In re Derivium Capital, LLC

• Decision Date: 22 December 2006
• Docket Number: Adversary No. 06-80163-JW.,Bankruptcy No. 05-15042-JW
• Citation: 380 B.R. 429
• Court: U.S. Bankruptcy Court — District of South Carolina
• Parties: In re DERIVIUM CAPITAL, LLC, Debtor. Kevin Campbell, Trustee, Plaintiff, v. Charles Cathcart, Scott Cathcart, Yuri Debevc, Veristeel, Inc., Veridia Solutions LLC, Derivium Capital (USA), Inc., Defendants.

380 B.R. 429

In re DERIVIUM CAPITAL, LLC, Debtor Kevin Campbell, Trustee, Plaintiff, v. Charles Cathcart, Scott Cathcart, Yuri Debevc, Veristeel, Inc., Veridia Solutions LLC, Derivium Capital (USA), Inc., Defendants.

Bankruptcy No. 05-15042-JW, Adversary No. 06-80163-JW.

United States Bankruptcy Court, D. South Carolina.

December 22, 2006.

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Jody A. Bedenbaugh, Linda K. Barr, Nelson, Mullins, Riley and Scarborough, Columbia, SC, for Plaintiff/Trustee.

Steven A. Soulios, Ruta & Soulios LLP, New York, NY, Joseph W. Grier, III, Grier Furr & Crisp PA, Charlotte, NC, Forrest Truett Nettles, II, J. Ronald Jones, Jr., Charleston, SC, for Defendants.

Betsy Johnson Burn, Columbia, SC, Richard Ashby Farrier, Jr., Nelson Mullins Riley and Scarborough LLP, Charleston, SC, for trustee.

ORDER

JOHN E. WAITES, Bankruptcy. Judge.

This matter comes before the Court on Motion to Dismiss or in the Alternative for Summary Judgment (the "Motion") filed by Veristeel Inc. ("Veristeel"). Plaintiff, Kevin Campbell, Chapter 7 Trustee of the Estate of Derivium Capital, LLC (the "Trustee"), filed an objection to the Motion (the "Objection"). This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (F), (H), and (O). Pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding by Fed. R. Bankr.P. 7052, the Court makes the following Findings of Fact and Conclusions of Law.¹

FINDINGS OF FACT

1. Derivium Capital, LLC ("Debtor") filed the above-captioned bankruptcy case as a case under Chapter 11 of the Bankruptcy Code on September 1, 2005 in the United States Bankruptcy Court for the Southern District of New York.

2. The Bankruptcy Court in New York subsequently converted this case to a case under Chapter 7 and transferred venue to this District.

3. On November 7, 2005, the Trustee was appointed as the Chapter 7 trustee for Debtor.

4. On August 10, 2006, the Trustee filed the Complaint in this adversary. The Trustee seeks relief against Veristeel and others under twenty-three causes of action.

5. The Complaint arises out of Debtor's operation of a stock-loan program operated pre-petition and the alleged misappropriation by Veristeel and others of funds received by Debtor.

6. Veristeel timely moved to dismiss the Complaint under Fed.R.Civ.P. 12(b)(6) and (7), made applicable to this proceeding by Fed. R. Bankr.P. 7012., on the grounds more fully set forth herein.

7. The Court entered a Scheduling Order on November 13, 2006. The deadline to conduct discovery lapses on February 23, 2007.

CONCLUSIONS OF LAW

Motion to Dismiss

In deciding a Rule 12(b)(6) motion to dismiss, a court must take all well-pleaded material allegations of a complaint as admitted and view them in the light most favorable to the pleader — in this case the Trustee. See De Sole v. U.S., 947 F.2d 1169, 1171 (4th Cir.1991) (citing Jenkins v. McKeithen, 395 U.S. 411, 421, 89 S.Ct. 1843, 1848, 23 L.Ed.2d 404 (1969)). A Rule 12(b)(6) motion should not be granted unless it "appears to a certainty that the plaintiff would be entitled to no relief under any state of facts which could be proved at trial in support of his claim." Rogers v. Jefferson-Pilot Life Insurance Co., 883 F.2d 324, 325 (4th Cir.1989) (citing Johnson v. Mueller, 415 F.2d 354, 355 (4th Cir.1969)). The function of a motion to dismiss is to test "the sufficiency of a complaint; importantly, it does not resolve contests surrounding the facts, the merits of a claim, or the applicability of defenses." See Republican Party of North Carolina v. Martin, 980 F.2d 943, 952 (4th Cir.1992). When reviewing the Motion, it is inappropriate, for the Court to consider facts outside of the Complaint, as its inquiry is limited to whether the Trustee's allegations, constitute a short and plain statement of the claim showing that he is entitled to relief. See Colleton Regional Hosp. v. MRS Medical Review Systems, Inc., 866 F.Supp. 891, 893 (D.S.C.1994).

