NOA, LLC, et al v. El Khoury, et al
Filing
269
ORDER denying 266 Motion of Plaintiffs to Withdraw the Reference of Adversary Proceeding to the Bankruptcy Court. The clerk is DIRECTED to transmit a copy of the instant order for filing in adversary proceeding Walid El Khoury, Edward El Khoury, and Hope Comercio E. Industria Limitada v. Insaf George Nehme, No. 5:19-AP-00033-SWH (Bankr. E.D.N.C.). Signed by District Judge Louise Wood Flanagan on 9/26/2019. (Collins, S.)
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF NORTH CAROLINA
WESTERN DIVISION
NO. 5:14-CV-114-FL
INSAF NEHME,
Plaintiff,
v.
WALID EL KHOURY, EDWARD EL
KHOURY, and HOPE COMERCIO E
INDUSTRIA LIMITADA,
Defendants.
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ORDER
This matter is before the court on defendants’ motion (DE 266) to withdraw reference to the
bankruptcy court of adversary proceeding captioned Walid El Khoury, Edward El Khoury, and Hope
Comercio E. Industria Limitada v. Insaf George Nehme, No. 5:19-AP-00033-SWH (Bankr.
E.D.N.C.) (the “adversary proceeding”). Upon defendants’ request, the motion, originally filed in
the bankruptcy court, was transmitted to this court and filed in the instant related matter, which
presently is stayed pending Chapter 7 bankruptcy proceedings in the case In re: Insaf George
Nehme, No. 18-05725-5-SWH (Bankr. E.D.N.C.) (“the Chapter 7 case”). Plaintiff responded in
opposition to the motion. In this posture, the issues raised are ripe for ruling. For the following
reasons, the motion is denied.
BACKGROUND
This case arises out of an intra-family dispute over the management of a joint venture,
defendant Hope Comercio E Industria Limitada (“Hope Comercio”). Plaintiff, Insaf Nehme
(“Nehme”) and former plaintiff NOA, LLC (“NOA”), a North Carolina limited liability company
of which plaintiff Nehme is the sole member, initiated this case by complaint filed February 28,
2014. Plaintiffs sued defendants Walid El Khoury (“Walid”), who is plaintiff Nehme’s cousin and
a resident of Angola and Lebanon; Edward El Khoury (“Edward”), who is plaintiff Nehme’s
nephew, defendant Walid’s son, and a resident of both Angola and Lebanon; and Hope Comercio,
a limited liability company organized and existing under the laws of Angola, asserting various tort
and breach of contract claims. In particular, plaintiffs asserted claims for breach of partnership
agreement, breach of fiduciary duty, conversion, and unjust enrichment against defendant Walid.
Plaintiffs asserted a conversion claim against defendant Edward. Finally, plaintiffs asserted a breach
of contract claim against defendant Hope Comercio, in addition to an action for an accounting of
defendant Hope Comercio’s assets.
The court dismissed all of plaintiff’s claims for failure to prosecute on August 15, 2018, due
to plaintiff’s failure to file notice of self-representation and other delays including failure by
plaintiff’s counsel to file timely notice of appearance. Claims by and against former plaintiff NOA
were voluntarily dismissed November 7, 2017.1 This left counterclaims remaining asserted by
defendants against plaintiff, adjudication of which is detailed below.
Defendants Walid and Hope Comercio filed counterclaims on June 29, 2015, wherein they
asserted four causes of action: breach of partnership agreement; constructive fraud; unfair and
deceptive trade practices; and unjust enrichment. This court previously summarized the alleged
facts underlying the counterclaims as follows:
1
Former plaintiff NOA is debtor in ongoing Chapter 11 bankruptcy case, In re NOA, LLC, No.
17-02097-5-JNC (Bankr. E.D.N.C.).
2
[P]laintiff and defendant Walid agreed in spring 2008 to form a partnership
to sell used clothing in Angola though Hope Comercio. (DE 94 at 13 ¶ 15).
Defendant Walid agreed to invest $500,000 immediately upon formation of the
partnership, and plaintiff agreed to invest a similar amount in the future. (Id. at 14
¶ 16). Plaintiff agreed to work with suppliers in the United States to obtain
merchandise, and Walid agreed to operate the retail store in Angola. (Id.). Both
parties agreed to reinvest the profits earned by the partnership, and if their intended
agreement was fulfilled, they would share profits. (Id.).
