Angell, Trustee v. Adcar, Inc. et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
IN RE:
CAREMERICA, INC., 	CASE NO: 06-02913-8-JRL
Chapter 7
Debtor.
JAMES B. ANGELL, TRUSTEE,
Plaintiff
vs.
BER CARE, INC., f/k/a PPS, Inc., Adcar,
Inc., Ann H. Day, Antonia P. Elliott f/k/a
Antonia Ferrara, Joseph Alex Cannon Jr.,
Cher Cannon, Diversified Enterprise, Inc.,
d/b/a Cannon Construction,
Cape Associates, LLC, Capital Resource
Solutions, LLC, Carolina Long Term Care,
LLC, d/b/a Carolina Care, LLC, City of
Kinston, City of Wilson, Crescent State
Bank, DeltaCom, Inc., Dona H. Burrell, 	ADVERSARY PROCEEDING
First Eastern, LLC, GEMSA Loan 	NO. L-08-00174-8-JRL
Services, LP, Institution Food House, Inc.,
Institutional Services, LLC, Jette Ferrell,
John F. Smith, III, Joshua Houghton,
National Assisted Living Risk Retention
Group and/or Rinklin-Shuttleworth of
Georgia, LLC, Opesnet Corporation,
Pachki, Inc., d/b/a Andy Anderson Agency,
SO ORDERED.
SIGNED this 23 day of July, 2009.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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Pinewood Associates, a General Partnership
and/or Pinewood of Pink Hill, LLC,
Powell Properties of Durham County, LLC,
Red Mortgage Capital, Inc., Robert D.
Shelley, Dawn O. Rowland and/or Walter
D. Rowland, Saundra Etheridge, Stanley E.
Brunson, Jr., Susan W. Simms, WFY, LLC,
Robert D. Shelley d/b/a WYC, LLC, and/or
Ed Prince d/b/a WYC, LLC,
Defendants
______________________________________________________________________________
ORDER
The matters before the court are the motions to dismiss the adversary proceeding by First
Eastern, LLC, Powell Properties of Durham County, LLC, Susan Simms, DeltaCom, Inc.,
Carolina Long Term Care, LLC, GEMSA Loan Services, Limited Partnership, Red Mortgage
Capital, Inc., Stanley Brunson, Jr., Pachki, Inc. d/b/a Andy Anderson Agency, Dona H. Burrell,
Cher Cannon, Joseph Alex Cannon Jr., Diversified Enterprise, Inc., John F. Smith III, OPESNET
Corp., BER Care., Inc., Antonia P. Elliott, and Saundra Etheridge, the motion to amend
complaint by the trustee, and the motion for severance of claims by First Eastern, LLC and
Powell Properties of Durham County, LLC. The court held a hearing on these matters on May
21, 2009 in Raleigh, North Carolina.
JURISDICTION AND PROCEDURE
This court has jurisdiction over the parties and the subject matter of this proceeding
pursuant to 28 U.S.C. §§ 151, 157, and 1334, 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 within the meaning of 28 U.S.C. § 157(b)(2), which this court may hear and
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determine.
UNDISPUTED FACTS
1. On September 15, 2006, Caremerica, Inc., Caremerica Adult Care, Inc., The Meadows
of Hermitage, Inc., The Meadows of Fayetteville Inc., and The Meadows of Wilmington, Inc.
each filed a petition for relief under chapter 11 of the Bankruptcy Code. These cases were
subsequently converted to cases under chapter 7. On February 4, 2008, the court entered an
order allowing the substantive consolidation of the debtors and the appointment of a trustee.
These consolidated cases are administered under the case of Caremerica, Inc., 06-02913-8-JRL.
2. On the date of petition, the debtors operated adult care homes in eastern North
Carolina. The debtors leased the buildings used to operate these adult care homes.
3. Ronald E. Burrell, Michael R. Elliott, and Susan Simms are shareholders and officers
of the debtors.
4. Ronald E. Burrell, Michael R. Elliott, and John Smith were the principal owners of
BER Care, Inc. on the date of filing of this adversary proceeding. BER Care, Inc. was formerly
known as PPS, Inc.
5. The trustee filed an adversary proceeding in this court on September 15, 2008. The
trustee sought in his complaint to avoid and recover certain alleged preferential and fraudulent
transfers made by the debtors to BER Care, Inc and subsequently transferred to the defendants.
The complaint contained a list of the total amounts of preferential and fraudulent transfers
alleged to have been received by each defendant. In addition, each defendant was listed as either
an insider or non-insider.
6. On December 15, 2008, the trustee filed an amended and restated complaint to avoid
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and recover preferential and fraudulent transfers (the “Amended Complaint”). Attached to the
Amended Complaint was a bank statement from a bank account in the name of PPS Inc. for the
period between February 1, 2006 and February 28, 2006.
7. On December 23, 2008, the trustee filed a motion for leave to amend his complaint.
8. On February 5, 2009, the trustee filed an amended and restated motion to amend
complaint. Attached to this motion to amend was a new Exhibit B. Exhibit B contained a list of
each alleged transfer and included specific amounts, dates, check numbers, payee reference
numbers, names of payees, account numbers and account names corresponding to each transfer.
In addition, Exhibit B included bank statements from the account of PPS, Inc. for the months of
September 2005 through March 2006.
9. Between November 4, 2008 and April 23, 2009, various defendants filed motions to
dismiss for failure to state a claim upon which relief can be granted, including First Eastern,
LLC, Powell Properties of Durham County, LLC, Susan Simms, DeltaCom, Inc., Carolina Long
Term Care, LLC, GEMSA Loan Services, Limited Partnership, Red Mortgage Capital, Inc.,
Stanley Brunson, Jr., Pachki, Inc. d/b/a Andy Anderson Agency, Dona H. Burrell, Cher Cannon,
Joseph Alex Cannon Jr., Diversified Enterprise, Inc., John F. Smith III, OPESNET Corp., BER
Care., Inc., Antonia P. Elliott, and Saundra Etheridge (collectively, the “Movants”). On July 6,
2009, Pinewood Associates and Pinewood of Pink Hill, LLC also filed a motion to dismiss.
10. On March 5, 2009, First Eastern, LLC and Powell Properties of Durham County,
LLC filed a motion for severance of claims.
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STANDARD OF REVIEW
A pleading which states a claim for relief must contain “a short and plain statement of the
claim showing that the pleader is entitled to relief . . . .” F ED . R. CIV . P. 8(a)(2); FED . R. BANKR .
P. 7008. 	A statement showing entitlement to relief under Rule 8(a)(2) must include “enough
facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S.
