Yelverton v. Homes at Potomac Greens Associates, Limited Partne

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF COLUMBIA
In re
STEPHEN THOMAS YELVERTON,
Debtor.
____________________________
STEPHEN THOMAS YELVERTON,
Plaintiff,
v.
HOMES AT POTOMAC GREENS
ASSOCIATES, LIMITED
PARTNERSHIP, et al.,
Defendants.
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Case No. 09-00414
(Chapter 11)
Adversary Proceeding No.
10-10001
Not for Publication in
West’s Bankruptcy Reporter
MEMORANDUM DECISION AND ORDER GRANTING MOTION TO DISMISS
This addresses the motion of defendant Chase Home Finance,
LLC (“Chase”), to dismiss the amended complaint in the above-
captioned adversary proceeding against it. 	For the reasons set
forth below, I will grant Chase’s motion.
I
On May 14, 2009, the plaintiff, Stephen Thomas Yelverton,
The document below is hereby signed.
Signed: April 21, 2010.
_____________________________
S. Martin Teel, Jr.
United States Bankruptcy Judge
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filed a petition in this court seeking relief under chapter 11 of
the Bankruptcy Code (11 U.S.C.). 	Thereafter, on January 4, 2010,
Yelverton commenced this adversary proceeding seeking to recover
from the defendants 1 damages arising from the purchase and
construction of a home located at 1804 Potomac Greens Drive,
Alexandria, VA, and filed an amended complaint on February 16,
2010. 	The material allegations in Yelverton’s amended complaint
as they relate to Chase are as follows:
On July 10, 2005, Yelverton entered into a contract to
purchase a yet-to-be-constructed townhouse in Alexandria,
Virginia, with the closing to occur on September 5, 2006. 	The
purchase price of the home was $761,615, to be financed by a
first mortgage on the property in the amount of $571,200 and
second mortgage of $152,300. 	In order to facilitate the sale of
their properties, the sellers entered into a long-term agreement
with George Mason Mortgage, LLC, to provide financing to
prospective buyers with discounts and quick financing approval.
Pursuant to that long-term financing agreement, George Mason
extended financing to Yelverton. 	Yelverton, in turn, granted
1 	The seller of the property was Homes at Potomac Greens
Associates, Limited Partnership, and the developer of the
property was Potomac Greens Associates, LLC. 	Potomac Land, LC,
and Homes at Potomac Greens were the builders, and EYA Marketing
was the sellers’ agent. 	Homes at Potomac Greens also formed a
home owners association. 	All of these parties are additional
defendants in this adversary proceeding and for purposes of this
motion to dismiss will be referred to as the “sellers.”
2
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George Mason a first and second mortgage on the property. 	Upon
closing, George Mason assigned the first mortgage to Chase.
After moving into the residence in October 2006, Yelverton
complained to the sellers about excessive noise levels from the
metro and freight trains that ran adjacent to the house. 	Noise
level measurements were taken at the house, and Yelverton
requested that action be taken to mitigate or reduce the
disturbance. 	The sellers refused to take any action to mitigate
the noise issues, and in October 2007 Yelverton vacated the
property and enlisted a broker to sell the house. 	By May 2008,
the broker had still not sold the house and in June 2008, Chase
foreclosed upon its mortgage and assessed a deficiency against
Yelverton.
In his amended complaint, Yelverton first seeks to hold
Chase jointly and severally liable with George Mason for the
entire amount of the first mortgage by virtue of it being George
Mason’s assignee. 	George Mason, in turn, Yelverton argues, is
liable for the defective design of his home under a theory that
by entering into a long-term agreement with the seller to provide
financing, George Mason became the sellers’ partner and,
consequently, jointly liable with the sellers for the defects in
the property. 	Second, Yelverton seeks to use the fraudulent
conveyance avoidance provision of § 548(a)(1)(B) to void the
foreclosure and to void any mortgage payments made two years
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before his petition date. 	Finally, Yelverton invokes the strong-
arm powers of § 544(a) and § 544(b)(1) to avoid the entire
mortgage and the foreclosure.
In response to Yelverton’s amended complaint, Chase filed
its motion to dismiss, to which Yelverton filed in opposition and
to which Chase filed in reply.
II
The purpose of a motion to dismiss is “to test the legal
sufficiency of the complaint.” 	Kingman Park Civic Ass'n v.
