PEM Entities LLC v. Eric M. Levin

Filing

UNPUBLISHED PER CURIAM OPINION filed. Originating case number: 5:14-cv-00889-D,8:13-01563,8:13-00122. Copies to all parties and the district court. [999909153]. [15-1669]

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 1 of 12

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT

No. 15-1669

In Re: PROVINCE GRANDE OLDE LIBERTY,
Deer Olde Liberty AA Lots, LLC,

LLC,

a/k/a

Silver

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.

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 2 of 12

Affirmed by unpublished per curiam opinion.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Unpublished opinions are not binding precedent in this circuit.

2

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 3 of 12

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

Specifically,

M.

Levin

PEM

recharacterization

and

Howard

contests
of

Shareff

the

certain

(“Appellees”).

bankruptcy

debt

into

equity.

court’s
For

the

following reasons, we affirm the decision of the district court.
I.
This case arises out of several North Carolina real estate
investments
Fixed

involving

Return

Fund,

Howard

LLC

Jacobsen

(“Lakebound”)

(“Howard”).

is

a

company

Lakebound
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
3

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 4 of 12

litigation in North Carolina state court and provides a basis
for Appellees claims in the underlying bankruptcy proceeding.
Specifically,

Appellees

misappropriation
from

Paragon

of

was

contend

Lakebound’s

an

that

this

funds.

arms-length

The

transfer

was

$6,465,000.00

transaction

evidenced

a

loan
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

Paragon.

Under

entered

that

into

agreement,

a

settlement

Paragon

agreement

agreed

to

with

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.
Jacobsen,

Rather,
negotiated

settlement

of

principals

had

the
the

Debtor’s
the

principals,

agreement

Loan.”

Paragon

authority

to

that

including

purported

understood
bind

PEM.

to

that

Howard
be

“in

Debtor’s

Further,

the

settlement agreement bound Paragon to sell the loan to PEM for a
4

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 5 of 12

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

$130,000.00,
contributed

outside
Conaty

debt.

Stanley

contributed

$70,000.00.

Jacobsen

$100,000.00,

Together,

these

contributed

and

three

the

Trust

contributions

totaled $300,000.00.
PEM

relied

on

financing

purchase

price.

Two

Simone

(collectively

to

individuals,
“D&S”),

assemble
Joseph

the

remainder

Deglomini

loaned

PEM

and

of

Joseph

$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

transferred
advanced”

the

loans

those

$202,087.71
$50,000.00

to

to

entities

PEM.
Debtor

made

Shortly
for

to

PEM.

thereafter,

miscellaneous

Debtor

PEM

“re-

operating

expenses. At no time did PEM or Debtor maintain any ledger or
5

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 6 of 12

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

agreement
investment

from
in

a

paid

debt

Debtor.

by

owed

PEM

pursuant

it

by

Debtor

the

court

Thus,

to

the
into

settlement
an

equity

rendered

PEM’s

$7,000,000.00 claim void.
PEM appealed the bankruptcy court’s order to the United
States

District

Court

for

the
6

Eastern

District

of

North

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 7 of 12

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

determination

of

the

whether

Bankruptcy
a

Code

particular

often

obligation

requires
is

debt

a
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
7

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 8 of 12

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

8

of

interests

between

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 9 of 12

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

negotiated

and

PEM’s

claims.

executed

by

The

Paragon

settlement
and

agreement

Debtor’s

was

principals.

While PEM notes that it was neither a party to nor a signor of
the settlement agreement, Paragon believed Debtor’s principals
9

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 10 of 12

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.

$292,000.00.

It

even

Clearly,

obligated

PEM

knew

Paragon

of,

to

loan

participated

PEM

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

extension

of

satisfaction

agreement
itself

of

the

to

in

which

complete

Paragon

loan.

Debtor
what

used

was,

Moreover,

PEM

as

an

in

effect,

a

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
10

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 11 of 12

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

facts.

made

Secondly,

this
the

mistake
court

in

its

recitation

obviously
11

of

understood

undisputed
that

PEM’s

Appeal: 15-1669

Doc: 36

Filed: 08/12/2016

Pg: 12 of 12

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

12