Estate of Jackson v. Schron (In Re Fundamental Long Term Care, Inc.)Estate of Jackson v. Schron (In Re Fundamental Long Term Care, Inc.)
IN RE: FUNDAMENTAL LONG TERM CARE, INC.,
Debtor.
ESTATE OF JUANITA JACKSON,
ESTATE OF ELVIRA NUNZIATA,
ESTATE OF JOSEPH WEBB,
ESTATE OF ARLENE TOWNSEND,
STATE OF OPAL LEE SASSER,
ESTATE OF JAMES HENRY JONES,
Plaintiffs - Appellants,
BETH ANN SCHARRER,
Plaintiff,
versus
RUBIN SCHRON,
Defendant - Appellee.
Appeal from the United States District Court for the Middle District of Florida
(October 19, 2017)
Before JORDAN and JULIE CARNES, Circuit Judges, and VINSON,* District Judge.
This case has a complex procedural history lasting more than a decade and spanning several state and federal venues. It began when the estates of several deceased nursing-home patients (the “Estates” or “Appellants“) brought a series of wrongful-death suits against a network of nursing homes. These suits collectively resulted in $1 billion in empty-chair judgments against the network. In an effort to evade enforcement of these and other liabilities, the defendant entities orchestrated a so-called “bust out” scheme under which they transferred the useful assets of the nursing-home business into a newly formed operating entity, leaving the core judgment debtor a judgment-proof shell company.
When the Estates learned that this judgment debtor had been stripped of its assets, they filed an involuntary Chapter Seven bankruptcy petition in the Middle District of Florida and initiated an adversary proceeding seeking to avoid, as fraudulent, the transfer of the debtor‘s assets. The complaint named seventeen entities and individuals as defendants and described a wide-reaching scheme in which assets were secretly diverted in order to hinder, delay, and defraud the debtor‘s various judgment creditors. One of the named
After careful consideration of the Estates’ thirty-two claims for relief—and after granting the Estates an opportunity to comprehensively amend their lengthy and deficient initial complaint—the bankruptcy court dismissed Schron from the suit, concluding that his alleged connection with the transaction was speculative at best. Claims against several additional defendants survived dismissal, and the case culminated in a twelve-day bench trial. At its conclusion, the Estates settled with the remaining defendants for $24 million. The bankruptcy court approved the settlement as fair and equitable on the condition that the Estates be permanently enjoined from pursuing any additional claims arising from the bust-out scheme against Schron individually.
The Estates appealed the dismissal of claims against Schron and the bankruptcy court‘s issuance of a permanent injunction with respect to Schron. The district court for the Middle District of Florida affirmed both orders. The Estates now appeal those orders to this Court. After careful review, and with the benefit of oral argument, we affirm.
BACKGROUND
Although this appeal relates solely to the Estates’ claims against Appellee Rubin
I. The March 2006 Transaction
Trans Healthcare, Inc. (“THI“) was founded in 1998 to operate nursing homes, assisted living facilities, and long-term acute-care hospitals throughout the United States. Trans Healthcare Management, Inc. (“THMI“) was a wholly owned subsidiary of THI and provided management services to THI until March 2006. By early 2006, numerous wrongful-death and negligence actions had been filed against THI and THMI on behalf of several nursing-home patients who had died while in THI and THMI‘s care.
Anticipating adverse judgments, the entities designed a transaction that would shield their assets from potential creditors without affecting their profitable operations (the “2006 Transaction“). Under the direction of Leonard Grunstein, a former real-estate lawyer, and Murray Forman, an investment banker, two new entities were created: Fundamental Long Term Care, Inc. (“FLTCI“) and Fundamental Long Term Care Holdings (“FLTCH“) (together, the “Fundamental Entities“). In the first phase of the transaction, THMI sold all its assets to FLTCH for $9.9 million. In the second phase, THI sold all its stock in the stripped-down THMI to FLTCI. FLTCI therefore acquired all of THMI‘s liabilities but none of its assets.
THI remained an active corporation and continued operating nursing homes on a small scale following the transaction. It was ultimately placed into a receivership and wound down. THMI continued to exist as an insolvent subsidiary and the sole asset of FLTCI; both entities quickly became defunct. FLTCH, on the other hand, was left with a substantial number of productive assets and continued operating the entities’ broader network of nursing homes, generating millions of dollars of income, without being saddled with the millions of dollars in liabilities attributable to those entities. To keep the network running, FLTCH rebranded the former THI/THMI facilities and created two new subsidiaries: FCC, which provided operational and clinical support; and FAS, the administrative arm of the company. Together, FLTCH, FCC, and FAS continued to operate in the same locations, and used the same employees and equipment, as did THI and THMI prior to the 2006 Transaction. At all relevant times, FLTCH was owned by Grunstein and Forman.2
As noted, the Estates’ complaint made allegations concerning Rubin Schron‘s involvement in the above-described 2006 Transaction. Schron is a wealthy New York real-estate investor whose involvement with the THI network began in 2002.
II. The Wrongful-Death Judgments
In the meantime, the estates of six deceased nursing-home patients pursued wrongful-death actions against THI and THMI in state court, alleging that the decedent patients had been abused, neglected, and injured by the negligent and reckless operation of THI‘s nursing homes in Florida and Pennsylvania. The Estates had no knowledge at the time that the named defendants, THI and THMI, had been stripped of their assets.
