Etheridge Oil Company, Inc. v. Brown et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
THOMAS E. BROWN, III
Debtor
CHAPTER 11
CASE NUMBER: 07-02856-8-RDD
ETHERIDGE OIL COMPANY, INC.
Plaintiff
v.
THOMAS E. BROWN, III, MICHAEL
K. BARNES, W. WATSON BARNES,
DAVID W. WOODARD, ROBIN
BROWN MERRITT, and BROWN OIL
COMPANY, INC., GEORGE MASON
OLIVER
Defendants
ADVERSARY PROCEEDING
NUMBER: 08-00230-8-RDD
PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS MATTER coming on to be heard and being heard before the undersigned United States
Bankruptcy Judge, Honorable Randy D. Doub, Judge Presiding at the May 15, 2012 term of the
United States Bankruptcy Court for the Eastern District of North Carolina, Wilson Division, pursuant
SO ORDERED.
SIGNED this 21 day of June, 2012.
________________________________________
Randy D. Doub
United States Bankruptcy Judge
____________________________________________________________
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 1 of
15

to the trial of issues set forth in that certain Amended Complaint filed herein on or about October
15, 2010; and, the Court having considered the testimony of witnesses and other evidence presented
by the Plaintiff and the Defendants beginning on May 15, 2012 with the Court being recessed at the
conclusion of the day on May 15 and reconvened on May 21, 2012; and, the Court after considering
the evidence, trial briefs submitted by the parties, matters of record, and the arguments of counsel,
hereby makes the following:
PROPOSED FINDINGS OF FACT
1. Plaintiff, Etheridge Oil Company, Inc. (“Plaintiff”) is a domestic North Carolina
corporation having its principal place of business in Kenly, Johnston County, North
Carolina.
2. Defendant, Thomas E. Brown, III (“Brown”), is a citizen and resident of Wilson,
Wilson County, North Carolina.
3. Defendant, Michael K. Barnes (“M. Barnes”), is a citizen and resident of Wilson,
Wilson County, North Carolina.
4. Defendant, W. Watson Barnes (“W. Barnes”), is a citizen and resident of Wilson,
Wilson County, North Carolina.
5. Defendant, David W. Woodard (“Woodard”), is a citizen and resident of Wilson,
Wilson County, North Carolina.
6. Defendant, Brown Oil Company, Inc. (“Brown Oil”), is a domestic North Carolina
corporation which operated a principal place of business being located in Wilson,
Wilson County, North Carolina.
7. Brown initiated a voluntary petition under Chapter 11 of the Bankruptcy Code (Case
Number: 07-02856-8-RDD) on or about August 3, 2007.
2
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 2 of
15

8. Brown’s Chapter 11 petition was dismissed by this Court on November 30, 2011; and
a Motion To Reconsider such dismissal was filed by Robin Brown Merritt (now
known as Robin Brown Farrin) on December 1, 2011, and denied on January 25,
2012.
9. An involuntary bankruptcy petition was filed against Brown Oil on October 19, 2010
(Case Number: 10-08577-8-RDD); and George Mason Oliver, Esquire, was
appointed as Chapter 7 Trustee for Brown Oil on February 4, 2011.
10. M. Barnes filed a voluntary bankruptcy petition under Chapter 13 of the Bankruptcy
Code on July 19, 2011 (Case Number: 11-05482-8-RDD); and Robert R. Browning,
Esquire, was appointed as Chapter 13 Trustee.
11. This Adversary Proceeding was called for trial by this Court on May 15, 2012
pursuant to a Scheduling Order entered by this Court.
12. The underlying claims at issue are based on North Carolina state law and are brought
by a creditor as a necessary part of the claims process as to Brown Oil. Etheridge Oil
Co. v. Brown, (In re Brown), No. 08-00230-8-RDD at 2 ¶ H (Bankr. E.D.N.C. March
13, 2012). Therefore, this Court has jurisdiction to hear this cause of action pursuant
to 28 U.S.C. 151, 157(a) and the general Referral Order from the U.S. District Court,
Eastern District of North Carolina dated August 3, 1984 as set forth in that certain
Consent Order entered by this Court on March 13, 2012. Id. The parties “consent
to this Court hearing any non-core claims asserted in this adversary proceeding
pursuant to 28 U.S.C. § 157(c)(1) and for the Honorable Randy D. Doub to submit
proposed findings of fact and conclusions of law related thereto to the District Court
3
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 3 of
15

