Indus. Fabricators, Inc. v. At-Net Servs. - Charlotte, Inc.

Indus. Fabricators, Inc. v. At-Net Servs. - Charlotte, Inc., 2018 NCBC 45.

STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE
SUPERIOR COURT DIVISION
GASTON COUNTY 17 CVS 84

INDUSTRIAL FABRICATORS, INC.,

Plaintiff,

v. ORDER AND OPINION ON
PLAINTIFF’S MOTION TO DISMISS
AT-NET SERVICES - CHARLOTTE, COUNTERCLAIMS AND FOR
INC.; JEFFREY S. KING; and PARTIAL SUMMARY JUDGMENT
DANIEL S. DUNKIN,

Defendants.

1. Defendant At-Net Services - Charlotte, Inc. (“At-Net”) provided information

technology support services for Plaintiff Industrial Fabricators, Inc. (“IFab”) for over

a decade. When IFab became dissatisfied with At-Net’s work, it terminated their

relationship and brought this lawsuit. At-Net responded with twelve counterclaims

asserting that IFab failed to pay for nearly $500,000 in services rendered.

2. IFab now contends that At-Net lacks standing to bring four of its

counterclaims or, alternatively, should be judicially estopped from asserting them.

The gist of both arguments is that At-Net improperly concealed the unpaid services

during its Chapter 11 bankruptcy in 2015 and 2016. Having considered all relevant

matters of record, the Court DENIES IFab’s motion.

Alexander Ricks PLLC, by Rodney E. Alexander and Mary K.
Mandeville, for Plaintiff.

Erwin, Bishop, Capitano & Moss, P.A., by A. Todd Capitano and
Matthew Holtgrewe, for Defendants.

Conrad, Judge.
I.
PROCEDURAL HISTORY

3. On January 10, 2017, IFab filed its complaint, which it amended later that

month. (Compl., ECF No. 1; Am. Compl., ECF No. 2.) The amended complaint

asserts three claims against At-Net, and seven claims against At-Net and two of its

officers, Jeffrey King and Daniel Dunkin.

4. Defendants timely answered on April 3, 2017. (ECF No. 16.) At-Net also

asserted six counterclaims for breach of contract and unjust enrichment.

5. At the request of the parties, the Court temporarily stayed all deadlines

pending an early mediation. (ECF Nos. 17, 18.) The mediation was unsuccessful,

and At-Net amended its counterclaims on June 15, 2017 to include six additional

claims for breach of contract and unjust enrichment. (First Am. Countercl., ECF No.

19 [“Countercl.”].)

6. IFab answered the counterclaims and denied any wrongdoing. (IFab’s

Answer to First Am. Countercl., ECF No. 24 [“IFab’s Answer”].) Three days later,

IFab filed its motion to dismiss or, in the alternative, for summary judgment as to

four of At-Net’s counterclaims under Rules 12(b)(1) and 56 of the North Carolina

Rules of Civil Procedure. (ECF No. 26.) The motion has been fully briefed. IFab also

objected to two affidavits filed by At-Net, which then moved for leave to supplement

the record with amended affidavits to overcome the objections. (ECF Nos. 44, 47.)

The Court held a hearing on December 5, 2017, at which the parties were represented

by counsel.
II.
BACKGROUND

7. This action includes an array of claims and counterclaims arising out of the

lengthy, though now ruptured, relationship between IFab and At-Net. The following

factual summary focuses on At-Net’s counterclaims and its Chapter 11 bankruptcy,

which are the subject of IFab’s motion. By reciting the relevant allegations in the

pleadings and drawing from the evidence offered by both parties, the Court does not

make findings of fact.

A. IFab and At-Net’s Relationship

8. At-Net provides information technology (“IT”) services. (Am. Aff. Berman

¶ 3, ECF No. 47.1.) IFab, a metal parts fabricator, was one of At-Net’s clients from

roughly 2005 until 2016. (See Aff. Bingham ¶ 4, ECF No. 28.) IFab describes it as a

one-sided relationship in which At-Net gained nearly complete control over IFab’s

network and systems. (See Am. Compl. ¶¶ 25, 27.) At-Net sees things differently,

alleging that IFab retained control over its systems but failed to devote appropriate

resources and training to its own staff. (See Countercl. ¶ 5; Am. Aff. Berman ¶¶ 24,

26–27.)

9. There appears to be no dispute, though, that the relationship changed in

significant ways in 2014 when IFab’s in-house IT employee, Jody Outlaw,

unexpectedly passed away. (Am. Compl. ¶ 24; Countercl. ¶ 2.) IFab describes Outlaw

as its “most experienced IT support person.” (IFab’s Answer ¶ 2.) With his sudden

passing, IFab turned to At-Net for additional support in maintaining its Electronic
Data Interchange (“EDI”), a platform IFab uses to communicate with its customers.

(Am. Aff. Berman ¶¶ 24–25; Countercl. ¶¶ 2–4.)

10. At-Net alleges that it agreed to bill IFab “on a time and materials basis” for

EDI support but that, over time, the increased demand for its services affected its

billing cycle. (Countercl. ¶ 3.) Initially, At-Net billed IFab’s simpler requests at a

flat rate and billed more complex matters separately. (Am. Aff. Berman ¶¶ 21–22.)

By May 2016, with no replacement having been hired for Outlaw, At-Net agreed to

bill IFab a flat fee of $2,000 per week for EDI support services, allowing any excess

to accrue for payment at a future date. (Am. Aff. Berman ¶ 38; Countercl. ¶¶ 5–6.)

