Terry Davis Cottle and Susan Whitford Cottle

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
NEW BERN DIVISION
IN RE:
TERRY DAVIS COTTLE
SUSAN WHITFORD COTTLE
DEBTORS
CASE NO.
07-03436-8-RDD
ORDER REGARDING EXTENT OF AUTOMATIC STAY
This matter is before the court on the debtors’ motion to determine the extent of the
automatic stay, and more specifically whether the automatic stay applies to a securities account held
by Challenger Resources, LLC. A hearing was held in Wilson, North Carolina on November 14,
2007.
The debtors filed a petition for relief pursuant to chapter 11 of the Bankruptcy Code on
September 17, 2007. On that date, a companion case was filed pursuant to chapter 11 on behalf of
Waynesborough Furniture, Inc., a corporation owned and operated by the debtors.
On November 3, 2006, the debtors formed Challenger Resources, LLC (“Challenger”), of
which the debtors are the sole members. On January 6, 2007, the debtors transferred their Wachovia
Securities Account to Challenger for no consideration. That securities account serves as collateral
SO ORDERED.
SIGNED this 15 day of November, 2007.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
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for a loan made to the debtors by New Century Bank. The value of the securities account is now
approximately $244,000.00
At the hearing, Mr. Cottle testified that the debtors opened the securities account
approximately 20 years ago to save for their retirement. After becoming concerned about the ability
of creditors to reach the funds in the account, Mr. Cottle decided to transfer the funds to Challenger.
Mr. Cottle testified that New Century Bank, for whom up to $250,000.00 of the securities account
serves as collateral, approved of the transfer. 	Mr. Cottle testified that it is his desire to use
$50,000.00 from the account to purchase new floor models for Waynesborough Furniture, Inc..
Based upon his experience, Mr. Cottle predicted that he could purchase floor models, generate sales
from them, create accounts receivable, and sell the accounts receivable for approximately
$90,000.00 within six months.
Counsel for the debtors indicated that an adversary proceeding had been commenced against
Challenger to avoid the fraudulent transfer from the debtors to Challenger pursuant to 11 U.S.C. §
548. Counsel indicates that, because Challenger has no defense to the adversary proceeding, the
funds are property of the estate, and the automatic stay should apply to the funds to prevent New
Century Bank from exercising control over the funds. Counsel argues that the use of the funds by
the debtors to purchase inventory would provide the greatest return to all creditors.
Counsel for New Century Bank and the Bankruptcy Administrator’s office both argue that
the securities account is not a part of the estate, as it belongs to a separate entity, Challenger. In
support of their position, both parties cite Kreisler v. Goldberg, 478 F.3d 209 (4th Cir. 2007). In
Kreisler, the Fourth Circuit found
The fact that a parent corporation has an ownership interest in a subsidiary, however,
does not give the parent any direct interest in the assets of the subsidiary. Although
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Bask could have established an ownership interest in the property, it chose not to do
so. 	Instead, it created an LLC for the purpose of holding title to the property.
Having assumed whatever benefits flowed from that decision, it cannot now ignore
the existence of the LLC in order to escape its disadvantages.
Id. at 214.
As in Kreisler, the debtors in this case no longer have a direct interest in the assets of
Challenger. The debtors chose to transfer the securities account to Challenger and now must live
with the consequences. Because Challenger is not a debtor in this court, the automatic stay imposed
in the Cottles’ individual case does not apply to the assets of Challenger. Therefore, the debtors may
not liquidate any amount of the securities account and may not buy and sell securities within the
account. Only Challenger may do so in conformance with the contractual relationship with New
Century Bank. Likewise, because the automatic stay does not apply to the assets of Challenger, New
Century Bank’s pending motion for relief from stay is moot.
SO ORDERED.
END OF DOCUMENT
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