as provided under Bankruptcy Rule 9033.” Id. at 3 ¶ I.
13. Plaintiff has filed an objection to the dischargeability of its debt as against Brown in
Case Number: 07-02856-8-RDD. Plaintiff has not filed an objection to the
dischargeability of its debt as against M. Barnes in Barnes’ Chapter 13 proceeding
identified as Case Number: 11-05482-8-RDD.
14. This is an action, inter alia, in which Plaintiff seeks to recover a money judgment
against Brown Oil and the individual Defendants, Brown, M. Barnes, Woodard, and
W. Barnes.
15. By separate orders, the Court has entered judgment against Brown Oil on the claim
for a money judgment and dismissed the nondischargeability claims as against Brown
and found any nondischargeability claims against M. Barnes as not properly pled.
16. In 2005, Wilson Petroleum Company, Inc. and Brown Oil Company, Inc. merged to
form one corporation, Brown Oil, which engaged in the sale of petroleum and
petroleum products, including but not limited to gasoline (“fuel”), in Wilson County
and surrounding counties in eastern North Carolina. At the time of the merger,
Brown Oil designated a new board of directors consisting of Brown, M. Barnes, W.
Barnes, and Woodard.
17. During the period from the merger in 2005 until some time in 2009, M. Barnes and
Brown served as employees and the managing officers who conducted day to day
operations of Brown Oil including, but not limited to, the buying and selling of fuel.
Brown’s employment as a managing officer of Brown Oil was terminated in 2009.
M. Barnes’ employment as the managing officer of Brown Oil continued until the
filing of an involuntary bankruptcy petition against Brown Oil in October, 2010.
4
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 4 of
15

18. In December, 2007, Plaintiff and Brown Oil entered into a contractual agreement
whereby Plaintiff would sell fuel to Brown Oil for the use and benefit of Brown Oil’s
customers. This contractual agreement also included the signing by both parties of
an Automated Clearing House Agreement (“ACH Agreement”) which authorized,
among other things, Plaintiff to make automatic direct drafts from Brown Oil’s bank
account with Branch Banking & Trust Company (“BB&T”) for the payment of fuel
received by Brown Oil from Plaintiff.
19. At all times during the period from December 2007 through June 2008, when
Plaintiff supplied fuel to Brown Oil pursuant to the contractual agreements, Plaintiff
was an unsecured creditor of Brown Oil.
20. At all times during the period from December 2007 through June 2008, BB&T was
a secured creditor of Brown Oil with liens on Brown Oil assets, including but not
limited, to all accounts receivable.
21. During January 2008, Brown Oil defaulted on fuel payments due to Plaintiff in an
amount in excess of $50,000.00.
22. Brown Oil agreed to cure the January 2008 payment defaults within a reasonable
period of time, and Plaintiff agreed to continue supplying fuel to Brown Oil pursuant
to the December 2007 contractual agreement.
23. In April 2008, Brown Oil again defaulted on fuel payments due to Plaintiff, and
Plaintiff again agreed to carry this payment default as an accounts receivable until
such time as Brown Oil could cure the default.
24. During the period from June 12, 2008 through June 16, 2008, Brown Oil accepted
deliveries of fuel from Plaintiff, but defaulted on multiple fuel payments due to
5
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 5 of
15

Plaintiff in an amount in excess of $400,000.00.
25. On June 16, 2008, Plaintiff terminated the agreement by and between the parties due
to payment defaults and refused to deliver fuel to Brown Oil.
26. On June 18, 2008, Brown Oil, by and through M. Barnes, directed BB&T to
terminate the automatic draft of its account in favor of Plaintiff (ACH Agreement)
due to Plaintiff’s termination of the contractual agreement with Brown Oil.
27. As a result of the termination of the contract with Plaintiff, Brown Oil was required
to curtail some of its business operations but continued to engage in business as a
seller of fuel through and including the time of the filing of the involuntary petition
in October 2010.
28. Brown Oil has made no payments to Plaintiff since June 2008 for the sale of fuel by
Plaintiff to Brown Oil.
29. On July 3, 2008, Michael Doty, Chief Operating Officer for Plaintiff, signed a
verified Complaint which was filed in Johnston County Civil Superior Court on July
18, 2008. Plaintiff sought relief in this Complaint against Brown Oil and the named
individual Defendants, inter alia, for a money judgment, the imposition of an
equitable lien and/or constructive trust against all assets of Brown Oil and the
appointment of a receiver as to some of the operations of Brown Oil.
30. On October 30, 2008, Plaintiff filed this adversary proceeding, which also sought
relief, inter alia, against Brown Oil and the named individual Defendants for a money
judgment, the imposition of an equitable lien and constructive trust on Brown Oil
assets as well as the appointment of a receiver.
31. During the period from the filing of this adversary proceeding on October 30, 2008
6
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 6 of
15

