Summary:
Carolina Internet had an oral agreement to pay O’Dell 6.5% of its sales from its largest customer, believing that O’Dell could take that account away. When Carolina Internet filed Chapter 11, however, it did not list O’Dell as a creditor. That failure notwithstanding, O’Dell was aware of the bankruptcy, both as it was being planned and after it was filed. After filing, Carolina Internet continued to pay O’Dell, unlike other unsecured creditors, and belatedly included a budget item for $22,124.66 a month in “sales commissions”, that were discovered by the Creditor’s Committee to have been paid to O’Dell as a “kickback.” The Creditor’s Committee insisted that payments to O’Dell be returned and discontinued, but Carolina Internet, fearing the loss of its primary customer, sought to assume what it alleged was an oral executory contract with O’Dell. Eventually, facing opposition to its plan Carolina Internet indicated that it would not seek assumption of the sales commission with O’Dell. In reality, however, Carolina Internet told O’Dell that once it emerged from bankruptcy, it would be “business as usual” and the commission would resume. Shockingly, once the bankruptcy was complete, Carolina Internet reneged on this “under the table” deal with O’Dell, who then sued in state court for amounts due during and after the bankruptcy. Carolina Internet then re-opened the bankruptcy as brought an action for a discharge violation against O’Dell.
Finding that any obligation that Carolina Internet owed to O’Dell was at best an executory contract and that as such was discharged upon confirmation. Even if there was a “side deal” after the bankruptcy, such a discharge waiver would have to have been, pursuant to 11 sc 1141(d)(4), in writing and approved by the court.
The court also addressed whether the lack of formal notice to O’Dell of the bankruptcy and plan violated his due process rights. Relying on Bosiger v. U.S. Airways, 510 F.3d 442 (4th Cir. 2007) and USA Funds v. Espinosa, 599 U.S. 260 (2010), the bankruptcy court held that notice only needs to be “reasonably calculated under all circumstances to apprise parties of the pendency of an action and afford them the opportunity to present objection.” Id. at 272 (Citing Mullane v. Central Hanover Bank, 339 U.S. 306 (1950)). As such, the court found that the active, albeit secretive, involvement of O’Dell in the bankruptcy constituted sufficient notice to satisfy his due process rights.
Accordingly, the bankruptcy court enjoined O’Dell from continuing his lawsuit against Carolina Internet. The court did express regret that Carolina Internet, whose failure to list O’Dell a creditor and its side deal constituted “fraud on the court”, prevailed in this matter, but it did not award any damages.
Commentary:
This matter has been appealed.
There is, however, no indication on the docket that, despite explicitly stating that Carolina Internet committed fraud against both the court and the financier of the re-organization, the court has referred Carolina Internet, its principals or others involved in this bankruptcy, to the United States Attorney for investigation of whether such parties should be prosecuted for bankruptcy fraud.
For a copy of the opinion, please see:
In re Carolina Internet, Ltd.- Violation of Discharge; Due Process Requirements for Notice
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