After the partnership began operations in October 2008, Walid transferred to
plaintiff $400,000 to purchase three vehicles and to ship several used clothing
containers to Hope Comercio. (Id. ¶ 17). At some point, plaintiff contributed less
than $150,000 worth of used clothing to the partnership, by shipping to Angola four
containers of items he could not sell at his Liberian store, River Way Stores. Plaintiff
never invested the remaining amount. (Id. ¶ 18).
In approximately August 2009, the partnership needed additional funding due
to a new policy in Angola that made it necessary to clear numerous containers of
clothing from the port in Luanda immediately. (Id. at 15 ¶ 19). At that time, Walid
asked plaintiff to provide his investment in the partnership, but plaintiff refused, and
Walid ultimately borrowed $200,000 from a friend to rescue Hope Comercio and the
partnership. (Id. at ¶¶ 20–21).
During the following years, the business carried on as Walid and Hope
Comercio sent money to plaintiff and NOA to use the money to purchase used
clothing. (Id. ¶ 22). Eventually, a dispute arose between the parties involving a
company that plaintiff and NOA used to source clothing called Carolina International
Trading ("CIT"), based in South Carolina. Specifically, plaintiff pai[d] CIT in
advance for clothing where his practice with other suppliers was to pay on delivery.
(Id. ¶ 23). By October 2011, plaintiff had caused Hope Comercio to advance more
than $340,000 to CIT, even as Hope Comercio's suppliers in Texas were complaining
that plaintiff failed to pay them. (Id. ¶ 24). In or around October 2011, Walid
accompanied plaintiff to visit CIT and, at that time, discovered that CIT's inventory
was worth less than $50,000. (Id. at 16 ¶ 25).
Several weeks later, plaintiff informed Walid that "we started the process to
take [CIT's owner] to court." (Id. ¶ 26). On or around February 29, 2012, plaintiff
informed Walid that CIT had filed bankruptcy, and that this would result in a loss to
Home Comercio of roughly $330,000. (Id.). Nonetheless, plaintiff continued to do
business with CIT and never filed a lawsuit against CIT. (Id. ¶ 27).
Defendants allege, on information and belief, that plaintiff used Hope
Comercio's prepayment to fund CIT's shipment of several containers of used clothing
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to Liberia, for sale in plaintiff's separate River Way Stores venture. (Id. ¶ 28).
During 2012, plaintiff began operating a used clothing supply and sorting company
under the name Sanford Rag Company ("SRC") and began supplying Hope
Comercio with used clothing from SRC, as well as from the previously existing
suppliers. (Id. ¶¶ 29–30). In 2013, plaintiff began using Hope Comercio's money to
prepay SRC for its used clothing while failing to pay Hope Comercio's other
suppliers. (Id. at 16–17 ¶ 31). Defendants allege, on information and belief, that
plaintiff used payments from Hope Comercio to purchase used clothing for River
Way Stores. (Id. at 17 ¶ 31).
In or around November 2013, six containers arrived to the port in Angola
without documentation. (Id. ¶ 34). Defendant Walid learned that the suppliers
withdrew documentation because plaintiff failed to pay them. (Id.). Over the course
of 2013, up to and including June 29, 2015, plaintiff held between $148,000 and
$600,000 of Hope Comercio's money, which does not include amounts plaintiff used
to fund his separate business interests. (Id. ¶¶ 32, 35).
(Order (DE 244) 11-13).
On August 15, 2018, the court granted defendants’ motion for entry of default as to the
counterclaims, leaving open for final resolution defendants’ motion for default judgment. (DE 223).
The court determined that a hearing for determination of default judgment was necessary on several
issues:
1)
“[A] damages hearing is necessary where the court may enter judgment only to the extent
defendants carry their burden to prove damages by a preponderance of the evidence.” (Order
(DE 244) at 13).
2)
“Moreover, the court exercises its discretion to investigate further whether, as defendants
allege on information and belief, plaintiff used Hope Comercio’s money to fund separate
business interests, and the court does not at this juncture treat this fact as established by
plaintiff’s default.” (Id.).
3)
“Finally, the court observes that proof of damages in this case inextricably is linked to proof
of the terms of any partnership agreement and other facts pertinent to alleged torts neither
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specified fully in defendants’ counterclaims nor otherwise developed on the record.
