Black Palm Development Corporation v. Barlage

Filing 9

MEMORANDUM OF DECISION AND ORDER Dismissing Appeal re: Bankruptcy Decision. Signed by District Judge Martin Reidinger on 10/13/11. (emw)

THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:09cv220

BLACK PALM DEVELOPMENT
CORPORATION,
Appellant,
vs.
DALE BARLAGE,
Appellee.

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MEMORANDUM OF
DECISION AND
ORDER

THIS MATTER is before the Court on the appeal from an Order of the
United States Bankruptcy Court for the Western District of North Carolina,
wherein the Adversary Proceeding of the Plaintiff-Appellant was dismissed.
[Doc. 1, AP Doc. 16].1
Plaintiff-Appellant Black Palm Development Corporation (Black Palm)
and Defendant-Appellee Dale Barlage are unsecured nonpriority creditors in
the Chapter 7 bankruptcy proceeding of Leigh Valentine (Debtor). [BC Doc.
1 at 22-23]. Black Palm objected to the claim of Barlage during the pendency

1

Citations to the underlying base case in the Bankruptcy Court, 06-40305 are
identified by the prefix BC followed by the docket number of the item therein, e.g. [BC
Doc.1]. Citations to the adversary proceeding file below, 09-4004, are identified by the
prefix AP followed by the docket number of the item in that file, e.g. [AP Doc. 1].
Citations to the docket of this Court contain no prefix, e.g. [Doc. 1].

of the Valentine bankruptcy. [BC Doc. 123]. Black Palm ultimately withdrew
that objection and filed the present adversary proceeding against Barlage. [AP
Doc. 1]. The Bankruptcy Court entered an order dismissing the adversary
proceeding. [AP Doc. 16]. Black Palm appeals from that order. [Doc. 1; AP
Doc. 18].
STANDARD OF REVIEW
The decision of the Bankruptcy Court is reviewed by a two-step process.
Reversal of the findings of fact of the Bankruptcy Court may occur only where
such findings are clearly erroneous. See Educational Credit Mgmt. Corp. v.
Frushour (In re Frushour), 433 F.3d 393, 398 (4th Cir. 2005). The Bankruptcy
Court’s legal conclusions, however, are subject to a de novo standard of
review. See Schlossberg v. Barney, 380 F.3d 174, 178 (4th Cir. 2004).
“Findings of fact are clearly erroneous ‘when, although there is evidence to
support [them], the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been committed.’” McGahren
v. First Citizens Bank & Trust Co. (In re Weiss), 111 F.3d 1159, 1166 (4th Cir.)
(quoting Green v. Staples (In re Green), 934 F.2d 568, 570 (4th Cir. 1991)),
cert. denied, 522 U.S. 950, 118 S.Ct. 369, 139 L.Ed.2d 287 (1997). As stated
by the Supreme Court:
If the [lower court’s] account of the evidence is
plausible in light of the record viewed in its entirety,
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the [appellate court] may not reverse it even though
convinced that had it been sitting as the trier of fact,
it would have weighed the evidence differently.
Where there are two permissible views of the
evidence, the factfinder’s choice between them
cannot be clearly erroneous.
Anderson v. Bessemer City, 470 U.S. 564, 573-74, 105 S.Ct. 1504, 1511, 84
L.Ed.2d 518 (1985). Additionally, due regard must be given to the Bankruptcy
Court’s assessment of the credibility of the witnesses. Educational Credit
Mgmt. Corp. v. Gouge, 320 B.R. 582, 583 (W.D.N.C. 2005). Thus, “absent
extraordinary circumstances, an appellate court should not disturb a
factfinder’s credibility determinations.” In re Environmental Aspecs, Inc., 235
B.R. 379, 384 (E.D.N.C. 1999).2
FACTUAL BACKGROUND
Barlage obtained a judgment in state court in Arizona against the Debtor
in the original amount of $784,000.00 on or about November 24, 2003. The
following findings of fact of the Bankruptcy Court regarding that judgment are
not in dispute:
5. The original judgment obtained by Barlage against Debtor in
Arizona was based upon Debtor’s default and a validly entered
2

