Bank of America, N.A. v. A & M Development, LLC et al

Filing 40

MEMORANDUM DECISION AND ORDER denying 25 Motion to Dismiss; deeming as moot 37 Motion for Leave to File. Signed by Judge B. Lynn Winmill. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (cjm)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO
BANK OF AMERICA, N.A.,
Plaintiff,

Case No. 1:11-cv-00336-BLW

v.

MEMORANDUM DECISION
AND ORDER

A & M DEVELOPMENT, LLC, HANS J.
ALBERT, VIRGINIA FAITH ALBERT,
LEONARD DE LOS PRADOS, CAROL DE
LOS PRADOS, AND COMPANIA
INVERSORA CORPORATIVA S.A. DE C.V.,
Defendants.

INTRODUCTION
The Court has before it Defendants’ Motion, under Rule 9(b) of the Federal Rules
of Civil Procedure, to Dismiss Count III of Plaintiff’s amended Complaint alleging that
Defendants engaged in a fraudulent conveyance of real property (Compl. at 6, Dkt. 4).
The Court also has before it Plaintiff’s Motion to file a Response to Defendants’ Reply
(Dkt. 37). The Court has read and fully considered the briefing and related materials
submitted by the parties, and has concluded that oral argument will not significantly aid
in its decision. For the reasons explained below, the Court will deny both motions.
BACKGROUND
The instant motion arises from Plaintiff Bank of America’s (BoA) claim that
Defendant A&M (“Borrower”) fraudulently transferred certain real property it owned
(the “Whitewater Property”) to Defendants Virginia Faith Albert, Leonard De Los
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Prados, Carol De Los Prados, and Defendant Compania Inversora Corporativa
(collectively, “transferees”). The facts recited in the Complaint and disclosed in the
briefing are relatively few and are mostly undisputed.
On August 10, 2005, Borrower and BoA entered into an agreement whereby BoA
lent Borrower approximately $1.2M toward the construction of a vacation home in
Valley County, Idaho. The residence was, in fact, constructed, but Borrower defaulted on
the agreement sometime before February 16, 2011, resulting in the sale of the Valley
County Property on that date, and the application of the sale proceeds to the loan balance.
Since the proceeds were insufficient to pay off the loan, BoA sought the amount of the
deficiency in a state court action. That case was then removed to this Court on diversity
grounds.
The alleged fraudulent transfer occurred on August 9, 2010, when Borrower
transferred the Whitewater property to the transferees by warranty deed. BoA alleges
that Borrower received no consideration for the transfer, and that the transfer was
designed to frustrate its attempts to collect amounts owed by Borrower. Defendants’ seek
dismissal of the fraudulent conveyance count on the ground that the claim fails to meet
the heightened pleading standards for fraud imposed by Rule 9(b) of the Federal Rules of
Civil Procedure.
ANALYSIS
I.

BoA’s fraudulent conveyance claim was stated in the alternative.
Before turning to the legal standard governing the motion to dismiss, the Court

will address Defendants’ contention that, contrary to BoA’s contention in its response
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brief, BoA failed to divide its fraudulent conveyance claim into alternatives based upon
“actual” and “constructive” fraud.
In their opening brief, Defendants treated BoA’s fraudulent conveyance claim as
one for common-law fraud. BoA’s asserts that this was an error. Instead, BoA argues
that their fraudulent conveyance count actually contains two distinct claims – one for
avoidance of an “actually” fraudulent conveyance under I.C. §§ 55-906 and 55-913(1)(a)
(so named because these statutes require proof of “actual intent” to frustrate collection),
and one for avoidance of a “constructively” fraudulent conveyance under I.C. § 55913(1)(b) (which does not require such proof). Because the fraudulent conveyance count
does not use the term “constructive” or cite directly to I.C. § 55-913(1)(b), Defendants
argue that BoA is attempting a backdoor amendment to the Complaint in order to cure the
defects complained of in their motion.
Although BoA did not clearly separate its fraudulent conveyance count into
distinct alternatives arising under the relevant statutes, the Amended Complaint puts
Defendants on notice as to the existence of both a § 55-913(1)(a) claim and a § 55913(1)(b) claim. Specifically, paragraph 29, contained in the fraudulent conveyance
count, unmistakably tracks the language of § 55-913(1)(b)(1)-(2). Thus, the Amended
Complaint sets forth claims for fraudulent conveyance based upon “actual intent” under
I.C. §§ 55-906 and 55-913(1)(a) and, in the alternative, upon constructive intent under
I.C. § 55-913(1)(b).
II.

