Gary Joseph Dowdy

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
NEW BERN DIVISION
IN RE:
GARY J. DOWDY, SR., 	CASE NUMBER 09-00336-8-JRL
CHAPTER 11
DEBTOR.
______________________________________________________________________________
ORDER
This matter came before the court on MOLAW, LLC’s pending motions to intervene and
for relief from stay. A hearing on the matters was held in Raleigh, North Carolina on September
2, 2009.
BACKGROUND
An involuntarily Chapter 7 petition was filed on January 15, 2009, naming Gary Joseph
Dowdy, Sr., as the debtor. On May 6, 2009, an order was entered by this court granting the
conversion of the debtor’s case from Chapter 7 to Chapter 11. Among the debtor’s real property
listed in the filed Schedule A are two tracts of adjoining property in Nags Head, North Carolina.
The first tract is described as 6504 S. Croatan Highway, Parcel No: 008822005 and valued at
$2,386,476.40 (“Tract 1"). The second tract is described as Forbes Street, Parcel No: 008822007
and valued at $230,000.00 (“Tract 2"). Tract 1 is divided into two parcels of real property and is
the tract at issue.
SO ORDERED.
SIGNED this 14 day of October, 2009.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1The judgment creditors assert a procedural irregularity in the clerk confirming the sale
without ruling on the motion for resale. Since that motion was clearly untimely no ruling prior
to the order confirming sale was required.
2
On November 14, 2005, a judgment in the amount of $3,000,000.00 was entered against
the debtor in favor of Muslima Subkhangulova Dowdy, Diana Subkhangulova, and Albina
Subkhangulova (the “judgment creditors”), which became a lien against the debtor’s real
property, including both Tracts 1 and 2. The debtor filed an appeal from the judgment. On
February 13, 2008, after all appeals were exhausted, the debtor was given notice of his right to
claim exempt property. The debtor filed a motion to claim exempt property on April 18, 2008,
but did not claim any exemption in Tract 1. On April 28, 2008, a writ of execution was issued
against the debtor’s property in Dare County, North Carolina. The Sheriff of Dare County
elected to sell all of Tract 1. On July 9, 2008, Tract 1 was sold at the Dare County Courthouse in
Manteo, North Carolina. After the sale of Tract 1, numerous upset bids were filed with the Clerk
of Court for Dare County. On August 28, 2008, a final upset bid was placed on the property by
MOLAW, a North Carolina limited liability company with its principal place of business in
Elizabeth City, in the amount of $250,670.00. 	No further upset bid was made within the ten-day
upset bid period following August 28th
, nor was an objection filed to resell the property on
grounds that MOLAW’s bid was too low.
On September 12, 2008, four days after the upset bid period expired, the judgment
creditors filed a motion for resale. However, due to the untimeliness of the judgment creditors’
motion, the Clerk of Superior Court for Dare County confirmed the sale to MOLAW on October
20, 2008.1 On October 31, 2008, the judgment creditors filed a notice of appeal. MOLAW
moved to dismiss the appeal on timeliness and jurisdictional grounds. On January 15, 2009,
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before the appeal could be heard, the judgment creditors placed the debtor into involuntary
bankruptcy. With the automatic stay in effect, the motion to dismiss the appeal remains frozen
in state court. MOLAW asserts that it is the equitable owner of Tract 1 and, therefore, should be
granted relief from the stay so that it may join its equitable interest with the legal title.
Both the debtor and judgment creditors oppose lifting the stay. The two parties are of the
opinion that Tract 1 remains part of the bankruptcy estate because of a procedural irregularity
involved in the execution sale process. After the debtor filed his motion to claim exemptions, no
order was entered setting off those exemptions. Because of this procedural irregularity, the
debtor and judgment creditors contend that the clerk of court was without authority to issue the
April 28, 2008, writ of execution. As such, they seek to have Tract 1 resold under the debtor’s
reorganization plan pursuant to 11 U.S.C. § 1123. MOLAW contends that regardless of the
existence of this procedural irregularity on the part of the clerk, it was a bona fide purchaser
whose interest is unaffected.
An additional party to the proceeding is Sandra Dowdy Jump (“Jump”), a former spouse
of the debtor. Jump asserts that on November 27, 2000, she and the debtor executed a North
Carolina general warranty deed regarding Tract 1. Language was included in the deed which
purports to grant Jump a right of first refusal should the debtor ever attempt to sell the property.
Jump further asserts that since the deed has been of record since September 5, 2001,the Sheriff’s
sale triggered her preemptive right permitting her to match MOLAW’s bid and purchase Tract 1
at the sale’s final price.
Also before the court is an issue which deserves brief mention. While MOLAW is a
separate legal entity, its members are all practicing attorneys with the Twiford Law Firm
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(“Twiford”) in Elizabeth City, North Carolina. Twiford represented the judgment creditors
during the litigation and successful settlement negotiations with the debtor that would later lead
to the judgment and execution. Twiford had no role in the execution process, having been
discharged by all three judgment creditors previous to that time. However, when MOLAW
learned of the execution process, correspondence was exchanged between MOLAW and the
judgment creditors about a bidding coalition in which MOLAW would make upset bids to
elevate and maximize the recovery on the judgment. That the members of MOLAW are the
former attorneys of the judgment creditors raises unusual questions into which the court inquired
at the hearing. This is particularly the case since MOLAW acknowledged that when the final bid
was submitted, there was an ongoing dispute between the judgment creditors and Twiford
concerning attorney’s fees. The court finds, however, that full disclosure of the cooperative
bidding was made both privately and on the public record without objection from the judgment
creditors. Therefore, the court will not turn its ruling on this unusual congruity of interests.
