In re McCurnin
| Decision Date | 24 September 2018 |
| Docket Number | Adv. Pro. No. 17-04553-KLP,Case No. 16-30093-KLP, Case No. 15-36551-KLP |
| Court | United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | IN RE: Shelby Farrell MCCURNIN, Jr., Debtor. In re: Leah Christine McCurnin, Debtor. Bruce H. Matson and Peter J. Barrett, Trustees individually and as assignees of M & T Bank, Plaintiffs, v. South Anna, Inc. and Stephanie Jeter Tumlin, Defendants. |
Christopher Julian Hoctor, Moran Reeves & Conn PC, Richmond, VA, for Defendants.
Christopher L. Perkins, LeClair Ryan, Jeremy S. Williams, Kutak Rock LLP, Richmond, VA, for Plaintiffs.
This matter comes before the Court on the motion of Defendants South Anna, Inc., and Stephanie Jeter Tumlin to dismiss the complaint (the "Complaint") filed by chapter 7 trustees Bruce H. Matson and Peter J. Barrett (collectively, the "Trustees"). For the following reasons,1 the counts of the Complaint asserting claims under the Bankruptcy Code, Counts II, III(a),2 and IV, will be dismissed for failure to state a claim upon which relief can be granted. The Court will abstain from hearing Counts I, III(b), V, and VI, the remaining counts of the Complaint, which assert claims under Virginia law.
Leah Christine McCurnin ("Mrs. McCurnin") filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on December 29, 2015, and Peter J. Barrett was appointed to serve as trustee in her case. Shelby Farrell McCurnin ("Mr. McCurnin") filed his own voluntary chapter 7 petition for relief on January 8, 2016, and Bruce H. Matson was appointed to serve as trustee in his case.
Mr. McCurnin and Mrs. McCurnin (collectively "the Debtors") were, at all relevant times, married and together owned all of the shares of Isis, Inc. ("Isis"), which they founded in 1998.3 Mr. McCurnin served as president and CEO of Isis, and Mrs. McCurnin served as its treasurer, CFO, and secretary. Defendant Stephanie Jeter Tumlin ("Tumlin") was a manager of Isis. At all relevant times, Tumlin was the sole owner of Defendant South Anna, Inc. ("South Anna" and, together with Tumlin, "the Defendants").4
The Trustees5 initiated this adversary proceeding by filing a complaint (the "Complaint") on December 29, 2017, asserting causes of action "individually and as assignees of M & T Bank."6 The Complaint alleges that the Debtors and Tumlin devised and executed a scheme to fraudulently transfer the assets of Isis to South Anna.7 The Trustees seek to avoid the transfers and recover the assets of Isis, or the value thereof, from South Anna and Tumlin pursuant to §§ 544, 548, and 550 of the Bankruptcy Code8 and § 55-80 of the Virginia Code, Va. Code Ann. § 55-80. The Trustees also seek a declaration that South Anna is liable as the successor in interest to and alter ego of Isis. Finally, the Trustees seek to hold Tumlin liable for conspiring to fraudulently transfer the assets of Isis to South Anna.9
On January 31, 2018, the Defendants filed a motion to dismiss the Complaint pursuant to Rule 12(b)(1) and (b)(6) of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 12(b)(1), (6),10 for lack of subject matter jurisdiction and for failure to state a claim (the "Motion"). On April 12, 2018, the Court held a hearing on the Motion.
The Court has jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334(b) and the general order of reference of the U.S. District Court for the Eastern of Virginia dated August 15, 1984.11 Venue is appropriate in this Court pursuant to 28 U.S.C. §§ 1409.
The Trustees allege the following facts.12 The Debtors formed Isis in 1998. Isis operated as a consulting business specializing in writing, implementing, and reselling accounting software for small to mid-sized companies in and around the Richmond, Virginia, area. The Debtors have been and remain the sole shareholders of Isis, with Mr. McCurnin owning 49 percent and Mrs. McCurnin owning 51 percent. In its first ten years, Isis experienced significant growth, with revenues of between $2.5 and $3 million per year and expansion to over 20 employees. Among other assets, Isis owned 80 to 100 computers, computer equipment, and a collection of office furniture, including desks, tables, chairs, cabinets, and cubicles.
Tumlin joined Isis in 1999 as a computer programmer, writing accounting software programs. Several years later she was promoted to manager of development. Her duties expanded to include managing Isis's team of eight to nine software developers as well as several employees of Isis's affiliate, Izida, LLC, which was located in Bulgaria.13 Tumlin became "third in command as far as managing the business" after the Debtors.14
Beginning in 2008, Isis's revenues fell and never recovered. It faced increasing collection pressure and litigation from its creditors. In October of 2014, its former landlord filed a complaint against Isis and the Debtors, as guarantors, in the Circuit Court for Henrico County, Virginia, seeking over $150,000 in unpaid rent.
In late 2014, the Debtors and Tumlin "devised a scheme to continue the business of Isis without its mounting debt."15 In January of 2015, the Debtors and Tumlin met to discuss the creation of a new business, to be owned by Tumlin, that would take over Isis's operations. Over the next several months, they created South Anna, identifying Tumlin as CEO and 100% owner of South Anna's stock. Isis's operations and employees were transferred to South Anna, which officially began operations on May 1, 2015, operating out of the same offices previously occupied by Isis. Tumlin made no capital contribution in exchange for her shares in South Anna.
