Liquidating Trustee of the App Fuels Creditors Trust v. West Virginia Alloys, Inc. et al
Filing
75
MEMORANDUM OPINION AND ORDER denying defendant Dow Corning Corporation's 40 Motion to Dismiss; and denying the Globe defendants' 43 Motion to Dismiss. Signed by Judge John T. Copenhaver, Jr. on 9/9/2014. (cc: counsel of record; any unrepresented parties) (taq)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF WEST VIRGINIA
AT CHARLESTON
LIQUIDATING TRUSTEE OF THE APP FUELS CREDITORS TRUST,
Plaintiff,
v.
Civil Action No. 2:13-30266
WEST VIRGINIA ALLOYS, INC. and GLOBE METALLURGICAL, INC. and
GLOBE SPECIALTY METALS, INC. and WVA MANUFACTURING, LLC and
DOW CORNING CORPORATION
Defendants.
MEMORANDUM OPINION AND ORDER
Pending are the separate motions to dismiss filed by
West Virginia Alloys, Inc. (“WV Alloys”), WVA Manufacturing, LLC
(“WVAM”), Globe Metallurgical, Inc. (“GMI”), and Globe Specialty
Metals, Inc. (“GSM”) (collectively “the Globe defendants”), on
May 27, 2014, and defendant Dow Corning Corporation (“Dow”), on
May 23, 2014.
I.
This is an action to recover and avoid alleged
fraudulent transfers between defendants WV Alloys, WVAM, GMI,
GSM, and Dow pursuant to the West Virginia Uniform Fraudulent
Transfers Act (“Act”), West Virginia Code 40-1A-1 et seq.
Plaintiff is the Liquidating Trustee (“Trustee”) of
The Trustee
the App Fuels Creditors Trust (“Creditors Trust”).
oversees the Creditors Trust, which was established under the
Joint Plan of Orderly Liquidation and Distribution (the "Plan")
in certain bankruptcy cases jointly administered with
Appalachian Fuels, LLC, (the "bankruptcy case”) in the United
States Bankruptcy Court for the Eastern District of Kentucky.
On June 11, 2009, three creditors of debtor
Appalachian Fuels, LLC, filed the bankruptcy case through an
involuntary petition for relief under Chapter 7.
At that time,
the debtor’s estate held claims against WV Alloys for avoidance
and recovery of preferential transfers ("claims").
On July 14,
2009, the United States Trustee appointed an Unsecured Creditors
Committee ("Committee").
At all relevant times the Globe defendants were
controlled, directly or indirectly, by three individuals.
They
are Jeff Bradley, Malcolm Appelbaum, and Stephen Lebowitz.
On
September 25, 2009, after the claims arose, WVAM was formed.
On October 28, 2009, WV Alloys entered into an Asset
Contribution Agreement and Membership Interest Subscription
Agreement ("agreement") with GMI and WVAM.
Pursuant to the
agreement, WV Alloys transferred all, or substantially all, of
its operating assets to WVAM in exchange for 89.36 percent of
2
the aggregate total of all membership interests in WVAM
(“membership interests”).
GMI received the other 10.64 percent
of the membership interests.
Pursuant to the agreement, WVAM
did not assume any liability related to any pending or
threatened litigation or other claim, action, or proceeding
against WV Alloys.
On October 30, 2009, the Board of Directors for WV
Alloys declared a "dividend" to its sole shareholder, GMI, in
the form of all the membership interests, which, as noted,
comprised all or substantially all of WV Alloys' assets as of
the membership interest transfer date.
WV Alloys received no
consideration in exchange for the membership interest transfer
to GMI.
Also on October 30, 2009, the GMI Board of Directors
declared a dividend to its sole shareholder, GSM, in the form of
100% of the membership interests it earlier received in WVAM.
On November 5, 2009, GSM sold 49% of its newly acquired
membership interests in WVAM to Dow.
Additionally, Dow was
listed as a party to receive notices under the October 28, 2009,
agreement.
The Trustee alleges that the transfers described above
were made in contravention of the Act.
3
Specifically, it
contends that the transactions recited above had the effect of
unlawfully removing substantially all of the assets of WV
Alloys.
An offshoot of that effect was that WV Alloys became
insolvent.
On April 11, 2011, the bankruptcy court entered an
agreed order in the bankruptcy case conferring standing on the
Committee to pursue recovery actions, including the claims, on
behalf of the Appalachian Fuels, LLC, estate.
On June 28, 2011, consistent with that grant of
authority, the Committee instituted an adversary proceeding to
avoid the alleged unlawful transfers.