In general, Veristeel asserts that the Trustee's Complaint fails to sufficiently plead a cause of action against it. Fed. R.Civ.P. 8 and 9, made applicable to this proceeding by Fed. R. Bankr.P. 7008 and 7009, provide the applicable standards for the Trustee's pleading. Rule 8(a) provides that a "pleading which sets forth a claim for relief . . . shall contain (1) a short and plain statement of the grounds upon which the court's jurisdiction depends . . ., (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief the pleader seeks. Fed.R.Civ.P. (8)(a)." The Supreme Court has stated that the express language of Rule 8(a) requires that a complaint give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002). "A court may dismiss a complaint only if it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Id. at 514, 122 S.Ct. 992. In order to determine whether Veristeel should prevail in its Motion, the Court shall review each cause of action individually and determine whether the allegations asserted in the Complaint are sufficient to state a claim.

I. Section 542 Turnover and Declaratory Relief

Section 542 requires an entity in possession, custody, or control of property that the trustee may use, sell, or lease under § 363, or that the debtor may exempt under § 522, to deliver such property to the trustee. 11 U.S.C. § 542.² The Trustee alleges in the First Cause of Action that a substantial portion of Debtor's assets have been transferred directly or indirectly to the Individual Defendants³ or to entities in which the Individual Defendants own beneficial interests, including without limitation the Corporate Defendants.⁴ The Trustee further alleges that the assets transferred to Veristeel were purchased using a portion of the Net Proceeds and constitute assets of the Estate.⁵

The Trustee asserts that a substantial portion of the Net Proceeds was transferred to a number of South Carolina start-up companies. The Trustee further asserts that Veristeel obtained assets originally owned by Scienda, one of the start-up companies, after Scienda voluntarily surrendered substantially of its assets to Charles Cathcart while in bankruptcy.⁶ The Trustee alleges that the Scienda assets were funneled through Spencer Partners and its affiliate:, Spencer Venture Partners, LLC, before finding their way to Veristeel.⁷

The Court finds that these allegations are sufficient to state a claim against Veristeel under § 542. Specifically, the Trustee has alleged facts that, if true, would indicate that Veristeel has possession, custody, or control of assets that may be property of the Estate and thus subject to the Trustee's powers under § 363. Therefore, the Court denies the Motion with respect to the Trustee's First Cause of Action.

II. Section 544(b)/S.C. Code 27-23-10 Actual Fraud & Constructive Fraud

Section 544(b) gives the Trustee the same rights to avoid transfers of an interest of the debtor in property that an actual unsecured creditor would have under applicable law. In his Second and Third Causes of Action, the Trustee is seeking to avoid the transfers of Debtor's assets to Veristeel under the South Carolina Statute of Elizabeth, codified at S.C.Code § 27-23-10 (West 2006), on the ground that those transfers were fraudulent.

S.C.Code § 27-23-10 provides in pertinent part:

Every . . . conveyance of lands, tenements or hereditaments, goods and chattels or any of them . . . by writing or otherwise . . . which may be had or made to or for any intent or purpose to delay, hinder, or defraud creditors and others of their just and lawful actions, suits, debts, accounts, damages, penalties, and forfeitures must be deemed and taken . . . to be clearly and utterly void, frustrate and of no effect, any pretense, color, feigned consideration, expressing of use, or any other matter or thing to the contrary notwithstanding.

Under a fraudulent transfer theory, an existing creditor may avoid a transfer if it can establish three things: "(1) the transfer was made by the grantor with the actual intent of defrauding its creditors; (2) the grantor was indebted at the time of the transfer; and (3) the grantor's intent is imputable to the grantee." In re J.R. Deans Co., 249 B.R. 121, 130 (Bankr.D.S.C.2000)(quoting Mathis v. Burton, 319 S.C. 261, 460 S.E.2d 406, 408 (Ct.App.1995)). Under a constructive fraud theory, an existing creditor may avoid a transfer if it can establish that:

(1) the grantor was indebted to him at the time of the transfer; (2) the conveyance was voluntary; and (3) the grantor failed to retain sufficient property to pay the indebtedness to the plaintiff in full — not merely at the time of the transfer, but in the final analysis when the creditor seeks to collect his debt.

Id.

In support of his claim for actual fraud under S.C.Code § 27-23-10, the Trustee alleges the following:

(1) the transfers of Debtor's assets to the Corporate Defendants were made with the intent to disturb, hinder, delay, or defraud the rights of creditors of Debtor and, such intent is imputable to the grantee of such transfers;

(2) Debtor was indebted at the time of the transfers; and

(3) the transfers were made to an insider.

In support of his claim for constructive fraud under S.C.Code § 27-23-10, the Trustee alleges the following:

(1) Derivium's assets were transferred to or by the Individual Defendants and/or the Corporate Defendants, including without limitation transfers of the Net Proceeds to the Individual Defendants and/or to entities in which the Individual Defendants own a beneficial interest;

(2) Derivium was indebted at the

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