Bledsoe III, Trustee v. Flamingo Properties, LLC

ames

SO ORDERED.

Coes

SIGNED this 23 day of September, 2021.

Agph ane! A. Maa □□□□

StephaniW.Humrickhouse □□□

United States Bankruptcy Judge

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF NORTH CAROLINA

WILMINGTON DIVISION

IN RE:

MICHAEL GENE MUSSELWHITE, CASE NO. 20-00928-5-SWH

DEBTOR. CHAPTER 13

JOSEPH A. BLEDSOE III,

TRUSTEE,

PLAINTIFF,

v. ADVERSARY PROCEEDING

NO. 20-00142-5-SWH

FLAMINGO PROPERTIES, LLC,

FLAMINGO SOUTH, LLC, and

L. BRIAN CHESHIRE,

DEFENDANTS.

ORDER DENYING MOTION TO DISMISS

The matter before the court is the Motion to Dismiss filed by the defendants on

February 11, 2021. Dkt. 9. The defendants filed a Memorandum in Support of the Motion to

Dismiss contemporaneously with the Motion to Dismiss. Dkt. 10. The plaintiff filed a Response

in Opposition to the Motion to Dismiss on March 3, 2021. Dkt. 13. A hearing was held on March 9,

2021 in Wilmington, North Carolina. At the conclusion of the hearing, the court took the matter

under advisement and invited the parties to file post-hearing briefs.

The plaintiff filed a post-hearing memorandum on March 23, 2021. Dkt. 15. The

defendants filed a post-hearing memorandum on March 24, 2021. Dkt. 16. The matter is now ripe

for determination.

BACKGROUND

Michael Gene Musselwhite (the “debtor” or “Musselwhite”) filed a voluntary petition

under chapter 13 of the Bankruptcy Code on March 3, 2020. Joseph A. Bledsoe, III (the “trustee”

or the “plaintiff”) filed this adversary proceeding on December 13, 2020 against Flamingo

Properties, LLC (“Flamingo Properties”), Flamingo South, LLC (“Flamingo South”), and L. Brian

Cheshire (“Cheshire”) (collectively, the “defendants”). The following causes of action are set forth

in the complaint:

(1) Turnover of debt that is property of the estate pursuant to 11 U.S.C. § 542(b) against

Flamingo Properties and Flamingo South,

(2) Avoidance of fraudulent transfers within 6 years of the petition date pursuant to 11

U.S.C. § 544(b)(1), using 28 U.S.C. §§ 3304(a)(1), 3306(a) of the Federal Debt

Collection Practices Act (“FDCPA”) as applicable law, against Flamingo Properties,

(3) Avoidance of fraudulent transfers within 6 years of the petition date pursuant to 11

U.S.C. § 544(b)(1), using 28 U.S.C. §§ 3304(a)(1), 3306(a) of the FDCPA as applicable

law, against Flamingo South,

(4) Avoidance of fraudulent transfers within 10 years of the petition date pursuant to 11

U.S.C. § 544(b)(1), using 26 U.S.C. §§ 6502(a)(1), 6901(a)(1)(A) of the Internal

Revenue Code (“IRC”) and N.C. Gen. Stat. § 39-23.5(a) of the North Carolina Uniform

Voidable Transactions Act (“NC UVTA”) as applicable law, against Flamingo

Properties,

(5) Avoidance of fraudulent transfers within 10 years of the petition date pursuant to 11

U.S.C. § 544(b)(1), using 26 U.S.C. §§ 6502(a)(1), 6901(a)(1)(A) of the IRC and N.C.

Gen. Stat. § 39-23.5(a) of the NC UVTA as applicable law, against Flamingo South,

(6) Recovery of avoided transfers pursuant to 11 U.S.C. § 550(a)(1) against Flamingo

Properties, Flamingo South, and Cheshire,

(7) Recovery of avoided transfers pursuant to 11 U.S.C. § 550(a)(2) against Cheshire, and

(8) Objection to claim of Cheshire pursuant to 11 U.S.C. § 502(d).

The defendants filed a Motion to Dismiss on February 11, 2021 seeking dismissal with prejudice

of the plaintiff’s claims for avoidance and recovery of fraudulent transfers—the second, third,

fourth, fifth, sixth, and seventh claims for relief.

The underlying facts of the transfers at issue have been recited by the Fourth Circuit Court

of Appeals1 as follows:

From 2000 to 2014, Musselwhite ran four Smithfield’s Chicken ‘N Bar-B-Q

restaurants in North Carolina’s New Hanover County with his business partner,

Brian Cheshire. To do this, Musselwhite and Cheshire created two sets of corporate

entities, each of which they initially owned in equal shares: one set owned the

Smithfield’s franchises themselves; another set owned the properties on which the

restaurants operated. The entities that owned the Smithfield’s franchises were

Whiteshire Foods, Inc. (Whiteshire); Leland-Hwy 17, Inc. (Leland); Shallotte-

Hwy 17, Inc. (Shallotte); and Wilmington-17th Street, Inc. (Wilmington). For each

of these respective entities, Musselwhite and Cheshire entered into Franchise

Agreements with MARC [Mid-Atlantic Restaurant Corporation]. And the entities

that owned the properties were Flamingo Properties, LLC, which owned the

Whiteshire and Wilmington properties, and Flamingo South, LLC, which owned

the Shallotte and Leland properties (collectively, the “Flamingo Companies”). For

both of these, Musselwhite and Cheshire entered into ownership agreements with

each other. In short, Whiteshire, Leland, Shallotte, and Wilmington rented their

restaurants’ physical spaces from the Flamingo Companies. Within this scheme,

1 See discussion infra on the Federal Court Action.

Musselwhite managed the restaurants’ day-to-day operations, while Cheshire

managed their finances.

Musselwhite and Cheshire ran these restaurants without incident until 2015. Early

that year, David Harris, a MARC executive, informed them that MARC wished to

operate their franchises itself. Musselwhite and Cheshire agreed with this proposal

and so executed four agreements on behalf of Whiteshire, Leland, Shallotte, and

Wilmington with MARC on February 27, 2015.

A few particulars of these agreements merit mention. First, all four agreements

contained broad release clauses. Among other things, these clauses’ workaday

language released MARC from claims that Whiteshire, Leland, Shallotte, and

Wilmington may have had against it if they accrued on or before February 27, 2015.

These agreements also transformed the companies’ relationships with each other.

As for Shallotte and Leland, they chose to terminate their existing

franchisor/franchisee relationship with MARC when they executed their

“Termination Agreement and Mutual Release” agreements (collectively, the

“Termination Agreements”). J.A. 334, 340. Yet Whiteshire and Wilmington took a

different tack. They executed “Franchise Agreement Amendment” agreements that

only modified—not terminated—their existing Franchise Agreements with MARC

(collectively, the “Amendment Agreements”), extending their

franchisor/franchisee relationship until December 31, 2017, about a year and a half

longer than originally planned. J.A. 346, 352.

