Foster v. Iou Cent., Inc. (In re Shoot the Moon, LLC)

• Decision Date: 21 May 2020
• Docket Number: Adv. No. 17-00060-TLM,Case No. 15-60979-TLM
• Parties: IN RE: SHOOT THE MOON, LLC, Debtor. JEREMIAH J. FOSTER, as trustee for the chapter 11 estate of SHOOT THE MOON, LLC, Plaintiff, v. IOU CENTRAL, INC., a Georgia corporation, and JOHN DOES 1-10, Defendant.
• Court: U.S. Bankruptcy Court — District of Montana

IN RE: SHOOT THE MOON, LLC, Debtor.JEREMIAH J. FOSTER, as trustee for the chapter 11 estate of SHOOT THE MOON, LLC, Plaintiff, v. IOU CENTRAL, INC., a Georgia corporation, and JOHN DOES 1-10, Defendant.

Case No. 15-60979-TLM

Adv. No. 17-00060-TLM

UNITED STATES BANKRUPTCY COURT DISTRICT OF MONTANA

May 21, 2020

MEMORANDUM OF DECISION

Before the Court is a Civil Rule 12(b) motion filed by IOU Central, Inc. ("Defendant"), seeking to dismiss this adversary proceeding brought by chapter 11 trustee, Jeremiah Foster ("Trustee").¹ Trustee argues Defendant waived its defenses by not raising them in a Civil Rule 12(b) motion before serving its answer to the initialcomplaint, and that Defendant has not met its burden under Civil Rule 12(b). On April 22, 2020, the matter was heard telephonically, and the parties delivered oral argument, after which the matter was taken under advisement. After consideration of the parties' written and oral submissions, the Court reaches the following conclusions.

BACKGROUND

On October 21, 2015, Shoot the Moon, LLC ("Debtor"), filed its chapter 11 petition. Shortly before filing its petition, Debtor allegedly completed a merger of nineteen entities, through which Debtor became the sole surviving entity.² Doc. No. 66 at 3. Trustee identifies four of these merged entities as being relevant to this adversary: Shoot the Moon of Idaho, LLC, Shoot the Moon 22, LLC, Shoot the Moon II, LLC, and Shoot the Moon III, LLC. Id.

On October 19, 2017, Trustee filed his complaint primarily seeking avoidance and recovery of transfers made to Defendant under §§ 547, 548, and 550 and various states' fraudulent transfer laws. Doc. No. 1 ("Initial Complaint"). Almost a year later, on September 27, 2018, Defendant filed an answer to the Initial Complaint.³ Doc. No. 54. Defendant had not filed a Civil Rule 12(b) motion prior to filing its answer. However, Defendant raised several affirmative defenses including those defined in Civil Rule 12(b) in its answer. Id. at 18-24. Specifically, Defendant raised the Civil Rule 12(b) defensesof lack of subject matter jurisdiction and improper venue.⁴ Id. at 19. Defendant did not raise a defense under Civil Rule 12(b)(6).

On October 30, 2019, pursuant to the parties' stipulation, Doc. No. 64, and this Court's order, Doc. No. 65, Trustee filed his "First Amended Complaint," Doc. No. 66 ("FAC"). In the FAC, Trustee seeks avoidance and recovery of preferential transfers made to Defendant under §§ 547 and 550. Doc. No. 65. In addition, Trustee seeks declaratory judgments under 28 U.S.C. § 2201, first, as to choice of law and, second, determining that certain contracts between Debtor and Defendant are loan agreements. Id. Further, Trustee seeks heightened damages for usurious interest under Montana's usury laws (Mont. Code Ann. §§ 31-1-107 and 31-1-108). Id. Overall, Trustee's FAC narrows the legal issues raised in the Initial Complaint and adds more factual allegations.

On January 7, 2020, Defendant filed its motion to dismiss,⁵ which seeks to dismiss the FAC under Civil Rule 12(b)(1), (3), and (6).⁶ Doc. No. 84 (the "Motion"). On March 19, 2020, Trustee filed "Trustee's Response Brief in Opposition to Defendant IOU Central, Inc.'s Motion to Dismiss," in which he addresses the merits of the Motion and argues Defendant waived its 12(b) defenses. Doc. No. 98 ("Trustee's Objection").Defendant responded to Trustee's Objection by filing "Defendant's Reply to Trustee's Response to Motion to Dismiss" on April 2, 2020. Doc. No 99 ("Defendant's Reply").

ANALYSIS

A. Waiver of Civil Rule 12(b) Defenses

Before reaching the merits of the Motion, this Court must consider whether the Motion is properly before the Court. Trustee contends the Motion must be denied because IOU waived Civil Rule 12(b) defenses by not asserting those defenses in response to the Initial Complaint. Doc. No. 98 at 5. Rule 7012(b) adopts Civil Rule 12(b). Civil Rule 12(b) provides: "Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following defenses by motion: (1) lack of subject-matter jurisdiction; . . . (3) improper venue; . . . (6) failure to state a claim upon which relief can be granted[.]" Id. (emphasis added).

