In Re: Phoenix Associates Land Syndicate, Inc.

Filing 167

ORDER & REASONS denying 133 Motion to Dismiss for Failure to State a Claim. Signed by Judge Susie Morgan on 8/9/13. (plh, )

Babin vs. Caddo East Estates I, Ltd., et al

Doc. 167

UNITED STATES DISTRICT COURT FOR
THE EASTERN DISTRICT OF LOUISIANA
WILBUR J. “BILL” BABIN, JR.,
IN HIS CAPACITY AS TRUSTEE
OF THE BANKRUPTCY ESTATE
OF PHOENIX ASSOCIATES
LAND SYNDICATE,
Plaintiff

CIVIL ACTION

VERSUS

No. 10-896

CADDO EAST ESTATES I, LTD,
ET AL.
Defendants

Section “E”

ORDER AND REASONS
Before the Court is a motion under Federal Rules of Civil Procedure 9(b) and
12(b)(6) to dismiss the claim of plaintiff Wilbur Babin, Jr. (the “Trustee”) under 11 U.S.C.
§ 548(a)(1)(A), filed by Caddo East Estates I, Ltd., Jet Transfer, L.L.C., Preston Turbines,
L.L.C., Grayson Aviation I, L.L.C., CEE Transfer, L.L.C., Lake Texoma Jet Center, L.L.C.,
Red River Turbines, L.L.C., and George Schuler (together, “Defendants”).1 The Trustee
opposes the motion.2 For the following reasons, the motion is DENIED.
BACKGROUND
Wilbur Babin, Jr. is the trustee for the bankruptcy estate of Phoenix Land Associates,
Inc. (“Debtor”), which has as its principals C. Paul Alonzo, Ronald L. Blackburn, and
Carolyn Alonzo. Debtor filed a voluntary petition for bankruptcy under Chapter 11 on June
10, 2009, which was converted into a Chapter 7 liquidation proceeding on July 31, 2009.
1

R. Doc. No. 133.

2

R. Doc. No. 143.
1

Dockets.Justia.com

The Trustee was appointed on July 31, 2009, and confirmed on August 27, 2009.
On January 19, 2010, the Trustee filed the instant suit, suing Defendants other than
Schuler for avoidance of fraudulent transfers on a theory of constructive fraud. On August
18, 2012, after being granted leave, he filed the second amended complaint at issue, which:
(1) added Schuler as an additional defendant, accusing him of aiding and abetting the
principals of the Debtor in breaching their fiduciary duties; (2) added a cause of action
against Defendants for recovery of fraudulent transfers based on a theory of actual fraud
under 11 U.S.C. § 548(a)(1)(A); and (3) added a cause of action against Defendants for a
declaratory judgment that the transfer of Debtor’s real property is a nullity under Louisiana
law.
Defendants now move to dismiss the claim for actual fraud in the Trustee’s second
amended complaint, asserting that it is barred by the statute of limitations and is not
pleaded with the specificity required by Federal Rule of Civil Procedure 9(b).3
STANDARD OF LAW
Pursuant to Federal Rule of Civil Procedure 12(b)(6), a district court may dismiss a
complaint, or any part of it, for failure to state a claim upon which relief may be granted if
the plaintiff has not set forth factual allegations in support of his claim that would entitle
him to relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); Cuvillier v. Taylor, 503
F.3d 397, 401 (5th Cir. 2007). As the Fifth Circuit explained in Gonzalez v. Kay:
“Factual allegations must be enough to raise a right to relief above the
speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct.
1955, 167 L.Ed.2d 929 (2007). The Supreme Court recently expounded upon
the Twombly standard, explaining that “[t]o survive a motion to dismiss, a

3

R. Doc. No. 133-1, p. 3.
2

complaint must contain sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, --- U.S. ----,
129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at
570, 127 S.Ct. 1955, 167 L.Ed.2d 929). “A claim has facial plausibility when
the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”
Id. It follows that “where the well-pleaded facts do not permit the court to
infer more than the mere possibility of misconduct, the complaint has alleged
– but it has not ‘show[n]’ – that the pleader is entitled to relief. ” Id. at 1950
(quoting Fed. R. Civ. P. 8(a)(2)).
577 F.3d 600, 603 (5th Cir. 2009).
This Court cannot look beyond the factual allegations in the pleadings to determine
whether relief should be granted. See Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir.
1999); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). In assessing the complaint, a court
must accept all well-pleaded facts as true and liberally construe all factual allegations in the
light most favorable to the plaintiff. Spivey, 197 F.3d at 774; Lowrey v. Tex. A & M Univ.
Sys., 117 F.3d 242, 247 (5th Cir. 1997). “Dismissal is appropriate when the complaint ‘on
its face show[s] a bar to relief.’” Cutrer v. McMillan, 308 F. App’x 819, 820 (5th Cir. 2009)
(per curiam) (unpublished) (quoting Clark v. Amoco Prod. Co., 794 F.2d 967, 970 (5th Cir.
1986)).
Complaints that allege fraud must meet a higher standard of pleading. Haber Oil
Co. v. Swinehart, 12 F.3d 426, 439 (5th Cir. 1994). Federal Rule of Civil Procedure 9(b)
requires complaints asserting fraud to set forth the facts with sufficient particularity so as
to “provide defendants adequate notice of the nature and grounds of the claim.” Hart v.
Bayer Corp., 199 F.3d 239, 248 n. 6 (5th Cir. 2000).

