In Re: Phoenix Associates Land Syndicate, Inc.

Filing 168

ORDER & REASONS denying 136 Motion to Dismiss for Failure to State a Claim; Motion to Dismiss for Lack of Jurisdiction. Signed by Judge Susie Morgan on 8/9/13. (plh, )

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

Doc. 168

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 Rule of Civil Procedure 12(b)(1) and
12(b)(6) to dismiss the claim of plaintiff Wilbur Babin, Jr. (the “Trustee”) for aiding and
abetting the breach of fiduciary duty, filed by defendant George Schuler.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.
The Trustee was appointed on July 31, 2009, and confirmed on August 31, 2009.
On January 19, 2010, the Trustee filed the instant suit, suing Defendants other than
1

R. Doc. No. 136.

2

R. Doc. No. 148.
1

Dockets.Justia.com

Schuler for avoidance of fraudulent transfers on a theory of constructive fraud. On August
13, 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.
Schuler moves to dismiss the second amended complaint’s claims against him,
asserting that: (1) they are preempted by the Bankruptcy Code; (2) there is no cause of
action under Louisiana law for aiding and abetting breach of fiduciary duty; (3) if such a
cause of action exists, it is barred by Louisiana’s statute of limitations; and (4) the Trustee,
standing in the shoes of the Debtor, is barred from pursuing any claim by the doctrine of
in pari delicto.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).4 As the Fifth Circuit explained in Gonzalez v. Kay:
3

R. Doc. No. 136-1, pp. 3–4.

4

Schuler also relies on Rule 12(b)(1), but as the Court explains infra, there
is no standing issue, in the sense of standing as a limit on subject matter
jurisdiction, in this case.
2

“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
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)).

ANALYSIS
I.

Preemption

Schuler asserts that the Trustee’s claim for aiding and abetting breach of fiduciary

3

duty must be dismissed because it is a “veiled claim for aiding and abetting a fraudulent
transfer, and such a claim is preempted by the Bankruptcy Code.”5 In the first instance, the
cases Schuler cites bearing on preemption hold only that claims for aiding and abetting a
fraudulent transfer are preempted, not claims for aiding and abetting breach of fiduciary
duty. See In re Fedders N. Am., Inc., 405 B.R. 527, 547–49 (Bankr. D. Del. 2009)
(preemption); In re Brentwood Lexford Partners LLC, 292 B.R. 255, 275 (Bankr. N.D. Tex.
2003) (preemption); In re Hamilton Taft & Co., 176 B.R. 895, 902 (Bankr. N.D. Cal. 1995)
(reaching a preemption result using a standing analysis).6 In fact, one of the cases Schuler
cites allowed a claim for aiding and abetting breach of fiduciary duty to go forward, despite
holding that the claim for aiding and abetting a fraudulent transfer was preempted. In re
Fedders, 405 B.R. at 543–44, 547–49. Many other cases have allowed such claims to
proceed as well. See, e.g., In re CDX Liquidating Trust, 640 F.3d 209, 219–20 (7th Cir.
2011); In re U.S. Bank Nat’l Assoc., 817 F. Supp. 2d 934, 944 (N.D. Tex. 2011); In re Yazoo
Pipeline Co., 459 B.R. 636, 656 (S.D. Tex. 2011); In re Tocfhbi, Inc., 413 B.R. 523, 536
(Bankr. N.D. Tex. 2009).7
Moreover, the reasoning behind preempting claims for aiding and abetting
fraudulent transfers—that “the trustee’s remedy for an avoided transfer is addressed by a

5

R. Doc. No. 136-1, p. 5.

6

The other cases Schuler cites simply hold or suggest that the Bankruptcy
Code does not provide its own remedy for aiding and abetting a fraudulent
transfer. In re McCook Metals, L.L.C., 319 B.R. 570, 591 (Bankr. N.D. Ill.
2005); In re H. King & Assocs., 295 B.R. 246, 293 (Bankr. N.D. Ill. 2003);
In re Ampat S. Corp., 128 B.R. 405, 410–11 (Bankr. D. Md. 1991).

