In re Juliet Homes, LP, 2011 WL 6817928 (Bkrtcy.S.D.Tex., Slip Copy, Dec. 28, 2011)
United States Bankruptcy Court, S.D. Texas, Houston Division.
In re JULIET HOMES, LP, Debtor(s).
Joseph M. Hill Ch 7 Trustee, et al, Plaintiff(s)
v.
Alex Oria, et al, Defendant(s).
Bankruptcy No. 07–36424.
Adversary No. 09–03429.
Dec. 28, 2011.
Jeremy R. Stone, Susan Hardie Jacks, Mehaffy Weber, Theresa D. Mobley, Cage Hill et al., Houston, TX, for Plaintiff(s).
Steve
Martin Williard, The Williard Law Firm LP, Peter Johnson, Law Offices
of Peter Johnson, Gretchen Gauer McCord, Kent Altsuler, Ronald J.
Sommers, Nathan Sommers et al., John T. Unger, Thompson Knight, Jerry M.
Young, Bennett G. Fisher, Fisher and Associates PC, T. Josh Judd,
Hoover Slovacek, LLP, Houston, TX, William Allen Gage, Jr., Buck Keenan
et al., William S. Chesney, III, Frank, Elmore et al., Kendall Johan
Burr, Edison McDowell et al., John H. Bennett, Jr ., Patrick D. Devine,
Warren G. King, Attorney at Law, Marilee A. Madan, Marilee A Madan PC,
George R. Gibson, Nathan Sommers Jacobs PC, Leonard H. Simon,
Pendergraft & Simon L.L.P., William Kyle Vaughn, Vaughn &
Associates, Steven A. Leyh, Leyh & Payne, LLP, Houston, TX, Martin
M. Hokanson, Attorney at Law, Katy, TX, for Defendant(s).
Bernie Kane, Houston, TX, pro se.
Binh Ho, Houston, TX, pro se.
Caroline Dazzio Brown, Houston, TX, pro se.
Connie Brown, Houston, TX, pro se.
Douglas Allen Brown, Fort Lauderdale, FL, pro se.
Shawn Goheen, Houston, TX, pro se.
Hue Ho, Houston, TX, pro se.
James Counce, Houston, TX, pro se.
Malladi S. Reddy Dr., Houston, TX, pro se.
Robert Odom, Houston, TX, pro se.
Ray Lindgren, Houston, TX, pro se.
Steve Ittner, Houston, TX, pro se.
Thai Nguyen, Houston, TX, pro se.
Theyen Hoang, Houston, TX, pro se.
Todd Stoner, Houston, TX, pro se.
Todd Pirtle, Houston, TX, pro se.
Washington Ho, Houston, TX, pro se.
William Marsh Resco I, LP, Houston, TX, pro se.
GGG Holdings, LP, Houston, TX, pro se.
Broyd, Inc., Sugar Land, TX, pro se.
Lawrence Hugo Ramming, Houston, TX, pro se.
ARCOA Funding, LC, Houston, TX, pro se.
Thomas Boyd, Houston, TX, pro se.
Nadenne Calderon, pro se.
Marquis Capital II, LLC, Houston, TX, pro se.
Marquis Capital II Westcott, LP d/b/a Marquis Capital, Houston, TX, pro se.
Don Weir, pro se.
Erica Brown, Ft. Lauderdale, FL, pro se.
C & B Investments, Inc., Katy, TX, pro se.
MEMORANDUM OPINION
MARVIN ISGUR, United States Bankruptcy Judge.
*1
The chapter 7 Trustees in the bankruptcy cases of Juliet Homes, LP;
Juliet GP, LLC (collectively, "Juliet Debtors"); and Douglas Brown filed
this proceeding on October 29, 2009, suing dozens of defendants for
preferential transfers, fraudulent transfers under both the Bankruptcy
Code and the Texas Uniform Fraudulent Transfer Act, unjust enrichment,
and legal fees. ECF No. 1. The Trustees also sought to pierce the
corporate veil of various entities affiliated with the Juliet Debtors.
ECF No. 1, at 18. From the beginning, the Trustees have alleged that the
Juliet Debtors operated a Ponzi scheme, eventually engaging in little
legitimate business and providing excessive rates of return to initial
investors.FN1
FN1.
The Trustees allege that the Juliet real
estate investment program had the attributes of a Ponzi scheme "[f]rom
its inception." The exact commencement date of the alleged Ponzi scheme
may be irrelevant to the Trustees' claims; the issue is whether the
Ponzi scheme is alleged to have been in place at the time of the alleged
transfers.
The Trustees' allegations have expanded during the
course of this proceeding. The Trustees have amended their complaint
twice. The most recent amendment was the Second Amended Complaint, ECF
No. 229. The Court allowed the Trustees to file the Second Amended
Complaint after lengthy hearings and extensive briefing. The Court
denied the Trustees' request to add dozens of new defendants but allowed
the Trustees to add new allegations and claims. See ECF No. 213. The
Second Amended Complaint elaborates on the
allegations of a Ponzi scheme
and includes a detailed chart of allegedly preferential and/or
fraudulent transfers ("Transfer Chart"). The Second Amended Complaint
also adds new causes of action for
common-law fraud, statutory fraud in a
real estate transaction, and constructive fraud, expands the unjust
enrichment cause of action into a "conversion/misappropriation of
assets/unjust enrichment" claim, and seeks punitive damages. ECF No.
229.
In response, several defendants ("Movants") have filed
motions to dismiss. This Memorandum Opinion deals with the issues raised
in fifteen separate motions to dismiss. ECF Nos. 233, 236, 253, 255,
256, 257, 258, 260, 261, 262, 264, 266, 267, 270 & 271. The Court
grants, in part, and denies, in part, the motions.
Background
This
adversary proceeding is connected to the bankruptcy cases of Juliet
Homes, LP ("Juliet Homes"); No. 07–36424; Juliet GP, LLC ("Juliet GP"),
No. 07–36426; and Douglas A. Brown, No. 07–36422. Creditors filed
involuntary petitions against each of the three Debtors on September 20,
2007.
Brown and the Juliet Debtors are closely related. On
his Schedule B, Brown noted that he was the 100% owner of Juliet GP and
the 28.376% owner of Juliet Homes. No. 07–36422, ECF No. 56, at 20. The
Juliet Debtors list interests in each other, of unspecified percentages,
on their respective schedules. No. 07–36426, ECF No. 23, at 8; No.
07–36424, ECF No. 111, at 7. Brown is listed as the Managing Member of
Juliet GP on Juliet GP's Schedules and on Juliet Homes' Schedules. No.
07–36426, ECF No. 23, at 4, 20; No. 07–36424, ECF No. 111, at 14.
According to the Second Amended Complaint, Brown testified at the joint
creditors' meeting for the three cases that Juliet GP was the general
partner for Juliet Homes. ECF No. 229, at 12–13.
*2 On
Debtors' motion, the Court entered orders for relief in the three cases
on October 31, 2007. The Court converted Juliet Homes' case and Brown's
case to chapter 11 on the same day. On November 2, 2007, Joseph Hill,
plaintiff in this adversary proceeding, became Trustee over the Juliet
Debtors' estates. On Hill's motion, the Court reconverted Juliet Homes'
case to chapter 7 on December 3, 2007.
Brown moved to
reconvert his individual case to chapter 7 on December 5, 2007, and the
Court granted his motion on December 19, 2007. Steve Smith, also a
plaintiff in this adversary proceeding, became Trustee of Brown's
chapter 7 estate.
