In re Derivium Capital, LLC

• Decision Date: 22 December 2006
• Docket Number: Adversary No. 06-80163-JW.,Civil Action No. 05-15042-JW
• Citation: 380 B.R. 407
• 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.
• Court: U.S. Bankruptcy Court — District of South Carolina

380 B.R. 407

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.

Civil Action No. 05-15042-JW, Adversary No. 06-80163-JW.

United States Bankruptcy Court, D. South Carolina.

December 22, 2006.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Jody A. Bedenbaugh, Nelson, Mullins, Riley and Scarborough, Linda K. Barr, Columbia, SC, 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, J. Ronald Jones, Jr., Charleston, SC, for Defendants.

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 a Motion to Dismiss filed by Charles Cathcart and Derivium Capital (USA), Inc. and a Motion to Dismiss filed by Scott Cathcart (the moving parties are collectively referred to herein as "Movants" and their respective motions are collectively referred to herein as "Motions"). Kevin Campbell ("Plaintiff") opposes the Motions. The 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 (0). 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") is a limited liability company organized under the laws of the State of South Carolina.

2. Scott Cathcart and Charles Cathcart held a membership interest in Debtor.

3. 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.

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

5. Plaintiff was appointed as the chapter 7 trustee for Debtor.

6. On August 10, 2006, Plaintiff filed the Complaint in this adversary. The Complaint arises out of Debtor's operation of a stock-loan program operated pre-petition and the alleged misappropriation by Movants of funds received by Debtor. Plaintiff seeks relief against the Movants and others under twenty-three causes of action. Nine of these actions are statutory actions under §§ 510(c), 542, 544, 547, 548, 549, and 550 of the Bankruptcy Code. Plaintiff also seeks relief under the following causes of action: piercing the corporate veil, alter ego, substantive consolidation, conversion; quantum meruit, constructive trust, accounting, injunction, breach of fiduciary duties, breach of covenant of good faith and fair dealing, negligence, deepening insolvency, civil conspiracy, and RICO. For each action, Plaintiff has alleged that Debtor suffered damages as a result of Movants' conduct.

7. Movants timely moved under Fed. R.Civ.P. 12(b)(1), (6), and (7), made applicable to this proceeding by Fed. R. Bankr.P. 7012, to dismiss the Complaint.

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

CONCLUSIONS OF LAW

I. Movants' Motions Under Rule 12(b)(1)

A. Standard For Granting the Motions Under Rule 12(b)(1)

Article III of the Constitution requires a party to have standing to invoke the powers of a federal court. See Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 2205, 45 L.Ed.2d 343 (1975). A complaint brought by a plaintiff that lacks standing may be dismissed pursuant to Fed. R.Civ.P. 12(b)(1). See Steel Co. v. Citizens for a Better Env't, 523 U.S. 83, 94, 118 S.Ct. 1003, 140 L.Ed.2d 210 (1998) (finding where there is no jurisdiction "the only function remaining to the court is that of announcing the fact and dismissing the cause"): In re Student Finance Corp., 335 B.R. 539 (D.Del.2005). Standing requires that the party seeking relief has alleged a personal injury traceable to the conduct of another that may be redressed by the relief requested: See Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 471-476, 102 S.Ct. 752, 757-761, 70 L.Ed.2d 700 (1982).

Section 704(1) authorizes Plaintiff to "collect and reduce to money the property of the estate." 11 U.S.C. § 704(1). Because claims of Debtor constitute property of a bankruptcy estate, § 704(1) grants Plaintiff the right to assert causes of action on behalf of Debtor. See 11 U.S.C. §§ 541(a)(1), 704(1). See also, Polis v. Getaways, Inc., (In re Polis), 217 F.3d 899, 901 (7th Cir.2000) (noting that § 541(a) has "uniformly been interpreted to include causes of action"). However, if a claim belongs solely to creditors, Plaintiff has no standing under 11 U.S.C. §§ 541 or 544(b) to pursue the claim unless it is assigned to him by the creditors, notwithstanding the fact that recovery may benefit creditors. See Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972): In re Bogdan, 414 F.3d 507, 513 (4th Cir.2005). Whether a particular claim belongs to Debtor, thus constituting "property of the estate," depends upon state law. See Steyr-Daimler-Puch of Am. Corp. v. Pappas, 852 F.2d 132, 135 (4th Cir.1988).

