In re Bostic Construction, Inc.

Jeff and Joe Bostic incorporated Bostic Brothers Construction, Inc. (Bostic) (debtor) in 1991. Melvin Morris managed Bostic’s construction projects. In 2000, Bostic started performing construction work for limited liability companies (LLCs) owned by Jeff, Joe, Morris, or Morris’s immediate family. In January 2003, Jeff and Morris became Bostic’s sole shareholders and directors. Bostic’s financial condition subsequently deteriorated, and an involuntary bankruptcy petition was filed against Bostic. The bankruptcy trustee determined that Jeff and Morris had breached their fiduciary duties by not taking reasonable care to satisfy Bostic’s financial obligations and by prioritizing the LLCs’ interests over Bostic’s. The trustee prepared a complaint against Jeff and Morris but never filed the complaint and eventually reached a settlement agreement requiring Jeff, Joe, and Morris to pay the trustee $500,000 in exchange for release from claims based on their alleged conduct. The bankruptcy court approved the settlement. Subsequently, a Bostic creditor sued Jeff, Joe, Morris, and others in North Carolina state court, alleging claims including constructive fraud. Jeff, Joe, and Morris moved to dismiss, arguing that the creditor’s claims belonged to Bostic’s bankruptcy estate and had been settled by the trustee. The court denied the motion to dismiss, finding that Bostic’s directors owed fiduciary duties to Bostic’s creditors while Bostic was facing insolvency and that the creditor had asserted injuries to the creditor specifically. Two more creditors then sued Jeff, Joe, Morris, and others in North Carolina state court, alleging claims for constructive fraud, aiding and abetting constructive fraud, and violations of North Carolina’s Racketeer Influenced and Corrupt Organizations (RICO) act. The creditors alleged that, while Bostic was operating in a way that constituted dissolution or winding up, Jeff and Morris, aided by Joe and others, had caused Bostic to enter into subcontracts with the creditors and that instead of paying moneys owed to the creditors, Jeff and Morris had caused Bostic to pay debts of Jeff’s and Morris’s businesses and engaged in other misconduct for their own personal gain, thus injuring the creditors. Jeff, Joe, Morris, and the others asked the bankruptcy court to interpret and enforce the settlement.