Williams, 348 F.3d 1033, 1040 (D.C. Cir. 2003). 	In deciding a
motion to dismiss, although the court “must construe the
allegations and facts in the complaint in the light most
favorable to the plaintiff . . . ,” Gustave-Schmidt v. Chao, 226
F. Supp. 2d 191, 195 (D.D.C. 2002), the complaint must
nevertheless plead “enough facts to state a claim to relief that
is plausible on its face,” Bell Atlantic Corp. v. Twombly, 550
U.S. 544 (2007), and “the court need not accept inferences drawn
by plaintiffs if such inferences are unsupported by the facts set
out in the complaint . . . . [nor must it] accept legal
conclusions cast in the form of factual allegations.” 	Kowal v.
MCI Communications Corp., 16 F.3d 1271, 1276 (D.C. Cir. 1994).
In deciding a motion to dismiss, “the Court may only consider the
facts alleged in the complaint, documents attached as exhibits or
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incorporated by reference in the complaint, and matters about
which the Court may take judicial notice.” 	Gustave-Schmidt, 226
F. Supp. 2d at 196.
III
In its motion, Chase argues that dismissal is proper on
Yelverton’s § 548 and § 544 claims based on his failure to state
a claim upon which relief could be granted. 	I will address
Yelverton’s § 548 claims first and then turn to his claims under
§ 544. 	Finally, I will address Yelverton’s contention that Chase
is liable under what appears to be a successor liability theory.
A. Section 548 Claims
1. Foreclosure Sale
Chase first argues that dismissal is proper on Yelverton’s
§ 548 avoidance claim for the foreclosure due to his failure to
allege facts in support of the claim. 	Under § 548(a)(1)(B) a
trustee may avoid any transfers of the debtor’s property in the
two years prior to bankruptcy where (1) the debtor received less
than reasonably equivalent value and (2) the debtor was insolvent
at the time of the transfer or became insolvent as a result of
the it.
First, Yelverton’s amended complaint should be dismissed
because he failed to allege that he did not receive reasonably
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equivalent value on the foreclosure. 	When a creditor forecloses
on collateral, the debtor receives reasonably equivalent value as
long as the foreclosure sale was conducted in accordance with the
state’s foreclosure laws. 	BFP v. Resolution Trust Corp., 511
U.S. 531, 545 (1994). 	Yelverton’s amended complaint alleges
nothing about the conduct of the foreclosure sale. 	In fact, the
only mention Yelverton makes of reasonably equivalent value in
his entire amended complaint is his mere conclusory statement
that “at the time of the foreclosure, the Debtor was insolvent
and did not receive ‘reasonably equivalent’ value for the
transfer.” 	Simply reciting § 548(a)(1)(B)’s test for fraudulent
transfer avoidance actions is insufficient under Twombly to
survive Chase’s motion to dismiss. 2
Second, Yelverton has also failed to alleged insolvency on
the date of foreclosure. 	The only mention of insolvency is
Yelverton’s recitation of the § 548(a)(1)(B)’s avoidance test.
And, for the reasons stated above, this conclusory assertion is
insufficient to survive the motion to dismiss. 3
2 	I note that in his opposition to Chase’s motion to
dismiss Yelverton states that he did not receive a credit against
the amount outstanding from the foreclosure sale, I will not
consider this as it is a fact that should have been alleged in
his amended complaint. 	And, in any event, this statement is at
odds with the fact that Chase has not filed a proof of claim in
this case for any deficiency as a result of the foreclosure and
the bar date for filing proofs of claim has passed.
3 	I 	note that in his opposition to Chase’s motion to
dismiss, Yelverton sets forth his assets and liabilities as of
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2. Mortgage Payments
Chase next argues that the mortgage payments Yelverton made
are not avoidable because he has failed, again, to plead the
necessary facts in support of the claim. 	In his amended
complaint, Yelverton simply states that he “invokes 11 U.S.C.
548(a)(1)(B)(i) and (ii)(I) . . . to VOID the transfer from him
for mortgage payments.”
First, Yelverton has not alleged, as a matter of law, that
he did not receive reasonably equivalent value in exchange for
his mortgage payments. 	Although in his amended complaint
Yelverton states that he moved out of the house in October 2007,
the mere fact that Yelverton did not live in the house while he
was paying on the mortgage does not mean that he did not receive
reasonably equivalent value for those payments. 	Yelverton’s
mortgage payments were payments on antecedent debt, which
§ 548(d)(2)(A) includes in the definition of value. 	Moreover,
the mortgage payments were reasonably equivalent: in exchange for
his payments, Yelverton received a curtailment on the principal
of his loan and the continued right to defer full payment of the
money that had been lent, as represented by the interest portion
of his payments. 	The fact that Yelverton did not occupy the
the foreclosure date and states that he received nothing in
exchange for the foreclosure. 	Once again, however, an opposition
is not the appropriate place to plead these facts. 	Rather, these
were facts that Yelverton should have pled in his amended
complaint.
