Buchwald Capital Advisors LLC ex rel. MFS GUC Trust v. JP Morgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.)Buchwald Capital Advisors LLC ex rel. MFS GUC Trust v. JP Morgan Chase Bank, N.A. (In re M. Fabrikant & Sons, Inc.)
MEMORANDUM AND ORDER
Buchwald Capital Advisors, LLC, which serves as Trustee of the MFS GUC Trust (“Appellant” or the “GUC Trust”), appeals from the January 25, 2011 Order of the Honorable Stuart M. Bernstein, Bankruptcy Judge, granting in part and denying in part the motion of the defendant banks
I. BACKGROUND
Debtors M. Fabrikant & Sons (“MFS”) and Fabrikant-Leer International (“FLI”) (collectively, “Debtors”) each filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code on November 17, 2006. Both debtors are jewelry companies owned or controlled by members of the Fortgang family. In re M. Fabrikant & Sons, Inc. (“Fabrikant III”),
On October 10, 2008, the Bankruptcy Court granted in part and denied in part the Banks’ motion to dismiss the Amended Complaint. In re M. Fabrikant & Sons, Inc. (“Fabrikant I”),
II. Legal Standaeds
District courts are vested with appellate jurisdiction over bankruptcy court rulings pursuant to 28 U.S.C. § 158(a)(1). Specifically, “Congress intended to allow for immediate appeal in bankruptcy cases of orders that finally dispose of discrete disputes within the larger case.” In re Fugazy Exp., Inc.,
Federal Rule of Civil Procedure 8(a) provides that a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” In order to survive a motion to dismiss, a complaint must “provide the grounds upon which his claim rests.” ATSI Commc’ns, Inc. v. Shaar Fund, Ltd.,
However, all averments of fraud must be “state[d] with particularity.” Fed.R.Civ.P. 9(b). Thus, to comply with the heightened pleading standard of Rule 9(b), a plaintiff must: “(1) detail the statements (or omissions) that the plaintiff contends are fraudulent, (2) identify the speaker, (3) state
III. DisCussion
The GUC Trust appeals the Bankruptcy Court’s dismissal of: (1) Counts I-IV (the “ ‘Collapsing’ Fraudulent Conveyance Claims”); (2) Counts VIII-X (the “Subsequent Fraudulent Conveyance Claims”) with respect to their claims of intentional fraudulent conveyance; (3) Count XI (the “Preference Claims”); and (4) Count XII (the “Disallowance Claim”) of the TAC. The Court addresses each in turn.
A. Counts I-IV: “Collapsing” Fraudulent Conveyance Claims
Counts I-IV of the TAC allege that, beginning in 2003, the Banks knowingly made numerous secured loans to Debtors, and Debtors subsequently reconveyed the proceeds of those loans to the Affiliates for less than reasonably equivalent value. According to Appellant, Debtors’ dealings with the Banks and the Affiliates should be collapsed and viewed as a single transaction. And, because Debtors did not retain the loan proceeds, Appellants contend that the conveyance of liens from Debtors to the Banks was a fraudulent transfer, in violation of 11 U.S.C. §§ 544, 548, and New York law.
1. Applicable Law
Pursuant to 11 U.S.C. § 548, a transfer made or obligation incurred within two years of the petition date may be avoided as intentionally or actually fraudulent if it was made “with actual intent to hinder, delay, or defraud any entity to which the debtor was or became, on or after the date that such transfer was made or such obligation was incurred, indebted.” 11 U.S.C. § 548(a)(1)(A). Alternatively, a transfer is constructively fraudulent if the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation; and was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation.” Id. § 548(a)(1)(B).
