In re: Joan Fabrics Corporation et al.
Filing
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MEMORANDUM OPINION regarding the appeal from the Bankruptcy Court's May 5, 2014, Order (D.I. 1 -2). Signed by Judge Richard G. Andrews on 11/5/2014. (nms)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
In re: Joan Fabrics Corporation, et al.
Debtor.
Chapter 7
Bankruptcy Case No. 07-10479-CSS
(Jointly Administered)
Fred Godley,
Appellant,
Civil Action No. 14-774-RGA
v.
Rutherford County,
Appellee.
MEMORANDUM
Presently before the Court is Fred Godley's appeal (D.I. 1) from the Bankruptcy Court's
May 5, 2014 Order (D.I. 1-2) denying his Motion to Enforce Sale Order.
1. Introduction. 1 Joan Fabrics Corp. and Madison Avenue Designs, LLC (collectively,
the "Debtors") filed for bankruptcy on April 10, 2007. On June 4, 2007, the Bankruptcy Court
approved an order authorizing the Debtors to sell several parcels of real property (the "Real
Property'') to Godley pursuant to an Asset Purchase Agreement ("AP A"). (Bankr. D.I. 441;
Bankr. D.I. 1015, Ex.Bat 3). Per the terms of the APA, Godley purchased the Real Property
subject only to "Permitted Encumbrances," which included "[ e]asements, liens, restrictions,
encumbrances, encroachments, agreements and other matters of record ... ."Id. In 2011,
Rutherford County ("Appellee") attempted to enforce a lien on the Real Property arising from
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The Bankruptcy Court Opinion provides a more extensive background of the case. In re Joan
Fabrics Corp., 508 B.R. 881, 883-85 (Bankr. D. Del. 2014). The Court writes primarily for the
benefit of the parties and thus presumes familiarity with the relevant facts.
2007 business personal property taxes (the "Tax Lien") that allegedly accrued from January 1,
2007, until the June 4, 2007 asset sale. Godley filed a Motion to Enforce the Sale Order,
including a request to hold Appellee in contempt. (Bankr. D.I. 974). The Bankruptcy Court's
May 5, 2014 Order denied that Motion.
2. Contentions. Presently at issue is whether the Bankruptcy Court erred in holding that
the asserted Tax Lien is "of record," and thus a "Permitted Encumbrance" under the AP A. 2
Appellant argues that the Bankruptcy Court's conclusion was erroneous, because, under North
Carolina law, an encumbrance on real property can only be "of record" if it is recorded in the
county's register of deeds, rather than the county tax records. (D.I. 8, at pp. 7-8). Appellant also
claims that the Bankruptcy Court abused its discretion by denying his request to hold Appellee in
contempt for violating the Sale Order. Id. at p. 14. Appellee contends that the Bankruptcy Court
correctly found that the Tax Lien was a matter "of record" as defined by the AP A, and thus the
May 5, 2014 Order should be affirmed. (D.I. 9, at p. 4).
3. Standard of Review. Appeals from the Bankruptcy Court to this Court are governed
by 28 U.S.C. § 158. District courts have mandatory jurisdiction to hear appeals "from final
judgments, orders, and decrees" and discretionary jurisdiction over appeals "from other
interlocutory orders and decrees." 28 U.S.C. § 158(a)(l) and (3). This Court reviews the
Bankruptcy Court's findings of fact for clear error and exercises plenary review over questions of
law. See Am. Flint Glass Workers Union v. Anchor Resolution Corp., 197 F.3d 76, 80 (3d Cir.
1999).
The parties disagree as to whether the Court should review the issue on appeal as a
question oflaw or a question of fact. (D.I. 10, at p. 3; D.I. 9, at p. 1). "Contract interpretation is a
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Under North Carolina law, a business personal property tax lien can attach to real property of
the taxpayer located within the same taxing unit. N.C. Gen. Stat. § 105-355(a).