Within a few months, significant excess fees accumulated. At-Net concluded that

IFab would never be able to catch up through the weekly payment arrangement and

insisted on full payment as services were incurred. (Am. Aff. Berman ¶ 38.) At-Net

points to evidence that the number of service requests spiked by 875% between 2014

and 2016, shifting from periodic to almost daily support. (Am. Aff. Berman ¶ 24; see

also Countercl. ¶ 4.)

11. In 2016, IFab faced a string of IT troubles, all of which it blames on At-Net.

IFab became increasingly unhappy with At-Net’s maintenance of the EDI. (See Aff.

Bingham ¶¶ 6–7.) IFab asserts that the EDI became unreliable, leading to customer

complaints, and that At-Net was unable to correct the problems. (See Aff. Bingham

¶¶ 6–7.) In September 2016, IFab’s network was crippled by a ransomware attack,

which IFab attributed to At-Net’s negligence in maintaining appropriate security.

(See Aff. Bingham ¶ 8.)
12. By the end of 2016, the relationship was past the breaking point, and IFab

terminated its contract with At-Net. (See Aff. Bingham ¶ 9.) At-Net immediately

delivered nine invoices to IFab “totaling about $460,000 for services rendered as far

back as June 4, 2015.” (Aff. Bingham ¶ 9; see also Countercl. ¶¶ 13–14.) IFab refused

to pay and instead filed this suit, prompting At-Net to assert four counterclaims as

to the unpaid invoices for EDI support along with eight additional counterclaims.

(See Countercl. ¶¶ 15–37.)

B. At-Net’s Bankruptcy

13. At the same time that its relationship with IFab was deteriorating, At-Net

was undergoing Chapter 11 reorganization. At-Net filed its bankruptcy petition in

December 2014, its initial disclosure statement in January 2015, and its joint

disclosure statement and joint plan of reorganization in April 2015. (Aff. Alexander

¶ 3, ECF No. 29; Am. Aff. Berman ¶ 33.) It is undisputed that At-Net remained a

debtor-in-possession and took on the duties and responsibilities of the bankruptcy

trustee. (See Aff. Alexander ¶ 3.)

14. In the initial reorganization plan, At-Net committed all of its net income for

2015 through 2017 to its bankruptcy creditors. (Aff. Alexander Ex. 1.6.) At-Net also

predicted it would have only $69,609 and $45,882 available for its unsecured creditors

in 2015 and 2016, respectively, based on historical revenue figures. (Aff. Alexander

Ex. 1.12 at Ex. D; Am. Aff. Berman ¶ 40.) The plan was amended several times. In

June 2015, At-Net offered to set aside 99.7 percent of its net income from 2016

through 2018 for unsecured creditors. (Aff. Alexander Ex. 1.11 at pp.9–10.)
Ultimately, the plan drew objections from two of At-Net’s largest creditors, both of

which reached settlements and agreed to accept fixed amounts, rather than

percentages, of future income. (See Aff. Alexander Exs. 1.20–21, 1.23 at p.3.) In the

final plan, At-Net committed an additional 23.4 percent of its net income from 2016

through 2018 to its remaining creditors. (See Aff. Alexander Ex. 1.23.)

15. The bankruptcy court confirmed the plan with an effective date of January

1, 2016. (Aff. Alexander Ex. 1.23.) At-Net’s case was closed as “fully administered”

on October 5, 2016. (Aff. Alexander Ex. 1.26.)

16. At no point in the bankruptcy proceeding did At-Net disclose any deferred

billings for EDI support. IFab asserts that these billings, incurred during the

bankruptcy proceeding, are property of the bankruptcy estate under 11 U.S.C.

§ 541(a). It also asserts that At-Net, as debtor-in-possession, was required to disclose

its unpaid work for IFab to the bankruptcy court.

III.
MOTION TO DISMISS

17. IFab moves to dismiss four of At-Net’s counterclaims under Rule 12(b)(1)

and, in the alternative, for entry of summary judgment under Rule 56. Because

IFab’s motion to dismiss challenges this Court’s subject matter jurisdiction, the Court

addresses it first.

A. Legal Standard

18. “Standing generally refers to a party’s right to have a court decide the merits

of a dispute.” DiCesare v. Charlotte-Mecklenburg Hosp. Auth., 2017 NCBC LEXIS 33,

at *19 (N.C. Super. Ct. Apr. 11, 2017). It “is a necessary prerequisite to a court’s
proper exercise of subject matter jurisdiction.” Aubin v. Susi, 149 N.C. App. 320, 324,

560 S.E.2d 875, 878 (2002) (citing Creek Pointe Homeowner’s Ass’n v. Happ, 146 N.C.

App. 159, 165, 552 S.E.2d 220, 225 (2001)).

19. In deciding whether subject matter jurisdiction exists, the Court may

consider matters outside the pleadings. See Tart v. Walker, 38 N.C. App. 500, 502,

248 S.E.2d 736, 737 (1978). The absence of subject matter jurisdiction requires

dismissal. See N.C. R. Civ. P. 12(h)(3); Harris v. Pembaur, 84 N.C. App. 666, 667, 353

S.E.2d 673, 675 (1987).

B. Analysis

20. IFab contends that any amounts it may have owed At-Net for EDI support

performed during the bankruptcy became property of the bankruptcy estate and

continue to be estate property. (See Pl.’s Br. Supp. Mot. to Dismiss & for Partial

Summ. J. 12, ECF No. 27 [“Br. Supp.”]; Pl.’s Reply Supp. Mot. to Dismiss & for Partial

Summ. J. 5–6, ECF No. 42 [“Reply”].) If IFab is correct, At-Net lacks standing to

assert its EDI-related counterclaims, and the Court lacks subject matter jurisdiction.