On January 24, 2012, the
Trustee was substituted as the plaintiff in the adversary
proceeding.
On June 29, 2012, the bankruptcy court entered an
agreed judgment for the Trustee and against WV Alloys in the
amount of $125,000.
On October 25, 2013, the Trustee instituted this
action in the Circuit Court of Fayette County, which was later
removed.
The second amended complaint alleged two claims under
the Act, seeking declarations that the transfers made by WV
Alloys be annulled and set aside, along with the "dividends”
paid by WV Alloys and GMI.
It further seeks an award of
exemplary damages and prejudgment attachment of the assets
transferred.
4
Dow previously moved to dismiss the second amended
complaint for failure to state a claim.
It contended that the
Trustee’s sole allegation against it stemmed from Dow’s
acquisition, by purchase, of a portion of the membership
interests in WVAM from GSM.
The Trustee responded that it had pled its claims
against Dow with the requisite degree of particularity.
The
actual allegations found in the second amended complaint, as to
Dow, were as follows:
Dow “was listed as a party to receive notices under
the” agreement. (Sec. Am. Compl. ¶ 18).
Before the transfers under the agreement, Dow “knew or
should have known that the [c]laims were going to be
asserted against WV Alloys.” (Sec. Am. Compl. ¶ 21).
The transfers “were engaged in by the Defendants to
shield WV Alloys’ assets from the [c]laims while, at
the same time, maintaining ownership and control of
those very same assets in WVA[M], an affiliated legal
entity.” (Sec. Am. Compl. ¶ 23).
“The Defendants engaged in a series of structured and
orchestrated transactions . . . to transfer and shield
assets of WV Alloys from” the claims in violation of
the Act. (Sec. Am. Compl. ¶¶ 38).
The court analyzed these allegations with the
understanding that the Trustee sought to hold Dow accountable
under Count One and Count Two of the second amended complaint.
Count One pled a claim pursuant to section 40-1A-4 of the Act.
Count Two pled a claim pursuant to section 40-1A-5.
5
(Memo. Op.
and Ord. at 20 (Apr. 24, 2014)).
The court noted at the outset
that the generic use of the term “Defendants” was troubling
inasmuch as the second amended complaint elsewhere used the term
in a manner relating only to WV Alloys, GMI, GSM and WVAM.
(See, e.g., id.; Sec. Am. Compl. ¶¶ 4, 5).
Assuming the term was intended to refer to Dow as
well, the court concluded that the well-pleaded factual
allegations of the operative pleading would only give rise to a
belief that Dow was entitled to receive notices of the
transfers.
The court concluded, “That minimalistic contention
will not suffice for purposes of pleading a claim under the Act,
especially in light of the rigorous Rule 9(b) standards.”
The court thus conditionally granted Dow’s motion to
dismiss, with the Trustee given leave to plead anew its claims
against Dow under the Act on or before May 10, 2014.
On May 12,
2014, the Trustee filed its third amended complaint.
This new
operative pleading has changed the factual allegations against
Dow, inter alia, to the following:
Dow “was listed as a party to receive notices under
the” agreement. (Third Am. Compl. ¶ 16).
Prior to the transfers preceding the November 5, 2009,
acquisition by Dow from WVA[M], WV Alloys, GMI, GSM
and Dow “knew or should have known that the Claims
were going to be asserted against WV Alloys.” (Id. at
¶ 21).
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“At the time it acquired its interest in WVA[M],
Defendant Dow knew that (i) Defendants WV Alloys,
WVA[M], GMI and GSM were purporting to transfer
substantially all of the assets of WV Alloys to WVA[M]
free from “any liability related to any pending or
threatened litigation or other claim, action or
proceeding against GMI or WV Alloys,” as described in
Schedule II of the Agreement, and (ii) Defendant WV
Alloys and GMI had transferred all of their interest
in GSM, for no consideration.” (Id. at ¶ 28).
In the instant dispositive motions, the defendants
assert that the Trustee has yet failed to state claims upon
which relief may be granted.
II.
A.
Governing Standard
Federal Rule of Civil Procedure 8(a)(2) requires that
a pleader provide “a short and plain statement of the claim
showing . . . entitle[ment] to relief.”
Fed. R. Civ. P.
8(a)(2); Erickson v. Pardus, 127 S. Ct. 2197, 2200 (2007).
Rule
12(b)(6) correspondingly permits a defendant to challenge a
complaint when it “fail[s] to state a claim upon which relief
can be granted . . . .”
