Richard M. Hutson, II, Trustee for National Gas Di v. Purolator Products NA, LLC et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
FAYETTEVILLE DIVISION
IN RE:
NATIONAL GAS DISTRIBUTORS, LLC,
DEBTOR
CASE NO.
06-00166-8-ATS
RICHARD M. HUTSON, II, Trustee
for National Gas Distributors, LLC,
f/k/a Paul Lawing, Jr., LLC,
Plaintiff
v.
PUROLATOR PRODUCTS NA, LLC,
Defendant.
ADVERSARY PROCEEDING NO.
S-06-00122-8-AP
ORDER DENYING MOTIONS TO DISMISS,
FOR MORE DEFINITE STATEMENT, AND TO STRIKE
The matter before the court is the motion of the defendant,
Purolator Products NA, LLC, to dismiss under Rules 12(b)(6) and 9(b) of
the Federal Rules of Civil Procedure (made applicable in this
bankruptcy proceeding by Rules 7012(b) and 7009 of the Federal Rules of
Bankruptcy Procedure) the claims of the plaintiff, Richard M. Hutson,
SO ORDERED.
SIGNED this 06 day of December, 2006.
________________________________________
A. Thomas Small
United States Bankruptcy Judge
____________________________________________________________
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II, trustee for the chapter 11 debtor National Gas Distributors, LLC.
Alternatively, Purolator moves to require the trustee to file a more
definite statement of his claims under Rule 12(e) and to strike certain
paragraphs of the Complaint under Rule 12(f) of the Federal Rules of
Civil Procedure (which rules are made applicable here by Rule 7012(b)
of the Federal Rules of Bankruptcy Procedure). A hearing, with the
consent of the parties, was held on November 15, 2006, in Durham, North
Carolina in the courtroom of the Turner Law Building on the campus of
the North Carolina Central University School of Law. The court also
heard similar motions to dismiss in 12 other adversary proceedings.
This court has jurisdiction over the parties and subject matter
of this proceeding pursuant to 28 U.S.C. §§ 1334, 151, and 157, and the
General Order of Reference entered by the United States District Court
for the Eastern District of North Carolina on August 3, 1984. This is
a "core proceeding" pursuant to 28 U.S.C. § 157(b)(2)(H), which this
court may hear and determine.
National Gas Distributors, LLC, filed a voluntary petition for
relief under chapter 11 of the Bankruptcy Code on January 20, 2006, and
at the request of Lawrence R. Hirsch, the receiver for National Gas
Distributors appointed in a state court proceeding prior to the
debtor's bankruptcy, Richard M. Hutson, II was appointed chapter 11
trustee. The trustee filed complaints against 13 former customers of
National Gas Distributors, including Purolator, seeking to avoid,
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pursuant to 11 U.S.C. §§ 548(a)(1)(A) and (a)(1)(B), pre-
bankruptcy transfers made by the debtor, and to recover those transfers
from the defendants pursuant to § 550(a)(1).
The gist of the trustee's complaints is that National Gas
Distributors, as part of a fraudulent scheme, sold natural gas to some
of its customers, including Purolator, at below market prices.
Specifically, with respect to Purolator, the trustee alleges that
during the twelve months preceding the filing of the bankruptcy
petition, the debtor sold natural gas to Purolator at below market
prices resulting in an aggregate loss of approximately $247,466.51. The
below market price of each sale, the alleged market price at the time
of each sale, and the resulting loss to National Gas from each sale is
set forth in detail in an attachment to the complaint.
The trustee alleges that the sales were made by National Gas with
the intent to hinder, delay and defraud creditors and that the fraud
included the below market sales, false invoices, false reporting of
invoices to the debtor's secured lenders, and obtaining loans on the
basis of false information. According to the trustee, those alleged
facts support avoidance of the transfers pursuant to § 548(a)(1)(A).
The trustee also alleges that at the time of the transfers,
National Gas Distributors was insolvent and, because the sales were
made at below market value, National Gas Distributors did not receive
reasonably equivalent value for the natural gas that it sold.
