Background:
BK Racing, LLC filed for Chapter 11 bankruptcy in 2018. Matthew W. Smith, appointed as trustee and later sole manager of the reorganized debtor, initiated adversary proceedings to recover allegedly fraudulent transfers and address related claims.
The complaint included claims such as fraudulent transfers, civil conspiracy, conversion, stay violations, and turnover of property.
In a pair of appellate decisions issued in January and arising from the bankruptcy of BK Racing, L.L.C., first the District Court for the Western District of North Carolina first denied the Payne's motion to withdraw reference of an adversary proceeding from the bankruptcy court under 28 U.S.C. § 157(d). Shortly thereafter, the Fourth Circuit Court of Appeals affirmed the entry of default judgment against Ronald C. Devine, Brenda S. Devine, and several related trusts and corporate entities for discovery abuses and misconduct during bankruptcy and adversary proceeding, including $31,094,099.89 in damages, costs, and attorneys' fees.
Summary of Smith v. Payne:
Payne sought to withdraw the reference, citing the need for a jury trial, the non-core nature of the claims, and the bankruptcy court's limited jurisdiction over state law causes of action. Under 28 U.S.C. § 157(d), in considering whether to withdraw reference to a bankruptcy court “for cause shown”, the district court looks to factors such as whether the proceeding is core or non-core, judicial economy, uniform bankruptcy administration, forum shopping, and the preservation of jury trial rights. While the claims were primarily state law-based and considered non-core, this factor alone did not justify withdrawal, as the bankruptcy court, familiar with the long-standing case, was deemed better suited to handle pre-trial proceedings efficiently and uniform administration of the case Nor did the request for a jury trial necessitate immediate withdrawal, as the bankruptcy court could oversee pre-trial matters, with the case returning to the district court for the jury trial if necessary. Accordingly, the court denied the motion to withdraw reference, allowing the bankruptcy court to manage discovery, pre-trial motions, and related proceedings, with the reference will only be withdrawn when the case is ready for trial.
Summary of Smith v. Devine:
The Court of Appeals upheld the finding that, despite multiple warnings and court orders, the Devines engaged in systematic obstruction, including failing to comply with court orders, providing false or incomplete responses, and withholding critical financial documents. After applying the Wilson factors, a default judgment was the only appropriate remedy due to the Devines' bad faith, the significant prejudice caused, the need for deterrence, and the ineffectiveness of lesser sanctions. That judgment included damages for fraudulent transfers and debt assumption transactions, trebled under North Carolina’s Unfair and Deceptive Trade Practices Act. Further, the decision to pierce the corporate veil and impose joint and several liability was justified based on evidence of the entities’ lack of independence and improper use as extensions of the Devines.
Commentary:
See also:
- Bankr. W.D.N.C.: Smith v. DeSeveria- Repayment of Short-Term Loans to Insiders was not a Fraudulent Conveyance
- Bankr. W.D.N.C.: In re BK Racing-
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