Carriage Crossing, Inc.

8:04-bk-03461NcebOct 20, 2005

Full text

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
CARRIAGE CROSSING, INC.
DEBTOR
CASE NO.
04-03461-8-ATS
ORDER APPOINTING CHAPTER 11 TRUSTEE
The matters before the court are the motion to convert filed by
the Internal Revenue Service, the motion to convert or dismiss filed by
the Employment Security Commission of North Carolina, the motion for
relief from the automatic stay filed by Branch Banking & Trust Company,
the motion to approve substitution of examiner filed by the debtor, and
the motion for disbursement filed by the debtor. A hearing took place
in Raleigh, North Carolina on October 20, 2005.
Carriage Crossing, Inc. filed a petition for relief under chapter
11 of the Bankruptcy Code on April 29, 2004. On June 24, 2005, this
case was administratively consolidated with the cases of Rufus Smith
Johnson, Case No. 04-02638-8-ATS and RSJ Realty, Inc., Case No. 04-
02346-8-ATS. This order applies to all three cases, and any reference
to the debtors in this order applies to the three consolidated debtors
unless otherwise stated.
The debtors were previously engaged primarily in the business of
purchasing and reselling real estate. Prior to filing their petitions
in bankruptcy, the debtors freely transferred assets between each other
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and generally treated each company and the individuals as one entity.
They provided seller-financing for many of the real estate
transactions, and a over one hundred of the lots they sold were
"double-sold" lots; that is, the debtors sold the lots, repossessed
them and re-sold them without paying the encumbrances on the property.
As a result, a number of consumers are unknowingly residing on property
subject to deeds of trust for which they are not liable on the
underlying debt. Because of these "double-sold" lots, the Consumer
Protection Division of the North Carolina Attorney General’s office has
been actively involved in this case. In addition, several secured
creditors have been working with the debtors to avoid foreclosing on
the property of these innocent third-party consumers.
After the cases were filed, the debtors assured the creditors and
the court that they would change their operating procedures to account
for their properties and cash flow. The debtors resisted numerous
motions for the appointment of a trustee or conversion to chapter 7,
always contending that the only way to protect the innocent consumers
with the double-sold lots was to keep the debtors operating. A
compromise was reached in November 2004 that resulted in the
appointment of an examiner to manage the receipts and disbursements of
the debtors. However, despite the best efforts of the examiner and the
bankruptcy administrator to oversee the debtors, some of the
questionable prepetition conduct continued postpetition, including
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transfers of properties to related non-debtor entities and cash
irregularities as well as alleged mortgage fraud. The FBI seized the
debtors’ records, and the debtors and their principals are facing
criminal investigations related to their business operations.
The individual debtor, Rufus Smith Johnson, passed away on
August 12, 2005. Since that time, the debtors’ ongoing operations of
purchasing real estate have ceased, and the debtors have focused on
liquidating their real estate holdings. In addition, a $3 million life
insurance policy has been assigned for the benefit of creditors, which
has substantially increased the cash that may be available to pay
creditors.
The IRS and the bankruptcy administrator contend that this case
should be converted to chapter 7 or a chapter 11 trustee should be
appointed. Because some of the prepetition conduct has also occurred
postpetition, even with substantial oversight, there are substantial
questions about the principals of the debtors continuing in a fiduciary
capacity. In addition, this case has been pending for 17 months and
little progress has been made toward confirming a plan or liquidating
the assets. The examiner has been unable to stop the cash flow
irregularities, and the bankruptcy administrator believes that the
debtors will continue to find ways to divert assets unless a trustee is
in place. The IRS and bankruptcy administrator are also concerned that
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the debtors will not pursue avoidance and fraudulent transfer actions
against their own principals and family members.
The debtors have proposed an orderly and speedy liquidation of the
real estate, some by public auction and some by private sale. They
also propose that the examiner’s duties be expanded to include
collecting all receipts and making all disbursements. The debtors’
office is closed, and there are no ongoing operations. The debtors
contend that the costs associated with having a trustee in place would
be enormous, and the amount of time it would take for a trustee to
become familiar with the details of this case would cause a substantial
delay in the asset liquidation. All of the secured creditors support
the debtors’ strategy for liquidating their assets, and all of the
secured creditors as well as the North Carolina Attorney General’s
office oppose the motion to convert or appoint a trustee.
The debtors have proposed a good strategy to liquidate their
assets, and they have the support of the secured creditors. However,
the performance of the debtors both pre- and postpetition mandates the
appointment of an independent fiduciary to oversee the liquidation. A
trustee would not be precluded from examining and perhaps adopting the
debtors’ proposed liquidation strategy. In addition, a trustee should
review all of the transactions between the parties, including the
validity of claims asserted by the secured creditors and the IRS.
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Finally, a trustee should investigate and pursue any avoidance actions
that might result in recovery to the estate.
Based on the foregoing, Joseph N. Callaway, II is appointed
chapter 11 trustee. The motion to disburse will be held open until the
trustee has an opportunity to review it. Similarly, BB&T’s motion for
relief from the automatic stay will be continued for the trustee to
review the matter, but if the parties have reached no agreement in two
weeks, the court will reconvene the hearing. The debtors’ motion for
substitution of examiner is denied.
SO ORDERED.
DATED: October 20, 2005
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