See Keener Lumber Co. v. Perry, 149 N.C. App. 19, 26, 560 S.E.2d 817, 822 (2002)

(“North Carolina state trial courts lack subject matter jurisdiction to hear claims that

belong to a bankruptcy estate.”).

21. For the reasons discussed below, the Court concludes that At-Net has

standing. Although part of the deferred billings for EDI support became property of

the estate, the Bankruptcy Code expressly vests all property of the estate in the

debtor upon confirmation of the reorganization plan. See 11 U.S.C. § 1141(b). As a
result, any deferred billings vested in At-Net at the time of plan confirmation, and it

has standing to assert its counterclaims seeking to recover these amounts.

1. At-Net’s Bankruptcy Estate

22. By statute, the commencement of a Chapter 11 reorganization “creates an

estate.” 11 U.S.C. § 541(a). “An estate is a separate legal identity, created on (and

by) the filing of a bankruptcy petition, and continuing until confirmation, conversion,

or dismissal of the case.” In re Herberman, 122 B.R. 273, 278 (Bankr. W.D. Tex. 1990).

Property of the bankruptcy estate includes “all legal or equitable interests of the

debtor in property as of the commencement of the case.” 11 U.S.C. § 541(a)(1). It also

includes “[a]ny interest in property that the estate acquires after the commencement

of the case.” Id. § 541(a)(7).

23. In its opposition brief, At-Net argued that its counterclaims do not concern

estate property because “[a]ll of the work for which [it] seeks recovery . . . was

performed post-petition.” (Defs.’ Br. Resp. to Pl.’s Mot. to Dismiss & for Partial

Summ. J. 9, ECF No. 36 [“Br. Resp.”].) At-Net pointed to the generally accepted

principle that “property acquired by the debtor after the petition is filed may be

retained by the debtor, clear of all claims ultimately discharged by the bankruptcy

proceeding.” (Br. Resp. 8 (quoting United States v. Gold (In re Avis), 178 F.3d 718,

720 (4th Cir. 1999).)

24. At the hearing, At-Net’s counsel retreated from this position and allowed

that some of the amounts receivable for work performed during the bankruptcy
should be considered property of the estate, not property of the debtor. The

concession was a good one.

25. Typically, the debtor in a Chapter 11 bankruptcy remains a debtor-in-

possession, just as At-Net did here. See 11 U.S.C. § 1101(1); see also United Surety

& Indem. Co. v. López-Muñoz (In re López-Muñoz), 866 F.3d 487, 497 (1st Cir. 2017);

Chicago Truck Drivers v. El Paso CGP Co., 525 F.3d 591, 598 (7th Cir. 2008). That

means the debtor itself serves as the trustee of the estate, keeping possession of any

assets and “administer[ing] them for the benefit of the creditor body.” Bowers v.

Atlanta Motor Speedway (In re Se. Hotel Props. Ltd. P’ship), 99 F.3d 151, 152 n.1 (4th

Cir. 1996). The debtor-in-possession holds all the powers and responsibilities of the

trustee, including the ability to continue operating the business. See 11 U.S.C.

§§ 1107, 1108.

26. In that circumstance, the receivables generated by the ongoing enterprise

are generated by the estate. They are not property of the debtor but instead “logically

fit into § 541(a)(7) as property acquired by the estate during the pendency of the

bankruptcy.” In re Evans, 337 B.R. 551, 557 (Bankr. E.D.N.C. 2005) (citation and

quotation marks omitted); see also Lowe v. Yochem (In re Reed), 184 B.R. 733, 739

(Bankr. W.D. Tex. 1995); In re Herberman, 122 B.R. at 279.

27. At least some of the EDI support that At-Net performed fits into this

category. The disputed invoices include more than $100,000 in services performed

after the petition was filed but before plan confirmation. (See Aff. Bingham ¶ 9, Ex.

1; see also Br. Supp. 5; Br. Resp. 9.) These receivables were therefore “generated by
the estate enterprise.” In re Evans, 337 B.R. at 557 (citation and quotation marks

omitted). And At-Net’s right to payment for this work, which At-Net now seeks to

recover in its counterclaims, became property of the bankruptcy estate. See id.; In re

Herberman, 122 B.R. at 279.

28. The remaining invoices itemize more than $300,000 in additional services

performed after plan confirmation. (See Aff. Bingham ¶ 9, Ex. 1; Aff. Alexander ¶ 15.)

These amounts were not generated by the estate because “the estate ceased to exist”

upon plan confirmation. Dynasty Oil & Gas, LLC v. Citizens Bank (In re United

Operating, LLC), 540 F.3d 351, 355 (5th Cir. 2008). Section 541(a)(7) therefore does

not apply, and these receivables were never property of the estate.

2. Section 1141(b)

29. The fact that some receivables for EDI support were property of the estate

during the bankruptcy proceeding does not necessarily mean that At-Net lacks

standing to pursue its claims now that the bankruptcy is complete. At-Net contends

that all estate property vested in it by operation of law upon plan confirmation, thus

restoring its right to sue. (See Br. Resp. 9–10.) IFab responds that At-Net’s right to

payment for post-petition work remains property of the estate because At-Net never

disclosed it to the bankruptcy court. (See Reply 6–7.)

