Beaman, Trustee v. Capital Community Foundation, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
AMERLINK, LTD., 	CASE NUMBER: 09-01055-8-JRL
CHAPTER 7
Debtor.
IN RE:
STEPHEN L. BEAMAN, 	ADVERSARY PROCEEDING
TRUSTEE 	NO. 10-00164-8-JRL
Plaintiff,
v.
JOHN M. BARTH, JR. AND WIFE
TRACY M. BARTH; RICHARD B. SPOOR
AND WIFE WALTON SPOOR; JOHN M. BARTH
AND WIFE EILEEN M. BARTH; HARLINGEN
STABLES, INC.; TALL GRASS FARMS, INC.;
PRO-FORM CONSTRUCTION, INC.;
NATIONAL CONSUMER COOPERATIVE BANK;
THOMAS R. SLOCUM; TERRY CASTLE; STEVEN
J. GUGENHEIM; HORIZON TRUST &
INVESTMENT MANAGEMENT, N.A.;
JR INTERNATIONAL HOLDINGS, LLC; AND
CAPITAL COMMUNITY FOUNDATION, INC.,
Defendants.
SO ORDERED.
SIGNED this 11 day of March, 2011.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1 These facts are a fair distillation of the complaint taken in the light most favorable to
plaintiff. That said, the complaint is not a model of clarity as it does not always proceed
chronologically, and it is not clear which defendants are implicated in the various counts.
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ORDER
This matter came before the court on the motions to dismiss filed separately by each
named defendant. A hearing was held on January 25, 2011, in Raleigh, North Carolina. Prior to
the hearing, Walton Spoor, Eileen Barth, Tracy Barth, and Horizon Trust & Investment
Management, N.A. were dismissed from the adversary proceeding by consent order. John M.
Barth, Sr. was voluntarily dismissed as to the thirteenth claim.
PROCEDURE
The underlying bankruptcy was filed by the debtor under chapter 11 on February 11,
2009. On November 23, 2009, the case was converted to a case under chapter 7. Steven L.
Beaman was duly appointed as the chapter 7 trustee. Subsequently, on July 23, 2010, the trustee
filed a complaint, initiating this adversary proceeding. The complaint states thirteen specific
claims for relief. Due to the complexity of the claims, the court will render decisions in multiple
orders. This order will address the second claim, preferential transfers, asserted against
defendants Richard B. Spoor, Pro-Form Construction, Inc., Harlingen Stables, Inc., and Tall
Grass Farms, Inc.
BACKGROUND1
When the debtor was formed, defendant Richard B. Spoor (“Spoor”) was the sole owner
and shareholder of the corporation. AmerLink, Ltd. (“AmerLink”) was in the business of log
home manufacturing, e.g., processing logs into home kits and contracting for installation of
homes. In the fall of 2006, groundwork was laid for the creation of an AmerLink employee
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stock option plan (“ESOP”). The ESOP was adopted on September 29, 2006, with an effective
date of October 1, 2005. Horizon Trust & Investment Management, N.A. (“Horizon”) acted as
trustee for the ESOP. Eleven days prior to adoption of the ESOP, September 18, 2006, John M.
Barth, Jr. (“Junior”) was hired as President and CEO of the debtor. During this time, Thomas R.
Slocum was a director and officer of the debtor, serving as the Vice President and Secretary.
AmerLink’s business records showed assets, property, and equipment valued at approximately
$17,036,117.00 at the time of the ESOP adoption. The same records indicated long term
liabilities totaling approximately $11,933,502.00. Retained earnings were $4,895,078.00.
