In Re: Juliet Homes, Case No. 07-36424
| Decision Date | 16 December 2010 |
| Docket Number | Adversary No. 09-03429,Case No. 07-36424 |
| Parties | In re: JULIET HOMES, LP, Debtor(s). JOSEPH M HILL CH 7 TRUSTEE, et al,Plaintiff(s) v. ALEX ORIA, et al,Defendant(s). |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
The chapter 7 Trustees1 in the bankruptcy cases of Douglas A. Brown; Juliet Homes, LP; and Juliet GP, LLC instituted this adversary proceeding on October 29, 2009. They now seek leave to amend their complaint. The Court grants, in part, and denies, in part, the Trustees' Motion for Leave to File Amended Complaint.
In their investigation into the bankruptcy cases, the Trustees came to believe that the Debtors had fraudulently or preferentially transferred the Debtors' funds. The Trustees sued the alleged recipients of the transfers, and then, several months later, sought to add new claims and dozens of new defendants. By the time the Trustees sought leave to amend their Original Complaint, the statutes of limitations had run on most of the claims against the new defendants.
The Trustees argue that the statutes of limitations should be equitably tolled because of extraordinary circumstances. During the course of their investigation, the Trustees' forensic accountant died. The accountant's death and the Debtors' and defendants' alleged concealment of records, the Trustees assert, justify extending the statutes of limitations. Additionally, the Trustees argue that the amendments to the complaint relate back to the date of the original filing under Fed. R. Civ. P. 15. The Trustees argue both that (i) failure to include the new defendants in the Original Complaint was due to a mistake of identity, and (ii) the underlying claims are based on the same transactions.
The Court finds that the Trustees failed to prove that the Debtors or defendants actively concealed records. The death of the Trustees' forensic accountant must be balanced against the Court's conclusion that the Trustees did not exercise sufficient diligence in their investigation. Although there is some evidence the Debtors passively concealed2 records, equitable tolling is not warranted where the plaintiff failed to exercise sufficient diligence. Additionally, the Trustees' alleged mistake with respect to most of the new defendants was not a mistake of identity, but rather a lack of knowledge. The avoidance claims against most of the new defendants therefore do not relate back to the time of the Original Complaint, and the claims against these defendants are barred.
Although the Trustees fail to state actual or constructive fraud claims or punitive damages claims against all but a few defendants, the Trustees sufficiently state a claim for conversion/misappropriation/unjust enrichment, and this claim relates back to the Original Complaint with respect to the original defendants.
The Court has jurisdiction over this matter under 28 U.S.C. § 1334. Venue is proper in this District pursuant to 28 U.S.C. § 1409.
This adversary proceeding is connected to the bankruptcy cases of Juliet Homes, LP ("Juliet Homes"), No. 07-36424; Juliet GP, LLC. ("Juliet GP"), No. 07-36426 (collectively, "Juliet Debtors"); and Douglas A. Brown, No. 07-36422. Creditors filed involuntary petitions against each of the three Debtors on September 20, 2007. Brown and the two Juliet Debtors are closely related. On his Schedule B, Brown noted that he was the 100% owner of Juliet GP and the 28.376% owner of Juliet Homes. (No. 07-36422, Doc. No. 56, at 20.) The Juliet Debtors list interests in each other, of unspecified percentages, on their respective schedules. (No. 07-36426, Doc. No. 23, at 8; No. 07-36424, Doc. No. 111, at 7.) Brown is listed as the Managing Member of Juliet GP on Juliet GP's Voluntary Petition and Schedules and on Juliet Homes' Schedules. (No. 07-36426, Doc. No. 23, at 4, 20; No. 07-36424, Doc. No. 111, at 14.)
On Debtors' motion, the Court entered orders for relief on October 31, 2007. The Court converted Juliet Homes' case and Brown's case to chapter 11 on the same day. On November 2, 2007, Joseph Hill, plaintiff in this adversary proceeding, became Trustee over the Juliet Debtors' estates. On Hill's motion, the Court reconverted Juliet Homes' case to chapter 7 on December 3, 2007.
Brown moved to reconvert his individual case to chapter 7 on December 5, 2007, and the Court granted his motion on December 19, 2007. Steve Smith, also a plaintiff in this adversary proceeding, became Trustee of Brown's chapter 7 estate.
On October 29, 2009, the Trustees filed this adversary proceeding against Brown, other individuals who were alleged to be investors in the Juliet Debtors, and five entities alleged to be affiliated with the Juliet Debtors. The Original Complaint alleged that Brown and the Juliet Debtors had made avoidable preferential and/or fraudulent transfers to themselves, their affiliates, and their investors under §§ 547 and 548 of the Bankruptcy Code and under Texas law.