30. In a Chapter 11 reorganization, “the confirmation of a plan vests all of the

property of the estate in the debtor” unless the plan itself or the bankruptcy court’s

confirmation order provides otherwise. 11 U.S.C. § 1141(b) (emphasis added).

Neither side suggests that At-Net’s reorganization plan or the confirmation order
authorizes any exceptions here. A plain reading of the statute therefore supports

At-Net’s argument that all estate property, including the property at issue in the

counterclaims, vested in At-Net as of January 1, 2016, the effective date of

confirmation. (See Aff. Alexander Ex. 1.23.)

31. Most federal courts appear to agree that the statute means just what it says.

A reorganization plan may exempt property from the vesting procedure in section

1141(b). See Cunningham v. Healthco, Inc., 824 F.2d 1448, 1460 (5th Cir. 1987). But

in the absence of “contrary provisions” in the plan, confirmation serves to vest estate

property in the debtor “along with normal ownership rights.” In re Chattanooga

Wholesale Antiques, Inc., 930 F.2d 458, 462 (6th Cir. 1991) (internal quotation marks

omitted); see also Valley Historic Ltd. P’ship v. Bank of N.Y., 486 F.3d 831, 837–38

(4th Cir. 2007); Linsenmeyer v. United States (In re Linsenmeyer), 92 Fed. App’x 101,

102–03 (6th Cir. 2003). The “revested” property is no longer property of the estate

and is beyond the bankruptcy court’s jurisdiction. See Bell v. Bell (In re Bell), 225

F.3d 203, 216 (2d Cir. 2000).

32. IFab insists that “undisclosed assets remain estate property.” (Reply 6.) Its

position is driven largely by policy considerations, rather than the statutory text. The

law, IFab contends, should not permit a debtor to conceal assets from the bankruptcy

court and creditors only then to use the assets later for its own benefit. (See Reply

7.)

33. The argument has surface appeal. A debtor-in-possession holds not only the

rights but also the duties of a trustee, including the “fiduciary” obligation to act “in
the interests of the creditors.” In re J.T.R. Corp., 958 F.2d 602, 604–05 (4th Cir.

1992). Disclosure is one of the most fundamental duties of the debtor-in-possession.

See In re Plaza de Retiro, Inc., 417 B.R. 632, 641 (Bankr. D.N.M. 2009); Petit v. New

England Mortg. Servs. Inc., 182 B.R. 64, 69–70 (D. Me. 1995). “Open, honest and

straightforward disclosure to the Court and creditors is intrinsic to the entire

reorganization process and begins on day one, with the filing of the Chapter 11

petition.” In re V. Savino Oil & Heating Co., 99 B.R. 518, 526 (Bankr. E.D.N.Y. 1989).

When a debtor tells the bankruptcy court one thing and later says another after

discharge, the integrity of the process is called into question. Courts can and should

use available equitable tools—for example, judicial estoppel—to prevent abuse and

preserve the integrity of the judicial process. See, e.g., Diamond Z Trailer, Inc. v. JZ

L.L.C. (In re JZ L.L.C.), 371 B.R. 412, 420 (Bankr. 9th Cir. 2007).

34. But standing is the wrong inquiry. The text of section 1141(b) is clear, and

importing an equitable exception “would defy congressional intent.” Lawski v.

Frontier Ins. Grp. LLC (In re Frontier Ins. Grp., Inc.), 2018 Bankr. LEXIS 442, at *35

(Bankr. S.D.N.Y. Feb. 15, 2018); see also Greenheart Durawoods, Inc. v. PHF Int’l

Corp., 1994 U.S. Dist. LEXIS 16509, at *7 (S.D.N.Y. Nov. 18, 1994). “When property

of the estate has been vested in the debtor, it cannot be said that the chapter 11 debtor

has no standing after the case is closed.” Diamond Z Trailer, 371 B.R. at 419; see also

Idearc Media LLC v. Glassman, 2011 U.S. Dist. LEXIS 14865, at *4–5 (E.D. Pa. Feb.

15, 2011).
35. Idearc Media dealt with this issue persuasively. The plaintiff failed to

disclose a post-petition claim for breach of contract during its Chapter 11 bankruptcy.

See Idearc Media, 2011 U.S. Dist. LEXIS 14865, at *2. When the plaintiff later

brought this claim, the defendant argued that it lacked standing because “the cause

of action remain[ed] property of the bankruptcy estate.” Id. The district court

disagreed. Because section 1141(b) plainly applies to all property of the estate, “even

if a Chapter 11 debtor fails to schedule a cause of action during bankruptcy

proceedings, that cause of action vests in the debtor and the debtor has standing to

sue” following plan confirmation. Id. at *4–5. The court noted, though, that the claim

could be subject to a defense of judicial estoppel at a later stage in the case. See id.

at *10.

36. The cases cited by IFab do not require a different result. Some relate to

Chapter 7, a context in which “courts have held that where a debtor conceals an asset

or fails to schedule it, the asset remains the property of the bankruptcy estate and,

accordingly, the debtor can be found to lack standing to pursue its further

disposition.” In re Kane, 628 F.3d 631, 641 (3d Cir. 2010). These cases offer no useful

guidance because Chapter 7 has no analog to section 1141(b).

