In Re: Nationsline New Jersey Inc., Case No. 08-71014
| Decision Date | 16 November 2010 |
| Docket Number | Adversary Proceeding No. 10-07037,Case No. 08-71014 |
| Parties | In re: NATIONSLINE NEW JERSEY, INC., Debtor. LYNN L. TAVENNER, TRUSTEE, Plaintiff v. LTA MANAGEMENT, INC., and NORMAN D. MASON,Defendants. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Virginia |
This adversary proceeding has been filed by the Debtor's Trustee in Bankruptcy to recover excessive compensation which she claims the Debtor paid to an affiliate company, LTA Management, Inc. ("LTA"), alleged to be owned by the Debtor's president, Norman D. Mason ("Mason"), his wife, and another insider of the Debtor, for management and accounting services which it purportedly provided to the Debtor. In addition to targeting LTA, the Trustee also seeks to recover from Mason the allegedly excessive amounts paid and to disallow, or failing that, to subordinate, two claims which he filed in the case against the bankruptcy estate. The Defendants have filed a Motion to Dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(6), which is made applicable to bankruptcy adversary proceedings by Bankruptcy Rule 7012. For the reasons which follow, the Court will partially grant that Motion and partially denyit. As to those counts where the Motion is granted, however, in accordance with the Trustee's express request, the Court will allow her the opportunity to file an amended complaint.
According to the Trustee's Complaint, the Debtor, NationsLine New Jersey, Inc. ("NationsLine"), was formed on March 1, 2004, with Defendant Mason as its majority shareholder, director, and president. (Compl. ¶8.) The stated purpose of the corporation was to construct a telecommunications network in New Jersey to provide local and long distance telephone service. Id. At about the same time as the formation of NationsLine, Mason formed Defendant LTA, which was owned by Mason, his wife, and an unspecified insider of NationsLine. (Compl. ¶ 9.) Both LTA and Mason are alleged upon information and belief to be residents of Virginia. (Compl. ¶ 3.) Mason took an active role in the operations of both LTA and NationsLine. (Compl. ¶ 14.) LTA provided management, bookkeeping, and accounting services to NationsLine, which had no employees of its own, in return for a management fee. (Compl. ¶ 9-10.)
NationsLine filed a voluntary petition under Chapter 11 of the Bankruptcy Code on June 3, 2008. (Compl. ¶ 1.) NationsLine, as debtor-in-possession, retained possession of its property and was authorized to continue the operation and management of its business. Id. The case was later converted to a Chapter 7 case and Lynn L. Tavenner was appointed as Chapter 7 Trustee on October 17, 2008. Id.
The Trustee asserts that, upon her appointment, she found that NationsLine's records and the documents it has filed in the case are inconsistent with regard to the method for determining the management fee owed and the actual amounts paid to LTA. The Trusteerequested a copy or explanation of the terms of the agreement between LTA and NationsLine for the provision of management and other services, but nothing was ever produced. (Compl. ¶ 9.) The books and records that were turned over to the Trustee are inconsistent with regard to the method of calculating LTA's fee. (Compl. ¶ 15.) She alleges that the Debtor's records, the pleadings, and prior testimony in the case show the cash revenue method, accrued revenue method, line count, and estimates were used with no consistency. Id. The Statement of Financial Affairs, which was signed by Mason and filed by NationsLine with its petition for relief, stated that $3,900 was paid to LTA in the year preceding the petition. (Compl. ¶ 11.) However, the Debtor's books and records reflect much higher amounts paid, with more than $550,000 paid in 2007 and in excess of $1,100, 000 paid in 2006. (Compl. ¶ 15.) The Trustee has specifically identified twelve transfers occurring within a year of the petition date totaling $432,129.65 and seven transfers occurring the previous year totaling $273,982.45. (Compl. ¶ 16-17.) In addition, after the petition date, NationsLine is alleged to have transferred property of the estate to LTA in an amount of at least $15,000. (Compl. ¶ 18.) Finally, Mason filed a post-petition request for administrative payment of fees due for management services in the amount of $72,962.58 on behalf of LTA. (Compl. ¶ 14.) NationsLine's books and records do not support the amount of this claim, and it was withdrawn after the Trustee objected. Id.