In this case, because the amount of the loans that Debtors received is roughly equivalent to the value of the liens that they gave the Banks in return, there is no allegation that these transactions were, standing alone, fraudulent conveyances. (Appellant Br. 15.) However, Appellant argues that when the transactions between the Banks and Debtors and the transactions between Debtors and the Affiliates are collapsed, the liens given to the Banks are fraudulent conveyances. (Id.) In order to collapse two transactions and treat them as a single transaction under fraudulent conveyance law, a plaintiff must establish that: (1) a party gave the debtor fair value in exchange for the debtor’s property, but the debtor then gratuitously reconveyed what it received to a third party, taking nothing in return; and (2) the party to the transaction with the debt- or that is sought to be avoided, “must have [had] actual or constructive knowledge of the entire scheme that renders [its] exchange with the debtor fraudulent.” HBE Leasing Corp. v. Frank,
2. Whether the Trustee Adequately Pleaded That the Loans Were Reconveyed
On appeal, Appellant argues that the TAC contains sufficient factual allegations to collapse the transactions and that the Bankruptcy Court improperly drew inferences in favor of the Banks, rather than GUC Trust, when it held otherwise. (Appellant’s Br. 20-21 & n. 14.) Specifically, the Trustee takes issue with the Bankruptcy Court’s focus on the TAC’s failure to allege specific pairings of transactions between the Banks and Debtors on the one hand, and Debtors and the Affiliates on the other. (Id. at 19.)
In order to bring a collapsing fraudulent conveyance claim, a plaintiff must identify a set of transfers that can be said to constitute a unified scheme to defraud creditors of the debtor. HBE Leasing,
Nevertheless, Appellant failed to comply with this directive and, in Fabrikant III, Judge Bernstein again found that the TAC failed to “allege that a particular Lending Bank made a specific advance that was subsequently reconveyed fraudulently with that Lending Bank’s knowledge or consent.” Id. at 191. The Bankruptcy Court concluded that, by not pleading pairs of loans made by the Banks to Debtors with conveyances from Debtors to the Affiliates, the TAC did not allege any transfers that were part of a single scheme.
Rather than identify pairs of transactions that actually amounted to integrated, fraudulent transfers — as case law requires and the Bankruptcy Court clearly directed — Appellant merely asserts that the transactions between the Banks and the Debtors, in the aggregate, resulted in a net loss to Debtors. (See, e.g., TAC ¶¶ 44, 58-59.) Clearly, more is required to state a collapsing fraudulent conveyance claim. As the Bankruptcy Court recognized, the Trustee’s “net transfer theory only makes sense when all of the transfers are presumptively fraudulent, as in the case of a Ponzi scheme.” Fabrikant II,
In essence, Appellant alleges that the TAC states a claim because the Debtors reconveyed some portion of the loan proceeds that they received from the Banks to the Affiliates without receiving anything in return. (Appellant Br. 19; e.g., TAC ¶¶ 6, 75.) While Appellant need not show a perfectly matched flow of consideration from the Banks to the Affiliates via Debtors — i. e., a five-million-dollar loan from the Banks to Debtors and a five-million-dollar transfer from Debtors to the Affiliates, without receiving value in return — Appellant nonetheless must identify specific transactions in which some portion of loan proceeds that Debtors received were gratuitously reconveyed to Affiliates as part of a single transaction. See HBE Leasing,
Nevertheless, Appellant asserts that the claims should proceed because resolving the particular loans made by the Banks that were improperly reconveyed to the Affiliates can be done on the merits following discovery. (Appellant Br. 27.) However, while Appellant is correct that Twombly did not impose a “probability requirement” and requires only that a claim be plausible, the allegations in the TAC do not plausibly establish that loans from the Banks were reconveyed to Affiliates as part of a single transaction. Because the TAC does not match any loans, from the Banks to Debtors, to transfers, from Debtors to the Affiliates, the TAC offers only conclusions without factual support that these transactions should be collapsed.
Accordingly, because the TAC does not allege that any particular loans from the Banks were gratuitously reconveyed to the Affiliates, the Court finds that the facts alleged in the TAC do not plausibly suggest that these transactions should be collapsed, and the Bankruptcy Court properly dismissed the “Collapsing” Fraudulent Transfer Claims.