On December 8, 2006, Pro-Form Construction, Inc. (“Pro-Form”) was created as a
subsidiary of the debtor. AmerLink was the sole shareholder of Pro-Form. Shortly thereafter, on
December 14, 2006, Spoor, as AmerLink’s sole shareholder, reconstituted AmerLink’s board of
directors. Spoor was elected chairman of the board. Junior, Slocum, Stephen Gugenheim, and
Terry Castle were also elected to AmerLink’s board of directors on the same date. Gugenheim
and Castle refer to themselves as the “outside directors” because they were not members of the
board at the time the ESOP was created. On December 19, 2006, two separate entities, In The
Woods, Inc. (“Woods”) and Harlingen Holdings, Inc. (“Harlingen Holdings”) were merged into
the debtor. Spoor controlled both Woods and Harlingen Holdings at the time of merger. Less
than a week later, on December 21, 2006, AmerLink adopted the first amendment to the ESOP.
The effective date of the first amendment was December 30, 2006.
One day prior to the effective date of the first amendment, December 29, 2006,
AmerLink and Pro-Form entered into a contribution agreement that provided for the transfer of
assets from AmerLink to Pro-Form. In exchange for transferred assets, AmerLink received
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100% ownership of Pro-Form. Thereafter, AmerLink transferred ownership of Pro-Form to
Spoor; however, this is an area of ambiguity. To the best of the court’s ability to decipher the
complexity of interwoven transactions plead in the complaint, it appears Spoor took ownership
to Pro-Form through Harlingen Stables, Inc. (“Harlingen Stables”), a separate entity controlled
by Spoor. Plaintiff alleges AmerLink made continual monthly payments for antecedent debts on
behalf of Harlingen Stables. Plaintiff alleges the same for a Spoor-owned corporation known as
Tall Grass Farms, Inc. (“Tall Grass”).
On February 12, 2007, Spoor transferred 49% of his shares in AmerLink to the ESOP.
The ESOP purchased the stock for $13,250,000.00, evidenced by a promissory note in favor of
Spoor (the “ESOP note”). On or about the same date, Capital Community Foundation, Inc.
(“Capital”), a non-profit, also received shares of stock in AmerLink. Capital sold the
17,177 shares of AmerLink stock to the ESOP for $350,000.00, evidenced by a promissory note.
As a result of the Woods and Harlingen Holdings mergers, payment of debts on behalf of
Harlingen Stables and Tall Grass, dealings with Pro-Form, and transactions with the ESOP, the
debtor’s balance sheet dated March 3, 2007 reflects assets of $12,612,328.00 and liabilities of
$23,536,671.11.
Six months following the transfers of AmerLink stock, on August 7, 2007, AmerLink
entered into three loan transactions with National Consumer Cooperative Bank (“NCCB”).
Although the debtor’s liabilities outweighed its assets, NCCB loaned a total of $13,000,000.00:
$8,000,000.00; $2,000,000.00; and, $3,000,000.00, respectively. From the loan proceeds,
AmerLink paid the ESOP $4,719,370.36; which, the ESOP in return paid to Spoor on account of
the ESOP note. Spoor allegedly used this payment to fund a certificate of deposit in favor of
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2The plaintiff alleges that the defendants were insiders, and thus subject to the one-year
preference period, as opposed to the 90-day period for non-insiders.
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NCCB; which, the bank required under the lending terms as security.
DISCUSSION
Defendants Spoor, Pro-Form, Harlingen Stables, and Tall Grass move to dismiss the
preferential transfer claim because the pleadings fail to state a claim to which the pleader is
entitled to relief pursuant to Federal Rule of Bankruptcy Procedure 7008(a)(2) and Federal Rule
of Civil Procedure 8(a)(2). In asserting a claim to avoid a preferential transfer under 11 U.S.C.
§547, a trustee must plead sufficient factual allegations to establish a preference claim for relief
that is plausible. Angell v. Ber Care, Inc. (In re Caremerica, Inc.) 409 B.R. 737, 750 (Bankr.
