567 B.R. 37
Bankr. W.D.N.Y.2017Background
- Chapter 11 Trustee sued commercial lenders (collectively “banks,” specifically Community Preservation Corp. (CPC) and First Citizens) seeking avoidance of loans and related transfers made to debtor Cornerstone Homes, alleged to have been operated by David Fleet as a Ponzi scheme.
- Trustee alleges banks made multiple loans (2006–2009) that refinanced private-investor notes, sometimes requiring assignment of investor mortgages and sometimes paying proceeds directly to Cornerstone.
- Trustee asserts Cornerstone was insolvent during the loans, financial statements/tax returns were inconsistent, and bank financing enabled Fleet to perpetuate the scheme and convert secured investor claims into unsecured ones.
- Trustee pleaded causes of action for actual fraud (NY DCL § 276) and constructive fraud (NY DCL §§ 273–275 and related Bankruptcy Code avoidance provisions).
- CPC and First Citizens moved to dismiss parts of the complaints: for failure to state a claim (Rules 8/12(b)(6)), failure to plead fraud with particularity (Rule 9(b)), standing barred by in pari delicto/Wagoner, and statute-of-limitations defenses.
- Court denied both banks’ motions to dismiss the fraud and avoidance counts, holding the Trustee met pleading standards, has § 544 statutory standing not barred by in pari delicto/Wagoner, and statute-of-limitations issues present factual questions precluding dismissal.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sufficiency of pleading for actual fraud (NYDCL § 276) | Trustee: identified specific transfers, timing, consideration, and pleaded badges of fraud to give strong inference of intent | Banks: allegations are conclusory; complaint lacks particularized facts to meet Rule 9(b) | Denied dismissal — Trustee pleaded transfers, timing, consideration and circumstantial badges giving a plausible inference of intent; Rule 9(b) satisfied given trustee’s relaxed pleading posture |
| Pleading standard for constructive fraud (NYDCL §§ 273–275) | Trustee: pleaded lack of good faith and facts suggesting insolvency and unfair effect of transfers sufficient under Rule 8(a) | Banks: Trustee failed to plead fair consideration (fair equivalent value and good faith) with specificity | Denied dismissal — court applies Rule 8(a)/Iqbal-Twombly plausibility standard (majority approach) and finds allegations of lack of good faith sufficient at pleading stage |
| Standing / in pari delicto / Wagoner rule | Trustee: brings avoidance claims under 11 U.S.C. § 544(b); trustee has statutory standing independent of debtor’s wrongdoing | Banks: in pari delicto/Wagoner bar trustee from suing because debtor participated in fraud | Denied dismissal — in pari delicto and Wagoner do not strip § 544 statutory avoidance standing; trustee may pursue avoidance actions |
| Statute of limitations for earliest transfers (Counts I–II) | Trustee: fraud discovery may be delayed; alleges scheme not reasonably discoverable by creditors before petition date | Banks: six-year CPLR limitation expired before bankruptcy petition; knowledge of banks should be imputed to creditors | Denied dismissal — factual questions about discovery rule and when creditors could reasonably have discovered fraud make disposition premature |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading must state a plausible claim)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) (pleading requires more than labels and conclusions)
- Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir. 1991) (Wagoner rule bars trustee from suing for wrong in which debtor participated)
- In re Bernard L. Madoff Inv. Secs. LLC, 740 F.3d 81 (2d Cir. 2014) (trustee standing and related bankruptcy avoidance principles)
- Shields v. Citytrust Bancorp, Inc., 25 F.3d 1124 (2d Cir. 1994) (Rule 9(b) – intent may be alleged generally; strong inference required)
- In re Lehman Bros. Holdings Inc., 469 B.R. 415 (Bankr. S.D.N.Y. 2012) (badges of fraud analysis)
- In re Saba Enters., Inc., 421 B.R. 626 (Bankr. S.D.N.Y. 2009) (addressing pleading of fraudulent intent and sufficiency of claims)