To ensure that the Estates were kept in the dark, FLTCH‘s goal was to use the THI receivership to conceal the linked transfers long enough for the statute of limitations to run on any available fraudulent-transfer claims. In furtherance of this plan, THI directed its counsel to withdraw representation of THI and THMI at around the same time as the relevant statutes of limitations ran. Thе liability proceedings moved forward, and the various state courts in which these claims were pending ultimately entered “empty-chair” jury verdicts (that is, verdicts not contested by the defendants) against THI and THMI totaling more than $1 billion.
Despite FLTCH‘s efforts at concealment, the Estates eventually learned of the 2006 Transaction and the formation of the successor Fundamental Entities. They responded by initiating supplementary state-court proceedings against various entities and individuals alleged to have fraudulently transferred the FLTCH assets out of creditors’ reach. THI, THMI, the Fundamental Entities, Grunstein, Forman, and Schron were specifically targeted. The Estates also initiated an involuntary Chapter Seven bankruptcy proceeding, naming FLTCI as debtor. A Trustee was appointed, and the Estates were identified as FLTCI‘s chief creditors.
Shortly after the Chapter Seven proceeding began, the Trustee expressed her intent to pursue fraudulent-transfer and related actions under the Bankruptcy Code against FLTCH and other entities involved in the 2006 Transaction. This cause of action overlapped with the Estates’ already ongoing judgment-enforcement actions, which were based primarily on state-law fraudulent-transfer theories. In order to fend off these simultaneous actions, FLTCH filed a dеclaratory-judgment action in a New York court seeking a declaration that any fraudulent-transfer or similar claims relating to the 2006 Transaction were barred by the statute of limitations. The bankruptcy court enjoined the declaratory-judgment action after concluding that it would impermissibly interfere with the Trustee‘s ability to administer the Chapter Seven proceeding and protect the assets of the estate.
III. The Adversary Proceeding
Following the bankruptcy court‘s Venue Order, the Estates initiated an adversary proceeding with a two-count complaint for declaratory judgment, naming THI, THMI, the Fundamental Entities, Grunstein, Forman, and Schron as defendants (collectively, the “Defendants“), in addition to several other entities involved in the transaction. In Count I, the Estates sought a declaration that FLTCH and FLTCI were liable for the judgments against THI and THMI under a successor theory of liability. In Count II, they sought a declaration that Defendants were directly liable for the judgments against THI and THMI under a veil-piercing theory. The Trustee intervened in that proceeding to add a count for substantive consolidation of FLTCI and THMI. The Estates and the Trustee were later granted leave to amend the initial complaint and join their respective claims.
A. First Amended Complaint
In December 2013, the Estates and Trustee (together, “Plaintiffs“) filed an enhanced First Amended Complaint—a 228-page tome containing 1,201 numbered paragraphs and twenty-two counts against Defendants and several additional entities. The twenty-two counts in the complaint can be broken into eight substantive claims for relief: one count for substantive consolidation of FLTCI and THMI; two counts for breach of fiduciary duty; four counts for aiding and abetting a breach of fiduciary duty; one count for successor liability; two counts for piercing of the corporate veil; three counts for alter-ego liability; eight counts for actual and constructive fraudulent transfer; and one count for conspiracy to commit a fraudulent transfer. Asserting theories of direct or derivative liability, Plaintiffs’ goal was to “unwind” the 2006 Transactions and recapture the FLTCH assets—wherever they may be held—in order to satisfy the Estates’ various judgments against the THI/THMI network.
Defendants moved to dismiss all but the substantive-consolidation count. In a thorough opinion, the bankruptcy court upheld several counts against several defendants and dismissed several without prejudice, granting leave to amend. See Estate of Jackson v. Gen. Elec. Capital Corp. (In re Fundamental Long Term Care, Inc.), 507 B.R. 359, 386 (Bankr. M.D. Fla. 2014). Specifically, the court allowed the claims for fraudulent transfer against FLTCH, Forman, and Grunstein to go forward, declining to enforce the statute of limitations on those claims in light of allegations that these defendants had intentionally concealed facts that would have given rise to the claim within the limitations period. As to the remaining claims, the bankruptcy court found the allegations “confusing, ambiguous, generalized, [and] conclusory,” and noted overall that the pleading required “considerable energy to read.” Id. at 385–86 (internal quotation marks omitted). The court was nonetheless “not ready to conclude that the Plaintiffs could not allege additional facts that may potentially give rise to the causes of action thе Court is dismissing.” Id. at 386. The court instructed Plaintiffs to amend again and cure the pleading defects. Id.
B. Second Amended Complaint
Plaintiffs filed their Second Amended Complaint in April 2014. Instead of clarifying their initial slate of allegations and rehabilitating the dismissed claims, as they were directed to do, the Second Amended Complaint incorporated several hundred paragraphs of the First Amended Complaint by reference and offered a new, but largely repetitive, restatement of several claims. It then added four brand-new claims against several defendants. With only two exceptions, the bankruptcy court dismissed with prejudice each of the newly pled and re-pled claims, citing the same defects identified in the first motion to dismiss.
The court concluded that it was appropriate to dismiss the failed claims with prejudice because “any further attempts by Plaintiffs to amend their complaint would be futile or unfairly prejudicial to the Defendants.” On that point, the court observed that, as a result of the parallel judgment-enforcement actions the Estates had already pursued in various state courts, Plaintiffs “had the benefit of almost complete discovery before filing their second amended complaint.”