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question of fact, and review is according to the clearly erroneous standard. In contrast, contract
construction is a question oflaw mandating plenary review." John F. Harkins Co. v. Waldinger
Corp., 796 F.2d 657, 659 (3d Cir. 1986) (internal citations omitted). A court is interpreting
language in a contract when it "determine[ s] what ideas that language induces in other persons,"
and requires a court to "ascertain[] the intent of the parties." Id. (quoting 3 Corbin on Contracts,
§ 534 at 9 (1960)). On the other hand, "[c]onstruction ... is a process by which legal
consequences are made to follow from the terms of the contract and its more or less immediate
context ... ."Id. In its Opinion, the Bankruptcy Court did not attempt to ascertain the intent of
the original parties to the AP A. Appellee was not even a party to the AP A. Instead, the
Bankruptcy Court's inquiry focused on the legal effect of the phrase "ofrecord," as defined by
North Carolina law. See In re Joan Fabrics Corp., 508 B.R. at 888-91. This sort of analysis is
contract construction, and, therefore, is a matter oflaw that the Court will review de novo.
The Court will review the Bankruptcy Court's failure to hold Appellee in contempt for an
abuse of discretion. See Harley-Davidson, Inc. v. Morris, 19 F.3d 142, 145 (3d Cir. 1994).
4. Analysis. After reviewing the parties' papers, the Court concludes that the
Bankruptcy Court reached the correct legal conclusions. Appellant does not dispute the
Bankruptcy Court's conclusion that, according to North Carolina law, an encumbrance is "of
record" if it is "recorded in the appropriate records." (D.I. 8, at p. 9); see RAM ofEastern North
Carolina, LLC v. Weyerhaeuser Real Estate Dev. Co., 2011 U.S. Dist. LEXIS 94424, at *12
(E.D.N.C. Aug. 23, 2011). However, this Court disagrees with Appellant's argument that the
"appropriate" record for business personal property taxes is the register of deeds. Under North
Carolina law, "[a]ll property subject to ad valorem taxation shall be listed annually." N.C. Gen.
Stat.§ 105-285(a). "Listings and assessments and any changes ... shall be entered on the county
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tax records." Id. § 105-319(d). "[T]he obligation to pay ad valorem property taxes in the State of
North Carolina attaches at the time the property is listed, even though the amount of the tax has
not yet been determined." Jn re Members Warehouse, Inc., 991F.2d116, 120 (4th Cir. 1993);
see N.C. Gen. Stat. § 105-285(a). The parties do not dispute that Debtors' 2007 business personal
property was listed on the county tax records before Godley purchased the Real Property.
(Bankr. D.I. 1015, at p. 2).
Nevertheless, Appellant relies on various authorities to support his argument that the
register of deeds is the only appropriate index to record Appellee's asserted Tax Lien. The Court
finds that these authorities are inapplicable to the present dispute. Appellant misconstrues N. C.
Gen. Stat. §§ 47-20 and 47-20. l. Section 47-20 discusses the priority of certain encumbrances
on real property, but applies only to a "[d]eed of trust or mortgage ofreal or personal property, or
... a leasehold interest or other chattel real, or conditional sales contract of personal property."
N.C. Gen. Stat.§ 47-20. Section 47-20.1 is even more restrictive, setting forth the registration
requirements only for a "deed of trust or mortgage of real property." N.C. Gen. Stat. § 47-20.1.
Neither statute applies to the type of encumbrance at issue here.
Appellant's reliance on SunTrust Bank, NA. v. Macky (In re McCormick), 669 F.3d 177
(4th Cir. 2012), is similarly misplaced. Appellant misreads that Court's statement that "North
Carolina law allows a purchaser to rely exclusively on the official recordation index of the
county to discover liens, regardless of what other independent knowledge that purchaser might
have." Id. at 178. The reasoning of that decision reveals that the Court was not making a blanket
statement suggesting that all possible encumbrances on real property must be recorded in the
register of deeds. Instead, the Court was merely explaining that under North Carolina's "pure
race" system, priority for the instruments listed in N.C. Gen. Stat. § 47-20(a) is dependent solely
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on constructive record notice, rather than other forms of notice. Id. at 183. Moreover, that Court
was analyzing the types of instruments covered by§ 47-20(a), which as stated above, does not
apply to the type of encumbrance at issue here. Id. at 180.
5. Conclusion. The Bankruptcy Court did not err in holding that the asserted Tax Lien
was an encumbrance "of record," and thus a "Permitted Encumbrance" under the AP A. Appellee
did not violate the Sale Order by attempting to recover on that lien, and the Bankruptcy Court did
not abuse its discretion by failing to hold Appellee in contempt. Accordingly, the Bankruptcy
Court's May 5, 2014 Order is AFFIRMED.
An appropriate Order will issue.
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November
2014
Wilmington, Delaware
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