And the Amendment Agreements worked one other noteworthy change. Under

these agreements, Whiteshire and Wilmington would retain their franchise rights

until August 2015, when they would turn them over to MARC. In exchange, MARC

would continue to lease the physical space from the Flamingo Companies for a few

years. Once these leases were up, MARC could choose to buy the properties

themselves from Whiteshire and Wilmington for a substantial sum. Put otherwise,

these Amendment Agreements were lucrative for Whiteshire and Wilmington, and

thus for Musselwhite and Cheshire, twice over—offering both a lucrative income

stream and an even more lucrative potential payout.

But around when these changes were made, Musselwhite and MARC’s relationship

deteriorated. As MARC puts it, Musselwhite mismanaged the restaurants, resulting

in not only declining sales but also unsanitary conditions. In fact, Musselwhite’s

behavior prompted the four agreements, MARC says. Tensions boiled over around

May 23, 2015, when Musselwhite and Harris fought at the Whiteshire restaurant.

Harris, who Musselwhite says stands at over six feet tall and regularly carries a

pistol, arrived at that restaurant and began disparaging Musselwhite’s managerial

acumen and threatening to terminate both the Whiteshire and Wilmington

Franchise Agreements—and ultimately physically barred Musselwhite from the

restaurant’s premises. And Harris’s threat apparently came to pass: A few days

later, on May 26, 2015, MARC terminated its Franchise Agreements with

Whiteshire and Wilmington by letters. In these letters, MARC cited the restaurants’

unprofitability, their unsanitary conditions, and other operational deficiencies as its

reasons for terminating the agreements.

This fracas irreparably changed Musselwhite and Cheshire’s relationship too. As

Musselwhite tells it, Harris began pressuring Cheshire to end his business

ventures—that is, his co-ownership of Whiteshire and Wilmington—with

Musselwhite, claiming that Musselwhite ineptly managed those restaurants. What’s

more, MARC also claimed that the Amendment Agreements—and their benefits—

would not survive if Musselwhite remained a co-owner of the Flamingo

Companies. Cheshire then spoke to Musselwhite and explained that they would

receive “nothing” unless Musselwhite divested himself from the Flamingo

Companies “on paper.” J.A. 19. So, three days after MARC ended its relationship

with Whiteshire and Wilmington, Cheshire bought out Musselwhite’s share in the

Flamingo Companies for $375,000 (hereinafter, the “Buyout Agreement”).

Musselwhite v. Mid-Atl. Rest. Corp., 809 Fed. App’x 122, 123-25 (4th Cir. 2020) (unpublished)

(per curiam).

The plaintiff alleges that in the agreements dated March 29, 2015, the debtor transferred

all of his membership interests in Flamingo Properties and Flamingo South back to the respective

LLCs. As a result of these assignments, Cheshire became the 100% owner and single member of

the Flamingo Companies. The plaintiff contends that the assignment of the debtor’s membership

interest in Flamingo Properties (the “Flamingo Properties Transfer”) and the assignment of the

debtor’s membership interest in Flamingo South (the “Flamingo South Transfer”) are avoidable

pursuant to 11 U.S.C. § 544(b)(1) and seeks a monetary judgment against the defendants in the

amount of the value of the avoided transfers, plus pre-judgment interest.

Musselwhite and the defendants have been involved in other litigation relating to the same

underlying facts of these causes of action. On January 26, 2016, Musselwhite filed an action in the

Superior Court Division of New Hanover County, North Carolina against all three defendants

named in this action for breach of contract, specific performance, fraud and misrepresentation,

constructive fraud, breach of fiduciary duty, unjust enrichment, constructive trust, unfair and

deceptive trade practices, notice of lis pendens, and breach of implied covenant of good faith and

fair dealing (the “State Court Action”).

On July 2, 2016, Flamingo Properties and Flamingo South’s motion to dismiss all claims

against those two defendants was allowed. Cheshire filed an answer and counterclaim asserting

the affirmative defenses of accord and satisfaction/release, estoppel, waiver, failure to mitigate,

and offset, and asserted a counterclaim against the debtor for breach of contract and breach of

fiduciary duty. Musselwhite filed an amended complaint asserting additional claims against

Cheshire for fraud in the inducement, mutual mistake, unilateral mistake, and substantive and

procedural unconscionability.

A trial was held in the State Court Action on February 12, 2018. At the close of

Musselwhite’s evidence, the court granted Cheshire’s motion for directed verdict and dismissed

Musselwhite’s claims with prejudice. Dkt. 10, Ex. X. The trial court concluded that the fraud, fraud

in the inducement, and misrepresentation claims failed because Musselwhite did not rely on

Cheshire’s statements but instead relied on the statements of Harris. Dkt. 10, Ex. X. The following

day, Cheshire voluntarily dismissed his counterclaims. Musselwhite appealed the order dismissing

the claims to the North Carolina Court of Appeals, and on July 2, 2019, the North Carolina Court

of Appeals affirmed. Musselwhite v. Cheshire, 831 S.E.2d 367 (N.C. Ct. App. 2019).

While the appeal was pending in the State Court Action, on May 23, 2018, Musselwhite,

on behalf of himself and Whiteshire Foods Inc., Leland-Hwy. 17 Inc., Shallotte-Hwy. 17 Inc., and

Wilmington-17th Street, Inc., filed a complaint against Mid-Atlantic Restaurant Corporation

(“MARC”), Cary Keisler, Inc., SCNB, Inc., Gregory Moor, Smithfield’s of Smithfield, Inc.,

Smithfield’s of Clayton, Inc., David Harris, Cheshire, Flamingo Properties, and Flamingo South

in the United States District Court for the Eastern District of North Carolina for tortious

interference with contract, breach of contract, breach of implied covenant of good faith and fair

dealing, breach of fiduciary duty, fraud, constructive fraud, unjust enrichment, negligent

misrepresentation, unfair and deceptive trade practices, violation of RICO, violation of Sherman

Antitrust Act and the Clayton Act, and civil conspiracy (the “Federal Court Action”). The plaintiffs

in that case filed an amended complaint asserting no claims against Cheshire but asserting

additional claims against the other defendants for negligent infliction of emotional distress and

intentional infliction of emotional distress.

The Federal Court Action was dismissed by order entered on October 29, 2018. Dkt. 10,

Ex. BB. The district court found that Musselwhite was collaterally estopped from bringing claims

of tortious interference and civil conspiracy against defendant Harris and that the other claims

brought by the plaintiffs all arose prior to February 27, 2015 and thus were barred by the release

language in the termination agreements. Dkt. 10, Ex. BB.

Musselwhite appealed the dismissal to the Fourth Circuit Court of Appeals. On April 15,

2020, in an unpublished opinion, the Fourth Circuit reversed the dismissal of the Federal Court

Action and remanded. Musselwhite v. Mid-Atl. Rest. Corp., 809 F. App’x 122 (4th Cir. 2020)

(unpublished) (per curiam). In part, the Fourth Circuit concluded that Musselwhite was not

collaterally estopped from bringing a tortious interference with contract claim against MARC. Id.

at 130. The Fourth Circuit found that although the “state-court judgment conclusively answers

whether Cheshire fraudulently induced Musselwhite to enter the Buyout Agreement or otherwise

wrongfully lied to him while buying out his stakes in the Flamingo Companies[,] it does not

conclusively answer whether MARC, through Harris, acted maliciously in any way.” Id. at 129.

