United States District Court, E.D. North Carolina, Eastern Division
W.S. BADCOCK CORPORATION, Appellant,
STEPHEN L. BEAMAN, as Chapter 7 Trustee of the Estate of Edward L. Braxton and Wanda F. Braxton, Appellee
Decided May 7, 2015
ON APPEAL FROM THE UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF NORTH CAROLINA, GREENVILLE DIVISION.
For W.S. Badcock Corporation, Appellant: Christopher L. DeCort, John E. Johnson, LEAD ATTORNEYS, Johnson & Cassidy, P.A., Tampa, FL; R. Daniel Boyce, Nexsen Pruet, PLLC, Raleigh, NC.
For Trustee Stephen L. Beaman, Appellee: Stephen Levi Beaman, LEAD ATTORNEY, Stephen L. Beaman, PLLC, Wilson, NC.
TERRENCE W. BOYLE, UNITED STATES DISTRICT JUDGE.
This cause comes before the Court on appeal from the Bankruptcy Court for the Eastern District of North Carolina's order of July 29, 2014, imposing sanctions on appellant. A hearing was held on the matter before the undersigned on April 29, 2015, at Raleigh, North Carolina. For the reasons discussed below, the decision of the bankruptcy court to impose sanctions is reversed in part and vacated in part.
Appellee, Stephen L. Beaman, is Chapter 7 trustee of the estate of Edward L. and Wanda F. Braxton. The Braxtons filed for Chapter 13 bankruptcy protection in October 2009 and the matter was converted to a proceeding under Chapter 7 in June 2011. [DE 2-5 p. 1]. Edward Braxton solely owned and operated Levy Management Group (Levy), a North Carolina corporation. Id. Prior to filing for bankruptcy protection, Levy had executed contracts with appellant, W.S. Badcock Corporation (Badcock or appellant), to operate four Badcock furniture stores in Wilson, Rocky Mount, Greenville, and Washington, North Carolina. [DE 6-1 pp. 27-78]. In January 2009, Levy notified Badcock that it wished to liquidate its interests in the North Carolina stores. [DE 3-6 p. 10]. Badcock elected, pursuant to the dealership agreements, to purchase commissions earned by Levy but not yet remitted and to operate the North Carolina stores formerly operated by Levy. [DE 3-6 pp. 11-12]. The trustee contends that, though Braxton and his counsel attempted to recover the commissions owed to Levy under the dealership agreement, including having participated in mediation in Florida, no resolution has been reached regarding the amount of commissions due to Levy. See [DE 2-5 p. 2].
While Levy was operating Badcock stores, Edward Braxton entered into a personal retail credit agreement with Badcock to allow him to purchase furniture from Badcock stores on credit at discounted rates. Badcock filed a proof of claim with respect to its personal retail credit agreement in the Braxton bankruptcy proceeding and such claim was fully resolved in March 2010. [DE 3-6 pp. 2-8].
In December 2013, the trustee moved in the bankruptcy court for permission to conduct a Rule 2004 examination of Badcock in Tampa, Florida, with documents to be produced to the trustee in North Carolina by December 20, 2013. [DE 2-1]. The trustee contended that the debtor, Edward Braxton, owned the entire interest in Levy which was not scheduled in the petition, and that the trustee believed that the assets of Levy may be liquidated for a sum greater than its liabilities. The motion for Rule 2004 examination of Badcock was granted, without opposition by Badcock after service of the motion, by order entered December 31, 2013. [DE 2-2].