E.D.N.C. 2009). The elements of a preference cause of action are: (1) a transfer of an interest of
the debtor in property; (2) to or for the benefit of a creditor; (3) for or on account of an
antecedent debt owed by the debtor before such transfer was made; (4) made while the debtor
was insolvent; (5) made within one year before the date of filing if such creditor at the time of
such transfer was an insider; 2 (6) that enables such creditor to receive more than such creditor
would receive if the case were under chapter 7. 11 U.S.C. §547(b). The heightened pleading
standards in Bell Atl. Corp. v. Twombly and Ashcroft v. Iqbal apply to pleadings of preference
actions. Ber Care, Inc., 409 B.R. at 750. Specifically, “[t]hreadbare recitals of the elements of a
cause of action, supported by mere conclusory statements do not suffice.” Iqbal, 129 S. Ct. 1937,
1949 (citing Twombly, 550 U.S. 544, 555). To comply with the heightened pleading standards
for § 547 claims, the complaint must include (a) an identification of the nature and amount of
each antecedent debt and (b) an identification of each alleged preferential transfer by (i) date, (ii)
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name of debtor/transferor, (iii) name of transferee and (iv) amount of the transfer. Ber Care,
Inc., 409 B.R. at 748 (citing Valley Media v. Borders (In re Valley Media), 288 B.R. 189, 192
(Bankr. D. Del. 2003)).
The complaint at issue is largely conclusory, stating that the debtor transferred property
to or for the benefit of Spoor directly or to entities controlled by him—Pro-Form, Harlingen
Stables, and Tall Grass—on account of antecedent debts while the debtor was insolvent within
the year prior to the petition date. There is some elaboration on the transfers. The plaintiff
attaches Exhibit 24, a list of payments totaling $178,140.14, which plaintiff states were made to
Harlingen Stables, Tall Grass, and others. Exhibit 24 includes the transferees (e.g. “Tall Grass
Farms Payroll”), the dates of transfers, and the amount.
Turning to the elements of a preference claim, the court next determines whether the
cause of action has been properly pled. First, plaintiff must assert facts showing that the debtor
had an interest in the property transferred. Ber Care Inc., 409 B.R. at 750. Exhibit 24 includes
the names of transferees, but does not indicate that the debtor was the transferor. The property
transferred could have been that of the creditors themselves and represent a list of transfers
between them; it is unclear from the complaint. Second, plaintiff must assert the transfers were
made to or for the benefit of a creditor. While Exhibit 24 labels some of the transferees—e.g.
“Tall Grass Farms Payroll,” “Harlingen Stables Payroll”—it fails to specify to whom the benefit
of other transfers were made—e.g. “Gas,” “Petty Cash”.
Although a listing of names of transferees, dates and amounts of each transfer is
sufficient to assert that funds were in fact transferred, the transferee’s identity as a creditor is
contingent on the existence of an antecedent debt. Ber Care Inc., 409 B.R. at 751. This
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constitutes the third element of a preference cause of action. Mere conclusory statements that
the transfers were made on account of an antecedent debt owed by the transferor are insufficient.
Id. Here, the complaint includes one such conclusory statement. Plaintiff elaborates that the
payments were made by the debtor on a balance due under the contribution agreement between
AmerLink and Pro-Form, dated December 29, 2006. As stated above, to the best of the court’s
ability to decipher the facts of the complaint, Spoor took title to Pro-Form through Harlingen
Stables, therefore Harlingen Stables would also be a creditor of the contribution agreement. This
still leaves some deficiencies in the pleading of the “antecedent debt” element. First, it is unclear
how Tall Grass is a creditor of the contribution agreement. The complaint defines Tall Grass as
a corporation owned by Harlingen Stables, which perhaps links Tall Grass to the contribution
agreement as another creditor of the antecedent debt, but not explicitly so. Second, the
complaint describes the contribution as already being executed. The factual allegations state in
paragraph 41 that AmerLink transferred assets to Pro-Form and assigned its rights and
obligations under various contracts to Pro-Form. Based on this description, it appears as though
the debt was satisfied rather than remaining outstanding during the preference period.
Regardless, the complaint does not specifically assert sufficient facts of the nature and amount of
the antecedent debt.