The Federal Court Action is presently pending in the United States District Court for the Eastern

District of North Carolina.

DISCUSSION

I. Standard of Review

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, as made applicable to this

adversary proceeding through Rule 7012 of the Federal Rules of Bankruptcy Procedure, a party

may move to dismiss a complaint for failure to state a claim upon which relief may be granted.

“The purpose of a Rule 12(b)(6) motion is to test the sufficiency of a complaint.” Edwards v. City

of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999) (citing Republican Party v. Martin, 980 F.2d 943,

952 (4th Cir. 1992)). A pleading must contain “a short and plain statement of the claim showing

that the pleader is entitled to relief.” Fed. R. Civ. P. 8(a); Fed. R. Bankr. P. 7008. The complaint

must contain sufficient factual matter that when accepted as true, “state[s] a claim to relief that is

plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.

Twombly, 550 U.S. 544, 570 (2007)).

II. The Rooker-Feldman doctrine, res judicata, and collateral estoppel

As a threshold matter, the defendants argue that this court lacks the ability to hear the

fraudulent transfer claims under either the Rooker-Feldman doctrine or under related preclusion

principles of res judicata and collateral estoppel because the factual allegations have been

completely litigated to a final judgment in the state court.

Under the Rooker-Feldman doctrine, lower federal courts are precluded “from exercising

appellate jurisdiction over final state-court judgments.” Thana v. Bd. of License Comm’rs for

Charles Cnty., Md., 827 F.3d 314, 319 (2016) (quoting Lance v. Dennis, 546 U.S. 459, 463 (2006)).

The Rooker-Feldman doctrine arises from federal jurisdictional statutes and “stands for the

unremarkable proposition that federal district courts are courts of original, not appellate

jurisdiction.” Gruntz v. Cnty. of Los Angeles (In re Gruntz), 202 F.3d 1074, 1078 (9th Cir. 2000).

The doctrine is limited to “cases brought by state-court losers complaining of injuries caused by

state-court judgments rendered before the district court proceedings commenced and inviting

district court review and rejection of those judgments.” Exxon Mobil Corp. v. Saudi Basic Indus.

Corp., 544 U.S. 280, 284 (2005). It does not override or supplant preclusion doctrines or allow

federal courts to stay or dismiss proceedings in deference to state court actions. Id.

The Ninth Circuit has recognized that final state court judgments are not always preclusive

in bankruptcy courts. Gruntz, 202 F.3d at 1079. “[B]ankruptcy courts are empowered to avoid state

judgments, see, e.g., 11 U.S.C. §§ 544, 547, 548, 549; to modify them, see, e.g., 11 U.S.C. §§ 1129,

1325; and to discharge them, see, e.g., 11 U.S.C. §§ 727, 1141, 1328.” Id. This does not mean that

the Rooker-Feldman doctrine never applies in bankruptcy proceedings, but rather that “Rooker-

Feldman does not allow a state court to interfere with the core administrative functions of an

operative bankruptcy.” Id. at 1084.

Although the underlying facts of this adversary proceeding and the state court litigation

may be the same, the plaintiff is not asking this court to review a final state court judgment. The

state court judge ultimately found that Musselwhite had no cause of action for breach of contract,

specific performance, fraud and misrepresentation, constructive fraud, breach of fiduciary duty,

unjust enrichment, constructive trust, unfair and deceptive trade practices, notice of lis pendens,

or breach of implied covenant of good faith and fair dealing against Flamingo Properties, Flamingo

South, or Cheshire. That judge also found that Musselwhite did not have any cause of action

against Cheshire for fraud in the inducement, mutual mistake, unilateral mistake, and substantive

and procedural unconscionability.

The causes of action in this adversary proceeding are substantively different from those

brought in the State Court Action. The claims at issue are bankruptcy-specific causes of action

created by §§ 544(b)(1) and 550 of the Bankruptcy Code. No judgment was rendered in the State

Court Action regarding the avoidance and recovery of fraudulent transfers. By hearing these

fraudulent transfer claims, this court is in no way reviewing the state court’s judgment on the other

causes of action. The limited nature of the Rooker-Feldman doctrine does not strip this court of

jurisdiction to hear claims under §§ 544 and 550 of the Bankruptcy Code, and the court finds that

the Rooker-Feldman doctrine has no application to this adversary proceeding.

The defendants also argue that either res judicata or collateral estoppel precludes the court

from hearing the fraudulent transfer claims. The defendants argue that Musselwhite had a full and

complete opportunity to litigate his claim involving the alleged unconscionability of the agreement

and the alleged disparity between the net value of the real property owned and what Musselwhite

would receive under the Agreement. For the reasons below, the court finds that neither of these

doctrines applies to this adversary proceeding.

“Federal courts must give the same preclusive effect to a state court judgment as the forum

that rendered the judgment would have given it.” Sartin v. Macik, 535 F.3d 284, 287 (4th Cir.

2008). Res judicata, or claim preclusion, bars the re-litigation of a claim if there is “(1) a final

judgment on the merits in a prior suit; (2) an identity of the cause of action in both the earlier and

the later suit; and (3) an identity of parties or their privies in the two suits.” Clodfelter v. Republic

of Sudan, 720 F.3d 199, 210 (4th Cir. 2013).

The fraudulent transfer and avoidance causes of action cannot be precluded under the

doctrine of res judicata. There were no prior causes of action under §§ 544(b)(1) and 550 because

these are bankruptcy specific claims. As discussed in further detail below, however, § 544(b)(1)

does not create a substantive cause of action itself, but it permits a trustee to avoid transfers under

“applicable law.” In the complaint, the trustee alleges that the FDCPA, the NC UVTA, and the

IRC may be used as “applicable law” under § 544(b)(1). No claims were brought in either the State

Court Action or the Federal Court Action under any of those statutes. Thus, this adversary

proceeding is not a re-litigation of any causes of action.

Collateral estoppel, also known as issue preclusion, forecloses the re-litigation of issues of

fact or law. Kloth v. Microsoft Corp. (In re Microsoft Corp. Antitrust Litig.), 355 F.3d 322, 326

(4th Cir. 2004). Under North Carolina law, a party must show that (1) the issue in question was

identical to an issue actually litigated and necessary to the judgment, (2) that the prior action

resulted in a final judgment on the merits, and (3) that the present parties are the same as, or in

privity with, the parties to the earlier action. Sartin, 535 F.3d at 288 (citing Thomas M. McInnis &

Assocs., Inc. v. Hall, 349 S.E.2d 552, 557 (N.C. 1986)). With regard to the first requirement, the

North Carolina Supreme Court has held that four criteria must be satisfied to meet this element:

(1) the issues must be the same as those involved in the prior action, (2) the issues

must have been raised and actually litigated in the prior action, (3) the issues must

have been material and relevant to the disposition of the prior action, and (4) the

determination of the issues in the prior action must have been necessary and

essential to the resulting judgment.

Id. (quoting State v. Summers, 528 S.E.2d 17, 20 (N.C. 2000)).