544, 570, 127 S. Ct. 1955, 1974 (2007). Under Rule 12(b)(6) of the Federal Rules of Civil
Procedure, a party may move to dismiss a complaint for failure to state a claim upon which relief
can be granted. F ED . R. CIV . P. 12(b)(6); FED . R. BANKR . P. 7012(b). In order to survive a
motion to dismiss, a plaintiff must provide “more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555, 127 S.
Ct. at 1965 (citing Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932 (1986)).
ANALYSIS
1. Motions to Dismiss Preference Claims
The Movants contend that the Amended Complaint fails to state a claim upon which
relief can be granted and therefore should be dismissed pursuant to Rule 12(b)(6). Specifically,
the Movants assert that the Amended Complaint fails to allege facts sufficient to show why the
Trustee is entitled to avoid alleged preferential transfers under § 547 of the Bankruptcy Code.
The Supreme Court recently adopted a heightened pleading standard for claims for relief under
Rule 8(a)(2) and the requirements for claims to survive a motion to dismiss under 12(b)(6).
Thus, the court will examine the new pleading standard for claims for relief as set forth in two
recent decisions by the Supreme Court. Next, the court will apply the new pleading
requirements to the trustee’s preference claims in determining whether to allow the defendants’
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motions to dismiss.
Twombly, Iqbal, and Rule 8(a)(2) Pleading Standards
Prior to Bell Atl. Corp. v. Twombly, the standard for determining the sufficiency of a
complaint under Rule 8(a)(2) was found in Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99 (1957).
The Supreme Court articulated in Conley that “a complaint should not be dismissed for failure to
state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support
of his claim which would entitle him to relief.” Conley, 355 U.S. at 45-46, 78 S. Ct. at 102.
Until recently, courts had generally embraced the liberal pleading standard in Conley when
confronting motions to dismiss for failure to state a claim. See, e.g., Hatfill v. N.Y. Times Co.,
416 F.3d 320, 329 (4th Cir. 2005); Kikumura v. Osagie, 461 F.3d 1269, 1294 (10th Cir. 2006);
Rivera v. Rhode Island, 402 F.3d 27 (1st Cir. 2005); Cler v. Ill. Educ. Ass’n, 423 F.3d 726, 729
(7th Cir. 2005); Martin K. Eby Const. Co., Inc. v. Dallas Area Rapid Transit, 369 F.3d 464, 467
(5th Cir. 2004); Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co. of N.Y., 375 F.3d
168, 176 (2d Cir. 2004); In re Rockefeller Ctr. Props., Inc. Secs. Litig., 311 F.3d 198, 215-16 (3d
Cir. 2002). However, the Supreme Court reconsidered the pleading requirements for claims for
relief in Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955 (2007).
In Twombly, the Supreme Court granted certiorari to consider whether a complaint in an
antitrust case was sufficient to overcome a Rule 12(b)(6) motion to dismiss. The complaint in
Twombly alleged that certain telecommunications providers had entered into an agreement not to
compete in violation of § 1 of the Sherman Act. Twombly, 550 U.S. at 551, 127 S. Ct. at 1963.
Under § 1 of the Sherman Act, liability requires a “contract, combination . . ., or conspiracy, in
restraint of trade or commerce.” In response, the defendants moved to dismiss the complaint for
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lack of facts showing that the alleged anticompetitive conduct arose from an agreement.
Twombly at 553, 127 S. Ct. at 1964 (citing Theatre Enters., Inc. v. Paramount Film Distrib.
Corp., 346 U.S. 537, 540, 74 S. Ct. 257 (1954)).
In considering what the plaintiff was required to plead in order to state a claim for relief
under Rule 8(a)(2), the Court ruled that “a plaintiff’s obligation to provide the grounds of his
entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the
elements of a cause of action will not do.” Twombly at 555, 127 S. Ct. at 1964-65 (citing
Papasan v. Allain, 478 U.S. 265, 286, 106 S. Ct. 2932 (1986)). Thus, in order to survive a
motion to dismiss, the Court determined that the complaint must assert “plausible grounds to
infer an agreement” and raise “a reasonable expectation that discovery will reveal evidence of
illegal agreement.” Twombly at 556, 127 S. Ct. at 1965. The Court reasoned that “[t]he need at
the pleading stage for allegations plausibly suggesting (not merely consistent with) agreement
reflects the threshold requirement of Rule 8(a)(2) that the ‘plain statement’ possess enough heft
to ‘show that the pleader is entitled to relief.’” Id. at 557, 127 S. Ct. at 1966. After studying the
complaint in Twombly, the Court found that allegations that the defendants had engaged in
parallel conduct were insufficient to establish that an agreement between the companies was
plausible “without some further circumstance pointing toward a meeting of the minds.” Id. at
556, 557, 127 S. Ct. at 1966. Similarly, a bare assertion of conspiracy or agreement was merely
conclusory and failed to supply facts adequate to show illegality. Id. at 557, 127 S. Ct. at 1966.
In response to the plaintiffs’ reliance on the liberal pleading standard set forth in Conley v.
Gibson, the Court held that a literal reading of Conley would result in the survival of a “wholly
conclusory statement of claim . . . whenever the pleadings left open the possibility that a plaintiff
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might later establish some ‘set of [undisclosed] facts’ to support recovery.” Twombly at 561,
127 S. Ct. at 1968. Ushering an aging pleading standard out the door, the Court concluded that
the “no set of facts” language in Conley had “been questioned, criticized, and explained away
long enough . . . .” and that “this famous observation has earned its retirement.” Twombly at
562-63, 127 S. Ct. at 1969. Finding no facts supporting the plausible existence of an agreement
between the telecommunications companies, the Court held that the complaint must be
dismissed. Id. at 570, 127 S. Ct. at 1974.
Following Twombly, it remained unclear whether the Supreme Court intended to
incorporate new pleading requirements for claims for relief beyond the antitrust context.
However, any ambiguity over the scope of Twombly disappeared when the Court rendered its
decision in Ashcroft v. Iqbal, 129 S. Ct. 1937 (U.S. 2009). In Iqbal, the plaintiff, a Pakistani
Muslim, was arrested and detained by federal officials in the wake of the September 11, 2001
terrorist attacks. Iqbal, 129 S. Ct. at 1942. Subsequently, the plaintiff filed a complaint in
district court against numerous federal officials, including petitioners John Ashcroft, the former
Attorney General of the United States, and Robert Mueller, the Director of the Federal Bureau of
Investigation, alleging that they had adopted an unconstitutional policy of detaining Muslims
under harsh conditions of confinement on account of his race, religion, or national origin. Id. at
1944. The district court denied in part the defendants’ motion to dismiss under 12(b)(6) and the
Court of Appeals for the Second Circuit affirmed in part. The Supreme Court granted certiorari.