B. Application of Law to Complaint

Movants assert that Plaintiff lacks standing to raises the actions sounding in fraud because these actions do not belong to Debtor but to the creditor body. However, under both South Carolina common law and applicable statutes, Plaintiff has standing to bring the actions since these actions belong to Debtor under South Carolina law and are therefore property of the estate. See Steyr-Daimler, 852 F.2d at 135. First, S.C.Code Ann. § 33-44-407(b) provides Debtor with a right of action against any of its members who receive distributions of corporate property in violation of applicable law. If the allegations in the Complaint are true, the scheme alleged by Plaintiff appears to violate S.C.Code Ann. § 33-44-406(a) in that Movants made distributions which left Debtor unable to pay its debts and with liabilities that exceeded its assets. Plaintiff thus appears to have standing to raise the Fourth Cause of Action as he has alleged a wrong to Debtor caused by Movants' conduct, which may be redressed under applicable law.

Plaintiff also has standing to raise the remaining causes of action against the Movants sounding in fraud pursuant to S.C.Code Ann. § 33-44-104(a) (West 2006) (supplementing the South Carolina Uniform Limited Liability Company Act with principles of law and equity).² Under South Carolina law, a corporation has standing to sue its agents whose fraudulent or wrongful conduct causes injury to the corporation. See Browne v. Hammett, 133 S.C. 446, 131 S.E. 612, 613 (S.C.1926) (finding an action against the directors of a bank for negligent or wrongful acts is an action that lies with the bank and is an asset of the bank); Stewart v. Ficken, 151 S.C. 424, 426, 149 S.E. 164, 165 (S.C.1929) (holding "if the mismanagement of the directors has caused a loss to the corporation, and not to any particular general creditor, depositor, or stockholder, the liability of the directors on account thereof is an asset of the corporation") (emphasis original); Johnson v. Baldwin, 221 S.C. 141, 69 S.E.2d 585 (S.C.1952); Ward v. Griffin, 295 S.C. 219, 367 S.E.2d 703 (S.C.Ct.App.1988). In this case, Plaintiff has alleged injury to Debtor under each cause of action sounding in fraud. See In re Ahead by a Length, Inc., 100 B.R. 157, 173 (Bankr.S.D.N.Y.1989) (finding a trustee has standing under state law to assert RICO allegations against individuals that controlled debtor as there was an allegation of injury to debtor). Under South Carolina law, these tort actions belong to Debtor and Plaintiff has standing to assert these actions. See Steyr-Daimler-Puch, 852 F.2d at 135; Browne, 131 S.E. at 613; Hovis v. Powers Const. Co. (In re Hoffman Assocs.), 194 B.R. 943 (Bankr.D.S.C. 1995) (allowing trustee to assert claims against insiders of debtor under actions for fraudulent conveyance and veil piercing/alter ego).

II. Movants' Motion Under Rule 12(b)(6)

A. Standard For Granting the Motions Under Rule 12(b)(6)

In deciding a Rule 12(b)(6) motion to dismiss, the Court must take all well-pled material allegations of a complaint as admitted and view them in the light most favorable to the Plaintiff. 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); Richmond, Fredericksburg & Potomac R.R. Co. v. Forst, 4 F.3d 244, 250 (4th Cir.1993) (finding defendants face a "procedural stumbling block" when asserting affirmative defenses in a motion to dismiss since a motion to dismiss is designed to test the sufficiency of the complaint). When reviewing a motion to dismiss, it is inappropriate to consider facts outside of the Complaint as the Court's inquiry is limited to whether Plaintiffs' allegations constitute short and plain...