37. IFab also relies on two cases in which courts dismissed claims of a former

Chapter 11 debtor for lack of standing. See Coney Island Land Co., LLC v. Domino’s

Pizza LLC, 2017 U.S. Dist. LEXIS 6941, at *11–14 (E.D.N.Y. Jan. 18, 2017); Kunica

v. St. Jean Fin., Inc., 233 B.R. 46, 52–55 (S.D.N.Y. 1999). In Coney Island, the court

did not cite or address section 1141(b) and instead held that the debtor lacked
standing based on precedents relating to Chapter 7. 2017 U.S. Dist. LEXIS 6941, at

*13 (citing Myers v. Costco Wholesale Corp., 2007 U.S. Dist. LEXIS 71566, at *4

(E.D.N.Y. Sept. 26, 2007)).

38. Kunica, on the other hand, addressed a different question altogether. The

court based its decision on section 349(b) of the Bankruptcy Code, which concerns

vesting of property after dismissal, not confirmation. See Kunica, 233 B.R. at 53. The

case is therefore inapposite.

39. It bears noting that Kunica touched briefly on section 1141(b) in dictum,

stating that “[t]he debtor may recover property of the estate . . . upon confirmation of

a plan of reorganization” but “only property that was ‘dealt with by the plan is free

and clear of all claims and interests of creditors . . . .’” Id. at 52–53 (quoting 11 U.S.C.

§ 1141(c)). The court stated that “undisclosed claims are not ‘dealt with’ by the plan”

and “do not revert to the debtor free of the claims of creditors.” Id. at 53. To the

extent IFab interprets Kunica to mean that only claims “dealt with” by the plan vest

under section 1141(b), the Court disagrees. Kunica appears to envision that

undisclosed claims vest in the debtor but may remain subject to creditors’ claims.

Moreover, section 1141(b)’s predecessor included language stating that “only

‘property dealt with’ in a plan or arrangement revested.” Diamond Z Trailer, 371

B.R. at 419; see also Bankruptcy Act § 70(i), 11 U.S.C. § 110(i) (1976). The fact that

Congress omitted this language from section 1141(b) strongly suggests that “all the

property” means all—disclosed or undisclosed, scheduled or unscheduled, dealt with
by the plan or not. See Idearc Media, 2011 U.S. Dist. LEXIS 14865, at *4–5;

Greenheart Durawoods, 1994 U.S. Dist. LEXIS 16509, at *6–7.

40. Accordingly, At-Net, as a former Chapter 11 debtor, has standing to assert

its counterclaims because all property of the estate vested in At-Net when the

bankruptcy court confirmed its plan of reorganization. See Idearc Media, 2011 U.S.

Dist. LEXIS 14685, at *4–5. The Court therefore denies IFab’s motion to dismiss.

See Newton v. Barth, 788 S.E.2d 653, 661 (N.C. Ct. App. 2016) (reversing grant of

motion to dismiss for lack of standing because claim belonged to plaintiffs, not

bankruptcy estate); Keener Lumber, 149 N.C. App. at 26–27, 560 S.E.2d at 822–23

(affirming denial of motion to dismiss for lack of subject matter jurisdiction).

IV.
MOTION FOR SUMMARY JUDGMENT

41. Although section 1141(b) unequivocally vests all property in the debtor upon

plan confirmation, it is not a license to conceal assets from the bankruptcy court.

Courts routinely apply equitable doctrines, including judicial estoppel, “to preserve

the integrity of the system” and to prevent unwarranted windfalls to debtors.

Diamond Z Trailer, 371 B.R. at 420; see also T-WOL Acquisition Co. v. ECDG South,

LLC, 220 N.C. App. 189, 199–205, 725 S.E.2d 605, 612–15 (2012); Bioletti v. Bioletti,

204 N.C. App. 270, 276–80, 693 S.E.2d 691, 695–98 (2010).

42. Judicial estoppel is the subject of IFab’s motion for summary judgment.

IFab contends that At-Net’s allegation that it deferred nearly half a million dollars

in EDI support billings in 2015 and 2016 is inconsistent with its failure to disclose

the deferred billings during the bankruptcy proceeding. (See Br. Supp. 17–18.) At-
Net concedes that it did not disclose the deferred billings for EDI support but

contends that it was not required to do so. (See Br. Resp. 13–20.)

43. After careful consideration of the record, the Court concludes that summary

judgment is not appropriate. Taking the facts in a light most favorable to At-Net, the

Court cannot conclude as a matter of law that At-Net intentionally concealed material

information from the bankruptcy court.*

A. Legal Standard

44. Summary judgment is appropriate “if the pleadings, depositions, answers to

interrogatories, and admissions on file, together with the affidavits, if any, show that

there is no genuine issue as to any material fact and that any party is entitled to a

judgment as a matter of law.” N.C. R. Civ. P. 56(c). In deciding a motion for summary

judgment, the Court views the evidence “in the light most favorable to the non-

mov[ant],” taking the non-movant’s evidence as true and drawing inferences in its

favor. Furr v. K-Mart Corp., 142 N.C. App. 325, 327, 543 S.E.2d 166, 168 (2001)

(citation and quotation marks omitted).

45. The moving party “bears the initial burden of demonstrating the absence of

a genuine issue of material fact.” Liberty Mut. Ins. Co. v. Pennington, 356 N.C. 571,

579, 573 S.E.2d 118, 124 (2002). If the moving party carries this burden, the

responding party “may not rest upon the mere allegations or denials of his pleading,”

N.C. R. Civ. P. 56(e), but must instead “come forward with specific facts establishing

* IFab objected to the affidavits submitted by At-Net in opposition. In response, At-Net moved

to supplement the record to include amended affidavits designed to overcome the objections.
After full consideration, the Court grants At-Net’s motion to supplement and overrules IFab’s
objections.
the presence of a genuine factual dispute for trial,” Liberty Mut. Ins., 356 N.C. at 579,

573 S.E.2d at 124. A “genuine issue” exists when “‘it is supported by substantial

evidence,’ which is that amount of relevant evidence necessary to persuade a

reasonable mind to accept a conclusion.” Id. (citation omitted) (quoting DeWitt v.