Collateral estoppel does not preclude the litigation of any issues in this adversary

proceeding because the chapter 13 trustee, the plaintiff in this adversary proceeding, was not a

party to the prior lawsuits, nor was the trustee in privity with the debtor. See Ingalls v. Erlewine

(In re Erlewine), 349 F.3d 205, 210 (5th Cir. 2003) (holding that the trustee was not in privity with

the debtor because their interests were quite distinct). The debtor was a party to the State Court

Action and the Federal Court Action, but the chapter 13 trustee was not. Thus, the court’s real

inquiry is whether the debtor and the chapter 13 trustee would be deemed in privity for purposes

of collateral estoppel.

“In determining the preclusive effect of a state-court judgment, the federal courts must, as

a matter of full faith and credit, apply the forum state’s law of collateral estoppel.” In re McNallen,

62 F.3d 619, 624 (4th Cir. 1995). Although no one definition of privity can be applied in all cases,

the prevailing definition of “privity” in North Carolina is that privity “denotes a mutual or

successive relationship to the same rights of property.” Whitacre Partnership v. Biosignia, Inc.,

591 S.E.2d 870, 893 (N.C. 2004) (quoting State ex. rel. Tucker v. Frinzi, 474 S.E.2d 127, 130

(N.C. 1996)). In making the determination of whether the parties are in privity, the courts “look

beyond the nominal party whose name appears on the record as plaintiff and consider the legal

questions raised as they may affect the real party or parties in interest.” Id. (quoting Summers, 528

S.E.2d at 21). “Privity involves a person so identified in interest with another that he represents

the same legal right.” Frinzi, 474 S.E.2d at 130 (quoting 47 Am. Jur. 2d Judgments § 663 (1995)).

Fourth Circuit law also dictates a similar test for privity which is “whether the interests of one

party are so identified with the interests of another that representation by one party is representation

of the other’s legal right.” Weinberger v. Tucker, 510 F.3d 486, 491 (4th Cir. 2007).

The trustee represents all unsecured creditors of the bankruptcy estate. In re Marlar, 267

F.3d 749, 754 (8th Cir. 2001) (holding that although res judicata could bar a specific creditor from

bringing a fraudulent transfer action that had previously been litigated, the trustee was not barred

from relying on the rights of other unsecured creditors in bringing the action); see also In re Fordu,

201 F.3d 693, 705-06 (6th Cir. 1999) (holding that the trustee was not in privity with the debtor).

In asserting a claim under § 544(b)(1), the trustee may avoid a transfer that is voidable by “a

creditor holding an unsecured claim.” 11 U.S.C. § 544(b)(1). Although in certain capacities the

trustee stands in the shoes of the debtor, when the trustee seeks to avoid transfers of property under

chapter 5, the trustee is stepping into the shoes of the creditors. In re Helms, 467 B.R. 374, 383

(Bankr. W.D.N.C. 2012).2

The court finds that in this situation, the chapter 13 trustee is not in privity with the debtor.

The trustee is not representing the same legal right in this action that the debtor was in the prior

lawsuits. Instead, the trustee is pursuing these fraudulent conveyance actions for the benefit of the

creditors. Even if identical issues were litigated and actually resolved in the state court or federal

court proceedings, the chapter 13 trustee and the debtor’s creditors were not parties in those suits.

The chapter 13 trustee has not had an opportunity to litigate these issues or facts in a prior

proceeding.

Additionally, the court does not believe that any issue in question here is identical to an

issue actually litigated and necessary to a previous judgment. Under the portion of the FDCPA that

the trustee is invoking, a transfer is fraudulent if the debtor made the transfer without receiving

reasonably equivalent value in exchange and the debtor is insolvent at that time or becomes

insolvent as a result of the transfer. 28 U.S.C. § 3304(a)(1). Although the state court concluded

that the fraud, fraud in the inducement, and misrepresentation claims failed and made factual

findings to support that conclusion, fraud is not an issue in this action. Neither the state nor the

federal court made a determination necessary to the judgment regarding “reasonably equivalent

value” or the debtor’s insolvency. Therefore, the court finds that neither res judicata nor collateral

estoppel bars the litigation of these claims and issues.

2 One court within the Fourth Circuit has found that a trustee is in privity with the debtor, such that collateral estoppel

would apply in a preference action before the bankruptcy court to preclude the re-litigation of issues determined in an

interpleader action in state court. In re Professional Coatings (N.A.), Inc., 210 B.R. 66 (Bankr. E.D. Va. 1997). That

case was decided under Virginia law where the court made “a difficult choice as to which line of cases to follow in

order to prognosticate how the Virginia courts would decide the issue.” Id. at 84.

III. Avoidance Claims

A. Trustee’s use of avoidance powers

Section 544(b)(1) of the Bankruptcy Code provides that “the trustee may avoid any transfer

of an interest of the debtor in property or any obligation incurred by the debtor that is voidable

under applicable law by a creditor holding an unsecured claim that is allowable under section 502

of this title or that is not allowable only under section 502(e) of this title.” 11 U.S.C. § 544(b)(1)

(emphasis added). This statute allows a trustee to “step into the shoes” of an unsecured creditor to

recover transfers that the creditor would have been able to recover under applicable law outside of

bankruptcy. Hillen v. City of Many Trees, LLC (In re CVAH, Inc.), 570 B.R. 816, 823 (Bankr.

Idaho 2017).

Section 544(b)(1) does not itself create a substantive cause of action, but rather it allows a

trustee in certain circumstances to assume causes of actions under “applicable law.” Field v.

Montgomery Cnty. (In re Anton Motors, Inc.), 177 B.R. 58, 64 (Bankr. D. Md. 1995). Most often,

§ 544(b) is used to recover transfers that would be voidable under state law. Wagner v. Ultima

Homes, Inc. (In re Vaughan Co.), 498 B.R. 297, 302 (Bankr. D.N.M. 2013). The NC UVTA, which

is commonly used as the “applicable law” in this state, only has a 4-year lookback period. N.C.

Gen. Stat. § 39-23.9. The 6-year and 10-year lookback periods of the FDCPA and the IRC,

respectively, are critical to the trustee’s fraudulent transfer claims because the alleged fraudulent

transfers occurred on March 29, 2015, close to five years prior to the date that the debtor filed the

bankruptcy petition on March 5, 2020.

The second and third causes of action assert that the trustee can step into the shoes of the

IRS as the “creditor holding an unsecured claim” and use the FDCPA (28 U.S.C. §§ 3304(a)(1)

and 3306(a)) as “applicable law” under § 544(b)(1) of the Code to avoid alleged fraudulent

transfers that occurred within 6 years of the petition date.3 The fourth and fifth causes of action

assert that the trustee can step into the shoes of the IRS as the “creditor holding an unsecured

claim” and use the NC UVTA (N.C. Gen. Stat. § 39-23.5(a)), in conjunction with the IRC (26

U.S.C. §§ 6502(a)(1) and 6901(a)(1)(A)), as “applicable law” under § 544(b)(1) of the Code to

avoid the alleged fraudulent transfers that occurred within 10 years of the petition date.4

In their motion to dismiss the second and third causes of action, the defendants contend

that the trustee cannot step into the shoes of the IRS as a “creditor holding an unsecured claim”

and use the FDCPA as “applicable law” under § 544 because it would impermissibly modify the

operation of title 11. With regard to the fourth and fifth causes of action, the defendants argue that

the trustee cannot step into the shoes of the IRS as a “creditor holding an unsecured claim” to allow

the trustee to bring the NC UVTA claim outside of the 4-year statute of limitations.