On October 29, 2009, the Trustees filed this
adversary proceeding against Brown, other individuals who were alleged
to be investors in the Juliet Debtors, and five entities alleged to be
affiliated with the Juliet Debtors. The Original Complaint alleged that
Brown and the Juliet Debtors had made avoidable preferential and/or
fraudulent transfers to themselves, their affiliates, and their
investors under secs. 547 and 548 of the Bankruptcy Code and under Texas
law.
The Trustees alleged that Brown and the Juliet Debtors
had engaged in a Ponzi scheme, providing financially infeasible returns
to preferred investors and partners while ultimately engaging in little
legitimate business.
The Trustees alleged, for example, that
Brown and his partner Bernie Kane charged exorbitant consulting fees
against the Juliet Debtors' accounts and purchased luxury vehicles and
expensive personal items out of the Debtors' funds. The Trustees also
alleged that
Brown and Kane issued false invoices from fictitious
vendors and subcontractors and that Brown and his wife, Caroline Brown,
diverted Juliet funds to Brown himself, affiliated entities, and
affiliated individuals. The Trustees additionally alleged that the
Juliet Debtors paid kickbacks to insiders, employees, relatives, and
other co-conspirators to act as "straw buyers" in the purchase and sale
of homes.
On December 2, 2009, the Trustees filed their
Amended Complaint. The Amended Complaint made minor changes to the
Original Complaint and was filed within the time allowed by Fed.R.Civ.P.
15(a)(1).
On February 26, 2010, the Trustees filed a Motion
for Leave to File Second Amended Complaint and for Extension of Time to
Serve Defendants. ECF No. 114. The Proposed Second Amended Complaint
expanded the scope of the claims, providing more detail about the
alleged Ponzi scheme and adding a chart that showed all of the allegedly
fraudulent and preferential transfers. The new allegations emphasized
the involvement of an entity called The Market on Congress ("TMOC"). The
Trustees alleged that TMOC was used to funnel money from the Debtors
into other entities and to individual investors.
The Proposed
Second Amended Complaint would have added dozens of new defendants. The
proposed new defendants, along with existing defendants, opposed the
amendment. After extensive litigation, the Court allowed, in part, the
amendment on December 16, 2010. ECF No. 213. The Court allowed the
Trustees to expand their allegations and add new causes of action, but
(with a few exceptions) the Court did not allow the Trustees to add new
defendants. ECF No. 213, at 48. The statutes of limitations on all
claims had already run, and the Court found that the claims against
nearly all the proposed new defendants did not relate back to the date
of the original complaint.
*3 The Trustees filed the Second
Amended Complaint on April 18, 2011. ECF No. 229. The Second Amended
Complaint adds the new claims and allegations and incorporates the
Transfer Chart, a modified version of the chart that was attached to the
Proposed Second Amended Complaint. ECF No. 229–1.
Numerous
defendants filed motions under Fed.R.Civ.P. 12, seeking to have claims
dismissed or struck or to require a more definite statement. A joint
motion to dismiss was filed by Don Sanders; Sanders 1998 Children's
Trust; Sanders Opportunity Fund, LP; and Sanders Opportunity Fund
(Institutional), L.P. (collectively, "Sanders Defendants"). ECF No. 233.
A joint motion to dismiss, or in the alternative, for a more definite
statement was also filed by Marquis Capital II Westcott, LP d/b/a
Marquis Capital; Marquis Capital II, LLC; Michael Ecklund; and William
Marsh Resco I, LP (collectively, "Marquis Defendants"). ECF No. 261.
David
Greenberg and Greenberg & Co. (collectively, "Greenberg
Defendants") filed a motion to strike and, in the alternative, motion to
dismiss. ECF No. 236. Tom Pirtle and Pirtle Investments, L.P. ("Pirtle
Defendants") filed a motion to strike, or in the alternative, motion to
dismiss, or in the alternative, motion for a more definite statement.
ECF No. 253.
Ravi Reddy, Shreyaskumar Patel, and Warren King
filed motions to dismiss and, alternatively, for a more definite
statement. ECF Nos. 256, 264 & 270. Robert Shiring, Richard Robert,
Tullis Thomas, Julian Fertitta, Vincent Galeoto, Mir Azizi, and Melisa
Thomas filed motions to dismiss. ECF Nos. 255, 257, 258, 262, 266, 267
& 271. Alex Oria and James Thomas filed a joinder in the Pirtle
Defendants', Shiring's, Reddy's, Robert's, and Tullis Thomas's motions.
ECF No. 260.
Although the fifteen motions differ as to the
particular arguments, all of the Movants argue that the Trustees' claims
should be dismissed under Rule 12(b)(6) for failure to state a claim
upon which relief may be granted.
The Greenberg Defendants
also argue that claims should be struck. When the Court did not allow
the Trustees to add new defendants, the Trustees then alleged that some
of the alleged transfers to the proposed new defendants had actually
been received by or for the benefit of David Greenberg. The Trustees
thus asserted new claims for those transfers against Greenberg. The
Greenberg Defendants argue that the addition of these claims violates
the Court's December 16, 2010 order and memorandum opinion, which did
not allow the Trustees to add new defendants because the statute of
limitations had already run against those proposed defendants.
The
Pirtle Defendants, finally, argue that the inclusion of Pirtle
Investments, LP as a defendant should be struck. Pirtle Investments, LP,
due to a clerical error, was not issued a summons, and the original
complaint allegedly was not served on Pirtle Investments, LP. The Pirtle
Defendants argue that Pirtle Investments, LP is therefore a "new
defendant," and the Court's December 16, 2010 order prohibits the
addition of new defendants.
Rule 12(b)(6) Standard
*4
The Court reviews motions under Rule 12(b)(6) "accepting all
well-pleaded facts as true and viewing those facts in the light most
favorable to the plaintiffs." Stokes v. Gann, 498 F.3d 483, 484 (5th
Cir.2007) (per curiam). However, the Court "will not strain to find
inferences favorable to the plaintiff." Southland Sec. Corp. v. INSpire
Ins. Solutions Inc., 365 F.3d 353, 361 (5th Cir.2004) (internal
quotations omitted).
To avoid dismissal for failure to state a
claim, a plaintiff must meet Fed.R.Civ.P. 8(a)(2)'s pleading
requirements. Rule 8(a)(2) requires a plaintiff to plead "a short and
plain statement of the claim showing that the pleader is entitled to
relief." In Ashcroft v. Iqbal, the Supreme Court held that Rule 8(a)(2)
requires that "the well-pleaded facts" must "permit the court to infer
more than the mere possibility of misconduct." 129 S.Ct. 1937, 1950
(2009) (quoting Rule 8(a)(2)). "Only a complaint that states a plausible
claim for relief survives a motion to dismiss." Id. (citing Bell
Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007)). "[A] complaint
does not need detailed factual allegations, but must provide the
plaintiff's grounds for entitlement to relief—including factual
allegations that when assumed to be true raise a right to relief above
the speculative level." Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232
(5th Cir .2009) (internal quotation marks removed).
Fraud
claims must, in addition, meet Fed.R.Civ.P. 9(b)'s heightened pleading
requirements. Under Rule 9(b), fraud claims must be alleged with
particularity concerning the circumstances of the fraud. Fed.R.Civ.P.
9(b). See Oppenheimer v. Prudential Sec. Inc., 94 F.3d 189, 195 (5th
Cir.1996) (upholding district court's dismissal of fraud claims where
the plaintiff failed to allege when an allegedly fraudulent sales charge
was incurred or the extent of her damages); Red Rock v. JAFCO Ltd.,
1996 WL 97549, at *3 (5th Cir. Feb. 16, 1996) (holding that the
plaintiff's allegations did not satisfy Rule 9(b) where they failed to
allege the time, place, or content of any misrepresentations). "To plead
fraud adequately, the plaintiff must 'specify the statements contended
to be fraudulent, identify the speaker, state when and where the
statements were made, and explain why the statements were fraudulent.' "
Sullivan v. Leor Energy, LLC, 600 F.3d 542, 551 (5th Cir.2010) (quoting
ABC Arbitrage v. Tchuruk, 291 F.3d 336, 350 (5th Cir.2002)).