Curiously, Appellant makes a strenuous argument (in bold print with
underlining) in its brief to this Court that the appropriate standard is for this Court to
review the record below “in the light most favorable to Appellant,” as though this were
an examination of the allegations in a complaint on a Rule 12(b)(6) motion, and on that
basis the judgment of the Bankruptcy Court should be reversed. [Doc. 8 at 17].
Appellant cites no authority for this novel proposition.
3

default judgment against Debtor in Arizona. Although the original
judgment of Barlage against Debtor in Arizona was a default
judgment, Debtor made at least three motions to set aside
Barlage’s judgment in Arizona pursuant to Arizona Rule of Civil
Procedure (“ARCP”) 60. The ARCP 60 motions by Debtor against
Barlage’s judgment in Arizona included, but were not limited to,
motions as follows:
a. Alleged inadequate service of process.
b. Alleged excessive damages because of violation of
ARCP 54(d) or alleged excessive damages because
of miscalculation/insufficient evidence.
c. Alleged attorney fee award problem.
6. All of the ARCP 60 motions brought by Debtor against
Barlage’s judgment in Arizona were eventually resolved in favor
of Barlage including, but not limited to, as follows:
a. The alleged inadequate service of process issue
was resolved by the Arizona appellate courts in favor
of Barlage and against Debtor.
b. The excessive damages and attorney fee issues
described above were resolved by the Arizona trial
court in favor of Barlage and against Debtor. The
Debtor appealed those issues and that appeal was
pending on her Petition date of June 1, 2006.
However, the Trustee chose not to pursue the appeal
on behalf of the Debtor’s bankruptcy estate, and, the
appeal was subsequently dismissed for failure to
prosecute.
7. As of Debtor’s Petition date, Barlage’s judgment against Debtor
in Arizona that formed the basis of Barlage Proof of Claim No. 6
was a valid out-of-state final judgment based upon adequate
service of process.
...
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10. On February 20, 2009, Black Palm filed the current adversary
proceeding seeking equitable subordination against Barlage Proof
of Claim No. 6 alleging in pertinent part as follows:
a. Alleged inadequate service of process (Adversary
Complaint ¶¶ 51-54).
b. Alleged excessive damages because of alleged
violation of ARCP 54(d) for award of damages in
excess of those claimed in state court Complaint and
a lle g e d e x c e s s iv e d a m a g e s b e c a u s e o f
miscalculation/insufficient evidence (Adversary
Complaint ¶¶ 55-58).
c. Alleged improper award of attorneys’ fees because
of alleged failure of Barlage’s counsel to tell state trial
court that contracts upon which state court Complaint
was based did not contain attorneys’ fees provision
(Adversary Complaint ¶ 59).
11. On April 24, 2009, after moving for an extension of time to
answer or otherwise respond, Barlage filed a timely motion to
dismiss pursuant to Bankruptcy Rule 7012 on multiple grounds
including:
a. Collateral estoppel by the Arizona litigation
between Debtor and Barlage.
...
c. Black Palm lacked standing to bring the Adversary
Complaint for equitable subordination because the
proper party plaintiff was the Trustee.
d. Black Palm lacked standing to bring the Adversary
Complaint because it violated Maryland corporate
statutes and lost its right to sue.
...
12. After reviewing the extensive submissions of the parties, the
Court decided to dismiss the Adversary Complaint on grounds of
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collateral estoppel because:
a. It appears to the Court that the issues raised by the
Adversary Complaint and described above were
actually litigated in the Arizona litigation between
Barlage and Debtor. Debtor had a full and fair
opportunity to litigate the issues in Arizona and was
represented by counsel in that litigation. Indeed, a
review of the briefs from the Arizona litigation
submitted on the issue of collateral estoppel in this
litigation show that several of the issues now
presented by Black Palm are taken virtually directly
from Debtor’s briefs in Arizona.
b. The Court finds that the interest of the Debtor in the
Arizona litigation is and was aligned with the interest
of Black Palm in the current Adversary Complaint
litigation. Therefore, the Court determines that the
Debtor’s identity of interest with Black Palm in the
current litigation means that they are in privity with
regard to the issues presented by Debtor’s ARCP 60
motions that collaterally estop Black Palm’s current
Adversary Complaint.3
13. The Court also finds that there may be other reasons to
dismiss plaintiff’s Adversary Complaint but does not elaborate on
those reasons at this time.
Based upon these findings of fact, the Bankruptcy Court made the
following conclusions of law:
1. Plaintiff Black Palm’s Adversary Complaint and claim for
equitable subordination against Barlage and Barlage’s Proof of
Claim No. 6 is collaterally estopped by the Arizona state court

