Lismore Village Homeowners' Association Inc v. Eastwood Construction LLC
Filing
57
ORDER and OPINION granting in part and denying in part 50 Motion for Extension of Time as set out; denying 50 Motion to Stay; granting 51 Motion to Compel; denying 34 Motion to Dismiss; denying 34 Motion to Transfer Case. Signed by Honorable Bruce Howe Hendricks on 6/20/16.(alew, )
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH CAROLINA
GREENVILLE DIVISION
LISMORE VILLAGE HOMEOWNERS’
ASSOCIATION, INC.,
) Civil Action No.: 6:14-CV-2185-BHH
)
)
Plaintiff, )
vs.
Opinion and Order
)
)
EASTWOOD CONSTRUCTION, LLC
)
f/k/a EASTWOOD CONSTRUCTION
)
COMPANY, INC.,
)
)
Defendant. )
_________________________________ )
This matter is before the Court on Defendant’s motion to dismiss for lack of
subject matter jurisdiction, or in the alternative, to transfer the case to the United States
District Court for the Eastern District of North Carolina (ECF No. 34), Defendant’s
motion to extend the scheduling order (ECF No. 50), and Plaintiff’s motion to compel
(ECF No. 51). For the reasons set forth in this Order, Defendant’s motion to dismiss, or
in the alternative to transfer, is denied, Defendant’s motion to extend the scheduling
order is granted in part, and Plaintiff’s motion to compel is granted.
BACKGROUND
Plaintiff Lismore Village Homeowners’ Association (“Plaintiff,” “Lismore HOA,” or
“Association”) filed suit on April 29, 2014, in the Court of Common Pleas for Greenville
County, South Carolina, alleging breach of Lismore HOA’s restrictive covenants and
breach of a fiduciary duty owed to Lismore HOA. On June 5, 2014, Defendant
Eastwood Construction Company, LLC (“Defendant” or “Eastwood”) removed the
lawsuit to this Court on the basis of diversity jurisdiction pursuant to 28 U.S.C.
1
§§ 1332(a) and 1441. (ECF No. 1.)
Eastwood is a home builder and real estate development company that has been
in the real estate business for more than thirty-five years. Landcraft Management, LLC
(“Landcraft”) was, prior to its bankruptcy proceeding, a regional real estate developer,
with developments in North and South Carolina. Landcraft’s business practice was to
form a limited liability company for each new subdivision it developed. That LLC would
generally purchase the real estate, contract with lenders and builders, and construct the
infrastructure improvements and amenities for the subdivision. The LLC would also
contract with Landcraft to manage the development. Lismore Townes, LLC (“Lismore
Townes”) was one of Landcraft’s subsidiary LLCs and developed Lismore Village, the
Greenville, South Carolina subdivision that is the subject of this lawsuit. During times
relevant to the case, Eastwood was under contract with Landcraft in several real estate
developments around the Carolinas, including Lismore Village. (ECF No. 34-3 at 2.)
When the real estate market deteriorated in mid to late 2008, Landcraft’s
developments began experiencing financial trouble, and Landcraft filed a number of
voluntary petitions for bankruptcy relief on behalf of certain subdivision LLCs which
were its subsidiaries. On November 7, 2008, Eastwood and others filed an involuntary
bankruptcy petition (“Landcraft Bankruptcy Case”) under Chapter 7 of Title 11, United
States Code in the U.S. Bankruptcy Court for the Eastern District of North Carolina
(“Bankruptcy Court”). (ECF No. 34-2.) The involuntary petition was granted and an order
for relief was entered declaring Landcraft a Chapter 7 debtor under the Bankruptcy
Code. (ECF No. 34-3.) Richard D. Sparkman (“Sparkman” or “Trustee”) was appointed
as trustee, effective January 20, 2009. (Sparkman Decl. ¶ 2, ECF No. 34-4.)
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At the time the Landcraft Bankruptcy Case commenced, Landcraft was a
defendant in an adversary proceeding (“Adversary Proceeding”) filed by Eastwood
against it and co-defendants Old Towne, LLC (“Old Towne”) and Landcraft Properties,
LLC. (ECF No. 34-6 at 3.) Landcraft Properties, LLC was later dismissed from the
Adversary Proceeding. (Id.) The Adversary Proceeding was filed in the Chapter 11
bankruptcy proceeding of Old Towne, which was also pending in the Bankruptcy Court.
(Id.) Gerald A. Jeutter, Jr. (“Jeutter”) was the duly appointed and acting trustee of Old
Towne and other subdivision LLCs affiliated with Landcraft (not including Lismore
Townes) in their respective bankruptcy cases. (Id.)
Among other things, the Adversary Proceeding, sought a declaratory judgment
regarding the disposition of $136,792.50 held by an escrow agent under an escrow
agreement authorized by order of the Bankruptcy Court entered January 14, 2009. (Id.)
After negotiations between Eastwood, Old Towne, Landcraft, and others, the parties
reached a settlement of all claims in the Adversary Proceeding. Accordingly, Sparkman,
as Chapter 7 Trustee for Landcraft, filed a motion to compromise in the Bankruptcy
Court seeking approval of the terms of the settlement agreement, inter alia, resolving
the Adversary Proceeding and addressing the status of Eastwood’s general unsecured
claims in the Landcraft Bankruptcy Case. (ECF No. 34-5.)
The motion to compromise was approved by order (“Settlement Order”) of the
Bankruptcy Court on July 24, 2009. (ECF No. 34-6.) In relevant part, the Settlement
Order directed the distribution of a certain amount of the escrowed funds to Eastwood,
authorized trustees Sparkman and Jeutter to appoint Eastwood as the “agent of the
declarant for homeowner association issues in the Landcraft and Landcraft affiliated
3
subdivisions (the ‘Declarant Agent’)”, and set forth the status of Eastwood’s general
unsecured claims in the Landcraft Bankruptcy Case. (Id. at 4-5.)