Legal Standard

MEMORANDUM DECISION AND ORDER — 3

Before outlining the proper legal standard for the fraud claims at issue, the Court
will briefly address two arguments raised by BoA bearing upon the appropriate legal
standard: (1) whether FRCP 9(b) applies to claims to avoid a fraudulent transfer brought
under the “constructive” prong of I.C. § 55-913(1)(b); and (2) whether a pleading which
satisfies Form 21 of the Appendix of Forms attached to the Federal Rules of Civil
Procedure satisfies Rule 9(b) as a matter of law under FRCP 84.
a. Applicability of Rule 9(b) to BoA’s Constructive Fraud Claim.
BoA urges this Court to hold that Rule 9(b) does not apply to allegations of
“constructively” fraudulent transfers. BoA directs the Court to the decision in In re
Hodge, cited above, in which the Court observed in a footnote that where a party was not
required by the terms of the applicable statute to demonstrate the existence of fraudulent
intent, the term “fraudulent conveyance” is a misnomer. 220 B.R. 386, 389 n.1 (D. Idaho
1998). BoA argues that the Court should extend this reasoning in order to conclude that
Rule 9(b) should not apply to avoidance actions premised on constructive fraud. BoA
acknowledges the absence of Ninth Circuit precedent on the applicability of Rule 9(b) to
“constructive fraudulent transfer” claims, but cites several district court opinions
adopting its preferred view, as well as a number of Bankruptcy court decisions construing
analogous fraudulent transfer statutes.
BoA’s arguments have some appeal, but in the absence of controlling precedent in
this area the Court declines to hold that Rule 9(b) is inapplicable to allegations of
“constructive” fraud. To do so would be to ignore the clear language of Idaho’s
fraudulent transfer statute, which states that “[a] transfer made or obligation incurred by a
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debtor is fraudulent as to a creditor . . . if the debtor made the transfer . . . [with] actual
intent . . . or [if the requisite badges of fraud are demonstrated].” I.C. § 55-913 (emphasis
added). The clear import of the preamble to the constructive fraud cause of action
created by § 55-913(1)(b) is that plaintiff can establish fraud either directly or by proving
the existence of certain common fraud indicia. To hold that a plaintiff proceeding under
§ 55-913(1)(b) is not stating a claim sounding in fraud simply because it allows scienter
to be proven indirectly would be to read the word “fraudulent” out of the statute. Thus,
the Court concludes that the heightened pleading standards of Rule 9(b) are applicable to
fraudulent transfer actions in which scienter is established constructively.
b. Whether a Fraudulent Transfer Claim that satisfies Form 21 satisfies Rule
9(b).
BoA next argues that pleadings which supply the information required by Form 21
contained in the Appendix of Forms attached to the Federal Rules of Civil Procedure are
presumed to satisfy Rule 9(b) per FRCP 84 (“The forms in the Appendix suffice under
these rules and illustrate the simplicity and brevity that these rules contemplate.”).
Therefore, BoA argues that its actual fraud claim passes muster under the Rule because it
easily supplies the information required by the Form.
BoA is correct that it has alleged the facts required by Form 21, which requires
Plaintiff merely to identify the underlying debt and the allegedly fraudulent transfer.
However, the Court cannot agree that Form 21obviates the heightened pleading
requirements for fraud under Rule 9(b). By its own terms, Form 21 is designed to
illustrate a “Claim . . . to Set Aside a Fraudulent Conveyance Under Rule 18(b)” (the