In considering the defendants’ motion to dismiss, the Court ruled that in order to survive
a 12(b)(6) motion, “a complaint must contain sufficient factual matter, accepted as true, to ‘state
a claim to relief that is plausible on its face.’” Iqbal at 1949 (citing Twombly at 570, 127 S. Ct.
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1955). The Court explained that there were “two working principles” upon which this
heightened pleading standard rested:
First, the tenet that a court must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a
cause of action, supported by mere conclusory statements, do not suffice. . . . Second,
only a complaint that states a plausible claim for relief survives a motion to dismiss.
Iqbal at 1949 (citing Twombly at 555, 127 S. Ct. 1955). The Court went on to provide its
definition of a plausible claim for relief:
A claim has facial plausibility when the plaintiff pleads factual content that allows the
court to draw the reasonable inference that the defendant is liable for the misconduct
alleged. The plausibility standard is not akin to a “probability requirement,” but it asks
for more than a sheer possibility that a defendant has acted unlawfully.
Iqbal at 1949 (citing Twombly at 556, 127 S. Ct. 1955). Thus, under the first prong of a Rule
8(a)(2) analysis, a court may “begin by identifying pleadings that, because they are no more than
conclusions, are not entitled to the assumption of truth.” Iqbal at 1950. If the court finds well-
pleaded factual allegations in the complaint, the court “should assume their veracity” and
proceed to determine “whether they plausibly give rise to an entitlement to relief.” Iqbal at 1950
(emphasis added). Determining whether a claim for relief is plausible is a “context-specific
task” requiring the court “to draw on its judicial experience and common sense.” Iqbal at 1950
(citing Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007)).
In order to properly assert a violation of a clearly established right, it was necessary for
the plaintiff in Iqbal to plead factual assertions showing that the defendants adopted the alleged
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detention policy for the purpose of discriminating on account of race, religion, or national origin.
Iqbal at 1948-49. Under its two-pronged analysis for pleadings, the Court first separated the
allegations entitled to an assumption of truth from those allegations disguised as legal
conclusions. Among the allegations set aside as legal conclusions were assertions that the
defendants agreed to subject the plaintiff to harsh conditions of confinement “as a matter of
policy, solely on account of his religion, race, and/or national origin and for no legitimate
penological interest.” Id. at 1944. In addition, the Court found allegations that Ashcroft was the
“principal architect” of the policy and that Mueller was “instrumental” in executing it to be a
“formulaic recitation of the elements” of a constitutional discrimination claim that were not
entitled to be assumed to be true. Iqbal at 1951.
Next, the Court considered whether the factual allegations remaining in the complaint
were facially plausible. The complaint alleged that one of the defendants directed the FBI to
arrest and detain Arab Muslim men as part of its investigation of the events of September 11. Id.
at 1944. The complaint further alleged that the defendants carried out a policy of holding post-
September-11th detainees in “highly restrictive conditions of confinement.” Iqbal at 1951-52.
The Court found these allegations to be consistent with the purposeful designation of detainees
based on their race, religion, or national origin, but determined that purposeful discrimination
was not a plausible conclusion arising from the facts alleged. Iqbal at 1951-52. The Court
reasoned that it was more likely that law enforcement was directed to arrest and detain
individuals because of their suspected link to the terrorist attacks and that such a policy, while
legitimate, would understandably “produce a disparate, incidental impact on Arab Muslims . . . .”
Iqbal at 1951. In addition, the Court found unpersuasive the plaintiff’s assertions that detainees
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were held under harsh conditions based on their race, religion, or national origin. Id. at 1952.
Rather, the allegation that defendants adopted a policy of holding detainees under restrictive
conditions of confinement merely suggested that federal officials “sought to keep suspected
terrorists in the most secure conditions available.” Id. Finding no factual allegations that would
plausibly show that the defendants possessed unconstitutional motives, the Court held that the
complaint failed to state a claim upon which relief could be granted. Iqbal at 1954.
Pleading Standard for § 547 Claims in Valley Media
In light of the Supreme Court’s decision in Iqbal, the court must determine what pleading
requirements the trustee must satisfy when asserting a claim for the avoidance of transfers
alleged to be preferential under § 547. In considering whether the Trustee’s claim for relief is
sufficient, the Movants assert that the court should espouse the pleading standards for
preferential transfers adopted by the Bankruptcy Court for the District of Delaware in In re
Valley Media, Inc., 288 B.R. 189 (Bankr. D. Del. 2003).
In Valley Media, the plaintiff alleged in its complaint that the defendant received
preferential payments during the 90-day preference period in the amount of “not less than
$624,627.18” and further alleged that such transfers were avoidable under § 547. Valley Media,
288 B.R. at 191. The defendant moved to dismiss the plaintiff’s preference claims under Rule
12(b)(6). Id. In granting the defendant’s motion to dismiss, the Court found that the complaint
failed to provide fair notice to the defendant and lacked a sufficient showing of entitlement to
relief as required under Rule 8(a)(2). Id. at 192. In addition, Judge Walsh ruled that in order to
overcome a 12(b)(6) motion to dismiss, a complaint to avoid a preferential transfer must include:
(a) an identification of the nature and amount of each antecedent debt and
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(b) an identification of each alleged preference transfer by (i) date, (ii) name of
debtor/transferor, (iii) name of transferee and (iv) the amount of the transfer.
Id. The Court granted the motion to dismiss but allowed the plaintiff leave to file an amended
complaint. Id.
Shortly after the Valley Media decision, another judge of the Delaware Bankruptcy Court
revisited the pleading standards for § 547 preference claims in In re The IT Group, Inc., 313 B.R.
370, 373-74 (Bankr. D. Del. 2004). In IT Group, the issue before the Court was whether a
complaint asserting a preferential transfer could survive a 12(b)(6) motion to dismiss when the
complaint identified the specific amount, date, and number of the transfer. IT Group, 313 B.R.
at 374. In a departure from the heightened pleading standard adopted by Judge Walsh in Valley
Media, Judge Lindsey stressed that the notice pleading standard of Rule 8(a)(2) merely required
that the complaint provide “fair notice of what the plaintiff’s claim is and the grounds upon
which it rests.” Id. (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 103 (1957)).
Finding the requirements for initial pleadings imposed by Valley Media “inappropriate and
unnecessarily harsh,” Judge Lindsey held that the preference complaint identifying the amount,
date, and number of the transfer “clearly provided fair notice of Plaintiff’s claim” and denied the
defendant’s motion to dismiss. IT Group at 373-74.