A
motion under Rule 12(b)(6) will be treated as one for summary judgment
under Rule 56 when matters outside the pleadings are presented and not
excluded by the Court. Fed.R.Civ.P. 12(d); Fed. R. Bankr.P. 7012(b).
Under Rule 56, summary judgment is appropriate where "the movant shows
that there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a); Fed. R.
Bankr.P. 7056. In the event a motion to dismiss is converted to one for
summary judgment, a court must first give the parties notice and then
may consider all evidence presented. Rodriguez v. Rutter, 310 F. App'x
623, 626 (5th Cir.2009).
Analysis
*5 The Movants
argue that the Trustees fail to plead essential facts as to some of the
claims. The Court examines each claim against each of the Movants to
determine whether the Trustees have stated a claim.
Additionally,
some Movants argue that claims are barred by the statute of
limitations. Under 11 U.S.C. sec. 546(a), avoidance claims had to have
been brought no later than October 31, 2009, two years after the entry
of the orders for relief in the bankruptcy cases. Under 11 U.S.C. sec.
108(a), claims asserted on behalf of the estate had to have been brought
by the later of October 31, 2009 or the expiration of the statute of
limitations under non-bankruptcy law.
It is too late to assert
new avoidance claims, and the Court has already held that equitable
tolling does not apply. The Court therefore considers whether any new
transfers relate back to the date of the original complaint.
As
to claims asserted on behalf of the estate, the Court considers whether
the claims relate back to the date of the original complaint or whether
the non-bankruptcy law statute of limitations has not yet expired.
1. Greenberg and Pirtle Defendants' Motion to Strike
The
Court first deals with the motions to strike. The Greenberg Defendants
argue that the Court's December 16, 2010 order and memorandum opinion do
not allow the Trustees to assert new claims for additional transfers
against Greenberg. Greenberg was named as a defendant in the original
complaint. The Court thus considers whether its December 16, 2010
memorandum opinion prohibits the addition of new avoidable transfer
claims against Greenberg.
In the December 16, 2010 memorandum
opinion, the Court held that the proposed Second Amended Complaint did
not relate back to the original complaint under Fed.R.Civ.P. 15(c)(1)(C)
for the purposes of adding new parties. Under Rule 15(c)(1)(C), an
amended pleading changing a party or the naming of a party relates back
to the date of the original pleading if the claim arises out of the
conduct, transaction, or occurrence set out in the original pleading and
if the party to be brought in by the amendment "(i) received such
notice of the action that it will not be prejudiced in defending on the
merits; and (ii) knew or should have known that the action would have
been brought against it, but for a mistake concerning the proper party's
identity."
The Court held that the addition of new defendants
did not relate back under Rule 15(c)(1)(C) because the Trustees'
failure to include those defendants in the original complaint was not a
mistake of identity. ECF No. 213, at 15. The Court "assume[d] without
deciding that the claims against the new defendants satisf[ied] the
requirement of Rule 15(c)(1)(B) that 'the amendment asserts a claim or
defense that arose out of the conduct, transaction, or occurrence set
out—or attempted to be set out—in the original pleading.' " ECF No. 213,
at 15 (quoting Fed.R.Civ.P. 15(c)(1)(B). The Greenberg Defendants argue
that the Court's ruling prohibits the Trustees' assertion of claims for
the very same transfers against Greenberg.
*6 Contrary to the
Greenberg Defendants' argument that the Court's December 16, 2010
memorandum opinion precludes amendment to include the additional
transfers, the opinion disallows only the addition of the new
defendants. The Court did not decide whether the transfers related back
under Rule 15(c)(1)(B).
Additionally, the Greenberg Defendants
argue that the Second Amended Complaint violates the Court's order
because it adds actual fraud claims. The Second Amended Complaint does
not purport to add actual fraud claims, and the Court does not construe
the Trustees' allegations regarding fraudulent transfers as de facto
fraud claims.
The Court denies the Greenberg Defendants'
motion to strike, but considers below the new question of whether the
new transfer claims against Greenberg relate back to the time of the
original complaint.
The Court next deals with the Pirtle
Defendants' motion to strike. The Pirtle Defendants argue that the
Second Amended Complaint must be struck or dismissed as to Pirtle
Investments, LP. The Pirtle Defendants argue that Pirtle Investments, LP
was not properly included as a defendant in the original complaint and
that claims against Pirtle Investments, LP therefore do not relate back
to the original complaint. Pirtle Investments, LP was listed as a
defendant in the original complaint. ECF No. 1, at 2. However, due to a
clerical error, Pirtle Investments, LP was not listed in the parties and
service section of the complaint and was not issued a summons. The
Pirtle Defendants assert that Pirtle Investments, LP was not served with
the original complaint. ECF No. 253, at 7. The Trustees' failure to
timely serve Pirtle Investments, LP may well be grounds for dismissal of
Pirtle Investments, LP as a party. It is not, however, grounds for
striking the Trustees' Second Amended Complaint. Pirtle Investments, LP
was named as a defendant in the original complaint. The clerical
failure, service error, and lack of a summons are distinct from the
issues dealt with in the Court's December 16, 2010 order and memorandum
opinion. The Pirtle Defendants are free to seek dismissal on the basis
of these procedural problems. However, the Court denies the motion to
strike, because these procedural problems have not yet been litigated
and decided by the Court.
2. Relation Back of New Transfer Claims
Because
the Trustees now seek only to add the transfers against existing
defendants, the Court now considers whether the transfers arose out of
the same conduct, transaction, or occurrence set out in the original
complaint. The Court concludes that the newly alleged transfers arose
out of the same conduct, transaction, or occurrence set out in the
original complaint. The new claims therefore relate back to the time of
the original complaint.
Under Rule 15(c)(1)(B), a new claim
relates back to the date of the original complaint if it arises out of
the same conduct, transaction or occurrence. New fraudulent transfer
claims may relate back to existing fraudulent transfer claims if the
newly alleged transfers were part of the same "course of conduct."
Adelphia Recovery Trust v. Bank of America, N.A., 624 F.Supp.2d 292, 334
(S.D.N.Y.2009). In Adelphia, the court held that additional fraudulent
transfers related by where they were all related to the same
"Co–Borrowing Facilities." Id.
*7 The Court must consider two questions:
(1)
Does the Second Amended Complaint allege that the new transfers
occurred as part of the same course of conduct as the transfers alleged
in the original complaint?
(2) Did the original complaint give
sufficient notice to the defendants that the Trustees may sue for
additional transfers that were part of the same course of conduct?
See
Adelphia, 624 F.Supp.2d at 334 (holding that "the addition of new
fraudulent transfers to a complaint 'relates back' if the fraudulent
transfers arise from the same course of conduct"); Buchwald Capital
Advisors LLC v. JP Morgan Chase Bank, N.A. ( In re Fabrikant & Sons,
Inc.), 447 B.R. 170, 181 (Bankr.S.D.N.Y.2011) ("The principal inquiry
is whether adequate notice of the matters raised in the amended pleading
has been given to the opposing party by the general fact situation
alleged in the original pleading.") (internal quotation marks omitted);
see In re Slaughter Co. & Assocs., 242 B.R. 97, 102
(Bankr.N.D.Ga.1999) ("If the original complaint indicates an intention
to pursue all transfers, the addition of transfer will relate back, but
where the additional transactions are truly separate and do not arise
from a common core of operative facts, the amendment should not be
allowed.").