through and including the date of trial, Plaintiff has not requested this Court to
impose an equitable lien, constructive trust, appointment of receiver or any other
protective remedy in favor of Plaintiff against Brown Oil and the named individual
Defendants.
32. In June 2008, Brown Oil owed certain secured indebtedness to BB&T identified as
Note #51 (balance of approximately $1,000,000.00), Note #52 (balance of
approximately $300,000.00) and Note #54 (line of credit with balance of
approximately $439,000.00).
33. As security for theses notes, BB&T had a perfected lien on all accounts receivable,
equipment, and inventory of Brown Oil. Brown Oil held its operating checking
account with BB&T.
34. During the period from January 2007 through the fall of 2010, BB&T made demands
upon Brown Oil to liquidate secured assets including, but not limited to, Merrill
Lynch stock valued in excess of $400,000.00 to pay down secured debt owed to
BB&T as set forth herein.
35. During the period from January 2007 through the filing of the involuntary bankruptcy
petition against Brown Oil in October 2010, Brown Oil paid to BB&T the full
amount of the three (3) notes due in an amount in excess of $1,750,000.00 including,
but not limited to, certain payments made on behalf of Brown Oil by W. Barnes as
a guarantor of the BB&T debt.
36. During the period from 2006 through 2009, Brown Oil filed state and federal tax
returns listing gross yearly sales in excess of $30,000,000.00 (2006), $20,000,000.00
(2007), $11,700,000.00 (2008), and $2,800,000.00 (2009).
7
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 7 of
15

37. During the period from the time of the merger of the corporations in 2005 until the
filing of the involuntary bankruptcy petition in 2010, the board of directors of Brown
Oil met one time on February 12, 2007 to discuss the execution of a BP Agreement
and the liquidation of certain life insurance assets (at the request of the secured
creditor BB&T). There were no other meetings of the board of directors of Brown
Oil during the above period except for the February 12, 2007 meeting.
38. The board of directors of Brown Oil at no time neither discussed nor considered a
plan to wind-up the business operations and/or dissolve the corporation during the
period from the time of the merger in 2005 until the filing of the involuntary
bankruptcy petition in October 2010. Brown Oil held itself out and represented itself
to the public and its creditors as an operating and viable corporation.
39. The Defendants, W. Barnes and Woodard, made no decisions nor took any part in the
day-to-day operations of Brown Oil during the period from the time of the merger in
2005 until the filing of the involuntary bankruptcy petition in October 2010.
40. The Defendants, W. Barnes and Woodard, had no knowledge of the payment defaults
occurring in January, April, and June 2008 as a result of the contractual agreement
between Plaintiff and Brown Oil until some time in July 2008.
41. Woodard did not receive any compensation of any kind during the period from the
merger in 2005 until the filing of the involuntary bankruptcy petition in October,
2010 as a result of being named a director of Brown Oil in 2005.
42. Woodard has never been a shareholder of Brown Oil.
43. Woodard did not receive any benefit of any kind, monetary or otherwise, as a result
8
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 8 of
15

of payment defaults by Brown Oil with regard to the contractual agreement with
Plaintiff.
44. At the time of the merger of the corporations in 2005, W. Barnes received a limited
amount of non-voting stock in the merged corporation, Brown Oil, by virtue of
having owned stock in its predecessor in interest, Wilson Petroleum Company, Inc.
45. As a result of the merger in 2005, W. Barnes agreed to become a guarantor of
approximately $925,000.00 in secured debt owed by the merged corporation, Brown
Oil, to its secured creditor, BB&T.
46. At no time during the period from the merger in 2005 until the filing of the
involuntary bankruptcy petition in October 2010, did W. Barnes receive any
compensation for serving as a director of Brown Oil.
47. From the time of the merger in 2005 until some time in early 2010, W. Barnes
received monthly rental payments from Brown Oil in the amount of $2,500.00 for the
lease of a convenience store owned by W. Barnes located in Wilson County, North
Carolina. On multiple occasions, W. Barnes also received $1,800.00 as a monthly
rental payment from Brown Oil during the same period for Brown Oil’s lease of a
convenience store located in Wilson County, North Carolina owned by Barnes
Properties, Incorporated which is a closely held family corporation. These payments
were made to W. Barnes in the regular course of business by Brown Oil.
48. During the period from the merger in 2005 until some time in 2009, W. Barnes
received approximately $1,750.00 per month from Brown Oil to compensate him for
the sale of Wilson Petroleum stock to Brown Oil as well as compensation for his
9
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 9 of
15