Subsequent to Valley Media and IT Group, Judge Walsh again examined the
requirements for initial pleadings with respect to § 547 claims in In re Oakwood Homes Corp.,
340 B.R. 510 (Bankr. D. Del. 2006). Like in Valley Media and IT Group, the defendants in
Oakwood Homes filed motions to dismiss on the grounds that the complaint failed to satisfy the
pleading requirements of Rule 8(a)(2). Oakwood Homes, 340 B.R. at 521. Applying the test
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from Valley Media, Judge Walsh first considered whether the complaint identified the nature and
amount of the antecedent debt. In addition to precise dates and amounts of each transfer, the
complaint provided the details of the relationship between the debtors and the defendants and
stated that many of the transfers arose out of a loan assumption program. Id. at 522. The Court
found this information sufficient to identify the nature and amount of the antecedent debt. Id.
Second, the Court considered whether the complaint provided fair notice of the identities of the
transferors. The transferors identified in the complaint included the debtors and all of their non-
debtor subsidiaries and affiliates. Id. Although the complaint failed to precisely identify all of
the transferors’ names, the Court found that the transferors operated as a unit with minimal
distinctions between the debtor and non-debtor entities. As a result, the Court held that the
complaint gave “fair notice as to their identities.” Id. Third, the Court addressed the sufficiency
of allegations that the defendants were insiders of the debtors. The complaint alleged that the
defendants were insiders because they were “in control of the debtor,” affiliates, and “managing
agents” of the debtors. Id. at 524. The Court concluded that the complaint alleged a relationship
that enabled the defendants to dominate and control the debtors, in satisfaction of Rule 8(a)(2),
and authorized further discovery to determine insider status. Id. Finding the claims for
preferential transfers sufficient to satisfy Rule 8(a), the Court denied the defendants’ motions to
dismiss. Id. at 523-24.
Notwithstanding the competing views on pleading standards for preference claims within
the Delaware Bankruptcy Court, the majority of courts which have addressed the pleading
requirements for § 547 claims have required something less than the standard implemented in
Valley Media to survive a 12(b)(6) motion to dismiss. See, e.g., In re Allou Distribs., Inc., 387
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1Section 547(b) provides:
(b) Except as provided in subsection (c) and (i) of this section the trustee may avoid any
transfer of an interest of the debtor in property –
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was
made;
(3) made while the debtor was insolvent;
(4) made –
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition,
if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the
provisions of this title.
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B.R. 365, 405 (Bankr. E.D.N.Y. 2008) (preference claim identifying the transferor and
transferee, check number, date, and amount was sufficient); In re NM Holdings Co., LLC, 376
B.R. 194, 204 (E.D. Mich. 2007) (complaint identifying the names of transferors and transferees,
the form of transfers, and their total amount met Rule 8(a)’s “liberal” pleading requirements); In
re Randall’s Island Family Golf Ctrs., Inc., 290 B.R. 55, 65 (S.D.N.Y. 2003) (“a preference
complaint may provide a defendant with fair notice of the claim despite the lack of information
required by Valley Media”). However, these cases were decided prior to the Supreme Court’s
implementation of more stringent pleading requirements for claims for relief under Rule 8 of the
Federal Rules of Civil Procedure.
Pleading Standard for § 547 Claims after Twombly and Iqbal
Under Twombly and Iqbal, the complaint of the trustee must satisfy a two-pronged test.
The court must therefore determine whether the trustee has pleaded sufficient factual allegations
to establish a § 547 preference claim for relief that is plausible. 1 Because a preference cause of
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action consists of several elements, the court will address each element in turn.
A. Transfer of an Interest of the Debtor in Property
Section 547(b) provides that a trustee may avoid “any transfer of an interest of the debtor
in property . . . .” 11 U.S.C. § 547(b). The trustee alleged in his Amended Complaint that the
debtors transferred funds by and through bank accounts of BER Care, Inc., which was formerly
known as PPS, Inc. (the “PPS/BER Care bank accounts”) as a conduit through which funds were
distributed to the defendants. The Amended Complaint further asserted that the debtors made
such transfers for the purpose of protecting their own bank accounts from attachment or
garnishment by creditors. In support of these assertions, the trustee filed Exhibit B as a
supplement to the Amended Complaint. Included in Exhibit B were copies of bank statements of
PPS/BER Care for the months in which the transfers were allegedly made. These bank
statements contained the method, date, and amount of each transfer flowing out of PPS/BER
Care bank accounts. Exhibit B also contained a table prepared by the trustee which identified
the dates and amounts of transfers received by each defendant (the “Table of Transfers”).
However, although the bank statements and Table of Transfers in Exhibit B lend sufficient
factual support to the allegation that various transfers were made from PPS/BER Care bank
accounts to the defendants, avoidance under § 547 is limited to “a transfer of an interest of the
debtor in property.” 11 U.S.C. § 547(b) (emphasis added). Therefore, a claim for relief under §
547 must assert facts showing that the debtors had an interest in the property exchanging hands.
Upon review of the Amended Complaint and Exhibit B, the court finds insufficient facts
to support the trustee’s contention that the funds flowing through BER Care, Inc. originated with
the debtors. The assertion that “the debtors transferred its (sic) funds into bank accounts
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operated by the debtors’ principals” is merely a conclusory statement that lacks factual support.
Similarly, the trustee provides little factual basis for his assertion that “one or more of the
debtors, or, in the alternative, the consolidated debtor . . . made certain transfers to such
defendant in at least the amount listed beside such defendant’s name . . . .” Exhibit B provides a
list of the transferees, amounts, and dates of each transfer, but fails to indicate what entity
initiated each transfer.
Turning to those factual allegations which tend to support the trustee’s claim, the court
finds that the allegation that the debtors were “subject to the dominion and control” of Ronald E.
Burrell and Michael R. Elliott, who were also the principal owners of BER Care, Inc., fails to
give rise to a reasonable inference that the debtors transferred funds to BER Care, Inc.
Similarly, although the PPS/BER Care bank statements provide the dates and amounts of each
credit into the account, there is no indication as to the source of such funds. Without more
factual support, there is nothing in the Amended Complaint or Exhibit B to rebut the alternative
and reasonable possibility that the funds flowing through BER Care, Inc. originated from sources
other than the debtors. For example, the fact that BER Care, Inc. is a business corporation
owned by Ronald E. Burrell, Michael R. Elliott, and John Smith gives rise to a plausible
conclusion that the transfers at issue came directly from individual accounts owned by Mr.