Accordingly, now with benefit of a period of discovery, the court will afford the parties
opportunity at hearing to develop more fully the record pertinent to damages and any other
issues necessary to support determination of damages.” (Id. at 13-14).
On August 27, 2018, the court entered an order further clarifying the following issues in
advance of hearing:
1)
“Hearing has been set on motion remaining, where there is no issue defendants are entitled
to judgment, to receive evidence to resolve factual ambiguities in the counterclaims, to
determine facts alleged on information and belief, and to determine defendants’ damages.”
(Order (DE 247) at 2).
2)
“Moreover, where the allegations are uncertain and where large damages are involved, as
in defendants’ counterclaims sounding in tort, the court properly exercises discretion to
‘establish the truth of [allegations] by evidence.’”
(Id.) (quoting Fed. R. Civ. P.
55(b)(2)(C)).
In advance of hearing on motion for default judgment, plaintiff filed a trial brief on
September 6, 2018, as supplemented November 5, 2018. At hearing held November 13, 2018,
defendants presented testimony of an accountant and plaintiff, and the parties introduced exhibits
into evidence.2 At the conclusion of the hearing, the court took under advisement the motion for
default judgment.
On November 30, 2018, plaintiff filed a suggestion of bankruptcy, including a notice of the
Chapter 7 case. On December 5, 2018, pursuant to 11 U.S.C. 362 and Federal Rule of Bankruptcy
2
Prior to hearing, plaintiff filed a motion to dismiss for lack of subject matter jurisdiction, which the court
denied by oral order at hearing.
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Procedure 4001, the court entered a text order staying the instant case due to the “bankruptcy
proceedings impacting all claims remaining, comprising counterclaims against plaintiff Insaf
Nehme.” (Text Order, Dec. 5, 2018).
Defendants filed the instant motion on June 13, 2019, and plaintiff responded in opposition
on June 27, 2019, in the bankruptcy court, and the motion papers were filed in this court on June 28,
2019.
DISCUSSION
Section 157 of Title 28 of the United States Code provides for district court referral to a
bankruptcy judge of proceedings arising under the bankruptcy code, including “all core proceeding
arising” thereunder. 28 U.S.C. § 157(a) & (b)(1); see Stern v. Marshall, 564 U.S. 462, 473 (2011).
As pertinent here, “[t]he district court may withdraw, in whole or in part, any case or proceeding
referred under this section, on its own motion or on timely motion of any party, for cause shown.”
28 U.S.C. § 157(d).
The United States Court of Appeals for the Fourth Circuit has not enumerated factors bearing
on the “cause shown” determination under § 157(d). Several other courts of appeals consistently
have done so, however, along with district courts within this circuit. In particular, in determining
whether a party has shown “cause,” courts consider factors including:
(1) whether the proceeding is core or non-core,
(2) uniformity in the administration of bankruptcy proceedings,
(3) expediting the bankruptcy process and promoting judicial economy,
(4) efficient use of the resources of the debtor and creditors,
(5) reduction of forum shopping, and
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(6) the preservation of the right to a trial by a jury.
See In re Orion Pictures Corp., 4 F.3d 1095, 1101 (2d Cir.1993); In re Pruitt, 910 F.2d 1160, 1168
(3d Cir.1990); Holland America Ins. Co. v. Succession of Roy, 777 F.2d 992, 999 (5th Cir.1985);
Security Farms v. Int'l Brotherhood of Teamsters, 124 F.3d 999 (9th Cir.1997); see, e.g, ACC Retail
Prop. Dev. & Acquisition Fund, LLC v. Bank of Am., N.A., No. 5:12-CV-361-BO, 2012 WL
8667572, at *2 (E.D.N.C. Sept. 28, 2012); In re Dozier Fin., Inc., No. CV 4:18-1888-MGL, 2019
WL 1075072, at *4 (D.S.C. Mar. 7, 2019) (recognizing continued consistency in factors used by
courts); see also In re Stansbury Poplar Place, Inc., 13 F.3d 122, 128 (4th Cir. 1993) (“This type of
pragmatic decision is best left to the district court”).