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residence while he was making those payments is of no consequence
to this analysis.
Second, even if Yelverton’s mortgage payments were not
reasonably equivalent value, Yelverton’s failure to plead
insolvency on the transfer date is, again, fatal to his
§ 548(a)(1)(B) claim. 	As with his § 548 foreclosure avoidanace
claim, Yelverton has failed to plead any facts relating to his
insolvency on the dates of the mortgage payments he is seeking to
avoid. 	Even in his opposition to Chase’s motion to dismiss, the
most Yelverton can say is that he was insolvent for “most of the
time from May 2007 through at least the end of 2008 . . . .”
Were I to consider the facts alleged in his opposition, which I
do not, even these would not be sufficient. 	Instead, Yelverton
would need to identify the exact payment dates on which he was
insolvent or became insolvent because of the payment. 4
Accordingly, Yelverton’s § 548(a)(1)(B) claim based on the
mortgage payments is appropriately dismissed.
B. Section 544 Claims
Chase argues that Yeverton’s § 544 claims should be
dismissed due to his failure to plead specific facts in support
4 	Alternatively, Yelverton’s amended complaint could have
survived the motion to dismiss by alleging that he was insolvent
throughout the period for which he was seeking to avoid payments,
if that were the case. 	That does not, however, based on
Yelverton’s opposition, appear to be the case.
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of the claims. 	In the amended complaint, Yelverton invokes
§§ 544(a) and (b) as the basis for avoiding Chase’s foreclosure
on the property and the fixing of the mortgage.
Under § 544(a), the trustee is given the power to avoid any
transfer of an interest of the debtor in property or obligation
incurred by the debtor that would be voidable by any one of three
hypothetical entities: (1) a hypothetical lien creditor who
extends credit to the debtor on the eve of bankruptcy and obtains
a judicial lien on all of the debtor’s property; (2) a
hypothetical lien creditor who extends credit to the debtor on
the eve of bankruptcy and obtains an execution which is
unsatisfied; and (3) a bona fide purchaser for value of real
property of the debtor as of the commencement of the case. 	The
purpose of these provisions is to allow the trustee to avoid any
unperfected security interests on the debtor’s property. 	In his
amended complaint, Yelverton fails to allege that the mortgage
was unperfected. 5 	Without that allegation, Yelverton’s § 544(a)
claim fails.
Under § 544(b), the trustee may avoid for the benefit of
5 	I note that Yelverton invoked § 544(a) to void both the
foreclosure and the mortgage. 	I have a hard time seeing how a
trustee could use § 544(a) to void the foreclosure directly.
Rather, it seems that any action to avoid a foreclosure under
§ 544(a) would be indirect. 	That is, the foreclosure would only
be void by virtue of the mortgage or deed of trust under which
the creditor foreclosed upon the property itself being void. 	I
construe Yelverton’s amended complaint as asserting just such an
indirect attack upon the foreclosure.
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general unsecured creditors any transfer of the debtor’s interest
in property or obligation incurred by the debtor that would be
voidable by a creditor holding an unsecured claim. 	In essence,
this provision allows a trustee to avoid transfers in bankruptcy
that would be avoidable by unsecured creditors under state
fraudulent conveyance law.
First, Yelverton’s § 544(b) claim must be dismissed because
he has failed to identify an actual unsecured creditor that could
avoid either the mortgage or foreclosure. 	A trustee seeking to
avoid a transfer of the debtor in property or an obligation
incurred by the debtor must identify a “creditor holding an
unsecured claim that is allowable under § 502" that could avoid
the mortgage and foreclosure. 	In other words, Yelverton had to
identify an actual unsecured creditor that both held a claim at
the time he entered into the mortgage or the foreclosure
occurred, and had that claim as an allowed claim in this
bankruptcy. 	In re International Loan Network, Inc., 160 B.R. 1,
18 (Bankr. D.D.C. 1993). 	Yelverton has not identified any such
creditor.
Moreover, even if such a creditor existed, Yelverton has not
alleged facts that show that creditor would be able to avoid
either the mortgage or the foreclosure under Virginia law. 6 	The
6 	The parties agree that both the foreclosure and the
mortgage are governed by Virginia law.
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Virginia fraudulent conveyance statute provides as follows:
Every 	gift, 	conveyance, 	assignment, 	transfer 	or 	charge
which is not upon consideration deemed valuable in law,
or 	which 	is 	upon 	consideration 	of 	marriage, 	by 	an
insolvent transferor, or by a transferor who is thereby
rendered insolvent, shall be void as to creditors whose
debts shall have been contracted at the time it was made,
but 	shall 	not, 	on 	that 	account 	merely, 	be 	void 	as 	to
creditors whose debts shall have been contracted or as to
purchasers 	who 	shall 	have 	purchased 	after 	it 	was 	made.
