Superior Contracting Group, Inc. v. Rachmale

Filing 14

OPINION and ORDER Granting in part and Denying in part 5 MOTION to Dismiss, ORDER TRANSFERRING Action, and Order Designating Action Closed on Docket. Signed by District Judge Denise Page Hood. (SSch) [Transferred from Michigan Eastern on 3/31/2016.]

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
SUPERIOR CONTRACTING
GROUP, INC.,
Plaintiff,
Civil Action No. 15-11381
v.
HONORABLE DENISE PAGE HOOD
AVINASH RACHMALE,
Defendant.
_________________________________/
OPINION AND ORDER GRANTING IN PART AND
DENYING IN PART MOTION TO DISMISS,
ORDER TRANSFERRING ACTION,
AND
ORDER DESIGNATING ACTION CLOSED ON DOCKET
I.

BACKGROUND/FACTS
On August 22, 2014, Plaintiff Superior Contracting Group, Inc. originally filed

the instant suit against Defendant Avinash N. Rachmale before the United States
District Court for the Western District of Tennessee. (Doc. No. 4, W.D. Tenn.
Docket) On December 31, 2014, the Honorable Samuel H. Mays, Jr. entered an order
granting Rachmale’s Motion to Dismiss based on improper venue and transferring the
action to this District. (Doc. No. 2, Order) The action was transferred by the Western
District of Tennessee Clerk to this District on April 16, 2015.
Superior Contracting is a licensed general contractor located in Memphis,

Tennessee. (Doc. No. 1, Comp., ¶ 1) Rachmale, an individual, is a citizen of the State
of Michigan, and is either the sole or majority shareholder of Lakeshore Engineering
Services, Inc., a non-party in this action. Id., ¶¶ 2, 5. On May 14, 2009, Superior
Contracting and Lakeshore, at the direction of Rachmale, entered into a
Mentor/Protégée Agreement, a program established by the United States Small
Business Administration, to pursue work allocated for Section 8(a) contractors by the
United States. Id., ¶¶ 4, 6. Superior Contracting and Lakeshore, at the direction of
Rachmale, entered into two joint venture entities, the Superior Contracting/Lakeshore
JV, LLC and Superior Contracting/Lakeshore JV2, LLC, to pursue construction
projects by the United States Army Corps of Engineers, St. Louis District. Id., ¶ 7.
Five Joint Venture Agreements were entered into between Superior Contracting and
Lakeshore, at the direction of Rachmale, for five projects constructed by the Corps
of Engineers: Keyesport, Gravity Drain Phase 1; Gravity Drain-Phase 2; Chesterfield
Levee; Chesterfield Railroad Closure; and, Len Small. Id., ¶ 8. All works on all the
projects were completed by April 29, 2013 and the Corps of Engineers had made final
payment. Id., ¶ 10.
Pursuant to the terms of the Joint Venture Agreements, Superior Contracting
was to receive 51% of the net profits and Lakeshore 49% of the net profits. Id., ¶ 11.
Overall management and construction of the projects was to be conducted by
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Superior Contracting, all books and records was to be maintained by Superior
Contracting, and the funds were to be maintained in a joint account controlled by both
Superior Contracting and Lakeshore. Id., ¶ 12.
After the projects were completed, Superior Contracting discovered that
Lakeshore, at the direction of Rachmale, had deposited payments received from the
Corps of Engineers into a joint bank account of the Joint Venture, but Superior
Contracting had no signatory authority on the account. Id., ¶ 13. Lakeshore, at the
direction of Rachmale, later withdrew the funds in the Joint Venture bank account
and deposited the funds into another bank account which was under the exclusive
custody and control of Lakeshore. Id. Superior Contracting asserts that Lakeshore,
at the direction of Rachmale, had paid itself funds from the projects exceeding the
49% net profits to which Lakeshore was entitled under the terms of the Joint Venture
Agreements. Id. Superior Contracting further asserts that Lakeshore charged
expenses to the Joint Venture that were not associated with the construction of the
Joint Venture Projects. Id. Superior Contracting demanded Lakeshore to produce all
original Project records and other financial records pertaining to the Projects, but the
demand was refused. Id., ¶ 14.
On August 23, 2013, Superior Contracting commenced an action against
Lakeshore for breach of contract/accounting in the Chancery Court of Shelby County,
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Tennessee. Id., ¶ 14. On May 2, 2014, Lakeshore filed a chapter 7 petition in the
United States Bankruptcy Court for the District of Delaware, imposing an automatic
stay of Superior Contracting’s action against Lakeshore pending the bankruptcy
proceeding. Id., ¶ 23.
The instant action was thereafter filed in August 2014, as noted above, against
the individual Rachmale alleging:

Conversion,

Fraud,

and

Intentional

Misrepresentation (Count I); Piercing the Corporate Veil (Count II); and, Punitive
Damages (Count III). District Judge May ordered the action transferred to this
District finding this District as the proper venue for the action. (Doc. No. 2, Order)
This matter is now before the Court on Rachmale’s Motion to Dismiss pursuant
to Fed. R. Civ. P. 12(b)(3), (6) and (7). A response and reply have been filed.
II.

