Angell v. Endcom, Inc. (In re Tanglewood Farms, Inc.)

• Decision Date: 26 February 2013
• Docket Number: Bankruptcy No. 10–06719–8–JRL.,Adversary No. 12–00187–8–JRL.
• Citation: 487 B.R. 705
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Parties: In re TANGLEWOOD FARMS, INC. OF ELIZABETH CITY, Debtor. James B. Angell, Chapter 7 Trustee, Plaintiff, v. Endcom, Inc., Defendant.

487 B.R. 705

In re TANGLEWOOD FARMS, INC. OF ELIZABETH CITY, Debtor.James B. Angell, Chapter 7 Trustee, Plaintiff,

v.Endcom, Inc., Defendant.

Bankruptcy No. 10–06719–8–JRL.

Adversary No. 12–00187–8–JRL.

United States Bankruptcy Court,

E.D. North Carolina,

Greenville Division.

Feb. 26, 2013.

Laurie B. Biggs, Stubbs & Perdue, PA, Raleigh, NC, Trawick H. Stubbs, Jr., Stubbs & Perdue, P.A., New Bern, NC, for Debtor.

ORDER

J. RICH LEONARD, Bankruptcy Judge.

This matter came before the court on Endcom, Inc.'s (“defendant”) motion to dismiss this adversary proceeding for failure to state a claim upon which relief can be granted, to which James B. Angell (“trustee”) has objected. A hearing on the matter was held on January 10, 2013 in Raleigh, North Carolina. At the conclusion of the hearing, the court took the matter under advisement and allowed the parties ten days to file supplemental briefs.

BACKGROUND¹

Tanglewood Farms, Inc. of Elizabeth City (“debtor”) filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on August 20, 2010, which was subsequently converted to one under chapter 7 on July 12, 2011. On August 23, 2010, James H. Winslow (“Mr. Winslow”) and his wife, Billie Winslow (“Mrs. Winslow”) (collectively “Winslows”) filed a joint voluntary petition under chapter 11 of the Bankruptcy Code. Prior to and at the time of both filings, Mr. Winslow was the president and sole shareholder of the debtor. In that capacity, he oversaw the debtor's granary operations in Pasquotank County, North Carolina and made decisions concerning the assets, liabilities and relationship between the debtor and his personal farming operation, Winslow Farms. See In re Tanglewood Farms, Inc. of Elizabeth City, No. 10–06719, 2011 WL 672060, at *1–2 (Bankr.E.D.N.C. Feb. 18, 2011) (denying motion to substantively consolidate the two chapter 11 cases although testimony revealed “that the creditors identified the debtors as one entity ... and the general impression from the community led [the appointed chief restructuring officer] to believe that Mr. Winslow administered the two farms under one identity.”). ²

On September 15, 2008, the debtor and Mr. and Mrs. Winslow individually executed a promissory note in favor of the defendant in the original principal amount of $600,000.00 (“promissory note”). The promissory note was a demand note, which became due and payable on or before December15, 2008. To secure repayment and performance of the obligations thereunder, the parties executed a security agreement granting the defendant a security interest in 113,208 bushels of harvested corn belonging to the debtor (“security agreement”). Both the promissory note and security agreement were executed by Mr. Winslow, individually and as the president of the debtor, as well as Mrs. Winslow. The proceeds of the loan, approximately $597,410.00, were deposited into the personal bank account of the Winslows at Wachovia Bank, N.A. on September 19, 2008. On October 31, 2008, the debtor tendered to the defendant a check in the amount of $50,000.00. Prior to the petition dates and unbeknownst to the defendant, the bushels of corn pledged as security for the promissory note were sold by the debtor, without the defendant's consent. The proceeds of the sale, however, were not paid to the defendant.³

The trustee filed a complaint initiating this adversary proceeding on August 19, 2012, asserting two separate causes of action to avoid and recover three alleged constructively fraudulent transfers pursuant to §§ 544, 548, 550 and 551 of the Bankruptcy Code and N.C. Gen.Stat. § 39–23.1 et seq. On September 9, 2012, the defendant filed the motion to dismiss currently before the court. The defendant submitted a brief in support of its motion to dismiss on November 27, 2012. On January 9, 2013, the trustee filed a memorandum of law in opposition to the defendant's motion to dismiss and in accordance with the court's oral ruling at the conclusion of the hearing held on January 10, 2013, the trustee filed a supplemental memorandum of law on January 22, 2013.