Thus, the court is left to determine two distinct issues: 1) whether the procedural error by
the clerk of court was of such magnitude that the sale should be undone and brought into the
bankruptcy estate, and 2) the effect of the right of first refusal on an execution sale.
DISCUSSION
N.C.G.S. §1C-1603(e) details the procedure for setting aside exempt property. The
judgment debtor may move to designate exemptions by filing a motion and schedule of assets or
requesting a hearing before the clerk. If the judgment debtor files a motion, a 10-day waiting
period is required after the motion to allow for the judgment creditor to file objections. If no
objection is filed within the 10-day time frame, the clerk shall enter an order designating
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allowable property as exempt. After the clerk’s order is entered, the judgment creditor may then
request the issuance of a writ of execution. N.C.G.S. § 1C-1603(e)(3)-(6).
Under North Carolina law, to gain relief from an irregular judgment that is entered
contrary to required procedures, the court must determine: 1) that the irregularity was material in
prejudicing the movant’s rights, 2) that the movant used diligence in discovering the irregularity,
and 3) that the movant is entitled to relief. Menzel v. Menzel, 250 N.C. 649, 654-56, 110 S.E.2d
333, 336-38 (1959).
At the hearing, Beth Meekins (“Meekins”), a Deputy Clerk for the Superior Court of
Dare County, testified that court records did contain the debtor’s motion to set aside exempt
property but did not contain an order from the clerk to set off such property. Meekins further
asserted that it was standard practice to send a copy of the debtor’s motion for exemptions along
with the execution to the sheriff’s office immediately upon the filing of the execution. Prior to
the present hearing, the deputy clerk acknowledged that she was unaware of the statutory 10-day
waiting period.
It is without question that the clerk of court erred in not filing an order to set aside
exempt property before issuing the writ of execution on the debtor’s property. N.C.G.S. § 1C-
1603(e)(6). However, the court finds that such error does not appear to have had a material
effect on the sale of Tract 1, or to have prejudiced the debtor or judgment creditors. Specifically
as to the debtor, notice of the initial sale was hand-delivered to him by the deputy sheriff of Dare
County. Affidavit of Marylynn Cahoon, August 28, 2008. Following the sale, notice of all upset
bids was mailed to the upset bidder and the debtor. At all times throughout the process, the
debtor was aware of the steps being taken as to Tract 1. Even if unaware of the clerk’s error, the
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debtor had ample opportunity to protect his rights throughout the sale process. More
importantly, however, Tract 1 was not listed as exempt property in the debtor’s motion to claim
exemptions. Therefore, the outcome of the sale of Tract 1 would be unchanged even if the clerk
had properly executed her duties.
While the judgment creditors were not sent notice of each upset bid filed, such
information was of public record. Furthermore, based on the correspondence between counsel
for the judgment creditors and MOLAW, the judgment creditors were aware of MOLAW’s
intentions to file repeated upset bids to raise the final price. Therefore, the judgment creditors
had sufficient opportunity to monitor upset bid periods were they concerned about the final sale
price.
Under North Carolina law, materiality of a defect in an execution sale is not established
solely by inadequacy of purchase price.
“[I]t is the materiality of the irregularity in such a sale. . .which is determinative of a
decision in equity to set the sale aside. . .Where inadequacy of purchase price is
necessary to establish the materiality of the irregularity, it must also appear that the
irregularity or unusual circumstance caused the inadequacy of price. ”
Beneficial Mortgage Co. v. Peterson, 163 N.C. App. 73, 80, 592 S.E.2d 724, 728 (2004), quoting
Swindell v. Overton, 310 N.C. 707, 713, 314 S.E.2d 512, 516 (1984).
The numerous upset bids filed are evidence that the procedural error had no effect on interest in
the property. Furthermore, the procedural misstep was immaterial as to the determination of
price as it is clear the debtor never asserted a claim of exemption in this tract.
The court has reached this conclusion with great reluctance. It appears this property was
likely sold significantly below market value, is the only asset available to satisfy a consent
judgment for grievous wrongs, has a serious procedural irregularity, and a curious intertwining
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of interests of counsel. Nonetheless, these are not sufficient to set aside the sale. The court
notes that this ruling returns the parties to state court where the appeal of the clerk’s
confirmation order is pending. Should the resident superior court judge with supervisory
authority over the internal procedures of his or her own court see this differently, a fair result
would be to return this property to the bankruptcy estate where it could be sold more
appropriately.
Based on the foregoing, the motion for relief from stay is GRANTED. While the second
issue concerning Jump’s right of first refusal is intriguing, and appears to be an issue of first
impression in North Carolina, the court will not extend its analysis to such matters. With the
stay lifted as to Tract 1, the impact of Jump’s preemptive rights on the execution sale is better
suited at this juncture for determination by the state courts.
END OF DOCUMENT
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