Isis ceased operations in June of 2015, and its registration with the Virginia State Corporation was subsequently terminated. In August, Isis defaulted on its loan with M & T Bank, and in December, M & T Bank filed a complaint against Isis and the Debtors in the Henrico County, Virginia, Circuit Court. By order dated February 26, 2016, the circuit court granted M & T Bank judgment against Isis for $99,661.44, plus interest and late fees of $2,029, as well as attorneys' fees and costs (the "Judgment").16
South Anna solicited Isis's customers and arranged for most of them to enter into contracts with South Anna. One customer refused to execute a new contract, so South Anna continued to do work for that customer under the old Isis contract. With the former Isis employees, in their new roles as employees of South Anna, servicing the former Isis customers, South Anna became profitable immediately. From May through August, South Anna used Isis's property, including its computer equipment and furniture.17 South Anna also used Isis's servicing credentials with Microsoft to service customers until it was able to obtain its own credentials.
By October of 2015, the Debtors' personal relationship had deteriorated, and Mr. McCurnin left Isis.18 On October 14, 2015, South Anna paid Isis $25,000 for computer equipment that South Anna had been using since May of 2015. The value of the computer equipment "far exceeds the $25,000 'paid' to Isis."19
On December 29, 2015, Mrs. McCurnin filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, and one week later Mr. McCurnin filed his own petition, completing the "final step in the scheme to continue Isis's business through South Anna [and] shed the personal guarantees [the McCurnins] had given to Isis's creditors."20 On his schedules, Mr. McCurnin listed over $480,000 of Isis's debt that he had personally guaranteed, including $145,000 for unpaid rent, $117,000 owed to M & T Bank, $50,000 owed to Microsoft, $50,000 owed to Wells Fargo Bank, and $25,000 owed to Windstream Communications. Mrs. McCurnin listed similar personal guaranty obligations in her schedules. Many of these creditors have filed proofs of claim in the Debtors' bankruptcies.
Mr. McCurnin listed his 49% interest in Isis as having a value of $147,000, from which the total value of Isis would be calculated as being close to $300,000. "South Anna 'acquired' this full enterprise value for almost no consideration."21
On December 14, 2017, M & T Bank executed an "Unconditional and Absolute Assignment of Judgment" (the "Assignment") wherein it assigned any and all interest in the Judgment to the Debtors' bankruptcy estates. The Assignment purports to assign "all of M & T's right, title, and interest in and to the Judgment, including all sums of money that may be obtained by means of or as a result of the Judgment." It further provides that the assignment is "unconditional, absolute and without consideration" and grants the bankruptcy estates the power and authority to "acknowledge satisfaction or to discharge and release the Judgment."22
Rule 12(b)(1). A motion to dismiss for lack of subject matter jurisdiction is brought pursuant to Rule 12(b)(1) of the Federal Rules of Civil Procedure.23 In addressing a defendant's facial challenge to subject matter jurisdiction, a court must accept the factual allegations of the complaint as true. Kerns v. United States , 585 F.3d 187, 192 (4th Cir. 2009). Plaintiffs have the burden of proof in establishing jurisdiction. Demetres v. E. W. Constr., Inc. , 776 F.3d 271, 272 (4th Cir. 2015).
Counts II, III(a), and IV of the Complaint are proceedings to "determine, avoid or recover fraudulent conveyances" pursuant to provisions of the Bankruptcy Code and are therefore core matters. 28 U.S.C. § 157(b)(2)(H). If the facts as alleged state a colorable claim upon which relief may be granted pursuant to §§ 544, 548 and 550 of the Bankruptcy Code, then subject matter jurisdiction exists.24
Counts I, III(b), V, and VI of the Complaint are claims brought under state law, over which the Court may exercise subject matter jurisdiction as a proceeding "related to" a case under title 11. 28 U.S.C. § 157(c). "Related to" jurisdiction may exist...
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TRU Creditor Litig. Trust v. Brandon (In re Toys "R" US, Inc.)
...stands in the place of the creditor and is entitled to pursue the claim on behalf of the estate. Matson v. S. Anna, Inc. (In re McCurnin ), 590 B.R. 729, 740 (Bankr. E.D. Va. 2018). Thus, under Fourth Circuit and this Court's precedent, the Trust has standing to pursue the claims assigned t......
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TRU Creditor Litig. Tr. v. Brandon (In re Toys "R" Us, Inc.)
... ... received an unconditional assignment of a claim from a ... creditor stands in the place of the creditor and is entitled ... to pursue the claim on behalf of the estate. Matson v. S ... Anna, Inc. ( In re McCurnin ), 590 B.R. 729, 740 ... (Bankr. E.D. Va. 2018). Thus, under Fourth Circuit and this ... Court's precedent, the Trust has standing to pursue the ... claims assigned to it by the Trade Vendors. [63] ... Critical ... Vendor Agreement ... ...
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TRU Creditor Litig. Tr. v. Brandon (In re Toys "R" Us, Inc.)
... ... received an unconditional assignment of a claim from a ... creditor stands in the place of the creditor and is entitled ... to pursue the claim on behalf of the estate. Matson v. S ... Anna, Inc. ( In re McCurnin ), 590 B.R. 729, 740 ... (Bankr. E.D. Va. 2018). Thus, under Fourth Circuit and this ... Court's precedent, the Trust has standing to pursue the ... claims assigned to it by the Trade Vendors. [63] ... Critical ... Vendor Agreement ... ...
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TRU Creditor Litig. Tr. v. Brandon (In re Toys "R" U.S., Inc.)
... ... trustee who received an unconditional assignment of a claim ... from a creditor stands in the place of the creditor and is ... entitled to pursue the claim on behalf of the estate ... Matson v. S. Anna, Inc. ( In re McCurnin ), ... 590 B.R. 729, 740 (Bankr. E.D. Va. 2018). Thus, under Fourth ... Circuit and this Court's precedent, the Trust has ... standing to pursue the claims assigned to it by the Trade ... Vendors. [ 64 ] ... Critical ... Vendor Agreement ... ...