3

Black Palm does not dispute that this is an accurate rendition of what took place
in the Bankruptcy Court. It does not concede, however, that the legal conclusions
therein are correct.
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litigation.
2. Barlage is entitled to an Order dismissing plaintiff Black Palm’s
Adversary Complain with prejudice.
[AP Doc.16 at 2-4].
It is from that determination that this appeal was taken to this Court.
DISCUSSION
As a threshold matter, Appellee asserts that Appellant has no standing.
In order to bring an action or to prosecute an appeal one must have standing;
otherwise the case or appeal must be dismissed. Elk Grove Unified School
Dist. v. Newdow, 542 U.S. 1, 14, 124 S.Ct. 2301, 2310, 159 L.Ed.2d 98, 111
(2004); Sprint Com. Co., L.P. v. APCC Services, Inc., 554 U.S. 269, 289, 128
S.Ct. 2531, 2544, 171 L.Ed.2d 424, 440 (2008). There are two components
to federal standing. First, there must be a “case or controversy” between the
parties; otherwise there is no constitutional basis under Article III for the Court
to take cognizance of the matter. Lujan v. Defenders of Wildlife, 504 U.S.
555, 560-61, 112 S.Ct. 2130, 2136, 119 L.Ed.2d 351, 364 (1992). Second,
“federal courts have adopted a set of prudential principles that preclude the
exercise of jurisdiction over some types of cases in which Article III standing
exists.” Schwarzer, Federal Civil Procedure Before Trial, ¶2:4108.

These

“prudential principles” are manifested in the Bankruptcy Code in 11 U.S.C. §
323(a) and (b), which generally grant the Trustee exclusive standing to sue
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and be sued as the sole representative of the estate. In re Seven Seas
Petroleum, 522 F.3d 575, 584 (5 th Cir. 2008); Bd. of Trustees of Teamsters
Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164, 169 (3d Cir. 2002);
St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir.
1989); In re Elrod Holdings Corp., 392 B.R. 110, 114 (Bkrtcy.D.Del., 2008).
It is for this reason that ordinarily one creditor cannot bring an action against
another creditor in a bankruptcy proceeding.

The action against the

defendant creditor is in the hands of the Trustee.
Black Palm has brought this action against Barlage seeking for the
Bankruptcy Court to equitably subordinate Barlage’s claim to the other general
unsecured claims in Valentine’s bankruptcy. Section 510(c) permits the court
to subordinate claims under principles of equitable subordination. 11 U.S.C.
§ 510(c). A Bankruptcy Court may subordinate a claim when claimant has
engaged in inequitable conduct, the misconduct results in injury to creditors
of the debtor or confers unfair advantage on a claimant, and equitable
subordination would not be inconsistent with the bankruptcy laws. Societa
Internazionale Turismo v. Lockwood (In re Lockwood), 14 Bankr. 374 (Bankr.
E.D.N.Y. 1981), aff'd, No. CV-81-3462 (E.D.N.Y. Mar. 18, 1982). In making
the doctrine of equitable subordination part of the Bankruptcy Code by
enacting section 510, Congress did not specify which parties would have
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standing to assert such a claim. As noted above, the Trustee clearly has
standing, based on his duties in the marshalling and distribution process. The
standing of an individual creditor to assert equitable subordination, however,
is dependent upon the nature of his claim. "If a claim is a general one, with
no particularized injury arising from it, and if that claim could be brought by
any creditor of the debtor, the trustee is the proper person to assert the claim,
and the creditors are bound by the outcome of the trustee's action." St. Paul
Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 701 (2d Cir.1989). For
instance, a creditor’s committee, whose position as representative of all
creditors is essentially synonymous with an inability to show particularized
injury, has no standing to present a claim for the equitable subordination of
one creditor’s claim unless granted special permission to do so by the Court.
In re Applied Theory Corp., 493 F.3d 82, 58 C.B.C.2d 351 (2d Cir. 2007).
See, generally, DeNatale and Abram, The Doctrine of Equitable Subordination
as Applied to Nonmanagement Creditors, 40 Bus. Law. 417 (1984-85).
The concept of “particularized injury” is simply yet broadly explained as
harm “which differs from injury incurred by all creditors,” and conversely as “a
unique claim reflecting particularized harm to the [individual] creditor's
separate interest.” In re Elrod Holdings Corp., 392 B.R. 110, 115, (Bkrtcy.
D.Del. 2008). Even where a Trustee brings an action against a creditor based
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on equitable subordination, some other individual creditor may have an
interest uniquely affected by that alleged inequitable conduct, “separate and
apart from the interests of the estate as a whole,” and therefore has standing
separate from the Trustee. See In re Vitreous Steel Prods. Co., 911 F.2d
1223, 1231 (7th Cir.1990). The Court in Vitreous Steel also noted that, “[i]n
addition, the Court can envision circumstances in which a trustee has little
interest in an equitable subordination dispute between two secured creditors.
It would make little sense to preclude an injured party from pursuing unique
relief in the hope that a disinterested party would zealously pursue it for them.”
Id. As such, this requirement of a particularized injury is consistent with and
an extension of the Supreme Court’s rulings regarding the “prudential
principles” of standing in Federal Court in any context, not just in Bankruptcy
Court. See Newdow, 542 U.S. at 14, 124 S.Ct. at 2310, 159 L.Ed.2d at 111;
Sprint, 554 U.S. at 289, 128 S.Ct. at 2544, 171 L.Ed.2d at 440.
Black Palm relies almost entirely on Vitreous Steel in its arguments. It
correctly quites that opinion in saying
[w]hile the Trustee may find that it is in the best interests of the
estate to seek equitable subordination, individual creditors have
an interest in subordination separate and apart from the interests
of the estate as a whole. The individual creditor should have an
opportunity to pursue its separate claims.
911 F.2d at 1231. In the same paragraph from which Black Palm quotes,
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however, the Vitreous Steel Court states that a creditor may pursue an
equitable subordination claim directly against another creditor because “it is
not acting in the interests of all the unsecured creditors.” Id. In other words,
such a creditor’s separate interest arises from the nature of his claim being
different from that of the other unsecured creditors.