Most relevant to this appeal are the court‘s conclusions as to the claims against Schron. Plaintiffs аttempted in their Second Amended Complaint to revive each of their original counts against Schron and to add four more: alter-ego liability; aiding and abetting a breach of fiduciary duty; abuse of process; conspiracy to commit abuse of process; negligence; constructive fraud; and improper post-petition transfer. The court dismissed each claim in turn, emphasizing the overarching flaw in the Plaintiffs’ narrative: “[N]owhere in the complaint . . . is Schron alleged to have committed any act individually,” nor did the allegations support a theory of derivative liability against Schron.
The court followed its decision with a final judgment in favor of Schron (the “Dismissal“), in which it stated that “[f]inal judgment is entered in favor of Schron on all claims that were or could have been asserted by Plaintiffs against him in the amended complaint and the second amended complaint.”
C. Subsequent Proceedings
Schron was the only defendant fully dismissed from the adversary proceeding at the pleading stage. Three additional defendants were dismissed later via their motions for summary judgment. In the course of pre-trial proceedings, the bankruptcy court also granted Plaintiffs’ motion to substantively consolidate THMI with the Chapter Seven debtor, FLTCI. The bankruptcy court then proceeded to consider the surviving claims during a twelve-day bench trial. At issuе in the bench trial were claims against Grunstein, Forman, and several related entities for breach of fiduciary duty, aiding and abetting breach of fiduciary duty, successor liability, fraudulent transfer, and conspiracy to commit fraudulent transfer.
At the conclusion of trial, the bankruptcy court dismissed claims against three additional defendants but remained “unsure”
Mediation was successful and ultimately yielded five settlement agreements. Under these agreements, Plaintiffs agreed to accept $18.5 million from FLTCH, FAS, THI, Forman, and Grunstein; $1.25 million from one of the law firms that defended THI and THMI against the Estates’ earlier actions; $3.25 million from three additional entities involved in the 2006 Transaction; and $700,000 from THI‘s state-court receiver. In total, these agreements yielded $23.7 million to cover Plaintiffs’ damages.
Having earlier been dismissed from the adversary proceeding at the pleading stage, Schron was the sole non-settling Defendant. Throughout the adversary proceeding, the Estates had maintained their intention to pursue further state actions against Schron notwithstanding his early dismissal from the case. Schron recognized the possibility of future action against him in a different venue and accordingly opposed the various settlements unless they were accompanied by a permanent injunction preventing the Estates from reviving or bringing any new state-court judgment-enforcement actions against him. Thus, Schron‘s insistence on a permanent injunction reflected his legitimate fear that Plaintiffs would try to upend the resolution reached by the bankruptcy court after much litigation by the parties.
Likewise concerned that Plaintiffs would attempt to undo the final resolution that had been the goal of the complex and protracted adversary proceeding, the bankruptcy court issued a permanent injunction (the “Permanent Injunction” or “Injunction“) prohibiting Plaintiffs from “pursuing claims against Rubin Schron arising out of the nucleus of facts set forth in the adversary complaint in this proceeding.” This injunction was integral to and a condition of the court‘s approval of the settlements, as the court determined that a settlement of the surviving claims could not be “fair and equitable” if it did not also finally resolve the claims against Schron. In the bankruptcy court‘s view, an injunction prohibiting further litigation against Schron in another forum was “necessary” to protect the court‘s prior judgment as to Schron. The court granted this permanent injunction in December 2015 and then, after approving each of the settlement agreements, issued an opinion thoroughly discussing the basis for the Injunction and the authority on which it was issued.
The Estates appealed the Dismissal and the Permanent Injunction as to Schron to the Middle District of Florida, which affirmed both orders of the bankruptcy court. The Estates now appeal the district court‘s affirmance, asking this Court to reverse the bankruptcy court‘s orders with respect to Schron.
STANDARD OF REVIEW
In a bankruptcy appeal, this Court functions as a second reviewer of the bankruptcy court‘s rulings and applies the same standards as the district court, which operates as the first level of appellate review. Brown v. Gore (In re Brown), 742 F.3d 1309, 1315 (11th Cir. 2014). We therefore review a lower court‘s dismissal
DISCUSSION
The Estates ask us to review the bankruptcy court‘s Permanent Injunction as to Schron as well as its Dismissal of all claims alleged in the First and Second Amended Complaints against Schron. We consider each of the Estates’ challenges in turn.
I. Grant of Permanent Injunction
The Estates urge this Court to reverse the bankruptcy court‘s Permanent Injunction of any claims against Schron “arising out of the nucleus of facts set forth” in the Estates’ Second Amended Complaint on two grounds: that the bankruptcy court lacked jurisdiction to enjoin state-law claims; and that, even if it had jurisdiction, the Permanent Injunction exceeded the court‘s authority under the All Writs Act and the Anti-Injunction Act. We have considered these challenges de novo and conclude that the Permanent Injunction was properly issued.
It is important first to clarify the scope of the Permanent Injunction, which is broad. By its language, the Injunction covers three categories of claims: (1) any claims against Schron “arising out of the nucleus of facts set forth” in the Second Amended Complaint; (2) the Estates’ pending state-court judgment-enforcement actions against Schron, which had been temporarily enjoined pending resolution of the adversary proceeding; and (3) any claims against Schron “as the ‘real party in interest‘” in three pending state-court cases involving three of the Estates. Thus, in addition to enjoining claims that the Estates had already unsuccessfully pled against Schron in their Second Amended Complaint (the “Dismissed Claims“),3 the Injunction precludes the Estates from pursuing any new or old state or federal actions against Schron asserting any claim arising from the 2006 Transaction, including claims the Estates did not specifically raise in the adversary proceeding.