Civil Rule 12 continues on: "A party waives any defense listed in Rule 12(b)(2)-(5) . . . by . . . failing to . . . include it in a responsive pleading or in an amendment allowed by Rule 15(a)(1) as a matter of course." Civil Rule 12(h)(1)(B)(ii) (emphasis added). However, "Failure to state a claim upon which relief can be granted [(the defense defined in Civil Rule 12(b)(6))] may be raised: (A) in any pleading allowed or ordered under Rule 7(a); (B) by a motion under Rule 12(c); or (C) at trial." Civil Rule 12(h)(2); In re Apple iPhone Antitrust Litigation, 846 F.3d 313, 317-18 (2017) ("A defendant who omits a defense under Rule 12(b)(6)—failure to state a claim upon which relief can be granted—does not waive that defense"). And, "[i]f the court determines atany time that it lacks subject-matter jurisdiction [(the defense defined in Civil Rule 12(b)(1))], the court must dismiss the action." Civil Rule 12(h)(3); United States v. Cotton, 535 U.S. 625, 122 S. Ct. 1781, 1785 (2002) ("subject-matter jurisdiction, because it involves a court's power to hear a case, can never be forfeited or waived").

Here, Defendant's Motion, filed after its original answer and before any responsive pleading to the FAC, invokes defenses under Civil Rule 12(b)(1), (3), and (6). Contrary to Trustee's assertions, Defendant raised the defenses of lack of subject matter jurisdiction and improper venue—Civil Rules 12(b)(1), (3)—in its answer to the Initial Complaint. Doc. No. 54 at 19. Further, at oral argument, Trustee conceded Defendant cannot and did not waive the defenses of lack of subject matter jurisdiction and failure to state a claim. Thus, Defendant did not waive its defenses under Civil Rules 12(b)(1), (3), or (6).⁷

B. Merits of Motion

1. Civil Rule 12(b)(1)—Subject Matter Jurisdiction and Standing

Defendant argues Trustee does not have standing to bring his claims, and this Court is, thus, without subject matter jurisdiction over this adversary proceeding. Doc. No. 84 at 18-24. The Ninth Circuit BAP addressed Civil Rule 12(b)(1) motions todismiss for lack of standing in Foster v. Sligar (In re Foster), 2012 WL 6554718 (9th Cir. BAP Dec. 14, 2012):

Article III limits a federal court's subject matter jurisdiction by requiring that plaintiffs have standing. Chandler v. State Farm Mut. Auto. Ins. Co., 598 F.3d 1115, 1122 (9th Cir. 2010). "Standing addresses whether the plaintiff is the proper party to bring the matter to the court for adjudication." Id. (citations omitted). Regardless of which type of standing is at issue, constitutional or prudential, both turn on whether the plaintiff can allege an "injury-in-fact" he or she suffered as a result of the defendant's alleged misconduct. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992); Powers v. Ohio, 499 U.S. 400, 410-11, 111 S. Ct. 1364, 113 L. Ed. 2d 411 (1991).

Because standing pertains to a federal court's subject matter jurisdiction, a motion to dismiss for lack of standing is properly brought as a motion to dismiss for lack of subject matter jurisdiction under Civil Rule 12(b)(1). White v. Lee, 227 F.3d 1214, 1242 (9th Cir. 2000). When faced with a Civil Rule 12(b)(1) motion, the plaintiff bears the burden of proving the existence of the court's subject matter jurisdiction. Thompson v. McCombe, 99 F.3d 352, 353 (9th Cir. 1996).

A challenge to subject matter jurisdiction may be facial or factual. White, 227 F.3d at 1242. Fosters' attack on the adversary complaint—that Briscoe lacked standing to bring it on Sligar's behalf—is a facial attack. See In re Beach, 447 B.R. 313, 317 (Bankr. D. Idaho 2011) (assertion that debtors lack standing to prosecute their claims is a facial subject matter jurisdiction attack); We Are Am./Somos Am., Coal. of Ariz. v. Maricopa Cnty. Bd. of Supervisors, 809 F. Supp. 2d 1084, 1089 (D. Ariz. 2011) (lack of standing is facial challenge). When the motion constitutes a facial attack, the court must presume the factual allegations of the complaint to be true and construe them in the light most favorable to the plaintiff. Wolfe v. Strankman, 392 F.3d 358, 362 (9th Cir. 2004).

Id. at *4.

Though a court must "accept all of the factual allegations in the complaint as true," it does "not accept legal conclusions in the complaint as true, even if 'cast in the form of factual allegations.'" Lacano Invs., LLC v. Balash, 765 F.3d 1068, 1071 (9th Cir.2014) (citing Doe v. Holy See, 557 F.3d 1066, 1073 (9th Cir. 2009)). Further, a court "may look beyond the complaint and consider extrinsic evidence." Id. (quoting Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1141 n.5 (9th Cir. 2003)).

Section 547(b) gives the trustee the authority to avoid preferential transfers. Section 550 grants the trustee authority to "recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee." Section 550(a). A well-respected treatise on bankruptcy addresses the standing of an appointed or elected trustee: "Ordinarily, a trustee assumes the authority to bring preference actions immediately upon being appointed or, if elected, upon being elected." 5 Collier on Bankruptcy ¶ 547.11[1] at 547-103 (Richard Levin & Henry J. Sommer eds., 16th ed. rev. 2019). Further, the bankruptcy trustee may bring other claims on behalf of the bankruptcy estate. Section 323(a), (b); Estate of Spirtos v. One San Bernardino Cty. Superior Court Case Numbered SPR 02211, 443 F.3d 1172, 1176 (9th Cir. 2006) ("[T]he bankruptcy code endows...