In Re: PROVINCE GRANDE OLDE LIBERTY, LLC, a/k/a Silver Deer Olde Liberty AA Lots, 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UNPUBLISHED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.
Certiorari granted by Supreme Court, June 27, 2017
Dismissed by Supreme Court, August 10, 2017

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Affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.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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