Burrell, Mr. Elliott, or Mr. Smith. It follows that the allegations by the trustee regarding
transfers of interests of the debtors in property fail to meet the plausibility standard necessary to
overcome a 12(b)(6) motion to dismiss.
B. To or for the Benefit of a Creditor
Count I of the Amended Complaint asserts that “each preferential transfer was made to or
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for the benefit of the defendant as a creditor of the transferor.” Count III provides that “each
preferential transfer was made to or for the benefit of defendant BER Care, Inc. as a creditor of
the transferor.” Additionally, the trustee alleged in his Amended Complaint that the debtors
disbursed funds through PPS/BER Care bank accounts to the defendants. In support of these
assertions, the trustee provided information with respect to each alleged transfer, including dates,
amounts, and names of transferees (including the Movants).
The court finds that the information provided in the Table of Transfers, including the
names of transferees and the dates and amounts of each transfer, is sufficient to plausibly assert
that funds were transferred to the Movants. The court further finds that each transferee’s identity
as a creditor is contingent on the existence of an antecedent debt, which is the next element of a
preference claim.
C. For or on Account of an Antecedent Debt
Section 547(b)(2) requires that a preferential transfer must be “for or on account of an
antecedent debt owed by the debtor before such transfer was made.” 11 U.S.C. § 547(b)(2). In
Valley Media, the Delaware Bankruptcy Court held that “the nature and amount of the
antecedent debt” was necessary to show entitlement to relief under a preferential transfer theory.
Valley Media, 288 B.R. at 192. This court agrees that the trustee must assert the nature and
amount of the antecedent debt in order to allege a plausible claim for relief. In the case at bar,
the Amended Complaint makes the conclusory assertion that each preferential transfer was made
“for, or on account of, an antecedent debt owed by the Transferor to the Defendant before the
transfer was made.” However, the trustee fails to assert facts supporting the existence of an
antecedent debt owed by the debtors to the defendants. In order to satisfy the pleading
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requirements under Iqbal, the court finds that the trustee is obligated to allege facts regarding the
nature and amount of the antecedent debt which, if true, would render plausible the assertion that
a transfer was made for or on account of such antecedent debt.
D. Made while the Debtor was Insolvent
The avoidance of a preferential transfer is contingent on the debtor being insolvent on the
date of the transfer. 11 U.S.C. § 547(b)(3). Under § 101(32)(A) of the Bankruptcy Code, a
debtor is insolvent when “the sum of such entity’s debts is greater than all of such entity’s
property, at a fair valuation . . . .” 11 U.S.C. § 101(32)(A). In In re Troll Commc’ns, 385 B.R.
110 (Bankr. D. Del. 2008), the Delaware Bankruptcy Court considered whether a trustee
adequately alleged the debtors’ insolvency in its claims for avoidance and recovery of
preferential and fraudulent transfers. Troll Commc’ns, 385 B.R. at 124. The complaint in Troll
Commc’ns contained a valuation of the debtors’ accounts payable and other liabilities, as well as
a negative valuation of the debtors’ tangible net worth. In addition, the trustee provided notes
from the debtors’ accountant expressing the unlikelihood that the debtors could continue as a
going concern. Id. at 114. The Court found that the financial data in the complaint supported
the trustee’s allegations that the debtors had a negative net worth and were unable to meet
maturing obligations leading up to their bankruptcy filings. Id. at 124. As a result, the Court
found sufficient factual allegations of insolvency to permit the trustee to proceed with discovery.
Id.
In the case at bar, the court finds that the allegations of the debtors’ insolvency on the
dates of the alleged transfers fall short of the plausibility threshold. The Bankruptcy Code
provides that the trustee may presume a debtor to be insolvent within the 90-day period
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immediately preceding the date of the bankruptcy filing. 11 U.S.C. § 547(f). However, this
presumption is inapplicable to preferential transfers to insiders made outside of the 90-day
period. Because a debtor must be insolvent on the date of the transfer in order for the trustee to
be successful in a claim based on § 547(b), it follows that the trustee must allege facts sufficient
to show that such insolvency is plausible. In this case, the trustee asserts that “[e]ach
preferential transfer was made while the [t]ransferor was insolvent.” Without factual assertions
in support of the debtor’s insolvency, however, the trustee’s conclusory statement fails to satisfy
the first prong under Iqbal. It follows that the trustee has failed to assert a claim supporting
entitlement to relief. E. Within 90 Days, or Within One Year if the Creditor was an Insider
The date on which the alleged transfer occurred is critical to ascertaining whether the
transfer is subject to avoidability under § 547. Generally, a transfer is avoidable under § 547 if it
was made within the 90-day period before the date of the filing of the petition. 11 U.S.C. §
547(b)(4)(A). However, if the claimant alleges that the creditor receiving the benefit of the
transfer was an insider, the transfer is avoidable if it occurred between 90 days and one year
prior to the petition date. Id. § 547(b)(4)(B). The trustee asserts in his Amended Complaint that
transfers were made “to each Defendant who is alleged to be an Insider . . . during the one year
period prior to the petition date . . . .” With respect to the timing of the transfers, the trustee’s
assertion is, on its own, a mere recitation of the elements comprising § 547(b)(4)(B). However,
supplemental Exhibit B contains the exact dates and amounts of each transfer and the court finds
such information sufficient to show that it is plausible that the alleged transfers occurred within
the preference period.
With respect to the allegation that certain defendants were insiders, the Delaware
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2Although In re Oakwood Homes was decided prior to Twombly and Iqbal, it
incorporates the Valley Media standard for pleadings in determining whether the complaint
satisfied Rule 8(a)(2). While Valley Media has been distinguished or ignored by the majority of
bankruptcy courts both nationwide as well as in Delaware, this court believes that the decisions
by the Supreme Court in Twombly and Iqbal breathe new life into the pleading requirements
implemented in Valley Media for § 547 preference claims. As such, the court finds persuasive
cases such as Oakwood Homes which apply the Valley Media pleading standard.
20
Bankruptcy Court considered the sufficiency of allegations that an insider relationship existed
between transferees and the debtors in In re Oakwood Homes.2 In Oakwood Homes, the
Delaware Bankruptcy Court considered whether a preference claim alleging that defendants
were insiders was sufficient to overcome a motion to dismiss. In re Oakwood Homes, 340 B.R.
510 (Bankr. D. Del. 2006). The complaint in Oakwood Homes alleged that the defendants were
insiders because they were “in control of the debtors,” affiliates, and “managing agents” of the
debtors. Id. at 524. In addition, the complaint described the relationships between the debtors
and the defendants. Id. at 522. Acknowledging that it was obligated to accept as true “all of the
allegations in the complaint and all reasonable inferences that can be drawn therefrom,” the
Court determined that the complaint alleged a relationship in which the defendants dominated
and controlled the debtors. Id. (citing Morse v. Lower Merion Sch. Dist., 132 F.3d 902, 906 (3d
Cir. 1997)). As a result, the Court determined that the complaint alleged an adequate factual
basis in support of the assertion that the defendants were insiders. Oakwood Homes at 524.