The court will first address whether the trustee can step into the shoes of the IRS to use the

10-year collection period of the IRC in place of the 4-year statute of limitations of the NC UVTA.

Then, the court will discuss whether the trustee can step into the shoes of the IRS to use FDCPA

and its 6-year statute of limitations as “applicable law” under § 544(b)(1).

1. The trustee can step into the shoes of the IRS as a creditor holding an

allowed, unsecured claim and utilize the 10-year lookback period of the

IRC.

The fourth and fifth causes of action assert that the trustee can step into the shoes of the

IRS as an unsecured creditor and utilize § 39-23.5(a) of the NC UVTA in tandem with

§§ 6502(a)(1) and 6901(a)(1)(A) of the IRC as “applicable law” under § 544(b)(1) of the

3 The second cause of action is asserted against Flamingo Properties, and the third cause of action is asserted against

Flamingo South.

4 The fourth cause of action is asserted against Flamingo Properties, and the fifth cause of action is asserted against

Flamingo South.

Bankruptcy Code. For the reasons stated below, the court finds that the trustee can step into the

shoes of the IRS and utilize the longer 10-year lookback period of the IRC.

In this adversary proceeding, the trustee cannot use the NC UVTA on its own because the

transfers fall outside of the 4-year lookback period of the NC UVTA. N.C. Gen. Stat. § 39-23.9.

Instead, the trustee takes the position that he can step into the shoes of the IRS and use the longer

10-year lookback period contained in the IRC, in conjunction with the NC UVTA, to avoid the

transfers. The court must ascertain if the trustee can step into the shoes of the IRS as the “creditor

holding an unsecured claim that is allowable under section 502,” and if by doing so whether the

trustee is enabled to use the 10-year collection period of the IRC in place of the 4-year statute of

limitations of the NC UVTA.

Section 544(b)(1) of the Code “enables a trustee to do in a bankruptcy proceeding what a

creditor would have been able to do outside of bankruptcy—except the trustee will recover the

property for the benefit of the estate.” Ebner v. Kaiser (In re Kaiser), 525 B.R. 697, 708 (Bankr.

N.D. Ill. 2014) (quoting In re Equip. Acquisition Res., Inc., 742 F.3d 743, 746 (7th Cir. 2014)).

The trustee’s power under § 544(b)(1) is derivative of that of an actual unsecured creditor under

the applicable law. Id. “[I]f any unsecured creditor could reach an asset of the debtor outside

bankruptcy, the Trustee can use § 544(b) to obtain that asset for the estate.” Id. (quoting In re

Leonard, 125 F.3d 543, 544 (7th Cir. 1997)). Section 544(b)(1) contains no restrictions on which

unsecured creditor the trustee may choose as the golden creditor.5 Id. at 711. The trustee must

choose the creditor wisely because the trustee is subject to the defenses that the chosen creditor

would be subject to itself. Id. (citing Equip. Acquisition Res., Inc., 742 F.3d at 751).

5 The triggering creditor, the one who the trustee chooses to step into its shoes under § 544(b)(1) as the “creditor

holding an unsecured claim that is allowable,” is informally referred to as the “golden creditor.” See Kaiser, 525 B.R.

at 703-04.

The starting point for the court is to identify whether the creditor chosen by the trustee is a

“creditor holding an unsecured claim that is allowable under section 502.” Then, the court must

determine if that creditor would have the requisite cause of action under “applicable law” to be

able to avoid these transfers.

It is undisputed that the IRS holds an allowed unsecured claim in this bankruptcy case. The

IRS filed a proof of claim (claim #4) on March 24, 2020 in the amount of $160,609.68. The debtor

objected to the proof of claim on May 29, 2020. On August 6, 2020, the IRS amended its proof of

claim. The amended proof of claim asserts that the IRS has a claim in the amount of $65,204.35

($28,379.31 of that amount being secured and $36,825.04 of that amount being unsecured). No

objection has been filed to the amended claim.

Outside of bankruptcy, the IRS would have the ability to bring a cause of action under the

NC UVTA against a transferee of a taxpayer’s property. Section 6901(a)(1)(A)6 of the IRC

establishes a procedure for tax collection, authorizing the collection of “[t]he liability, at law or in

equity, of a transferee of property. . . of a taxpayer.” 26 U.S.C. § 6901(a)(1)(A); see also Kaiser,

525 B.R. at 709. The liability of the transferee would be governed by the state fraudulent transfer

law. Kaiser, 525 B.R. at 710.

6 (a) Method of Collection

The amounts of the following liabilities shall, except as hereinafter in this section provided, be

assessed, paid, and collected in the same manner and subject to the same provisions and limitations

as in the case of the taxes with respect to which the liabilities were incurred:

(1) Income, Estate, and Gift Taxes

(A) Transferees

The liability, at law or in equity, of a transferee of property—

(i) of a taxpayer in the case of a tax imposed by subtitle A (relating to income

taxes),

(ii) of a decedent in the case of a tax imposed by chapter 11 (relating to estate

taxes), or

(iii) of a donor in the case of a tax imposed by chapter 12 (relating to gift taxes),

in respect of the tax imposed by subtitle A or B.

26 U.S.C. § 6901(a)(1)(A) (emphasis added).

If the IRS sought to collect taxes using the NC UVTA, the action would not be governed

by the state statute of limitations. See Vaughan Co., 498 B.R. at 303 (citing U.S. v. Spence, 2000

WL 1715216, at *3 (10th Cir. 2000)). According to the doctrine of nullus tempus occurrit regi, the

United States (including the IRS) is not bound by state statutes of limitations. Id. at 303-04 (citing

U.S. v. Summerlin, 310 U.S. 414, 416 (1940)). This doctrine originates from the principle that “no

time runs against the king.” Id. The plaintiff’s position is that he is not bound by the 4-year state

statute of limitations of the NC UVTA, but instead, would have a 10-year lookback period under

26 U.S.C. § 6502(a)(1), just like the IRS outside of bankruptcy.7

The majority of courts that have directly addressed the issue of whether § 544(b) permits a

trustee to step into the shoes of the IRS have found that § 544(b) allows a trustee to do so. See,

e.g., Vieira v. Gaither (In re Gaither), 595 B.R. 201 (Bankr. D.S.C. 2018); Mukamal v. Citibank

N.A. (In re Kipnis), 555 B.R. 877 (Bankr. S.D. Fla. 2016). Those courts reason that the issue is a

task of statutory construction and that the plain language of § 544(b)(1) is clear. Gaither, 595 B.R.

at 209. Section 544(b)(1) imposes no limitation on the type of unsecured creditor a trustee can

choose as a triggering creditor nor any limitation on the “applicable law” that may be used. Kipnis,

555 B.R. at 882 (citing Kaiser, 525 B.R. at 771).

On the other side, one court has found that, by enacting § 544(b), Congress did not

“intend[ ] to vest sovereign powers in a bankruptcy trustee and thereby immunize her from the

strictures of state law in the pursuit of her private interests.” Vaughan Co., 498 B.R. at 304. The

Vaughan court reasoned that although the trustee could stand in the shoes of any unsecured creditor

7 (a) Length of period

Where the assessment of any tax imposed by this title has been made within the period of limitation

properly applicable thereto, such tax may be collected by levy or by a proceeding in court, but only

if the levy is made or the proceeding begun—

(1) within 10 years after the assessment of the tax . . . .

