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In re Outerbanks Ventures, Inc.

United States District Court, E.D. North Carolina, Northern Division

September 29, 2017





         This matter is before the court on appeal from an order of the United States Bankruptcy Court for the Eastern District of North Carolina dismissing Debtor's Adversary Proceeding, No. 16-00009-5-SWH. The parties have thoroughly briefed the issue on appeal, and this matter is ripe for adjudication.


         Procedural History

         Outerbanks Ventures, Inc., ("Debtor") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on November 13, 2015. J. Jeffrey Tinkham ("Tinkham") and J. Jeffrey Tinkham Family Trust ("Trust") (Collectively, "Appellees") filed a Proof of Claim against debtor in the amount of $902, 716.79 on December 29, 2015. [DE #9-2 at 38-39 ¶29, 44 ¶73; #11-1 at 34-35] . Debtor filed a complaint in an adversary proceeding with Richard C. Willis ("Willis") and Richard A. Brindley ("Brindley") (Collectively, "Appellants") on February 9, 2016, and filed an amended complaint on March 21, 2016 to demand relief of a kind specified in Bankruptcy Rule 7001 and in objection to the claim of Tinkham under Bankruptcy Rule 3007(b). The amended complaint alleged six claims: (1) constructive fraud - 2011 transaction; (2) constructive fraud - 2013 transaction; (3) duress - 2013 transaction; (4) violation of N.C. Gen. Stat. § 84-13 Fraudulent Practice, Attorney Liable in Double Damages; (5) disallowance of claim and purported lien against property of estate; and (6) punitive damages.

         In response to appellants' amended complaint, appellees filed a Motion to Dismiss on April 11, 2016, on the basis of, inter alia, a waiver included in the 2013 transaction and attached to the amended complaint. The bankruptcy court conducted a hearing on appellees' Motion to Dismiss on June 8, 2016, and entered an order on August 12, 2016, granting the motion, finding appellants had not sufficiently alleged duress to invalidate the waiver and noting the additional claims of the appellants were remedies and did not provide independent bases for relief in light of the dismissal of the substantive claims. [DE #1-1 at 13, 14 n.16].

         Statement of Facts

         Viewing the' facts in the light most favorable to the appellants, the facts the appellants allege in the amended' complaint are as follows. Appellants' contentions arise out of a series of transactions with appellees which began in 2009. An agreement was executed in 2009 ("2009 Agreement") between Tinkham, Willis, and Brindley. [DE #9-2 Ex. A at 47]. Debtor and Trust were not named in the 2009 Agreement. Id. This agreement provided Tinkham would pay to Brindley a contribution of up to $500, 000.00 in exchange for a one-third (1/3) ownership interest to Tinkham "in the entity (or entities) that will own the Salvo, NC property (land, hotel, retail, marina, miniature golf, etc.)." Id. It also provided Tinkham "would become a one-third (1/3) owner in the entity (or entities) that will purchase Carolina Water's wastewater and water assets in Dare and Currituck Counties." Id. This 2009 Agreement permitted Tinkham to convert his ownership interest into a loan equal to his contribution by conveying it to Brindley and Willis, "[i]f the hotel financing is not procured in 2009 or if the Carolina Water transaction is not consummated in 2009." Id. There was no time specified as to when Tinkham would have to execute this conversion option. The anticipated transactions were not consummated in 2009. [DE #9-2 at 36 ¶15]. Tinkham did not exercise his option to convert his ownership interest into a loan at that time. Instead, he continued working with Brindley and Willis toward the profits to be realized from a regional wastewater treatment operation in Currituck County's Southern Outer Banks. Id.