In this case, the first factor strongly weighs against withdraw of reference because the
adversary proceeding is a core proceeding in the bankruptcy court. See, e.g., In re Orion, 4 F.3d at
1101. The adversary proceeding is a complaint by defendants “objecting to discharge and requesting
determination of dischargeability of debt,” premised upon exceptions to discharge set forth in 11
U.S.C. § 523(a)(2), (4), and (6), for fraudulent and willful misfeasance by plaintiff. (Adversary
Proceeding Complaint, No. 18-05725-5-SWH, Doc. 1 at 1 (Bankr. E.D.N.C., April 3, 2019)). These
matters expressly are enumerated “core proceedings”
under 28 U.S.C. § 157(b)(2)(I)
(“determinations as to the dischargeability of particular debts”) and (J) (“objections to discharges”).
The fact that the adversary proceeding is a core proceeding directly bears on several other
factors weighing against withdraw of reference.
Adjudicating the adversary proceeding in
bankruptcy court promotes uniformity in the administration of bankruptcy proceedings and efficient
use of judicial and party resources, where dischargeability issues fall squarely within the special
province of the bankruptcy court and bankruptcy law. See, e.g., In re Gibson, 250 B.R. 226, 238
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(Bankr. E.D. Va. 2000) (recognizing “the expertise of the bankruptcy courts in resolving
dischargeability issues”); In re Bozzano, 183 B.R. 735, 739 (Bankr. M.D.N.C. 1995)
(“Dischargeability is uniquely a bankruptcy question and questions regarding the dischargeability
of debts are questions of federal bankruptcy law.”); see also Brown v. Felsen, 442 U.S. 127, 136
(1979) (noting that one purpose of predecessor bankruptcy code was to “take these [dischargeability]
claims away from state courts that seldom dealt with the federal bankruptcy laws and to give those
claims to the bankruptcy court so that it could develop expertise in handling them”). Likewise, the
nature of the dischargeability issues, as well as the pleadings in the adversary proceeding, also
confirm that the right to trial by jury is not at issue.
In addition, keeping the dischargeability determination in bankruptcy court promotes
expediting the bankruptcy process and efficient use of judicial resources. “[T]he purpose of
establishing a nationwide bankruptcy system is to alleviate the district courts of excessive workloads
and to provide a system where judges with experience and expertise in bankruptcy matters can
handle bankruptcy claims.” In re Jaritz Indus., Ltd., 151 F.3d 93, 107 (3d Cir. 1998). Allowing the
bankruptcy court to proceed with adjudication of the adversary proceeding promotes this purpose.
With respect to the efficiency and judicial resources factors, the court recognizes defendants’
argument that the district court has already spent significant time presiding over proceedings on
plaintiff’s claims and defendants’ counterclaims. Nevertheless, the litigation in the district court,
despite its protracted length, did not involve a substantive adjudication on the merits of plaintiff’s
claims, and it has not resulted yet in any substantive adjudication on the merits of defendants’
counterclaims. Moreover, there are multiple significant differences, set forth as follows, between
the issues raised by the motion for default judgment and the issues now raised by the adversary
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proceeding.
First, the counterclaims, as pleaded, and upon which default was entered, included claims
for breach of partnership agreement and unjust enrichment, which do not overlap with the fraud
claims raised in the adversary proceeding. (Compare Counterclaims (DE 94) at 18-20, with
Adversary Proceeding Complaint, No. 18-05725-5-SWH, Doc. 1 at 9-12 (Bankr. E.D.N.C., April
3, 2019)). Second, even though defendants abandoned their breach of partnership counterclaim at
hearing and urged a theory of constructive fraud (see, e.g., Tr. (DE 264) at 140-142), the court could
proceed to adjudicate default judgment damages on the basis of unjust enrichment alone, without
making findings of fraud or misrepresentation.
Third, the instant case has advanced through an unusual procedural posture. The issues
presented by the motion for default judgment were not presented for a trial on the merits, but rather
for a hearing on default judgment, in part under unique and complicated exceptions to the default
rule, where some facts were treated as “established by plaintiff’s default,” and others were not.
(Order (DE 244) at 13) (citing Fed. R. Civ. P. 55(b)(2)(C)-(D)). The court noted the indeterminate
status of the alleged facts supporting the counterclaims, noting “where the allegations are uncertain
and where large damages are involved, as in defendants’ counterclaims sounding in tort, the court
properly exercises discretion to ‘establish the truth of [allegations] by evidence.’” (Order (DE 247)
at 2) (quoting Fed. R. Civ. P. 55(b)(2)(C)).