One of the assets administered by Sparkman in the Landcraft Bankruptcy Case
was its one hundred percent membership interest in Lismore Townes. (ECF No. 34-4
¶ 4.) As previously mentioned, Lismore Townes was the owner and developer of a
residential townhome development in Greenville, South Carolina known as Lismore
Village. (Id.) Lismore Village is a community composed of eighty-two (82) single-family
attached townhomes in Greenville County and is governed by the Declaration of
Covenants, Conditions, Restrictions, and Easements for Lismore Village (“Declaration”)
recorded in the Register of Deeds Office for Greenville County in Book DE 2242 at
Page 1633. (ECF No. 28-2.) The Declaration sets forth, inter alia, the definition of a
“Declarant” with respect to Lismore Village, the roles and responsibilities of such a
“Declarant,” and a covenant for assessments applicable to each lot in Lismore Village.
(Id.) Exhibit B to the Declaration is the By-Laws of Lismore Village Homeowners’
Association, Inc. (“By-Laws”). (Id. at 25-36.) The By-Laws document includes its own
definition of “Declarant” with respect to Lismore Village, which differs from the definition
in the Declaration. (Id. at 25.) The By-Laws document further describes the procedure
for establishment of a Board of Directors, the powers and authority of such a Board, and
the duties of such a Board—including the fixture and collection of assessments
applicable to each lot in Lismore Village. (Id. at 28-32.)
Plaintiff Lismore HOA is a not-for-profit corporation composed of all homeowners
in the Lismore Village subdivision. (Compl. ¶1, ECF No. 28.) Plaintiff’s complaint alleges
that Eastwood owned and developed some seventy-one (71) residential lots (“Subject
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Lots”) within Lismore Village. (Id. ¶ 6 & Ex. A.) The complaint further alleges that
Eastwood assumed the role of “Declarant,” under the definition in the Declaration,
beginning in February 2007 and continuing until February 2012. (Id. ¶¶ 13-15.) As the
putative “Declarant” for Lismore Village, it is averred that Eastwood took the following
actions: (a) hiring and retaining HOA Community Management, LLC to serve as
Association manager; (b) directing HOA Community Management to pay various
vendors on behalf of the Association; (c) serving as the Board of Directors for Lismore
Village, officially or unofficially, pursuant to Article IV, Section I of the By-Laws; (d)
exercising architectural control authority; (e) preparing or approving the annual budget
for the Association; (f) approving the annual assessment rate and installment schedule
for the Association; (g) directing HOA Community Management to invoice all lot owners
except Defendant; (h) directing HOA Community Management to prepare estoppel or
payoff letters for closings on all lots except those sold to Defendant; (i) directing HOA
Community Management to file liens against certain lot owners for failure to pay said
assessments; and (j) maintaining model homes for sale of Defendant’s lots. (Id. ¶ 16.)
According to the complaint, the homeowners in Lismore Village assumed responsibility
for the Association in February 2012 when they elected their first member-controlled
Board of Directors. (Id. ¶ 17.)
Shortly after being elected, the homeowner Board of Directors sent a formal
demand to Defendant seeking payment of assessments that Plaintiff alleges had
accrued, but were unpaid, during Defendant’s ownership of the Subject Lots. (Id. ¶ 18.)
It is alleged that, having received this demand, Defendant expressly refused to make
payment of the assessments putatively owed. (Id. ¶ 19.) Accordingly, Plaintiff brought a
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breach of contract/breach of covenant claim and a breach of fiduciary duty claim
regarding the unpaid assessments. (Id. ¶¶ 20-51.)
Eastwood asserts that it was never the “Declarant” for Lismore Village and that
pursuant to the By-Laws, Lismore Townes was the Declarant, along with any others
designated by Lismore Townes. (ECF No. 34-1 at 5-6.) Eastwood avers that during the
course of Sparkman’s investigations into Landcraft’s assets he determined that Lismore
Townes, in its role as Declarant for Lismore Village, had certain responsibilities to
Plaintiff, and that Sparkman, as Trustee for the Landcraft Bankruptcy Case, bore full
responsibility for the administration of all of Landcraft’s assets. (ECF No. 34-4 ¶¶ 4, 6.)
Moreover, Eastwood alleges that pursuant to the terms of its settlement agreement with
Sparkman, as authorized in the Settlement Order, Eastwood was appointed as the
“Declarant Agent,” to act as agent for and on behalf of the Trustee, for the purposes of
discharging certain duties of the Declarant of homeowners’ associations where
Eastwood was involved as builder, including Lismore Village. (Id. ¶ 5.) However,
Eastwood claims it was never appointed as the Declarant itself by the Bankruptcy Court
or Sparkman, as Sparkman acquired that role when he was appointed Trustee in the
Landcraft Bankruptcy Case. (Id.) The Landcraft Bankruptcy Case was closed on March
28, 2013, and Sparkman was discharged as Trustee. (Id. ¶ 7.) The membership interest
in Lismore Townes was abandoned. (Id.)
On November 3, 2016, Defendant filed a motion to dismiss for failure to comply
with the Barton doctrine, or in the alternative, to transfer the case to the United States
District Court for the Eastern District of North Carolina, which was the situs for the
bankruptcy case at issue. (ECF No. 34.) Plaintiff responded on November 20, 2015
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(ECF No. 35), and Defendant replied on December 10, 2015 (ECF No. 43). On
November 30, 2015, the Court issued an Amended Conference and Scheduling Order
requiring, inter alia, that expert witnesses be designated by April 1 and May 6, 2016,
respectively, and that mediation be conducted by and discovery be concluded by June
10, 2016. (ECF No. 41.) By way of its motion, Defendant seeks to extend the discovery
deadlines and stay or extend all other deadlines and scheduling orders pending the
Court’s resolution of the motion to dismiss or transfer. (ECF No. 50 at 2-3.) Alternatively,
Defendant seeks to extend all deadlines for 90 days. (Id.) Plaintiff responded on April
11, 2016 (ECF No. 52), and Defendant replied on April 19, 2016 (ECF No. 53). Finally,
Plaintiff filed a motion to compel various depositions on April 7, 2016 (ECF No. 51), and
Defendant responded on April 21, 2016 (ECF No. 55). The Court has thoroughly
reviewed all of these filings and the applicable law, and now issues the following rulings.
