Unsecured Creditors' Committee Ex Rel. Heartland Chemicals, Inc. v. Banque Paribas (In Re Heartland Chemicals, Inc.)Unsecured Creditors' Committee Ex Rel. Heartland Chemicals, Inc. v. Banque Paribas (In Re Heartland Chemicals, Inc.)
OPINION
This matter is before the Court on the motion of the defendant, Banque Paribas (the “Bank”), to dismiss the complaint filed against it by the Unsecured Creditors’ Committee (the “Committee”) of Heartland Chemicals, Inc.
On July 8, 1987, pursuant to an agreed order of this Court, the Committee filed this nine-count adversary proceeding for itself and on behalf of the Debtor, Heartland Chemicals, Inc., against the Bank. The complaint alleges a fraudulent scheme by the Bank to force Heartland’s trade creditors to fund the debts of both Heartland and its several affiliates (the “Ceres Group”) to the Bank. The complaint seeks avoidance and equitable subordination of the Bank’s claim, avoidance of fraudulent transfers and obligations, an accounting, the turnover of all funds received by the Bank pursuant to this Court’s Turnover Order, and money damages. The nine counts of the complaint may be summarized as follows:
Count I Equitable subordination under 11 .U.S.C. § 510(c)(1)
Count II Voidable Preference under 11 U.S.C. § 547 and 11 U.S.C. § 550(a)(1)
Count III Breach of duty of good faith
Count IV Common law fraud
Count V Fraudulent conveyances under 11 U.S.C. § 544(b) and Ill.Rev.Stat. ch. 59, 114
Count VI Fraudulent conveyances under 11 U.S.C. § 544(b) and Ill.Rev.Stat. ch. 59, U 4
Count VII Fraudulent conveyances under 11 U.S.C. § 548(a)(1)
Count VIII Fraudulent conveyances under 11 U.S.C. § 548(a)(2)
Count IX Objections to the Bank’s claim
The Bank has moved to dismiss Counts I-VIII of the complaint. The Bank argues that the complaint is defective under Fed. R.Civ.P. 12(b)(6) for failure to state a claim upon which relief may be granted, under Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction, and under Fed.R.Civ.P. 9(b) for failure to plead fraud with particularity.
In appraising the sufficiency of the complaint, this Court follows “the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond a doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.”
Conley
*1014
v. Gibson,
The complaint is 59 pages long and contains 186 paragraphs. At the risk of oversimplifying the complaint, the Court believes a brief overview of the complaint is helpful before addressing the merits of the motion to dismiss. Heartland was incorporated in 1975 and engaged in the business of distributing agricultural chemicals to dealers throughout Illinois and Indiana. In January 1981, Citibank provided Heartland with a $10 million dollar line of credit. In exchange for this line of credit, Heartland granted Citibank a security interest in substantially all of Heartland’s assets. In April 1984, Citibank sold a 21.21% participation in the loan to the Bank. In October 1984, Citibank sold its entire interest in the loan to the Bank.
In 1985, the Bank made an internal policy decision to reduce or eliminate its agricultural-based loans. To this end, the complaint alleges that the Bank engaged in a fraudulent pattern of misrepresentations devised to recoup from Heartland the funds that had been previously loaned to Heartland and its affiliates. According to the complaint, Heartland's trade creditors were injured by the Bank’s scheme when the Bank induced these creditors to supply additional inventory on an unsecured basis to Heartland at a time when the Bank intended to liquidate Heartland, and knew that Heartland could not pay for the inventory. The complaint further alleges that the Bank destroyed Heartland’s going concern value by liquidating Heartland at the time and in the manner it did.
Count I of the complaint alleges that the Bank’s claim should be equitably subordinated to all unsecured claims pursuant to 11 U.S.C. § 510(c)(1). The Bank argues that the Committee has not alleged sufficient facts to establish the persuasive control and egregious conduct necessary to support a claim of equitable subordination. The Court disagrees. The complaint alleges both control and gross misconduct by the Bank. The complaint alleges control by the Bank through the use of conduit accounts, restrictions on deposits and investments by Heartland, insistence on personal guarantees of corporate debt, the Bank’s participation in management decisions, and the Bank’s refusal to approve the sale of Heartland as a going concern. The complaint alleges gross misconduct by the Bank in its scheme to shift its credit risks to Heartland’s trade creditors. The complaint alleges various misrepresentations by the Bank to Heartland and its trade creditors regarding the Bank’s financing of Heartland’s operations. These allegations are sufficient to state a claim for equitable subordination under 11 U.S.C. § 510(c)(1).
The Bank also suggests that Count I should be dismissed because the Committee does not have standing to bring an equitable subordination claim on its own behalf. This claim is without merit. If the allegations in the complaint are true, then the unsecured creditors of Heartland clearly suffered substantial injury as a result of the Bank’s conduct. Since the Committee represents the unsecured creditors, it has standing to file an equitable subordination claim against the Bank.