3. Whether the Banks had Knowledge
The “Collapsing” Fraudulent Conveyance Claims additionally fail because the TAC does not provide factual support for the contention that the Banks were actually or constructively aware that Debtors would reconvey the loan proceeds to the Affiliates for less than reasonably equivalent value. See HBE Leasing,
First, the TAC offers no facts to support the claim that the Banks had actual knowledge beyond the wholly conclusory assertion that the Banks were “intimately involved in the formulation or implementation of the plan by which the proceeds of the loan were channeled to the third-party,” In re Sunbeam Corp.,
Similarly, the TAC also fails to allege that the Banks had constructive knowledge of the alleged scheme. In determining whether constructive notice has been established, courts have looked to “red flags” that should have put the grantee on notice of potential fraud. In re Bayou Grp., LLC,
However, although these allegations could conceivably raise some doubts as to Debtors’ financial stability, they hardly rise to the level of suggesting fraud. Indeed, the facts alleged in the TAC actually undermine the suggestion that the Banks knew or should have known that their loans would be funneled to the Affiliates while providing no benefit to Debtors. For example, the attachments to the TAC show large payments coming to Debtors from the Affiliates, some of which appear to far exceed the amount being transferred from Debtors to the Affiliates. (TAC Ex. C.) Moreover, as the Bankruptcy Court noted, a 2002 report produced by JPMC, and referenced in the TAC, revealed that MFS owed the Affiliates far more than the Affiliates owed MFS. Fabrikant III,
Moreover, Appellant’s contention — that the Banks were aware of, but indifferent to, the fact that all of the Fortgang companies were simultaneously insolvent and simply shuffling money around to meet short-term obligations — requires an inference that is highly implausible, bordering on the absurd. In essence, Appellant alleges that the Banks took the massive risk of continuing their lending relationships with the Fortgang companies (id. ¶¶ 109-114) on the speculative hope that “there may be sufficient liquidity in the ‘Fabri-kant Empire’ ... as a whole to enable the Banks to obtain repayment” through personal guarantees and “other pressure” (id. ¶¶ 78, 108, 122-123). Such an assertion would be nonsensical if the Banks were in fact aware that Debtors and the Affiliates had to use the same dollars to repay separate obligations. Put simply, drawing all inferences in favor of Appellant, it is difficult to see what benefit the Banks could hope to obtain by lending ever-larger amounts of money to failing companies. The TAC’s wholly conclusory allegations that the Banks were “[c]louded in judgment due to lavish commissions” (id. ¶ 78) is equally implausible, since the loss of principal would have far outweighed the commissions earned on the loans, cf., e.g., Pungitore v. Barbera, No. 11 Civ. 6249(VB),
Considering the TAC in its entirety, the Court has little difficulty concluding that Appellants have failed to allege constructive knowledge on the part of the Banks. Instead, the far more plausible inference is that the Banks were confident that Debtors could continue operating based on the overall strength of the Fortgang companies. Consistent with this inference, Bank Leumi’s note in 2002 that a weak Affiliate might nonetheless be creditworthy because it was “ ‘under the umbrella’ of the M. Fabrikant Group” (TAC ¶ 106), suggests
Moreover, the TAC alleges that as of 2006 — the year when Debtors filed their bankruptcy petitions — the Banks believed that they had extended too many loans to Debtors and that intercompany lending was problematic. (Id. ¶¶ 94, 104.) That these communications were in connection with “the debtors’ attempts to maintain [their] credit facility” (id.) suggests that the Banks realized at that time, and not before, that the Debtors might be insolvent.
Additionally, even if the allegations were sufficient with respect to some of the Banks, Appellant repeatedly conflates all of the Banks in the TAC, such as where it alleges that the loans “funded fraudulent transfers to the ... Affiliates of which the Banks were themselves creditors” — even though only four of the banks had lending relationships with the Affiliates — and that “the Banks” relied on liquidity in the “Fa-brikant Empire” as a whole for repayment. (Id. ¶¶ 120,122-123,126.) Appellant’s tenuous theory as to the Banks’ motive as a group is even more implausible with regard to the Banks that have no alleged relationship with the Affiliates and, thus, apparently were participating in a scheme to defraud themselves based on Appellant’s assertions. Appellant has utterly failed to plead a plausible cause of action against each Bank, relying instead on sweeping and conclusory allegations that the lenders “operated as a single syndicate of lenders.” (Id. ¶ 91.)