STANDARD OF REVIEW
Under Fed. R. Civ. P. 12(b)(1), a party may assert the defense of a lack of
subject-matter jurisdiction by motion. If the court determines at any time that it lacks
subject-matter jurisdiction, the court must dismiss the action. Fed. R. Civ. P. 12(h)(3).
“When a motion to dismiss is based on lack of subject matter jurisdiction, the district
court’s inquiry is limited to determining whether the challenged pleadings set forth
allegations sufficient to show the court that it has subject matter jurisdiction over the
case.” Bedi v. Grondin, 51 F.3d 265 (4th Cir. 1995) (unpublished table decision). “In that
situation, the facts alleged in the complaint are taken as true, and the motion must be
denied if the complaint alleges sufficient facts to invoke subject matter jurisdiction.”
Kerns v. United States, 585 F.3d 187, 192 (4th Cir. 2009).
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Under Fed. R. Civ. P. 12(b)(7), a party may assert by motion the defense of
failure to join a party under Rule 19. Such a motion requires the court to conduct a two-
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step inquiry. First, the court must determine “whether a party is necessary to a
proceeding because of its relationship to the matter under consideration pursuant to
Rule 19(a).” Owens-Illinois, Inc. v. Meade, 186 F.3d 435, 440 (4th Cir. 1999) (quoting
Teamsters Local Union No. 171 v. Keal Driveweay Co., 173 F.3d 915, 917–18 (4th
Cir.1999)). If the absent party is necessary, it will be ordered into the action. Id. If the
party is necessary but unavailable, the court must then determine whether the
proceeding can continue in that party’s absence or whether it is indispensable pursuant
to Rule 19(b) and the action must be dismissed. Teamsters, 173 F.3d at 917–18.
DISCUSSION
I. Motion to Dismiss or Transfer Venue
A. Subject Matter Jurisdiction
In Barton v. Barbour, 104 U.S. 126 (1881), the U.S. Supreme Court held that the
failure by a claimant to seek leave of the appointing court before bringing suit against a
court-appointed receiver deprives any other tribunal of subject matter jurisdiction over
claims against the receiver. Id. at 128. This principle, the so called “Barton doctrine,”
has been extended to suits against bankruptcy trustees, and “prohibits a party from
suing a trustee in a non-appointing court for acts done in the official capacity of the
trustee and within the trustee’s authority as an officer of the court.” Gordon v. Nick, 162
F.3d 1155 (4th Cir. 1998) (unpublished table decision). Moreover, “The Barton doctrine
protects not only the trustee, but also other court-appointed officers who represent the
bankruptcy estate, including the attorney of the trustee. Id. (citing In re DeLorean Motor
8
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Co., 991 F.2d 1236, 1240-41 (6th Cir. 1993) (“It is well settled that leave of the
appointing forum must be obtained by any party wishing to institute an action in a nonappointing forum against a trustee, for acts done in the trustee’s official capacity and
within the trustee’s authority as an officer of the court . . . . counsel for trustee, court
appointed officers who represent the estate, are the functional equivalent of a
trustee.”)). Defendant’s motion pursuant to Rules 12(b)(1) and 12(h)(3) is premised on
the theory that Plaintiff was required to secure leave from the U.S. Bankruptcy Court for
the Eastern District of North Carolina before commencing the instant suit against
Eastwood, that Plaintiff failed to obtain such leave, and that because of such failure no
state or federal court has subject matter jurisdiction over Plaintiff’s claims against
Eastwood other than the Bankruptcy Court. (ECF No. 34 at 2.)
Defendant advances a series of arguments to support its theory that this Court
lacks subject matter jurisdiction over the instant case: (1) the Barton doctrine requires
the bankruptcy court to serve as “gatekeeper” of litigation against a trustee in order to
protect the jurisdiction of the appointing bankruptcy court and the integrity of bankruptcy
proceedings (ECF No. 34-1 at 10); (2) the Barton doctrine applies to suits against
agents of a trustee because the policy reasons justifying the doctrine apply equally to
parties who, by virtue of their appointment, serve as the “functional equivalent of a
trustee” (Id. at 11); (3) the Barton doctrine still applies after a bankruptcy case has been
closed and the estate assets are no longer under the trustee’s control (Id. at 12-13); (4)
the Barton doctrine is jurisdictional (Id. at 13); and (5) application of the Barton doctrine
requires dismissal of this case because the enforcement of the terms of Lismore
Village’s Declaration and the assessment of homeowners, Eastwood, or others, vested
9
with the Trustee upon the commencement of the Landcraft Bankruptcy case, and the
Trustee, not Eastwood or anyone else, was the Declarant of Lismore Village with the
power to act as such (Id. at 13-14).
In response, Plaintiff argues that the motion to dismiss on the basis of a lack of
subject matter jurisdiction should be denied because Lismore HOA had no obligation to
seek leave of the Bankrupcty Court before filing the pending suit. The Barton doctrine
applies, Plaintiff avers, when two conditions are present: (1) suit is filed against a
trustee; and (2) the claims relate to actions taken by the trustee in his official capacity.
