In re National Century Financial Enterprises, Inc., Case No. 2:03-md-1565.

Decision Date11 May 2009
Docket NumberCase No. 2:03-md-1565.,Case No. 2:04-cv-1090.
Citation617 F.Supp.2d 700
PartiesIn re NATIONAL CENTURY FINANCIAL ENTERPRISES, INC., INVESTMENT LITIGATION. The Unencumbered Assets, Trust, et al., Plaintiffs, v. JP Morgan Chase Bank, et al., Defendants.
CourtU.S. District Court — Southern District of Ohio

Leon Friedberg, Ritchey H. Hollenbaugh, Carlile Patchen & Murphy, Columbus, OH, Jeffry J. Cotner, Brandon T. Allen, Kathy D. Patrick, Robert J. Madden, Scott Humphries, Sydney Gibbs Ballesteros, Gibbs & Bruns LLP, Houston, TX, for Plaintiffs.

Jason M. Koral, William H. O'Brien, William J. Schwartz, Cooley Godward Kronish, Jeffrey Q. Smith, Steven G. Brody, Susan F. Dicicco, McKee Nelson LLP, Mina Audrey Kim, Kronish Lieb Weiner & Hellman LLP, New York, NY, Jennifer Temchine, Thomas Fellig, Fellig Feingold Edelblum & Schwartz LLC, Hackensack, NJ, Brian Edward Dickerson, Sharlene I. Chance, The Dickerson Law Group, Upper Arlington, OH, Matthew L. Fornshell, Katherine G. Manghillis, Schottenstein Zox & Dunn, John Edward Haller, Shumaker Loop & Kendrick, Thomas Leslie Long, Baker & Hostetler, Columbus, OH, Craig D. Singer, John K. Villa, Matthew B. Andelman, Robert M. Cary, Williams & Connolly LLP, Washington, DC, for Defendants.

OPINION AND ORDER ON THE FOUNDERS' MOTIONS TO DISMISS IN THE UNENCUMBERED ASSETS TRUST CASE

JAMES L. GRAHAM, District Judge.

This matter is before the court on the motions to dismiss filed by Lance and Barbara Poulsen, Donald Ayers, and Rebecca Parrett (collectively the "Founders") in the Unencumbered Assets Trust (the "UAT") case. The UAT is a creation of the bankruptcy court's April 16, 2004 order confirming the liquidation plan of National Century Financial Enterprises, Inc. The liquidation plan transferred to the UAT all of the unencumbered assets of debtor National Century and its subsidiaries. Those assets included legal causes of action that belonged to the debtors prior to bankruptcy.

The UAT brings this action to pursue claims allegedly belonging to National Century and two subsidiaries of National Century, NPF VI and NPF XII, which were limited-purpose corporations formed under Ohio law. NPF VI and NPF XII were securitization programs through which National Century purchased healthcare accounts receivable and issued investment-grade notes that were backed by the accounts receivable. The complaint names numerous defendants who were involved in some way in National Century's operations and are alleged to have caused legal injury to the debtors. This order deals only with the motions to dismiss filed by the Founders.

I. BACKGROUND
A. Summary of the Factual Allegations

The complaint alleges that NPF VI and NPF XII were originally formed as legitimate businesses whose purpose was to "buy bona fide, health care accounts receivable with the proceeds of notes secured by those receivables." UAT Compl., ¶ 1. NPF VI and NPF XII each had a corporate existence independent from National Century, such that they each had their own corporate records, accounts, financial statements, books, and assets, and they were prohibited from becoming involved in the management of any other National Century entity. Master Indenture Agreements governed the NPF VI and NPF XII programs and imposed numerous safeguards to ensure that the notes they issued would be considered investment grade. Those safeguards included restrictions on the types of receivables purchased, the maintenance of reserve accounts, controls on transfers in and out of the accounts, audits, and other regular reporting requirements. A servicer, National Premier Financial Services, Inc. (the "Servicer"), was created to perform certain functions for NPF VI and NPF XII, including purchasing receivables and instructing the transfer of funds from accounts.

Lance Poulsen, Donald Ayers, and Rebecca Parrett formed National Century Financial Enterprises, Inc. in Ohio in 1990. They were shareholders and allegedly controlled the operations of National Century, NPF VI, NPF XII, and the Servicer. The complaint alleges that Lance Poulsen was president and a director of National Century; president, treasurer, and a director of NPF VI; president, treasurer, and a director of NPF XII; and president and treasurer of the Servicer. His wife, Barbara, served as a director of National Century and an officer of the Servicer. Donald Ayers was the chief operating officer and a director of National Century; a director of NPF VI; vice president and a director of NPF XII; and vice president of the Servicer. Rebecca Parrett was secretary, treasurer, and a director of National Century; vice president and a director of NPF VI; a director of NPF XII; and vice president of the Servicer.

