PEM Entities, LLC v. Province Grande Olde Liberty, LLC

UNPUBLISHED

UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-1669

In Re: PROVINCE GRANDE OLDE LIBERTY, LLC, a/k/a Silver
Deer Olde Liberty AA Lots, LLC,

Debtor.

------------------------------

PEM ENTITIES LLC,

Appellant,

v.

PROVINCE GRANDE OLDE LIBERTY, LLC,

Defendant,

and

ERIC M. LEVIN; HOWARD SHAREFF,

Creditors - Appellees.

Appeal from the United States District Court for the Eastern
District of North Carolina, at Raleigh. James C. Dever III,
Chief District Judge. (5:14-cv-00889-D; 8:13-01563; 8:13-00122)

Argued: May 10, 2016 Decided: August 12, 2016

Before GREGORY, Chief Judge, TRAXLER, Circuit Judge, and Joseph
F. ANDERSON, Jr., Senior United States District Judge for the
District of South Carolina, sitting by designation.
Affirmed by unpublished per curiam opinion.

ARGUED: John Arlington Northen, NORTHEN BLUE, LLP, Chapel Hill,
North Carolina, for Appellant. James C. White, LAW OFFICE OF
JAMES C. WHITE, P.C., Chapel Hill, North Carolina, for
Appellees. ON BRIEF: Vicki L. Parrott, John Paul H. Cournoyer,
NORTHEN BLUE, LLP, Chapel Hill, North Carolina, for Appellant.
Michelle M. Walker, LAW OFFICE OF JAMES C. WHITE, P.C., Chapel
Hill, North Carolina, for Appellees.

Unpublished opinions are not binding precedent in this circuit.

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PER CURIAM:

PEM Entities, LLC (“PEM”) appeals the district court’s

order affirming the bankruptcy court’s grant of summary judgment

in favor of Eric M. Levin and Howard Shareff (“Appellees”).

Specifically, PEM contests the bankruptcy court’s

recharacterization of certain debt into equity. For the

following reasons, we affirm the decision of the district court.

I.

This case arises out of several North Carolina real estate

investments involving Howard Jacobsen (“Howard”). Lakebound

Fixed Return Fund, LLC (“Lakebound”) is a company formed to

invest in real estate and provide a fixed, high-yield return to

its investors. Lakebound is managed by Howard. Appellees

invested $500,000.00 each into Lakebound. Province Grande Olde

Liberty, LLC (“Debtor”) is an entity formed by Howard for the

purpose of acquiring the Olde Liberty Golf and Country Club

(“Golf Club”), a golf and residential real estate development in

Franklin County, North Carolina. Debtor’s membership included

Howard, his parents—Stanley and Rhonda Jacobsen—and Robert B.

Conaty.

To finance the acquisition of the Golf Club, Debtor

obtained $188,000.00 from Lakebound and borrowed $6,465,000.00

from Paragon Commercial Bank (“Paragon”). The transfer of

$188,000.00 from Lakebound to Debtor is the subject of ongoing

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litigation in North Carolina state court and provides a basis

for Appellees claims in the underlying bankruptcy proceeding.

Specifically, Appellees contend that this transfer was a

misappropriation of Lakebound’s funds. The $6,465,000.00 loan

from Paragon was an arms-length transaction evidenced by a

promissory note and secured by a deed of trust on the Golf Club

property.

In 2010, Debtor defaulted on the Paragon loan. The

following year, Paragon initiated foreclosure proceedings on the

real estate security. In an effort to resolve the loans to

Debtor and other entities, Howard, Debtor, and several other

related entities entered into a settlement agreement with

Paragon. Under that agreement, Paragon agreed to sell its

$6,465,000.00 loan to a new company, PEM, for the discounted

price of $1,242,000.00. PEM is a Delaware company, owned by

Stanley Jacobsen – Howard’s father, Robert B. Conaty, and an

entity owned by trusts established by Stanley Jacobsen for the

benefit of his grandchildren (“the Trust”).

Importantly, PEM’s members did not negotiate the settlement

agreement. Rather, Debtor’s principals, including Howard

Jacobsen, negotiated the agreement that purported to be “in

settlement of the Loan.” Paragon understood that Debtor’s

principals had the authority to bind PEM. Further, the

settlement agreement bound Paragon to sell the loan to PEM for a

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fixed price and even included an outline of the financing of the

loan’s purchase. PEM, however, was not a signor of the

settlement agreement.

