including the

principal      from        the     Paragon         loan     and      accrued       interest.

Additionally, it listed Appellees as creditors with unknown and

disputed      claims.       Appellees         filed        claims    in     the        Debtor’s

bankruptcy proceeding in the amount of $500,000.00 each. They

made claims for equitable subordination and recharacterization

and    also    statutory         claims       for    avoidance        and    recovery       of

allegedly fraudulent transfers. The parties moved for summary

judgment on all claims.

       The bankruptcy court granted summary judgment in favor of

Appellees      on    their       equitable          claim    of     recharacterization.

Specifically, the bankruptcy court concluded that the PEM’s loan

purchase was, in effect, a settlement and satisfaction of the

Paragon loan. The court recharacterized the $300,000.00 portion

of    the   $1,242,000.00        paid    by    PEM    pursuant       to    the    settlement

agreement     from     a    debt     owed      it     by    Debtor        into    an     equity

investment      in      Debtor.         Thus,        the     court        rendered       PEM’s

$7,000,000.00 claim void.

       PEM appealed the bankruptcy court’s order to the United

States      District       Court    for       the    Eastern        District      of     North

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Carolina. In its de novo review, the district court found the

bankruptcy   court    correctly     applied   the    law    and    affirmed      its

judgment. PEM timely filed its Notice of Appeal to this Court.

                                       II.

                                       A.

      Recharacterization is well within the broad powers afforded

a   bankruptcy   court.   In    re:    Official     Committee      of    Unsecured

Creditors for Dornier Aviation (North America), Inc., 453 F.3d

225 (2006). The Bankruptcy Code establishes a scheme in which

contributions to capital receive a lower priority than loans

because their nature is that of a fund contributed to meet the

obligations of a business and which should be repaid only after

all other obligations have been satisfied. Id. at 231. Thus,

adjudication     under    the   Bankruptcy        Code     often    requires      a

determination    of   whether   a     particular    obligation      is    debt    or

equity. Id. When that question is in dispute, the bankruptcy

court must make this determination in order to effectuate the

priority scheme. Id.

      In determining whether or not to recharacterize a claim, a

bankruptcy court should apply the eleven factors adopted by this

Court in Dornier:

      (1) the names given to the instruments, if any,
      evidencing the indebtedness; (2) the presence or
      absence of a fixed maturity date and schedule of
      payments; (3) the presence or absence of a fixed rate
      of interest and interest payments; (4) the source of

                                        7
      repayments;   (5)  the   adequacy  or   inadequacy  of
      capitalization; (6) the identity of interest between
      the creditor and the stockholder; (7) the security, if
      any, for the advances; (8) the corporation’s ability
      to obtain financing from outside lending institutions;
      (9) the extent to which the advances were subordinated
      to the claims of outside creditors; (10) the extent to
      which the advances were used to acquire capital
      assets; and (11) the presence or absence of a sinking
      fund to provide repayments.

Id. at 233 (quoting Bayer Corp. v. Masco Tech, Inc. (In re

AutoStyle     Plastics,    Inc.),    269       F.3d   726,    747-48   (6th    Cir.

2001)). None of these eleven factors are themselves dipositive.

Id. at 234. Rather, their significance varies depending upon the

circumstance. Id.

                                          B.

      In   this   case,   the   bankruptcy       court   weighed   each   of    the

Dornier factors in analyzing the settlement agreement. The court

found that all of them weighed in favor of recharacterization.

The court emphasized several facts in drawing its conclusion:

(1) the naming of the settlement agreement and the fact that it

was entered into “in settlement of the loan”; (2) the fact that

Debtor’s principals negotiated the settlement agreement and note

purchase on behalf of PEM; (3) the failure of both Debtor and

PEM to observe any formalities such as payment schedules, actual

interest payments or even a ledger; (4) Debtor’s total reliance

on money from PEM to meet expenses and its inability to obtain

any   other   financing;    (5)     the       identity   of   interests   between

                                          8
Debtor and PEM; and (6) that approximately $900,000.00 of the

$1,242,000.00         was    funded       by   the     pledge      of   security    owned    by

Debtor. These facts adequately support the bankruptcy court’s

decision.