26 U.S.C. § 6502(a)(1).

to set aside transfers, it did not necessarily follow that by standing in the shoes of the IRS that the

trustee was immunized from state statutes of limitations. Id. The Vaughan court was concerned

that if the trustee could use the 10-year lookback period of the IRC, that usage would effectively

eviscerate the 4-year lookback period of the state fraudulent transfer law. Id. at 305.

Other courts have criticized the analysis of the Vaughan court. See, e.g., CVAH, Inc., 570

B.R. at 835; Kipnis, 555 B.R. at 882; Kaiser, 525 B.R. at 773. The Kaiser court found that because

§ 544(b)(1) was clear, the court did not need to look at the underlying policy concerns. Kaiser, 525

B.R. at 713-14. The Kaiser court noted that even if the court were inclined to look at the underlying

policy concerns – primarily the concern that allowing the trustee to use the 10-year lookback period

of the IRC would eliminate the state statute of limitations in most cases – those concerns were

unavailing. Id. at 712. The Kaiser court was of the opinion that the slippery slope argument was a

logical fallacy, disproven by actual experience. Id. The court in Kipnis did not adopt the same

conclusion as Kaiser that the ruling would have limited impact, yet the court agreed that the policy

concerns were not dispositive of the issue. Kipnis, 555 B.R. at 882. The court found that even

though the policy concerns were valid, the court was not permitted to read such a limitation into

the text of § 544(b). Id.

This court agrees with the majority of courts finding that there is no prohibition against the

trustee stepping into the shoes of the IRS. The court must begin with the language of the statute

itself. Gaither, 595 B.R. at 209 (quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241

(1989)). Under section 544(b)(1), “the trustee may avoid any transfer of an interest of the debtor

in property or any obligation incurred by the debtor that is voidable under applicable law by a

creditor holding an unsecured claim that is allowable under section 502 of this title . . . .” 11

U.S.C. § 544(b)(1) (emphasis added). The language of § 544(b) does not limit which unsecured

creditor the trustee may choose as the “creditor holding an unsecured claim.” Kaiser, 525 B.R.

at 711. The plain language of § 544(b)(1) is not restrictive, and the court sees no reason to limit

the trustee from choosing the IRS as the golden creditor, and thereby be subject to the same statute

of limitations that the IRS would be subject to outside of bankruptcy. It is not necessary for the

court to address whether this outcome was the intent of Congress or any other underlying policy

concerns because the plain language of the statute clearly permits the trustee to choose any

unsecured creditor holding an allowed claim as the golden creditor.

The defendants also contend that the Fourth Circuit’s decision in Schlossberg v. Barney,

380 F.3d 174 (4th Cir. 2004), prevents the trustee from stepping into the shoes of the IRS. In

Schlossberg, the Fourth Circuit examined whether Ҥ 544(a)(2) vests a trustee with the rights and

powers of the IRS as a hypothetical creditor to penetrate the entireties exemption for the benefit of

the individual creditors of the debtor.” Id. at 177. To support their contention, the defendants point

to the court’s statements that “we do not believe that Congress intended a bankruptcy trustee to

wield the extraordinary collection powers of the federal government,” and that “[n]othing in the

text or legislative history of the strong-arm clause suggests that Congress intended a bankruptcy

trustee to be capable of invoking the ‘sovereign prerogative’ to attach property that ordinary

secured creditors could not reach.” Id. at 181.

In Schlossberg, the Fourth Circuit was looking at a different issue than the one before this

court. Significantly, the trustee was pursuing a claim under § 544(a)(2), which allows a trustee to

step into the shoes of a hypothetical “creditor that extends credit.” The IRS was not an actual

creditor holding a claim in that case. See also Gaither, 595 B.R. at 207 (distinguishing Schlossberg

because “[s]ections 544(a) and 544(b) are different and should be analyzed separately”). The

Fourth Circuit ultimately held that the IRS was not a “creditor that extends credit” and affirmed

on those grounds. Schlossberg, 380 F.3d at 177.

Additionally, the trustee in Schlossberg argued that he could use § 544(a)(2) to reach

entireties property despite the exemption created by § 522(b)(2). Id. at 176. The court was

concerned that allowing a trustee to use the strong-arm powers in this way would eviscerate the

tenancies by the entireties exemption that is explicitly recognized by the Bankruptcy Code. Id. at

181-82. The court concluded that “if a trustee could assert the rights of a hypothetical federal tax

lien holder, no state law exemption would exempt property from the estate, and § 522(b)(2)(B)

would be superfluous.” Id. at 182. The Fourth Circuit’s opinion in Schlossberg is specific to

§ 544(a) and the tenancies by the entireties exemption, and it does not inform the court nor is it

dispositive of the issue before it now. Thus, the court finds that the trustee may step into the shoes

of the IRS as a creditor holding an allowed, unsecured claim and utilize the 10-year lookback

period provided for by the IRC.

2. The trustee may step into the shoes of the IRS to bring a cause of action

under the FDCPA as the “applicable law.”

The second and third causes of action allege that the trustee can step into the shoes of the

IRS as an unsecured creditor and utilize 28 U.S.C. §§ 3304(a)(1)8 and 3306(a)9 of the FDCPA as

8 (a) Debt Arising Before Transfer.—Except as provided in section 3307, a transfer made or obligation

incurred by a debtor is fraudulent as to a debt to the United States which arises before the transfer is made or

the obligation is incurred if—

(1)

(A) the debtor makes the transfer or incurs the obligation without receiving a reasonably

equivalent value in exchange for the transfer or obligation; and

(B) the debtor is insolvent at that time or the debtor becomes insolvent as a result of the

transfer or obligation. . . .

28 U.S.C. § 3304(a)(1).

9 (a) In General.—In an action or proceeding under this subchapter for relief against a transfer or obligation,

the United States, subject to section 3307 and to applicable principles of equity and in accordance with the

Federal Rules of Civil Procedure, may obtain—

“applicable law” under § 544(b)(1) of the Code to avoid fraudulent transfers made in the 6 years

prior to the petition date. As discussed below, the court finds that the trustee has appropriately

brought these claims.