To fund the loan purchase provision of the settlement

agreement, PEM used both equity contributions from its members

as well as outside debt. Stanley Jacobsen contributed

$130,000.00, Conaty contributed $100,000.00, and the Trust

contributed $70,000.00. Together, these three contributions

totaled $300,000.00.

PEM relied on financing to assemble the remainder of

purchase price. Two individuals, Joseph Deglomini and Joseph

Simone (collectively “D&S”), loaned PEM $650,000.00.

Additionally, Paragon agreed to loan PEM the final $292,000.00,

interest free, needed to complete the settlement. Both loans

were secured by Golf Club real estate owned not by PEM, but by

Debtor. Finally, PEM agreed to subordinate its position in the

security to the loans from both D&S and Paragon.

After the completion of the settlement agreement, Debtor

sold some of its property for $462,146.15. From those funds,

Debtor paid $240,120.00 directly to Paragon and D&S in partial

payment of the loans those entities made to PEM. Debtor

transferred $202,087.71 to PEM. Shortly thereafter, PEM “re-

advanced” $50,000.00 to Debtor for miscellaneous operating

expenses. At no time did PEM or Debtor maintain any ledger or

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account of the Paragon loan. Several other cash transfers went

between Debtor and PEM and Howard sometimes called “loans” and

other times “readvances.”

Debtor filed its bankruptcy petition on March 11, 2013. In

that filing, it listed PEM’s claim at $7,000,000, including the

principal from the Paragon loan and accrued interest.

Additionally, it listed Appellees as creditors with unknown and

disputed claims. Appellees filed claims in the Debtor’s

bankruptcy proceeding in the amount of $500,000.00 each. They

made claims for equitable subordination and recharacterization

and also statutory claims for avoidance and recovery of

allegedly fraudulent transfers. The parties moved for summary

judgment on all claims.

The bankruptcy court granted summary judgment in favor of

Appellees on their equitable claim of recharacterization.

Specifically, the bankruptcy court concluded that the PEM’s loan

purchase was, in effect, a settlement and satisfaction of the

Paragon loan. The court recharacterized the $300,000.00 portion

of the $1,242,000.00 paid by PEM pursuant to the settlement

agreement from a debt owed it by Debtor into an equity

investment in Debtor. Thus, the court rendered PEM’s

$7,000,000.00 claim void.

PEM appealed the bankruptcy court’s order to the United

States District Court for the Eastern District of North

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Carolina. In its de novo review, the district court found the

bankruptcy court correctly applied the law and affirmed its

judgment. PEM timely filed its Notice of Appeal to this Court.

II.

A.

Recharacterization is well within the broad powers afforded

a bankruptcy court. In re: Official Committee of Unsecured

Creditors for Dornier Aviation (North America), Inc., 453 F.3d

225 (2006). The Bankruptcy Code establishes a scheme in which

contributions to capital receive a lower priority than loans

because their nature is that of a fund contributed to meet the

obligations of a business and which should be repaid only after

all other obligations have been satisfied. Id. at 231. Thus,

adjudication under the Bankruptcy Code often requires a

determination of whether a particular obligation is debt or

equity. Id. When that question is in dispute, the bankruptcy

court must make this determination in order to effectuate the

priority scheme. Id.

In determining whether or not to recharacterize a claim, a

bankruptcy court should apply the eleven factors adopted by this

Court in Dornier:

(1) the names given to the instruments, if any,
evidencing the indebtedness; (2) the presence or
absence of a fixed maturity date and schedule of
payments; (3) the presence or absence of a fixed rate
of interest and interest payments; (4) the source of

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 repayments; (5) the adequacy or inadequacy of
capitalization; (6) the identity of interest between
the creditor and the stockholder; (7) the security, if
any, for the advances; (8) the corporation’s ability
to obtain financing from outside lending institutions;
(9) the extent to which the advances were subordinated
to the claims of outside creditors; (10) the extent to
which the advances were used to acquire capital
assets; and (11) the presence or absence of a sinking
fund to provide repayments.

Id. at 233 (quoting Bayer Corp. v. Masco Tech, Inc. (In re

AutoStyle Plastics, Inc.), 269 F.3d 726, 747-48 (6th Cir.

2001)). None of these eleven factors are themselves dipositive.

Id. at 234. Rather, their significance varies depending upon the

circumstance. Id.

B.

In this case, the bankruptcy court weighed each of the

Dornier factors in analyzing the settlement agreement. The court

found that all of them weighed in favor of recharacterization.

