Bartholomew v. Avalon Capital Grp. Inc.

• Decision Date: 30 November 2009
• Docket Number: Civil No. 09–1279 (MJD/AJB).
• Citation: 828 F.Supp.2d 1019
• Parties: James A. BARTHOLOMEW and Lighthouse Management Group, Inc., as Receiver for Lakeland Construction Finance, LLC, Plaintiffs, v. AVALON CAPITAL GROUP, INC., Defendant.
• Court: U.S. District Court — District of Minnesota

828 F.Supp.2d 1019

James A. BARTHOLOMEW and Lighthouse Management Group, Inc., as Receiver for Lakeland Construction Finance, LLC, Plaintiffs,

v.AVALON CAPITAL GROUP, INC., Defendant.

Civil No. 09–1279 (MJD/AJB).

United States District Court, D. Minnesota.

Nov. 30, 2009.

Edward T. Wahl, Faegre & Benson LLP, for Plaintiffs.

Jason R. Asmus, Briggs and Morgan, P.A., for Defendant.

Amended Memorandum of Law & Order

MICHAEL J. DAVIS, Chief Judge.I. INTRODUCTION

This matter comes before the Court on Defendant's Motion to Dismiss [Docket No. 8]. Plaintiffs filed this Complaint requesting Avoidance of Fraudulent Transfers under the Minnesota Uniform Fraudulent Transfer Act (“UFTA”), Recovery of Illegal Purported Equity Transfers under Minnesota Statute section 322B.54, Breach of Fiduciary Duty, and Unjust Enrichment. The Court heard oral arguments on October 16, 2009.

II. FACTUAL BACKGROUNDA. Parties

Lakeland Construction Finance, LLC (“Lakeland”) is a Minnesota limited liability company that has its principal place of business in Eagan, Minnesota. Lakeland operated as a non-bank finance lender that provided short-term secured construction and land development loans to developers and home builders of single-and multi-family homes. The Lakeland loans were financed through a combination of bank debt, asset securitizations, capital contributions, net earnings, and loans by its principal shareholder, Defendant Avalon Capital Group, Inc. (“Avalon”). Lakeland has become insolvent and is now controlled by Plaintiffs, James A. Bartholomew and Lighthouse Management Group, Inc. (collectively “the Receiver”), as the court appointed Receiver.

Avalon is a Delaware corporation with its principal place of business in California. Prior to Lakeland entering into receivership, Avalon owned all of the voting units of Lakeland and acted as Lakeland's sole manager.

B. Bank of Scotland Loans and Equity and Debt Transfers to Avalon

In September 2007, Lakeland entered into two agreements and subsequent loans with the Bank of Scotland (“BOS”) and BOS (USA) Inc., a subsidiary of BOS. On September 4, 2007, Lakeland and BOS signed a Credit and Security Agreement (“Senior Credit Agreement”), under which BOS agreed to make certain loans of up to $425 million to Lakeland. That same day, Lakeland borrowed $360 million under the Senior Credit Agreement to pay outstanding debts to other creditors. On September 27, 2007, Lakeland entered into a Term Loan Agreement with BOS (USA) Inc., under which BOS (USA) Inc. agreed to make loans of up to $70 million to Lakeland. The following day, Lakeland borrowed $70 million under the Term Loan Agreement. Lakeland's indebtedness under both the Senior Credit Agreement and the Term Loan Agreement was secured by a security interest in substantially all of Lakeland's assets.

On September 28, 2007, the same day that Lakeland borrowed the $70 million under the Term Loan Agreement, Lakeland directed BOS (USA) Inc. to transfer $33,927,537.26 of the Term Loan proceeds to Avalon for interest and principal on unsecured debt owed to Avalon by Lakeland, and $25,476.028.72 of the Term Loan proceeds to Avalon to redeem an unspecified number of Avalon's preferred member interests. Additionally, Lakeland directed BOS (USA) Inc. to transfer $8,096,434.02 of Term Loan proceeds to Avalon to pay dividends on Avalon's preferred member interests. In total, Lakeland transferred approximately $67.5 million of the Term Loan proceeds to Avalon.

C. Lakeland Defaults and Receiver Appointed.

On October 31, 2007, Avalon advanced $4 million to Lakeland to enable Lakeland to make its October principal and interest payment to BOS under the Senior Credit Agreement. One month later, on November 30, 2007, Avalon advanced an additional amount of $4.5 million to Lakeland to enable Lakeland to pay its November principal and interest payment to BOS under the Senior Credit Agreement. After Lakeland made the November 2007 payment to BOS, it defaulted under the Senior Credit Agreement, failing to make any additional payments to BOS. To date, Lakeland has failed to date to make any payments under the Term Loan Agreement.

Between January 2008 and September 2008, throughout several communications between Lakeland and BOS and BOS (USA) Inc., Lakeland acknowledged that it was in default under both the Senior Credit Agreement and the Term Loan Agreement. Due to Lakeland's defaulting on the loans, BOS moved to establish a receivership and appoint a receiver for the management, operations and assets of Lakeland.