The Trustee also calls attention to several claims that were filed in the bankruptcy case. The first is a claim filed by the trustee of an affiliated debtor, CAT Communications International, Inc., in the amount of $500,000, to which the Trustee notes that she has not objected. (Compl. ¶20.) The Trustee alleges that the claim relates to a complaint filed by Verizon New Jersey, Inc. ("Verizon") on December 6, 2005, against NationsLine, CAT Communications, and certain of their common principals, including Mason, in the United States District Court for the District of New Jersey. (Compl. ¶ 19.) The complaint contained allegations of fraud, fraudulent transfers, and conspiracy. Id. The litigation has not proceeded since the petition date. Id. The other claims mentioned in the Complaint are two filed by Mason in which he states, under penalty of perjury, that NationsLine owes him $611,194.00 for a note and $1.00 for indemnification. (Compl. ¶ 12-13.) The claim based upon the note does not specify a date for the note and contains no other supporting documentation, NationsLine's ledgers do not reflect the indebtedness, and NationsLine's schedules, which were signed by Mason, do not reflect any debt to Mason. (Compl. ¶ 12.) The only supporting documentation attached to the claim for indemnification is a copy of NationsLine's bylaws. (Compl. ¶13.)
The Trustee has brought this adversary proceeding to challenge the transfers to LTA and the claims filed by Mason. The first seven counts of the Complaint assert causes of action under Bankruptcy law, counts eight through twelve assert Virginia state law causes of action, and counts thirteen and fourteen challenge the proofs of claim filed by defendant Mason. LTA and Mason have filed a Motion to Dismiss, challenging the sufficiency of the facts pled in the Complaint and asserting that some of the state law causes of action are not recognized by applicable Virginia law.
Count I seeks to have the property transferred to LTA both pre-and post-petition turned over to the estate and to force LTA to account for all of the property of the Debtor it has used pursuant to 11 U.S.C. § 542. Count II seeks to have the transfers made within two years of the petition date avoided as both actual and constructive fraudulent transfers under 11 U.S.C. § 548. Count III seeks to avoid the transfers as voluntary conveyances under Virginia law pursuant to 11 U.S.C. § 544 and Va. Code Ann. § 55-81. Count IV alleges that the transfers were actual fraudulent transfers and seeks to avoid them under Virginia law pursuant to 11 U.S.C. § 544 and Va. Code Ann. § 55-80. Count V seeks to avoid the transfers as preferences under 11 U.S.C. § 547. Count VI seeks to avoid all post-petition transfers pursuant to 11 U.S.C. § 549. Count VII seeks recovery of the property transferred in the event that any of the transfers are avoided pursuant to 11 U.S.C. § 550.
The Motion to Dismiss challenges these counts on the ground that the Trustee has failed to allege sufficient facts to make her claims plausible as required by the Supreme Court's decisions in Twombly v. BellAtl. Corp., 550 U.S. 540, 127 S.Ct. 1955 (2007), and Ashcroft v. Iqbal, ---U.S. 129 S. Ct. 1937 (2009). With regard to Count V, Defendants argue first that the Trustee has failed to allege facts to support her contention that the transfer was for or on account of an antecedent debt. Specifically, they argue that the Trustee has failed to allege the nature and amount of the antecedent debt and that the facts which are alleged suggest that the transfers were contemporaneous exchanges for value and therefore not avoidable under § 547(c). The Trustee, on the other hand, argues that she has alleged the existence of an antecedent debt and, because the Defendants have been thwarting her access to information, a more liberal pleading standard should apply to her Complaint. Specifically, she argues that she should not be forced to identify the nature and amount of each antecedent debt.
Defendants next argue that the Trustee has failed to allege facts supporting her allegations that the Debtor was insolvent at the time the transfers were made, which would be required for avoiding the transfers as constructive fraudulent transfers in Counts II and III and aspreferential transfers in Count IV. They argue that the allegations are mere conclusions unsupported by facts indicating the Debtor's insolvency outside the ninety day presumption period. In response, the Trustee argues that this Court should adopt the position that pleading insolvency is a pleading of fact, not a conclusion. In addition, the Trustee points to her allegations that the Debtor had creditors both before or within a reasonable time after the transfers and the allegations concerning the New Jersey litigation to argue that she has alleged sufficient facts to make it plausible to infer that the Debtor was insolvent.
Defendants also challenge the Trustee's Complaint on the ground that it does not contain facts to support her allegation that the transfers allowed LTA to receive more than it would have under a chapter 7 liquidation, which is an element of the preferential transfer claim in Count V. The Trustee argues that she alleged the Debtor was insolvent, which means that the Debtor could not pay all of its unsecured creditors the full balance of their claims. By receiving any...
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