ORDER RE: MOTION FOR PARTIAL DISMISSAL
This mаtter came before the Court in a telephonic hearing on Defendant OneWest Bank’s Motion for Partial Dismissal. Defendant moved to dismiss two counts of Trustee’s Complaint to Avoid Transfer. Jason C. Palmer and Thomas M. Boes represented Defendant. Eric W. Lam represented the Chapter 7 Trustee. The Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O).
STATEMENT OF THE CASE
Michael Walter signed two promissory notes now held by Defendant OneWest Bank. To secure the promissory notes, both Michael and Carol Walter signed and recorded deeds of trust, also now held by Defendant. According to Trustee, around the time Debtors recorded the second deed of trust, Debtors became indebted to the Internal Revenue Service (IRS). Trustee filed the Complaint to avoid the deeds of trust as fraudulent transfers under 11 U.S.C. § 544. Trustee attempts to step into the shoes of the IRS and utilize the transfer avoidance provisions of state law and federal nonbankruptcy law to recover for the Estate.
Defendant moves to dismiss the two lien-avoidance counts of Trustee’s Complaint. Defendant asserts that Trustee fails to state a plausible claim to avoid fraudulent transfers under the Supreme Court’s pleading standards set forth in Ashcroft v. Iqbal,
PLEADINGS AND FACTUAL ALLEGATIONS
The following factual allegations are taken from the Trustee’s Complaint. Debtors Michael and Carol Walter were married in 1974. In March 1995, they purchased a second home (non-homestead property) in Osage Beach, Missouri (the “Missouri Property”). They paid $435,000.
Michael sold his share of a business in 1995, which resulted in a payment of $1,000,000, or more, to Michael. He and Carol used approximately $300,000 of those funds to improve the Missouri Property. They also used some of the funds to pay off the mortgage on the Missouri Property.
Michael later acquired an ownership interest in two limited liability companies: Retlaw’s Riverside Sports Bar & Grille, L.C. (“RRSBG”) and John W. Enterprises, L.C., d/b/a Retlaw’s at the Lake (“JWE”). The Missouri Property was used as collateral for purchasеs made by the business. In 2001, RRSBG purchased a bar in Charles City, Iowa. RRSBG borrowed the funds from First Citizens National Bank. Michael personally guaranteed the loan and pledged the Missouri Property as collateral. In addition, Carol signed an unlimited guarantee in favor of First Citizens National Bank with respect to all debts.
In 2005, JWE purchased a bar and restaurant in Clear Lake, Iowa. JWE also obtained financing from First Citizens Na
In 2006, IndyMac Bank, FSB (“Indy-Mac”) approached Michael and offered to loan him $1,000,000. This offer was based on an appraisal of the Missouri Property showing a value of $1,600,000. IndyMac did not ask for tax returns from Michael or Carol or perform other analysis regarding Michael’s financial strength to repay Indy-Mac.
On July 13, 2006, Michael signed a $1,000,000 promissory note in favor of In-dyMac. Carol did not sign a promissory note. To secure the note, Michael and Carol both signed a deed of trust on the Missouri Property in favor of IndyMac, which was recorded on July 20, 2006.
Michael used the $1,000,000 loan to retire debt, to operate the bars/restaurants, and to make the loan payments to Indy-Mac. He used $477,000 to pay off the two First Citizens National Bank mortgages on the Missouri Property.
A few months later, IndyMac loaned another $150,000 to Michael. On September 28, 2006, Michael signed a promissory note for this second loan. This was characterized as a home equity line of credit. To secure this second note, both Michael and Carol signed a second deed of trust on the Missouri Property in favor of Indy-Mac. The second deed of trust was recorded sometime in 2007. Defendant, OneWest Bank, now holds the $1,000,000 note, the $150,000 note, and'the two deeds of trust.
Trustee’s focus in this case is the effect of these transactions and transfers on Carol’s financial condition. Trustee specifically alleges that after thе first deed of trust (on the Missouri Property) was recorded in July 2006, Carol’s remaining non-exempt, unencumbered assets were worth less than the debts for which Carol was liable. If Carol had not pledged her interest in the Missouri Property in that deed of trust, that interest would have been available to her creditors. The second deed of trust, according to Trustee, had similar or compounding effect.
In 2007, Debtors incurred a debt to the IRS. Three years later, on December 17, 2010, Debtors filed a voluntary Chapter 7 Petition. As of the Petition date, the penalty balance owing to the IRS was $4,750, plus interest.
