Citrus Tower Boulevard Imaging Ctr., LLC v. Key Equip. Fin., Inc. (In re Citrus Tower Boulevard Imaging Ctr., LLC)

• Decision Date: 08 September 2014
• Docket Number: Bankruptcy No. 11–70284–MGD.,Adversary No. 14–05105.
• Citation: 520 B.R. 892
• Parties: In re CITRUS TOWER BOULEVARD IMAGING CENTER, LLC, Debtor. Citrus Tower Boulevard Imaging Center, LLC, Plaintiff, v. KEY EQUIPMENT FINANCE, INC., Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

520 B.R. 892

In re CITRUS TOWER BOULEVARD IMAGING CENTER, LLC, Debtor.

Citrus Tower Boulevard Imaging Center, LLC, Plaintiff

v.KEY EQUIPMENT FINANCE, INC., Defendant.

Bankruptcy No. 11–70284–MGD.

Adversary No. 14–05105.

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

Signed Sept. 8, 2014.

Filed and Entered Sept. 9, 2014.

Anna Mari Humnicky, Garrett H. Nye, Gus H. Small, Cohen Pollock Merlin & Small, P.C., Atlanta, GA, for Plaintiff.

John F. Isbell, Garrett A. Nail, Thompson Hine LLP, Atlanta, GA, for Defendant.

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

MARY GRACE DIEHL, Bankruptcy Judge.

This is an action brought by Debtor against its lender, Key Equipment Finance, Inc. (“Key”). Debtor was formed to build out an imaging center that would be leased to participating physicians. Debtor and Key entered into a Master Lease and Progress Payment Loan and Security Agreement in January 2010 to finance the build-out and to purchase necessary equipment. Key disbursed funds under the Progress Payment Loan based upon Debtor's written requests. Debtor alleges that Key distributed approximately $3.9 million without sufficient documentation. The parties later entered into a Forbearance Agreement in April of 2011 when Debtor defaulted under the Lease Documents.¹ Debtor filed its Chapter 11 case on July 12, 2011 and later shut down the imaging center and liquidated its assets.

This action is before the Court on Key's Motion to Dismiss for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6), which is made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012. Key's Motion to Dismiss applies to all counts (Docket No. 4). Debtor filed a response and Key filed a reply (Docket Nos. 10 & 11). Debtor filed a sur-reply brief, which Key moved to disregard (Docket Nos. 15 & 18). Based upon Debtor's failure to seek leave to file the sur-reply brief, the Court has exercised its discretion pursuant to Bankruptcy Local Rule 7007–1(h) to limit its consideration to the response and reply.²

Following the July 31, 2014 status conference held in connection with a hearing on a matter in Debtor's Chapter 11 case, the parties filed a joint stipulation in this adversary proceeding and also filed court documents that had been entered in the pending Northern District of Georgia case: Key Equipment Finance, Inc. v. Overend et al., 1:12–CV–2473–CAP. (Docket No. 19). At the status conference, the Court gave the parties permission to file supplemental briefs regarding the relevancy of the District Court's Order to Key's pending Motion to Dismiss in this Court. (Docket Nos. 19–22). Based upon the posture of the District Court case and the distinct parties (guarantors instead of Debtor), there is no basis to rely on the District Court's Order Partially Granting Key's Motion for Summary Judgment. Further, there is a pending motion to reconsider the District Court's Summary Judgment Order. Key has also filed a Motion for Final Judgment as to certain counts against Mr. Overend under Rule 54(b), which also remains pending. With no final judgment in the District Court case, there is no application to this action.

In this action, Debtor brings a multi-count complaint against Key premised on allegations that Key failed to provide proper oversight of the written draw requests made by Debtor such that Debtor's member, Franklin Trell, and employee, Cynthia Vinson, and their related entities were able to allegedly fraudulently obtain and/or misappropriate the funds disbursed by Key. Debtor brought this action against Key, asserting the following claims:

I. Equitable Disallowance/Reduction of Claim

II. Equitable Subordination of Claim

III. Breach of Contract

IV. Negligence

V. Gross Negligence

VI. Lender Liability

VII. Objection to Proof of Claim

VIII. Avoidance and Recovery of Preference

This is a core proceeding as to which the bankruptcy court has authority to issue an order and judgment. Jurisdiction and venue are proper in this action. 28 U.S.C. §§ 157(b), 1334(b).