Count II alleges that payments to-talling $1,060,000 made by Heartland to the Bank in the ninety days preceding the bankruptcy constitute voidable preferences under 11 U.S.C. § 547(b). The Bank’s liability in Count II is premised on a finding in Count I that the Bank should be equitably subordinated. The Bank argues that Count II should be dismissed without prejudice because it will not be ripe for adjudication until the Bank’s claim is either disallowed or subordinated. The Bank suggests that the Court should not waste its time on a count that may have no basis. The Committee concedes that it must win on Count I in order to prevail on Count II. The Committee argues, however, that the facts are essentially the same, that the Bank has completed all of the acts neces *1015 sary to form the factual predicate of Count II, and that judicial economy is promoted by trying all Counts together. This Court agrees with the Committee. The Committee’s judicial economy argument is especially compelling in a case such as this one where the attorneys and witnesses are from out of town and the anticipated length of the trial requires a special setting.
Count III alleges that the Bank violated its duty of good faith imposed by Sec. 1-203 of the Illinois Commercial Code, Ill. Rev.Stat. ch. 26, 111-203. The Bank responds that an allegation of a failure to act in good faith under Sec. 1-203 does not state a claim for relief. The Bank’s position is supported by the case law.
Wash-bum v. Union National Bank & Trust Co.,
The Committee counters that it is actually alleging a breach of the Bank’s common law duty of good faith. This argument is not persuasive. A fair reading of the complaint indicates that the Committee is relying exclusively on Sec. 1-203. Since a violation of Sec. 1-203 does not state a cause of action, Count III must be dismissed.
Count IV alleges fraudulent misrepresentations and omissions by the Bank. The Bank argues that the Committee has failed to allege sufficient facts to establish a scheme to defraud Heartland on a pattern of fraudulent activities committed by the Bank against Heartland. The Court disagrees with the Bank’s position. The complaint clearly alleges a fraudulent scheme by the Bank to seek repayment of the entire debt of the Ceres Group from Heartland and its trade creditors through a pattern of misrepresentations and omissions. Moreover, the fraudulent scheme is alleged with sufficient particularity to satisfy Rule 9 of the Federal Rules of Civil Procedure. The factual allegations in the complaint show how, when, and where the fraud occurred. Nothing more is required by Rule 9.
The Bank has also moved to strike portions of Count IV dealing with the alleged misrepresentations of the Bank to individual trade creditors of Heartland. The Bank argues that the Committee lacks standing to raise them and that they are irrelevant to the issues in Count IV. The Bank is confusing the factual allegations of a complaint with a claim for relief. The fact that a trade creditor may have a separate cause of action for fraud against the Bank does not preclude the Committee from suing for fraud. The allegations in the complaint concerning the misrepresentations of the Bank to the trade creditors are relevant to establishing the Bank’s overall scheme to defraud Heartland because they serve as concrete examples of the Bank’s fraudulent intent. Therefore, the motion to strike will be denied.
Count V seeks avoidance of the 1981 Letter Agreement pursuant to the Illinois Fraudulent Conveyance Statute. Ill.Rev.Stat. ch. 59, IT 4. The Bank argues that this Count should be dismissed because it is time-barred by the applicable statute of limitations.
Under Illinois law, the appropriate statute of limitations for a fraud action is the five-year limitations imposed by Ill.Rev. Stat. ch. 110, ¶ 13-205.
Rozny v. Marnul,
Anticipating the Court’s ruling on the appropriate statute of limitations, the Committee has requested leave to amend Count V to allege exactly when the fraudulent conveyance was discovered by Heartland’s trade creditors. Although this request has merit,
see In re Josefik,
Count VI seeks to avoid the 1985 Loan and Security Agreement as a fraudulent conveyance under Illinois law. The Bank has moved to dismiss Count V and VI on the grounds that the Committee does not have standing to challenge these conveyances.
In order to set aside the 1981 Letter Agreement and the 1985 Security Agreement under 11 U.S.C. § 544(b), the Committee has the threshold burden of establishing the existence of a creditor holding an unsecured claim under 11 U.S.C. § 502 as of the date of the transfers subject to attack under Illinois law.
In re Akin,
The Court’s review of the applicable law supports the Bank’s position. In
Chicago Daily News v. Siegel,
Where a conveyance is alleged to be made in fraud of the rights of creditors, the creditors injured are those whose claims exist at the time of the conveyance ... If the conveyance was made before the indebtedness was incurred, then there was no fraud, as there was no design to hinder or delay creditors at the time; and the credit was not given upon the supposition that this property could be rendered liable for its payment.