Eveready Battery Co., 355 N.C. 672, 681, 565 S.E.2d 140, 146 (2002)).

B. Analysis

46. Generally speaking, “judicial estoppel forbids a party from asserting a legal

position inconsistent with one taken earlier in the same or related litigation.” Price

v. Price, 169 N.C. App. 187, 191, 609 S.E.2d 450, 452 (2005) (internal quotation marks

omitted). The doctrine defies rigid definition, but our Supreme Court has identified

three key factors: (1) whether a party’s subsequent position is clearly inconsistent

with its earlier position; (2) whether the party “succeeded in persuading a court to

accept that party’s earlier position”; and (3) whether the party asserting the

“inconsistent position would derive an unfair advantage or impose an unfair

detriment on the opposing party if not estopped.” Whitacre P’ship v. BioSignia, Inc.,

358 N.C. 1, 29, 591 S.E.2d 870, 888–89 (2004) (quotation marks omitted). Due to the

equitable nature of the doctrine, courts may consider other factors, including whether

a party’s prior inconsistent position was the result of “inadvertence or mistake.” Id.

at 30, 591 S.E.2d at 889 (internal quotation marks omitted).

47. Our courts have held that judicial estoppel may bar post-bankruptcy

litigation when a debtor was required to, but did not, disclose relevant assets or legal

claims during the bankruptcy proceeding. See T-WOL Acquisition, 220 N.C. App. at
204–05, 725 S.E.2d at 615; Bioletti, 204 N.C. App. at 276–80, 693 S.E.2d at 695–98.

This is consistent with decisions of numerous federal courts. See, e.g., Browning Mfg.

v. Mims (In re Coastal Plains, Inc.), 179 F.3d 197, 204–05 (5th Cir. 1999); Oneida

Motor Freight, Inc. v. United Jersey Bank, 848 F.2d 414, 419–20 (3d Cir. 1988).

1. Whether At-Net Has Taken Clearly Inconsistent Positions

48. At a minimum, judicial estoppel requires a showing that a party has taken

clearly inconsistent positions in the same or related litigation. See Whitacre, 358 N.C.

at 29, 591 S.E.2d at 888–89. In this context, the question is whether At-Net concealed

information from the bankruptcy court about assets and potential claims that are the

subject of its counterclaims in this suit.

49. The disclosure obligations of a Chapter 11 debtor are substantial. See 11

U.S.C. §§ 521, 1125. Among other things, the debtor must file a schedule of assets

and liabilities, a schedule of current income and expenditures, and a statement

regarding anticipated changes in income or expenditures for the 12-month period

after the filing of the petition. See 11 U.S.C. § 521(a)(1). The debtor must also

disclose existing legal claims and “any litigation likely to arise in a non-bankruptcy

context.” Medicare Rentals, Inc. v. Advanced Servs., 119 N.C. App. 767, 770, 460

S.E.2d 361, 364 (1995). The duty of disclosure “is a continuing one.” Browning Mfg.,

179 F.3d at 208 (citation and quotation marks omitted).

50. In a Chapter 11 proceeding, the disclosure obligation ties directly to the

debtor’s reorganization plan, which “is basically a court-approved contract between

the debtor and its creditors.” Friday Invs., LLC v. Bally Total Fitness of the Mid-Atl.,
Inc., 803 S.E.2d 233, 240 (N.C. Ct. App. 2017) (citing In re WorldCom, Inc., 352 B.R.

369, 377 (Bankr. S.D.N.Y. 2006)). For the system to work as intended, the creditors

and the bankruptcy court must have sufficient information to evaluate the plan. The

Bankruptcy Code therefore requires the debtor “to file a disclosure statement

providing ‘adequate information’ in which a hypothetical investor could make an

informed judgment about the proposed reorganization plan.” Medicare Rentals, 119

N.C. App. at 770, 460 S.E.2d at 364 (quoting 11 U.S.C. § 1125(b)). “Adequate

information” broadly means “information of a kind, and in sufficient detail, as far as

is reasonably practicable in light of the nature and history of the debtor” to enable an

informed judgment, though balanced by considerations of the “complexity of the case,

the benefit of additional information to creditors and other parties in interest, and

the cost of providing additional information.” 11 U.S.C. § 1125(a)(1).

51. Confirmation brings the process to a close. “Once the bankruptcy court

confirms a plan of reorganization, the debtor may go about its business without

further supervision or approval.” Pettibone Corp. v. Easley, 935 F.2d 120, 122 (7th

Cir. 1991). The bankruptcy court’s jurisdiction extends only to “matters pertaining

to the implementation or execution of the plan.” Bank of La. v. Craig’s Stores of Tex.,

Inc. (In re Craig’s Stores of Tex., Inc.), 266 F.3d 388, 390 (5th Cir. 2001).

52. According to IFab, these obligations required At-Net to disclose the unbilled

EDI support services as well as its May 2016 agreement to cap IFab’s weekly bills

and defer any excess. IFab contends that At-Net instead concealed this information,

while falsely reporting that it was operating its business in the ordinary course and
also understating the amounts that would be available to creditors under its plan.

At-Net responds that deferred billings were not unusual, depending on the type of

work being performed, and that its filings were accurate based on the knowledge it

had at the time they were made.