The Estates identify three types of claims that were not resolved through the adversary proceeding and were thus improperly foreclosed by the Injunction: proceedings supplementary under
A. Subject-Matter Jurisdiction
The Estates first argue that the bankruptcy court lacked jurisdiction to issue the Permanent Injunction. We begin by outlining the legal principles that define the bankruptcy court‘s power to enjoin proceedings in foreign venues.
Any power by the bankruptcy court to issue the Permanent Injunction against non-bankruptcy proceedings must necessarily derive from the federal bankruptcy jurisdictional statute,
Bankruptcy courts plainly lack jurisdiction over outside proceedings that do not affect the debtor. Celotex Corp. v. Edwards, 514 U.S. 300, 309 n. 6 (1995). But the phrase “related to“—which is not defined in the Bankruptcy Code—“must be read to give [bankruptcy courts] jurisdiction over more than simply proceedings involving the property of the debtor or the estate.” Id. at 308; see also id. at 307–08 (“Congress did not delineate the scope of ‘related to’ jurisdiction, but its choice of words suggests a grant of some breadth.” (footnote omitted)).
The Third Circuit has held that a civil proceeding is “‘related to’ a [bankruptcy] proceeding if the outcome of [the] proceeding could conceivably have any effect on the estate being administered in bankruptcy.” Nuveen Mun. Trust ex rel. Nuveen High Yield Mun. Bond Fund v. WithumSmith Brown, P.C., 692 F.3d 283, 293–94 (3d Cir. 2012) (second alternation in original) (emphasis in original) (quoting Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)) (internal quotation marks omitted). We have indicated our agreement with that principle. Miller v. Kemira, Inc. (In re Lemco Gypsum, Inc.), 910 F.2d 784, 788 (11th Cir. 1990) (“We join the majority of the circuits that have adopted the Pacor formulation.“); see also Celotex, 514 U.S. at 308 (agreeing “with the views expressed by the Court of Appeals for the Third Circuit in [Pacor], that ‘Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate‘“); Wortley v. Bakst, 844 F.3d 1313, 1320 (11th Cir. 2017) (applying the “conceivable effect” test from Lemco Gypsum to conclude that the bankruptcy court had related-to jurisdiction over certain state-law tort claims).
Under this standard, a bankruptcy court can enjoin any civil action “if the outcome could alter the debtor‘s rights, liabilities, options, or freedom of action” or “in any way impacts upon the handling and administration of the bankrupt estate.” Celotex, 514 U.S. at 308 n.6 (quoting Pacor, 743 F.2d at 994) (internal quotation marks omitted); see also Wortley, 844 F.3d at 1318–20. The overriding question, then, is whether the claims covered by the Permanent Injunction could “conceivably” affect the administration of the bankruptcy estate, especially in light of the substantive consolidation of FLTCI (the named debtor) and THMI (the Estates’ chief judgment debtor). We conclude that they could.
Consider the simple example of a state-law judgment under
ordered to disgorge any prior transfer of assets, then the sum transferred would necessarily reenter, and enlarge, the joint FLTCI/THMI bankruptcy estate. It is clear that such an outcome would, at the least, “conceivably” impact the size and the administration of the estate.
The Estates ask us to focus on a somewhat more complicated example: an action to avoid (that is, undo) fraudulent transfers from THI, which is THMI‘s former parent and the Estates’ secondary judgment creditor. The Estates assert that certain of the claims they wish to bring against Schron “are individual, grounded in state law and [ ] designed to collect on the Estates’ judgments against THI—an entity that ‘has not been substantively consolidated into the Debtor, [or] determined to be the alter ego of or successor to the debtor.‘” According to the Estates, because THI is an entirely separate entity from debtors THMI and FLTCI, any action seeking to hold Schron liable for the Estates’ judgments against THI will have “no conceivable impact” on the property of the debtor‘s estate.
We disagree. As noted, the Estates wish to pursue fraudulent transfer claims under state law, with the goal of recovering assets that were transferred by THI through FLTCI and, finally, to FLTCH. If a state court were to find those transfers to be non-fraudulent, then the FLTCI estate would have a hard time succeeding on its own fraudulent-transfer claim against FLTCH. In other words, because THI was the entity from which the 2006 Transaction originated, a finding in state court that THI‘s transfers were not fraudulent would undermine the debtor‘s central avoidance claim аgainst FLTCH—the primary transferee of THI‘s assets. Such a result would no doubt impact the size of the estate and the parties’ various efforts to reverse the
The Estates have identified no scenario in which a claim to recover on a judgment against THI would not impact the size and administration of the bankruptcy estate, as well as the debtor‘s potential claims with respect to the 2006 Transaction. As a result, we conclude the bankruptcy court possessed subject-matter jurisdiction under
B. Authority under the All Writs Act
The next question the Estates ask us to consider is whether the bankruptcy court had statutory authority to enjoin pending and future state-court proceedings under the particular circumstances of this case.
The bankruptcy court justified the Permanent Injunction under the All Writs Act,
A court of the United States may not grant an injunction to stay proceedings in a State court except [1] as expressly authorized by Act of Congress, or [2] where necessary in aid of its jurisdiction, or [3] to protect or effectuate its judgments.
