Summary:
The Debtor was the manager and majority member of IYB Properties (“IYB”), where he executed and personally guaranteed a promissory note in favor of Prestige Wealth Management (“Prestige”) for $1.5 million. The Debtor owned an 85% interest in IYB, with Prestige holding 15%, with the purpose of acquiring and developing specific real property to expand the recycling operation owned by the Debtor. The operating agreement provided that IYB could not engage in other business ventures, without the unanimous consent of all owners and all funds were to be held in bank accounts to which IYB, the Debtor and Prestige had access. Through the attorney for IYB, $500,000 was used to purchased the real property, but the remaining proceeds, roughly $1 million and which were to be used for development of the property, were transferred to a bank account controlled solely by IYB, to which Prestige had no access. During the subsequent month, the Debtor transferred the remaining funds to entities in which Prestige had no ownership and, consequently, Prestige notified the Debtor that IYB was in default and the entire balance was due. Prestige then commenced suit against the Debtor, IYB and other entities in Wake County Superior Court seeking injunctive relief and damages for fraud, conversion, breach of fiduciary duty, constructive trust and accounting, and breach of the security instruments. The state court enjoined the Debtor from exercising further management or control over IYB and its assets and financial resources. (A later order expanded this to additional entities and assets controlled by IYB and the Debtor.) Prestige also commenced various collection efforts, including repossessing collateral pledged by the Debtor and IYB, including 450 automobiles, which were crushed and sold as scrap for $235,000.00. In response, the Debtor attempted to circumvent the restraining order through systemic transfers of the remaining loan proceeds and interference with repossession activities, ranging from a lack of cooperation and hiding collateral to firing a gun in the vicinity of a repo man. This lead to the state court finding the Debtor in civil contempt in December 2012, for his “willful, without any justification, and inexcusable” violations, where upon he was imprisoned for 90 days. At a second hearing, the Debtor’s contempt was found to still be on-going, particularly following testimony from the court appointed accountant that the Debtor had failed to maintain adequate books and had, without any legitimate business purpose, keep 36 separate bank accounts, from which non-IYB expenses were paid, and he was ordered to serve an additional 90-days. During this period, the Debtor filed a voluntary Chapter 11 petition. Prestige then sought, pursuant to 11 U.S.C. § 1104 (a), the appointment of a Trustee, which the Debtor opposed.
Starting from the position that the “appointment of a trustee in a chapter 11 case is an extraordinary remedy, and there is a strong presumption in favor of allowing the debtor to remain in possession.” In re Tanglewood Farms, Inc. of Elizabeth City, 2011 WL 606820, at *2 (Bankr. E.D.N.C. Feb. 10, 2011), the bankruptcy court held that an examination of both pre- and post-petition behavior by the Debtor was required, with “isolated instances” of fraud, mismanagement, dishonesty or other misconduct being insufficient, as some such failure exist in nearly every bankruptcy. After contrasting In re Piedmont Center Invs., LLC, 2011 WL 5903398, at *3–4 (Bankr. E.D.N.C. Sept. 8, 2011), where a trustee was appointed as the debtor had been indicted by a federal grand jury of 15 felony counts including bank fraud, false statements and identity theft, with Tanglewood Farms, where the Debtor was allowed to retain control, despite a “fraudulent scheme” that diverted assets. The court then found that the mismanagement and misconduct but the Debtor and IYB, even considering the finding of civil contempt, was a response to the “scorched earth” strategy utilized by Prestige, which could have prevented the Debtor from access to all assets and left him without means of support, and were not sufficient to constitute cause to appoint a trustee. Further, the court held that the costs and burdens of a trustee would exceed the benefits to the estate, especially as current bankruptcy counsel would be able to ensure that the debtor complies with all duties, obligations and reporting requirements of Chapter 11.
For a copy of the opinion, please see:
Bergeron- Appointment of Chapter 11 Trustee
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