53. The timeline matters here. At-Net could not have disclosed any deferred

billings when it filed its initial schedules in January 2015 because there was nothing

to disclose. The unbilled services did not begin until roughly six months later. (See

Aff. Alexander ¶ 15, Ex. 1.3; Aff. Bingham ¶ 9.) At-Net’s initial bankruptcy filings

are therefore not inconsistent with its position in this action, and IFab does not argue

otherwise.

54. Nor is there any clear inconsistency in later filings. IFab points to the joint

disclosure statement, in which At-Net represented to the bankruptcy court that it

would have $69,609 and $45,882 available for its unsecured creditors in 2015 and

2016, respectively. (Aff. Alexander Ex. 1.12 at Ex. D.) IFab contends that these

predictions are inconsistent with At-Net’s current position that “IFab owes it

$137,000 for work it performed in 2015 and $353,000 for 2016 work.” (Br. Supp. 17.)

55. When the joint disclosure statement was filed, though, At-Net had accrued

less than $20,000 in deferred billings for IFab. (See Aff. Alexander ¶ 15.) There is no

evidence showing that At-Net knew, at that time, that the deferred billings would

continue indefinitely, much less that they would eventually grow to nearly half a

million dollars. (Br. Resp. 19; Aff. Alexander ¶ 15; Am. Aff. Berman ¶ 38.) At-Net’s

affidavits suggest that the company thought the situation was a “short-term
arrangement,” one that would conclude when IFab hired a new IT employee. (Am.

Aff. Berman ¶ 27.)

56. Furthermore, the joint disclosure statement’s projections are just that—

projections. At-Net calculated the anticipated available funds for 2015 and 2016

based on “historical results” and not “a client-by-client analysis of anticipated sales

in future years.” (Br. Resp. 18; see also Am. Aff. Berman ¶ 40.) The joint disclosure

statement warns that actual results may differ from the estimates for any number of

reasons. (See Aff. Alexander Ex. 1.12 at Ex. D.) A projected amount of revenue based

on historical results and accompanied by a disclaimer is not clearly inconsistent with

At-Net’s later assertion of amounts owed based on actual billings.

57. IFab also argues that the deferred billings contradict At-Net’s

representation that it was operating its business normally. Determining what is

normal and what is unusual are fact-intensive questions. Some evidence suggests

that At-Net normally delayed billings for complex work until that work was

completed, including for clients other than IFab. (See Am. Aff. Berman ¶¶ 19–24, 29–

32, Exs. B–H .) This is supported by the fact that At-Net actually billed IFab for over

$600,000 in 2015, apparently for more routine services. (Am. Aff. Berman Ex. K.) It

is reasonable to infer that At-Net viewed its EDI support services in 2015 as a normal,

temporary uptick in complex bills for a major client. (See Br. Resp. 4; Am. Aff.

Berman ¶ 38, Ex. K.)

58. At-Net acknowledges that it came to view the relationship with IFab

differently in 2016. Service requests surged, and in May 2016, At-Net agreed to cap
IFab’s bills at $2,000 per week and to defer any excess. (Br. Supp. 3, 18; see also

Countercl. ¶¶ 6–11; Am. Aff. King ¶¶ 7–9, Exs. A, B, ECF No. 47.15.) Although IFab

contends that At-Net should have disclosed this agreement, it arose after

confirmation, at a time when At-Net was free to carry on its business without

supervision by the bankruptcy court. (See Br. Supp. 18; Br. Resp. 14–15; Aff.

Alexander Ex. 1.23 at Ex. A, § 9.1.) There is no evidence that this agreement existed

before plan confirmation, and it does not appear that At-Net had any duty to disclose

it to the bankruptcy court. (See Br. Resp. 14–15; Aff. Alexander Ex. 1.23 at Ex. A,

§ 9.1.) In the absence of a post-confirmation duty of disclosure, At-Net’s failure to

disclose this information to the bankruptcy court is not inconsistent with its efforts

to seek recovery in this action. See In re Grinstead, 75 B.R. 2, 3 (Bankr. D. Minn.

1985) (noting that a debtor lacks fiduciary obligations post-confirmation because

“[t]here is no debtor in possession status of a debtor post confirmation” and “[t]he

rights and duties of creditors and the debtor are determined by the confirmed Chapter

11 plan”); see also Dynasty Oil & Gas, 540 F.3d at 355; Bank of La., 266 F.3d at 390;

Pettibone Corp., 935 F.2d at 122.

59. In addition, the evidence does not suggest that At-Net was aware, before

confirmation, that it may have a potential legal claim against IFab. There is no

indication that IFab had refused payment, and one of its own witnesses states that

the company would have paid any legitimate invoices in a timely manner. (Aff.

Bingham ¶ 14.) At-Net surely knew of a potential claim in December 2016 (when

IFab first refused payment), and it may have known of a potential claim as of August
2016 (when it realized IFab likely would not cover its growing balance). But its duty

of disclosure had long ended by either date.

60. Perhaps there is a point at which the deferred EDI support billings became

sufficiently large and sufficiently abnormal to require At-Net to amend its

disclosures. The accrued amounts eclipsed the $100,000 mark before plan

confirmation and then accelerated through the end of 2016. (See Aff. Alexander ¶ 15,

Ex. 1.23.) At-Net certainly had some knowledge that something was amiss during

the months before and after the confirmation order.

61. On the current record, though, IFab has not carried its burden to show that

At-Net’s failure to disclose the deferred billings, based on its knowledge at the time,

is clearly inconsistent with the allegations supporting its counterclaims. Judicial

estoppel is a “harsh doctrine” to be applied with caution. Medicare Rentals, 119 N.C.