The bankruptcy court concluded that the Permanent Injunction was “necessary in aid of its jurisdiction” and necessary “to protect or effectuate its judgments” under the second and third Anti-Injunction Act exceptions. The district court agreed with the bankruptcy court‘s rationale, finding that “the Bankruptcy Court‘s injunction clearly seeks to protect the integrity or enforceability of its existing orders, i.e. its order dismissing the Bankruptcy Estates’ claims against Schron, as well as the settlement agreement between the Probate Estates, the Trustee, and the remaining defendants.” We agree.
The Anti-Injunction Act‘s third exception, often called the “relitigation exception,” permits injunction of state-court actions “to protect or effectuate [the federal court‘s] judgments.” See SFM Holdings, 764 F.3d at 1335. This exception “is designed to implement well-recognized concepts of claim and issue preclusion.” Id. (quoting Smith, 131 S. Ct. at 2375) (internal quotation marks omitted). We have, however, acknowledged that “the relitigation exception is narrower” than traditional principles of claim preclusion and “only authorizes an injunction to prevent state litigation of a claim or issue that previously was presented to and decided by the federal court.” Id. at 1336 (quoting Smith, 131 S. Ct. at 2375) (internal quotation marks omitted).
Given this framework, there is no question that the Injunction was proper under the third Anti-Injunction Act exception as to the Dismissed Claims—i.e., the claims specifically asserted in the Second Amended Complaint against Schron. These matters were “presented to and decided by” the bankruptcy court when it considered and dismissed the Second Amended Complaint with prejudice as to Schron.
The Potential Claims, on the other hand, were not asserted in the Second Amended Complaint and thus were not decided by the bankruptcy court. While the relitigation exception is therefore not applicable, we conclude that an injunction directed against the Potential Claims was “necessary in aid of [the court‘s] jurisdiction” under the second Anti-Injunction Act exception.
We have consistently held that “state in personam proceedings that threaten to make complex multidistrict litigation unmanageable” may be enjoined in aid of the court‘s jurisdiction. Juris v. Inamed Corp., 685 F.3d 1294, 1339 (11th Cir. 2012) (internal quotation marks omitted); see also Estate of Brennan ex rel. Britton v. Church of Scientology Flag Serv. Org., Inc., 645 F.3d 1267, 1274 (11th Cir. 2011). To fall within this exception, the injunction must be “necessary ‘to prevent a state court from so interfering with a federal court‘s consideration or disposition of a case as to seriously impair the federal court‘s flexibility and authority to decide that case.‘” Wesch v. Folsom, 6 F.3d 1465, 1470 (11th Cir. 1993) (quoting Atl. Coast Line R.R. Co. v. Bhd. of Locomotive Eng‘rs, 398 U.S. 281, 295 (1970)). For instance, in Battle v. Liberty National Life Insurance Co., 877 F.2d 877, 880–83 (11th Cir. 1989). The underlying case involved “years of litigation and mountains of paperwork,” and we concluded that any future state-court judgment “would destroy the settlement” the parties had reached and “nullify [the] court‘s work in refining its Final Judgment” while “subject[ing] the parties to added expense and conflicting orders.” Id. at 882 (internal quotation marks omitted).
We agree with the bankruptcy court that “[t]his case, although not involving a class action or multi-district litigation, falls squarely within the Eleventh Circuit‘s decisions in Battle” and subsequent, similar cases. See, e.g., Wesch, 6 F.3d at 1470–71 (affirming injunction on finding that “virtual equivalent of a res to be administered” existed where the district court had “invested a great deal of time and other resources in the arduous task of reapportioning Alabama‘s congressional districts“); Juris, 685 F.3d at 1339–40 (concluding that “paradigmatically complex” litigation that ended in carefully crafted settlement “presumptively satisfie[d]” the second Anti-Injunction Act exception under Battle and Wesch).
The bankruptcy court‘s description of the course of proceedings in this matter merits repeating:
What started off as six negligence or wrongful death lawsuits has morphed into 25 lawsuits (including adversary proceedings) and 15 appeals before 11 courts and 17 judges in five states over 11 years. . . . [I]t quickly became apparent the Probate Estates and Trustee were pursuing identical claims against identical parties arising out of the same nucleus of operative facts—i.e., the March 2006 transactions—in more than one forum (state court, district court, and bankruptcy court). . . .
This Court (and others) have devoted years of time and effort to this exceedingly complex litigation. . . . The complaints in this proceeding . . . totaled nearly 300 pages and contained more than 1,600 numbered paragraphs [and] alleged 32 claims for relief against 17 parties. . . . The mediation produced four settlements that will bring nearly $24 million into the bankruptcy estate . . . and, perhaps more important, resolve this adversary proceeding and bankruptcy case in their entirety.
The scale of this proceeding, the broad scope of the Estates’ claims in the First and Second Amended Complaints, and the fact that the Estates have had several opportunities to develop their claims against Schron justify the court‘s injunction of actions that will raise claims substantially similar, if not identical, to the claims that have been dismissed.
It is also important to note that the bankruptcy court‘s approval of the settlements as fair and equitable was expressly conditioned on the issuance of the Permanent Injunction. In the bankruptcy court‘s view, a broad settlement agreement that left the door open to state actions alleging analogous claims against Schron would “unduly prejudice[] Schron.” The bankruptcy court‘s careful consideration of the Estates’ claims and substantial efforts in reaching a fair, equitable, and comprehensive resolution of this matter would be undone by future state-court adjudications raising the same claims. And because the Estates have been unequivocal about their intent to pursue state action against Schron, the necessity of the Injunction in aid of the bankruptcy court‘s jurisdiction is clear.