7

Other support, which the Court has reviewed, appears at R. Doc. No. 148,
p. 6 n. 12.
4

specific statutory provision, section 550, and that provision only allows the trustee to
recover” the property or the value of the property “from a transferee, or a party for whose
benefit the transfer was made”—does not apply to claims for aiding and abetting breach of
fiduciary duty. Id. at 548. The Bankruptcy Code does not provide its own exclusive remedy
for breaches of fiduciary duty, so a claim for aiding and abetting such conduct does not
“lead to a result that expands remedies beyond” those prescribed by Congress. In re
Brentwood, 292 B.R. at 275. That is, a claim for aiding and abetting a fraudulent transfer
addresses only the injury of a fraudulent transfer, one for which the Bankruptcy Code
provides a remedy. But a claim for aiding and abetting breach of fiduciary duty—even when
the effect of the breach is a fraudulent transfer—addresses the separate kind of injury a
breach of fiduciary duty inflicts, an injury for which the Bankruptcy Code does not provide
a remedy.
To hold otherwise (by focusing on the loss of property to the corporation rather than
the nature of claim brought based on the transfer) would result in a kind of roving
preemption where any state law claim could be preempted so long as the transaction giving
rise to it could also be characterized as a fraudulent transfer. If this were the case, debtors
and those with whom they deal could limit their exposure to disgorgement for claims based
not just on breach of fiduciary duty, but also on contract, breach of regulatory requirements
(such as inadequate capitalization), and the like. If Congress had intended this result—a
significant curtailment of traditional remedies commonly available—it would have spoken
more clearly. The Trustee’s claim is not preempted.
II.

The State Law Applicable

The parties dispute the appropriate choice of law governing the Trustee’s aiding and
5

abetting claim. Schuler asserts that Louisiana law applies, and since Louisiana law does not
recognize a claim for aiding and abetting breach of fiduciary duty (and if it does, the claim
has prescribed), the Trustee’s claim must be dismissed.8 The Trustee asserts that either
Nevada or Texas law applies, both of which recognize a claim for aiding and abetting and
consider this claim timely.9
Federal courts sitting in diversity apply the choice of law rules of the state in which
the court is located. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941).10 The
parties suggest that four of Louisiana’s choice of law articles could be applicable to this
case: the general or residual choice of law provision in Article 3515 of the Louisiana Civil
Code; the tort (delict) provision in Article 3542; the “standards of conduct and safety” tort
sub-rule in Article 3543; and the “loss distribution and financial protection” tort sub-rule
in Article 3544. They also suggest a fifth option, the so-called “internal affairs” doctrine.
Torch Liquidating Trust v. Stockstill, 561 F.3d 377, 386 n.7 (5th Cir. 2009) (“Under
Louisiana law, the law of the place where the corporation was incorporated governs
disputes regarding the relationship between the officers, directors, and shareholders and
the officers’ and directors’ fiduciary duties.”). The doctrine is really a particular example
of the policies in Article 3515, one that recognizes the needs of the interstate system will

8

R. Doc. No. 136-1, pp. 7–13; R. Doc. No. 151–1, pp. 3–8.

9

R. Doc. No. 148, pp. 8–23.

10

Courts sitting in bankruptcy are not technically bound by Klaxon, as they
are not exercising diversity jurisdiction. Nevertheless, bankruptcy courts
apply the choice of law rules of the state in which they sit as a matter of
course when dealing with state law claims in bankruptcy. In re E.
Cameron Partners, L.P., 2011 WL 4625368, at *3 (Bankr. W.D. La. June
23, 1999).
6

always demand that corporations be subject to one set of laws when it comes to their
internal affairs so as to avoid conflicting obligations. Atherton v. FDIC, 519 U.S. 213, 224
(1997) (noting that the “internal affairs doctrine” is “a conflict of laws principle which
recognizes that only one state should have the authority to regulate a corporation’s internal
affairs . . . because otherwise a corporation could be faced with conflicting demands”).
The parties dispute which rule applies, and the outcome of applying a given rule. As
an initial matter, the Court notes that the “standards of conduct and safety” and the “loss
distribution and financial protection” tort sub-rules do not apply. Loss distribution and
financial protection rules involve issues like immunity from suit, whether liability is joint
and several, contribution rules, and the like. Standards of conduct and safety rules involve
issues like strict liability, the appropriate standard of care, statutory health and safety
provisions, and the like. Whether there exists a cause of action for aiding and abetting
breach of fiduciary duty and what shape it takes are not issues that fall under either rubric.
The Court also notes that inasmuch as aiding and abetting breach of fiduciary duty
is a tort, the general choice of law provision in Article 3515 cannot apply. Article 3542
specifically applies to torts, and Article 3515 applies “only to cases that fall within the scope
of this Book and that are not otherwise provided for in this Book.” La. Civ. Code art. 3515,
cmt. (a) (“If any other article in this Book is found to be applicable to a particular case or
issue, that article prevails.”).
Eliminating those three Articles from consideration leaves Article 3542, the general
tort provision, and the internal affairs doctrine, the freestanding rule derived from Article
3515. The most obvious starting place is the internal affairs doctrine, because it is
specifically applicable to breach of fiduciary duty claims. But as the Trustee acknowledges,
7