In the case at bar, the Amended Complaint includes a list of transferees and specifies
which transferees are alleged to be insiders. However, the mere labeling of transferees as
insiders is not enough to establish a reasonable inference of insider status. Unlike the complaint
in Oakwood Homes, the Amended Complaint provides few details regarding the relationship
between the debtors and the defendants. Importantly, the Amended Complaint also fails to
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address in what capacity the defendants are insiders of the debtors. The trustee’s assertion that
the defendants “are insiders as that term is defined in § 101(31) and used in § 547(b)” is
conclusory and insufficient without supporting facts. In summary, the court finds that a § 547
preference claim alleging insider status must include the basis for asserting that a defendant
qualifies as an insider under § 101(31) and facts showing that the alleged relationship is
plausible.
F. Enabled Creditor to Receive More than it would under Chapter 7
Under § 547(b)(5), avoidance is also contingent on the trustee establishing that the
alleged preferential transfer enabled the transferee to receive more than it would have under
chapter 7. “Section 547(b)(5) is a central element of the preference section because it requires a
comparison between what the creditor actually received and what it would have received under
[chapter 7].” 5 Collier on Bankruptcy, ¶ 547.03[7] (Alan N. Resnick & Henry J. Sommer, eds,
15th ed. rev.). Generally, as long as the distribution to general unsecured creditors would be less
than 100%, any payment to such a creditor during the preference period would enable the
creditor to receive more than it would in a liquidation had the payment not been made. Id.; see
also In re Virginia-Carolina Fin. Corp., 954 F.2d 193, 199 (4th Cir. 1992). Thus, in a situation
where the alleged preferential transferee is an unsecured nonpriority creditor, the trustee must
show that the distribution to all such creditors in a chapter 7 liquidation would be less than
100%. Under Rule 8(a)(2), and in light of the heightened pleading standard expressed in Iqbal,
the trustee is obligated to support his allegation with facts showing that it is plausible that
creditors would receive less than a 100% payout in a liquidation. The court finds that the
debtors’ summary of schedules, reflecting liabilities far greater than assets, is sufficient to satisfy
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the trustee’s pleading requirement. See Precision Walls, Inc. v. Crampton, 196 B.R. 299, 303
(E.D.N.C. 1996) (summary of schedules demonstrating that liabilities exceeded assets was
sufficient to support the bankruptcy court’s finding that unsecured creditors would receive less
than 100% on their claims).
The trustee raises several arguments in opposition to the court’s adoption of the
heightened pleading standard for claims for relief. First, the trustee argues that the new pleading
requirements impose an undue burden on the trustee to supplement each element of its cause of
action with factual support. In response, the court admits that claims for relief are more difficult
to plead sufficiently following Twombly and Iqbal. However, the trustee is certainly more likely
to have access to this information than the antitrust plaintiffs in Twombly or the Pakistani
detainee in Iqbal. If these claimants were held to a heightened pleading standard, so too can a
trustee in bankruptcy. After all, the trustee has theoretically had all of the books and records of
the debtors for up to two years prior to bringing these causes of action, with the full discovery
powers of the court through 2004 exams and other means available during that time.
Second, the trustee argues that the Supreme Court considered special discovery issues in
Twombly and Iqbal which are not applicable to the case at bar. The trustee asserts that the
Supreme Court in Twombly was concerned with the expense of discovery in antitrust litigation
and argues that Iqbal was similarly unique because the defendants were government officials
entitled to qualified immunity and protection from the burdens of litigation. The trustee argues
that the discovery issues raised in Twombly and Iqbal are not applicable to cases under§ 547 and
contends that he should not be subject to the heightened pleading standard in Iqbal or the
requirements imposed in Valley Media.
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The court finds that the trustee is incorrect in asserting that Twombly and Iqbal are
limited in application to cases with special discovery issues. The Supreme Court in Twombly
signaled the retirement of the “no set of facts” standard in Conley v. Gibson, and reiterated in
Iqbal that a claim’s survival on a 12(b)(6) motion was contingent on the inclusion of “sufficient
factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Iqbal at
1949. The holdings in Twombly and Iqbal were not unique to those cases; rather, the standard
for pleadings set forth by the Supreme Court are applicable to all claims for relief under Rule
8(a) of the Federal Rules of Civil Procedure.
2. Motions to Dismiss Fraudulent Transfer Claims
In addition to claims to avoid preferential transfers, the trustee’s complaint seeks to avoid
alleged fraudulent transfers incurred within the two-year period prior to the petition date of the
debtor. In response, the Movants contend that the trustee’s claims to avoid alleged fraudulent
transfers fail to satisfy necessary pleading requirements. Section 548 of title 11 allows the
trustee to avoid fraudulent transfers of an interest of the debtor in property incurred within 2
years before the date of the filing of the petition. 11 U.S.C. § 548(a)(1). Such transfers may be
founded on actual fraud or constructive fraud. Id. § 548(a)(1)(A), (B). Under § 548(a)(1), a
transfer is avoidable if it was either actually fraudulent in that it “(i) had at its purpose an intent
to hinder, delay or defraud the debtor’s creditors,” or that it was constructively fraudulent in that
it “(ii) was made while the debtor was in a precarious financial condition, and the transaction did
not provide the debtor with a reasonably equivalent value in exchange for the item transferred.”
5 Collier on Bankruptcy, ¶ 548.01 (Alan N. Resnick & Henry J. Sommer, eds, 15th ed. rev.).
The Movants allege that the trustee’s fraudulent transfer claims must be dismissed for failure to
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plead sufficient facts to support either actual or constructive fraud.
First, the Movants contend that the Amended Complaint fails to satisfy the heightened
pleading standard for actual fraud provided in Rule 9(b) of the Federal Rules of Civil Procedure.
Rule 9(b), made applicable by Rule 7009 of the Federal Rules of Bankruptcy Procedure, requires
a party alleging fraud to “state with particularity the circumstances constituting fraud . . . .” F ED .