First, for the same reasons as those discussed above, the court finds that the trustee may

step into the shoes of the IRS as the golden creditor. To bring a claim under the FDCPA, the trustee

must be able to step into the shoes of the United States. Section 3306 of the FDCPA provides that

“the United States . . . may obtain . . . avoidance of the transfer or obligation to the extent necessary

to satisfy the debt to the United States.” 28 U.S.C. § 3306(a).10 The IRS is an allowed, unsecured

creditor in this case. Nothing in the plain language of § 544(b)(1) prohibits the trustee from

stepping into the shoes of the IRS as an actual, unsecured creditor and exercising the powers

available to the IRS. Outside of bankruptcy, the IRS could bring a claim under the FDCPA.

Finding that the trustee can step into the shoes of the IRS as the golden creditor, the court

must next determine if the FDCPA can be used as the “applicable law” under § 544(b)(1). The

defendants argue that treating the FDCPA as “applicable law” would impermissibly modify the

operation of the Bankruptcy Code. For the reasons below, the court finds that the FDCPA can be

used as “applicable law” under § 544(b)(1) and that doing so does not impermissibly modify the

operation of the Bankruptcy Code.

(1) avoidance of the transfer or obligation to the extent necessary to satisfy the debt to the United

States;

(2) a remedy under this chapter against the asset transferred or other property of the transferee; or

(3) any other relief the circumstances may require.

28 U.S.C. § 3306(a).

10 The court in Gaither concluded that because the trustee can exercise the powers available to one creditor to entirely

avoid a transfer for the benefit of the estate, the limitation on recovery that avoidance is only “to the extent necessary

to satisfy the debt of the United States” is not a limitation under § 544(b). Gaither, 595 B.R. at 206 (citing Moore v.

Bay, 284 U.S. 4 (1931)). This issue was not addressed by the parties, and so the court will likewise not address it at

this time.

As previously outlined, section 544(b)(1) does not itself create a substantive cause of

action, but rather it allows a trustee in certain circumstances to assume causes of actions under

“applicable law.” Field v. Montgomery Cnty. (In re Anton Motors, Inc.), 177 B.R. 58, 64 (Bankr.

D. Md. 1995). Most commonly, trustees use state fraudulent transfer law as the “applicable law.”

The FDCPA, however, has a longer 6-year lookback period, in comparison to the 4-year lookback

period of the NC UVTA. Compare 28 U.S.C. § 3306(b) with N.C. Gen. Stat. § 39-23.9.

Courts are split on the issue of whether the FDCPA can be used as “applicable law.” Most

courts have held that the FDCPA can be used as “applicable law” under § 544(b). See Vieira v.

Gaither (In re Gaither), 595 B.R. 201 (Bankr. D.S.C. 2018); Hillen v. City of Many Trees, LLC

(In re CVAH, Inc.), 570 B.R. 816 (Bankr. Idaho 2017). Those courts have found that “applicable

law” is a broad term that does not limit a plaintiff to only using a state’s fraudulent transfer law as

the “applicable law.” Gaither, 595 B.R. at 214.

At least one circuit court has held that the FDCPA cannot be used as “applicable law.” MC

Asset Recovery LLC v. Commerzbank A.G. (In re Mirant Corp.), 675 F.3d 530 (5th Cir. 2012). In

Mirant, the Fifth Circuit looked at 28 U.S.C. § 3003(c)11 and found that treating the FDCPA as

“applicable law” would impermissibly modify the operation of title 11. Id. at 535. The court

reasoned that, although the legislative history of the FDCPA was not dispositive, a statement of

Representative Brooks that the FDCPA would have absolutely no effect on the Bankruptcy Code

supported the conclusion that the FDCPA was not “applicable law” under § 544(b) of the Code.

Id. at 535-36.

The plain language of § 544(b) does not exclude the FDCPA from being used as the

substantive “applicable law.” “Applicable law” should be construed broadly as § 544(b) contains

11 “This chapter shall not be construed to supersede or modify the operation of–(1) title 11 . . . .” 28 U.S.C. § 3003(c).

no limiting language. CVAH, Inc., 570 B.R. at 825. This conclusion is consistent with the Supreme

Court’s holding in Patterson that the phrase “applicable nonbankruptcy law,” as found in § 541 of

the Code, does not refer exclusively to state law because the statute contains no limitation on the

source of the law. Patterson v. Shumate, 504 U.S. 753, 757 (1992). The court declines to follow

the Fifth Circuit in finding that the using the FDCPA as “applicable law” impermissibly modifies

the operation of the Bankruptcy Code. The plain language of the statute is unambiguous, and

therefore any reliance upon legislative history is unwarranted. The court holds that the FDCPA

may be used as “applicable law” under § 544(b).

B. The plaintiff sufficiently plead “reasonably equivalent value” and

“insolvency.”

As another basis for dismissal of the avoidance claims, the defendants argued that the

plaintiff did not plausibly plead a lack of “reasonably equivalent value” or the debtor’s alleged

“insolvency.” The court finds that the plaintiff has sufficiently done so.

As previously stated, to survive a motion to dismiss, a complaint must contain sufficient

facts to “state a claim to relief that is plausible on its face.” Iqbal, 556 U.S. at 678 (quoting

Twombly, 550 U.S. at 570). While a complaint does not need detailed factual allegations, it must

contain “more than labels and conclusions, and a formulaic recitation of the elements of a cause

of action will not do.” Twombly, 550 U.S. at 555 (citations omitted). The court must accept all

well-pled facts to be true and draw all reasonable inferences in favor of the plaintiff. Nemet

Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 253 (4th Cir. 2009) (citations omitted).

However, the court does not need to accept legal conclusions drawn from the facts. Id. (citing

Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008)).

Paragraphs 41, 49, 57, and 65 of the plaintiff’s complaint allege that the Flamingo

Properties Transfer and the Flamingo South Transfer were not for reasonably equivalent value.

The complaint does not contain merely bare bones allegations, but also contains the following facts

which support the allegation that the transfers were not for reasonably equivalent value:

In consideration for a $375,000 note payable over 5 years, and fringe benefits

payable for 2-5 years, the Debtor transferred his membership interest in FP, with a

value of at least $1,782,421.48, back to FP. At the time of the FP Transfer, the book

value of the real property of FP was at least $3,564,842.96. The Debtor’s interest,

one-half, was worth at least $1,782,421.48. Additionally, FP was to receive net

rents of $2,250,000.00 over the next 7 years.

Compl. ¶¶ 43, 59.

In consideration for a $375,000 note payable over 5 years, and fringe benefits

payable for 2-5 years, the Debtor transferred his membership interest in FS, with a

value of at least $369,162.94, back to FS. At the time of the FS Transfer, the book

value of the real property of FS was at least $738,325.88. The Debtor’s interest,

one-half, was worth at least $369,162.94. Additionally, FS was to receive net rents

of $918,000.00 over the next 7 years.

Compl. ¶¶ 51, 67.

Paragraphs 30 through 33 of the complaint allege that, as a result of the transfers, the debtor

became insolvent:

30. As a result of the Transfers, the Debtor became insolvent as defined by 28

U.S.C. § 3302, and N.C. Gen. Stat. § 39-23.2. Immediately after the Transfers, the

assets of the Debtor, corresponding values (and lien(s), if applicable), and available

claims of exemption, in late May 2015 were, upon information and belief:

(a) real property located at 651 Fairlie Court, Wilmington, North Carolina

28412. Fair market value of $361,900.00 (New Hanover County tax value),

first priority deed of trust with BB&T in the amount of $226,409.45, second

priority deed of trust with BB&T in the amount of $17,891.50, claim of

exemption under N.C. Gen. Stat. § 1C-1601(a)(1) in the amount of

$35,000.00; net value of $82,599.05.