         Appellants further allege in the amended complaint that prior to 2011 Tinkham occupied a superior bargaining position relative to the other partners because of his power and control over the books and records of the partnership (and related entities); his ability to cash out and obligate his fellow partners to repay his contribution and, his role as a legal advisor.[1] [Id. at 36 ¶16]. At all pertinent times to the amended complaint, Willis, on behalf of the Debtor, sought advice and assistance from Tinkham in matters pertinent to his profession as an attorney. [DE #9-2 at 37 ¶17]. Tinkham rendered valuable legal assistance to the Debtor in various matters, including but not limited to, the contract involving the Debtor's acquisition of property in Monteray Shores. Tinkham assisted in advising Debtor as to the terms and provisions of the financial documents when the Monteray Shores transaction closed on May 10, 2011. Tinkham was also intimately aware of the Debtor's financial condition, including its assets and liabilities; the terms of its obligations; what the Debtor was planning and why; what the objectives were and how they would be accomplished; the business contacts that Debtor had and wanted; and the business strategies to protect and promote the interests of the Debtor, which Tinkham helped formulate. Id.

         In the summer of 2011, Tinkham, Brindley, Willis, the Debtor, and the Richard A. Brindley Amended and Restated Revocable Trust executed a Credit Line Deed of Trust Note ("2011 Note"). [DE #9-2 at 37 ¶22; at 48 Ex. B] . The Debtor was added for the first time, as it had not appeared as a signatory on the 2009 Agreement. Appellants allege prior to the 2011 Note, Tinkham did not disclose that he had chosen not to exercise his right of conversion and failed to advise Brindley, Willis, or the Debtor, that they were no longer obligated to sign a note vouchsafing his contribution. [DE #9-2 at 37 ¶21] . This 2011 Note consolidated Tinkham's previous investment of $483, 028.00 under the 2009 Agreement, two contributions of $50, 000.00 each under separate loans, and established a $1, 000, 000.00 line of credit for the appellants. [DE #9-2 Ex. B at 48] . The maturity date for this 2011 Note, executed June 1, 2011, was December 31, 2011. [DE #9-2 Ex. B at 48, 50, Ex. C. at 52]. As security for the 2011 Note, the Debtor executed a Future Advances Deed of Trust encumbering certain real property, executed June 1, 2011. [DE #9-2 Ex. C at 51].

         Appellants allege the business of the partnership continued with the same goal of removing the wastewater treatment facilities from Debtor's property and occupying the status of a utility or quasi-utility as permitted by the North Carolina Utilities Commission to benefit from the construction of new facilities, the wastewater capacity, and receiving tap-on fees. [DE #9-2 at 38 ¶23] . Willis, on behalf of the Debtor and Brindley, discussed with Tinkham a plan to sell a portion of the Debtor's property. A release of collateral was then made by Tinkham upon request of appellants in 2012. [DE #9-2 at 38 ¶24; Ex. D at 56], In the fall of 2013, the 2011 Note had matured and the appellants sought another release of collateral from Tinkham for the sale of property, Phase 12, owned by the Debtor. [DE #9-2 at 38 ¶25]. The appellants allege that Tinkham advised them to go forward with the 2013 sale, but that he later changed his mind and refused to cooperate, causing them to be threatened with a lawsuit by the potential buyer. [DE #9-2 at 38 ¶¶25-28]. Accordingly, the parties executed the First Amendment to Credit Line Deed of Trust Note and Deed of Trust ("2013 Note") . [DE #9-2 Ex. D at 56] . The 2013 Note restated the appellants' obligations under the 2011 Note and noted the 2011 Note was in default with outstanding principle advanced under the 2011 Note at $832, 352.13 as of October 31, 2013. Id.

         Under the terms of the 2013 Note, Patricia Brindley was added as a party undertaking liability. Id. at 57, 61. The 2013 Note restructured the 2011 Note to extend the maturity date from December 31, 2011 to December 31, 2015, released and substituted the collateral, and substituted Trust as holder of the Notes, making the advance on behalf of Tinkham. Id. at 57. By the terms of the 2013 Note, the payment for the sale of Phase 12 would be made directly to Trust. Id. The appellants allege in the amended complaint that since 2012, Tinkham and Trust have received in excess of $900, 000.00 in payments on the 2011 Note. [DE #9-2 at 38 ¶29]. The debtor filed a voluntary petition for relief under Chapter 11 bankruptcy on November 13, 2015.

         On August 25, 2016, Debtor filed its notice of appeal of the bankruptcy court's order granting Tinkham and Trust's motion to dismiss the complaint and amended complaint under the adversary proceeding.

         COURT'S ...

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