The Court concludes that the new fraudulent
transfers were part of the same course of conduct as the transfers
alleged in the original complaint. From the time of the original
complaint, the Trustees have alleged an overarching Ponzi scheme. The
Trustees have consistently alleged that the
Debtors ultimately conducted
very little legitimate business and primarily existed to divert money
to preferred investors and insiders. The fraudulent transfers alleged in
the original complaint, along with the new transfers alleged in the
Second Amended Complaint, are alleged to have been part of this overall
Ponzi scheme. Both the original and the newly alleged fraudulent
transfers therefore arose as part of the same course of alleged conduct.
The
original complaint also gave the Movants notice that the Trustees might
sue for transfers that were part of the same course of conduct. The
allegations of the Ponzi scheme gave reasonable notice that the Trustees
would seek to recover any amounts that may have been transferred as
part of that scheme, including partnership distributions, consulting
fees, sales proceeds, lease payments, and similar transfers. The
defendants to the Second Amended Complaint were included in the original
complaint, and because the original complaint alleged that Juliet
conducted little legitimate business and mostly existed to divert funds,
the defendants were on notice that the Trustees would likely view any
transfers from the Debtors as potentially fraudulent.
The new
fraudulent transfer claims relate back under Adelphia. However, courts
have typically held that preferential transfers cannot be part of a
"course of conduct," reasoning that each preferential transfer is a
separate transaction. See Adelphia, 624 F.Supp.2d at 334 ("[P]reference
actions stand in contrast to actions to avoid fraudulent transfers,
which often involve a common scheme to defraud which provides a nexus
for relation back.") (quoting In re Austin Driveway Servs., Inc., 179
B.R. 390, 398 (Bankr.D.Conn.1995)); Fabrikant & Sons, 447 B.R. at
182 ("In avoidance litigation [regarding preferential transfers], each
transfer is treated as a separate transaction for purposes of applying
the 'relation back' doctrine"); In re Metzeler, 66 B.R. 977, 984
(Bankr.S.D.N.Y.1986) (noting that "courts have consistently treated
preferential transactions as separate and distinct under Rule 15(c)" and
reasoning, contrary to later case law, that fraudulent transfers should
be treated the same way). Fraudulent transfers, on the other hand, may
arise out of a single fraudulent scheme and are connected by the
fraudulent intent that underlies all the transfers. Adelphia, 624
F.Supp.2d at 334.
*8 It is true that preferential transfers,
in the absence of unifying fraudulent intent, probably are not part of a
course of conduct. However, when preferential transfers occur in the
context of a fraudulent scheme, there is no reason why they cannot be
regarded as part of that course of conduct. This Court concludes that
preferential transfers may be part of a course of conduct when they are
alleged to have occurred alongside fraudulent transfers as part of an
overarching scheme. The Court therefore rules that the newly alleged
fraudulent and preferential transfers relate back to the original
complaint. Because the newly alleged transfers relate back to the
original complaint, they are not barred by limitations.
3. Transfers to or for the Benefit of Defendants
However,
even if a transfer relates back for Rule 15 purposes, the Trustees have
not stated a claim against any of the defendants if they do not
adequately plead that the transfer was made to or for the benefit of one
of the defendants. The Greenberg Defendants argue that the Second
Amended Complaint and the Transfer Chart do not adequately allege that
any of the new transfers were made to or for the benefit of David
Greenberg.
The general allegation that all transfers were to
or for the benefit of defendants, along with the organization of the
Transfer Chart to include transfers received by certain entities under
David Greenberg's name, sufficiently pleads that those transfers were
for the benefit of David Greenberg. The Court therefore does not dismiss
claims for failure to allege that transfers were made to or for the
benefit of David Greenberg.
The Pirtle Defendants similarly
argue that there are no allegations of transfers to or for the benefit
of Tom Pirtle. ECF No. 253, at 7–8. The Transfer Chart lists the
"Defendant Name" as "Tom Pirtle and/or Pirtle Investments LP," and shows
that Tom Pirtle and/or Pirtle Investments LP received three transfers.
ECF No. 229–1, at 22. The Pirtle Defendants argue, "The problem is that
all three alleged transactions are only allegedly made to Pirtle
Investments, LP. There are no alleged transactions on this exhibit
involving Tom Pirtle, individually." ECF No. 253, at 7. While two of the
transfers are alleged to have been paid to Pirtle Investments LP, one
is listed only as "Advance distribution—Midtown Village." ECF No. 229–1,
at 22. The identification that the transfers were received by "Tom
Pirtle and/or Pirtle Investments LP" is sufficient to allege that the
transfer was received by or for the benefit of Tom Pirtle. The Court
therefore does not dismiss claims for failure to allege that transfers
were made to or for the benefit of Tom Pirtle.
4. Preferential Transfers
The
Court dismisses the Trustees' preferential transfer claims as to each
of the Movants. In order to state a claim for a preferential transfer
under sec. 547(b), the Trustees must plead that the transfer of an
interest in the Debtors' property was:
*9 (1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such a transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) within 90 days before the date of the filing of the petition; or
(B)
made within one year before the date of the filing of the petition, if
such creditor at the time of such transfer was an insider; and
(5) that such payment enables such creditor to receive more than such creditor would if—
(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11
U.S.C. sec. 547(b). The Debtors' bankruptcy cases were all filed
(through involuntary petitions) on September 20, 2007. The 90–day
preference period therefore runs backward to June 22, 2007. The one-year
insider preference period runs backward to September 20, 2006. Most of
the transfers allegedly received by the Movants occurred outside both
the 90–day and one-year preference periods.
Against the
Sanders Defendants, the Pirtle Defendants, Richard Robert, Tullis
Thomas, Alex Oria, James Thomas, Julian Fertitta, and Melisa Thomas, the
Trustees allege no transfers within one year. The alleged transfers
therefore could not avoided as preferences even if the recipients were
insiders. The Court therefore dismisses all preferential transfer claims
against these Movants.
Against Robert Shiring, Ravi Reddy,
the Marquis Defendants, Vincent Galeoto, Mir Azizi, and Warren King, the
Trustees allege transfer within the one-year preference period, but not
within 90 days of the Debtors' bankruptcy petitions. The Transfer Chart
says "UNKNOWN" in the "Insider" column next to the names of Robert
Shiring, Ravi Reddy, Vincent Galeoto, and Mir Azizi. This is
insufficient, without more, to plead that these defendants were
insiders, and the Trustee therefore does not state a claim against these
defendants for preferential transfers.
The Transfer Chart has
a "YES" in the "Insider" column for Melisa Thomas, Tullis Thomas, the
various Marquis Defendants, and Warren King. The Court therefore
examines whether the Second Amended Complaint pleads sufficient facts to
support a finding that any of these defendants were insiders.