“generally speaking, different conflicts principles apply where the rights of third parties
external to the corporation”—like Schuler—“are at issue.”11 A number of courts have
nevertheless concluded that the internal affairs doctrine governs claims against third
parties for aiding and abetting a breach of fiduciary duty. BSS Norwalk One, Inc. v.
Raccolta, Inc., 60 F. Supp. 2d 123, 129 (S.D.N.Y. 1999) (“[B]ecause the [aiding and abetting
breach of fiduciary duty] claim in this case relates fundamentally to the conduct of the
internal affairs of BBS, the law of the state of incorporation-Delaware-governs.”); Buckley
v. Deloitte & Touche USA LLP, 2007 WL 1491403, at *13 (S.D.N.Y. 2007) (holding that
aiding and abetting breach of fiduciary duty claim “relate[d] to the internal affairs of a
corporation, [so it is] governed by the law of the state of incorporation.”); In re Jevic
Holding Corp., 2011 WL 4345204, at *13 (Bankr. D. Del. 2011) (“Here, because Jevic is a
Delaware corporation, Delaware law governs the Committee's claim for aiding and abetting
the breach of a fiduciary duty.”). Other courts have reached the opposite conclusion.
Marino v. Grupo Mundial Tenedora, 810 F. Supp. 2d 601, 612–13 (S.D.N.Y. 2011) (“New
York courts have taken three approaches to deciding which state’s law applies to an aiding
and abetting breach of fiduciary duty claim: an internal affairs approach, a torts based
“greater interest” approach, and a hybrid approach.”); In re Magnesium Corp. of Am., 399
B.R. 722, 742 (Bankr. S.D.N.Y. 2009); Solow v. Stone, 994 F. Supp. 173, 177 (S.D.N.Y.
1998); In re Adelphia Comm. Corp., 365 B.R. 24, 41 (Bankr. S.D.N.Y. 2007).
Most of the decisions electing to apply the internal affairs doctrine do so out of a
concern that the same law should apply to both the issue of whether there was a breach of

11

R. Doc. No. 148, p. 10.
8

fiduciary duty and to the issue of whether a third party aided and abetted the breach of
fiduciary duty. But nothing in Louisiana law prohibits the application of one state’s law to
the issue whether there was a breach of fiduciary duty, and Nevada law clearly governs that
issue, and another state’s law to whether there is a cause of action for aiding and abetting.
Favaroth v. Appleyard, 785 So. 2d 262, 265 (La. Ct. App. 2001) (“The use of the term
‘issue’ in the first paragraph of [the general choice of law] Article is intended to focus the
choice-of-law process on the particular issue as to which there exists an actual conflict of
laws.”); La. Civ. Code. art. 3515 cmt. (d) (“This so-called issue-by-issue analysis is an
integral feature of all modern American choice-of-law methodologies and facilities a more
nuanced and individualized resolution of conflicts problems. One result of this analysis
might be that the laws of different states may be applied to different issues in the same
dispute.”). In light of this system of dépeçage, and the fact that the internal affairs doctrine
does not by its terms apply to claims affecting the rights of third parties (and could produce
inequity if it did), the Court concludes that the internal affairs doctrine should not control
the choice of law governing this claim against Schuler.
That conclusion leaves Louisiana’s tort choice of law provision. This article directs
the Court to consider a number of factors, including “the place of conduct and injury, the
domicile, habitual residence, or place of business of the parties, and the state in which the
relationship, if any, between the parties was centered” along with “the policies of deterring
wrongful conduct and of repairing the consequences of injurious acts.” La. Civ. Code. art.
3542. While Schuler is domiciled and engaged in at least some acts in Texas, the Debtor
and its principals are, for these purposes, domiciled in Louisiana. Much of the property at
issue was located in Louisiana. The relationship between the parties was centered in
9