II. Dismissal of Second Amended Complaint with Prejudice
The Estates also challenge the bankruptcy court‘s order of final dismissal as to Schron, arguing that the courts below failed to properly analyze allegations that Schron (1) is an alter ego of debtor FLTCI; (2) aided and abetted a breach of fiduciary duty by the board of directors of THMI; (3) committed and benefited from fraudulent transfers of the assets of THI and THMI, thus committing constructive fraud; and (4) committed abuse of process and conspired to commit abuse of process. If their arguments as to the merits of these claims fail, the Estates ask this Court to reverse the bankruptcy court‘s decision to dismiss with prejudice and provide them another opportunity to amend their complaint.
We agree with the courts below that the Second Amended Complaint failed to sufficiently allege any causes of action against Schron personally, and we find no abuse of discretion in the bankruptcy court‘s decision to dismiss those claims with prejudice.
A. Sufficiency of the Allegations
The Estates wish to revive several distinct claims against Schron that the bankruptcy court dismissed. We discuss each in turn, taking the factual allegations contained in the Second Amended Complaint as true and construing them in the light most favorable to the Estates.
1. Claims Arising from the 2006 Transaction
Importantly, there is no allegation in the Complaint that Schron took any affirmative act with respect to the 2006 Transaction. Indeed, the Complaint states that “Grunstein and Forman undertook all the actions described [ ] regarding the transfers of the assets of THI and THMI.” As such, for the Complaint to havе stated a claim against Schron for alter-ego liability,8 aiding and abetting breach of fiduciary duty,9 and fraudulent conveyance10 in connection with the 2006 Transaction, it must have alleged that Grunstein and Forman were acting as Schron‘s agents. The bankruptcy court concluded that the Complaint
We agree. The Estates baldly claim that Grunstein and Forman exercised rights belonging to Schron “as Schron‘s agent, lawyer and fiduciary” in planning and executing the 2006 Transaction, but they fail to allege that Schron acknowledged, accepted, or instructed the two men to move forward with the Transaction—nor do they make the necessary connections to demonstrate how Schron stood to gain from the Transaction. That is, while Grunstein and Forman may have sometimes functioned as Schron‘s agent, lawyer, or fiduciary in other contexts, the Complaint does not allege that they operated in this capacity for purposes of the 2006 Transaction.
First, and importantly, the allegations do not plausibly establish that Schron ever held an ownership interest in THI, THMI, FLTCI, or FLTCH. And to suffice, a faсtual allegation must do more than speculate that a right to relief might exist. It must “state a claim to relief that is plausible on its face.” See Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007). The Complaint falls short of this standard. It states in pertinent part: “Grunstein informed Schron about FLTCH taking over the operations of [THI],” and Grunstein and Forman ultimately “agreed to give Schron an option to buy one-third of FLTCH for a nominal amount, so that Schron also benefitted from the transaction.” An option agreement was subsequently executed among FLTCH, Forman, Grunstein, and “Schron‘s entity.” (Emphasis added). It is not clear which “entity” this latter allegation refers to, though the Complaint later implies that Quality Health Services LLC (“QHS“) was the recipient of the option. Yet, even stretching an implication into an allegation, the Complaint offers no explanation as to how, exactly, QHS was “Schron‘s entity.” The Estates argue that the use of this possessive descriptor clearly alleged ownership, but there is no specific allegation regarding Schron‘s ownership of QHS, nor is there any allegation that Schron knew that “his entity” was purchasing such an option. Elsewhere in the complaint, the Estates allege that “FLTCH is owned by Forman and Grunstein,” with no mention of any one-third interest held by “Schron‘s entity.” Clearly, these allegations are insufficient to identify Schron as having any interest in these entities. And it is important to remember that these allegations were not made at a point in the litigation when Plaintiffs lacked the necessary knowledge to fill in the blanks. Plaintiffs had enjoyed the opportunity for extensive discovery in state-court proceedings by the time of the Second Amended Complaint.
In another attempt to find some way to place Schron in the Transaction, the Complaint identifies another entity, SWC Property Holdings, LLC (“SWC“), as “Schron‘s entity” and then alleges that SWC played a role in “forcing” the sale of THMI. Even if it had coherently explained SWC‘s involvement in the Transaction, the Complaint still fails to specify the nature of Schron‘s interest in or control over SWC during the relevant timeframe.11
The Complaint also alleges plainly contradictory facts regarding the fiduciary relationship
Upon careful review of the pleadings, we agree with the bankruptcy court that the Complaint‘s allegations are too vague and inconsistent to successfully state a claim against Schron under an agency theory of liability. The failure to properly allege an agency relationship dooms the Estates’ claims for alter-ego liability, aiding and abetting breach of fiduciary duty, and fraudulent conveyance with respect to the 2006 Transaction. We therefore AFFIRM the bаnkruptcy court‘s dismissal of these claims.
2. Claims Arising from 2012 Settlement Agreement
The Estates also seek to revive a separate fraudulent-conveyance claim against Schron involving a 2012 transaction in which Schron was a direct participant. In January 2012, the THI receiver entered into an agreement with several of the Defendants—including Schron—whereby the receiver assigned to these defendants all claims the THI estate held against any third parties (the “2012 Settlement Agreement“). In exchange, these defendants collectively paid the receiver $700,000. Schron personally supplied $200,000 of the purchase price.
