Grochocinski v. Campbell (In re Campbell)

• Decision Date: 02 July 2012
• Docket Number: Adversary No. 11 A 01897.,Bankruptcy No. BR 10 B 50562.
• Parties: In re Craig Lyle CAMPBELL and Kim Ann Webster–Campbell, Debtors. David E. Grochocinski, trustee of the Chapter 7 bankruptcy estate of Craig Lyle Campbell and Kim Ann Webster–Campbell, Plaintiff, v. Craig Lyle Campbell and Kim Ann Webster–Campbell, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

475 B.R. 622

In re Craig Lyle CAMPBELL and Kim Ann Webster–Campbell, Debtors.

David E. Grochocinski, trustee of the Chapter 7 bankruptcy estate of Craig Lyle Campbell and Kim Ann Webster–Campbell, Plaintiff,

v.Craig Lyle Campbell and Kim Ann Webster–Campbell, Defendants.

Bankruptcy No. BR 10 B 50562.

Adversary No. 11 A 01897.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

July 2, 2012.

Kathleen M. McGuire, Grochocinski Grochocinski & Lloyd Ltd., Orland Park, IL, for Plaintiff.

Ronald Barliant and Nicholas S. Alexsovich, Goldberg Kohn Ltd., Chicago, IL, for Defendants.

MEMORANDUM OPINION

DONALD R. CASSLING, Bankruptcy Judge.

This matter is before the Court on the Debtors' Motion to Dismiss the First Amended Complaint to Deny Discharge and to Surcharge Exemptions (the “Motion to Dismiss”) under Federal Rule of Civil Procedure 12(b)(6) (made applicable by Fed. R. Bankr.P. 7012(b)). For the reasons stated herein, the Court grants in part and denies in part the Motion to Dismiss. Portions of Count I, all of Count II, portions of Count III, and all of Count V are dismissed without prejudice and the Motion to Dismiss is otherwise denied. The Trustee is given leave to file a second amended complaint on or before August 10, 2012. This adversary proceeding is set for a status hearing on August 24, 2012 at 10:00 a.m.

I. JURISDICTION AND PROCEDURE

The Court has jurisdiction to entertain this matter under 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (J), and (O).

II. BACKGROUND

On November 11, 2010 (the “Petition Date”), the Debtors filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. On September 15, 2011, David E. Grochocinski, the Chapter 7 trustee of the bankruptcy estate of the Debtors (the “Trustee”), filed a complaint against the Debtors, which he amended on December 22, 2011 (the “Amended Complaint”). In the Amended Complaint, the Trustee asserts four counts objecting to the Debtors' discharge under 11 U.S.C. §§ 727(a)(2)(A), 727(a)(2)(B), 727(a)(4)(A) and 727(a)(6)(A),¹ and a fifth count seeking to impose a surcharge on the Debtors' exemptions.

Under Count I of the Amended Complaint, the Trustee asserts that the Debtors' discharge should be denied under § 727(a)(2)(A), based upon: (1) Debtor Craig Campbell's conduct as a former director and officer of various banks; (2) the Debtors' alleged evasion of service of citations to discover assets in certain state court actions; (3) the Debtors' removal of assets from their joint accounts; (4) the Debtors' payment of personal expenses through accounts under other names; (5) Debtor Craig Campbell's closing of bank accounts of certain limited liability companies of which the Debtors were members; and (6) the Debtors' pre-petition depletion of assets of Campbell Income Fund, L.P.

Count II of the Amended Complaint seeks denial of the Debtors' discharge under § 727(a)(2)(B), based upon the Debtors' post-petition use of estate funds to trade in certain risky securities. The Amended Complaint alleges that the Debtors thereby depleted the value of the estate's interest in several of the Debtor's entities with an intent to hinder, delay, or defraud creditors after the Petition Date.

Count III of the Amended Complaint alleges that the Debtors knowingly and fraudulently made a false oath or account in connection with the case in violation of § 727(a)(4)(A) when they knowingly undervalued certain real and personal property and closed certain limited liability company bank accounts that were controlled by one or both of the Debtors.

Finally, under Count V, the Trustee alleges that the Debtors' exempt assets should be surcharged to the extent of losses incurred from the post-petition transactions described in Count II.

III. APPLICABLE STANDARDS

“A motion under Rule 12(b) challenges the sufficiency of the complaint to state a claim upon which relief may be granted.” Hallinan v. Fraternal Order of Police of Chicago Lodge No. 7, 570 F.3d 811, 820 (7th Cir.2009). “The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims.” AnchorBank, FSB v. Hofer, 649 F.3d 610, 614 (7th Cir.2011). To survive a motion to dismiss under Rule 12(b)(6), a complaint 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) (made applicable by Fed. R. Bankr.P. 7008(a)).