3

ANALYSIS
I.

Statute of Limitations

Section 548 claims are subject to a limitations period of the later of (1) two years
after the date the bankruptcy petition was filed and (2) one year after the trustee’s
appointment. 11 U.S.C. § 546(a)(1). Defendants assert that the Trustee’s Section 548 claim
should therefore be dismissed because he filed the second amended complaint later than
either time, and the second amended complaint does not relate back to the original
complaint.
Under Federal Rule of Civil Procedure 15(c)(1)(B), an amended complaint relates
back to the original complaint, and is therefore considered filed on the date of the original
complaint for limitations purposes, when it “asserts a claim or defenses that arose out of
the conduct, transaction or occurrence set out—or attempted to be set out—in the original
pleading.” Fed. R. Civ. P. 15(c)(1)(B). “The fact that an amendment changes the legal
theory on which the action initially was brought is of no consequence if the factual situation
upon which the action depends remains the same and has been brought to the defendant’s
attention by the original pleading.” FDIC v. Bennett, 898 F.2d 477, 480 (5th Cir. 1990).
The Trustee’s claim of actual fraud arises out of the same set of transactions and
occurrences set out in support of the claim for constructive fraud in his original complaint.
Both turn on the effect of the same Debt Modification Agreement and the same transfers
of assets, in short, the same scheme.4 That the Trustee “state[d] a new legal theory of relief
[and] amplif[ied] the facts alleged in the prior complaint” does not change the fact that

4

A red line of the second amended complaint against the original complaint
appears in R. Doc. No. 143-1.
4

“relation back is allowed.” FDIC v. Conner, 20 F.3d 1376, 1386 (5th Cir. 1994).
Defendants do not seriously dispute that the actual fraud claim arises out of the same
transaction or occurrence described in the original complaint. Instead, they argue that the
original complaint “involved a simple claim [for constructive fraud] and whether the Debtor
received ‘reasonably equivalent value’ for the transfers,” while the amended complaint
“introduces detailed allegations about the Principals and their operation of the Debtor and
whether the Principals made the transfers with the ‘intent to hinder, delay, or defraud.’”5
But so long as both claims arise out of the same conduct, transaction, or occurrence—and
at the very least they arise out of the same transaction, given that the Trustee’s actual and
constructive fraud claims are both based on the same agreement and same transfers—the
amended complaint relates back. In re Grube, 2013 WL 343455, at *8 (Bankr. C.D. Ill. Jan.
29, 2013) (“Although the elements of the [actual fraud and constructive fraud] claims and
the evidence needed to prove those elements are largely different, the claims arise out of
the same transfer—the same conduct, transaction or occurrence, which is the standard used
in Civil Rule 15(c)(1)(B). The Court reluctantly determines that the actual fraud claims
must be deemed to relate back to the timely pleaded constructive fraud claims for purposes
of Civil Rule 15(c), as arising out of the same conduct, transaction or occurrence.”)
II.

Rule 9(b)

Defendants also assert that the Trustee has failed to adequately plead his claim for
actual fraud under the heightened pleading standard set forth in Federal Rule of Civil
Procedure 9(b), which requires a party “to state with particularly the circumstances