To state a plausible fraudulent-conveyance claim with respect to the 2012 Settlement Agreement, the Estates were required to allege facts demonstrating that the claims Schron received were not reasonably equivalent in value to the price he paid. “Reasonably equivalent value” does not mean dollar-for-dollar equivalence. See Crumpton v. Stephens (In re Northlake Foods, Inc.), 715 F.3d 1251, 1257 (11th Cir. 2013). Instead, courts make informed judgments as to asset valuation in light of the totality of the circumstances. Thus, in order to have “nudged their claims across the line from conceivable to plausible,” Twombly, 550 U.S. at 570, the Estates must have offered more than a bald assertion that the malpractice claim (in addition to the other unidentified claims Schron acquired) had, as alleged, a potential value of more than $2 billion, or at the least that the value exceeded $700,000.
We agree with both lower courts that the Second Amended Complaint failed to allege that, under the circumstances prеsent at the time, $700,000 was not a reasonably equivalent value for the transferred claims. While the Complaint does allege that a successful malpractice claim is theoretically worth at least the value of the underlying judgment, it does not address the potential costs of pursuing those claims, the likelihood that the underlying judgments might be reversed on appeal, or—most importantly—the probability of the claim succeeding. In fact, the Complaint does not set out any facts tending to show that the claims were worth upwards of $1 billion, actually or in theory.
For instance, in at least two portions of the Complaint, the Estates note that certain of the wrongful-death judgments against THI and THMI were subject to appeal in state and federal court. Such allegations introduce the possibility that a portion of the underlying empty-chair judgments may be reversed. A reversal of those underlying judgments would, in turn, directly diminish the value of the malpractice claim. Thus, under the allegations of
More problematically, the Estates fail to address a glaring inconsistency between their valuation of the malpractice claim and their broader fraud argument. In order to succeed, the action for legal malpractice would require Schron to step into the shoes of the THI receiver and establish that THI‘s attorneys negligently failed to prevent the $1 billion in empty-chair judgments against THI. This theory of liability arguably has some initial facial appeal, given the allegation that THI‘s defense counsel ultimately withdrew its representation of THI in those actions. But elsewhere in the Complaint, the Estates assert that THI‘s defense counsel withdrew its representation only at the express instruction of the THI receiver—who was, in turn, acting at the behest of Schron and the other Defendants—in furtherance of a common scheme to conceal the 2006 Transaction from creditors. Thus, under the Estates’ description of the circumstances, establishing a viable malpractice claim would require a court to find THI‘s counsel liable to the THI receiver (and, derivatively, to Schron) for its obedience to the receiver‘s direct instructions. The chances of success on such a theory are clearly slim. And as the bankruptcy court observed, this conceptual inconsistency is plain from the face of the Second Amended Complaint.
Thus, the allegations contained in the Second Amended Complaint do not plausibly assert that the malpractice claim is worth the full value of the underlying empty-chair judgments (plus interest), as the Complaint supposes. Such a valuation would require an assumption that the malpractice claim has a near-absolute certain chance of succeeding. The Complaint‘s own allegations make such an assumption implausible. In the absence of any countervailing allegations to overcome these issues and shore up the $2 billion valuation, the Complaint does not state a claim that $700,000 was less than reasonably equivalent value for the claims under the circumstances.13
For these reasons, we conclude that the Second Amended Complaint does not contain sufficient factual detail to plausibly assert that the malpractice claim, or any of the other unidentified claims transferred through the 2012 Settlement Agreement, were sold for less than reasonably equivalent value. We therefore AFFIRM the bankruptcy court‘s dismissal of the fraudulent-conveyance claim arising from the 2012 Settlement Agreement.
3. Abuse of Process and Conspiracy to Commit Abuse of Process
Finally, the Estates argue that their abuse-of-process claims against
Under Florida law, which governs this claim, “[a]buse of process involves the use of criminal or civil legal process against another primarily to accomplish a purpose for which it was not designed.” See Bothmann v. Harrington, 458 So. 2d 1163, 1169 (Fla. 3d DCA 1984). An abuse of process has not occurred unless the process is used to accomplish an immediate purpоse other than that for which it was designed. Id. The fact that a party may be motivated by incidental or concurrent benefits of the use of process is not sufficient to constitute an abuse. See S & I Investments v. Payless Flea Mkt., Inc., 36 So. 3d 909, 917 (Fla. 4th DCA 2010) (“There is no abuse of process . . . when the process is used to accomplish the result for which it was created, regardless of an incidental or concurrent motive of spite or ulterior purpose.” (emphasis in original) (quoting Bothmann, 458 So. 2d at 1169)).
As both lower courts noted, the 2012 Settlement Agreement was likely unenforceable, and Defendants’ conduct in subsequent state-court proceedings was improper. Indeed, the parties do not dispute that Defendants’ counsel‘s representation of THMI pursuant to the 2012 Settlement Agreement was unauthorized and that Defendants misled various state courts with respect to the nature of THMI‘s defense.14 But the question before us is not whether Defendants properly exercised their rights under the Agreement or whether the Agreement itself was enforceable as a matter of law. The sole question is whether the Complaint alleged that the Defendants’ defense of THMI under the Agreement constituted a use of civil process that was intended to achieve an immediate purpose for which it was not designed. See Bothmann, 458 So. 2d at 1169.