Thus, a general

unsecured creditor can bring such an equitable subordination action if it can
show that it has a particularized injury that puts it in a position different from
the other general unsecured creditors.
In this case Black Palm points to no evidence in the lengthy record
showing that it has suffered a unique injury. Moreover, it does not even claim
to have suffered any such particularized injury. The only injury it forecasts is
that the distribution, left undisturbed, will net Black Palm "just a fraction" (34%)
of a payout rather than complete payout. [Doc. 6 at 19, AP Doc. 13-3]. This
fate, however, is identical to that to be suffered by all Valentine’s general
creditors. While not acknowledging the requirement of particularized injury
specifically, Black Palm essentially concedes in its briefs to this Court and to
the Bankruptcy Court in the adversary proceeding (in identical language) that
there is no particularized inquiry. It states that it is similarly situated with all
other creditors, vis a vis Barlage’s alleged actions and relative claim position:
[Barlege] must now respond, in equity, to the
scrutinization of his conduct in obtaining his judgment
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and its impact on diluting distributions to other
creditors of the Debtor.
[Doc. 6 at 12, AP Doc. 13 at 2] (emphasis added).
In his brief to this Court, he goes on to add:
The facts averred in Black Palm’s complaint that
Barlage fraudulently inflated his claim by more than
$724,000.00 principal (plus fraudulent interest on the
fraudulently inflated claim), if proven at trial, evidence
sufficient inequitable conduct by Barlage, with
resulting damages to unsecured creditors, to justify
the equitable subordination of the claim of Barlage.
[Doc. 6 at 12] (emphasis added).
Black Palm also relies on Bezanson v. Bayside Enterprises, Inc. (In re
Medomak Canning), 922 F.2d 895 (1 st Cir. 1990), to support its position that
it has standing. This case, however, lends no aid to Black Palm’s argument
at all. The First Circuit in Medomak stated:
As unsecured creditors, appellants could not in these
circumstances evade the responsibility of looking to the Trustee
in the first instance as their fiduciary and representative to
vindicate their interests, including even their interest in pursuing
equitable subordination beyond the hope of receiving a pro rata
distribution of the estate along with the other general unsecured
creditors. The Trustee is ordinarily the appropriate party to seek
equitable subordination on behalf of the estate and unsecured
creditors. Generally, an unsecured creditor may assert
equitable subordination only where the Trustee has refused
to do so and the court grants an unsecured creditor leave to
contest a claim.
Id. at 902 (italics in original, bold emphasis added). The Court went on to hold
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that an unsecured creditor could pursue a claim of equitable subordination to
the extent it had a “special interest,” Id., i.e. a “particularized injury.”
Having failed to show any particularized injury and not having sought
any leave of court to pursue the claim separately, the Appellant lacks standing
to assert equitable subordination in the adversary proceeding or to prosecute
this appeal.

Since the Trustee has neither brought nor joined in this

proceeding, this appeal must be dismissed.4
ORDER
For the foregoing reasons, IT IS, THEREFORE, ORDERED that this
appeal is DISMISSED.
Signed: October 13, 2011

4

Since this appeal will be dismissed for lack of standing, the Court need not
address anew the claims giving rise to the equitable subordination claims and the
evidentiary basis for the bankruptcy Court’s determination that Black Palm is collaterally
estopped from asserting the equitable subordination claim, even though those issues
appear to be identical to those litigated in the state court proceeding in Arizona.
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