5

R. Doc. No. 133-1, p. 4.
5

constituting fraud.” Although the matter is not free from doubt, Defendants are probably
correct that in this Circuit the Trustee must meet the heightened pleading standard in Rule
9(b). In re NE 40 Partners, 440 B.R. 124, 128 (Bankr. S.D. Tex. 2010); see also In re Gene
Exp., Inc., 2013 WL 1787971, at *3 (Bankr. E.D.N.C. Apr. 26, 2013) (“In order to survive a
motion to dismiss for actual fraud under § 548, the trustee’s complaint must satisfy the
particularity requirement of Rule 9(b).”).6 Because this heightened standard is met in this
case, it is not necessary for the Court to decide this issue.
Fraud under 11 U.S.C. § 548(a)(1) means any transfer made “with actual intent to
hinder, delay or defraud” creditors. In re Soza, 542 F.3d 1060, 1067 (5th Cir. 2008). There
are six “‘badges of fraud’ that tend to evidence a transfer made with intent to defraud.” Id.
They are:
(1) the lack or inadequacy of consideration; (2) the family, friendship or close
associate relationship between the parties; (3) the retention of possession,
benefit or use of the property in question; (4) the financial condition of the
party sought to be charged both before and after the transaction in question;
(5) the existence or cumulative effect of the pattern or series of transactions
or course of conduct after incurring of debt, onset of financial difficulties, or
pendency or threat of suits by creditors; and (6) the general chronology of
events and transactions under inquiry.
Id. (citing Chastant v. Chastant, 873 F.2d 89, 91 (5th Cir. 1989)). The “circumstances
constituting fraud” under Section 548 need not be statements, but may instead be actions

6

But see Pate v. Hunt, 136 B.R. 437, 452 (Bankr. N.D. Tex. 1991) (“The
Court also emphasizes that a less stringent standard prevails in a
bankruptcy proceeding involving fraudulent transfer claims brought by a
trustee.” (citing Hassett v. Weissman, 35 B.R. 854, 862 (Bankr. S.D.N.Y.
1983))). The rationale for this less stringent standard is that “the third
party trustee is generally pleading fraud on second-hand information.” Id.;
see also Aphton Corp. v. Sonafi Pasteur, 423 B.R. 76, 85 (Bankr. D. Del.
2010).
6

coupled with these indicia of fraud.7
The Trustee has adequately pleaded the required “who, what, when, where, and how”
of the alleged fraud. Benchmark Elecs. v. J.M. Huber Corp., 343 F.3d 719, 724 (5th Cir.
2003); In re NE Partners, 440 B.R. at 129. The Trustee has alleged that, while aware
Debtor was insolvent or about to be, three of Debtor’s insiders caused it to transfer specific,
identified property worth no less than $8 million to companies designated by its lender.8
This provides facts tending to support two of the badges of fraud: the poor “financial
condition of the party sought to be charged both before and after the transaction in
question” and the “close associate relationship”—lender and lendee—“between the parties.”
The Trustee also alleges that the transfer did not result in a release or satisfaction of
Debtor’s obligations to its lender, but did result in a release of Debtor’s officers and insiders
from a personal guarantee of nearly $3 million.9 This provides facts tending to support two
more badges of fraud: there was a “lack or inadequacy of consideration” and “retention of
. . . benefit”—discharge of their personal indebtedness—by Debtor’s insiders. And the
Trustee alleges that the transaction was unusual, inasmuch as it provided for multiple

7

Defendants are also wrong to suggest that the Trustee’s failure to plead
secrecy or concealment is somehow fatal. R. Doc. No. 133-1, p. 7. Even if
all of the badges of fraud had to be present, and they do not have to be,
secrecy or concealment, though doubtlessly probative of fraudulent intent,
is not listed in the Fifth Circuit’s articulation of them. In any event, the
Trustee’s allegations concerning the convoluted nature of the transaction
would satisfy any requirement of concealment.

8

R. Doc. No. 129, pp. 4–5. Rule 9(b) allows “intent, knowledge, and other
conditions of a person’s mind [to] be alleged generally.” Accordingly,
there was no need for the Trustee to allege the actors’ awareness with
particularly.

9

R. Doc. No. 129, pp. 4–5, 10.
7

transfers of the same property, with assets going to some companies owned by the principal
of Debtor’s lender and liabilities going to others.10 This supports the badges or fraud above,
as well as provides information concerning the “cumulative effect of the pattern or series
of transactions.”
The Trustee has clearly identified the who, what, when, where, and how of the
alleged fraud, or put another way, the “‘property allegedly conveyed, the timing and
frequency of those allegedly fraudulent conveyances, [and] the consideration paid.’” In re
M. Fabrikant & Sons, Inc., 447 B.R. 170, 186 (Bankr. S.D.N.Y. 2011) (quoting United
Feature Syndicate, Inc. v. Miller Features Syndicate, Inc., 216 F. Supp. 2d 198, 221
(S.D.N.Y. 2002)). That is all that is required.
CONCLUSION
The Trustee’s second amended complaint relates back to the original complaint, and
it adequately pleads a claim for actual fraud under the standard set forth in Federal Rule
of Civil Procedure 9(b). Accordingly, Defendants’ motion to dismiss is DENIED.

New Orleans, Louisiana, this August 9th, 2013.

_____________________________
SUSIE MORGAN
UNITED STATES DISTRICT JUDGE

10

R. Doc. No. 129, p. 12.
8