Angell v. Endcom, Inc. (In re Tanglewood Farms, Inc.)Angell v. Endcom, Inc. (In re Tanglewood Farms, Inc.)
ORDER
This mаtter came before the court on Endcom, Ine.’s (“defendant”) motion to dismiss this adversary proceeding for failure to state a claim upon which relief can be granted, to which James B. Angelí (“trustee”) has objected. A hearing on the matter was held on January 10, 2018 in Raleigh, North Carolina. At the conclusion of the hearing, the court took the matter under advisement and allowed the parties ten days to file supplemental briefs.
BACKGROUND
Tanglewood Farms, Inc. of Elizabeth City (“debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on August 20, 2010, which was subsequently converted to one under chapter 7 on July 12, 2011. On August 23, 2010, James H. Winslow (“Mr. Winslow”) and his wife, Billie Winslow (“Mrs. Win-slow”) (collectively “Winslows”) filed a joint voluntary petition under chapter 11 of the Bankruptcy Code. Prior to and at the time of both filings, Mr. Winslow was the president and sole shareholder of the debtor. In that caрacity, he oversaw the debtor’s granary operations in Pasquotank County, North Carolina and made decisions concerning the assets, liabilities and relationship between the debtor and his personal farming operation, Winslow Farms. See In re Tanglewood Farms, Inc. of Elizabeth City, No. 10-06719,
On September 15, 2008, the debtor and Mr. and Mrs. Winslow individually executed a promissory note in favor of the defendant in the original principal amount of $600,000.00 (“promissory note”). The promissory note was a demand note, which became due and payable on or before De
The trustee filed a complaint initiating this adversary proceeding on August 19, 2012, asserting two separate causes of action to avoid and recover three alleged constructively fraudulent transfers pursuant to §§ 544, 548, 550 and 551 of the Bankruptcy Code and N.C. Gen.Stat. § 39-23.1 et seq. On September 9, 2012, the defendant filed the motion to dismiss currently before the court. The defendant submitted a brief in support of its motion to dismiss оn November 27, 2012. On January 9, 2013, the trustee filed a memorandum of law in opposition to the defendant’s motion to dismiss and in accordance with the court’s oral ruling at the conclusion of the hearing held on January 10, 2013, the trustee filed a supplemental memorandum of law on January 22, 2013.
STANDARD OF REVIEW
Rule 8(a)(2) of the Federal Rules of Civil Procedure requires every pleading to contain a “short and plain statement of the claim showing that the pleader is entitled to relief....” Fed.R.Civ.P. 8(a)(2); Fed. R. Bankr.P. 7008. A party may move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012(b). To demonstrate entitlement to relief and survive a motion to dismiss, a complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly,
A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defеndant has acted unlawfully. Where a complaint pleads facts that are “merely consistent with” a defendant’s liability, it “stops short of the line between possibility and plausibility of entitlement to relief.”
Ashcroft v. Iqbal,
DISCUSSION
Pursuant to Federal Rule of Civil Proсedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012, the defendant alleges that the trustee’s causes of action must be dismissed for failure to state a claim upon which relief may be granted.
Section 548 of the Bankruptcy Code permits the trustee to avoid, based on a theory of constructive fraud, “any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred . .•. within two years before the date of the fling of the petition,” provided the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation[ ]” and either
(I) was insolvent on the date that such transfеr was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or
(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(B); BER Care, Inc.,
Section 544 of the Bankruptcy Code allows the trustee to avoid any transfer of the debtor’s property or obligation incurred by the debtor under the North Carolina Uniform Fraudulent Conveyance Act, N.C. GemStat. § 39-21.1, provided an unsecured creditor existed at the time of the transfer. 11 U.S.C. § 544(a). Under N.C. GemStat. § 39-23.4, “a transfer is fraudulent if made without receiving reasonably equivalent value; and, the debtor was either engaged in a business transaction for which the remaining assets of the debtor were unreasonably small in relation to the transaction, or the debtor knew debt incurred was beyond the debtor’s ability to pay.” Beaman v. Barth (In re AmerLink, Ltd.), No. 10-00164,
The Fourth Circuit has emphasized that when evaluating reasonably equivalent value “[t]he focus is on the consideration received by the debtor, not on the value given by the transferee. The purpose of fraudulent transfer law is the preservation of the debtor’s estate for the benefit of its unsеcured creditors.” Harman v. First Am. Bank (In re Jeffrey Bigelow Design Grp., Inc.),
This court has emphasized that “[a]dequate pleadings under § 548(a)(1)(B) include a list of the alleged fraudulent transfers, identification of the consideration received by the transferee, and information concerning why the consideration was not equivalent in value.” AmerLink,
The complaint in this case asserts two separate causes of action. The first, based on §§ 548, 550 and 551, seeks avoidance of a promissory note and security agreement executed by the debtor in favor of the defendant during the two-year period prior to the petition date, as constructively fraudulent transfers. Specifically, the trustee alleges that the debtor was insolvent at the time of the execution and did not receivе reasonably equivalent value in exchange for the obligations it incurred by executing the promissory note and the security interest it granted to the defendant. Second, the trustee seeks avoidance and recovery of a $50,000.00 payment made by the debtor to the defendant during the two-year period prior to filing, pursuant to §§ 544, 548, 550 and 551 and N.C. Gen. Stat. § 39-21.1 et seq. In support, the trustee asserts that Mr. Winslow was the primary beneficiary of the proсeeds of the loan, $597,410.00, which were deposited in the Winslows’ personal bank account and used to operate Winslow Farms. This, according to the trustee, establishes that the debtor did not receive reasonably equivalent value in exchange for incurring the obligation and the payment in partial satisfaction of the indebtedness because Mr. Winslow, not the debtor, was the direct beneficiary of the loan proceeds and used them to finance his personal farming operations.