Even 	though 	it 	is 	decreed 	to 	be 	void 	as 	to 	a 	prior
creditor, 	because 	voluntary 	or 	upon 	consideration 	of
marriage, it shall not, for that cause, be decreed to be
void as to subsequent creditors or purchasers.
To plead a prima facie case under Virginia Law, then, Yelverton
had to allege that “(1) a transfer was made, (2) the transfer was
not supported by consideration deemed valuable in law, and (3)
the transfer was done when the transferor was insolvent or the
transfer rendered the transferor insolvent.” 	In re Meyer, 244
F.3d 352, 353 (4th Cir. 2001). 	Although it is clear that a
transfer of Yelverton’s property was made on both the mortgage
itself and the foreclosure, because both were supported by
valuable consideration and because Yelverton has failed to allege
he was insolvent at the time of the transfer or became insolvent
because of the transfer, his claim under § 544(b) also fails.
Regarding the mortgage itself, Yelverton’s § 544(b)
avoidance claim first fails because he received valuable
consideration. 	In both his amended complaint and opposition to
Chase’s motion to dismiss, Yelverton wholly misconstrues the
nature of the transaction he is seeking to avoid with Chase. 	In
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sum, his argument is that because he received an allegedly
defective house, he received less than adequate consideration
from the purchase-money lender. 	But Yelverton did not receive
the house from the lender. 	Rather, in exchange for his granting
a first priority security interest in the property, Yelverton
received $571,200. 	It was that $571,200 that Yelverton used to
purchase the property. 	Any claim that Yelverton had to avoid the
purchase of the home as a fraudulent conveyance, is appropriately
limited to the sellers of the home, not the party who extended
the financing. 7 	Moreover, dismissal of the amended complaint is
also appropriate due to Yelverton’s failure to allege insolvency.
As I pointed out in the section addressing Yelverton’s §
548(a)(1)(B) claim, nowhere in his amended complaint does
Yelverton allege specific facts pointing to his insolvency as of
the date he entered into the mortgage or that the mortgage
resulted in his insolvency. 	Without specific facts in support of
this prong, his claim under § 544(b) likewise fails.
Regarding Yelverton’s § 544(b) claim to avoid the
foreclosure, it too must be dismissed based on his failure to
allege specific facts showing his insolvency on the date of the
foreclosure or as a result of the foreclosure.
7 	For the reasons stated below, the mere fact that Chase
took an assignment of the mortgage from George Mason, does not
make then liable for any fraud imputed to George Mason by virtue
of Yelverton’s partnership theory. 	And, accordingly, this would
not be a basis for avoiding the mortgage as to Chase.
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C. Successor Liability
The final issue to address is whether Chase could be held
liable to Yelverton under what I am construing to be a theory of
successor liability. 	In his amended complaint, Yelverton alleges
that George Mason Mortgage, the entity that assigned the first
mortgage to Chase, is liable with the sellers of the property for
its defective design, breach of contract, and gross negligence,
under a theory that George Mason and the seller were partners.
Yelverton then argues that Chase, in turn, is jointly and
severally liable with George Mason as its assignee of the first
mortgage.
Under Virginia law, the general rule is that “a company that
purchases or otherwise receives the assets of another company is
generally not liable for the debts and liabilities of the selling
corporation.” 	Kaiser Foundation Health Plan v. Moore, 123 F.3d
201, 204 (4th Cir. 1997). 	There are, however, four exceptions to
this rule: “(1) the purchasing corporation expressly or impliedly
agreed to assume such liabilities, (2) the circumstances
surrounding the transaction warrant a finding that there was a
consolidation or de facto merger of the two corporations, (3) the
purchasing corporation is merely a continuation of the selling
corporation, or (4) the transaction is fraudulent in fact.”
Harris v. T.I., Inc., 243 Va. 63, 70 (1992). 	Yelverton has
alleged no facts in support of any of these four exceptions, and,
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accordingly, any claims against Chase under a theory of successor
liability are appropriately dismissed. 8
IV
Pursuant to the foregoing, it is
ORDERED that the Chase’s motion to dismiss is granted.
[Signed and dated above.]
Copies to: All counsel of record; Office of United States
Trustee.
8 	I note that the fourth exception–-the transaction is
fraudulent in fact–-pertains to the transaction between George
Mason and Chase. 	In order to meet this exception, Yelverton
would have needed to allege that George Mason assigned the
mortgage to Chase for the purpose of defrauding him. 	He has made
no such allegation and, therefore, this exception would not
apply.
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