Angell v. Southco Distributing Co. (In re Hatu)
| Decision Date | 13 August 2021 |
| Docket Number | 19-05428-5-JNC,Adv. Pro. 21-00023-5-JNC |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | IN RE: AMJED FARAJ HATU Debtors v. SOUTHCO DISTRIBUTING COMPANY, Defendant JAMES B. ANGELL, Chapter 7 Trustee for Amjed Faraj Hatu, and AMJED FARAJ HATU, Plaintiffs, |
The matter before the court is the Motion to Dismiss Complaint seeking Avoidance of Attachment Liens and Motion for Abstention (AP Dkt. 12; the "Motion")[1] filed by defendant Southco Distributing Company ("Southco" or the "Defendant"), and the two responses in opposition thereto (the "Responses") respectively filed by co-plaintiffs James B. Angell (the "Trustee"), in his capacity as chapter 7 trustee for Amjed Faraj Hatu (AP Dkt. 14), and Amjed Faraj Hatu, the chapter 7 debtor in this case ("Mr. Hatu" or the "Debtor") (AP Dkt. 17). A hearing on the matter was noticed for and held July 28, 2021, in Greenville, North Carolina. James B. Angell appeared for the Trustee; Kathleen O'Malley appeared on behalf of the Debtor; and Byron L Saintsing appeared representing Southco.
The court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 151 and 1334, and it is authorized to hear the matters raised under the General Order of Reference entered August 3, 1984 by the United States District Court for the Eastern District of North Carolina. The surviving matters raised in the adversary proceeding make it a core proceeding pursuant to 28 U.S.C. § 157(b). The court has statutory and constitutional authority to enter this order pursuant to Wellness Int'l Network, Ltd v Sharif, 575 U.S. 665, 135 S.Ct. 1932, 1947 (2015).
Mr Hatu filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on November 25, 2019 (the "Petition Date") (Ch. 7 Dkt. 1). On May 5, 2021 his chapter 11 case was converted to a proceeding under chapter 7 (Ch. 7 Dkt. 250), and Mr. Angell was appointed as chapter 7 trustee for the case the same day (Ch. 7 Dkt. 253).
Prior to chapter 7 conversion, the complaint in this adversary proceeding was filed by Mr. Hatu as plaintiff on March 5, 2021 (AP Dkt. 1). After conversion, on March 11, 2021, the Trustee moved to intervene and replace Mr. Hatu as the primary plaintiff (AP Dkt. 8). By order entered June 2, 2021, the Trustee was authorized to intervene and become the primary plaintiff, with Mr. Hatu being permitted to remain in the case to the extent his allowable exemptions might be impaired by the case result under 11 U.S.C. § 522(f), (g), and (h) (AP Dkt. 11).[2]
The heart of the cause of action is the attempt by the Debtor and the Trustee to set aside prejudgment, prepetition orders of attachment issued by the Superior Court of Wake County, North Carolina, in a case filed there by Southco against Mr. Hatu among others seeking to obtain a judgment for breach of contract and other claims. See Southco Distributing Co. v. H and H Distributors, et al, NO. 18-CVS-4253 (N.C. Sup. Ct. 2018) (the "state court action"). In that case, shortly after filing suit, Southco was granted prejudgment attachment liens against real property owned by Mr. Hatu or former trusts controlled by him in Pitt, Martin and Nash Counties, North Carolina, that otherwise are property of this bankruptcy estate.
The complaint here seeks to relegate Southco to unsecured status by avoiding or otherwise removing the attachment liens granted in the state court action from that real property. In it, the plaintiffs assert five causes of action: (1) avoidance of the prepetition state court attachment liens issued for Southco as constructively fraudulent pursuant to 11 U.S.C. § 548(a)(1)(B); (2) a declaratory judgment that the attachment liens are invalid under North Carolina law; (3) in the alternative, relief from the automatic stay of 11 U.S.C. § 362(a) to return to state court and challenge the attachment liens there; (4) equitable subordination of the attachment liens pursuant to 11 U.S.C. § 510(c); and (5) modification of the attachment liens under N.C. Gen. Stat. § 1-440.43, made applicable to this proceeding by 11 U.S.C. § 544.