The Trustees alleged, for example, that Brown and his partner Bernie Kane charged exorbitant consulting fees against the Juliet Debtors' account and purchased luxury vehicles and expensive personal items out of the Debtor's funds. The Trustees also alleged that Brown and Kane issued false invoices from fictitious vendors and subcontractors and that Brown and his wife, Caroline Brown, diverted Juliet funds to Brown himself, affiliated entities, and affiliated individuals. The Trustees additionally alleged that the Juliet Debtors paid kickbacks to insiders, employees, relatives, and other co-conspirators to act as "straw buyers" in the purchase and sale of homes.
On December 2, 2009, the Trustees filed their Amended Complaint. The Amended Complaint made minor changes to the Original Complaint and was filed within the time allowed by Rule 15(a)(1).
On February 26, 2010, the Trustees filed a Motion for Leave to File Second Amended Complaint and for Extension of Time to Serve Defendants. (Doc. No. 114.) The Trustees attached the Second Amended Complaint (Doc. No. 114-1) and the Transfer Chart3 (Doc. No. 114-2, 114-3, 114-4.) The Second Amended Complaint expanded the scope of the claims, elaborating on the allegations of an overarching "Ponzi scheme" encompassing the transfersidentified in the Original Complaint. The Trustees sought to add dozens of individuals and entities as defendants and to add causes of action for fraud, conspiracy, conversion, and aiding and abetting. The Second Amended Complaint did not itself contain factual allegations against all the new defendants. The Transfer Chart identified transfers to many of the new defendants. However, neither the Second Amended Complaint nor the Transfer Chart made specific factual allegations against 46 of the defendants.
To support their motion to amend the complaint, the Trustees asserted that they did not find out about the additional transfers and the role of the new defendants in time to include them in the Original Complaint. However, the investigation that led to the new allegations in the Second Amended Complaint began a few months before the Original Complaint was filed.
The Trustees' new allegations emphasize the involvement of an entity called The Market on Congress ("TMOC"). The Trustees allege that TMOC was used to funnel money from the Debtors into other entities and to individual investors. According to the Trustees, TMOC was used "to divert millions of dollars belonging to Juliet through checks and wire transfers from accounts held by Juliet and Pinnacle Title." (Second Am. Compl. ¶ 195, Doc. No. 114-1, at 27.)
The Trustees say that they learned about the need to investigate TMOC's role when they received a document mentioning TMOC in June 2009. (Trustees' Post-Hr'g Br. ¶ 39, Doc. No. 198, at 11.) The Trustees had, however, received notice of TMOC's existence and potential importance over a year earlier. Juliet Homes' Statement of Financial Affairs, filed on February 5, 2008, had listed four transfers to TMOC, totaling $74,250.00, in the 90 days before Juliet Homes filed for bankruptcy. (No. 07-36424, Doc. No. 111-5, at 1-8.) And as early as August 2008, Trustee Steve Smith knew that TMOC was possibly an alter ego of Doug Brown. (Discharge Compl. ¶ 14, No. 08-03320, Doc. No. 1, at 7-8.)
In June 2009, the Trustees requested documents from Bank of America regarding the Debtors' and TMOC's finances. The Trustees received Bank of America's first production of documents in August 2009, before they filed their Original Complaint. The Original Complaint mentions TMOC and alleges that it played a role in the Debtors' scheme to transfer money: "Brown used affiliated entities including, but not limited to, TMOC... to funnel monies out of Juliet and to himself, insiders, the Juliet Investors and other co-conspirators." (Orig. Compl. ¶ 69(c), Doc. No. 1, at 12.) However, the Original Complaint did not include TMOC as a defendant. At the time they filed the Original Complaint, the Trustees had not yet received Bank of America's second production of documents, which would include a record of TMOC's checks.
Theresa Mobley, counsel for the Trustees, testified that the Trustees received TMOC's checks from Bank of America in November 2009. (Mot. to Am. Hr'g Tr. vol. 2, 177-78, June 30, 2010, Doc. No. 185-1, at 91-92.) Mobley said that while going through the bank records for the purpose of producing the Transfer Chart for the Court, the Trustees discovered more transfers. (Mot. to Am. Hr'g Tr. vol. 2, 177-79, June 30, 2010, Doc. No. 185-1, at 91-93.) The record of checks led the Trustees to believe that the Juliet Debtors had transferred funds to additional entities that had not been named in the Original Complaint.
By the time the Trustees sought to add the new defendants, however, the statutes of limitations had already expired with respect to many of the state-law claims and any new federal-law fraudulent transfer or preferential...
To continue reading
Request your trial