Accordingly, the Court finds that the TAC fails to plausibly allege that the Banks were aware, actually or constructively, that Debtors would reconvey the loan proceeds to the Affiliates for less than reasonably equivalent value. Therefore, the Court affirms the Bankruptcy Court’s dismissal with prejudice of Counts I through IV because the TAC does not plausibly allege either required element of a collapsible fraudulent conveyance.
B. Counts VIII-X: Subsequent Fraudulent Transfer Claims
Counts VIII, IX, and X allege that MFS transferred funds to the Affiliates for less than reasonably equivalent value and that the Affiliates reconveyed those funds to ABN, IDB, HSBC, and Sovereign.
As noted above, pursuant to Rule 9(b) of the Federal Rules of Civil Procedure, a party alleging fraud must “state with particularity the circumstances constituting fraud.” “Since ‘[i]t is a serious matter to charge a person with fraud,’ a plaintiff is not permitted to do so ‘unless he is in a position and is willing to put himself on record as to what the alleged fraud consists of specifically.’ ” United Feature Syndicate, Inc. v. Miller Features Syndicate, Inc.,
Appellant asserts that Debtors’ payments to several different entities over the course of nearly a year, or two years with respect to Affiliate VSI, LLC, constitute “granular detail” sufficient to satisfy Rule 9(b)’s pleading standard. (Appellant Br. 31.) However, the sole case that they cite for the proposition that individual payments need not be identified, S.E.C. v. Feminella,
C. Count XI: Preference Claims
Count XI seeks recovery of numerous transfers made by Debtors to the Banks within ninety days of the filing of its bankruptcy petition. The Bankruptcy Court, relying primarily on its opinion in Fabri-kant II, determined, first, that Appellant lacked standing to raise the Preference Claims, and, further, that, even if Appellant had standing, the Preference Claims were untimely.
The Court agrees that the Preference Claims were untimely. Pursuant to the Bankruptcy Court’s Final Order Authorizing Debtors’ Use of Cash Collateral and Granting Adequate Protection Claim and Lien (the “Final Cash Collateral Order” or “FCCO”), the deadline for filing avoidance claims was October 1, 2007. Notwithstanding that firm deadline, Appellant failed to assert the Preference Claims until it filed its Second Amended Complaint on December 1, 2008—more than a year after the deadline. Fabrikant III,
Appellant argues that the FCCO merely prevented the GUC Trust from initiating new adversary proceedings after the deadline. (Appellant’s Br. 34-35.) Appellant further argues that “[t]he preferential payments made by the Debtors were among these precise transfers that the Trustee originally sought recovery of on fraudulent conveyance grounds” in the first complaint and, therefore, the claims relate back to the filing date of the original Complaint pursuant to Federal Rule of Civil Procedure 15. (Id. at 35.)
The FCCO provides in relevant part that the Creditors’ Committee (Appellant’s predecessor in interest) had until October 1, 2007 “to commence an adversary proceeding against any of the Lender Parties for the purpose” of, inter alia, filing avoidance claims.
Of course, a time-barred claim may be raised in an amendment and related back to the date of the timely complaint if “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.” Fed.R.Civ.P. 15(c)(1)(B). In order for an amendment to relate back to an earlier pleading, that earlier pleading must have “put the defendants ... on notice of what must be defended against in the amended pleadings.” Barr v. Charterhouse Grp. Int’l, Inc.,
Moreover, the law is clear that each preferential and fraudulent transaction is treated separately and distinctly. Id. at 984; see also 360networks,
The general allegation that transfers from October 2004 until Appellees sold their claims were fraudulent fails to identify any particular objectionable transactions. Overly general original pleadings do not provide defendants with adequate notice as to what facts they are to defend against, and, therefore, such general allegations cannot be hooks on which to hang later amended pleadings. See, e.g., Fair Hous. in Huntington Comm. v. Town of Huntington, No. 02-CV-2787 (DRH),
Although “Rule 15(c) [is] to be liberally construed, particularly where an amendment does not allege a new cause of action but merely ... make[s] defective allegations more definite and precise,” Siegel v. Converters Transp., Inc.,
Because the Court affirms dismissal of Count XI on timeliness grounds, the Court need not consider the Bankruptcy’s determination that Appellant lacked standing to raise the Preference Claims.