STANDARD OF REVIEW

Rule 8(a)(2) of the Federal Rules of Civil Procedure requires every pleading to contain a “short and plain statement of the claim showing that the pleader is entitled to relief....” Fed.R.Civ.P. 8(a)(2); Fed. R. Bankr.P. 7008. A party may move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss a complaint for failure to state a claim upon which relief can be granted. Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012(b). To demonstrate entitlement to relief and survive a motion to dismiss, a complaint must contain “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (emphasizing that a pleading providing “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” (citing Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986))).

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. Where a complaint pleads facts that are “merely consistent with” a defendant's liability, it “stops short of the line between possibility and plausibility of entitlement to relief.”

Ashcroft v. Iqbal, 556 U.S. 662, 677–78, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal citations, quotation marks and brackets omitted). The veracity of well-pleaded allegations in the complaint will be assumed in determining “whether they plausibly give rise to an entitlement to relief.” Angell v. BER Care, Inc. (In re Caremerica, Inc.), 409 B.R. 737, 747 (Bankr.E.D.N.C.2009) (citation omitted).

DISCUSSION

Pursuant to Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012, the defendant alleges that the trustee's causes of action must be dismissed for failure to state a claim upon which relief may be granted.⁴ However, the trustee's complaint alleges, with respect to the obligation and payment alleged to be fraudulent, that the debtor received less than reasonably equivalent value in exchange. Therefore, the dispute before the court is whether the trustee's complaint for avoidance and recovery of the constructive fraudulent transfers contains sufficient facts to support a plausible belief that the debtor did not receive reasonably equivalent value in exchange for the obligation incurred under the promissory note and in return for the $50,000.00 payment made to the defendant.

Section 548 of the Bankruptcy Code permits the trustee to avoid, based on a theory of constructive fraud, “any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred ... within two years before the date of the fling of the petition,” provided the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation[ ]” and either

(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;

(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or

(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

11 U.S.C. § 548(a)(1)(B); BER Care, Inc., 409 B.R. at 754. To avoid payments as constructively fraudulent, the trustee must prove by a preponderance of the evidence, that the challenged payments were not made in exchange for reasonably equivalent value. 11 U.S.C. § 548(a)(1)(B). Value, as defined in § 548(d)(2)(A), includes the “satisfaction or securing of a present or antecedent debt of the debtor....”

BFP v. Resolution Tr. Corp., 511 U.S. 531, 535–36, 114 S.Ct. 1757, 128 L.Ed.2d 556 (1994) (citation and internal quotation marks omitted); 11 U.S.C. § 548(d)(2)(A); see, e.g., Cooper v. Ashley Commc'ns Inc. (In re Morris Commc'ns NC, Inc.), 914 F.2d 458, 466 (4th Cir.1990) (“Section 548 provides no definition to guide the Court in the application of the term ‘reasonably equivalent value.’ Congress left to the courts the obligation of marking the scope and meaning of such term.”); Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.I., Inc. (In re R.M.I., Inc.), 92 F.3d 139, 148 (3d Cir.1996) (recognizing “that the mere ‘opportunity’ to receive an economic benefit in the future constitutes ‘value’ under the [Bankruptcy] Code.”). “In contrast to actual fraud, a claim for constructive fraud focuses on the effect the transfer had on the debtor's financial condition without regard for the debtor's state of mind or intentions.” Cox v. Grube (In re Grube), No. 09–8111, 2012 WL 3263905, at *6 (Bankr.C.D.Ill. Aug. 9, 2012) (citations omitted).

Section 544 of the Bankruptcy Code allows the trustee to avoid any transfer of the debtor's property or obligation incurred by the debtor under the North Carolina Uniform Fraudulent Conveyance Act, N.C. Gen.Stat. § 39–21.1, provided an unsecured creditor existed at the time of the transfer. 11 U.S.C. § 544(a). Under N.C. Gen.Stat. § 39–23.4, “a transfer is fraudulent if made without receiving reasonably equivalent value; and, the debtor was either engaged in a business transaction for which the remaining assets of the debtor were unreasonably small in relation to the transaction, or the...