The complaint must also allege that the preferential transfer was made while the debtor
was insolvent. Although the Bankruptcy Code allows the trustee to presume a debtor to be
insolvent within the 90-day period prior to filing, insolvency is not presumed from the 90-day
period until the year prior to filing. § 547(f). Since the plaintiff alleges these transfers were
made by insiders and subject to the one-year preference period, plaintiff must provide facts of
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the debtor’s insolvency beyond the 90-day presumption. Conclusory statements that the
transfers were made while the debtor was insolvent fail to satisfy the requirements under Iqbal.
Ber Care Inc., 409 B.R. at 752. Plaintiff’s complaint includes one such conclusory statement in
paragraph 75.
Next, for transfers made by insiders, the plaintiff must assert the transfers were made
within one year of the petition date. Regarding the timing of the transfers, the complaint refers
to the list of transfers in Exhibit 24 totaling $178,140.14 and includes dates for each transfer. All
of these transfers fall within the year preceding the petition date, and are therefore properly pled
with respect to timing. Plaintiff also attempts to allege that $416,303.92 was paid to Spoor
through the ESOP within the year prior to filing. Although plaintiff refers to Exhibit 24, this
particular transfer in this amount, or even cumulative transfers which total $416,303.92, is not
listed on Exhibit 24. This court has held that with respect to the timing of the transfer, a mere
recital of the element “made within one year of filing” is insufficient to plead that element. Ber
Care Inc., 409 B.R. at 752. Since a more specific date or dates of the transfer or transfers to
Spoor through the ESOP have not been provided, the plaintiff has failed the heightened pleading
requirements as to the ESOP transfer.
Regarding insider status, the Bankruptcy Code defines an insider as, among other things,
a person in control of the debtor. § 101(31). This court has found it sufficient to allege that
transferees were insiders as a result of their control of the debtor or status as “managing agents”
of the debtor. See Ber Care Inc., 409 B.R. at 753 (citing In re Oakwood Homes, 340 B.R. 510,
524 (Bankr. D. Del. 2006)). Here, the complaint sufficiently alleges that the defendants, Spoor,
Tall Grass, Harlingen Stables, and Pro-Form, are insiders. It states that the companies are owned
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and/or controlled by Spoor, who is an insider of the debtor himself, as he chaired the Board of
Directors of the debtor. Therefore, the plaintiff has sufficiently pled this fifth element.
Finally, for a preference cause of action to be sufficiently pled, the complaint must assert
facts that the transfers enabled the creditor to receive more than it would in a chapter 7
liquidation. This analysis 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, it is sufficient to show that
unsecured creditors would receive less than 100%, id., or that the debtor’s summary of schedules
reflect liabilities far greater than assets. Ber Care Inc., 409 B.R. at 754 (citing Precision Walls
Inc. v. Crampton, 196 B.R. 299, 303 (E.D.N.C. 1996)). Here, plaintiff asserts that the trustee
liquidated unencumbered assets and received approximately $78,386.23. Plaintiff states the
administrative claims alone exceed this amount. Furthermore, the plaintiff states that secured
claims exceed $12 million, priority claims exceed $3.57 million, and unsecured claims exceed
$20 million. Therefore, the plaintiff has sufficiently asserted that liabilities are far greater than
assets and that the alleged creditors received more than they would under chapter 7 as a result of
the preferential transfers.
Although plaintiff has sufficiently pled some of the elements of a preference cause of
action, all elements must be properly pled in order to comply with the heightened pleading
requirements of Rule 8(a)(2) and Iqbal. Based on the facts alleged in the pleadings, however, the
court finds it appropriate to grant the plaintiff another opportunity to sufficiently plead a
preference cause of action. The court hereby GRANTS the defendants’ motion to dismiss the
preferential transfer claims with leave to amend the pleadings. The obligation of the plaintiff to
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amend his pleadings is suspended until the court rules on all of the pending motions to dismiss,
at which point the court will set appropriate deadlines.
END OF DOCUMENT
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