Plaintiff asserts that neither of these requirements are met in the pending case. (ECF
No. 35 at 4-5.) Rather, according to Plaintiff, both causes of action in the complaint arise
out of Eastwood’s ownership of lots within Lismore Village, specifically the obligations
imposed on Eastwood by the Declaration to pay assessments and contribute to working
capital as both an owner of lots and the operative Declarant of the community, not out of
Eastwood’s appointment as “Declarant Agent.” (Id. at 5-6.) Plaintiff argues that the
present case is not subject to the Barton doctrine because Lismore HOA has not
initiated any claims against the Trustee, nor do any of its claims relate to actions taken
in the official capacity of the Trustee or his designee. (Id.) Finally, Plaintiff asserts that
the Barton doctrine does not apply to the present case because the central issue
revolves around Eastwood’s alleged non-payment of assessments for the seventy-one
(71) lots it owned in Lismore Village, none of which were assets of the Landcraft
Bankruptcy estate. (Id. at 6-7.) The Court generally agrees with Plaintiff’s arguments
and reasoning and hereby denies the motion to dismiss, or in the alternative to transfer,
for the following reasons.
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Article I, Section 4 of the Declaration defines “Declarant” as follows:
“Declarant” means and refers to Lismore Townes, LLC, a South Carolina
limited liability company, and its successors and assigns in interest, and
shall also mean and refer to any person, firm, or corporation hereafter
vested, at any given time, with title to two or more undeveloped Lots for
the purpose of causing residences and appurtenant buildings to be
constructed thereon, and any such successor in title to Lismore Townes,
LLC, shall be a Declarant during such period of time as such successor is
vested with title to two or more such lots (whether undeveloped or
developed by such successor but not conveyed from such successor), but
no longer.
(ECF No. 28-2 at 3.) Pursuant to that definition, and taking the facts alleged in the
complaint as true, see Kerns v. United States, 585 F.3d 187, 192 (4th Cir. 2009),
Eastwood was a “Declarant” with respect to Lismore Village. There is no mention, within
the Declaration, of a requirement for a formal designation as a “Declarant” before an
entity owning two or more undeveloped lots for the itemized purpose assumes that role.
On the other hand, Article II, Section 3 of the By-Laws defines “Declarant” in the
following manner:
“Declarant” shall mean and refer to Lismore Townes, LLC, a South
Carolina limited liability company, and shall also mean and refer to any
person, firm or corporation which shall also be designated as a “Declarant”
by Lismore Townes, LLC hereafter when such designee becomes vested
with title to two (2) or more undeveloped Lots for the purpose of causing
residential dwellings to be constructed thereon, and any such successor in
title to Lismore Townes, LLC shall be a Declarant during such period of
time as said party is vested with title to two or more such lots (whether
undeveloped or developed and unconveyed) but no longer.
(ECF No. 28-2 at 25) (emphasis added). Eastwood adamantly argues that the definition
of “Declarant” in the By-Laws controls, and because Lismore Townes never officially
designated an additional party as Declarant under the By-Laws, Lismore Townes, and
subsequently the Trustee, remained the only Declarant. (ECF No. 43 at 3.) While this
distinction may reflect on the merits of Plaintiff’s breach of fiduciary duty claim (e.g. with
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regard to whether Eastwood owed any fiduciary duty to the Association), the Court does
not see the distinction as controlling the question of whether subject matter jurisdiction
exists over the case.
By taking title to a lot within Lismore Village, the owner of that lot covenants and
agrees to pay assessments. (Declaration, Article V, Section 1, ECF No. 28-2 at 8.)1 The
relevant provision in the Declaration states that “Each such assessment or charge,
together with interest, costs and reasonable attorney’s fees, shall also be the personal
obligation of the Owner of such Lot at the time when the assessment fell due.” (Id.)
Assessments are uniform against all lots, with the exception of Declarant owned lots,
which are required to pay 25% of the regular assessment until such time as a residence
is constructed upon the lot, at which point the assessment becomes 100%. (Article V,
Section 5, ECF No. 28-2 at 10-11.)2 In addition to Assessments, Article IV, Section 6 of
the Declaration requires payment of a Working Capital Fund contribution in the amount
of One Hundred Dollars ($100.00) per Lot at the closing of the transfer of title from the
Declarant to a Lot purchaser. (ECF No. 28-2 at 8.)
Eastwood may dispute its status as a Declarant under the By-Laws, but it does
not dispute the fact that it purchased seventy-one (71) unimproved lots within Lismore
Village with the purpose of constructing residential townhomes thereon. Nor does it
1
The Covenant for Assessments reads in relevant part: “The Declarant for each Lot owned within the
property, hereby covenants and causes by this Declaration to impose upon each such Lot, and each
Owner of any Lot by acceptance of a deed therefor, whether or not it shall be so expressed in such deed,
is deemed to covenant and agree to pay to the Association, annual assessments or charges and special
assessments for working capital and reserve funds for capital improvements, permitted in this
Declaration, and established and collected as hereinafter provided.” (ECF No. 28-2 at 8.)
2
“Assessment Rate. Both annual and special assessments must be fixed at an equal amount for all Lots.
Notwithstanding the foregoing, so long as Declarant owns any Lots, Declarant shall pay twenty five (25%)
of the otherwise applicable annual or special assessment for any such Lots until the completion of
construction of a residential dwelling on such Lot. Thereafter, the Declarant shall pay one hundred
percent (100%) of such annual or special assessment until such Lot is sold to another Owner.” (ECF No.
28-2 at 10-11.)
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dispute the fact that it was the “Owner” of the lots that it purchased. And Plaintiff has
alleged that Eastwood failed to pay assessments or make working capital contributions
on the lots that it owned. So whether or not Eastwood was the “Declarant” for purposes
of the By-Laws, there is no circumventing the core allegation that Eastwood failed to
pay monies it owed under the Declaration.
