In re Mission Bay Ski & Bike, Inc., No. 07 B 20870. DK] No. 08 A 55 (Bankr. N.D. Ill. 9/9/2009)
| Decision Date | 09 September 2009 |
| Docket Number | No. 08 A 55.,No. 07 B 20870.,07 B 20870.,08 A 55. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re: MISSION BAY SKI & BIKE, INC., Chapter 7, Debtor. RICHARD M. FOGEL, as trustee of the bankruptcy estate of Mission Bay Ski & Bike, Inc., Plaintiff, v. WILLIAM W. LINNEMANN; VALERIE GERVAIS; and FIRST AMERICAN BANK, an Illinois banking corporation, Defendants. |
Before the court for ruling is the motion of plaintiff Richard M. Fogel ("Fogel"), trustee of the bankruptcy estate of debtor Mission Bay Ski & Bike, Inc. ("Mission Bay"), to strike certain affirmative defenses in the answer of defendant First American Bank (the "Bank") and also to strike the Bank's jury demand. For the reasons that follow, Fogel's motion to strike the affirmative defenses will be granted, but his motion to strike the jury demand will be denied.
The facts are taken from Fogel's complaint, the court's docket, and the transcript of a hearing held on April 1, 2009. The complaint alleges that debtor Mission Bay was a seller of high-end bicycle equipment and accessories as well as other sports gear. Defendants William Linnemann and Valerie Gervais were the owners of Mission Bay. On February 28, 2007, Linnemann and Gervais entered into a stock purchase agreement to sell their interests in Mission Bay and a sister company to Lukasz Remiasz, David Remiasz, Troy Crady, and Aaron Post for $1.4 million. At the closing, Gervais and Linnemann received $1.1 million in cash plus a $300,000 promissory note from the four purchasers.
According to Fogel, the sale was not the typical sale of a small business but took the form of a leveraged buyout. See Mellon Bank, N.A. v. Metro Commc'ns, Inc., 945 F.2d 635, 645 (3rd Cir. 1991) (defining the term). The $1.1 million payment was funded from a loan the Bank made, not to the purchasers, but to Mission Bay itself. In return, Mission Bay granted the Bank a first priority security interest in all of its assets and pledged a collateral account into which $1 million of the loan proceeds were to be placed. The loan was funded simultaneously with the closing of the sale. Linnemann and Gervais immediately deposited in the pledge account $1 million of the $1.1 million they received. Mission Bay obtained nothing of value in connection with the transaction.
Fogel alleges that at the time the loan was made, the Bank knew the loan would render Mission Bay insolvent (if it was not insolvent already), the purchasers had a combined net worth of less than $100,000, the purchasers had a combined annual income of less than $100,000, and Mission Bay would be unable to pay the monthly debt service. Despite knowing all of this, the Bank went ahead with the loan, albeit only after Gervais and Linnemann agreed to deposit $1 million of the loan proceeds in the pledge account.
Fogel's complaint has eleven counts, but only four involve the Bank and so are relevant to the current motion. Counts I and II are fraudulent transfer claims under sections 548(a)(1)(B) and 544(b) of the Code, 11 U.S.C. §§ 548(a)(1)(B), 544(b). Both counts are directed at Linnemann, Gervais, and the Bank and seek to avoid the loan to Mission Bay, the Bank's security interest, and the transfer of the loan proceeds to Linnemann and Gervais. Count IX is a turnover claim against all three defendants under section 550, 11 U.S.C. § 550. Count XI (mistakenly numbered VII) is an objection under section 502(d), 11 U.S.C. § 502(d), to any claims the three defendants have asserted or might assert in the bankruptcy.
At this juncture, some procedural history is necessary. The Mission Bay bankruptcy did not start out in chapter 7 but was filed on November 7, 2007, as a chapter 11 case. In January 2008, Mission Bay as debtor-in-possession filed an adversary proceeding against Linnemann and Gervais. Captioned Mission Bay Ski & Bike, Inc. v. William W. Linnemann and Valerie J. Gervais, No. 08 A 55 (the "first action"), the complaint challenged (among other things) the sale and loan transactions involving Linnemann, Gervais, and the Bank and alleged fraudulent transfer claims under sections 548(a) and 544. Linnemann and Gervais answered the complaint and asserted affirmative defenses.