On May 3, 2011, Trustee filed this three-count Complaint to avoid the Deeds of Trust on the Missouri Property. Trustee alleges in all cоunts that Carol received nothing in return for signing away her interest in the Missouri Property in the first and second deed of trust. Trustee alleges the deed of trust transactions should be set aside as to Carol for failure of consideration (Count I), and as fraudulent transfers Trustee can avoid under his § 544 powers (Counts II & III). In Count II, Trustee asks the Court to declare the Deeds of Trust voidable as fraudulent conveyances under 28 U.S.C. §§ 3301-3308. In Count III, he asks the Court to declare the Deeds of Trust voidable under Iowa Code Chapter 684.
Defendant moved to dismiss the two fraudulent conveyance counts in the Complaint. Defendant argues Trustee failed to state a claim on which relief may be granted. According to Defendant, Trustee fаiled to cite the legal authority that forms the basis for Trustee’s claim, Trustee failed to satisfy the heightened pleading requirements of Fed.R.Civ.P. 9, and Trustee failed to provide sufficient plausible factual assertions to support the elements of the claims under the Rule 8 pleading standards as interpreted by the Supreme
Trustee resists. Trustee argues that he has specified the legal basis for his claim. Trustee argues the pleading standards for actual fraud in Rule 9 do not apply to claims for constructively fraudulent transfer, and that his Complaint satisfies Iqbal and Twombly.
CONCLUSIONS OF LAW
A. Motion to Dismiss Standard
The Bankruptcy Rules follow the Federal Rules of Civil Procеdure standards for dismissal and requirements for pleading. Bankruptcy Rule 7012 specifically notes: “Rule 12(b)-(i) F.R.Civ.P. applies in adversary proceedings.” Defendant moves for dismissal under Rule 12(b)(6) for “failure to state a claim upon which relief can be granted.” Id.
In order to determine whether a complaint states a “claim upon which relief can be granted,” courts look to what a party is required to plead. Again, Bankruptcy Rule 7008(a) provides: “Rule 8 F.R.Civ.P. applies in adversary proceedings.” Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.”
As this Court recently discussed in detail in Sarachek v. Right Place, Inc. (In re Agriprocessors, Inc.), No. 08-02751, Adv. No. 10-09128,
The decisions in Iqbal and Twom-bly provide the minimum standard of pleading required to survive a motion to dismiss. Defendant initially appears to argue that Trustee’s Complaint is deficient because Trustee failed to state his legal theory. In particular, Defendant argues Trustee failed to provide precise code sections in his Complaint. Iqbal and Twom-bly, however, did not modify the Federal Rules’ liberal pleading standard for stating legal theories:
[U]nder the Fеderal Rules of Civil Procedure, however, a complaint need not pin plaintiffs claim for relief to a precise legal theory. Rule 8(a)(2) of the Federal Rules of Civil Procedure generally requires only a plausible “short and plain” statement of the plaintiffs claim, not an exposition of his legal argument.
Skinner v. Switzer, — U.S. -,
Trustee here specified that he was attempting to exercise his § 544 powers by
B. Fraudulent Conveyance Claims
In order to evaluate whether the Complaint satisfies the Iqbal and Twombly requirements, this Court must evaluate whether the factual assertions by Trustee “plausibly” establish an entitlement to relief. To do so, the Court must first identify the legal standards Trustee must meet in alleging plausible facts to support a claim.