App. at 771, 460 S.E.2d at 364. And the federal courts have not adopted a clear rule

defining a debtor’s obligation to report fluctuations in asset values or projected

revenues. See, e.g., Vehicle Mkt. Research, Inc. v. Mitchell Int’l, Inc., 767 F.3d 987,

996 (10th Cir. 2014) (“It appears to be a minority view that in a bankruptcy

proceeding, debtors have a continuing duty to disclose changes in an asset’s value.”).

The Court cannot conclude, as a matter of law, that At-Net knowingly withheld

material information that it had a duty to disclose or that it knowingly deferred IFab’s

bills to shield them from the bankruptcy court and its creditors.
2. Other Equitable Considerations

62. The absence of a clear inconsistency is a sufficient basis, standing alone, to

deny IFab’s motion for summary judgment. See T-WOL Acquisitions, 220 N.C. App.

at 201, 725 S.E.2d at 613 (citing Estate of Means v. Scott Elec. Co., 207 N.C. App. 713,

718–19, 701 S.E.2d 294, 298–99 (2010)); see also Whitacre, 358 N.C. at 29 n.7, 591

S.E.2d at 888 n.7. Even if that were not the case, several other equitable

considerations weigh against the entry of summary judgment.

63. First, although the Court “is not obliged to specifically determine that the

party to be estopped intended to mislead the court by its representations in the later

action,” intent is a relevant consideration. Whitacre, 358 N.C. at 32, 591 S.E.2d at

891. The evidence regarding At-Net’s motive to conceal assets from the bankruptcy

court is at best a mixed bag.

64. In mid-2015, At-Net’s proposed plan of reorganization allocated net profits

for the years 2016 to 2018 to At-Net’s unsecured creditors, but exempted profits from

2015. (See Br. Resp. 21; Aff. Alexander Ex. 1.11 at pp.9–11.) In other words, deferring

revenues into future years would have been costly for At-Net but beneficial to

creditors. By the same token, due to the legal expenses associated with its

bankruptcy, At-Net had an incentive to “realize revenues at that time.” (Br. Resp.

21.) Taken together, this evidence suggests that At-Net would have been motivated

to accelerate payment for its services in 2015, not to defer payment.

65. IFab argues that the confirmed plan differs from the proposed plan in ways

that suggest the opposite motive. (See Reply 9–10; see also Aff. Alexander Exs. 1.9,
1.11, 1.20–21, 1.23.) At-Net reached settlements with two of its creditors, agreeing

to fixed payments rather than a percentage of net profits. Arguably, At-Net had a

motive to understate its financial position during these negotiations. This conflicting

evidence concerning At-Net’s intent weighs against the imposition of judicial estoppel

on summary judgment.

66. Second, it is far from clear that At-Net would derive an unfair advantage if

allowed to pursue its counterclaims. More than half of the amounts At-Net seeks to

recover accrued for work performed post-confirmation. (See Br. Supp. 5; Aff.

Alexander ¶ 15.) As noted, there is no evidence to show that At-Net knew in 2015

that it would perform hundreds of thousands of dollars in complex EDI support

services the next year. It would be inequitable to prevent At-Net from seeking

recovery for those services at a time when it had no obligation to disclose them to the

bankruptcy court and was free to operate its business without judicial supervision.

67. On the other hand, dismissing At-Net’s counterclaims could harm some of

its creditors, which continue to hold an interest in At-Net’s net after-tax income

between 2016 and 2018. In similar situations, some courts have declined to invoke

judicial estoppel when doing so would prevent creditors from obtaining a share of the

recovery in a meritorious claim asserted by the former debtor. See, e.g., Diamond Z

Trailer, 371 B.R. at 421 (noting that estoppel may result in creditors being “doubly

punished: first when the asset is omitted; and, second, when there is an estoppel from

pursuing the asset”); Richardson v. UPS, 195 B.R. 737, 739 (E.D. Mo. 1996) (declining

to apply judicial estoppel pre-confirmation to a debtor who omitted an asset from its
schedule because “creditors would be penalized if the Court were to dismiss the

claim”).

68. It also bears noting that, had At-Net actually billed IFab in 2015 for all EDI

support services performed that year, roughly 30 percent of the amount At-Net seeks

in this lawsuit would have been exempt from the amounts made available to

unsecured creditors through At-Net’s net income for 2016 to 2018. (See Reply 9–10;

Aff. Alexander ¶ 15, Exs. 1.11, 1.20–21, 1.23.) Thus, had At-Net billed as IFab

contends it should have, it would have had less available for its creditors than it will

if it prevails in this lawsuit.

69. Additional evidence may show that At-Net was “cooking the books,” as IFab

contends. (Reply 11.) Taken in a light most favorable to At-Net, however, the

evidence suggests that At-Net had no motive to conceal information during its

bankruptcy and that estopping At-Net from pursuing its counterclaims now would

unfairly harm its creditors. See Diamond Z Trailer, 371 B.R. at 421. On balance,

these equitable considerations further support the denial of summary judgment.

V.
CONCLUSION

70. For the foregoing reasons, the Court DENIES the motion to dismiss and

DENIES the motion for partial summary judgment. The Court also GRANTS

At-Net’s motion to supplement the record and overrules IFab’s objections to the

affidavits offered by At-Net.
This the 9th day of May, 2018.

/s/ Adam M. Conrad
Adam M. Conrad
Special Superior Court Judge
for Complex Business Cases