Additionally, Plaintiff’s complaint alleges that Eastwood began performing the
functions of a Declarant in February 2007 (ECF No. 28 ¶ 15), one and a half years prior
to Eastwood and others filing an involuntary bankruptcy petition against Landcraft in
November 2008 (ECF No. 38-2), and two years prior to the entry of the January 2009
Settlement Order that authorized Sparkman and Jeutter to appoint Eastwood as the
“agent of the declarant for homeowner association issues in the Landcraft and Landcraft
affiliated subdivisions (the ‘Declarant Agent’)” (ECF No. 34-6 at 5). Among other actions
consistent with the role of a Declarant, Plaintiff alleges that Eastwood hired and retained
a company to serve as Association manager at Lismore Village, approved the annual
assessment rate and installment schedule for the Association, directed the Association
manager to invoice all lot owners except Eastwood, and directed the Association
manager to file liens against certain lot owners for failure to pay assessments. (ECF No.
28 ¶ 16.) The complaint further alleges that the homeowners in Lismore Village only
assumed responsibility for the Association and elected their first member-controlled
Board of Directors in February 2012, five years after Eastwood allegedly began
performing functions consistent with that of a Declarant. (Id. ¶ 17.) Meanwhile, with
respect to the entire length of the Landcraft Bankruptcy Case (November 2008 to March
2013), the Trustee states in his declaration:
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In my capacity as Declarant for Lismore Village, I did not make or
authorize any annual, supplemental, or special assessment of
homeowners’ dues or fees on the owners in Lismore Village. I also did not
authorize Eastwood, as my agent, to make any annual, supplemental, or
special assessment of homeowners’ dues or fees on the owners of
Lismore Village. Similarly, I did not fix, set or authorize any annual
assessment period, the due dates of annual assessments of homeowners’
dues or fees, or issue or authorize the issuance of any notices of annual
assessments of homeowners’ dues or fees.
(ECF No. 34-4 ¶ 6.) Yet, according to the complaint, assessments were made, were
collected, and were enforced against all lot owners except Eastwood, an allegation that
the Court is compelled to accept as true at this stage. Some entity must have approved
those assessments, and given the stage of this litigation the Court must accept the
averment that it was Eastwood. Hence, in an ironic turn of events, evidence submitted
by Eastwood in support of its motion to dismiss (Sparkman’s declaration) in the end
actually supports the denial of that motion.
The precise parameters of the Barton doctrine’s reach are somewhat unclear,
given that the law is not well developed regarding: (1) just how close the relationship
between trustee and agent, in the context of the bankruptcy proceedings, must be
before the doctrine applies, and (2) what actions of a trustee (or agent) are properly
deemed to have been taken within his official capacity. What is clear to this Court is that
the doctrine’s reach is not without limit. In other words, the mere showing by a moving
party that said party had some level of principal/agent relationship with the trustee,
without more, is insufficient to require dismissal for failure to seek leave of the
bankruptcy court of a suit with no clear connection to the trustee’s appointed duties of
collecting debtor assets, evaluating and paying creditor claims, and the like.
In McDaniel v. Blust, 668 F.3d 153 (4th Cir. 2012), the Fourth Circuit Court of
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Appeals stated, “To determine whether a complained-of act falls under the Barton
doctrine, courts consider the nature of the function that the trustee or his counsel was
performing during commission of the actions for which liability is sought.” Id. at 157
(citing Heavrin v. Schilling (In re Triple S Rests., Inc.), 519 F.3d 575, 578 (6th
Cir.2008)). Clearly, “When trustees act ‘within the context’ of their role of ‘recovering
assets for the estate,’ leave must be obtained.” Id. Moreover, “Acts are presumed to be
part of the duties of the trustee or his counsel ‘unless Plaintiff initially alleges at the
outset facts demonstrating otherwise.’” Id. (quoting Lowenbraun v. Canary (In re
Lowenbraun), 453 F.3d 314, 321 (6th Cir. 2006)). The McDaniel court held that the
Barton doctrine applied to a suit against the bankruptcy trustee’s attorneys for actions
taken during the prosecution of an adversary proceeding, because it could not be
“seriously dispute[d] that the actions were taken in the context of attempting to prove the
adversary action.” Id.
In contrast, the actions and inactions of which Plaintiff complains in the instant
case have nothing to do with the proceedings in the Landcraft Bankruptcy Case. There
is no indication that the making and collection of assessments in Lismore Village, or
failure to do the same, was done or not done within the context of recovering assets for
the Landcraft estate, evaluating and paying creditor claims, or anything of the sort.
Thus, Eastwood’s argument that the Barton doctrine applies to agents of the trustee
who are the “functional equivalent of a trustee” (ECF No. 34-1 at 11-12) weighs against,
not in favor of, the application of the Barton doctrine in this case because Eastwood
cannot meaningfully be said to have been acting as the equivalent of a trustee when it
allegedly failed to pay assessments on the properties it owned in Lismore Village.
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The cases cited by Eastwood in support of the proposition that the Barton
doctrine is applicable here are unavailing for the simple reason that those cases, to the
extent they involved the conduct of the trustees’ agents, dealt with actions taken by the
agents for the purpose of administering the estate or protecting its assets. (See id.) For
example, in Lawrence v. Goldberg, 573 F.3d 1265 (11th Cir. 2009), the Eleventh Circuit
Court of Appeals applied the Barton doctrine to a suit brought by a Chapter 7 debtor,
who had been held in contempt and incarcerated for failing to comply with the
bankruptcy court’s order to turn over certain assets, against, inter alia, the trustee, the
trustee’s consulting firm, a law firm that represented the trustee, the trustee’s special
counsel, an investigative services firm that assisted the trustee, and seven “creditor”
defendants. Id. at 1270. With respect to the application of the Barton doctrine to the
investigative services firm, the Lawrence court noted:
The bankruptcy court . . . approved the [t]rustee’s hiring of investigator
Aviv and his company Interfor, Inc. to help him discharge his duty to locate
assets belonging to the bankruptcy estate. Thus, Aviv and Interfor, Inc.
also functioned as the equivalent of court appointed officers, and [the
plaintiff’s] claims that they violated the terms of their retainers concerned
actions taken in their official capacities.