ANALYSIS
A.

Rule 12(b)(3) Motion to Dismiss for Improper Venue

Even though Rachmale first addresses the Motion to Dismiss for failure to state
a claim upon which relief may be granted under Rule 12(b)(6), the Court will first
address the Motion to Dismiss for Improper Venue under Rule 12(b)(3). District
courts should resolve issues related to jurisdiction or venue prior to ruling on a
motion to dismiss for failure to state a claim. See Reilly v. Meffe, 6 F. Supp. 3d 760,
764 (S.D. Ohio 2014) (citing, Arrowsmith v. United Press Int’l, 320 F.3d 219, 221
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(2d Cir. 1963)). District Judge May’s Order transferring this matter to this District
does not address the issue of whether the bankruptcy court in the District of Delaware
was the proper venue for this action or whether that issue was raised by the parties.
Rachmale argues that the proper venue for this action is the District Court
where the bankruptcy action is pending, which is the District Court of Delaware.
Superior Contracting responds that the Bankruptcy Court for the District of Delaware
has simply no jurisdiction over this case since Rachmale, himself, is not the subject
of the bankruptcy proceeding in that court.
Section 1334 grants jurisdiction to district courts in bankruptcy cases and
proceedings and grants the district court original jurisdiction of all cases under title
11. 28 U.S.C. § 1334(a). The district courts also have original, but not exclusive
jurisdiction, of all proceedings arising under title 11, or arising in or “related to cases
under title 11.” 28 U.S.C. § 1334(b). “Congress intended to grant to the district
courts broad jurisdiction in bankruptcy cases.” In re Salem Mortgage Co., 783 F.2d
626, 634 (6th Cir. 1986). The Sixth Circuit Court of Appeals follows the test for
determining “related to” jurisdiction enunciated in Pacor, Inc. v. Higgins (In re
Pacor), 743 F.2d 984 (3d Cir. 1984)–“whether the outcome of the proceeding could
conceivably have any effect on the estate being administered in bankruptcy.” See, In
re Wolverine Radio Co., 930 F.2d 1132, 1142 (6th Cir. 1991). “An action is related
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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. Under the
“conceivable effect test,” the claims are related to the bankruptcy proceeding because,
if they had been brought during the proceeding, any recovery received would have
represented an asset available for distribution to the debtor’s creditors. Browning v.
Levy, 283 F.3d 761, 773 (6th Cir. 2002).
Suits between third parties which have an effect on the bankruptcy estate are
“related to” a bankruptcy proceeding. Celotex Corp. v. Edwards, 514 U.S. 300, 30708 (1995). Section 1334(b) “does not require a finding of definite liability of [an]
estate as a condition precedent to holding an action related to a bankruptcy
proceeding.” In re Salem, 783 F.2d at 635. When a plaintiff alleges liability resulting
from the joint conduct of the debtor and non-debtor defendants, bankruptcy
jurisdiction exists over all claims under section 1334. In re Dow Corning Corp., 86
F.3d 482, 492 (6th Cir. 1996)(citations omitted). The degree of identity between a
debtor and nondebtor codefendant is an important factor. Id. at 492-93.
Venue of proceedings related to bankruptcy cases filed under title 11, “may be
commenced in the district court in which such [the bankruptcy case] is pending.” 28
U.S.C. § 1409. Under 28 U.S.C. § 1412, a district court may transfer a case or
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proceeding under title 11 to another district court, in the interest of justice or for the
convenience of the parties. In re Manville Forest Prod. Corp., 896 F.2d 1384, 1390
(2d Cir. 1990). The party moving for change of venue bears the burden of proof and
that the burden must be carried by a preponderance of the evidence. Id. at 1390-91.
The district in which the underlying bankruptcy case is pending is presumed to be the
appropriate district for hearing and determination of a proceeding in bankruptcy. Id.
at 1391. The decision to transfer a case or proceeding lies within the sound discretion
of the court requested to effect the transfer. Matter of GEX Kentucky, Inc., 85 B.R.
431, 435 (Bankr. N.D. Ohio 1987). The most important consideration is whether the
transfer would promote the “economic and efficient administration of the estate.” Id.
In a bankruptcy action, 28 U.S.C. § 157(b)(5) provides that “[t]he district court
shall order that personal injury tort and wrongful death claims shall be tried in the
