Harker v. Cummings (In re GYPC, Inc.)
| Decision Date | 04 August 2020 |
| Docket Number | Adv. No. 19-3047,Adv. No. 19-3046,Case No. 17-31030 |
| Parties | In re: GYPC, INC., Debtor DONALD F. HARKER, III, TRUSTEE, Plaintiff v. CHRISTOPHER F. CUMMINGS, Defendant DONALD F. HARKER, III, TRUSTEE, Plaintiff v. ERIC WEBB, Defendant |
| Court | U.S. Bankruptcy Court — Southern District of Ohio |
Decision Granting in Part and Denying in Part Motions of Defendants Christopher Cummings and Eric Webb to Dismiss Plaintiff's First Amended Complaints The Chapter 7 Trustee, Donald F. Harker, III (the "Trustee"), has filed amended complaints against the only officers and shareholders of GYPC, Eric Webb and Christopher F. Cummings (collectively, the "Defendants").1 The Complaints include both preference and fraudulent transfer allegations. As with the original complaints, the Defendants moved to dismiss the Complaints for the failure to state a claim.2 The court's previous decision determined that the original complaints were not pled with the required specificity as to the factual allegations, but granted the Trustee's motion for leave to amend.3 The Trustee amended his complaints; however, the Defendants assert that the Complaints remain insufficiently pled as to the factual allegations underlying the Complaints. The Trustee has opposed the motions to dismiss, but alternatively sought further leave to amend as needed.
For purposes of a motion to dismiss, the court accepts the allegations in the amended complaints as true. In the pre-petition period from 1996 until January 2016, the debtor's name was General Yellow Pages Consultants, Inc. ("Consultants"). Complaints ¶5. The company did business as Marquette Group. Id. This portion of the business consisted of, among other things, Consultants acting as a "Certified Marketing Representative" that assisted firms in placing advertisements in Yellow Pages directories and similar on-line resources. Id.
Additionally, Consultants, prior to January 2016, was the sole shareholder of US Motivation, Inc. ("USM"). Complaints ¶6. USM was a separate business line that engaged in "incentive promotions, meeting, and event management", as well as communications, marketing, and "on-line fulfillment award administration." Id. USM entered into contracts with firms for its "Travel and Awards divisions" and had access to those customers' funds, which USM held on deposit to pay for incentives, or expenses for conventions, as became due. Complaints ¶6. However, these funds were not held separately, but instead deposited into accounts subject to agreements with USM's primary secured creditor, Alostar Bank of Commerce ("Alostar"). USM also paid for various expenses with American Express cards. Complaints ¶8.
Consultants' consolidated financials, as of December 31, 2014, included liabilities that exceeded assets by $20,855,769. Complaints ¶9. In addition, Consultants' auditors believed that the goodwill for the company was overstated. Id. The auditors believed that Consultants' financial condition raised the uncertainty of whether it could continue as a going concern. Id. The consolidated debtor was insolvent as of the end of 2014. Id.
In January 2016 Consultants entered into an Asset Sale and Purchase Agreement (the "APA"). Consultants was the seller; the Defendants were the principals; Mindstream Media, LLC ("Mindstream") was the buyer, and Eastport Holdings, Inc. was the parent company of Mindstream. Complaints ¶10. The APA provided for the sale of substantially all the assets of Consultants but excluded USM. Complaints ¶11. Post-closing, Consultants' name was changed to GYPC, Inc. ("GYPC"). Complaints ¶15. Among other consideration, GYPC received quarterly payments through the APA on or about May 13, 2016, September 6, 2016, and November 28, 2016 (the "Quarterly Payments"). Complaints ¶27.
USM's audited 2015 financials prepared in January 2016 showed USM's liabilities exceeded current assets by $11,253,336. Complaints ¶16. Assets were $9,089,202 and current liabilities $20,342,538. Id. In addition, USM's liabilities exceeded total assets by $447,592. Id. These total assets may include inter-company payables owed to USM. Id.
In the time period beginning the month of the closing of the APA, specifically January until September 2016, Alostar froze GYPC's line of credit, negatively impacting GYPC's cash flow. Complaints ¶20. From November 1, 2016 until the end of December 2016, the Alostar line of credit went from zero to "a high of $1,901,160.33." Complaints ¶32. From December 2016 to March 2017, the line of credit was paid down through consumer deposits that were not Alostar's collateral. Complaints ¶34. The Defendants were guarantors on this line of credit. Complaints ¶33.
