In re Am. Home Mortgage Holding

• Court: U.S. Bankruptcy Court — District of Delaware
• Writing for the Court: CHRISTOPHER S. SONTCHI, Bankruptcy Judge.
• Citation: In re Am. Home Mortgage Holding, 458 B.R. 161 (Bankr. Del. 2011)
• Decision Date: 13 October 2011
• Docket Number: Adversary No. 10–50913.,Bankruptcy No. 07–11047 (CSS).
• Parties: In re AMERICAN HOME MORTGAGE HOLDING, et al., Debtors.American Home Mortgage Corp., Plaintiff,v.Showcase of Agents, L.L.C. and Piero Orsi, Defendants.

458 B.R. 161

In re AMERICAN HOME MORTGAGE HOLDING, et al., Debtors.American Home Mortgage Corp., Plaintiff,

v.Showcase of Agents, L.L.C. and Piero Orsi, Defendants.

Bankruptcy No. 07–11047 (CSS).

Adversary No. 10–50913.

United States Bankruptcy Court, D. Delaware.

Oct. 13, 2011.

Cross & Simon, LLC, Michael J. Joyce, Wilmington, DE, Mark D. Belongia, Bruce de'Medici, Elizabeth M. Schutte, Belongia, Shapiro & Franklin LLP, Chicago, IL, for Showcase Agents, LLC and Piero Orsi.Young Conaway Stargatt & Taylor, LLC, Sean M. Beach, Curtis J. Crowther, Michael S. Neiburg, Justin H. Rucki, Wilmington, DE, for Plaintiff American Home Mortgage Corp.

OPINION ¹

CHRISTOPHER S. SONTCHI, Bankruptcy Judge.

INTRODUCTION

American Home Mortgage Corporation (“AHM”) initiated this adversary proceeding by filing a complaint against Showcase of Agents (“Showcase”) and Piero Orsi (collectively, the “Defendants”) asserting claims for turnover, conversion, unjust enrichment, and an accounting almost three years after the incident giving rise to the claims. The Defendants filed a motion (the “Motion”) to dismiss arguing that the complaint fails to state a claim upon which relief can be granted, and is barred by the equitable doctrines of laches, waiver, or unclean hands. For the reasons explained below, the Court will grant, in part, and deny, in part, the Motion.

BACKGROUND

A. Factual Background

In 1995, Mortgage First Showcase LLC (“MFS”) was formed with two members: Showcase and VJJ Corporation (“VJJ”).² Orsi, who was the President of both Showcase and VJJ executed an operating agreement under which VJJ would serve as the managing member of MFS and the net profits and net losses would be equally allocated between both members.

In 1999, First Home Mortgage Corp. (“FHM”) merged with VJJ and acquired VJJ's interest in MFS. In 2000, AHM merged with FHM, and acquired FHM's interest in MFS. As a result of the merger, AHM became the new manager of MFS and, pursuant to the operating agreement, maintained a separate bank account for each member of MFS. Despite the managing member changes, Orsi continued to manage the day-to-day operations of MFS.

Six days before the bankruptcy filing, while AHM was suffering “severe financial distress,” Orsi transferred $350,000 from MFS's bank account to Showcase's bank account. In October 2007 (after the bankruptcy filing), Orsi transferred the remaining funds from MFS's bank account to Showcase's bank account, ultimately closing MFS's account. As MFS's managing member, AHM did not authorize the transfers or the closing of the account and the transactions were not in the ordinary course of MFS's business. In February 2009, this Court confirmed the Debtors' plan of reorganization, which became effective in November 2010.

B. Procedural Posture

In April, 2010, a year following confirmation of the plan, but prior to the plan's effective date, AHM initiated this adversary proceeding, alleging conversion and unjust enrichment, seeking turnover of the transferred funds, and an accounting. Alternatively, AHM seeks to have the Defendants deemed to hold the transferred funds in a constructive trust for AHM's benefit.

The Defendants filed the motion to dismiss pursuant to Federal Rules of Civil Procedure 8(a)(2), 9(f), and 12(b)(6) asserting that the complaint fails to state a claim, does not provide notice of the asserted claims, and is barred by the equitable doctrines of laches, waiver, and unclean hands. Briefing was completed in July, 2010 and shortly thereafter the Court issued a scheduling order for discovery on the Motion.

Subsequently, Orsi moved to bifurcate adjudication of the Motion claiming that the ongoing discovery did not relate to him. Orsi seeks (i) a ruling on his dismissal from the complaint based on the pleadings already submitted or, in the alternative, (ii) a separate schedule and hearing on his dismissal. Orsi alleges that the only issue in the Motion that pertains to him is whether AHM has pled a cause of action against Orsi individually. Orsi claims that it is unfair and unnecessary to await the completion of discovery before adjudicating the Motion as it relates to him.

