In re Fargo Financial, Inc., Bankruptcy No. 86-08185
| Decision Date | 15 January 1988 |
| Docket Number | Adv. No. 86-0915A.,Bankruptcy No. 86-08185 |
| Citation | 80 BR 247 |
| Parties | In re FARGO FINANCIAL, INC., Debtor. PANELIZED TECHNOLOGY, INC., d/b/a Paneltech and Third National Bank in Knoxville, Plaintiffs, v. TESORO SAVINGS & LOAN ASSOCIATION, Defendant. |
| Court | U.S. Bankruptcy Court — Northern District of Georgia |
Rufus T. Dorsey, IV, Parker, Hudson, Rainer & Dobbs, Atlanta, Ga., for plaintiffs.
Grant T. Stein, Alston & Bird, Atlanta, Ga., for defendant.
Before the court is the motion of defendant Tesoro Savings & Loan Association ("Tesoro") to dismiss the above-styled complaint for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6), applicable herein through Bankruptcy Rule 7012. The underlying complaint, filed by Panelized Technology, Inc., d/b/a Paneltech, and Third National Bank in Knoxville ("plaintiffs"), contains a claim for relief on grounds of equitable subordination pursuant to 11 U.S.C. Section 510(c). In its motion, Tesoro challenges plaintiffs' standing to pursue this claim primarily because it is not a creditor of the estate and because only the debtor in possession has standing to sue on behalf of the bankruptcy estate. A recitation of the pertinent factual allegations in plaintiffs' complaint is as follows:
Plaintiff Paneltech and debtor, Fargo Financial, Inc. ("Fargo"), entered into a subcontractor agreement regarding the construction of the Gwinnett Square Apartments. Paneltech then assigned its interest in the contract to the Third National Bank in Knoxville. Under the agreement, Paneltech furnished materials and installation services for this apartment project. Fargo became indebted to Paneltech in the amount of $195,210.86 but failed to pay the amounts due. Consequently, Paneltech filed a materialman's lien on the apartment complex and instituted a state court civil action against Fargo, which was removed to United States District Court. Fargo, in its answer in that suit, contends that Paneltech breached the contract.
In 1983 Tesoro allegedly agreed to provide funds to Fargo for the acquisition of property and construction of apartments for resale. Pursuant to the loan commitment agreements, Tesoro was to receive a twenty percent profit participation. As security for its advances, Tesoro asserted a first priority security interest in the apartments. Plaintiffs allege that Fargo and Tesoro's relationship constituted a partnership or joint venture due to Tesoro's routine involvement and control over the project. Plaintiffs claim that Tesoro condoned and acquiesced in Fargo's proposal to delay payment to the materialmen and mechanics. Plaintiffs contend that in August of 1986, Tesoro, with knowledge of the existing liens on the property, wrongfully and without forewarning froze the disbursement of funds previously advanced to Fargo.
As a result of these acts, the construction project collapsed due to Fargo's inability to obtain funding and it was forced to file for relief under Chapter 11. Plaintiffs contend that debtor is unable to pay them because of Tesoro's alleged actions in terminating its financing. This court has previously granted Tesoro's motion for relief from automatic stay by Order filed January 7, 1987, as amended March 26, 1987, allowing it to proceed with foreclosure of the apartment property. Plaintiffs request that the court subordinate Tesoro's alleged first priority lien to their lien.
The function of a motion for dismissal for failure to state a claim is to test the legal sufficiency of the claim for relief and should be denied "unless it appears beyond doubt that the Plaintiff can prove no set of facts in support of its claims" which would entitle it to relief. Jackam v. Hospital Corporation of America Mideast, Ltd., 800 F.2d 1577, 1579 (11th Cir. 1986), quoting Bracewell v. Nicholson Air Services, Inc., 680 F.2d 103, 104 (11th Cir.1982) (emphasis in original). See also Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). For purposes of this motion the complaint should be construed in the light most favorable to the plaintiff and its allegations taken as true. Jenkins v. McKeithen, 395 U.S. 411, 421-23, 89 S.Ct. 1843, 1848-49, 23 L.Ed.2d 404 (1969). In reviewing the sufficiency of the complaint before receiving evidence by affidavit or admissions, the issue is not whether plaintiff will ultimately prevail, but whether he is entitled to offer evidence to support the claims. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed. 2d 90 (1974).
