In re Computer Personalities Systems, Inc.

• Decision Date: 26 September 2002
• Docket Number: Bankruptcy No. 01-14231DWS.,Adversary No. 02-0581.
• Citation: 284 B.R. 415
• Parties: In re COMPUTER PERSONALITIES SYSTEMS, INC., Debtor. Lawrence Lichtenstein, Trustee for the Estate of Computer Personalities Systems, Inc., Plaintiff, v. MBNA America Bank, N.A., Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

Page 415

284 B.R. 415

In re COMPUTER PERSONALITIES SYSTEMS, INC., Debtor Lawrence Lichtenstein, Trustee for the Estate of Computer Personalities Systems, Inc., Plaintiff, v. MBNA America Bank, N.A., Defendant.

Bankruptcy No. 01-14231DWS.

Adversary No. 02-0581.

United States Bankruptcy Court, E.D. Pennsylvania.

September 26, 2002.

COPYRIGHT MATERIAL OMITTED

Edmond M. George, Obermayer, Rebmann, Maxwell & Hippel, LLP, Philadelphia, PA, for Plaintiff.

Paul M. Hummer, Saul Ewing LLP, Philadelphia, PA, for Defendant.

Dave P. Adams, Philadelphia, PA, United States Trustee.

MEMORANDUM OPINION

DIANE WEISS SIGMUND, Bankruptcy Judge.

Before the Court is defendant MBNA America, N.A.'s ("MBNA") Motion to Dismiss Counts II through VII of Plaintiff's Complaint Pursuant to Federal Rule of Civil Procedure 12(b)(6) (the "Motion"). The plaintiff Lawrence Lichtenstein, Trustee (the "Trustee") of the estate of Computer Personalities Systems, Inc. ("CPSI"), responded to the Motion by, inter alia, attaching a proposed Amended Complaint that he contends would cure deficiencies, if any, in the claims as originally pled. The parties agree that for the purpose of judging whether the Trustee has stated claims for which relief may be granted, I may review the Amended Complaint since if a complaint can be cured by amendment, the amendment would be allowed in lieu of dismissal.¹ Based on that review, the memoranda filed by the parties and argument made at the hearing conducted on July 16, 2002, I grant the motion in part.

BACKGROUND

CPSI was formerly engaged in the business of retail computer sales generating business through direct retail store sales and television infomercials. Amended Complaint ¶ 8. On or about July 2, 1999, CPSI and MBNA entered into a Sales Finance Agreement (the "Agreement") with a term of approximately three years.² Id. ¶ 10 & Agreement (attached to the Amended Complaint as Exhibit A) ¶ 11. Pursuant to the Agreement, MBNA agreed to provide financing to CPSI customers to purchase CPSI products. MBNA customers could get instant loan approval at the time of placing an order, and unused credit could be used for other purposes. Amended Complaint ¶¶ 11, 12. Pursuant to the Agreement, CPSI agreed to use MBNA as the sole provider of financial service products and to refrain from referring its customers to any other such provider. Id. ¶ 13. Also pursuant to the Agreement, CPSI included in its infomercials transmitted nationally "information about the `partnering' with MBNA, whereby CPSI advertised that customers could finance their purchases through loans made by MBNA." Id. ¶¶ 14, 15.

Under the Agreement, MBNA advanced proceeds of its loans to its customers to CPSI's accounts. Id. ¶ 16. CPSI was responsible for payment to MBNA of refunds arising from cancellation of customer purchases from CPSI or the return of all or part of the computer but had no responsibility for the repayment of the customer loans. Id. ¶¶ 21. Almost from the outset CPSI had financial difficulties and was failing to deliver computers as purchased. Id. ¶¶ 22, 23. CPSI failed to comply with Pennsylvania and federal consumer protection laws that prohibit a vendor from charging a consumer for a product before it is shipped. Id. ¶ 24. The Trustee contends that MBNA was aware of CPSI's premature billing practices and the increasing customer complaints about the untimely computer deliveries and took no action "to rectify the manner in which CPSI did business." Id. ¶¶ 24, 25, 26, 28, 31, 32. As a result of CPSI's manner of doing business, "MBNA asserted that CPSI had incurred refund obligations to MBNA." Id. ¶ 29. MBNA began issuing chargebacks and reducing the funding of customer loans, "further exacerbating CPSI cash flow problems, of which MBNA was aware." Id. ¶ 30.

During the summer of 2000, CPSI's cash flow problems and customer complaints about undelivered computers continued to grow. Id. ¶¶ 36-41. While MBNA continued to offer loans to CPSI customers, it began to insist on CPSI funding a weekly reserve from which it could deduct its claimed losses. Id. ¶ 44. On or about December 28, 2000, MBNA "forced an amendment" to the Agreement (the "Addendum") which obligated CPSI to establish a reserve account as "security for MBNA America's losses arising from Unresolved Customer Disputes and as consideration for MBNA extending additional credit to approved CPSI Customers." Addendum (included as part of Exhibit A to the Amended Complaint) ¶ 3.