In January 2017 GYPC merged with USM and USM ceased to exist as a separate corporate entity. Complaints ¶21. In this same time period, GYPC hired Restructuring Advisors. Id.
On February 1, 2017 Cummings "purportedly made" a change in his revocable trust that may have disqualified GYPC from being entitled to Subchapter S tax status. Complaints ¶22. That revocable trust may be an undisclosed owner of GYPC. Id. The change may have been to disqualify GYPC as an S Corporation in anticipation of the bankruptcy filing. Id. On February 3, 2017 GYPC ceased doing business and terminated substantially all its employees. Complaints ¶23.
An involuntary bankruptcy petition was filed against USM on March 7, 2017 in the Bankruptcy Court for the District of Delaware, but that case was dismissed following the voluntary petition filed by GYPC in this court on March 30, 2017. Complaints ¶24; est. doc. 1.
This court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F) & (H).
A motion to dismiss an adversary proceeding for "failure to state a claim upon which relief can be granted" is governed by Federal Rule of Civil Procedure 12(b)(6) (applicable by Federal Rule of Bankruptcy Procedure 7012(b)). To survive a motion under Rule 12(b)(6), the factual allegations of a complaint must put the defendant on notice as to the claims beingalleged and provide a sufficient factual predicate to make the allegations plausible, and not merely possible. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Federal courts are not obligated to accept as true legal conclusions couched as factual allegations. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). While detailed factual allegations are not necessary, the allegations must be sufficiently detailed to create more than speculation of a cause of action. Id. A claim is plausible if the factual allegations are sufficient to allow "the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." HDC, LLC v. Ann Arbor, 675 F.3d 608, 611 (6th Cir. 2012) (citations and internal quotation marks omitted). See Fed. R. Civ. P. 8(a)(2) ().
The Defendants' motions to dismiss raise the following issues: (1) whether the Trustee has sufficiently plead GYPC's insolvency during the relevant periods in order to avoid the Quarterly Payments4; (2) whether the Trustee can recover the Alostar payments5 when he has only plead a date range rather than specific transfer dates for the re-payments at issue; (3) whether the Trustee's voluntary dismissal of a separate preferential transfer adversary proceeding against Alostar precludes the Trustee's pursuit of those same transfers against the Defendants, as guarantors of the Alostar debt; (4) whether GYPC's tax status is a property interest of GYPC such that the conversion of GYPC from an S Corporation to a C Corporation may be pursued as an avoidable preferential or fraudulent transfer; (5) whether the Miscellaneous Transfers6 were properly plead as fraudulent transfers, and if so, whether theclaims based upon those transfers should be dismissed on account of the defenses of ordinary course of performance or subsequent new value provided by 11 U.S.C. § 547(c)(2) and (c)(4); (6) whether the Unknown Transfers were properly plead with no factual specificity having been provided; and (7) whether the actual and constructive fraudulent transfer allegations lack sufficient factual specificity.
The Defendants argue that the Complaints are insufficiently plead. Pleadings must contain "a short and plain statement of the claim showing that pleader is entitled to relief[.]" Fed. R. Civ. P. 8(a)(2) (applicable by Fed. R. Bankr. P. 7008). A complaint may not just list the elements of a cause of action but must contain sufficient factual allegations to state a plausible claim. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007). When pleading fraudulent or preferential transfers, the complaint should identify the transfers to be avoided, including the transferor, transferee, and the dates of the transfers. State Bank & Trust Co. v. Spaeth (In re Motorwerks, Inc.), 371 B.R. 281, 292-93 (Bankr. S.D. Ohio 2007). The complaint must contain sufficient information in order to allow a defendant to respond with appropriate affirmative defenses. Id. In addition, actual fraud claims must be plead with particularity pursuant to Federal Rule of Civil Procedure 9(b).7 In re Licking River Mining, LLC, 565 B.R. 794, 809 (Bankr. E.D. Ky. 2017). See also Harker v. I.R.S., Case No. 16-32161, Adv. No. 18-3008, doc. 32 at 12 n. 11 (Bankr. S.D. Ohio Aug. 30, 2018) ().
Section 547(f) of the Bankruptcy Code creates a presumption of insolvency for pre-petition preferential transfers within 90 days of the petition date. Preferential transfers may be pursued against...
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