R. CIV . P. 9(b); FED . R. BANKR . P. 7009. However, “malice, intent, knowledge, and other
conditions of a person’s mind may be alleged generally.” Id. A claim alleging an actual
fraudulent transfer under § 548 must satisfy the particularity requirement of Rule 9(b). See In re
Derivium Capital, LLC, 380 B.R. 429, 439 (Bankr. D.S.C. 2006) (citing In re Verestar, Inc., 343
B.R. 444, 459 (Bankr. S.D.N.Y. 2006)). The Movants argue that the Amended Complaint fails
to identify and describe the fraudulent circumstances on which the trustee’s claims are founded.
In response, the trustee admits that his claims to avoid fraudulent transfers under § 548(a)(1)(A)
are subject to the Rule 9(b) standard for pleading but argues that the particularity requirement of
Rule 9(b) is relaxed as applied to him because he is a third party with secondhand knowledge
and limited access to information at the pleading stage.
The court finds that the trustee’s claims to avoid actual fraudulent transfers pursuant to §
548(a)(1)(A) satisfy the particularity requirement of Rule 9(b). The Amended Complaint asserts
that the debtors transferred funds into a bank account operated by the principals of the debtors
and in the name of a non-debtor entity, BER Care, Inc., for the purpose of hindering creditors
from attaching or garnishing the debtors’ bank accounts, including the Internal Revenue Service,
which allegedly notified the debtors of its intent to levy and garnish their accounts. Exhibit B to
the Amended Complaint further provides the dates, amounts, and names of transferees with
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respect to each alleged fraudulent transfer. The court finds that the allegations in the Amended
Complaint and Exhibit B comply with Rule 9(b)’s pleading requirements for actual fraud.
Second, the Movants contend that the trustee has failed to sufficiently plead allegations
of constructive fraud pursuant to § 548(a)(1)(B). Section 548(a)(1)(B) allows for the avoidance
of certain transfers in which the debtor “received less than reasonably equivalent value” and
either (I) was or became insolvent on the date of the transfer; (II) became insufficiently
capitalized following the transfer; (III) intended to incur debts that would be beyond its ability to
repay; or (IV) made such transfer 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). Rule 9(b) does not apply to
claims for avoidance of constructively fraudulent transfers because such claims are not based on
actual fraud but instead rely on the debtor’s financial condition and the sufficiency of
consideration provided by the transferee. In re Derivium Capital, LLC, 380 B.R. 429, 439
(Bankr. D.S.C. 2006) (citing In re Verestar, Inc., 343 B.R. 444, 459 (Bankr. S.D.N.Y. 2006)).
Rather, § 548(a)(1)(B) claims must satisfy Rule 8(a) and contain a short and plain statement
showing entitlement to relief. Under Iqbal, it follows that claims to avoid constructively
fraudulent transfers must assert factual allegations which show that relief is plausible.
The Amended Complaint alleges that, with respect to transfers alleged to be fraudulent,
the transferors “received less than reasonably equivalent value in exchange from the defendant
for such fraudulent transfer.” The Amended Complaint also alleges that these transferors were
“insolvent on the date of each fraudulent transfer or became insolvent as a result of the
fraudulent transfer.” The court finds that the trustee’s allegations mirror the elements of §
548(a)(1)(B). However, the trustee fails to support such allegations with factual assertions other
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than dates, amounts, and names of transferees included in Exhibit B. Missing from the Amended
Complaint is an identification of the consideration received by each transferor, information as to
why the value of such consideration was less than the amount transferred, and facts supporting
the debtors’ insolvency at the time of the transfer. In the absence of such factual assertions, the
trustee’s claims based on constructive fraud fail to meet the Rule 8 pleading standard.
3. Motion to Amend and Relate Back
The trustee moves to amend his complaint against the defendants to include particular
facts and clarify his claims for relief under §§ 547, 548, and 550. Attached to the trustee’s
motion to amend is Exhibit B, consisting of a summary of the alleged transfers and their dates,
amounts, and names of transferees, as well as PPS/BER Care bank statements for the months of
September 2005 through March 2006. In addition, the trustee requests that the proposed
amendment relate back to the date of the original complaint.
In response, defendants John Smith III, Jette Ferrell, Joseph and Cher Cannon, Dona
Burrell, Susan Simms, Stanley Brunson, Jr., First Eastern, Powell Properties, and BER Care, Inc.
filed objections to the trustee’s motion. These objecting defendants argue that the proposed
amendment is futile because it fails to rectify the deficiencies in the original pleading.
Specifically, the proposed amendment fails to identify the names of transferors, antecedent debts,
or the grounds why the defendants are insiders. Additionally, the objecting defendants contend
that the allegations do not amount to fraud. Further, the objecting defendants argue that the
original complaint failed to reveal the conduct, transactions, or occurrences alleged in the
amendments. Finally, the objecting defendants argue that the statute of limitations applicable to
the trustee’s complaint precludes amendment. As a result, the objecting defendants argue that
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the amendments must not relate back.
Rule 15 of the Federal Rules of Civil Procedure authorizes a party to amend a pleading
with the court’s leave. FED . R. CIV . P. 15(a)(2); F ED . R. BANKR . P. 7015. Leave to amend
pleadings “shall be freely given when justice so requires” and should be granted absent prejudice
to the opposing party, bad faith on the part of the moving party, or futility of amendment.
Hutson v. Greenwich Ins. Co. (In re E-Z Serve Convenience Stores, Inc.), 2005 Bankr. LEXIS
3074 (Bankr. M.D.N.C. 2005) (citing Nolte v. Capital One Fin. Corp., 390 F.3d 311, 317 (4th
Cir. 2004)). Here, the opposing parties are not prejudiced by the trustee’s request to amend. In
fact, the trustee’s amendment supplements the original complaint with information which may
assist the defendants in asserting affirmative defenses to the trustee’s claims. Further, the court
finds that the trustee has acted in good faith and that amendment is not futile. The information
contained in the trustee’s motion to amend provides necessary factual support to the trustee’s
claims. In light of the heightened pleading standard recently adopted by the Supreme Court, the
court grants the trustee leave to amend his pleadings to adhere to the new pleading requirements
for preferential and fraudulent transfers.
The trustee also requests that his amended claims relate back to the date of the original
complaint. An amendment to a pleading relates back to the date of the original pleading when
“the amendment asserts a claim or defense that arose out of the conduct, transaction, or
occurrence set out – or attempted to be set out – in the original pleading.” F ED . R. CIV . P.
15(c)(1)(B); F ED . R. BANKR . P. 7015. Relation back is contingent on the court determining that
there is a factual nexus between the amendment and the original claim and that the defendants
had notice of the claim and will not be prejudiced by the amendment. In re E-Z Serve
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Convenience Stores, Inc. at 8-9 (citing Grattan v. Burnett, 710 F.2d 160, 163 (4th Cir. 1983)).