Id. (emphasis added). With regard to the creditor defendants, the court reasoned:
[T]he bankruptcy court approved a financing arrangement in which the
creditors—namely Bear Stearns, acting through managing partners Taub
and Lehman—would advance the costs necessary to recover property of
the estate and would receive repayment from recovered assets, if any.
Thus, to the extent the creditors financed the [t]rustee’s efforts to locate
hidden assets on behalf of the estate, they likewise functioned as the
equivalent of court appointed officers, as did their counsel.
Id. (emphasis added). The lesson to be drawn from all of this is that where an agent of
the trustee has acted in a manner consistent with the traditional trustee tasks of
recovering assets for the estate or determining the validity and priority of creditor claims,
16
those actions will be deemed as the functional equivalent of the trustee’s own actions
and afforded the protections of the Barton doctrine. See McDaniel, 668 F.3d at 157.
Equally sensible is the conclusion that when an agent’s challenged actions are wholly
distinct from those traditional trustee tasks, and have no connection to the collection or
distribution of estate assets, neither the policy nor the legal justifications underpinning
the Barton doctrine apply to an action brought against the agent, notwithstanding the
existence of a principal/agent relationship with the trustee. Here, the Court finds that the
alleged actions that form the corpus of Plaintiff’s complaint have no connection to the
traditional tasks of a trustee, and the Barton doctrine’s requirement of pre-suit
authorization from the Bankruptcy Court does not apply in this case.
In holding that the Barton doctrine did not support requiring permission from the
bankruptcy court in a case where debtors brought an action against the bankruptcy
trustee alleging violation of their Fourth Amendment rights when the trustee seized their
computer and searched their home pursuant to a district court order, the Fifth Circuit
Court of Appeals stated:
The Barton Court’s primary concern when holding that leave of the
appointing court was required before suit could be brought against the
receiver was the usurpation of the powers and duties which belonged
exclusively to the appointing court that . . . would have made impossible of
performance the duty of that court to distribute the trust assets to creditors
equitably and according to their respective priorities. The Seventh Circuit
articulated a related and similar concern that if debtors could sue the
trustee in a foreign jurisdiction, the foreign court would have the practical
power to turn bankruptcy losers into bankruptcy winners. But this concern
is not implicated by [the plaintiffs’] complaint.
Carroll v. Abide, 788 F.3d 502, 506 (5th Cir. 2015) (internal citations, quotations, and
alterations omitted). Similarly, in this case, the rationales underlying the Barton doctrine
do not support a requirement of leave from the Bankruptcy Court responsible for the
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Landcraft Bankruptcy Case because, even if Lismore HOA’s claims had been brought
before that case was closed and Sparkman was discharged as Trustee, those claims
would have run no risk of usurping powers and duties that belonged to the Bankruptcy
Court, would have had no effect on the ability of the Bankruptcy Court to distribute the
estate’s assets to creditors equitably and according to their respective priorities, and
would have had no power to turn bankruptcy losers into bankruptcy winners. When held
up next to the pragmatic foundations of the Barton doctrine, it is easy to see Lismore
HOA’s lawsuit for what it is: a straightforward breach of covenant/breach of fiduciary
duty suit seeking to enforce the financial obligations of the entity that owned more than
eighty-five percent of the lots in the Lismore Village subdivision.
Moreover, “The Barton doctrine serves the principle that a bankruptcy trustee ‘is
an officer of the court that appoints him,’ and therefore that court ‘has a strong interest
in protecting him from unjustified personal liability for acts taken within the scope of his
official duties.’” McDaniel, 668 F.3d at 157 (quoting Lebovits v. Scheffel (In re Lehal
Realty Assocs.), 101 F.3d 272, 276 (2d Cir. 1996)). And “‘Without the requirement [of
obtaining leave], trusteeship w[ould] become a more irksome duty, and so it w[ould] be
harder for courts to find competent people to appoint as trustees. Trustees w[ould] have
to pay higher malpractice premiums, and this w[ould] make the administration of the
bankruptcy laws more expensive.’” Id. (quoting In re Linton, 136 F.3d 544, 545 (7th Cir.
1998) (alterations in original)). In the case sub judice, it can hardly be argued that the
Bankruptcy Court had an interest in protecting Eastwood, which was originally the
plaintiff in an Adversary Proceeding against the debtor at issue, from liability over its
choice to pay or not pay assessments and working capital fund contributions for the lots
18
it owned in the Lismore Village subdivision. Such action or inaction cannot be
reasonably construed as “within the scope of [the Trustee’s] official duties,” see
McDaniel, 668 F.3d at 157. Likewise, the mere fact that the Bankruptcy Court
authorized Sparkman to appoint Eastwood as “the agent of the declarant for
homeowner association issues” for certain Landcraft affiliated subdivisions, see (ECF
No. 34-6 at 5), does not bring the alleged failure to pay such amounts within that scope.