Under the Bankruptcy Code, the term "insider" includes:
(A) if the debtor is an individual—
(i) relative of the debtor or of a general partner of the debtor;
(ii) partnership in which the debtor is a general partner;
(iii) general partner of the debtor; or
(iv) corporation of which the debtor is a director, officer, or person in control;
(B) if the debtor is a corporation—
(i) director of the debtor;
(ii) officer of the debtor;
(iii) person in control of the debtor;
(iv) partnership in which the debtor is a general partner;
(v) general partner of the debtor; or
*10 (iv) relative of a general partner, director, officer, or person in control of the debtor;
(C) if the debtor is a partnership—
(i) general partner in the debtor
(ii) relative of a general partner in, general partner of, or person in control of the debtor;
(iii) partnership in which the debtor is a general partner;
(iv) general partner of the debtor; or
(v) person in control of the debtor;
(D) if the debtor is a municipality, elected official of the debtor or relative of an elected official of the debtor;
(E) affiliate, or insider of an affiliate as if such affiliate were the debtor; and
(F) managing agent of the debtor;
11 U.S.C. sec. 101(A)(31). An "affiliate" is:
(A)
entity that directly or indirectly owns, controls, or holds with power
to vote, 20 percent or more of the outstanding voting securities of the
debtor, other than an entity that holds such securities—
(i) in a fiduciary or agency capacity without sole discretionary power to vote such securities; or
(ii) solely to secure a debt, if such entity has not in fact exercised such power to vote;
(B)
corporation 20 percent or more of whose outstanding voting securities
are directly or indirectly owned, controlled, or held with power to
vote, by the debtor, or by an entity that directly or indirectly owns,
controls, or holds with power to vote, 20 percent or more of the
outstanding voting securities of the debtor, other than an entity that
holds such securities—
(i) in a fiduciary or agency capacity without sole discretionary power to vote such securities; or
(ii) solely to secure a debt, if such entity has not in fact exercised such power to vote;
(C)
person whose business is operated under a lease or operating agreement
by a debtor, or personal substantially all of whose property is operated
under an operating agreement with the debtor; or
(D) entity that operates the business or substantially all of the property of the debtor under a lease or operating agreement
11 U.S.C. sec. 101(A)(2). These categories provide general guidance, but are not exclusive:
Courts
regularly treat [section 101(A)'s definition of an "insider"] as
illustrative of types of insider relationships and not as an exhaustive
list.... The insider analysis is a case-by-case decision based on the
totality of the circumstances, an bankruptcy courts have used a variety
of factors in their determinations. One approach focuses on the
similarity of the alleged insider's position to the enumerated statutory
categories, while another approach focuses on the alleged insider's
control of the debtor. If the alleged insider holds a position
substantially similar to the position specific in the definition, a
court will often find that individual to be an insider. But, based on
the legislative history of the statute, our case law has also held that
the term insider can also encompass anyone with a "sufficiently close
relationship with the debtor that his conduct is made subject to closer
scrutiny than those dealing at arm's length with the debtor."
*11 In re Longview Aluminum, L.L.C., 657 F.3d 507, 509 (7th Cir.2011).
The
Second Amended Complaint alleges that Warren King was a Class B partner
of Juliet. ECF No. 229, at 11–12. Although this is insufficient,
without more, to plead insider status, the Second Amended Complaint also
alleges that King was the director of Pinnacle Title, an entity that is
alleged to have been actively involved in the Debtors' fraudulent
schemes. According to the Second Amended Complaint, King authorized
disbursements of money, handled all closings for the Debtors,
transferred funds from the Debtors' escrow accounts, and drafted and
amended HUD–1 settlement statements. King's relationship with the
Debtors, based on the Trustees' allegations, may have been "sufficiently
close ... that his conduct [should be] made subject to closer scrutiny
than those dealing at arm's length with the debtor." Longview Aluminum,
657 F.3d at 509.
Furthermore, the Trustees' allegations that
King was an investor in the Debtors' Ponzi scheme and that he owned a
partnership interest in Juliet, combined with the general allegation at
paragraph 147 that "[t]ransfers were made on account of an antecedent
debt" are sufficient to allow an inference that the transfers were on an
account of an antecedent debt.FN2 The Trustees have pleaded sufficient
facts to state a preferential transfer claim against King as to the
transfers that were made within one year of the petition date. The
allegation of the amount of the transfer is enough to support an
inference that King received more than he would have received in a
chapter 7 case, if the transfer had not been made, and if he had
received payment to the extent provided by the provisions of the
Bankruptcy Code. The Trustee thus states a sec. 547 claim against King.
FN2.
Such a finding may be in the alternative to a finding that the
transfers were fraudulent. The potential incompatibility of the two
theories does not matter at the Rule 12(b)(6) stage; the Court considers
only whether both are plausible.
The Second Amended Complaint
also lists Melisa Thomas as a Class B partner of Juliet. ECF No. 229,
at 11. The Trustees do not plead any other facts that would support an
inference that she was an insider, and therefore they do not state a
sec. 547 claim against Melisa Thomas. Tullis Thomas and the various
Marquis Defendants are listed as insiders on the Transfer Chart, but the
Second Amended Complaint does not contain facts that support this
assertion. The Trustees therefore do not state a sec. 547 claim against
Tullis Thomas or the Marquis Defendants.
Finally, the Court
examines the allegations against the Greenberg Defendants. The Trustees
do not plead that Greenberg & Co. received any transfers within one
year of the petitions. They do, however, allege that David Greenberg
received several transfers within one year of the petitions, that he
received two transfers within 90 days of the petitions, and that he
received one post-petition transfer. ECF No. 229–1, at 10. The alleged
post-petition transfer is not avoidable under sec. 547. However, the
alleged transfers within one year are avoidable under sec. 547 if
Greenberg was an insider and if the other statutory requirements are
met.
*12 The Trustees state a claim as to the two transfers
made within 90 days of the petition date. As discussed above, the
Trustees plead sufficient facts to give rise to an inference that the
transfers were on account of an antecedent debt and that the other
elements of a sec. 547 claim are met. The Trustees thus plead a sec. 547
preferential transfer claim against Greenberg as to the transfers
within 90 days.
As to the transfers between one year and 90
days, the Trustees do not state a claim. The Transfer Chart has a "YES"
in the "Insider" column next to Greenberg's name. However, although
Greenberg is alleged to have had a Class B partnership interest in
Juliet, ECF No. 229, at 11, the Trustees do not plead any other facts
giving rise to an inference that he was an insider.
The
preferential transfer claims are dismissed as to all defendants except
Warren King and David Greenberg. In the Conclusion below, the Court
specifically identifies the alleged transfers as to which the Trustees
have stated a claim.
5. Actual Fraudulent Transfers
Most
of the Movants also argue that the Trustees fail to plead actual
fraudulent transfer with particularity. Claims for actual fraudulent
transfer under either sec. 548 or TUFTA must be pleaded with
particularity under Rule 9(b). See E. Poultry Distrib., Inc. v. Yarto
Puez, 2001 WL 34664163, at *2 (N.D.Tex.2001) ("If the fraudulent
transfer statute Plaintiffs want the Court to apply requires intent to
defraud, the enhanced pleading requirements of Rule 9(b) apply; if the
statute allows for fraudulent transfer without intent to defraud,
however, only the general pleading rules of Rule 8(a) must be
satisfied.").
"To satisfy Rule 9(b)'s particularity
requirement, a party must ordinarily allege: '(1) a the property subject
to the transfer, (2) the timing and, if applicable, frequency of the
transfer and (3) the consideration paid with respect thereto.' " Picard
v. Madoff (In re Bernard L. Madoff Inv. Sec. LLC, 458 B.R. 87, 2011 WL
4434632, at *6 (Bankr.S.D.N.Y. Sept. 22, 2011) (quoting Pereira v.
Grecogas Ltd. (In re Saba Enters., Inc.), 421 B.R. 626, 640 (Bankr
.S.D.N.Y.2009)).
The Trustees sufficiently plead actual
fraudulent transfer. First, they adequately plead Juliet's fraudulent
intent. It is the transferor's intent that is relevant for an actual
fraudulent transfer claim under both sec. 548 and TUFTA. In re Almazan,
2011 WL 841349, at *2 (Bankr.S.D.Tex. Mar. 7, 2011). Throughout the
Second Amended Complaint, the Trustees extensively allege the existence
of a Ponzi scheme, especially at paragraphs 134–136. ECF No. 229, at
26–27. As discussed above, the Trustees allege that Juliet had little
legitimate business and that
investors received a rate of return that
was not financially feasible. ECF No. 229, at 27. The Trustees also
allege that funds received from investors were commingled among the
Juliet entities and used, among other things, to pay earlier investors.