Fed. R. Civ. P. 12(b)(6).
The required “short and plain statement” must provide
“‘fair notice of what the . . . claim is and the grounds upon
7
which it rests.’”
Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
545 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957),
overruled on other grounds, Twombly, 550 U.S. at 563); see also
Anderson v. Sara Lee Corp., 508 F.3d 181, 188 (4th Cir. 2007).
In order to 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, 129 S. Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S.
at 570); see also Monroe v. City of Charlottesville, 579 F.3d
380, 386 (4th Cir. 2009).
Application of the Rule 12(b)(6) standard requires
that the court “‘accept as true all of the factual allegations
contained in the complaint . . . .’”
Erickson, 127 S. Ct. at
2200 (quoting Twombly, 127 S. Ct. at 1965); see also South
Carolina Dept. Of Health And Environmental Control v. Commerce
and Industry Ins. Co., 372 F.3d 245, 255 (4th Cir. 2004)
(quoting Franks v. Ross, 313 F.3d 184, 192 (4th Cir. 2002)).
The court must also “draw[] all reasonable . . . inferences from
th[e] facts in the plaintiff's favor . . . .”
Edwards v. City
of Goldsboro, 178 F.3d 231, 244 (4th Cir. 1999).
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B.
Analysis
1. Dow’s Motion to Dismiss
Akin to the predecessor pleading, Counts One and Two
of the third amended complaint pled claims, respectively,
pursuant to section 40-1A-4 and 40-1A-5 of the Act.
Regarding Dow’s motion to dismiss, the Trustee has
clarified in its briefing in response that it seeks only an
adjudication that Dow does not qualify as a good faith
transferee pursuant to section 40-1A-8(b)(2) of the Act.
(See
Resp. at 5 “[T]he Third Amended Complaint only includes
additional factual allegations to clarify Plaintiff’s claim
that, because Defendant . . . [DOW] is not a good faith
transferee of a membership interest in Defendant WVAM pursuant
to W.Va. Code §40-1A-8(b)(2), a judgment rendered against the
Globe Defendants under W.Va. Code §§ 40-1A-4 or 40-1A-5 may be
enforced against the interest of Defendant . . . [DOW] in
WVAM.”); id. at 12 (“The above alleged ‘badges of fraud’ are
more than sufficient to establish an actionable claim against
the Globe Defendants under W.Va. Code §40-1A-4 and a claim
against Defendant [DOW] under W.Va. Code § 40-1A-8(b)(2).”)).
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Section 40-1A-8(b)(2) of the Act provides the
following:
[T]o the extent a transfer is voidable in an action by
a creditor under [section 40-1A-7(a)(1)[1]], the
creditor may recover judgment for the value of the
asset transferred, as adjusted under subsection (c) of
this section, or the amount necessary to satisfy the
creditor's claim, whichever is less. The judgment may
be entered against:
. . . .
(2) Any subsequent transferee other than a good
faith transferee who took for value or from any
subsequent transferee.
W. Va. Code § 40-1A-8(b)(2).
The Trustee’s complaint is admittedly not a model of
clarity on the point.
section 40-1A-8(b)(2).
For example, it nowhere references
Nevertheless, it alleges, as noted, that
(1) Dow “was listed as a party to receive notices under the”
agreement, (Third Am. Compl. ¶ 16), (2) Dow knew or should have
1
This section deals with the remedies for defrauded
creditors and provides as follows:
(a) In an action for relief against a transfer or
obligation under this article, a creditor, subject to
the limitations in section eight of this article, may
obtain:
(1) Avoidance of the transfer or obligation to
the extent necessary to satisfy the creditor's
claim . . . .
W. Va. Code § 40-1A-7(a)(1).
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known prior to November 5, 2009, that the Trustee’s claims were
going to be asserted against WV Alloys, and (3) on November 5,
2009, Dow knew that WV Alloys, WVAM, GMI and GSM were purporting
to transfer substantially all of the assets of WV Alloys to WVAM
free from any liability related to any pending or threatened
litigation or other claim, action or proceeding against GMI or
WV Alloys and WV Alloys and GMI had transferred all of their
interest in GSM, for no consideration.
It is further alleged in
related part as follows:
Given the proximity of the November 5, 2009 transfer
in WVA[M] to Dow, to the October 28, 2009 Agreement,
Defendant Dow knew that Defendants WV Alloys, GMI and
GSM were transferring substantially all of the assets
of WV Alloys, such that creditors with claims in
pending or threatened litigation against WV Alloys
would be unable to obtain a satisfaction of their
claims.