Thus, to plausibly state a claim for abuse оf process, the Complaint must have alleged that the defense of THMI was not primarily designed for the simple goal of
For the above reasons, we AFFIRM the bankruptcy court‘s dismissal of claims of abuse of process and conspiracy to commit abuse of process against Schron. Because we find that the Complaint fails to allege the facts necessary to support these claims, we do not consider the alternative grounds on which the bankruptcy court dismissed them.16
B. Dismissal with Prejudice
The bankruptcy court dismissed each of the claims against Schron with рrejudice. Such dismissal is reviewed for abuse of discretion, and a court generally does not abuse its discretion where future amendments would be futile or unfairly prejudicial. We find no abuse of discretion.
The Estates’ First Amended Complaint spanned nearly three-hundred pages and contained hundreds of repetitive paragraphs. Its narrative was convoluted and difficult to track. It did not comport with Rule 8‘s mandate to present a “short and plain statement of the claim.”
Instead of clarifying the content of the initial pleading and remedying its deficiencies
The Estates have given no indication that a third pleading would be any more fruitful than their second. If the Estates could have alleged viable claims against Schron, they already would have done so. We find no abuse of discretion in the court‘s decision not to grant the Estates a third bite at the apple and AFFIRM accordingly.
CONCLUSION
We conclude that the bankruptcy court had jurisdiction to enjoin future claims arising from the 2006 Transaction and that it acted within the scope of its authority under the All Writs Act and the Anti-Injunction Act in issuing the Permanent Injunction. The Permanent Injunction was broad, but its breadth was justified in this case. We also find the various claims against Schron implausible as alleged in the Second Amended Complaint, even taking all the Estates’ allegations as true. And given the Estates’ inability or unwillingness to remedy the deficiencies in their pleadings, the bankruptcy court exercised proper discretion in dismissing the Second Amended Complaint with prejudice. We therefore AFFIRM the bankruptcy court‘s dismissal of claims against Schron with prejudice and its issuance of a permanent injunction with respect to claims against Schron.
Notes
- A common-law claim for aiding and abetting breach of fiduciary duties owed to THMI and THMI‘s creditors;
- Claims for a declaratory judgment establishing that Schron is liable as a successor to THI, THMI, and FLTCI and under veil-piercing and alter-ego theories;
- A claim for actual and constructive fraudulent transfers, as well as conspiracy to commit fraudulent transfers, under various state laws;
- A claim for abuse of process and conspiracy to commit abuse of process under Florida state law;
- A claim for negligence under Florida state law; and
- A claim to avoid certain postpetition transfers under the Bankruptcy Code.
The fact that the assets that were allegedly transferred to Schron . . . belonged to THMI is crucial. If that is the case, what difference does it make if the creditors are going after those assets in an attempt to collect on a judgment against THI? How can the [Estates] collect on [their] judgment against THI by seeking to undo a transfer of assets that belong to THMI—whether under an alter ego or fraudulent transfer theory—without interfering with the administration of this estate?
As best the Court can tell, the Plaintiffs allege that one of three different people or entities actually own the one-third option [in FLTCH that the Estates claim is Schron‘s]. In one instance, the Plaintiffs allege that “[Grunstein] and Forman agreed to give Schron an option to buy one-third of FLTCH for a nominal amount,” although they do not allege they actually gave Schron himself the option. In other instances, the Plaintiffs allege that “Schron‘s entity“—SWC Property Holdings, LLC—received the option, without alleging whether Schron has any ownership interest in that entity. If that is not confusing enough, the Plaintiffs allege in still other places that “Schron‘s entity“—presumably SWC Property Holdings—designated Quality Health Services, LLC to take title to the option. Again, there is no allegation regarding Schron‘s ownership interest—if any—in Quality Health Services. Trying to harmonize those seеmingly contradictory allegations, it appears the Plaintiffs are alleging that Schron benefitted from the March 2006 transaction because Forman and Grunstein contracted with SWC Property Holdings to convey a one-third option to Quality Health Services. Without any allegation that Schron actually owns SWC Property Holdings or Quality Health Services, however, the Plaintiffs cannot plausibly state a claim that Schron personally benefitted from the March 2006 transaction.
Damages in a legal malpractice action are the amount of damages sustained by the client as [a] result of malpractice. As of the date of this filing, the THI Enterprise has sustained damages in the amount of $1.4 billion, plus accruing interest. Three of the Plaintiffs[‘] Estates here still have pending litigation against the THI Enterprise. Without a doubt, the potential value of the THI Enterprise‘s claims could be well over $2 billion.
fails to consider, among other things, that the more than $1 billion in judgments largely consist of punitive damages claims; all but one of those judgments is currently on appeal; and Schron‘s ability to prevail on the potential malpractice claims—which are based on the allegation that the lawyers for THI and THMI negligently withdrew their defenses of those entities in the state-court wrongful death cases—is seriously diminished because the lawyers took their direction from the THI Receiver (and Schron would be standing in the shoes of the THI Receiver pursuing the malpractice claims).
It would be one thing if the Plaintiffs were alleging an abuse of process claim based on FAS allegedly orchestrating a defense on THMI‘s behalf before THMI‘s counsel withdrew in 2010. At least there, the Plaintiffs would have a plausible claim that FAS (or some of the other Defendants) were not using their defense of THMI to avoid liability but rather to stall the litigation long enough for the statute of limitations to run on any fraudulent transfer claim arising out of the March 2006 transaction. That would arguably be an improper purpose. But asserting a defense on THMI‘s behalf for the purpose of avoiding liability—which is all that is alleged here—cannot give rise to an abuse of process claim.