agreement to guarantee approximately $925,000.00 in secured debt owed by Brown
Oil to BB&T.
49. Plaintiff offered no evidence to show the officers and directors of Brown Oil engaged
in a plan to wind-up and close the business operation and/or dissolve the corporation
during the period from the time of the merger in 2005 until the filing of the
involuntary bankruptcy petition in October 2010.
50. During the period from the merger in 2005 until the filing of the involuntary
bankruptcy petition in October 2010, M. Barnes and/or Brown continued to operate
Brown Oil in an attempt to generate income needed to pay secured and unsecured
creditors of Brown Oil.
51. W. Barnes received no benefit of any kind, monetary or otherwise, from the payment
defaults committed by Brown Oil in 2008 which resulted in the termination of the
contractual agreement with Plaintiff.
52. Brown continued to receive a salary from Brown Oil until his termination as an
employee some time in 2009. M. Barnes continued to receive compensation in the
nature of a salary until January 2011. The salaries received by Brown and M. Barnes
were in exchange for services rendered to Brown Oil. Brown and M. Barnes did
receive an increase in salary and received some employment benefits such as
insurance, etc., but nothing out of the ordinary for a business of this kind.
53. At no time did Plaintiff seek relief from this Court by way of equitable lien,
constructive trust, or the appointment of a receiver with regard to the issue of whether
or not the salaries or other benefits paid by Brown Oil to Brown and M. Barnes were
10
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 10 of
15

excessive, unduly beneficial, or otherwise inappropriate.
54. The fuel delivered by Plaintiff to Brown Oil during the period from December 2007
through June 2008 resulted in charges owed by Brown Oil to Plaintiff in the amount
of $867,194.70.
55. Money paid by Brown Oil to BB&T, including but not limited to, money resulting
from the liquidation of secured assets as requested by BB&T, were subject to secured
liens held by BB&T on accounts receivable, inventories, etc. Plaintiff was not
entitled to any of the money paid to BB&T as a secured creditor of Brown Oil during
the period from the time of the merger in 2005 through and including the date of trial
as Plaintiff was an unsecured creditor.
56. At the time of the filing of the involuntary bankruptcy petition against Brown Oil in
October 2010, Brown Oil owed debt in excess of $800,000.00 to numerous
unsecured creditors (not including Plaintiff); and the total debt owed by Brown Oil
to unsecured creditors including the Plaintiff was in excess of $1,600,000.00. As a
result of paying the BB&T debts, Brown Oil’s assets were unencumbered.
57. At all times during the period from the merger in 2005, until the filing of the
involuntary petition against Brown Oil in October 2010, Brown Oil’s liabilities were
substantially in excess of the value of its assets, but the corporation generated
sufficient cash flow to continue operating the business through and including the
filing of the involuntary petition in 2010.
58. Plaintiff has offered no evidence to prove the individually named Defendants, Brown,
M. Barnes, Woodard, and W. Barnes, were unjustly enriched in any way as a result
11
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 11 of
15

of the payment defaults committed against Plaintiff in 2008.
PROPOSED CONCLUSIONS OF LAW
1. This Court has jurisdiction over the parties and the subject matter of this cause of
action pursuant to 28 U.S.C. §§ 151, 157(a) and the general Referral Order from the
U.S. District Court, Eastern District of North Carolina dated August 3, 1984.
2. The parties have heretofore entered into a Consent Order with regard to jurisdiction
consistent with that certain holding in Stern v. Marshall, 564 U.S. _____, 131 S. Ct.
2594, 2011 WL 2472792 (June 23, 2011) and 28 U.S.C. §§ 151, 157(a) and the
general Referral Order from the U. S. District Court, Eastern District of North
Carolina dated August 3, 1984.
3. Plaintiff’s claims for relief for breach of contract (claim one) and objection to
dischargeability of debt under 11 U.S.C. § 523(a)(2), (7) (claims nine and ten) are
core proceedings and Court has authority to enter final judgment pursuant to 28
U.S.C. § 157(b).1
4. The remaining claims for relief are non-core proceedings and this Court is
authorized to submit Proposed Findings of Fact and Conclusions of Law related
thereto to the United States District Court pursuant to 28 U.S.C. § 157(c)(1) and as
provided under Federal Rule of Bankruptcy Procedure 9033.
5. The directors of Brown Oil, Brown, M. Barnes, W. Barnes, and Woodard, did not
owe any fiduciary duty to Plaintiff with regard to payment defaults because Brown
The bankruptcy court for the Eastern District of North Carolina entered an order and1
judgment on the claim for relief of breach of contract and an order on the objections to
dischargeability under 11 U.S.C. § 523(a)(2), (7), claims one, nine, and ten on June 21, 2012.
12
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 12 of
15