district court in which the bankruptcy case is pending, or in the district court in the
district in which the claim arose, as determined by the district court in which the
bankruptcy case is pending.” 28 U.S.C. § 157(b)(5) (italics added).
Superior Contracting admits in its response brief that the Court is required “to
consider the Joint Venture Agreements between Superior and Lakeshore” in
reviewing the tort claims against Rachmale. (Doc. No. 9, Resp., Pg ID 222) The
factual allegations in the Complaint against Rachmale expressly refer to the various
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agreements between Superior Contracting and Lakeshore. As admitted by Superior
Contracting, in order to determine whether Superior Contracting has stated claims
upon which relief may be granted as to Rachmale, the various agreements entered into
between Superior Contracting and Lakeshore must be reviewed in order to determine
whether Rachmale’s actions were outside the agreements. The Court’s review of the
allegations in the Complaint finds that the claims against Rachmale are “related to”
the bankruptcy case against Superior Contracting. The outcome of this proceeding
“could conceivably” have an effect of the Lakeshore Bankruptcy Estate, since the
claims in this case allege damages which were wrongfully obtained by Rachmale
from the Superior Contracting and Lakeshore Joint Ventures. It is clear from the
Court’s reading of the Complaint that Plaintiff is asserting a “joint conduct” between
Lakeshore, the debtor in the bankruptcy action in Delaware, and the non-debtor
Defendant Rachmale in this action. Throughout the Complaint as noted above,
Superior Contracting asserts that “at the direction of Rachmale,” Superior Contracting
and Lakeshore entered into various joint venture agreements. Superior Contracting
in fact first filed an action against Lakeshore before filing the instant action against
the individual Rachmale. The Delaware Bankruptcy Court has jurisdiction over all
the “joint conduct” claims against Rachmale. In re Dow Corning, 86 F.3d at 492.
The debtor Lakeshore and the non-debtor Rachmale are one and the same, as alleged
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by Superior Contracting in this Complaint, and as asserted in Superior Contracting’s
claim to pierce the corporate veil of Lakeshore to reach Rachmale. (Doc. No. 1,
Comp., ¶¶ 5 & Count II, Piercing the Corporate Veil)
In addition, Rachmale asserts that he has an indemnification agreement with
Lakeshore Toltest, the parent corporation to Lakeshore. Superior Contracting argues
that the claim for indemnification has nothing to do with the adjudication of the
claims between Superior Contracting and Rachmale. The Sixth Circuit in Dow
Corning found that claims for indemnification and contribution would affect the size
of the estate, concluding that the bankruptcy court had jurisdiction over such claims
which could potentially affect the ability of the debtor’s ability to resolve its
liabilities. Dow Corning, 86 F.3d at 494. The parent corporations of Dow Corning,
in addition to other nondebtor manufacturer defendants, had asserted contribution and
indemnification claims against the debtor Dow Corning, which the Sixth Circuit
found were related to the Dow Corning bankruptcy action. Id.
Based on the above, the Court finds that the claims in this action are clearly
related to the debtor Lakeshore’s bankruptcy proceedings before the District of
Delaware. The Court finds that under the venue statute, 28 U.S.C. § 1409, venue is
proper in the United States District Court for the District of Delaware and will so
transfer the instant case to that District under 28 U.S.C. § 1412. The District of
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Delaware court will then refer the matter to the appropriate bankruptcy court, if it so
finds appropriate.
III.

CONCLUSION
For the reasons set forth above,
IT IS ORDERED that Defendant’s Motion to Dismiss (Doc. No. 5) is

GRANTED IN PART AND DENIED IN PART.
IT IS FURTHER ORDERED that the Clerk TRANSFER this action to the
United States District Court for the District of Delaware.
IT IS FURTHER ORDERED that this matter is designated as CLOSED on the
Court’s docket.

S/Denise Page Hood
Denise Page Hood
Chief Judge, United State District Court

Dated: March 30, 2016
I hereby certify that a copy of the foregoing document was served upon counsel of
record on March 30, 2016, by electronic and/or ordinary mail.
S/LaShawn R. Saulsberry
Case Manager

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