However, as the Supreme Court has made clear, “[w]hile a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds' of his ‘entitle [ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.]’ ” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (internal citation omitted); see also Ashcroft v. Iqbal, 556 U.S. 662, 677–78, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Thus, the complaint must contain enough factual detail to give the defendant “fair notice” of the claim under Rule 8(a), and the allegations must plausibly suggest that the plaintiff has a right to relief, raising that right above the “ ‘speculative level.’ ” EEOC v. Concentra Health Servs., 496 F.3d 773, 776 (7th Cir.2007) (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). “In evaluating the sufficiency of the complaint, [courts] view it in the light most favorable to the plaintiff, taking as true all well-pleaded factual allegations and making all possible inferences from the allegations in the plaintiff's favor.” Hofer, 649 F.3d at 614.

When one alleges fraud, as the Trustee has done by invoking § 727(a)(2)(A), (a)(2)(B), and (a)(4)(A), additional rules apply. Specifically, in addition to the pleading rules described above, “the circumstances constituting fraud” must be stated “with particularity.” ²Fed.R.Civ.P. 9(b) (made applicable by Fed. R. Bankr.P. 7009). Stating particularity under Rule 9(b) requires alleging the “who, what, when, where, and how of the fraud-the first paragraph of any newspaper story.” Pirelli Armstrong Tire Corp. Retiree Med. Benefits Trust v. Walgreen Co., 631 F.3d 436, 441–42 (7th Cir.2011) (internal quotations omitted).

The Debtors implicitly ask the Court to ignore these pleading standards when they argue that objections to discharge under § 727 should be liberally construed in favor of debtors and strictly against objectors because there is a strong policy of providing debtors with a fresh start.³ Applying that fresh-start policy, the Debtors argue that the Amended Complaint “fall[s] woefully short of stating claims for relief and should be dismissed.” (Reply in Supp. of Mot. to Dismiss at p. 2.) But the Debtors are urging the Court to apply a decision standard applicable to a trial on the merits, a stage this proceeding has not reached. At the pleading stage of the proceedings, the Court is not obliged to construe the allegations in the Amended Complaint in favor of the Debtors. Rather, the Court's task is simply to determine whether the Amended Complaint contains enough factual detail to give the Debtors fair notice of the claims against them and whether the allegations plausibly suggest that the Trustee has a right to relief. It is that standard that the Court applies here.

IV. DISCUSSION

A. Preliminary Issue—Did the Acts Complained of Involve Property of the Estate ?

The Debtors first attack Counts I, II, and III on the ground that many of the acts complained of by the Trustee did not involve property of the estate and therefore cannot support objections to discharge under § 727. Specifically, the Debtors argue that they own only equity interests in various limited liability companies and a limited partnership described by the Trustee in the Amended Complaint, and that the Debtors' transactions with the property of those entities cannot be fraudulent as to the estate's creditors because those entities and their assets are not property of the Debtors' estate. (Mot. to Dismiss at ¶ 10.)

The Trustee disagrees, claiming that the Debtors' ownership interests in these entities are themselves property of the bankruptcy estate. The Amended Complaint alleges ⁴ (and the Court must accept as true for purposes of this motion) that:

1. Each Debtor is a fifty percent member of OPAR, a manager-managed limited liability company (“OPAR”). (Am. Compl. at ¶¶ 16–18 & Ex. B.) Debtor Craig Campbell is the manager of OPAR. ( Id. at ¶ 17.)

2. OPAR, in turn, is the one-hundred percent member of Campbell Fixed Income Fund, LLC, Campbell CapitalManagement, LLC, and Campbell Capital Advisors, LLC, all of which are member-managed. ( Id. at ¶¶ 23–28.)

3. Campbell Capital Management, LLC is the general partner of Campbell Income Fund, L.P. ( Id. at ¶ 29.)

4. Prior to the Petition Date, the Debtors owned seventy-seven percent of the limited partnership interests in Campbell Income Fund, L.P. ( Id. at ¶ 30.) The remaining twenty-three percent of the limited partnership interest is owned by a third-party minority partner. ( Id. at ¶ 31.)

This chain of ownership is summarized in the following chart, derived from Ex. B to the Amended Complaint:

Image 1 (6.6" X 4.45") Available for Offline Print

According to the Trustee, this chain of ownership enabled the Debtors, and now enables the Trustee as their successor in interest, to exercise all of the Debtors' economic and non-economic rights in and to these entities, including the rights to dissolve, wind-up, and liquidate them. (Resp. to Mot. to Dismiss at pp. 9–10.) In the Trustee's analysis, that power transforms these entities and their assets into property of this estate.

In response, the Debtors argue that even if their property rights as members of OPAR passed to the estate, the powers...