For the reasons set forth below, Key's Motion to Dismiss is GRANTED. Debtor's objection to claim remains and Key is directed to file an amended claim.³

I. Motion to Dismiss Standard

A complaint should be dismissed under Rule 12(b)(6) only where it appears that the facts alleged fail to state a “plausible claim for relief.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1950, 173 L.Ed.2d 868 (2009) ; Fed.R.Civ.P. 12(b)(6). Under Federal Rule of Civil Procedure 8(a)(2), a pleading need only contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). In ruling on a motion to dismiss, the court must accept all of the factual allegations in the complaint as true and construe them in the light most favorable to the plaintiff. Iqbal, 129 S.Ct. at 1949. However, “[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Id. at 1949. The complaint “must contain either direct or inferential allegations respecting all the material elements necessary to sustain recovery under some viable legal theory.” Bell Atlantic v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 1969, 167 L.Ed.2d 929 (2007) (italics in original). “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.” Iqbal at 1949.

“Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. at 1950 (citation omitted). In deciding a motion to dismiss, a court may consider the full text of documents that are quoted in the complaint or documents that the plaintiff either possessed or relied upon in bringing the suit without converting the motion to a motion for summary judgment.

Bickley v. Caremark RX, Inc., 461 F.3d 1325, 1329 n. 7 (11th Cir.2006) ; Rothman v. Gregor, 220 F.3d 81, 88–89 (2d Cir.2000). The movant has the burden of demonstrating that dismissal is appropriate. Paul v. Intel Corp. (In re Intel Corp. Microprocessor Antitrust Litig.), 496 F.Supp.2d 404, 408 (D.Del.2007).

II. Facts Alleged

Debtor and Key entered into a Master Lease and Progress Payment Loan and Security Agreement in January 2010 to provide financing for the build-out and purchase of necessary equipment for the imaging center. Key disbursed funds under the Progress Payment Loan based upon Debtor's written requests. On behalf of Debtor, Mr. Trell and Mr. Overend executed the Master Lease and Mr. Trell on behalf of Debtor executed the Progress Payment Loan and Security Agreement for Debtor. Paragraph 3 of the Progress Payment Loan and Security Agreement provided how Key would make disbursements. Paragraph 3 provides in relevant part:

3) PROGRESS PAYMENTS

a) The Progress Payments. ... KEF hereby agrees to make the Progress Payments to the Suppliers upon Borrower's request at the times and in the amounts set forth in the Purchase Documentation⁴ ...

c) Express Condition to Progress Payments. ... KEF shall have no obligation to make any Progress Payment hereunder unless: ...

ii) KEF shall have received the following documents duly executed and delivered by the parties thereto: ...

(D) an original invoice, acceptable to KEF, from the supplier to whom payment is requested, countersigned by Borrower, ...;

(F) with respect to payments to Borrower to reimburse it for payments previously made to Suppliers, either (1) copies of canceled checks (front and back) or (2) if funds were wired, a copy of a wire confirmation receipt, plus copies of invoices marked “paid in full,” plus for confirmation purposes, the name and telephone number of such Supplier; ...

(Progress Payment Agreement ¶ 3, Docket No. 4; Exhibit C). The Master Lease Agreement also includes a provision for Lessee's Waivers.⁵

Debtor's written requests for disbursements from Key were made by Mr. Trell or Ms. Vinson on behalf of Debtor. Mr. Overend was not involved in requesting any draws on behalf of Debtor. Debtor's draw requests included requests for a MRI, a C–Arm, and X-ray machine. The MRI request included invoices from Hitachi Medical Systems, but Key also made disbursements to Debtor to purportedly purchase the C–Arm and X–Ray equipment upon Debtor's written request but without any back-up documentation or invoice.

The C–Arm and X–Ray equipment were not purchased by Debtor. Instead, potential or actual leasing physicians purchased the C–Arm and X–Ray equipment.

Key also made disbursements based upon the written request of Debtor, which were made upon a single-page of Debtor's letterhead and/or to third party entities named “MD Office Solutions, LLC” and “Medical Development Group, LLC” based upon their request made on their own letterhead. Key did not investigate these entities before making the requested disbursements. There is no evidence that these entities provided any service to Debtor or that any equipment was purchased for Debtor. Funds disbursed by Key were also allegedly unlawfully transferred to non-Debtor accounts by these third-party entities through the actions of Mr. Trell and/or Ms. Vinson.

Key also disbursed $1.5 million to Roger B. Kennedy, Inc., the project's general contractor, without a copy of the contract, request for lien waiver, and without any invoices or inspection of work. Roger B. Kennedy, Inc. later recorded a lien on the project site. To remove the lien, Mr. Overend personally loaned money to Debtor to satisfy Roger B. Kennedy, Inc.

In total, Debtor alleges that Key distributed approximately $3.9 million without sufficient documentation. Debtor defaulted under the Lease Documents, and the parties later entered into a Forbearance Agreement in April of 2011. The Forbearance Agreement required Debtor to make catch-up payments and included a release of claims. The release clause in the Forbearance Agreement...