Accordingly, Defendant’s motion to dismiss for failure to comply with the Barton doctrine
is denied.3
B. Failure to join a necessary party
Defendant’s motion to dismiss pursuant to Rule 12(b)(7) is premised on the
theory that the Trustee is a necessary party because the actions of an agent
(Eastwood) acting on his behalf have been challenged and have the potential for
impacting the Trustee’s interests and potential liability. (ECF No. 34-1 at 15.) Defendant
links this theory with its other theory of dismissal, discussed above, that any action
against the Trustee would require Plaintiff to secure leave from the Bankruptcy Court,
and in the absence of such leave the Trustee may not be joined in this action. (Id. at 1516.) Therefore, argues Defendant, because the Trustee is a required party, but his
3
While neither party has argued the applicability of 28 U.S.C. § 959, the Court finds its general premise
helpful to the analysis here. Section 959(a) allows trustees and receivers or managers of any property,
including debtors in possession, to be sued “with respect to any of their acts or transactions in carrying on
business connected with such property” without prior approval of the appointing court. Gordon v. Nick,
162 F.3d 1155 (4th Cir. 1998) (unpublished table decision). This exception has been construed narrowly
such that it does not apply to suits against a trustee for actions taken while administering the estate. In re
Cutright, No. 08-70160-SCS, 2012 WL 1945703, at *6 n.9 (Bankr. E.D. Va. May 30, 2012); see In re
DeLorean, 991 F.2d at 1241. Morever, the exception “contemplates ‘pursuing [the debtor’s] business as
an operating enterprise,’ not the duties of collection, liquidation, and preservation of the debtor’s assets.”
Id. (quoting Muratore v. Darr, 375 F.3d 140, 144 (1st Cir. 2004)). In the view of the undersigned, the
alleged non-payment of assessments and working capital contributions, which constitute the basis of
Plaintiff’s claims, have more to do with the carrying on of business connected with the Lismore Village
subdivision than they do with the administration of the Landcraft Bankruptcy estate. The Court’s analysis
of the Barton doctrine’s application to this case stands, irrespective of section 959(a). But the premise
underlying this exception makes the issue even more clear given the alleged facts.
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joinder is not feasible, the factors in Rule 19(b) counsel toward dismissal of this action.
Plaintiff responds that the Trustee is not a necessary party, and that even if the Court
were to find he was a necessary party the Court should allow the case to proceed in his
absence under the factors itemized in Rule 19(b). (ECF No. 7-11.)
Under Federal Rule of Civil Procedure 19, the Court must conduct a two-step
analysis to determine whether the failure to join a person requires dismissal pursuant to
Rule 12(b)(7). See Teamsters Local Union No. 171 v. Keal Driveaway Co., 173 F.3d
915, 917-18 (4th Cir. 1999). Rule 19(a)(1) states that a person is required to be joined if:
(A) in that person’s absence, the court cannot accord complete relief among existing
parties; or (B) that person claims an interest relating to the subject of the action and is
so situated that disposing of the action in the person’s absence may impair or impede
the person’s ability to protect the interest or leave an existing party subject to substantial
risk of incurring inconsistent liability. See Fed. R. Civ. P. 19(a). If a party is required to
be joined but cannot be, the court must determine whether, in equity and good
conscience, the action should proceed with the existing parties or be dismissed, based
on the following factors: (1) the extent to which a judgment rendered in the person’s
absence might prejudice that person or the existing parties; (2) the extent to which any
prejudice could be lessened or avoided by protective provisions in the judgment,
shaping the relief, or other measures; (3) whether a judgment in the person’s absence
would be adequate; and (4) whether the plaintiff would have an adequate remedy if the
action were dismissed for nonjoinder. See Fed. R. Civ. P. 19(b).
The Court finds that the Trustee is not a necessary party and the action may
proceed in his absence. First, the Trustee has not claimed an interest relating to the
20
action, thus it cannot be argued that his joinder is required under Rule 19(a)(1)(B). See,
e.g., Wellin v. Wellin, No. 2:14-CV-4067-DCN, 2015 WL 628071, at *8 (D.S.C. Feb. 12,
2015) (holding that an absent person’s failure to claim an interest in the case constitutes
adequate grounds to deny a Rule 19 motion). Second, the Court can afford complete
relief between Lismore HOA and Eastwood based on the terms of the covenants in the
Declaration, which form the basis of Plaintiff’s claims. As more fully explicated in the
subject matter jurisdiction analysis above, the actions and inactions of which Plaintiff
complains are entirely independent of the proceedings in the Landcraft Bankruptcy
Case and cannot be reasonably construed as being in furtherance of the Trustee’s
official actions. Eastwood’s potential liability rises or falls on its own obligations under
the Declaration as an owner of seventy-one (71) lots in Lismore Village, irrespective of
its principal-agent relationship with the Trustee.
The Court need not reach the application of the factors in Rule 19(b), because
the Trustee is not a necessary party. Therefore, Defendant’s motion to dismiss on
grounds of failure to join a necessary party is denied.
C. Transfer venue
Finally, Defendant asserts that, in the event the Court declines to dismiss the
pending case for violation of the Barton doctrine, proper venue lies with the Bankruptcy
Court and this matter should be transferred thereto. (ECF No. 34-1 at 17-24.) Defendant
argues that any determination of liability in this action will require interpretation of the
Settlement Order and settlement agreement incorporated therein along with deliberation
regarding the scope of the Trustee’s duties as Declarant and Eastwood’s activities as
Declarant Agent. (Id. at 17.)
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On this point, the Court would say rather little. As explained more fully above, the
pending suit does not truly concern the Trustee’s administration of the Landcraft
bankruptcy estate, notwithstanding a tangential connection between the two. The Court
finds that this action is not “related to” the Bankruptcy Case for purposes of 28 U.S.C.
§ 157(a), nor is it a “core proceeding” for purposes of § 157(b).
