Summary:
The Trustee brought an adversary proceeding against Calvin Phelps and his wife, Lisa Yamaoka, challenging numerous transfers and payments that were made by Renegade Holdings of approximately $8 million to or for the benefit of the Phelps prior to the bankruptcy filing, obtaining an order for a levy on their tangible and intangible personal property, specifically of pertinence in the instant case for Writs of Garnishment served on Branch Banking and Trust Company ("BB&T") and Bank of the Carolinas ( "BOC") . Eventually, the Trustee and the Phelps reached a settlement, whereby the Phelps could retain certain property, with the remainder of the assets to be received by the Trustee. This provided that the Trustee would retain $174,949.71 held in a BB&T Tax Escrow Account and that the Phelps would retain the first $25,000 in the “BOC Accounts.” When $103,764 was subsequently discovered in BOC safety deposit boxes (all parties apparently agree me that no one was aware that these funds were in the safety deposit boxes) the Trustee argued that this was included in the “BOC Accounts”, equating it with a “bank account”.
The bankruptcy court rejected this interpretation, finding that as the settlement was unambiguous regarding the definition of the term “bank account”, which, under the definitions in both Black's Law Dictionary and N.C.G.S. § 25-4-104(a)(1), are comprised of monetary deposits and serve to create a debtor-creditor relationship between the depositor and the bank. Safe deposit boxes, however, do not create such a relationship and instead are “rental contracts under which the customer rents or leases a receptacle made available by the bank for use without any record required as to the contents that may be placed in the box by the customer.” See In re Estate of Schmidt, 119 A.2d 786 (N.J. Super. Ct . Prob . Div. 1956). As such, the settlement was not open to judicial construction and the court could look to extrinsic evidence beyond the terms of the contract to determine the intentions of the parties. Walton v, City of Raleigh, 467 S.E.2d 410, 411 (N.C. 1996); Schenkel & Shultz, Inc. v. Fox & Assoc., 658 S.E.2d 918, 921 (N .C. 2008) .
That notwithstanding, the bankruptcy court found that reformation of the settlement agreement was appropriate to allow the Trustee to take possession of the funds. Under North Carolina law, “[r]eformation is a well-established equitable remedy used to reframe written instruments where, through mutual mistake or the unilateral mistake of one party induced by the fraud of the other, the written instrument fails to embody the parties' actual, original agreement." Metropolitan Prop. and Cas . Ins. Co . v. Dillard, 487 S.E.2d 157, 159 (N.C. Ct. App . 1997). Under the broad language of the Settlement Agreement, the levy and attachment extended to and included the contents of the safe deposit boxes at BOC in the names of the Phelps and they were to retain certain specified assets, including up to $25,000 held at BOC. Consistent with the settlement, the Trustee was then to receive the rest of the cash, as no one was aware of the existence of these funds. There was no waiver by the Trustee as such requires an “the intentional relinquishment of a known right and may occur where one with ‘full knowledge of the material facts, does or forebears the doing of something inconsistent with the existence of the right.’” Quoting McNally v . Allstate Ins. Co., 544 S.E. 2d 807 (N.C. Ct. App. 2001).
Commentary:
I get excited if I find a $5 bill in a pair of shorts that I have not worn since last summer. Finding more than a $100,000 that had been forgotten would be astonishing. It would seem that the Phelps were in a bit of a Catch-22 regarding these funds- without knowledge of their existence, they could not successfully argue that the Settlement Agreement allowed them to retain those funds. If, however, they had been aware of these funds, they would likely have faced greater difficulties for failing to disclose assets.
For a copy of the opinion, please see:
Renegade Holdings v Phelps
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