ECF No. 229, at 27. A transferor's actual intent to hinder, delay, or
defraud creditors may be inferred from the mere existence of a Ponzi
scheme. E.g., S.E.C. v. Resource Development Int'l, LLC, 487 F.3d 295,
301 (5th Cir.2007) (noting that, with respect to a TUFTA claim, "[i]n
[the Fifth Circuit], proving that IERC operated as a Ponzi scheme
establishes the fraudulent intent behind the transfers it made"); Hayes
v. Palm Seedlings Partners ( In re Agricultural Research and Tech.
Group, Inc.), 916 F.2d 528, 535 (9th Cir.1990) (holding that a debtor's
fraudulent intent, for purposes of sec. 548(a), can be inferred from the
existence of a Ponzi scheme).
*13 The Trustees also
sufficiently allege that the Ponzi scheme was in existence at the time
of each of the alleged transfers to the Movants. The Second Amended
Complaint alleges Ponzi scheme activities, including agreements to
provide extravagant guaranteed returns to investors, as early as July
2005. ECF No. 229, at 16–17. With a few exceptions, the alleged
transfers to the Movants occurred after this time. One alleged transfer
to Warren King, labeled "Partnership Distribution," occurred on December
20, 2004. ECF No. 229–1, at 23. An alleged transfer to Alex Oria is
labeled "Loan to Alex Oria 12/31/2004 per TMOC Trial balance for client
spreadsheet." ECF No. 229–1, at 2. Finally, Richard Robert allegedly
received transfers on November 29, 2004; December 16, 2004; May 25,
2005; June 10, 2005; and June 27, 2005. All of the transfers are labeled
"Partnership Distribution—Ballpark III." ECF No. 229–1, at 19. The
Trustees allege that most, if not all, of Juliet's profits from the sale
of homes were fictitious and that profit payments to investors thus
represented fictitious profits. This allegation, combined with the
agreements to provide allegedly excessive guaranteed returns only months
later, would allow an inference that the alleged Ponzi scheme was in
existence as early as November 29, 2004. The Trustees adequately plead
actual intent.
Second, the Trustees amply lay out the
particulars of each of the alleged transfers. The Transfer Chart
identifies the transferor, recipient, amount, and date of the transfers.
The Transfer Chart contains commentary as to the circumstances of many
of the specific transfers, including, in many cases, the account from
which funds were transferred and/or the check number. The exact dates of
almost all the transfers are listed. ECF No. 229–1. The Second Amended
Complaint provides sufficient context as to the overall scheme. The
Court therefore, for the most part, does not dismiss the actual
fraudulent transfer claims against the Movants.
There is one
exception. As to Shreyaskumar Patel, the Transfer Chart does not
identify any specific transfer. The Transfer Chart instead states that
the "Date of Transfer" is "Various" and the "Amount" is "$285,000.00."
The "Capacity of Transfer(s)" is "Juliet Homes, LP buyout
documentation." This information is not sufficiently specific. The
Transfer Chart does not even identify the year in which the alleged
transfer or transfers occurred. The Court will allow the Trustee to
replead to state a claim for actual fraudulent transfer against
Shreyaskumar Patel. See Hart v. Bayer Corp., 199 F.3d 239, 248 n. 6 (5th
Cir.2000) ("Although a court may dismiss the claim, it should not do so
without granting leave to amend, unless the defect is simply incurable
or the plaintiff has failed to plead with particularity after being
afforded repeated opportunities to do so.").
6. Constructive Fraudulent Transfers
The
Movants also argue that the Trustees' constructive fraudulent transfer
claims under sec. 548 and TUFTA fail because they do not adequately
plead insolvency or lack of reasonably equivalent value. This argument
fails. First, the Trustees adequately plead insolvency because they
adequately plead that Juliet operated as a Ponzi scheme. See Madoff,
2011 WL 4434632, at * 17 ("Ponzi schemes are presumptively insolvent,
and the Trustee need not allege specific facts supporting the insolvency
of BLMIS at the times of the preferential transfers.").
*14
Second, "fictitious profits from a Ponzi scheme are deemed to have been
received for less than reasonably equivalent value and can be avoided."
Id. at * 11. The Trustees adequately plead that the transfers shown on
the Transfer Chart were made as part of Juliet's overall Ponzi scheme.
It was not necessary for the Trustees to plead that each individual
transfer was made without reasonably equivalent value. The Court
therefore does not dismiss the constructive fraudulent transfer claims.
7. Conversion/Misappropriation/Unjust Enrichment
The
Movants also argue that the Trustees do not adequately plead the
elements of conversion, misappropriation, or unjust enrichment and that
the statute of limitations has run as to these claims.
The
Trustees may commence actions to enforce claims owned by the estates up
to two years after the date of the order for relief, which was October
31, 2007:
If applicable nonbankruptcy law ... fixes a period
within which the debtor may commence an action, and such period has not
expired before the date of the filing of the petition, the trustee may
commence such action only before the later of—
(1) the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
(2) two years after the order for relief.
11
U.S.C. sec. 108(a). The Debtors' petitions were filed on September 20,
2007, and the order for relief was entered on October 31, 2007. With
respect to any claims relating to pre-petition conduct, the later of the
two periods under sec. 108(a) would necessarily be two years after the
order for relief. The Trustee brought the unjust enrichment claim on
October 29, 2009, within the two-year period under sec. 108(a)(2). The
conversion and misappropriation claims relate back to the date of the
original complaint. ECF No. 213, at 32 ("The conversion,
misappropriation, and unjust enrichment theories are all based on the
allegation that Juliet's investors received assets that should have
remained in the bankruptcy estate. The claim therefore relates back
under Rule 15(c)(1)(B)."). The question, therefore, is whether the
limitations period on the claims had not yet expired on September 20,
2007, the date the petitions were filed.
Under Tex. Civ. Prac.
& Rem.Code sec. 16.003(a), "a person must bring suit for ...
conversion ... not later than two years after the day the cause of
action accrues." The statute of limitations for conversion also applies
to unjust enrichment and misappropriation claims. Verizon Emp. Benefits
Comm. v. Frawley, 655 F.Supp. 644, 647–48 (N.D.Tex.2008); Elledge v.
Friberg–Cooper Water Supply Corp., 240 S.W.3d 869, 869–71 (Tex.2007);
see Computer Assocs. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 455
(Tex.1996) (noting that sec. 16.003(a) governs claims for "injury to the
property of another or conversion of the property of another" and
applying the two-year limitations period to a claim for misappropriation
of trade secrets).
*15 Two doctrines may apply to extend the
statute of limitations: the discovery rule and the fraudulent
concealment doctrine. BP America Prod. Co. v. Marshall, 342 S.W.3d 59,
65–67 (Tex.2011). The discovery rule defers the accrual of a cause of
action and thus delays the start of the limitations period. Id. at 65.
"The discovery rule is applied categorically to instances in which 'the
nature of the injury incurred is inherently undiscoverable and the
evidence of injury is objectively verifiable.' " Id. (quoting Computer
Assoc. Int'l, Inc. v. Altai, Inc., 918 S.W.2d 453, 456 (Tex.1996)).
The
fraudulent concealment doctrine, on the other hand, suspends or tolls
the running of the limitations period when it has already begun. Id. "A
party asserting fraudulent concealment must establish an underlying
wrong, and that 'the defendant actually knew the plaintiff was in fact
wronged, and concealed that fact to deceive the plaintiff.' " Id. at 67
(quoting Earle v. Ratliff, 998 S.W.2d 882, 888 (Tex.1999)). Fraudulent
concealment tolls the running of limitations only until the fraud is
discovered or could have been discovered with reasonable diligence. Id.