Under 11 U.S.C. Section 510(c), the court may subordinate for purposes of distribution the interest of a creditor to those of another in accordance with principles of equitable subordination. In order to warrant such relief the party seeking subordination must show the following elements:
Estes v. N & D Properties, Inc. (In re N & D Properties, Inc.), 799 F.2d 726, 731 (11th Cir.1986). After carefully examining the allegations contained in plaintiffs' complaint, the court finds and concludes that they sufficiently state a legal claim upon which this court may grant relief.
Tesoro has also argued that Paneltech is not a creditor of Fargo's estate because its claim was scheduled as disputed by Fargo pursuant to Section 1111(a). It is Tesoro's contention that until Paneltech's claim is allowed it is not a creditor to whom Tesoro can be subordinated. This court concludes, however, that plaintiffs do hold claims against Fargo's estate and that they are entitled to assert them. As noted by plaintiffs, Section 101(4) defines a claim as follows:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. . . .
A creditor is defined in Section 101(9) as an "entity that has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor. . . ." The court file reflects that plaintiffs filed proofs of claim against Fargo on March 10, 1987, based on a filed materialman's lien. Accordingly, although Fargo disputes these claims, the court finds that plaintiffs have sufficiently alleged a claim against Fargo to entitle them to litigate its validity on the merits and to maintain an action regarding their distribution order in the estate. A similar principle is demonstrated by Section 502(c) which permits a court to estimate a contingent or unliquidated claim that cannot be timely resolved, for purposes of participation in administration of the estate. Otherwise a debtor could remove the standing of any creditor in asserting its claim by merely disputing it.
Tesoro next challenges the sufficiency of the complaint on grounds that Paneltech has no standing to pursue its claims and that this action is premature. See generally Klebanow v. New York Produce Exchange, 344 F.2d 294, 296 (2d Cir.1965); Tademy v. Scott, 157 F.2d 826, 827-28 (5th Cir.1946). This contention is based on the argument that Paneltech, as an individual creditor, lacks standing in this proceeding because only a debtor in possession, vested with the rights, duties, and powers of a trustee, is entitled by statute to bring a claim for equitable subordination. See 11 U.S.C. Sections 323, 1107. Further, Tesoro argues that Paneltech has alleged no cognizable direct injury resulting from Tesoro's alleged inequitable conduct. Finally, Tesoro insists that their foreclosure of the apartment property wiped out Paneltech's junior lien interest against the property.
Plaintiffs have the burden of pleading and proving injury in fact, causation, and redressability and in considering a motion to dismiss for lack of standing the court must accept the truth of the material allegations of the plaintiffs. See Steele v. National Firearms Act Branch, 755 F.2d 1410, 1414 (11th Cir.1985). Additionally the court may allow a plaintiff the opportunity to present evidence on this issue to establish the factual background needed to resolve the standing question. Id. at 1414-15. The requirement that a litigant have standing to bring a suit in federal court developed from the limitation placed on judicial power by Article III of the U.S. Constitution. See Saladin v. City of Milledgeville, 812 F.2d 687, 690 (11th Cir.1987), citing Valley Forge Christian College v. Americans United for Separation of Church and State, 454 U.S. 464, 471-72, 102 S.Ct. 752, 757-59, 70 L.Ed.2d 700 (1982); Steele, supra, 755 F.2d at 1413.
Tesoro cites the decision of Bunker Exploration Co. v. Clarke (In re Bunker Exploration Co.), 42 B.R. 297, 301 (Bankr. W.D.Okla.1984), as recognizing the following proposition:
Most jurisdictions have adopted the general rule that once a trustee has been elected and qualified, no general creditor has standing to contest another general creditor\'s claim, unless the trustee, upon application, refuses to object and the court has authorized the creditor to proceed in the trustee\'s name.
42 B.R. at 301, citing Rooke v. Reliable Home Equipment Co., 195 F.2d 667 (4th Cir.1952); Fred Reuping Leather Co. v. Fort Greene National Bank of Brooklyn (In re Honesdale Union Stamp Shoe Co.), 102 F.2d 372 (3rd Cir.1939).
The Third Circuit Court of Appeals in Honesdale, supra, had explained the underlying rationale for this general rule in terms of the trustee's fiduciary duty to represent all creditors and the prevention of undue protraction of the settlement of the estate, which could result if each creditor were allowed to sue any other creditor at will. Honesdale Union Stamp Shoe Co., 102 F.2d 372, 373. See also ...
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