In June 2008, Mission Bay and the four purchasers filed a second adversary proceeding, this time against the Bank. Captioned Mission Bay Ski & Bike, Inc., et al. v. First American Bank, No. 08 A 442 (the "second action"), the complaint challenged (among other things) the transactions involving Linnemann, Gervais, and the Bank and alleged a fraudulent transfer claim under section 548(a). Mission Bay took the unusual tack of remarking in the body of the complaint that the two actions involved" the same subject matter and similar claims," and that a separate action had been filed only because the Bank had not consented to an extension of a filing deadline set in a December 2007 cash collateral order. Mission Bay suggested it would be" more efficient" to consolidate the adversary proceedings.
The Bank moved to dismiss the complaint in the second action. The motion was granted in part and denied in part. (Notably, the motion was denied as to the fraudulent transfer count attacking the sale and loan transactions.) Mission Bay and the four purchasers filed their amended complaint in October 2008. In mid-November, the Bank filed its answer and asserted affirmative defenses. The Bank did not demand a jury in its answer, nor did the Bank file a separate jury demand. See Fed. R. Civ. P. 38 (made applicable by Fed. R. Bankr. P. 9015(a)).
At this point, Mission Bay's efforts to reorganize foundered. Two weeks after the Bank answered the complaint in the second action, the U.S. Trustee's motion for appointment of a chapter 11 trustee was granted, and Fogel was approved as trustee. In early December, the case was converted to one under chapter 7, and Fogel was appointed trustee in the chapter 7 case.
As trustee of Mission Bay's bankruptcy estate, Fogel inherited the first action against Linnemann and Gervais and the second action against the Bank. In March 2009, Fogel moved under Rule 41 to dismiss the second action without prejudice or alternatively under Rule 42 to consolidate it with the first action. He also moved for leave to amend his complaint in the first action to add the Bank as a defendant.
Fogel's goal in pursuing the two motions was economy. As he explained in presenting them, (Tr. dated 4/1/09 at 8). He continued: "I think dismissal of the second case, and leave to file the amended complaint, makes the most sense." (Id.). In response, the Bank's counsel expressed no preference: "If the consolidation works better for everyone's paperwork here . . . that would be fine with us." (Id.). Because Fogel preferred dismissal and dismissal seemed easier, the second action was dismissed without prejudice. Fogel was allowed to file his amended complaint in the first action adding the Bank as a defendant.
In June 2009, the Bank filed its answer to the amended complaint in the first action. The answer purports to assert twelve affirmative defenses to Counts I and II: (1) "solvency," (2)" reasonably equivalent value," (3) "good faith transferee for value," (4) "attempt to recover for the benefit of entities other than unsecured creditors," (5) failure to state a claim, (6) in pari delicto, (7) estoppel, (8) waiver, (9) laches, (10) unclean hands, (11) single satisfaction, and (12)" preservation of defenses." Each defense consists of one sentence (except for the fourth defense which has two), and the first four defenses along with the eleventh state that the action is barred "to the extent that" a certain state of affairs exists. As defenses to Counts IX and XI, the answer incorporates the first twelve and adds two more: (13) ordinary course, and (14) new value.
The same day that it filed an answer to the amended complaint, the Bank also filed a separate jury demand.
Fogel now moves to strike six of the Bank's affirmative defenses because they are not affirmative defenses at all and another five because they are pled only as conclusions. Fogel also moves to strike the Bank's jury demand on the ground that the Bank has waived its right to trial by jury.
Fogel's motion to strike the affirmative defenses will be granted. As he rightly argues, the affirmative defenses are either not affirmative defenses or else are pled improperly. His motion to strike the jury demand, however, will be denied. The Bank has not waived its right to jury trial.
Fogel is correct, first of all, that many of the Bank's affirmative defenses are defective. The defenses he challenges will therefore be stricken.
Rule 12(f) allows the court to "strike from a pleading an insufficient defense." Fed. R. Civ. P. 12(f) (made applicable by Fed. R. Bankr. P. 7012(b)). Motions to strike are sparingly used, Kmart Corp. v. Uniden Am. Corp. (In re Kmart Corp.), 318 B.R. 409, 413 (Bankr. N.D. Ill. 2004), and are disfavored, Williams v. Jader Fuel Co., 944 F.2d 1388, 1400 (7th Cir. 1991), because often they serve only to delay, Heller Fin., Inc. v. Midwhey Powder Co., 883 F.2d 1286, 1294 (7th Cir. 1989). Motions to strike can be useful, however, as a way to "remove unnecessary clutter from the case," and then "they serve to expedite, not delay." Id.; see also Reis Robotics USA, Inc. v. Concept Indus., Inc., 462 F. Supp. 2d 897, 904 (N.D. Ill. 2006).
In this district, courts typically assess the sufficiency of an affirmative defense with a...
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