The complaint alleges that the Founders conceived and executed a scheme to defraud and loot NPF VI and NPF XII of their corporate assets. With the help of other defendants — such as the indenture trustees, the underwriter of the notes, and auditors — the Founders allegedly misappropriated nearly $3 billion. The Founders accomplished this, according to the complaint, by surreptitiously causing NPF VI and NPF XII to spend hundreds of millions of dollars in purchasing low-quality or even non-existent receivables from healthcare companies that the Founders controlled or had some financial interest in. In order to orchestrate such a fraud, the Founders allegedly forced NPF VI and NPF XII to commit numerous violations of the Master Indentures. The alleged violations include: purchasing worthless or non-existent accounts receivable, failing to maintain reserve accounts, engaging in related-party transactions, and exceeding concentration limits on the type and source of receivables purchased.

B. Claims Against the Founders

The complaint asserts claims against the Founders under the federal Racketeer and Influenced Corrupt Organizations Act, 18 U.S.C. § 1962, and the Ohio Corrupt Activities Act, O.R.C. § 2923.32. The UAT alleges that the Founders formed and directed an enterprise that subverted the otherwise lawful operation of the NPF VI and NPF XII note programs by causing them to issue billions of dollars of worthless notes, misappropriating their assets, and forcing them into insolvency. The alleged predicate acts include mail fraud, wire fraud, bank fraud, and theft.

Next, the complaint asserts a claim for fraud, alleging that the Founders defrauded NPF VI and NPF XII by misrepresenting how the note programs would be operated. According to the complaint, the Founders made misrepresentations and material omissions in the Master Indentures, which NPF VI and NPF XII allegedly relied on to their detriment by issuing notes and incurring debt.

The complaint next brings a claim for breach of fiduciary duty. The Founders were officers of NPF VI and NPF XII and are alleged to have owed fiduciary duties to the companies. They allegedly breached their duties by misappropriating corporate assets and failing to disclose the existence of numerous violations of the Master Indenture.

Claims for civil conspiracy and civil aiding and abetting are brought as well. The complaint alleges that the Founders conspired with each other and with the Indenture Trustees (Bank One, N.A. and JPMorgan Chase Bank) to misappropriate the assets of NPF VI and NPF XII. Further, the Founders allegedly aided each other and the Trustees in committing acts of fraud and breaching their fiduciary duties.

As to Parrett and Ayers, the complaint asserts a claim for breach of contract. National Century allegedly made loans of $5 million to Parrett and $2.55 million to Ayers, and the loans were secured by stock pledges of National Century stock. According to the complaint, Parrett and Ayers never made any payments on their respective loans. They later executed a second round of promissory notes — this time, non-recourse loans — extending the time to repay the loans, but again allegedly failed to make any payments.

The final group of claims relate to transfers that the debtor entities made to the Founders or to healthcare companies owned by the Founders. The transfers range from March 1999 to October 28, 2002, and include the loans made to Parrett and Ayers. The complaint asserts claims for avoidable transfer under the Bankruptcy Code, fraudulent transfer under the Ohio Uniform Fraudulent Transfer Act, and for unlawful dividend payments under Ohio corporate law. The complaint also asserts another claim for breach of fiduciary duty, alleging that the Founders breached their duties by authorizing the transfers. Finally, the complaint brings a claim for unjust enrichment on the grounds that the transfers were made with no benefit or consideration provided to the debtors.

II. MOTION TO DISMISS STANDARD OF REVIEW

When considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), a court must construe the complaint in the light most favorable to the plaintiff and accept all well-pleaded material allegations in the complaint as true. Erickson v. Pardus, 551 U.S. 89, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007) (citing Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)); Sensations, Inc. v. City of Grand Rapids, 526 F.3d 291, 295 (6th Cir.2008). A motion to dismiss under Rule 12(b)(6) will be granted only if the complaint is without merit due to an absence of law to support a claim of the type made or of facts sufficient to make a valid claim, or where the face of the complaint reveals that there is an insurmountable bar to relief. See Evans-Marshall v. Bd. of Educ., 428 F.3d 223, 228 (6th Cir.2005); Westlake v. Lucas, 537 F.2d 857, 858 (6th Cir.1976). Under Rule 8(a), "[s]pecific facts are not necessary; the statement need only `give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Erickson, 127 S.Ct. at 2200 (quoting Conley v. Gibson, 355 U.S. 41, 47, 78...

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