In re Motorwerks, Inc., Bankruptcy No. 05-32116.

• Decision Date: 13 July 2007
• Docket Number: Bankruptcy No. 05-32116.,Adversary No. 06-3334.
• Citation: 371 B.R. 281
• Parties: In re MOTORWERKS, INC., Debtor. The State Bank and Trust Company, Plaintiff, v. Paul H. Spaeth, Trustee of the Estate of Motorwerks, Inc., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

371 B.R. 281

In re MOTORWERKS, INC., Debtor.

The State Bank and Trust Company, Plaintiff, v. Paul H. Spaeth, Trustee of the Estate of Motorwerks, Inc., Defendant.

Bankruptcy No. 05-32116.

Adversary No. 06-3334.

United States Bankruptcy Court, S.D. Ohio, Western Division at Dayton.

July 13, 2007.

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Adam J. Biehl, Bailey Cavalieri, LLC, Columbus, OH, for Wright-Patt Credit Union, Inc. James D. Brookshire, Troy, OH, for State Bank & Trust Co.

DECISION OF THE COURT GRANTING, IN PART, AND DENYING, IN PART, THE PLAINTIFF'S MOTION TO DISMISS DEFENDANT'S COUNTERCLAIMS OR, IN THE ALTERNATIVE, FOR A MORE DEFINITE STATEMENT

LAWRENCE S. WALTER, Bankruptcy Judge.

The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This matter is before the court on Plaintiffs Motion to Dismiss Defendant's Counterclaims or, in the Alternative, For More Definite Statement [Adv. Doc. 11]; the Objection of Defendant Paul H. Spaeth, Trustee of the Estate of Motorwerks, Inc. to Plaintiffs Motion [Adv. Doc. 16] and the Plaintiffs Reply Memorandum in Support of its Motion [Adv. Doc. 18].

PROCEDURAL BACKGROUND

On October 10, 2006, Plaintiff State Bank and Trust Company ("State Bank") filed a complaint seeking declaratory judgment against Defendant Paul H. Spaeth, the Chapter 7 Trustee ("Trustee") for the bankruptcy estate of the Debtor, Motorwerks, Inc. ("Debtor") [Adv. Doc. 1]. In its complaint, State Bank requests declaratory judgment that it is the owner / assignee of certain pre-petition vehicle lease agreements involving State Bank and the Debtor, that the leases are not property of the Debtor's estate, and that State Bank has the first and best perfected lien on the leased vehicles that secure the obligations of the lessees under the leases.

The Trustee filed an answer acknowledging the prepetition relationship and lease agreements between State Bank and the Debtor, but denying the validity of many of the leases, assignments and/or security interests State Bank asserts in the vehicles [Adv. Doc. 9]. Furthermore, the Trustee's answer includes counterclaims against State Bank. The counterclaims assert actions for fraudulent transfers avoidable under the Bankruptcy Code and/or state law, preferential transfers avoidable under 11 U.S.C. § 547, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, equitable subordination, and an objection to proofs of claim filed by, or to be filed by, State Bank.

After the Trustee filed his answer, State Bank filed a motion to dismiss the Trustee's counterclaims or, in the alternative, a motion for a more definite statement [Adv. Doc. 11]. State Bank asserts that all of the Trustee's counterclaims fail as a matter of law and, thus, dismissal is appropriate pursuant to Fed R. Bankr.P. 7012 incorporating Fed.R.Civ.P. 12(b)(6). In the alternative, State Bank asserts that the counterclaims fail to disclose the facts underlying the Trustee's causes of action, especially with respect to the Trustee's allegations of fraud. Consequently, State Bank requests a more definite statement as to the facts forming the basis for the counterclaims. The Trustee has responded to State Bank's motion and the matter is now fully briefed and ready for disposition.

FACTUAL BACKGROUND

For purposes of State Bank's motion to dismiss, the factual allegations in the Trustee's counterclaims are deemed true.¹ On March 11, 2005, an involuntary Chapter 7 bankruptcy petition was filed against the Debtor, Motorwerks, Inc., an alleged vehicle leasing business. [Adv. Doc. 9, ¶¶ 35-36.] Mark Van Nest was the sole owner and principal officer and director of the Debtor. [Id., ¶ 37.]

Between 1998 and 2003, Debtor had a business relationship with State Bank that included a lending arrangement referred to as a "floor plan." [Id., ¶ 38.] Under the floor plan, Debtor would borrow funds by drawing upon a revolving line of credit provided by State Bank purportedly for the purpose of purchasing and leasing vehicles. [Id.] State Bank made advances to the Debtor by depositing funds into a floor plan bank account in the name of the Debtor to enable the Debtor to purchase the vehicles. [Id.] The Debtor, in turn, was to lease the vehicles to its customers. [Id.] The leases were typically financed by various lending and financial institutions including State Bank in many instances. [Id.] The advances authorized by State Bank with the revolving line of credit were up to $1,000,000.00. [Id.]