See Eckhart v. Burrell Manufacturing Co.,
The Bank has also moved to dismiss Counts V through VII for failure to plead *1017 fraud with particularity as required by Rule 9(b) of the Federal Rules of Civil Procedure. The Bank argues that the complaint merely contains the “buzzwords” of the statute and is devoid of the requisite specificity of facts surrounding the alleged misrepresentations made by the Bank to Heartland. The Court disagrees. The complaint alleges myriad facts in support of its allegations and states precisely what transactions are alleged to be fraudulent. The Court finds that the complaint sets forth the Bank’s fraudulent scheme with sufficient particularity to permit the Bank to form a responsive pleading. No more is required by the Federal Rules..
Finally, Count VIII seeks to avoid the 1985 Loan and Security Agreement pursuant to 11 U.S.C. § 548(a)(2) to the extent that the obligations and transfers thereunder were for the benefit of the Ceres Group rather than Heartland. The Bank has moved to dismiss this claim on the ground that Heartland’s execution of the 1985 Loan and Security Agreement did not make Heartland responsible for the payment of any pre-existing obligations or liability for which it was not already liable. The Bank’s argument is premised on Heartland’s obligation under the 1981 Letter Agreement to repay the indebtedness of certain other members of the Ceres Group. The Bank argues that Heartland did not undertake responsibility for any additional pre-existing obligations when it executed the 1985 Loan and Security Agreement.
The Bank’s argument must be rejected. Even if the 1985 Loan and Security Agreement merely restates Heartland’s previous obligations under the 1981 Letter Agreement, Count VIII still states a cause of action because the Committee seeks to avoid the 1981 Letter Agreement under other Counts of the complaint. If the earlier transfer can be avoided, then the 1985 Agreement may also be avoided. As the Court has previously stated, the Court believes that judicial economy mandates trying all Counts of the complaint together.
For the foregoing reasons, the Bank’s motion to dismiss Counts I, II, IV, VII, and VIII is denied and the Bank’s motion to dismiss III, V, and VI is allowed.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
ON MOTION FOR RECONSIDERATION
This matter is before the Court on the Defendant’s motion to reconsider the Court’s Order of April 28, 1989, as it pertains to the Defendant’s motion to dismiss Count VIII of the Plaintiff’s Complaint.
' Count VIII seeks to avoid the 1985 Loan and Security Agreement pursuant to 11 U.S.C. § 548(a)(2) to the extent that the obligations and transfers thereunder were for the Ceres Group rather than Heartland. The Bank’s motion to dismiss argued that Heartland’s execution of the 1985 Loan and Security Agreement did not make Heartland responsible for the payment of any pre-existing obligations or liability for which it was not already liable because Heartland was already obligated under the 1981 Letter Agreement to repay the indebtedness of certain other members of the Ceres Group. The Court rejected this argument in its Order of April 28, 1989 as follows:
Even if the 1985 Loan and Security Agreement merely restates Heartland’s previous obligations under the 1981 Letter Agreement, Count VIII still states a cause of action because the Committee seeks to avoid the 1981 Letter Agreement under other counts of the complaint. If the earlier transfer can be avoided, then the 1985 Agreement may also be avoided.
The Bank’s motion to reconsider points out the Court dismissed the only count in the Complaint which sought to avoid the 1981 Letter Agreement for lack of standing and failure to comply with the applicable statute of limitations. Since the 1981 Letter Agreement may not be avoided under the Complaint as it now stands, the Bank argues that there is no basis for Count VIII. The Committee counters that Heartland’s execution of the 1985 Loan and Security Agreement created new obligations *1018 for which Heartland was not already liable under the 1981 Letter Agreement. Thus, the issue presented by the motion to reconsider is whether Heartland incurred sufficient additional obligations pursuant to the 1985 Loan and Security Agreement to support a claim under 11 U.S.C. § 548(a)(2).
The Court has reviewed the copies of the 1981 Letter Agreement and the 1985 Loan and Security Agreement which were attached to the Complaint. Under the 1981 Agreement, Heartland executed a “continuing guaranty” in which Heartland guaranteed the payment of all obligations owed to the Bank’s predecessor in interest by Ceres Management Corporation, Galesville Chemical Co., Inc., Community Grain Company and Consolidated Growers, Inc. Under the subsequent 1985 Loan and Security Agreement, Heartland was named as the only borrower of all the debt owed by these affiliated corporations. Thus, the 1985 Loan and Security Agreement transformed Heartland’s obligations from those of a guarantor to those of a principal. Therefore, Heartland lost its surety rights of contribution, exoneration, reimbursement and subrogation. Accordingly, Heartland assumed additional obligations as a result of the 1985 Loan and Security Agreement.
For the foregoing reasons, the Defendant’s motion to reconsider the Court’s Order of April 28, 1989, as it pertains to Count VIII is denied.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.