The Bankruptcy Code allows a trustee to use non-bankruptcy law to avoid certain transfers for the estate’s benefit. 11 U.S.C. § 544; Ries v. Wintz Properties, Inc. (In re Wintz Co.),
1. Fraudulent Conveyance Claim under the FDCPA
In Count II of his Complaint, Trustee alleges that the Deeds of Trust were fraudulent as to the debt to the IRS. Trustee claims he can recover the fraudulent transfer under § 544 by using 28 U.S.C. § 3304(a)(1) and § 3304(b)(1)(B) of the FDCPA. The pertinent part of § 3304(a)(1) states:
Except as provided in section 3307, a transfer made or obligation incurred by a debtor is fraudulent as to a debt to the United States which arises before the transfer is made or the obligation is incurred if—
(1)(A) the debtor makes the transfer or incurs the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation; and
(B) the debtor is insolvent at that time or the debtor becomes insolvent as a result of the transfer or obligation;
28 U.S.C. § 3304(a)(1)(A) & (B) (emphasis added). The pertinent part of § 3304(b)(1) states:
Except as provided in section 3307, a transfer made or obligation incurred by a debtor is fraudulent as to a debt to the United States, whether such debt arises before or after the transfer is made or the obligаtion is incurred, if the debtor makes the transfer or incurs the obligation—
(A) with actual intent to hinder, delay, or defraud a creditor; or
(B) without receiving a reasonably equivalent value in exchange for the transfer or obligation if the debtor—
(i) was engaged or was about to engage in a business or a transaction for whichthe remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
28 U.S.C. § 8304(b)(1)(A) & (B) (emphasis added). The FDCPA thus includes provisions that allow avoidance of transfers based on both actual fraud and constructive frаud. 28 U.S.C. § 3304(a) (constructively fraudulent as to existing debt), § 3304(b)(1)(A) (actual intent to defraud regarding existing or future debt), and § 3304(b)(1)(B) (constructively fraudulent as to existing or future debt); see also Porter,
2. Fraudulent Conveyance under Iowa Code Chapter 684
Defendant also moves to dismiss Count III of Trustee’s Complaint where the Trustee seeks, under § 544, to avoid transfers under Iowa Code §§ 684.4(1)(b) and 684.5(1). These sections are part of Iowa’s enactment of the Uniform Fraudulent Transfer Act (“UFTA”). Trustee alleges that the Deeds of Trust were fraudulent under the UFTA as to past and future creditors. Section 684.4(1) provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation under any of the following circumstances:
a. With actual intent to hinder, delay, or defraud any creditor of the debtor.
b. Without receiving a reasonably equivalent value in exchange for the transfer or obligation, if either of the following applies:
(1) The debtor was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction.
(2) The debtor intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
Iowa Code § 684.4(1). Section 684.5(1) provides:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.
Iowa Code § 684.5(1). Like the FDCPA, Iowa’s version of the UFTA thus includes provisions that allow avoidance of fraudulent transfers based on both actual and constructive fraud. Iowa Code § 684.4(1)(a) (actual intent to defraud), Iowa Code § 684.4(1)(b) (constructively fraudulent transfer), and Iowa Code § 684.5(1) (constructively fraudulent transfer). Here, Trustee only seeks to avoid transfers based on constructive fraud under §§ 684.4(1)(b) and 684.5(1).
3. Constructively Fraudulent Transfers
To make a claim for constructively fraudulent transfer under the FDCPA for a debt arising before the alleged transfer, Trustee must establish:
(1)(A) the debtor makes the transfer or incurs the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation; and
(B) the debtor is insolvent at that time or the debtor becomes insolvent as a result of the transfer or obligation
28 U.S.C. § 3304(a)(1).
For debts arising either before or after the аlleged transfer is made, Trustee must establish that a debtor made the transfer:
(B) without receiving a reasonably equivalent value in exchange for the transfer or obligation if the debtor—
(i) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(ii) intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
28 U.S.C. § 3304(b)(1)(B). The provisions of the UFTA contain the same elements and employ the same language. Iowa Code §§ 684.4(1)(b) and 684.5(1). See also Porter,
Section 548(a)(1)(B) of thе Bankruptcy Code also allows trustees to avoid transfers based on constructive fraud and requires a trustee to prove these same elements. While § 548 is not pled or involved directly with this case, the Court will look to § 548 cases for guidance in conducting the FDCPA and UFTA analysis. See United States v. Goforth,
C. Applicability of Rule 9 Pleading Standards
Defendant argues the constructively fraudulent transfer claims (Count II and III) should also be dismissed for failing to satisfy Rule 9 pleading requirements. Bankruptcy Rule 7009 applies Rule 9 of the Federal Rules of Civil Procedure. When a plaintiff alleges fraud, Fed. R.Civ.P. 9(b) states that the plaintiff “must state with particularity the circumstances
Again, while not pled here, § 548(a) and cases interpreting it provide useful guidance. Section 548(a), like the FDCPA and UFTA, allows a trustee to avoid transfers that are incurred by either actual fraud or constructive fraud. Most cases interpreting § 548(a) have drawn a distinctiоn between cases of actual fraud (§ 548(a)(1)(A)) and constructive fraud (§ 548(a)(1)(B)) in deciding whether Rule 9 applies. This Court has adopted the majority view and recently held that Rule 9(b) is inapplicable to constructively fraudulent transfers under § 548(a) because intent or deceit is not an element of constructive fraud. Right Place,
Defendant cites Northwest Bank & Trust Co. v. First Illinois Nat’l Bank,
D. Pleading Standards Where Bankruptcy Trustee is Plaintiff
In cases decided both before and after Iqbal and Twombly, courts have given more leeway in pleading where the bankruptcy trustee is the plaintiff. As this Court noted in Right Place, “[f]or claims brought by a bankruptcy trustee, courts take a more liberal view when examining allegations of actual fraud ... in the context of a fraudulent conveyanсe, since a trustee is an outsider to the transaction who must plead fraud from second-hand knowledge.” Right Place,
In the cases cited in Right Place, the courts analyzed actual fraudulent transfer pleadings under the heightened standards of Rule 9. While this is not an actual fraud case that falls under Rule 9, the discussion regarding leeway for Trustees in pleading does have some application. Right Place,
E. Factual Allegations Required to Establish a Plausible Claim
In order to survive a motion to dismiss under Iqbal and Twombly, Trustee’s constructively fraudulent transfer claims here must allege sufficient facts that plausibly show Trustee is entitled to recover the alleged transfer. A mere recitation of the elements of constructively fraudulent transfer is inadequate to satisfy Iqbal and Twombly. Right Place,
1. Valid Right to Avoid a Transfer
Defendant argues that Trustee lacks a valid right to avoid Carol’s alleged transfers in the Deeds of Trust.