By contrast, in the adversary proceeding, defendants seek a judgment on the claims and facts
alleged in the adversary proceeding complaint. Plaintiff, as debtor and defendant in the adversary
proceeding, has answered and challenged all of the claims raised in the adversary proceeding. Thus,
it is unclear what, if any issues, addressed in the instant action will promote efficiencies in the
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adversary proceeding. Indeed, reliance in the adversary proceeding on evidence presented for more
limited purposes in the instant matter may invite procedural or substantive error in the adversary
proceeding. The court need not resolve these issues definitively at this juncture, but rather notes that
these are significant issues that weigh against withdrawal of the reference under the unique
circumstances of this case.
Defendants suggest that the bankruptcy court may not have authority under the United States
Constitution to issue a final judgment on the merits in the adversary proceeding. Notably, however,
defendants do not take a position one way or another on this issue. The case defendants rely upon
in raising the issue, Stern, also does not address the issue in the context of a dischargeability
adversary proceeding. See 564 U.S. at 474 (examining adversary proceeding only involving
“counterclaims by [a debtor’s] estate against persons filing claims against the estate,” under §
157(b)(2)(C)). Moreover, cases since Stern have held there is no impediment to the bankruptcy
court issuing a final judgment in a discharge proceeding. See, e.g., In re Hart, 564 F. App'x 773, 776
(6th Cir. 2014) (“Stern does not strip the bankruptcy court of its constitutional authority to enter a
final monetary judgment in this dischargeability action under § 523(a)(2)(B).”); In re Ritz, 567 B.R.
715, 736–37 (Bankr. S.D. Tex. 2017) (stating that “the limitation imposed by Stern does not prohibit
this Court from entering a final judgment” in a dischargeability adversary proceeding).
Defendants also suggest that “to reach a final judgment in the Adversary Proceeding, the
bankruptcy court would have to lift the automatic stay for the District Court to enter a final judgment
on damages.” (Defs’ Mem. (DE 267) at 5). Defendants, however, cite no authority for this
proposition, and the procedural and substantive utility of such an approach is not apparent. Indeed,
based upon the foregoing analysis, the adversary proceeding may proceed to final judgment
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independent of the instant action. Furthermore, any determination of damages in the instant action
may not be useful to a final judgment in the adversary proceeding, if the damages determination in
the instant action is based solely on unjust enrichment or other theory not resting on findings of
fraud or misrepresentation.
The court also recognizes defendants’ suggestion that plaintiff seeks to prolong proceedings
in the adversary proceeding by requesting time for additional discovery. There is unquestionably
a large record and volume of discovery materials upon which the parties can rely in the adversary
proceeding. This does not provide, however, a definitive answer regarding whether additional
discovery is warranted or not. The issue of whether additional discovery is warranted may require
careful assessment of the claims now asserted and the status of the record and discovery materials
presently available, which assessment must be undertaken in any event by the bankruptcy court or
this court. Accordingly, the court finds this factor neutral to the withdrawal issue.
Finally, the court also finds neutral the forum shopping factor. To a certain degree,
plaintiff’s commencement of bankruptcy proceedings can be viewed as forum shopping to avoid
further litigation in the district court, where plaintiff has already suffered adverse rulings. By the
same token, however, defendants’ instant motion to withdraw the reference can be viewed as forum
shopping to remove the adversary proceeding from its natural setting back to the district court,
where defendants have already obtained favorable rulings.
In sum, the relevant factors do weigh in favor of withdrawal of the reference under the
circumstances presented. Where defendants have not met their burden to show cause for the
withdrawal, the instant motion must be denied.
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CONCLUSION
Based on the foregoing, defendants’ motion to withdraw reference (DE 266) is DENIED.
The clerk is DIRECTED to transmit a copy of the instant order for filing in adversary proceeding
Walid El Khoury, Edward El Khoury, and Hope Comercio E. Industria Limitada v. Insaf George
Nehme, No. 5:19-AP-00033-SWH (Bankr. E.D.N.C. ).
SO ORDERED, this the 26th day of September, 2019.
_____________________________
LOUISE W. FLANAGAN
United States District Judge
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