The court emphasized several facts in drawing its conclusion:

(1) the naming of the settlement agreement and the fact that it

was entered into “in settlement of the loan”; (2) the fact that

Debtor’s principals negotiated the settlement agreement and note

purchase on behalf of PEM; (3) the failure of both Debtor and

PEM to observe any formalities such as payment schedules, actual

interest payments or even a ledger; (4) Debtor’s total reliance

on money from PEM to meet expenses and its inability to obtain

any other financing; (5) the identity of interests between

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Debtor and PEM; and (6) that approximately $900,000.00 of the

$1,242,000.00 was funded by the pledge of security owned by

Debtor. These facts adequately support the bankruptcy court’s

decision.

PEM contends that the bankruptcy court misapplied the

Dornier factors by applying them to the wrong transaction. PEM

argues that the bankruptcy court should have limited its

analysis to the inception of the Paragon debt rather than to the

later settlement agreement. Thus, according to PEM, we should

apply the Dornier factors to the situation at the time Paragon

made the loan to Debtor. We find this argument unpersuasive.

The bankruptcy court’s broad recharacterization power is

“integral to the consistent application of the Bankruptcy Code.”

Dornier, 453 F.3d at 233. “A bankruptcy court’s equitable powers

have long included the ability to look beyond form to

substance.” Id. at 233. The recharacterization decision itself

rests on the “substance of the transaction” involved. Id. at 232

(emphasis in original).

Here, the settlement agreement is the “substance of the

transaction” because it was the basis of the note purchase and

gave rise the PEM’s claims. The settlement agreement was

negotiated and executed by Paragon and Debtor’s principals.

While PEM notes that it was neither a party to nor a signor of

the settlement agreement, Paragon believed Debtor’s principals

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had the authority to bind PEM. Further, the settlement agreement

specifically obligated Paragon to sell the loan to PEM. Indeed,

the settlement agreement specifically outlined the sources of

PEM’s funding. It even obligated Paragon to loan PEM

$292,000.00. Clearly, PEM knew of, participated in, and

consented to those terms. While PEM itself may not have been

obligated by the settlement agreement, the settlement agreement

certainly obligated Paragon towards PEM.

Thus, the bankruptcy court properly “looked beyond form” to

determine that the “substance of the transaction” was in fact

the settlement agreement in which Debtor used PEM as an

extension of itself to complete what was, in effect, a

satisfaction of the Paragon loan. Moreover, the bankruptcy

court’s application of the Dornier factors adequately supported

its recharacterization decision.

C.

PEM challenges several of the bankruptcy court’s factual

findings. Findings of fact by a bankruptcy court in proceedings

within its full jurisdiction are reviewable only for clear

error. In re Johnson, 960 F.2d 396, 399 (4th Cir. 1992). Under

this standard, we will not reverse a bankruptcy court’s factual

finding that is supported by the evidence unless that finding is

clearly wrong. In re ESA Envtl. Specialists, Inc., 709 F.3d 388,

399 (4th Cir. 2013). We will conclude that a finding is clearly

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erroneous only if, after reviewing the record, we are left with

“a firm and definite conviction that a mistake has been

committed.” Klein v. PepsiCo, Inc., 845 F.2d 76, 79 (4th Cir.

1988) (citation omitted).

Of the six errors claimed by PEM, none rise to the level of

clear error. First, PEM challenges the court’s alleged

mischaracterization of both the $300,000.00 contribution by the

members of PEM and the relief requested by Appellees. The

bankruptcy court recharacterized the $300,000.00 portion of the

$1,242,000.00 settlement of the $7,000,000.00 claim or in other

words, exactly the relief sought by Appellees. The court made a

detailed explanation of all the intricate moving parts of this

complex dispute. To the extent the court failed to clearly

explain each moving piece, it was not due to any mistaken fact,

but rather to the unwieldy jargon associated with this type of

litigation.

Next, PEM contends the court was in error by stating that

Stanley Jacobsen was the sole member of PEM at the time of the

settlement agreement. This fact appears to be incorrect as the

evidence, discussed above, is that the members of PEM were

Stanley Jacobsen, Robert B. Conaty, and the Trust. However, this

minor mistake does not rise to the level of clear error. First,

the court made this mistake in its recitation of undisputed

facts. Secondly, the court obviously understood that PEM’s

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membership included all three members at all relevant times. In

its analysis of the first Dornier factor, the court specifically

noted that these three members were responsible for the

$300,000.00.

PEM’s four other claims of errors merely reargue the proper

application of the Dornier factors. None constitute clear error.

III.

For the foregoing reasons, the judgment of the district

court is AFFIRMED.

AFFIRMED

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