D. Count XII: Disallowance Claim
Count XII of the TAC seeks disallowance of Appellees’ claims based on the allegations of fraudulent conveyances and preferences. Accordingly, Count XII rises and falls with the above-discussed claims. (Appellant Br. 36.) The Bankruptcy Court dismissed Count XII as against JPMC, Bank of America, HSBC, Bank Leumi, and ADB with prejudice; however, it dismissed the claim as against Sovereign and SPM, with leave to replead based on its dismissal without prejudice of Count VII, and denied the motion as to ABN and IDB. Fabrikant III, at 196-97.
Because the Court has affirmed the Bankruptcy Court’s rulings on the fraudulent conveyance and Preference Claims, the Court also affirms the Bankruptcy Court’s dismissal with prejudice of Count XII as to JPMC, Bank of America, HSBC, Bank Leumi, and ADB.
IV. Conolusion
For the foregoing reasons, the Court affirms the Bankruptcy Court’s January 25, 2011 order granting in part and denying in part the Banks’ motion to dismiss
SO ORDERED.
Notes
. Appellees are JP Morgan Chase Bank, N.A. ("JPMC”); ABN AMRO Bank N.V. ("ABN”); Bank of America, N.A.; HSBC Bank, National Association ("HSBC”); Bank Leumi USA (“Bank Leumi”); Israel Discount Bank of New York ("IDB”); Antwerpse Diamantbank, N.V. ("ADB”); Sovereign Precious Metals LLC ("SPM”); and Sovereign Bank ("Sovereign”).
. Specifically, Count I seeks to avoid obligations incurred by the Debtors to the Banks from January 2003 to the petition date pursuant to 11 U.S.C. § 544 and N.Y. D.C.L. § 276; Count II seeks to avoid obligations incurred by FLI from January 2005 to the petition date, pursuant to 11 U.S.C. § 548; Count III seeks to avoid obligations incurred by MFS from January 2005 to the petition date, pursuant to 11 U.S.C. § 548; and Count IV seeks to avoid the security interests and liens that secured all of those obligations from October 2004 until the Banks sold their claims, pursuant to 11 U.S.C. §§ 544, 548, and 550.
. Similarly, a transfer for less than reasonably equivalent value is constructively fraudulent if the debtor: "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; [or] 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.” 11 U.S.C. § 548(a)(l)(B)(ii)(II)-(III).
. Section 544(b) of the Bankruptcy Code provides a cause of action to avoid transfers that are fraudulent under applicable state law.
. Judge Bernstein noted that the Trustee represented at oral argument that the transactions listed in paragraph 61 of the TAC did not involve loans to Affiliates that were the subject of the scheme; accordingly, the Court disregards this paragraph, as Appellants requested.
. Specifically, the FCCO provides that the Committee may file such suits “through and until the earlier of the one hundred and twentieth (120th) day following the date on which notice of its appointment is filed by the U.S. Trustee (or the first business day thereafter if such day is not a business day).” (No. 07-2780(SMB), Doc. No. 16-2, ¶22.) The par
. The Complaint also alleges that on January 13, 2006, FLI guaranteed MFS’s debt, and, on July 7, 2006, the Debtors incurred an obligation to Sovereign on account of MFS’s purchase of gold. (Compl.HH 34-39.) However, neither of these transactions took place within ninety days of Debtors’ bankruptcy petition, and, therefore, those allegations could not have put the Banks on notice of possible Preference Claims.