(b) household goods with an approximate value of $3,500.00 (as shown on

the Debtor’s schedule B). These would be fully exempt under N.C. Gen.

Stat. § 1C-1601(a)(4).

(c) bank accounts with an aggregate value of less than $2,000.00. These

monies would be fully exempt under N.C. Gen. Stat. § 1-362.

(d) one-half interest in Brike Management, LLC (“Brike”). Brike was a

single-asset real estate company that owned real property located at 330

Military Cutoff Road, Suite A1, Wilmington, North Carolina 28405. Value

of real property, $138,800.00 (New Hanover County tax value), lien of

BB&T in the amount of $121,154.65; net value of $17,645.35; one-half of

net value: $8,822.68.

(e) Promissory Note and other payables from FP and FS (see, Exhibits A &

C) totaling approximately $361,248.00 in value (value as shown on the

Debtor’s amended 2015 income tax returns).

31. The value of the Debtor’s assets, for purposes of 28 U.S.C. § 3302, and N.C.

Gen. Stat. § 39-23.2, was $452,669.73 immediately after the Transfers.

32. The Debtor’s liabilities immediately after the Transfer were, upon information

and belief:

(a) personal guarantee of FP obligations to BB&T of approximately

$1,638,157.05.

(b) personal guarantee of FS obligations to BB&T of approximately

$4,491,674.13.

(c) Department of the Treasury – Internal Revenue Service, 2014 income

taxes which totaled approximately $70,000.00 (a lien for this tax year was

filed against the Debtor on May 4, 2016 in the amount of $82,478.46, see,

Claims Register No. 4, amended August 6, 2020). A copy of this claim is

attached hereto as Exhibit D.

(d) revolving credit card debt to American Express and BB&T that totaled

approximately $9,000.00.

33. The total of the Debtor’s liabilities, for purposes of 28 U.S.C. § 3302, and N.C.

Gen. Stat. § 39-23.2, was $6,208,831.18 immediately after the Transfers.

Compl. ¶¶ 30-33.

The defendants argue that the plaintiff’s valuations are incorrect. Valuation is a factual

question, and questions of fact should not be resolved on a motion to dismiss. For the purposes of

a Rule 12(b)(6) motion, the court must accept that the plaintiff’s factual allegations are true. The

court finds that the plaintiff did not merely recite the elements of the causes of action, but that the

plaintiff pled sufficient facts to plausibly support the conclusion that there was a lack of

“reasonably equivalent value” and that the debtor was “insolvent.”

IV. Liability of Cheshire

The sixth and seventh claims for relief are for recovery of the avoided transfers. Section

550(a) provides that

(a) Except as otherwise provided in this section, to the extent that a transfer is

avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the

trustee may recover, for the benefit of the estate, the property transferred, or, if the

court so orders, the value of such property, from—

(1) the initial transferee of such transfer or the entity for whose benefit such

transfer was made; or

(2) any immediate or mediate transferee of such initial transferee.

11 U.S.C. § 550(a).

Claim six seeks a judgment against Flamingo Properties, Flamingo South, and Cheshire in

the amount of the avoidable transfers, plus pre-judgment interest, pursuant to 11 U.S.C.

§ 550(a)(1). The plaintiff alleges that Flamingo Properties and Flamingo South were the initial

transferees, but that the transfers were made for the benefit of Flamingo Properties, Flamingo

South, and Cheshire.

Claim seven seeks a judgment against Cheshire in the amount of the value of the transfers,

plus pre-judgment interest, pursuant to 11 U.S.C. § 550(a)(2). The plaintiff alleges, in the

alternative, that Cheshire was an immediate transferee of the avoidable transfers as his membership

interest increased from 50% to 100% as a result of the transfers.

The defendants argue in their motion to dismiss that Cheshire has no liability for any of the

avoidance claims. First, the defendants argue that the initial transferees of Musselwhite’s

membership interest are Flamingo South and Flamingo Properties, not Cheshire, and thus Cheshire

cannot be liable under § 550(a)(1). Second, the defendants argue that Cheshire is not an immediate

transferee.

When taking the allegations that have been incorporated by reference in causes of action

six and seven as true, the court finds that the allegations plausibly state a claim for relief under 11

U.S.C. § 550 against Cheshire. The complaint plausibly alleges that Cheshire is either an entity for

whose benefit such transfer was made or an immediate transferee of the avoidable transfers by

virtue of his membership interest increasing from 50% to 100% as a result of the transfers. The

motion to dismiss the six and seventh causes of action against Cheshire will be denied.

V. Motion to Withdraw the Reference

Last, the defendants argue that if this case is not dismissed, the reference of this adversary

proceeding should be withdrawn. The defendants do not consent to the entry of a final judgment

by this court, nor do the defendants consent to a jury trial being conducted by this court. Cheshire

filed a proof of claim, but Flamingo Properties and Flamingo South have not filed claims in this

bankruptcy case. The defendants argue that no claim is stated against Cheshire as a “transferee,”

and so although Cheshire has filed a proof of claim, that should not deprive Flamingo Properties

and Flamingo South of their right to a jury trial on those claims. The defendants further argue that

the district court should withdraw the reference to the entire case, rather than only with respect to

the claims on which Flamingo Properties and Flamingo South are entitled to a jury trial.

The plaintiff takes the position that the district court is not required to withdraw the

reference and argues that mandatory withdrawal is not applicable because the federal laws

involved in this adversary proceeding arise under the Bankruptcy Code. Furthermore, the court

should not permissively withdraw the reference because this adversary proceeding deals with core

proceedings and will impact the bankruptcy estate. Finally, the plaintiff argues that withdrawing

the reference right now serves no practical purpose and if the case progresses to trial, the

defendants could renew their motion at that time.

The decision of whether the reference should, or must, be withdrawn lies with the district

court. Fed. R. Bankr. P. 5011; 28 U.S.C. § 157(d). Section 157(d) of title 28 of the United States

Code provides that

[t]he district court may withdraw, in whole or in part, any case or proceeding

referred under this section, on its own motion or on timely motion of any party, for

cause shown. The district court shall, on timely motion of a party, so withdraw a

proceeding if the court determines that resolution of the proceeding requires

consideration of both title 11 and other laws of the United States regulating

organizations or activities affecting interstate commerce.

28 U.S.C. § 157(d). The motion for withdrawal of the reference this adversary proceeding will not

be resolved by this court, but instead should be transmitted to the United States District Court for

the Eastern District of North Carolina for review.

CONCLUSION

THEREFORE, IT IS ORDERED THAT

1. The Motion to Dismiss the second, third, fourth, fifth, sixth, and seventh causes of

action is hereby DENIED; and

2. The Motion for Withdrawal of this adversary proceeding shall be transmitted to the

United States District Court for the Eastern District of North Carolina.

END OF DOCUMENT