Southco filed the Motion and an accompanying Memorandum of Law in Support (AP Dkt. 13) asserting, among other things, that the bankruptcy court has no jurisdiction to hear a challenge or collateral attack on the prejudgment attachment liens because, due to the effect of the Rooker-Feldman doctrine, the state court has exclusive jurisdiction over its attachment lien orders; and alternatively for reasons of comity, the bankruptcy court should voluntarily abstain from ruling on plaintiffs' claims. The Trustee, in his Memorandum in Support of Response (AP Dk. 15) maintains that the Rooker-Feldman doctrine is inapplicable to the present controversy because, among other things, the attachment orders are not final as state courts can amend or dissolve them, or if deemed final, the liens are subject to avoidance or subordination under the Bankruptcy Code.
At the hearing, the Trustee requested that he be allowed to voluntarily dismiss the Third Claim for Relief (the alternative request for relief from automatic stay) without prejudice, which request was granted in open court. Therefore, the merits of the third claim are not considered in this order. After considering the legal arguments in the Memorandum and the presentations of counsel made at the hearing, and accepting all facts pled in the Complaint as true, at the conclusion of the hearing the court announced that the Motion would be granted as to the second (declaratory judgment) and fourth (equitable subordination) claims for relief, and denied as to the first (section 548) and fifth (section 544) claims for relief. This memorandum opinion and order sets for the basis of the court's decision.
"A pleading that states a claim for relief must contain . . . a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). If a complaint fails to meet this threshold obligation, the action should be dismissed under Rule 12(b)(6) for "failure to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6); see Tobey v. Jones, 706 F.3d 379, 387 (4th Cir. 2013). The complaint must include "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly 550 U.S. 544, 570 (2007). Bell was followed by in Ashcroft v. Iqbal, which explained that "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions," and that "only a complaint that states a plausible claim for relief survives a motion to dismiss." 129 S.Ct. 1937, 1949 (2009). The allegations must be more than a "formulaic recitation of the elements" of a claim. Id. at 1951. See also, Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir, 1992).
A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw a reasonable inference that the defendant is liable for the misconduct alleged. See Fessler v. Int'l Bus. Machs. Corp., 959 F.3d 146, 152 (4th Cir. 2020). Plausibility is not a synonym for probability; but it is more than a sheer possibility that a defendant acted unlawfully. Ashcroft, 129 S.Ct. at 1949. Dismissal is proper when, from the face of the complaint, it is clear that the asserted claims are not supported by law, that one or more facts necessary to assert a valid claim are not pled, or that facts exist that necessarily defeat the plaintiff's claims. Mere conclusions of law recited in a complaint are not factual allegations. In reviewing a motion to dismiss under Rule 12(b)(6), the court may review documents attached to the complaint or other filings incorporated by reference, Clatterbuck v. City of Charlottesville, 708 F.3d 549, 557 (4th Cir. 2013). A court may also take judicial notice of matters of public record. Philips v. Pitt County Mem. Hosp., 572 F.3d 176, 180 (4th Cir. 2009) (citing Hall v. Virginia, 385 F.3d 421, 424 (4th Cir. 2004)).
If the action seeks to avoid the attachment liens based on fraud, an even higher standard of pleading is required. Rule 9(b) of the Federal Rules of Civil Procedure, made applicable to this proceeding by Rule 7009 of the Federal Rules of Bankruptcy Procedure, requires that a party to Fed.R.Civ.P. 9(b). "To comply with this particularity requirement, a plaintiff must plead the 'time, place, and contents of the alleged fraudulent representation, as well as the identity of each person making the misrepresentation and what was obtained thereby.'" McGinnis v. Fatone (In re Fatone), Case No. 13-00081-8-RDD, AP Case No. 13-00085-8-RDD, 2013 WL 5798999, at *2 (Bankr. E.D. N.C. Oct. 25, 2013) (citing Riley v. Murdock, 828 F.Supp. 1215, 1225 (E.D. N.C. 1993)). See also, In re KVS Foodsystems, LLC, 2009 Bankr. LEXIS 1184 (Bankr. E.D. N.C. April 29, 2009).
The threshold question, therefore, is what standard is required for review of the claims presented in the complaint filed in this action. In many instances, claims pursuant to 11 U.S.C §§ 544 and 548 are based on alleged fraudulent conduct and therefore require pleading with particularity. However, the instant complaint is not based on allegations of fraud or deceit by the Debtor or Southco. The first claim in the complaint is made under 11 U.S.C. § 548...
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