On October 31, 2008, the Honorable Ann Alton issued an order in Hennepin County District Court, establishing a receivership and appointing a receiver for Lakeland. The court found that, as of September 2008, Lakeland was insolvent and owed $340,407,204.37 to BOS under the Senior Credit Agreement, and $77,239,353.57 to BOS (USA) Inc. under the Term Loan Agreement. Accordingly, the court appointed James A. Bartholomew and Lighthouse Management Group, Inc. (collectively “the Receiver”) as receiver for Lakeland, instructing the Receiver to oversee the management, operations and assets of Lakeland.

D. The Dispute

On May 22, 2009, the Receiver sued Avalon in Hennepin County District Court in order to recover the $67.5 million of the Term Loan proceeds transferred from Lakeland to Avalon in September 2007. Plaintiffs asserted nine claims against Avalon; however the first three will be dismissed per Plaintiffs' concession in their Memorandum in Opposition of the Motion to Dismiss [Docket No. 12]. The remaining claims are: (Count IV) avoidance of fraudulent transfer made with actual intent to defraud creditors; (Count V) avoidance of fraudulent transfer; (Count VI) recovery of illegal purported equity transfers; (Count VII) breach of fiduciary duty (purported equity transfers); (Count VIII) breach of fiduciary duty (purported debt transfers); and (Count IX) unjust enrichment. Avalon removed the case to this Court and has moved to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim upon which relief can be granted.

III. DISCUSSION

Avalon asserts two sets of arguments to support its Motion to Dismiss. First, it argues that Counts IV, V, VII, VIII and IX must be dismissed as a matter of law because they assert no viable cause of action. Second, it asserts that all of Plaintiffs' Counts must be dismissed because Plaintiffs have failed to plead sufficient facts to support those causes of action.

A. Minnesota Uniform Fraudulent Transfer Act (“UFTA”) Claims

1. Plaintiffs' Standing as a Receiver

In Counts IV and V, Plaintiffs seek avoidance of the debt transaction under sections 513.44(a)(1) and 513.45(b) of the UFTA. Defendant moves to dismiss these counts due to a lack of standing. Defendant argues that because the UFTA protects only creditors and not transferors, a receiver, sitting in a transferor's place, has no standing to bring suit.

Sections 513.44(a)(1) and 513.45(b) of the UFTA do indeed protect creditors rather than transferors of debt. Section 513.44(a)(1) provides:

(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

(1) with actual intent to hinder, delay, or defraud any creditor of the debtor.

Minn.Stat. § 513.44(a)(1). Similarly, section 513.45(b) provides:

A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

Minn.Stat. § 513.45(b). Moreover, only creditors are entitled to remedies under the UFTA. Minn.Stat. §§ 513.47, 513.48(b) (“[T]o the extent a transfer is voidable in an action by a creditor ... the creditor may recover judgment for the value of the asset transferred ... or the amount necessary to satisfy the creditor's claim, whichever is less.”)

Here, however, the Receiver Plaintiffs assert Counts IV and V on behalf of Lakeland's creditors, rather than on behalf of Lakeland, the debtor. Defendant disputes Plaintiffs' standing to sue on behalf of said creditors.

“A plaintiff has the burden of establishing subject matter jurisdiction, for which standing is a prerequisite.” Jones v. Gale, 470 F.3d 1261, 1265 (8th Cir.2006) (citations omitted). In order to properly dismiss for lack of subject matter jurisdiction under Rule 12(b)(1), the complaint must be successfully challenged on its face or on the factual truthfulness of its averments. In a facial challenge to jurisdiction, all of the factual allegations concerning jurisdiction are presumed to be true and the motion is successful if the plaintiff fails to allege an element necessary for subject matter jurisdiction. Titus v. Sullivan, 4 F.3d 590, 593 (8th Cir.1993) (citations omitted). “In a factual attack, the court considers matters outside the pleadings, and the non-moving party does not have the benefit of 12(b)(6) safeguards.” Osborn v. United States, 918 F.2d 724, 729 n. 6 (8th Cir.1990) (citations omitted). “The district court has the authority to consider matters outside the pleadings on a motion challenging subject matter jurisdiction under Federal Rule of Civil Procedure 12(b)(1). The court's election to do so does not convert the 12(b)(1) motion to dismiss into a motion for summary judgment.” Deuser v. Vecera, 139 F.3d 1190, 1192 n. 3 (8th Cir.1998) (citations omitted). Defendant's motion to dismiss constitutes a facial challenge because it attacks Plaintiff's ability, as a receiver, to sue on behalf of third party creditors.

In disputing Plaintiff's standing, Defendant relies on the Minnesota LLC Act, which does not expressly grant a receiver the rights that belong to creditors of a limited liability company. See Minn....