In the Fourth Circuit, the test for determining whether an action is “related to” a
bankruptcy proceeding is “‘whether the outcome of that proceeding could conceivably
have any effect on the estate being administered in bankruptcy.’” In re Celotex Corp.,
124 F.3d 619, 625 (4th Cir. 1997) (quoting Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d
Cir. 1984)). In other words, “‘An action is related to bankruptcy if the outcome could alter
the debtor’s rights, liabilities, options or freedom of action (either positively or
negatively) and which in any way impacts upon the handling and administration of the
bankruptcy estate.’” Id. at 624-25 (quoting Pacor, 743 F.2d at 994). The instant action,
regardless of result, will have no conceivable impact on the Landcraft Bankruptcy
estate. Eastwood’s liability to Lismore Village, if any, is derived from the Declaration.
The determination of Eastwood’s obligations under the restrictive covenants will not
impact any rights or liabilities of Landcraft or the Trustee.
As to whether any particular case constitutes a core proceeding under § 157(b),
the Fourth Circuit has stated:
On the one hand, a broad reading of the literal terms of the statutory text
could lead to the result that courts treat just about every dispute as “core.”
See, e.g., 28 U.S.C.A. § 157(b)(2)(A) (“matters concerning the
administration of the estate”); § 157(b)(2)(O) (“other proceedings affecting
liquidation of the assets of the estate”). But, the statute must be
interpreted keeping in mind (1) that Congress passed it in response to the
defects revealed by [Northern Pipeline Construction Co. v. Marathon Pipe
Line Co., 458 U.S. 50 (1982)], and (2) that Northern Pipeline remains
22
good law, even if perhaps narrowed by subsequent decisions (internal
citations omitted).
In re Apex Express, 190 F.3d 624, 631 (4th Cir. 1999). Defendant argues that the
pending case is a core proceeding under § 157(b) because resolution of the case will
necessarily address the implementation and performance of the settlement agreement
incorporated into the Settlement Order whereby Eastwood’s appointment as agent of
the Trustee was authorized. The Court disagrees. Plaintiff was not a creditor in the
Landcraft Bankruptcy Case or a party in any related adversary proceeding. The
settlement agreement that Defendant references is connected to this case only very
tangentially, if at all, and the subject matter of Plaintiff’s claims derives from the
Declaration, not the implementation and performance of the settlement agreement.
Moreover, the controversy at issue here does not involve the debtor or property of the
debtor or of the estate, nor will it “affect[] the liquidation of the assets of the estate or the
adjustment of the debtor-creditor . . . relationship.” See 28 U.S.C. § 157(b)(2)(O). As
Plaintiff effectively argues, the relief sought by Lismore HOA hinges upon Eastwood’s
obligations under the Declaration by purchasing lots from Lismore Towns, LLC years
prior to the inception of the Bankruptcy Case. (See ECF No. 35 at 15.) Accordingly,
venue in this Court is proper and will remain. The motion in the alternative to transfer is
denied.
II. Motion to Extend Scheduling Order
In its motion to extend the scheduling order, Defendant argues that reasons of
judicial economy and efficiency favor extension of the discovery deadlines and stay or
extension of all other deadlines and scheduling orders pending the Court’s resolution of
the motion to dismiss. (ECF No. 50 at 2-3.) Such resolution, argues Defendant, will
23
have a significant impact on the need for or scope of discovery, potentially even
obviating the need for discovery in this Court altogether. (Id. at 3.) In response, Plaintiff
points out that Defendant filed a similar motion to stay and/or extend discovery
deadlines, referencing the same rules and reasoning, when its first motion to dismiss
was pending before the Court, and that the cumulative effect has been extensive delay
of the case and Defendant’s failure to participate in ongoing discovery, in particular
Defendant’s refusal to produce witnesses for properly noticed depositions. (ECF No.
52.)
The Defendant’s motion to extend the scheduling order is granted to the extent
that it included a request for a 90 day extension of all deadlines. The premise of the
motion to extend discovery and stay all other deadlines was that the Court had not yet
ruled on Defendant’s motion to dismiss. The motion to dismiss is now resolved by way
of this Order. In general, parties should continue to litigate cases according to
scheduled deadlines, even when a continuance motion has been filed, until relieved of
that responsibility by the Court. However, in recognition of the time that has elapsed
since the filing of the motion to extend (March 24, 2016), and the passage of various
milestones in the interim, the Court hereby grants Defendant’s request for a 90 day
extension of all deadlines in the scheduling order beginning with paragraph 5, Plaintiff’s
expert disclosures, and following. Defendant is instructed to submit a proposed second
amended scheduling order with the dates adjusted accordingly.
III. Motion to Compel
On April 7, 2016, Plaintiff filed a motion to compel the depositions of Christopher
Day, Joe Dority, and a 30(b)(6) representative of Eastwood. (ECF No. 51.) Plaintiff
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noticed the depositions on March 3, 2015, to be taken on March 30-31, 2016, but
Defendant did not make the putative deponents available for the depositions. Plaintiff
requests that the Court grant an Order compelling Defendant to make these individuals
available for the taking of their depositions. (Id.) Defendant argues in response that it is
not resisting Plaintiff’s efforts to take the depositions described, but simply requesting a
delay of the depositions in order to allow the Court time to rule on the pending motion to
dismiss and avoid potentially wasteful discovery. (ECF No. 55.)
The motion to dismiss has been resolved by way of this Order. Accordingly,
Plaintiff’s motion to compel is granted, and Defendant is directed to make all properly
noticed individuals available for the taking of their depositions.
CONCLUSION
For the reasons set forth above, Defendant’s motion to dismiss, or in the
alternative to transfer (ECF No. 34) is denied, Defendant’s motion to extend the
scheduling order (ECF No. 50) is granted in part, and Plaintiff’s motion to compel (ECF
No. 51) is granted. Defendant is directed to submit a proposed second amended
scheduling order with dates adjusted as indicated above.
IT IS SO ORDERED.
/s/ Bruce Howe Hendricks
United States District Judge
June 20, 2016
Greenville, South Carolina
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