(Id. ¶ 47).
These allegations minimally suffice to support the
limited declaration against Dow that the Trustee seeks.
It is, accordingly, ORDERED that Dow’s motion to
dismiss be, and hereby is, denied.2
2
Dow additionally asserts that the claim against it is
barred by the four-year statute of limitations. The trustee
instituted this action on October 23, 2013. The parties agree
that the applicable limitations period requires the action be
instituted within four years of the alleged fraudulent transfer,
the earliest of which would have occurred on October 28, 2009,
the date of the agreement. The action is timely irrespective of
the technical amendments to the complaint coming after October
23, 2013. See Fed. R. Civ. P. 15(c)(1)(B) (“An amendment to a
pleading relates back to the date of the original pleading when
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2.
Globe Defendants’ Motion to Dismiss
The Globe defendants move to dismiss primarily on the
following ground:
[T]he Globe Defendants and WVA[M] . . . submit, quite
simply, that, in light of (a) the $100,000,000 sum . .
. [Dow] paid for its membership interests in WVA[M] .
. . , and (b) the fact that this was but one part of a
$175,000,000 transaction, that plaintiff’s allegations
in the TAC to the effect that the defendants entered
into the subject transactions with the “actual intent”
to “shield WV Alloys’ assets from the Claims” -- viz.
plaintiff’s $125,000 claim – is starkly implausible on
its face. Indeed, on these facts, any such allegation
of such actual intent would be preposterous, for no
rational actor would enter into a complex transaction
of such economic magnitude in order to “delay or
hinder” a creditor from collecting on such a
comparatively infinitesimal claim. Would a homeowner
transfer title to his $175,000 house with the “actual
intent” to hinder the milkman from collecting on a
$125 bill, when the transaction costs are sure to
dwarf that latter sum? Plaintiff’s allegations here
are no less absurd.
(Memo. in Supp. at 6 (emphasis added)).
To the extent that this argument is anything more than
a value judgment and cognizable as a true Twombly/Iqbal
challenge, the Trustee adequately meets it.
It responds as
follows, after discussing the badges of fraud either pled in, or
reasonable inferred from, the third amended complaint:
. . . the amendment asserts a claim . . . that arose out of the
conduct, transaction, or occurrence set out -- or attempted to
be set out -- in the original pleading[.]”). The limitations
defense is thus not meritorious.
12
[T]he allegations illustrate a structured sequence of
integrated transactions that . . . culminat[ed] with
Defendant . . . [Dow’s] ultimate acquisition of 49% of
the membership interests in Defendant WVAM . . . . The
structured sequence of integrated transactions alleged
in the Third Party [sic] Complaint rendered Defendant WV
Alloys insolvent. There is more than sufficient
information in the Third Amendment [sic] Complaint for the
Globe Defendants to have fair notice of the claims
asserted against them. Whether the asserted “badges of
fraud” establish a violation of the W.Va. Code §40-1A4 is purely a question of fact to be determined by the
jury.
In fact, the structured sequence of integrated
transactions appears to be specifically designed to
insulate Defendants GSM and . . . [Dow] from liability
exposure under the . . . [the Act], by giving each the
ability to claim the defense of a ‘subsequent
transferee who took … from any subsequent transferee’.
See, W.Va. Code §40-1A-8(b)(2). There does not appear
to be any other logical or reasonable business purpose
for the Globe Defendants to engage in the structured
sequence of integrated transactions that they did,
merely to sell a 49% interest in Defendant WVAM to
Defendant [DOW]. Under the Agreement, the assets of
Defendant WV Alloys were transferred to Defendant WVAM
free from “any liability related to any pending or
threatened litigation or other claim, action or
proceeding against GMI or WV Alloys.”
(Resp. at 11-12).
The Trustee is correct.
The allegations give
rise to a plausible claim against the Globe defendants under
Counts One and Two.3
It is, accordingly, ORDERED that the Globe
defendants’ motion to dismiss be, and hereby is, denied.
3
The Globe defendants’ only remaining ground for dismissal
arises out of their contention that the Trustee has failed to
allege that “WV Alloys did not receive ‘reasonably equivalent
value’ in . . . a trade of its assets for membership interests
in” WVAM. (Memo in Supp. at 8). The allegations surrounding the
structured transactions, and the reasonable inferences available
therefrom, suffice to fill that void.
13
The Clerk is requested to transmit this written
opinion and order to all counsel of record and to any
unrepresented parties.
DATED:
September 9, 2014
John T. Copenhaver, Jr.
United States District Judge
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