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Accordingly, the trustee maintains that the transfers should be avoided
under § 548(a)(1)(B).
Purolator and the other defendants argue that these allegations
are not sufficient to state a claim upon which relief can be granted
under either § 548(a)(1)(A) or § 548(a)(1)(B).
For purposes of deciding a motion to dismiss for failure to state
a claim upon which relief may be granted under Rule 12(b)(6) of the
Federal Rules of Civil Procedure (made applicable by Rule 7012 of the
Federal Rules of Bankruptcy Procedure), the court must accept the
plaintiff’s factual allegations as true, drawing all reasonable
inferences in the plaintiff’s favor. Ibarra v. United States, 120 F.3d
472, 474 (4th Cir. 1997). Because the rules require only notice
pleading, courts construe a plaintiff’s allegations liberally. In
addition, the court may not consider materials outside the pleadings
without converting the motion to one for summary judgment under Rule 56
of the Federal Rules of Civil Procedure. See Rule 7012, Fed. R. Bankr.
P.
Trustee’s Cause of Action Pursuant to § 548(a)(1)(A)
Section 548(a)(1)(A) provides
(a)(1) The trustee may avoid any transfer (including any
transfer to or for the benefit of an insider under an
employment contract) of an interest of the debtor in
property, or any obligation incurred by the debtor, that was
made or incurred on or within 2 years before the date of the
filing of the petition, if the debtor voluntarily or
involuntarily--
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(A) made such transfer or incurred such obligation
with actual intent to hinder, delay, or defraud any
entity to which the debtor was or became, on or
after the date that such transfer was made or such
obligation was incurred, indebted; or . . . .
11 U.S.C. § 548(a)(1)(A).
Purolator contends that there are several reasons why the
trustee’s complaint fails to state a cause of action under
§ 548(a)(1)(A). Purolator argues that the trustee has failed to set
forth with particularity the circumstances constituting the alleged
fraud as is required by Rule 9(b) of the Federal Rules of Civil
Procedure. The court disagrees with Purolator, as the complaint does
state with particularity the circumstances constituting the fraud. The
fraud as alleged consists of a scheme orchestrated by Paul Lawing, Jr.,
the sole member/manager of the debtor. The fraudulent enterprise
involved making sales to certain customers, including Purolator, at
substantially below market prices, creating false invoices, making
false reports to lenders, and obtaining loans from secured lenders by
making false statements. The individual within National Gas who
conceived of and who executed the fraudulent scheme is identified as
are the components of the fraudulent enterprise. The specifics of the
below market sales are attached to the complaint, and the secured
lenders that received the fraudulent reports, First-Citizens Bank and
Trust Company and Branch Banking and Trust Company, are named.
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Purolator and the other defendants argue that they knew nothing
of the fraud being committed by National Gas and were innocent of any
wrongdoing. However, wrongdoing by the recipient is not an element of
transfer avoidance under § 548(a)(1)(A). The transfer may be avoided
if the debtor made the transfer "with actual intent to hinder, delay,
or defraud." 11 U.S.C. § 548(a)(1)(A). The complaint clearly alleges
that the debtor made the transfers with a fraudulent intent.
Purolator and the other defendants also argue that the trustee
failed to plead a sufficient nexus between the alleged intentionally
fraudulent conduct and the debtor's sale of gas to the defendant.
Although the trustee's allegation that the debtor falsified accounting
records clearly relates to the sale of gas to Purolator, Purolator
contends that the fraud could have been accomplished by the debtor
regardless of whether the actual sale was for below or above market
prices. Purolator argues that there is no allegation of how the actual
sales as opposed to the reporting of sales prices were accomplished
with the "actual intent to hinder, delay or defraud" creditors.