       PEM    contends        that     the     bankruptcy          court    misapplied      the

Dornier factors by applying them to the wrong transaction. PEM

argues       that     the     bankruptcy        court       should      have     limited    its

analysis to the inception of the Paragon debt rather than to the

later settlement agreement. Thus, according to PEM, we should

apply the Dornier factors to the situation at the time Paragon

made the loan to Debtor. We find this argument unpersuasive.

       The    bankruptcy       court’s         broad       recharacterization       power    is

“integral to the consistent application of the Bankruptcy Code.”

Dornier, 453 F.3d at 233. “A bankruptcy court’s equitable powers

have     long       included        the    ability         to   look       beyond   form     to

substance.” Id. at 233. The recharacterization decision itself

rests on the “substance of the transaction” involved. Id. at 232

(emphasis in original).

       Here, the settlement agreement is the “substance of the

transaction” because it was the basis of the note purchase and

gave     rise       the     PEM’s    claims.         The     settlement        agreement    was

negotiated      and       executed        by   Paragon       and    Debtor’s      principals.

While PEM notes that it was neither a party to nor a signor of

the settlement agreement, Paragon believed Debtor’s principals

                                                 9
had the authority to bind PEM. Further, the settlement agreement

specifically obligated Paragon to sell the loan to PEM. Indeed,

the settlement agreement specifically outlined the sources of

PEM’s     funding.         It   even      obligated        Paragon     to     loan       PEM

$292,000.00.         Clearly,     PEM     knew       of,     participated      in,       and

consented to those terms. While PEM itself may not have been

obligated by the settlement agreement, the settlement agreement

certainly obligated Paragon towards PEM.

      Thus, the bankruptcy court properly “looked beyond form” to

determine that the “substance of the transaction” was in fact

the     settlement        agreement     in    which    Debtor     used       PEM    as    an

extension       of    itself     to     complete      what     was,    in     effect,      a

satisfaction         of   the   Paragon      loan.     Moreover,       the    bankruptcy

court’s application of the Dornier factors adequately supported

its recharacterization decision.

                                             C.

      PEM challenges several of the bankruptcy court’s factual

findings. Findings of fact by a bankruptcy court in proceedings

within    its    full      jurisdiction       are    reviewable       only    for    clear

error. In re Johnson, 960 F.2d 396, 399 (4th Cir. 1992). Under

this standard, we will not reverse a bankruptcy court’s factual

finding that is supported by the evidence unless that finding is

clearly wrong. In re ESA Envtl. Specialists, Inc., 709 F.3d 388,

399 (4th Cir. 2013). We will conclude that a finding is clearly

                                             10
erroneous only if, after reviewing the record, we are left with

“a    firm    and        definite       conviction       that      a    mistake        has    been

committed.” Klein v. PepsiCo, Inc., 845 F.2d 76, 79 (4th Cir.

1988) (citation omitted).

      Of the six errors claimed by PEM, none rise to the level of

clear     error.         First,     PEM     challenges            the        court’s       alleged

mischaracterization of both the $300,000.00 contribution by the

members      of    PEM     and    the    relief       requested         by    Appellees.      The

bankruptcy court recharacterized the $300,000.00 portion of the

$1,242,000.00 settlement of the $7,000,000.00 claim or in other

words, exactly the relief sought by Appellees. The court made a

detailed explanation of all the intricate moving parts of this

complex      dispute.       To    the    extent       the   court       failed      to     clearly

explain each moving piece, it was not due to any mistaken fact,

but rather to the unwieldy jargon associated with this type of

litigation.

      Next, PEM contends the court was in error by stating that

Stanley Jacobsen was the sole member of PEM at the time of the

settlement agreement. This fact appears to be incorrect as the

evidence,      discussed         above,     is    that      the    members      of     PEM    were

Stanley Jacobsen, Robert B. Conaty, and the Trust. However, this

minor mistake does not rise to the level of clear error. First,

the   court       made    this    mistake    in       its   recitation         of    undisputed

facts.    Secondly,         the     court    obviously            understood        that     PEM’s

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membership included all three members at all relevant times. In

its analysis of the first Dornier factor, the court specifically

noted   that   these   three   members   were   responsible   for   the

$300,000.00.

     PEM’s four other claims of errors merely reargue the proper

application of the Dornier factors. None constitute clear error.

                                 III.

     For the foregoing reasons, the judgment of the district

court is AFFIRMED.

                                                              AFFIRMED

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