LEGAL DISCUSSION

A. Pleading Standards Under Fed.R.Civ.P. 8(a)(2) and 9(f)

The Defendants argue that AHM has made only conclusory allegations in the complaint instead of providing facts sufficient to demonstrate an entitlement to relief. Specifically, the Defendants claim that AHM has failed to establish its interest in MFS because it mischaracterized MFS as a joint venture; the alphabet soup of transfers of interest in MFS from VJJ to FHM to AHM were improper; and AHM failed to plead how it is entitled to the assets of MFS. The Defendants also argue that AHM's allegations related to timing are insufficient under federal pleading standards.

1. Fed.R.Civ.P. 8(a)

Federal Rule of Civil Procedure 8(a) applies to adversary proceedings pursuant to Federal Rule of Bankruptcy Procedure 7008 and requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” ³ The pleading need not state with detail the facts that provide the basis for the claim.⁴ “Because Rule 8 is fashioned in the interest of fair and reasonable notice, not technicality, more extensive pleading of facts is not required.” ⁵ The pleading is sufficiently specific to withstand a motion to dismiss under Rule 8(a) so long as it provides fair notice of the claim's nature and the grounds for the claim.⁶

Rule 8(a) does not require AHM to prove its interest in MFS nor to establish how it acquired its entitlement to relief. AHM need only provide the Defendants with notice of the claim. The facts alleged in the complaint provide the Defendants with sufficient notice of the grounds and nature of the actions asserted and, thus, the Motion is denied as to Rule 8(a).

2. Fed.R.Civ.P. 9(f)

Federal Rule of Civil Procedure 9(f) provides that “[a]n allegation of time or place is material when testing the sufficiency of a pleading.” “ ‘Rule 9(f) does not require specificity in pleading time and place, but provides only that when specific allegations are made, they are material.’ ” ⁷ Timing is not an issue here other than the three year period from the incidents giving rise to the claims and the filing of the complaint. The Motion is denied as to Rule 9(f).

B. Fed.R.Civ.P. 12(b)(6) Failure to State a Claim

The Defendants assert that the complaint should be dismissed because AHM has failed to plead a basis for recovery against both of the Defendants. Federal Rule of Civil Procedure 12(b)(6), made applicable to these proceedings by Federal Rule of Bankruptcy Procedure 7012, enables a court to dismiss a complaint for failure to state a claim upon which relief may be granted. The purpose of the Rule 12(b)(6) motion to dismiss is not to decide the merits of the case, but to test the sufficiency of the factual allegations in a complaint.⁸ In considering a motion to dismiss filed under Rule 12(b)(6), a court reviews the complaint and any “document integral or explicitly relied on in the complaint.” ⁹

The court must accept all of the allegations in the complaint as true and view any inferences drawn from such allegations in the light most favorable to the plaintiff.¹⁰ The moving party bears the burden of persuasion.¹¹ The court must decide whether the complaint provides sufficient facts to allow the plaintiff the opportunity to offer evidence supporting the claims.¹² Mere recitation of the elements of a claim is insufficient to survive a Rule 12(b)(6) motion to dismiss.¹³ The motion to dismiss should be granted only if “it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” ¹⁴

1. Count I: Turnover of Estate Property Under 11 U.S.C. § 542

Section 542 of the Bankruptcy Code provides the cause of action for turnover, which requires an entity in possession of property of the estate to deliver the property, or value thereof, to the trustee.¹⁵ A properly pled complaint asserting a claim for turnover must allege an undisputed right to recover the claimed debt.¹⁶ Turnover is not appropriate where there is a legitimate dispute over ownership of the property.¹⁷

Here, accepting all allegations as true and all inferences in the light most favorable to AHM, AHM has sufficiently pled a cause of action for turnover. AHM alleges that its funds (the “AHM Funds”) were held in MFS's account. AHM further alleges that Orsi transferred the entire balance of MFS's account, including the AHM Funds, to Showcase's account and closed MFS's account. AHM alleges that Showcase and/or Orsi are in possession of the AHM Funds and that they have no right to such possession. The complaint fails to indicate or imply any dispute over ownership of the AHM Funds. While a legitimate dispute may exist, the motion to dismiss is limited to the facts alleged in the complaint. The Motion is denied as to the turnover count.

2. Count II: Conversion

The Defendants argue that AHM fails to state a claim for conversion because AHM shows neither wrongful control over the AHM Funds nor AHM's interest in the account. The Defendants further argue that the AHM Funds were not identifiable chattel because they were commingled in MFS's account. Under Illinois state law, a claim for conversion requires a plaintiff to establish (1) a right to the property at issue; (2) an absolute and unconditional right to the immediate possession; (3) wrongful, unauthorized control over the property; and (4) a demand for possession.¹⁸ In stating a claim for the conversion of money, the plaintiff must show an entitlement to a specific fund, account, or “specific money in coin or bills,” not merely a particular amount of money.¹⁹ While the money need not be earmarked to support a claim for conversion, it must be “ ‘capable of being described, identified, or segregated in a specific manner.’ ” ²⁰

Here, the complaint alleges that AHM owns the AHM...