Butler, III, Trustee v. Kruse et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILMINGTON DIVISION
IN RE:
RONALD HARLOW KRUSE and
KAREN LEE KRUSE,
Debtors. Case No. 04-7504-8-JRL
Chapter 7
ALGERNON L. BUTLER, III, TRUSTEE
in BANKRUPTCY FOR RONALD HARLOW
KRUSE and KAREN LEE KRUSE,
Plaintiff,
vs. Adversary Proceeding No.:
06-00236-8-AP
RONALD HARLOW KRUSE,
KAREN LEE KRUSE,
AMTEC FUNDING GROUP, LLC.
RICHMOND TITLE SERVICES, LP
d/b/a RICHMOND TITLE SERVICES
AS TRUSTEE, and
PLANVIEW DESIGN, INC.,
Defendants.
____________________________________________________________________________
ORDER
This case is before the court on the trustee’s motion for a preliminary injunction. On
SO ORDERED.
SIGNED this 04 day of December, 2006.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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November 15, 2006, the court conducted a hearing on this matter in Wilmington, North Carolina.
On September 27, 2004, the debtors filed a Chapter 7 petition. On their schedules the
debtors listed their residence as 6337 Northshore Drive, Wilmington, North Carolina (“Property”).
The market value of the Property was listed as $223,000, which was the price the debtors paid for it
that same year. The amount owed on the mortgage was $200,855, and the debtors claimed the N.C.
Gen. Stat. § 1C-1601(a)(1) exemption of $20,000.
On October 5, 2006, the debtors’ Chapter 7 trustee filed this adversary proceeding against
the debtors; Amtec Funding Group, LLC (“Amtec”); Richmond Title Services, LP as trustee under the
deed of trust; and Planview Design, Inc (“Planview”). The trustee alleges, among other things, that
around May 18, 2006, the debtors executed a promissory note pursuant to which they borrowed
$315,000 from Amtec. That same day, the debtors executed a deed of trust secured by the Property
in favor of Amtec as lender and Richmond Title Services, LP as trustee. The trustee contends that at
the time of the execution, delivery, and recordation of the deed of trust, the Property and the interests
of the debtors therein were property of the bankruptcy estate. Therefore, the trustee asserts that the
proceeds received by the debtors pursuant to the promissory note were property of the estate.
At the hearing on this matter, Mr. Kruse admitted to refinancing the Property. He asserted the
he did not know the trustee had any interest in the Property and thought he was free to refinance it.
The proceeds were reportedly used to pay off the existing mortgage, some debts, closing costs, as
well as fund the growth of the debtors’ new business, Planview. The debtors have only $19,000 of the
proceeds remaining. This money was placed in the trust account of the debtors’ attorney pursuant to a
consent order dated October 17, 2006. The debtors are no longer living at the Property and are in
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the process of trying to sell it. However, they are currently paying the expenses to maintain the
Property.
In the complaint, the trustee seeks avoidance and recovery of the post-petition transfer, a
determination of the interest in property and violation of the automatic stay, damages for violation of
the automatic stay, and turnover of the property. The trustee also seeks a preliminary injunction
prohibiting the debtors and Planview from further transferring, dissipating, or otherwise disposing of
the $19,000. In determining whether a preliminary injunction is appropriate, the court must consider
four factors: the likelihood that the plaintiff will prevail on the merits, the likelihood of irreparable harm
to the plaintiff if the injunction is denied, the likelihood of harm to the defendant if the relief is granted,
and the public interest. Virginia Carolina Tools, Inc. v. International Tool Supply, 984 F.2d 113, 119-
20 (4th Cir. 1993). The second and third factors are the most important. Id. at 120.
In this case, it is clear that the proceeds from the refinancing are property of the estate as a
matter of law. 11 U.S.C. § 541(a)(6). The only issue at trial is whether the defenses of laches or
estoppel bar the trustee’s claim. Therefore, the likelihood of the plaintiff prevailing on the merits weighs
in favor of the trustee. As to the second factor, if the injunction is denied, testimony suggests that the
$19,000 will be used to further expand Planview. Aside from the $19,000, the debtors and Planview
have no other resources that could be used to satisfy a judgment against them. Thus, the trustee would
suffer irreparable harm if the debtors were allowed to dissipate the proceeds prior to a trial. In regards
to the third factor, the debtors reportedly are able to make their monthly expenses, except for the
house payments which they have been taking money out of Planview to help fund.
In considering all four factors, the court finds that a preliminary injunction is appropriate. Even
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so, the debtors are no longer living in the residence, the Property is property of the estate, and the
trustee intends to sell it. To require the debtors to pay the mortgage, taxes, insurance, and electricity
on Property out of post-petition funds, which are not property of the estate, is unreasonable.
Therefore, the court grants the preliminary injunction and orders the $19,000 to remain in the trust
account of the debtors’ attorney. However, when the mortgage, taxes, insurance, and electric
expenses become due, the debtors’ attorney will release the appropriate amount to the debtors to
make the payments or the debtors’ attorney will make the payments directly.
“END OF DOCUMENT”
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