Furthermore, any fraud committed by the debtor would not have included
sales at a below market price because such sales would not have been in
the debtor’s interest. However, the allegation is that the below
market sales were a part of the scheme. It may ultimately be shown
that the sales for below market price played no part in the fraudulent
scheme, but that is not something to be decided on a motion to dismiss.
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The trustee has adequately pled his cause of action under §
548(a)(1)(A), and the defendant’s motion to dismiss with respect to
that cause of action is DENIED.
Trustee’s Cause of Action Pursuant to § 548(a)(1)(B)
Section 548(a)(1)(B) provides
(a)(1) The trustee may avoid any transfer (including any
transfer to or for the benefit of an insider under an
employment contract) of an interest of the debtor in
property, or any obligation incurred by the debtor, that was
made or incurred on or within 2 years before the date of the
filing of the petition, if the debtor voluntarily or
involuntarily--
* * *
(B) (i) received less than a reasonably equivalent
value in exchange for such transfer or obligation;
and
(ii) (I) was insolvent on the date that such
transfer was made or such obligation was
incurred, or became insolvent as a result of
such transfer or obligation;
(II) was engaged in business or a
transaction, or was about to engage in
business or a transaction, for which any
property remaining with the debtor was an
unreasonably small capital;
(III) intended to incur, or believed that
the debtor would incur, debts that would
be beyond the debtor's ability to pay as
such debts matured; or
(IV) made such transfer to or for the
benefit of an insider, or incurred such
obligation to or for the benefit of an
insider, under an employment contract and
not in the ordinary course of business.
11 U.S.C. § 548(a)(1)(B).
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Purolator also contends that the trustee's complaint does not
state a sufficient constructive fraud cause of action under
§ 548(a)(1)(B), and that the cause of action under § 548(a)(1)(B)
should be dismissed pursuant to Rule 12(b)(6). Again, the court
disagrees.
Purolator argues that the bare allegation that the transfers to
Purolator were not for reasonably equivalent value is insufficient,
and the plaintiff bears the burden of alleging and proving a lack of
reasonable equivalence. Purolator challenges the trustee's
calculations as overly simplistic, and maintains that the trustee has
failed to meet his threshold burden. However, the trustee's
allegations are specific, and the precise terms of the sales, the
amount by which the sale price was below the market price and the
resulting loss for each sale is detailed in the attachment to the
complaint. The trustee has stated a claim under § 548(a)(1)(B), and
the motion to dismiss regarding that cause of action is DENIED.
Motions for More Definite Statement and to Strike
The defendant's motions for a more definite statement and to
strike portions of the complaint are also DENIED.
Purolator argues that the trustee's pleading fails to provide
sufficient detail regarding each cause of action. As the court has
already stated, the allegations are sufficiently specific. In orders
entered on September 26, 2006, in the related adversary proceedings
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brought by the trustee against Campbell Soup Company, Adv. Pro. No. S-
06-00083-8-AP, and Pepperidge Farm, Incorporated, Adv. Pro. No. S-06-
00094-8-AP, the court discussed the basis on which the motions for more
definite statement in those proceedings were denied, and the same
reasoning set forth in those orders is applicable here. Any further
elaboration of the alleged facts may be obtained through discovery.
The court has discretion under Rule 12(f) of the Federal Rules
of Civil Procedure to strike any portion of a pleading that is
"redundant, immaterial, impertinent, or scandalous." Purolator takes
exception to several of the trustee's factual allegations, on varying
grounds, but the court does not consider any of the challenged
allegations to be redundant, immaterial, impertinent, or scandalous,
and the defendant's motion to strike is DENIED. Purolator is
concerned that the allegations may suggest that Purolator was an active
participant in the debtor's fraud, but the plaintiff's allegations are
a legitimate part of the trustee's effort to explain the nature of the
debtor's fraudulent activity, and they do not in themselves improperly
suggest that Purolator intentionally engaged in concealment or other
fraudulent activity of any kind.
Since the motion to dismiss has been denied, the defendant must
file an answer to the complaint within ten days from the date of this
order.
END OF DOCUMENT
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