Oil did not at any time engage in a plan to wind-up business operations and/or engage
in a plan to dissolve the corporation prior to the filing of an involuntary bankruptcy
petition in October 2010.
6. The individual Defendants, Brown, M. Barnes, W. Barnes, and Woodard, were not
parties to nor did they breach the terms of the contractual agreement between
Plaintiff and Brown Oil which was the subject of this cause of action.
7. The individual Defendants, Brown, M. Barnes, W. Barnes, and Woodard, have
incurred no individual liability with regard to the breach of contract committed by
Brown Oil as alleged in Plaintiff’s First Claim of Relief.
8. Plaintiff has offered no evidence to prove Defendants are liable to Plaintiff based on
unjust enrichment/constructive trust/equitable lien as alleged in Plaintiff’s Second
Claim of Relief.
9. Plaintiff has offered no evidence to prove Defendants are liable to Plaintiff for acts
of fraud as alleged in Plaintiff’s Third Claim of Relief. Plaintiff offered no evidence
that an officer or director of Brown Oil made a false representation or acted to
conceal a material fact in relation to Plaintiff.
10. Plaintiff has offered no evidence to prove Defendants are liable to Plaintiff for
negligent misrepresentation as alleged in Plaintiff’s Fourth Claim of Relief.
11. Plaintiff has offered no evidence to prove Defendants are liable to Plaintiff for breach
of fiduciary duty/constructive fraud as alleged in Plaintiff’s Fifth Claim of Relief.
12. Plaintiff has offered no evidence to prove Defendants are liable to Plaintiff for unfair
and deceptive trade practices as alleged in Plaintiff’s Sixth Claim of Relief.
13
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 13 of
15

13. Plaintiff has offered no evidence to prove Defendants are liable to Plaintiff for civil
conspiracy as alleged in Plaintiff’s Seventh Claim of Relief.
14. Plaintiff has offered no evidence to prove Defendants are liable to Plaintiff for a
Uniform Fraudulent Transfer Act (USTA) violation as alleged in Plaintiff’s Eighth
Claim of Relief.
15. Plaintiff has failed to offer evidence necessary to allow Plaintiff to pierce the
corporate veil as set out in Plaintiff’s Eleventh Claim of Relief for piercing the
corporate veil.
BASED ON THE FOREGOING PROPOSED FINDINGS OF FACT AND CONCLUSIONS
OF LAW, THE BANKRUPTCY COURT PROPOSES JUDGMENT BE ENTERED AS
FOLLOWS:
1. Plaintiff has failed to prove the allegations set forth in the Second Claim of Relief:
unjust enrichment/constructive trust/equitable lien, and therefore, the same is denied.
2. Plaintiff has failed to prove the allegations set forth in the Third Claim of Relief:
fraud, and therefore, the same is denied.
3. Plaintiff has failed to prove the allegations set forth in the Fourth Claim of Relief:
negligent misrepresentation, and therefore, the same is denied.
4. Plaintiff has failed to prove the allegations set forth in the Fifth Claim of Relief:
breach of fiduciary duty/constructive fraud, and therefore, the same is denied.
5. Plaintiff has failed to prove the allegations set forth in the Sixth Claim of Relief:
unfair and deceptive trade practices, and therefore, the same is denied.
6. Plaintiff has failed to prove the allegations set forth in the Seventh Claim of Relief:
civil conspiracy, and therefore, the same is denied.
14
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 14 of
15

7. Plaintiff has failed to prove the allegations set forth in the Eighth Claim of Relief:
Uniform Fraudulent Transfer Act (UFTA) violation, and therefore, the same is
denied.
8. Plaintiff has failed to prove the allegations set forth in the Eleventh Claim of Relief:
piercing the corporate veil, and therefore, the same is denied.
9. Each party shall pay their own costs including attorney’s fees in this cause of action.
The Proposed Findings of Fact and Conclusions of Law are hereby filed pursuant to Federal
Rule of Bankruptcy Procedure 9033. The Clerk of Court shall serve forthwith copies on all parties
by mail and note the date of mailing on the docket.
END OF DOCUMENT
15
Case 08-00230-8-RDD Doc 147 Filed 06/21/12 Entered 06/21/12 16:01:23 Page 15 of
15