During the 90 day period prior to the commencement of the bankruptcy case, CPSI made transfers to MBNA that allegedly included certain improper chargebacks and setoffs taken by MBNA. Amended Complaint ¶ 51. The Trustee seeks to recover these transfers, damages and costs under various theories. MBNA's Motion is directed at the following counts as numbered in the Amended Complaint:³ Count II — Fraudulent Conveyances Pursuant to 11 U.S.C. § 548; Count III — Fraudulent Conveyances Pursuant to 11 U.S.C. § 544; CountV — Recovery of Fraudulent Transfers Under 11 U.S.C. § 550;⁴ Count VI — Contribution;⁵ Count VII — Breach of Agreement;⁶ and Count VIII — Equitable Subordination.⁷ MBNA's arguments for dismissal can be summarized as follows:

A. Counts II and III, which attempt to allege fraudulent transfer claims, should be dismissed for failure to state a claim because the only transfers made by CPSI were in repayment of a commercial debt pursuant to the parties' Agreement and as such cannot be "fraudulent transfers." Moreover, if Counts II and III do not state a claim, then it follows that the Trustee's claim under 11 U.S.C. § 550 (Count V in the Amended Complaint) which is premised upon the finding of a fraudulent transfer must likewise fail.

B. Count VI, which purports to state a claim for contribution should be dismissed for failure to state a claim because: (1) the parties were not involved in a joint venture; and (2) the doctrine of in pari delicto forecloses tort liability in this case.

C. Count VII which seems to aver that MBNA breached the Agreement by entering into the Addendum, fails to state a breach of contract since modification of and subsequent compliance with the terms of an agreement do not constitute a breach of contract claim; and

D. Count VIII fails to state a valid cause of action for equitable subordination because Plaintiff has failed to allege that MBNA engaged in some type of inequitable conduct.

DISCUSSION

I.

The Third Circuit Court of Appeals has stated that in considering a Rule 12(b)(6)⁸ motion to dismiss, a court must accept all allegations in the complaint, and all reasonable inferences that can be drawn therefrom, as true and view them in the light most favorable to the non-moving party. See Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3rd Cir.1989) (citations omitted); Angelastro v. Prudential-Bache Securities, Inc., 764 F.2d 939, 944 (3rd Cir.), cert. denied, 474 U.S. 935, 106 S.Ct. 267, 88 L.Ed.2d 274 (1985). A complaint must not be dismissed for failing to state a claim unless it appears beyond reasonable doubt that plaintiffs can prove no set of facts in support of their claim that would entitle them to relief. See City of Philadelphia v. Lead Industries Ass'n, Inc., 994 F.2d 112, 118 (3d Cir.1993)(citing Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)).

II. Fraudulent Transfer Claims

MBNA contends that the Trustee's fraudulent transfer claims are precluded because the transfers at issue were in repayment of a debt which CPSI was obligated to pay MBNA under the Agreement and Addendum. MBNA asserts that "[a]s a matter of law, the repayments of debts to a bona fide creditor are not fraudulent conveyances." Defendant MBNA America's Memorandum of Law in Support of its Motion to Dismiss Counts II through VII of Plaintiff's Complaint ("MBNA's Brief") at 4. In support of this proposition, MBNA cites In re Miller, 39 F.3d 301, 307 (11th Cir.1994) (transfer of property to debtors' largest creditor, in exchange for cancellation of unsecured debt, was not "tantamount to a fraudulent transfer" since the transfer was to a bona fide creditor and the debtors'"motivation in effecting the transfer was to obtain funds to keep their businesses alive while satisfying their largest creditor[.]"), and In re Erie Marine Enterprises, Inc., 216 B.R. 529, 537-38 (Bankr.W.D.Pa.1998) (granting summary judgment in favor of creditor on actual fraud theory under § 548(a)(1) and stating that "[i]t is difficult to perceive how the payments made by the Debtor to [the creditor] on a debt which was justly owed can be tortured into an act done with the intent to hinder, delay and defraud creditors.").

I am unpersuaded by MBNA's argument because it rests on the assumption that MBNA is a bona fide creditor. While that assumption may be proven to be true during the course of this litigation, at this stage of the proceeding (i.e., a motion to dismiss) I must accept as true all allegations in the complaint and draw all reasonable inferences therefrom in the light most favorable to the Debtor. The Trustee has included allegations in the Complaint which suggest that MBNA may not have been a bona fide creditor vis-a-vis the Addendum and the transfers made pursuant thereto. For example, the allegations in the Amended Complaint suggest that CPSI was "forced" to agree to the Addendum. See Amended Complaint ¶ 50. Moreover, the Amended Complaint, while not specifically identifying the chargebacks and setoffs alleges that MBNA obtained them "improperly." See id. ¶ 51. The Trustee has also alleged that the Debtor acted with "actual intent to hinder, delay and defraud its present or future creditors." See id. ¶ 67. While the Trustee may ultimately be unable to prove these allegations,⁹ at this stage of the proceeding the allegations are sufficient to withstand MBNA's motion to dismiss. See Fisher v. American National Bank and Trust (In re Elite Marketing Enterprises, Inc.), 2001 WL...