First, relation back is proper because there is a factual nexus between the amended claim
and the original complaint. The purpose of the amendment is to supplement the original
complaint by adding bank statements of the immediate transferee and a table providing dates,
amounts, and names of transferees. The court finds that the amendment clarifies the original
complaint by providing more detail regarding the transfers from the debtors and through BER
Care, Inc. to the defendants.
Second, the defendants had sufficient notice of the amended claim based on the
allegations in the original complaint. The original complaint alleged preferential and fraudulent
transfers by the debtors through BER Care, Inc. as a conduit to the defendants. The original
complaint provided the total of amounts transferred to each defendant and specified under what
theories the trustee sought to avoid the transfers. In comparison, the proposed amendment
specifies the dates and amounts of each transfer to the defendants. The amendment neither
includes new transfers nor adds new defendants. It follows that the amended claim is based on
the same transactions or occurrences set forth in the original complaint.
At hearing, counsel for Joseph and Cher Cannon, Diversified Enterprise, Inc., and Dona
Burrell argued that the original complaint’s failure to satisfy the pleading standards in
Twombly and Iqbal precluded the trustee from amending his complaint after the statute of
limitations had run. The court disagrees. Relation back of a proposed amendment is not
contingent on the original complaint satisfying the pleading standard contained in Rule 8(a)(2).
See Davis v. Piper Aircraft Corp., 615 F.2d 606, 611-12, n. 8 (4th Cir. 1980) (“It is clear that
under federal law the failure to have stated a claim under Rule 8(a)(2) is no impediment to the
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later allowance of an amendment having relation back effect . . . .”); see also FED . R. CIV . P.
15(d) (permitting a party to serve a supplemental pleading “even though the original pleading is
defective in stating a claim or defense.”). In addition, Rule 15(c) requires that the transaction or
occurrence must be “set out – or attempted to be set out” by the original pleading. Because the
court finds that the proposed amendment asserts a claim arising out of the transactions or
occurrences set out in the original pleading, relation back under Rule 15(c) is proper.
4. Motion for Severance of Claims
Defendants First Eastern, LLC (“First Eastern”) and Powell Properties of Durham, LLC
(“Powell Properties”) move for severance of their claims pursuant to Rule 21 of the Federal
Rules of Civil Procedure. Rule 21 provides that the court may “sever any claim against a party.”
FED . R. CIV . P. 21; FED R. BANKR . P. 7021. First Eastern and Powell Properties assert that the
trustee’s claims against them are not related to claims against other defendants in this adversary
proceeding. First Eastern and Powell Properties argue that the inclusion of numerous unrelated
claims against unrelated defendants would work an undue hardship on them and would require
the expenditure of substantial time and money to participate in every proceeding involving all of
the defendants. In addition, First Eastern and Powell Properties argued at hearing that they
anticipated significant discovery in this adversary proceeding and that there was no reason for
every attorney to be present at every deposition related to the case. Also at hearing, counsel for
defendants John Smith III and Susan Simms argued that consolidating the trustee’s claims would
unduly burden the defendants and their attorneys.
Conversely, the trustee argues that the joinder of the defendants in a single adversary
proceeding is permitted under Rule 20 of the Federal Rules of Civil Procedure. Rule 20 allows
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for the permissive joinder of defendants in a single action if:
(A) any right to relief is asserted against [the defendants] jointly, severally, or in the
alternative with respect to or arising out of the same transaction, occurrence, or series of
transactions or occurrences; and (B) any question of law or fact common to all
defendants will arise in the action.
FED . R. CIV . P. 20(a)(2); F ED . R. BANKR . P. 7020. The trustee asserts that BER Care, Inc. is a
necessary party to the claims against the defendants and argues that a mediate transferee’s
liability is comparable to joint and several liability of joint tortfeasors. The trustee further
asserts that the transfers to BER Care, Inc. present common legal and factual issues as to all of
the defendants. Additionally, the trustee argues that a consolidation of claims promotes judicial
efficiency. From a procedural standpoint, the trustee agrees with the proponents of severing that
it is unnecessary for all defendants to be involved in every aspect of discovery. At hearing, the
trustee recommended that the trials be separated with respect to each defendant once the issues
regarding avoidability of transfers to the immediate transferee, BER Care, Inc., have been
determined.
The court is empathetic to the concerns regarding time and expense expressed by the
defendants seeking severance of claims. However, the court finds that severance is not
necessary with respect to the trustee’s claims to avoid alleged preferential and fraudulent claims.
Under Rule 20 of the Federal Rules of Civil Procedure, the court may issue orders protecting
parties from “expense, or other prejudice that arises from including a person against whom the
party asserts no claim and who asserts no claim against the party.” FED . R. CIV . P. 20(b); FED . R.
BANKR . P. 7020. In the case at bar, the court finds that the defendants’ concerns will be
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alleviated by bifurcating the adversary proceeding. First, the court will address the trustee’s
claims under §§ 547 and 548 to avoid alleged preferential and fraudulent transfers to immediate
transferee BER Care, Inc. Participation in this first stage by defendants other than BER Care,
Inc. shall be discretionary. Once the issues in the first stage have been decided, any claims to
recover transfers pursuant to § 550 will be adjudicated.
5. Conclusion
Based on the foregoing,
(1) The Movants’ motions to dismiss the trustee’s claims to avoid alleged preferential
transfers, contained in Counts I and III of the Amended Complaint, are GRANTED. The
Movants’ motions to dismiss the trustee’s claims to avoid alleged fraudulent transfers under §
548(a)(1)(B), contained in Counts II and IV of the Amended Complaint, are GRANTED.
However, the court grants permission for the trustee to re-plead his claims against the defendants
under the pleading standards expressed in this order.
(2) The Movants’ motions to dismiss the trustee’s claims to avoid alleged fraudulent
transfers under § 548(a)(1)(A), contained in Counts II and IV of the Amended Complaint, are
DENIED. The court finds that the trustee has alleged sufficient information to satisfy the
pleading standard for actual fraud provided in Rule 9(b).
(3) The trustee’s motion to amend and relate back is GRANTED. The trustee shall have
30 days from the date of this order in which to file a second amended complaint. Once the
trustee has filed his second amended complaint, the defendants will have 20 days in which to
answer.
(4) The motion to sever claims is GRANTED in part. The trustee’s claims for recovery
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of transfers under § 550 are stayed pending adjudication of the claims to avoid transfers to BER
Care, Inc. pursuant to §§ 547 and 548. Once the issues regarding avoidance of transfers to BER
Care, Inc. have been decided, the claims remaining against the defendants under § 550 shall be
adjudicated.
“END OF DOCUMENT”
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