A typical leasing arrangement was structured as follows. Debtor would act through Mark Van Nest or employees to locate a vehicle which a customer wished to lease. [Id., ¶ 39.] The Debtor would purchase the vehicle using the funds advanced by State Bank under the floor plan and then execute a lease with the customer. [Id.] Many times the leases were then purportedly assigned by the Debtor to State Bank as the funding source. [Id.] The funding source would then pay a commission to the Debtor. [Id.]

When the leases were assigned, the stream of payments was paid by the Debtor's customer, the lessee, to the lending institution that advanced the funds and took assignment of the lease. [Id., ¶ 40.] In many of these lease transactions, the vehicles were titled in the name of the Debtor, with liens purportedly to attach to the vehicles in favor of the lending institution advancing the funds. [Id.]

In order to obtain advances of funds under the floor plan to purchase particular vehicles, Debtor was required by State Bank to submit certain documentation including, but not limited to, trust receipts identifying the specific vehicles to be purchased and containing such details as the Vehicle Identification Number (VIN), make, model and year of the vehicle. [Id., ¶ 43.]

While the above describes a typical lease arrangement, the Trustee asserts, on information and belief, that many of the transactions involving State Bank were more unusual. The Trustee alleges that from September, 2000 through May 1, 2003, Mark Van Nest and or agents / employees of the Debtor submitted trust receipts to State Bank for the purchase of various vehicles under the floor plan.² [Id., ¶ 44.] However, many of the trust receipts submitted for advances, while describing different vehicle models, listed identical VIN numbers. [Id.] The Trustee asserts that trust receipts with duplicate VIN numbers were submitted by Mark Van Nest or agents and employees of the Debtor at least 193 times between September of 2000 and May 1, 2003. [Id.] Furthermore, the Trustee asserts that the documentation submitted by the Debtor to State Bank was often deficient in other ways. [Id., ¶ 46.]

The Trustee believes that State Bank advanced funds to the Debtor under the floor plan even when the trust receipts included duplicative VIN numbers or the documentation was incomplete. [Id., ¶¶ 46, 48.] Furthermore, the Trustee suggests that State Bank's advances were often in amounts significantly in excess of the loan limitations under the loan agreements between the Debtor and State Bank. [Id., ¶ 50.] The Trustee contends that if State Bank had conducted due diligence by reviewing and monitoring the documentation submitted by the Debtor in support of the advances, it would have been clear that the information provided by the Debtor was false with respect to many of the transactions. [Id., ¶ 48.]

The Trustee also alleges that the advances received by the Debtor from State Bank were not always used for their intended purpose, the purchase of vehicles. [Id., ¶ 45.] Instead, Mark Van Nest or agents and employees of the Debtor used the funds for other purposes including but not limited to personal expenditures of Mark Van Nest and his relatives, payment of debt, and maintenance of a check kiting scheme. [Id., ¶ 47.] The Trustee believes that the amount of funds misappropriated to pay personal expenses of Mark Van Nest and his relatives is at least $1,127,196.52. [Id.] The Trustee asserts that State Bank did not act prudently as a floor plan financier by failing to monitor the Debtor and perform due diligence to ensure that the floor plan advances were used for their intended purpose. [Id., ¶ 49.]

With respect to check kiting, the Trustee alleges that between March 11, 2001 and March 11, 2005, Mark Van Nest engaged in a massive and elaborate scheme with respect to numerous bank accounts of the Debtor and with a number of financial institutions. [Id., ¶ 51.] Mark Van Nest frequently drew checks on Debtor's bank accounts that did not have sufficient funds to cover the checks. [Id.] The checks were then deposited into other Debtor accounts. [Id.] The scheme generally went as follows. Before the check drawn on the first account was returned to the first bank for payment, Debtor deposited a check drawn on either the second account or other account into the first account. [Id.] Although there were insufficient funds to cover the check, the time delay in processing the check would create an artificially inflated balance. [Id.] Mark Van Nest was then able to take advantage of the false and artificially inflated balance, the "float," during the time period of processing the checks before they cleared. [Id.]

The Trustee asserts that State Bank's advances, deposited in the floor plan account, were used by Mark Van Nest in his check kiting scheme. [Id., ¶ ¶ 152-53.] Specifically, Mark Van Nest wrote checks against the floor plan account or accounts taking advantage of the availability of provisional credits extended by State Bank when there were insufficient funds to support the checks. [Id., ¶ 53.] Mark Van Nest would make deposits into bank accounts to cover the checks after expiration of the "float" period. [Id.] The Trustee asserts that the amounts of the advances requested from State Bank and deposited in the floor account frequently were not equal to the purchase price of...