On January 25, 2014, the trustee filed a motion for order confirming authority of the trustee regarding Levy and enforcement of its claims against Badcock. [DE 10-5]. The motion was granted, without opposition by Badcock after service of the motion, by order entered February 14, 2014. [DE 2-5]. Also on January 25, 2014, the trustee moved for a modified order for Rule 2004 examination of records and employees of Badcock. [DE 2-3]. The trustee sought to amend the Rule 2004 order to require production of specific documents held by Badcock relating to, inter alia, correspondence, contracts, payments, and transactions between Badcock and Levy. The motion further requested that Badcock designate a person or persons with knowledge regarding, inter alia, conversations and communications with Braxton or Levy, contract claims between Braxton or Levy and Badcock, and financial records of Badcock relating to Levy to appear at the examination. [DE 2-3]. The motion was granted, without opposition by Badcock after service of the motion, by order entered February 14, 2014. [DE 2-4]. The documents and person designated for oral examination were to be produced on March 24, 2014, at a location in Tampa, Florida. Id. On or about January 27, 2014, Levy filed suit for breach of contract and enforcement of arbitration in the Circuit Court for Polk County, Florida. [DE 41 pp. 27-30].
On March 18, 2014, Badcock filed in the Bankruptcy Court for the Middle District of Florida a motion to quash or alternatively for protective order. The Florida bankruptcy court granted in part and denied in part the motion, quashing the 2004 exam subpoena issued by the North Carolina bankruptcy court and ordering that the subpoena be issued by the Florida bankruptcy court, but denying the motion on all other grounds raised. [DE 4-1 p. 35]. The order further directed the Rule 2004 exam to be conducted " within the scope of examination as prescribed by Fed. R. Bankr.P. 2004(b)." Id. The trustee reissued his subpoena from the Florida bankruptcy court on April 25, 2014, for an examination to be held on May 12, 2014, in Tampa, Florida. [DE 2-9 pp. 22-23].
The Rule 2004 examination took place on May 12, 2014, with the trustee and a representative of Badcock. Badcock's representative was prepared only to testify as to Braxton's personal credit account with Badcock, which Badcock believed to be the proper scope of the examination as limited by the Florida bankruptcy court. Badcock further failed to produce any documents ordered for production by the North Carolina bankruptcy court's amended order. [DE 10-5]. Following the Rule 2004 examination, Badcock filed a motion for protective order as to the Rule 2004 examination in the Florida bankruptcy court. [DE 5-1]. At a hearing on the matter, the Florida bankruptcy court granted Badcock's motion, and an order was entered on June 26, 2014. [DE 2-9 pp. 17-18]. Specifically, the order held that the trustee was prohibited from further attempting to discover information relating to Badcock's relationship with Levy by Rule 2004 examination or otherwise while there is a pending proceeding by the trustee on behalf of Levy against Badcock pending in state court. Id. The trustee moved for reconsideration, and the Florida bankruptcy court after a hearing on July 21, 2014, amended its order, holding that it had exceeded its authority under Rule 45 of the Federal Rules of Civil Procedure and that it was for the North Carolina bankruptcy court to decide whether the Rule 2004 examination and particular discovery requested should be precluded by the " pending proceeding" rule. [DE 10-5 p. 9]. Badcock was permitted to seek a protective order from the North Carolina bankruptcy court. [DE 7-4 p. 61]. The trustee was assessed $750 in attorney's fees not as a sanction but " as a fee shifting under the equities of the case."  Id. at pp. 59-60.
Badcock proceeded to file a motion for protective order in the North Carolina bankruptcy court on July 25, 2014. [DE 5-3]. On June 13, 2014, the trustee had filed a third motion for Rule 2004 Examination of Badcock and a motion for order to appeal and show cause in the North Carolina bankruptcy court. [DE 2-6 & 2-7]. The North Carolina bankruptcy court issued its show cause order [DE 2-8] held a non-evidentiary hearing on July 29, 2014. The bankruptcy court entered an oral order granting the trustee's six motions for Rule 2004 examination, denying Badcock's motion for protective order, imposing a fine of $50,000 to be paid by Badcock into the bankruptcy estate, awarding the trustee attorney's fees and costs in an amount to be determined, and directing Badcock to withdraw its motion to dismiss for lack of standing in the Polk ...