Louisiana. And the injury and the conduct of the principals of the Debtor occurred in
Louisiana. Moreover, the policies of deterring wrongful conduct and repairing the injurious
act can be satisfied under Louisiana law, which may not recognize a freestanding claim for
aiding and abetting but does recognize claims for conspiracy under Article 2324. Guidry
v. Bank of LaPlace, 661 So. 2d 1052, 1057 (La. Ct. App. 1995) (holding “there is no distinct
cause of action for aiding and abetting under Louisiana law” only “in the absence of a
conspiracy”). Louisiana law therefore applies, and the Trustee is granted leave to amend
his complaint to plead a cause of action for conspiracy under Louisiana law.12
III.

In Pari Delicto

Schuler asserts that the Trustee “lacks standing and is otherwise barred by the
doctrine of in pari delicto” from pursuing the aiding and abetting claim.13 But the in pari
delicto doctrine is a defense, and “[t]hat the defendant may have a valid defense on the
merits of a claim brought by the debtor goes to the resolution of the claim, not the ability
of the debtor to assert the claim.” In re Educs. Group Health Trust, 25 F.3d 1281, 1286 (5th
Cir. 1994); see also In re Senior Cottages of Am., L.L.C., 482 F.3d 997, 1003 (8th Cir. 2007)
(“Several other circuits have declined to conflate the constitutional standing doctrine with
the in pari delicto defense,” citing In re Educs. Group Health Trust in addition to cases
12

An amendment does not appear to be futile on the ground that any civil
conspiracy claim has prescribed. For example, “[i]interruption of
prescription against one joint tortfeasor is effective against all joint
tortfeasors,” La. Civ. Code art. 2324(C), and there may be other tolling
doctrines applicable to claims for breach of fiduciary duty or in
bankruptcy. Whether a conspiracy claim has prescribed, just as whether
any amended complaint the Trustee elects to file states a claim for civil
conspiracy under Louisiana law, may be tested by another motion to
dismiss.

13

R. Doc. No. 136-1, p. 14.
10

from the First, Third, Sixth, and Eleventh Circuits). That is so even when the defense is
“that the causes of action listed in the complaint are not property of the estate because the
debtor’s representatives participated in the acts or omissions giving rise to the causes of
action,” i.e., the in pari delicto defense. In re Educs. Group Health Trust, 25 F.3d at 1286.
Accordingly, the Trustee has standing to assert this claim.
It is also not appropriate to dismiss the Trustee’s aiding and abetting claim on the
basis of Schuler’s in pari delicto defense. Just as under Texas law, where the success of the
defense turns on the “peculiar facts and equities of the case” that cannot be developed at
the motion to dismiss phase, In re Today’s Destiny, Inc., 388 B.R. 737, 748–49 (Bankr. S.D.
Tex. 2008) (quoting Lewis v. Davis, 199 S.W.2d 146, 151 (1947)), and under Nevada law,
where “[t]he fundamental purpose of the rule must always be kept in mind, and the realities
of the situation must be considered,” Magill v. Lewis, 333 P.2d 717, 719 (Nev. 1959), the in
pari delicto defense under Louisiana law is factually intensive and requires policy analysis.
See Cole v. Mitchell, 73 So. 3d 452, 457 (La. Ct. App. 2011) (“The court must apply the rule
not because it is a matter of defense, but because it is against public policy to hear the case
if the unconscionable character of the matter or transaction be established.”). These kinds
of “policy analysis can not be undertaken prior to discovery and an evidentiary hearing.”
In re Today’s Destiny, Inc., 388 B.R. at 749.
CONCLUSION
The Trustee’s aiding and abetting breach of fiduciary duty claim against Schuler is
not preempted, he has standing to bring it, and it would be inappropriate to dismiss it on
the basis of an in pari delicto defense. The claim is governed by Louisiana law, however,
and it does not recognize aider and abettor liability in the absence of a conspiracy.
11

Accordingly, the Trustee must amend his complaint to allege a timely cause of action for
civil conspiracy against Schuler under Louisiana law. If he does not within 15 days from the
date of this order, the claim will be dismissed. Defendants are, of course, free to file new
motions to dismiss should the Trustee elect to amend. But at this time, Schuler’s motion
to dismiss is DENIED.

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

_____________________________
SUSIE MORGAN
UNITED STATES DISTRICT JUDGE

12