In response, Trustee points to the language of 28 U.S.C. § 3304(b), which states that “a transfer made or obligation incurred by a debtor is fraudulent as to a debt to the United States, whether such debt arises before or after the transfer is made or the obligation is incurred....” Id. Thus, even assuming here that the IRS debt became due and owing only after Carol’s alleged transfer of her property interest via the Deeds of Trust, Trustee may still apply this provision to avoid the transfer as constructively fraudulent. Thus, Trustee’s Complaint sufficiently alleges his valid right to avoid a transfer.
2. Reasonably Equivalent Value
The second element a trustee must plausibly show is that “debtor [made] the transfer or incurred] the obligation with
The term “reasonably equivalent value” is not defined in the Bankruptcy Code. The terms “reasonably equivalent value” and “value” are, however, both defined in the FDCPA and the UFTA. The FDCPA provides:
(a) Transaction. Value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course оf the promisor’s business to furnish support to the debtor or another person.
(b) Reasonable Equivalent Value. For the purposes of sections 3304 and 3307, a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollusive foreclosure sale or execution of a power of sale for the acquisition or disposition of such interest upon default under a mortgage, deed of trust, or security agreement.
28 U.S.C. § 3303(a) and (b). The UFTA section defining “value” and “reasonably equivalent value” also includes the definition of “transfer” and provides:
1.Value is given for a transfer or an obligation if, in exсhange for the transfer or obligation, property is transferred or an antecedent debt is secured or satisfied, but value does not include an unperformed promise made otherwise than in the ordinary course of the prom-isor’s business to furnish support to the debtor or another person.
2. For the purposes of section 684.4, subsection 1, paragraph “b”, and section 684.5, a person gives a reasonably equivalent value if the person acquires an interest of the debtor in an asset pursuant to a regularly conducted, noncollu-sive foreclosure sale or execution of a power of sale for the acquisition or disposition of the interest of the debtor upon default under a mortgage, deed of trust, or security agreement.
3. A transfer is made for present value if the exchange between the debtor and the transferee is intended by them to be contemporaneous and is in fact substantially contemporaneous.
Iowa Code § 684.3. The FDCPA and UFTA definitions are nearly identical.
“Generally, courts have noted that the provisions of the UFTA parallel § 548 of the Bankruptcy Code, and the same analysis applies under both laws.” In re Chapman Lumber Co., Inc., No. 06-09112,
In Right Place, this Court specifically addressed the rules for pleading reasonably equivalent value in a § 548 case. “[Rjeasonably equivalent value is a fact intensive determination that typically requires testing through the discovery pro
Defendant argues that Trustee failed to plausibly show that Carol did not receive reasonably equivalent value in exchange for the Deeds of Trust. Trustee alleged that Carol received (1) no consideration and (2) she received nothing in exchange for the pledge of her interest in the Missouri Property. Complaint ¶¶ 35, 42 and 45. Allegations of no consideration and receipt of nothing in exchange for the transfer or obligation are factual assertions, not legal conclusions. Right Place,
a trustee’s allegation that debtor received nothing in exchange for the alleged transfers is sufficiеnt factual support [for a claim that Debtor did not receive reasonably equivalent value in exchange]. The Court draws an inference that Trustee cannot find any money or other consideration that the Debtor received in exchange for making the alleged transfers. In other words, when Trustee alleges Debtor received nothing from the defendant in exchange for an alleged fraudulent transfer, it is entirely plausible that Debtor received less than reasonably equivalent value in exchange for that alleged transfer.
