579 B.R. 282
M.D. Ala.2017Background
- SpecAlloy (Debtor) processed catalytic converters and received large "advances" from Heesung beginning in 2013 to fund purchases and operations; advances were sparsely documented and allegedly gave Heesung control over SpecAlloy’s operations.
- In late 2015 Heesung seized pooled metals and supplier-provided converter components, refused to pay outstanding invoices, and asserted setoffs; SpecAlloy filed bankruptcy soon after and the case converted to Chapter 7 with William C. Carn III as Trustee.
- Trustee sued Heesung asserting avoidable setoff (11 U.S.C. §§553,550), preference (11 U.S.C. §§547,550), fraudulent transfers (11 U.S.C. §548; Ala. UFTA), recharacterization of advances, and equitable subordination; suppliers (LKQ, Converter Brokers, Enterprise) asserted conversion, breach of contract, quantum meruit, unjust enrichment, and agency/joint-venture claims.
- Heesung moved to dismiss under Fed. R. Civ. P. 12(b)(6) and 12(b)(7), relying heavily on extrinsic bankruptcy documents; the district court refused to convert the motion to summary judgment and declined to consider disputed evidentiary materials at the pleading stage.
- The court found the Trustee’s and Suppliers’ complaints sufficiently alleged plausibly pleaded claims (insolvency, insider/control, badges of fraud, agency, partial performance/misleading acceptance), and denied the motion to dismiss on all asserted counts.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Avoidable setoff under §553/§550 | Trustee: Heesung’s seizures/setoffs within 90 days while debtor insolvent are avoidable and recoverable | Heesung: Pleadings are factually inaccurate; exhibits negate claims | Denied dismissal; allegations sufficient to state plausible §553/§550 claim |
| Preference claims under §547/§550 | Trustee: Transfers/advances (including insider transfers) within preference periods while insolvent; seeks avoidance | Heesung: Trustee fails to plead insolvency/identify transfers/antecedent debt/insider status with particularity | Denied dismissal; insolvency presumption for 90-day period and pleaded facts support insider preference plausibly |
| Fraudulent conveyances (§548 and Ala. UFTA) | Trustee: Transfers over 2-/4-year windows are actual and constructive fraud (badges of fraud; inadequate consideration; insolvency; insider control) | Heesung: Documentary record undermines allegations | Denied dismissal; badges and constructive-fraud allegations plausibly pled |
| Recharacterization / equitable subordination | Trustee: Advances were equity in substance; or Heesung’s conduct warrants equitable subordination | Heesung: Insufficient pleading; documentary evidence shows loans | Denied dismissal; multi-factor recharacterization and inequitable-conduct allegations plausible |
| Suppliers’ conversion / contract / quasi-contract claims | Suppliers: Heesung received/accepted converters (partial performance), knew suppliers retained title, and wrongfully kept/shipped goods; alternatively SpecAlloy acted as Heesung’s agent | Heesung: No contract with suppliers; Statute of Frauds and proofs of claim bar quasi-contract; SpecAlloy is necessary party | Denied dismissal; allegations of acceptance, mistake/unjust enrichment, agency/joint venture fact-intensive but plausibly pled; joinder dismissal not warranted |
Key Cases Cited
- SFM Holdings, Ltd. v. Banc of Am. Sec., LLC, 600 F.3d 1334 (11th Cir. 2010) (when a district court may consider documents attached to a motion to dismiss)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (pleading standard: courts need not accept legal conclusions)
- Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) (plausibility pleading standard)
- Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995) (setoff principle preserved under §553)
- In re Prudential of Florida Leasing, Inc., 478 F.3d 1291 (11th Cir. 2007) (state substantive law governs setoff rights under the Bankruptcy Code)
- Woodrum v. Ford Motor Credit Co. (In re Dillard Ford, Inc.), 940 F.2d 1507 (11th Cir. 1991) (requirements for setoff under §553)
- In re XYZ Options, Inc., 154 F.3d 1262 (11th Cir. 1998) (badges of fraud analysis for actual fraudulent transfers)