Claims
may be dismissed on the basis of the statute of limitations only if the
limitations defense is apparent from the face of the complaint. See
EPCO Carbon Dioxide Prods., Inc. v. JP Morgan Chase Bank, NA, 467 F.3d
466, 470 (5th Cir.2006) (allowing dismissal at the Rule 12(b)(6) stage
on the basis of an affirmative defense when the defense is apparent from
the face of the complaint). The Trustees plead facts that indicate that
the fraudulent concealment doctrine may apply to toll the statute of
limitations. They allege the existence of an overall Ponzi scheme, the
commingling of funds of the various Juliet entities, the use of a shell
company (TMOC) to divert funds among the entities and to various
investors, and the execution of phony agreements and invoices. The
Trustee has therefore alleged concealment of facts about the scheme and
has provided additional allegations that allow an inference of
concealment. Because the fraudulent concealment doctrine may apply, it
is not apparent from the face of the complaint that any of the
conversion, misappropriation, and unjust enrichment claims are barred by
limitations.
Courts have applied the discovery rule to
bankruptcy trustees, tolling statutes of limitations until the filing of
a bankruptcy petition:
Although the Trustee steps into the
shoes of the [bankrupt] company, it is not in a position, prior to the
filing of the bankruptcy action, to be aware of potential claims arising
from injuries to the bankrupt company. A reasonable person in the
Trustee's position could not be aware of, or reasonably be expected to
discover, injuries to [the debtor] prior to the filing of the bankruptcy
petition. Therefore, the discovery rule applies to toll the statute of
limitations until the filing of the bankruptcy petition[.]
*16
Seitz v. Detweiler, Hershey & Assocs., P.C. (In re CitX Corp.,
Inc.), 2004 WL 2850046 (E.D.Pa. Dec. 8, 2004) (applying the
Pennsylvania-law discovery rule to a bankruptcy trustee and concluding
that because the trustee had filed malpractice and negligent
misrepresentation claims within two years of the bankruptcy petition,
claims were not barred by the statute of limitations).
The
Seitz court's reasoning extends to applying the Texas-law fraudulent
concealment doctrine to bankruptcy trustees. Tolling the statute of
limitations until the petition date or until the bankruptcy trustee
could reasonably have discovered the cause of action would also be
compatible with the Fifth Circuit's reasoning in Reed v. City of
Arlington, 650 F.3d 571, 576 (5th Cir.2011). In Reed, the Fifth Circuit
held that even when a debtor would be barred by judicial estoppel from
bringing a claim, the bankruptcy trustee may—depending on the facts of
the case—be able to bring the claim on behalf of the bankruptcy estate.
Id. This is because "judicial estoppel is an equitable doctrine, [and]
courts may apply it flexibly to achieve substantial justice." Id. The
fraudulent concealment doctrine, like judicial estoppel, is an equitable
doctrine, and its application is fact-specific. BP America Prod., 342
S.W.3d at 67.
The nature of the Trustees' allegations—that the
Juliet Debtors operated a Ponzi scheme and fraudulently diverted
money—indicates that the fraudulent concealment doctrine may apply. It
is not apparent from other facts on the face of the Second Amended
Complaint that the fraudulent concealment doctrine would not permit the
tolling of the statute of limitations on the conversion,
misappropriation, and unjust enrichment claims. Although the Court has
already found that the Trustees did not exercise sufficient diligence
after the filing of the bankruptcy petitions to warrant equitable
tolling in this case, this finding applied only to prevent tolling after
the Trustees' appointment, after which time they could reasonably have
discovered claims. The Court's previous finding does not preclude the
application of the fraudulent concealment doctrine to toll the
limitations period until after the petition date. If the limitations
period may be tolled until after the petition date, then the claims were
live when the bankruptcy cases were filed, and the Trustees had until
October 31, 2009 to assert the claims. As the Court has already held,
the conversion, misappropriation, and unjust enrichment claims were
asserted in or relate back to the October 29, 2009 original complaint.
Because
the fraudulent concealment doctrine may apply and the claims should not
be dismissed on the basis of limitations, the Court need not consider
whether the discovery rule could also apply to these claims.
Of
course, the concealment issue may be the appropriate subject of a
motion for summary judgment or at trial, once an evidentiary record is
established.
*17 Furthermore, as to any alleged transfers that
occurred less than two years before the petition date, the conversion,
misappropriation, and unjust enrichment claims were clearly live on the
petition date and have been timely asserted. The Court therefore does
not dismiss the conversion, misappropriation, and unjust enrichment
claims on the basis of limitations.
The Court also finds that
these claims are adequately pleaded. To prove conversion, a plaintiff
must establish (i) that it owned or had legal possession of the property
or entitlement to possession, and (ii) the defendant unlawfully and
without authorization assumed and exercised dominion and control over
the property to the exclusion or, or inconsistent with, the plaintiff's
rights. Hill v. New Concept Energy, Inc. (In re Yazoo Pipeline), –––B.R.
––––, 2011 WL 4902960, at *11–12 (Bankr.S.D.Tex.2011) (quoting Hunt v.
Baldwin, 68 S.W.3d 117, 131 (Tex.App.Houston [14th Dist.] 2001, no
pet.). If conversion is to be shown by the defendant's refusal to comply
with the demand for possession—for example, in situations of conversion
by a bailee—the plaintiff must also establish (iii) that the plaintiff
demanded return of the property, and (iv) the defendant refused to
return the property. Id. (citing Presley v. Cooper, 284 S.W .2d 138, 141
(Tex.1955)). Here, demand and refusal would not be necessary to
establish unlawful possession; the Trustees allege that the defendants
acquired possession of the Debtors' property unlawfully, through
diversions of funds.
The Trustees plead both that (i) that the
Debtors were lawfully entitled to possession of the transferred funds
and (ii) that the defendants unlawfully exercised dominion and control
over the property. The Trustees specifically allege, for example, that
the transferred funds were the property of the Debtors, acquired from
other investors. ECF No. 229, at 18–19. The funds were allegedly
commingled, rendering them untraceable, and diverted to various
defendants. ECF No. 229, at 19. The Trustees also allege that
"[m]illions of dollars were paid out of Juliet and TMOC to individuals,
affiliate entities, and 'preferred investors,' while many subcontractors
and vendors remained unpaid for the work performed on the residences
constructed for Juliet." ECF No. 229, at 23. These allegations,
particularly in the context of the alleged overall Ponzi scheme,
sufficiently plead both the Debtor's lawful entitlement to the funds and
the defendants' unlawful dominion over the funds.
Moreover,
the Court notes that the Trustees need not establish wrongful intent to
prove conversion. "Wrongful intent is not an element of conversion—even
innocent buyers of property may be liable." NXCESS Motor Cars, Inc. v.
JPMorgan Chase Bank, N.A., 317 S.W.3d 462, 471 (Tex.App.-Houston [1st
Dist] 2010, pet. denied). "The requisite intent is only one to assert a
right in the property, and a wrongful intent is not required."
White–Sellie's Jewelry Co. v. Goodyear Tire & Rubber Co., 477 S.W.2d
658, 662 (Tex.Civ.App.-Houston [14th] Dist.1972, no writ). The intent
to assert a right in the transferred property may be inferred from the
facts alleged in the Second Amended Complaint. The Trustees therefore
have pleaded conversion, and the Court does not dismiss the conversion
claims.
*18 The Trustees have also pleaded an alternative
theory of "misappropriation or unjust enrichment." ECF No. 229, at 37.