Right Place,
Defendant points out that in this case the Trustee expressly contradicts himself on this issue in the Complaint. Trustee claims on the one hand that Carol received no consideration. On the other hand, Trustee states that the $1,000,000 loan, for which Carol signed a deed of trust as security, was used to pay off prior mortgages on the Missouri Property — the First Citizen National Bank loans backed by Carol’s unlimited guarantee. According to Defendant, this shows Carol received a substantial benefit from this IndyMac loan because it cancelled her prior unlimited guarantee obligation.
The Court concludes this argument about contradicting allegation raises a factual dispute — not an argument that Trustee failed to plausibly allege reasonably equivalent value. Trustee is only required to state a plausible claim. Whether Carol received reasonably equivalent value is ultimately a factual determination to be made based on the totality of the circumstances. Charys,
3. Insolvency or Debts Beyond Debt- or’s Ability to Pay
The third element a trustee must plead with plausible facts is that at the time of the transfers, the debtor (i) was insоlvent before or as a result of the transfer, or (ii) “was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or
A debtor is insolvent if the “sum of the debtor’s.debts is greater than all of the debtor’s assets, at a fair valuation.” 28 U.S.C. § 3802; see also Iowa Code § 684.2 (same); 11 U.S.C. § 101(32)(A) (same). To calculate insolvency, all thrеe fraudulent transfer schemes exclude assets that were “transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable.” Iowa Code § 684.2(4); 28 U.S.C. § 3302; 11 U.S.C. § 101(32)(A). Again, the Court recently had occasion to address nearly identical arguments in Right Place. The Court stated: “[a] complaint must contain enough factual information to plausibly show the debtor’s liabilities exceeded assets at the time of the transfers.” Right Place,
In this case, Trustee provided several facts to plаusibly show that Carol’s non-exempt assets were worth less than Carol’s debts. In Paragraph 32, 33, and 43 of Trustee’s Complaint, Trustee provides facts that show Carol did not work outside the home in 2005 and 2006, that Carol’s assets were minimal, and that for several years Michael liquidated his and Carol’s personal assets to fund the two bar and restaurant businesses. In Paragraph 46, Trustee provides additional information about the couple’s personal financial statement. Additionally, Trustee pleads alternatively that if Carol owned part of the businesses, she was still insolvent because the businesses’ inventory and equipment did not exceed the businesses’ debt. Finally, in Paragraph 28 Trustee alleges that “Indymac loaned Miсhael $1,000,000.00, and part of the loan ... was then used by Michael to make the $7,000.00 monthly payments due Indymac.” Based on these allegations, the Court finds that Trustee has pled sufficient facts to make a plausible claim that Carol’s debts were greater than her assets at the time of the alleged fraudulent transfer.
F. Amount of Recovery Trustee Can Make
Defendant argues that even if Trustee can successfully avoid the alleged transfers, Trustee cannot recover the full amount of the Deeds of Trust. Defendant argues Trustee’s recovery is limited to the value of the IRS claim — $4,750 plus interest. Defendant argues under the FDCPA the United States may only obtain “avoidance of the transfer or obligation to the extent necessary to satisfy the debt to the United States.” 28 U.S.C. §§ 3306(a)(1), 3307(b). Defendant also argues that under Iowa law a creditor may only obtain “avoidance of the transfer or obligation to the extent necessary to satisfy the creditor’s claim.” Iowa Code § 684.7(1)(a). According to Defendant, the statutory language limits Trustee’s relief to the amount of the IRS claim.
Trustee cites Eighth Circuit case law holding that a trustee’s recovery is not limited to the value of the claim of the unsecured creditor. Stalnaker v. DLC, Ltd.,
In Stalnaker, the Eighth Circuit cited Liebersohn v. IRS (In re C.F. Foods, L.P.),
Trustee’s argument that both Deeds of Trust are voidable and the full amount of the Deeds of Trust should be property of the estate appears to have strong support in the law. This Court, however, need not definitely decide the issue now. Trustee has sufficiently alleged his claims. The full parameters of his right to recover, if any, will be determined later in the case.
Trustee has sufficiently pled the required elements of 28 U.S.C. § 3304(a), § 3304(b)(1)(B), § 684.4(1)(b), and § 684.5(1). Defendant’s Motion for Partial Dismissal will be denied.
WHEREFORE, Defendant’s Motion for Partial Dismissal is DENIED.
Notes
. In this case, the parties agree that Trustee represents an existing unsecured creditor with an allowable unsecured claim under § 544(b)(1).