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Federal Rule governing the joinder of claims). Moreover, the advisory committee notes
following Rule 84 suggest that the purpose of providing the Forms was to prevent
litigants from having to guess the meaning of the language of Rule 8 regarding the form
of the complaint. The Court can find no controlling authority indicating that the Forms
were intended to address the heightened pleading standard set forth in Rule 9(b). Finally,
it is well-established in the Ninth Circuit that satisfaction of Rule 9(b) requires more than
the mere identification of the neutral facts necessary to identify the transaction, Cooper v.
Pickett, 137 F.3d 616, 625 (9th Cir. 1997), which is contrary to the minimalist
presentation “authorized” by Form 21.1 Accordingly, the Court declines to hold that a
claim sufficient to complete Form 21 satisfies Rule 9(b) as a matter of law.
c. Legal Standard for Application of FRCP 9(b) to Fraudulent Conveyance.
The fraudulent conveyance claim raised by BoA is premised upon two Idaho
statutes, I.C. § 55-906 and I.C. § 55-913. Section 55-906 requires a showing of “intent to
delay or defraud any creditor,” while I.C. § 55-913 provides two distinct pathways to
liability. First, the Plaintiff-creditor may show that the transfer was made “with actual
intent to hinder, delay, or defraud any creditor of the debtor,” Id. § 55-913(1)(a). Second,
the plaintiff-creditor may show that the transfer was made “[w]ithout receiving a
reasonably equivalent value in exchange for the transfer or obligation, and the debtor
[either] was engaged or was about to engage in a business or a transaction for which the
1

The Court need not decide how much more a Plaintiff must allege, beyond what is minimally
required by Form 21, in order to comply with Rule 9(b); the reasons given are sufficient to
establish that the Form is not intended to address the application of Rule 9(b). However, the
Court does note, in light of its analysis in Part III.a., that it may well be that the difference in
what is required is fairly nominal for fraudulent transfer claims of the “actual intent” variety.
MEMORANDUM DECISION AND ORDER — 6

remaining assets of the debtor were unreasonably small in relation to the business or
transaction; or [i]ntended to incur, or believed or reasonably should have believed that he
or she would incur, debts beyond his or her ability to pay as they became due.” Id. § 55913(1)(b)(1)-(2).
Thus, a creditor proceeding under I.C. § 55-913 has the option of proving scienter
either affirmatively or constructively by showing the presence of the specified “badges of
fraud.” Mohar v. McLelland Lumber Co., 501 P.2d 722, 726 (Idaho 1972) (“Actual fraud
must be proven by clear and convincing evidence; but when certain ‘badges of fraud’
attend the conveyance, and are not adequately explained, an inference of actual fraud
may be warranted.”). See also In re Hodge, 220 B.R. 386, 389 n.1 (D. Idaho 1998)
(Noting that under I.C. § 55-913 it is not necessary for the party seeking avoidance of an
allegedly fraudulent transfer to demonstrate that the transferor had any fraudulent intent).
At the pleading stage, Rule 9(b) of the Federal Rules of Civil Procedure requires a
party alleging fraud to “state with particularity the circumstances constituting fraud,”
although “intent . . . may be alleged generally.” In order to satisfy Rule 9(b), “a plaintiff
must set forth more than the neutral facts necessary to identify the transaction. . . . The
plaintiff must set forth what is false or misleading about a statement, and why it is false.”
Cooper v. Pickett, 137 F.3d 616, 625 (9th Cir. 1997) (internal quotation marks omitted).
A party may allege on information and belief under circumstances in which the required
facts are peculiarly within the defendant’s knowledge or control, but, should they do so,
the party must still state the factual basis for the belief. Neubronner v. Milken, 6 F.3d
666, 672 (9th Cir. 1993). Although the elements of a fraudulent transfer claim differ
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from those applicable to common-law fraud, plaintiffs still must allege the “who, what,
when, where, and how” of the suspect transaction in order to survive a Rule 9(b) motion.
Id. at 627; Valvanis v. Milgroom, 529 F.Supp.2d at 1198 (D. Hawaii 2007).
III.