The "misappropriation or unjust enrichment" theory is discussed in
paragraph 185 of the Second Amended Complaint, and the Court construes
this theory as an unjust enrichment cause of action. Unjust enrichment
is based on the equitable principle that one who receives benefits
unjustly must make restitution for those benefits. Cristobal v. Allen,
2010 WL 2873502, at *6 (Tex.App.-Houston [1st Dist.] July 22, 2010, no
pet.). "Unjust enrichment is defined as the unjust retention of a
benefit to the loss of another, or the retention of money or property of
another against the fundamental principles of justice or equity and
good conscience." Conoco, Inc. v. Fortune Prod. Co., 35 S.W.3d 23, 31
(Tex.App.-Houston [1st Dist.] 1998), rev'd on other grounds, 52 S.W.3d
671 (Tex.2000). As discussed in connection with the conversion claims,
the Trustees have pleaded that the defendants received property to the
loss of the Debtors. The consequence of the alleged loss is that the
Trustees should be able to seek recovery to promote an overall equitable
division of the estate. See Reed, 650 F.3d at 575 ("All of these
provisions reflect Congress's clear preference for the preservation of
the bankruptcy estate and for its equitable distribution to creditors
through the bankruptcy process."). The Court does not dismiss the unjust
enrichment claims.
8. Substantive Consolidation/Reverse Veil–Piercing
Several
Movants also argue that the Trustees may not assert claims for
transfers that were made from non-debtor Juliet entities. E.g., ECF No.
253, at 8; ECF No. 262, at 5–6; ECF No. 276, at 10–13. Fertitta
specifically argues that, in order to state a claim for preferential or
fraudulent transfer from a particular entity, the Trustees must show
that that entity should be substantively consolidated under bankruptcy
law with one or more of the Debtors. ECF No. 278, at 6–7.
The
Trustees do not need to plead substantive consolidation. Instead, if the
Trustees have stated a state-law claim for reverse veil-piercing with
respect to the Juliet entities, the Trustees have standing to assert a
fraudulent or preferential transfer claim because of a transfer made
from the Juliet entities. See ASARCO LLC v. Americas Min. Corp., 382
B.R. 49, 66–67 (S.D.Tex.2007) (recognizing that substantive
consolidation and veil-piercing are subtly different and allowing the
debtor to pursue its wholly owned subsidiary's fraudulent transfer claim
"where the wholly-owned subsidiary acts as a mere instrumentality or
alter ego of the parent"). Although ASARCO applied Delaware law of
veil-piercing, the court's holding—that a debtor can pursue its wholly
owned subsidiary's fraudulent transfer claim where state-law
veil-piercing requirements are met—applies.
Here, the Trustees
have pleaded the elements of a reverse veil-piercing claim under Texas
law. Traditional veil-piercing uses the alter ego doctrine to break
through corporate formalities and include the assets of a shareholder as
assets of a corporation. See Tex. Bus. Org.Code sec. 21.223(b)
(requiring actual fraud to hold a shareholder liable for the contractual
obligations of a corporation); The Cadle Co. v. Brunswick Homes, LLC (
In re Moore), 379 B.R. 284, 290 (Bankr.N.D.Tex.2007) (discussing the
traditional use of corporate veil piercing to "mak[e] a shareholder
liable for a corporation's contractual debts"). Reverse veil-piercing,
which is a common-law rather than a statutory doctrine in Texas, instead
counts the assets of a corporation or other entity as the assets of its
shareholder. See Moore (noting that reverse veil-piercing "appl[ies]
the traditional veil piercing doctrine in reverse, so that a
corporation's assets are held accountable for the liabilities of
individuals who treated the corporation as their alter ego") (citing
Zahra Spiritual Trust v. United States, 910 F.2d 240, 243 (5th
Cir.1990)).
*19 Reverse veil-piercing can be used to bring
assets of an affiliated entity into a bankruptcy estate, although the
court in Moore was "troubled" by the expansion of the practice. Id. at
294. The doctrine applies when the corporate entity is the alter ego of
the individual—that is, "when there is such a unity between corporation
and individual that the separateness of the corporation has ceased and
holding only the individual liable would result in injustice." Bollore
S.A. v. Import Warehouse, Inc., 448 F.3d 317, 325 (5th Cir.2006)
(stating the standard for alter-ego liability and noting that the
"standard applies equally to reverse-piercing cases such as this one").
To determine whether the alter ego doctrine applies, a court considers
the following factors:
the total dealings of the corporation
and the individual, including the degree to which corporate formalities
have been followed and corporate and individual property have been kept
separately, the amount of financial interest, ownership and control the
individual maintains over the corporation, and whether the corporation
has been used for personal purposes.
Id. (citing Permiam Petroleum Co. v. Petroleos Mexicanos, 934 F.2d 635, 643 (5th Cir1991)).
Here,
the Trustees seek to count the assets of non-debtor Juliet entities as
assets of the Debtors (the shareholder/interest holder). The Trustees
allege that the non-debtor Juliet entities should be pierced or
recognized as collapsed because they are alter egos of the Debtors
and/or were used as a sham to perpetrate a fraud on the estates. ECF No.
229, at 34. The Trustees allege specific facts showing an identity or
unity between the Debtors and the other Juliet entities, including:
• The entities were organized and operated as a mere tool or business conduit of the Debtors. ECF No. 229, at 34.
•
The entities were run by and for the personal benefit of the Debtors
and were the agents and instrumentalities through which the Debtors
conducted business. ECF No. 229, at 35.
• The entities
commingled funds in the TMOC account, diverted company profits to Brown
and other insiders, were undercapitalized, and failed to keep corporate
and personal assets separate. ECF No. 229, at 35.
• To
perpetrate fraud, Brown had corporate revenues siphoned off, depleting
the remaining shareholder equity and ultimately rendering Juliet
insolvent. ECF No. 229, at 35.
To summarize, the Trustees
allege that the entities were a sham and were not truly separate from
the Debtors, and that the sham entities were specifically used to
facilitate the fraudulent diversion of assets. These allegations thus
adequately state a claim for reverse veil-piercing under Texas law.
The
Greenberg Defendants argue that the Trustees' veil-piercing allegations
are insufficient because all of the Juliet entities are lumped
together. ECF No. 276, at 11–12. However, the Trustees assert that all
of the entities were similarly involved in the alleged Ponzi scheme, and
that all were mere conduits for the Debtors. In the context of the
alleged Ponzi scheme, the Trustees plausibly plead reverse veil-piercing
as to the non-debtor Juliet entities.
*20 The Court therefore
does not dismiss any claims on the basis of the Trustees' failure to
plead substantive consolidation or failure to adequately plead reverse
veil-piercing.
Conclusion
The Court denies the Greenberg Defendants' motion to strike and the Pirtle Defendants' motion to strike.
Except
as to the actual fraudulent transfer claim against Shreyaskumar Patel,
the Court denies the Movants' motions for a more definite statement.
The Court grants, in part, and denies, in part, the Movants' motions to dismiss for failure to state a claim.
The
Court dismisses the preferential transfer claims against all of the
Movants except Warren King and David Greenberg. As to Warren King, the
Trustees have stated a claim for preferential transfer with respect to
the December 13, 2006 transfer of $58,610.63. As to David Greenberg, the
Trustees have stated a claim for preferential transfer with respect to
the June 22, 2007 transfer and the August 10, 2007 transfer.
The
Court does not dismiss the actual fraudulent transfer claims for
failure to plead with particularity under Rule 9(b). However, the
Trustees do not state a claim with particularity against Shreyaskumar
Patel, and the Court will allow the Trustees to replead. The Trustees
state an actual fraudulent transfer claim with particularity against all
other Movants.
The Court does not dismiss the conversion/misappropriation/unjust enrichment claims against any Movants.