The facts and allegations in the complaint therefore, support the trustee’s assertion that the debtor did not receive any benefit, direct or indirect, in exchange for the liability it incurred by executing the promissory note. The complaint establishes that Mr. Winslow, and not the debtor, was the recipient of all the loan proceeds. Because thе loan proceeds were deposited in the Winslows’ personal bank account, the debtor did not receive reasonably equivalent value in exchange for the obligations it incurred under the promissory note. See Frontier Bank v. Brown (In re N. Merchandise, Inc.),
The second cause of action involves the $50,000.00 payment, which took place on October 31, 2008. The allegations in the trustee’s complaint establish the plausible belief that the debtor did not receive reasonably equivalent value in exchange for the $50,000.00 payment it made to the defеndant. The factual allegations reveal and the trustee does not dispute that this payment was made pursuant to the promissory note, to which the debtor was an obligor along with the Winslows. Although the defendant asserts that this payment was a partial repayment of an antecedent debt,
If the court avoids an obligation under section 548 or it is otherwise not binding on the debtor, transfers mаde by the debtor on account of that obligation are not made for reasonably equivalent value, and may be set aside as actually or constructively fraudulent if the other requirements for actual or constructive fraud are met.
5. Collier on Bankruptcy ¶ 548.03[a]. Because the trustee has sufficiently plead avoidance of the debtor’s incurrence of the underlying obligation, the debtor’s payment to the defendant was for less than reаsonably equivalent value because the debt itself may be avoided and, therefore, eliminated.
The court finds, based on the record, that the trustee’s complaint for avoidance and recovery of the constructive fraudulent transfers contains sufficient facts to support a plausible belief that the debtor did not receive reasonably equivalent value in exchange for the obligations set forth in the prоmissory note and in return for the $50,000.00 payment made to the defendant. Because the trustee has sufficiently plead the requirements for both causes of action under § 548(a)(1)(B), dismissal is not appropriate.
CONCLUSION
Based on the foregoing, the trustee’s complaint states claims for relief under § 548(a)(1)(B) that are plausible and, therefore, are not subject to dismissal under Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Prоcedure 7012(b). Accordingly, the defendant’s motion to dismiss is DENIED.
Notes
. These facts are a fair distillation of the complaint taken in the light most favorable to the non-movant, the trustee. GE Inv. Private Placement v. Parker,
. This court concluded that "[c]onsolidation in this instance will result in significant dilution of the claims by forcing the creditors of the Winslows to 'share on a parity with creditors of a less solvent debtor,' Tanglewood.” Tanglewood Farms, Inc.,
. The defendant filed an adversary proceeding against Mr. Winslоw in the Winslows’ individual bankruptcy case, seeking a determination that this particular obligation under the promissory note was nondischargeable, No. 11-00057. On June 20, 2011, this court entered an order declaring the obligation nondischargeable as to Mr. Winslow.
. With regard to the trustee’s first cause of action, the defendant conceded that its claim in the debtor’s case was, for distribution purposes, unsecured. This concession, according to the defendant resolves the trustee’s first cause of action to avoid the underlying obligation incurred by the debtor and security interest granted to the defendant. Because the defendant conceded that its claim is unsecured, the court need not address, for purposes of this motion, the avoidance of the security interest. However, the concession does not, as the defendant suggests, resolve the issue of whethеr the underlying obligation incurred by the debtor is avoidable.
For purposes of its motion to dismiss, the defendant does not dispute that the obligation incurred by the debtor and the $50,000.00 payment made in partial satisfaction of that obligation were within the two years prior to the petition date or that the debtor was insolvent on the date of the challenged transfers or became insolvent as a result. Specifically, the defendant contends that the debtor received reasonably equivalent value in exchange for the $50,000.00 payment it made to the defendant.
. The defendant’s argument overlooks the fact that the debtor did not receive reasonably equivalent value in exchange for incurring the obligations under the promissory note. Numerous courts addressing whether a debtor’s transfer of funds in satisfaction of an outstanding obligation is constructively fraudulеnt, have concluded that the debtor received reasonably equivalent value in exchange. See, e.g., O’Toole v. Kamani (In re Trinsum Grp., Inc.),
. Essential to the court’s decision in All-Type Printing, however, was the fact that the trustee did not seek to avoid the debtor’s incur-rence of the underlying obligation, instead seeking to avoid the monthly payments.