Whether Count III of the Amended Complaint Satisfies Rule 9(b)
a. Actual Fraudulent Conveyance under I.C. §§ 55-906, 55-913(1)(a).
Here, although BoA’s fraudulent conveyance claim borrows heavily from the

language of the relevant statutes, enough factual matter is alleged in the Complaint to put
Defendants on notice of the claim and to allow them to prepare a defense. Specifically,
BoA has identified the subject of the transfer, the identity of the transferor and the
transferees, the date of the transfer, the method of the transfer, and the amount of the
transfer. BoA has further identified the underlying debt owed to it by the transferor, and
has alleged that the transfer of the Whitewater property was conducted purposefully in
order to frustrate BoA’s ability to collect it. This is all that the fraudulent transfer statutes
require and, accordingly, all that Rule 9(b) requires.2
For these reasons, the Court holds that BoA has sufficiently stated a claim for
avoidance of a fraudulent conveyance under I.C. § 55-906 and I.C. § 55-913(1)(a).
b. Constructive Fraudulent Conveyance under I.C. § 55-913(1)(b).
For reasons similar to those expressed above, the Court finds that the Amended
Complaint adequately pleads a claim for avoidance of a “constructively” fraudulent
2

While Defendants assert that the transfer occurred in the absence of any knowledge on their
part that the Whitewater property might be at risk, that averment is irrelevant to the adequacy of
the pleadings. The same is true of Defendants’ argument concerning the inclusion of the
boilerplate phrase “for value received” on the warranty deed. On a motion to dismiss, all factual
allegations contained in the Complaint are accepted as true. Bell Atlantic Corp. v. Twombly, 550
U.S. 544, 570 (2007).
MEMORANDUM DECISION AND ORDER — 8

conveyance under I.C. § 55-913(1)(b). BoA supplied Defendants with the who, what,
when, where, and how of the suspect transaction, the particulars of the underlying debt,
and has alleged the existence of the requisite badges of fraud under the statute in lieu of
pleading scienter directly. Specifically, BoA alleged that it was a creditor of the
transferor, that the transferor conveyed the Whitewater property to the transferees without
receiving a reasonably equivalent value in exchange for the transfer, and that in doing so
the borrower rendered itself insolvent and/or rendered itself unable to pay its debts as
they became due. Again, these allegations are sufficient to put Defendants on notice as to
the relevant particulars of the claim so that they can prepare to meet it.
Moreover, while it is true that BoA alleged inadequate consideration on
“information and belief,” and its paragraph 29 primarily restates the terms of the statute,
the amount and form of any consideration received is peculiarly within the knowledge of
the Defendants in this case. Also BoA has plead the facts upon which its belief is based –
namely, that borrower breached the promissory note and remains indebted upon it in an
amount certain despite the transfer of the Whitewater property. This fact, taken as true
for purposes of this motion, also supports BoA’s otherwise conclusory allegations
concerning the existence of the badges of fraud indicated in I.C. § 55-913(1)(b)(1)-(2).
For all these reasons, the Court finds that BoA’s claim to avoid a constructively
fraudulent transfer satisfies Rule 9(b).
IV.

Whether BoA Should be given Leave to Respond to Defendants’ Reply
BoA requests that this Court allow it to file responsive briefing in order to answer

MEMORANDUM DECISION AND ORDER — 9

“new” arguments raised by Defendants in their reply (Dkt. 37). Given the Court’s ruling
on Defendant’s motion to dismiss, the issue is moot, and no such supplementary briefing
is necessary. Therefore, BoA’s motion will be denied.
ORDER
IT IS ORDERED:
1. Defendants’ Motion to Dismiss Pursuant to F.R.C.P. Rule 9(b) (Dkt. 25) is
DENIED.
2. Plaintiff’s Motion to File Response to Defendants’ Reply (Dkt. 37) is
DEEMED MOOT.

DATED: May 21, 2012

_________________________
B. Lynn Winmill
Chief Judge
United States District Court

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