In re Norvergence, Inc.

Citation405 B.R. 709
Decision Date13 May 2009
Docket NumberAdversary No. 06-2142(RG).,Bankruptcy No. 04-32079(RG).
PartiesIn re NORVERGENCE, INC., Debtor. Charles M. Forman, Chapter 7 Trustee of the Estate of Norvergence, Inc., Plaintiff, v. Thomas N. Salzano, et al., Defendants.
CourtU.S. Bankruptcy Court — District of New Jersey

Porzio, Bromberg & Newman, P.C. by Warren J. Martin, Jr., Esq., Douglas A. Amedeo, Esq., Robert M. Schechter, Esq., Morristown, NJ, Special Litigation Counsel to Charles M. Forman, Chapter 7 Trustee of the Estate of Norvergence, Inc.

Platzer, Swergold, Karlin, Levine, Goldberg & Jaslow, LLP by Linda Mandel Gates, Esq., New York, NY, Co-counsel for IFC Credit Corporation.

Askounis & Borst, P.C. by Vincent T. Borst, Esq., Chicago, IL, Co-Counsel for IFC Credit Corp.

Frey, Petrakis, Deeb, Blum & Briggs, P.C. by Inez M. Markovich, Esq., Louise Melchor, Esq., Cherry Hill, NJ, for Alfa Financial Corp. d/b/a OFC Capital, Dolphin Capital Corp., Liberty Bank, Sterling National Bank, PFG Commercial Finance Commercial Finance and Information Leasing Corp. n/k/a National City Commercial Capital.

Blank Rome, LLP by Thomas E. Biron, Esq., Gregory T. Kupniewski, Esq., Philadelphia, PA, for Popular Leasing U.S.A. Inc.

Sherman, Silverstein, Kohl, Rose & Podolsky, P.A. by Jeffrey P. Resnick, Esq., Pennsauken, NJ, for First Lease, Inc.

Duane Morris LLP by David H. Stein, Esq., Newark, NJ, for Insight Financial Corporation.

Drinker, Biddle & Reath LLP by A. Dennis Terrell, Esq., Florham Park, NJ, for U.S. Express Leasing, Inc.

Farr, Burke, Gambocorta & Wright, P.C. by William G. Wright, Esq., Mount Laurel, NJ, for CitiCapital Technology Finance, Inc.

OPINION

ROSEMARY GAMBARDELLA, Bankruptcy Judge.

MATTERS BEFORE THE COURT

In the adversary proceeding, designated as Adv. Pro. No. 06-2142 and initiated under the umbrella of the NorVergence Inc. Chapter 7 bankruptcy, a group of Defendants—CitiCapital Technology Finance, Inc. ("CitiCapital"), IFC Credit Corporation ("IFC"), FirstLease, Inc. ("First Lease"), Insight Financial Corporation, Inc. ("Insight"), Alfa Financial Corporation and related companies1 (the "Alfa Group") and Popular Leasing USA, Inc. ("Popular") (collectively referred herein as "Leasing Companies")2—have each filed motions to dismiss the Complaint (also abbreviated as "Compl." or "Adv. Compl.") filed by Charles M. Forman, the Chapter 7 Trustee for the Estate of Debtor NorVergence, Inc. ("Debtor" or "NorVergence"). The leasing companies invoke Fed.R.Civ.P. 8, 9, and 12(b)(6) as grounds for the relief sought. In addition, the movants also pursue the dismissal of the complaint as the courts in New Jersey have not recognized the tort of deepening insolvency. Even if the leasing companies have engaged in the wrongdoing alleged by the Trustee, the doctrine of in pari delicto provides them with an affirmative defense to the adversary proceeding. Defendant Popular, apart from requesting a dismissal of the complaint outright, requests that the Court order the Trustee to provide a more definite statement pursuant to Fed. R.Civ.P. 12(e) as an alternative remedy for the alleged vagueness of the Trustee's Complaint. The motion of Defendant Insight also seeks to dismiss the Cross-Claim for Indemnification and Contribution of Defendant Arthur S. Scuttaro.

The Trustee has submitted an omnibus brief ("Trustee's Omn. Repl.") in opposition the leasing companies' motions. Subsequent to the Trustee's response, the Leasing Companies filed separate replies to the Trustee's brief. Thereafter, the Trustee filed an omnibus sur-reply ("Trustee Sur Repl.") to these filings by the leasing companies.3 Subsequent pleadings have also been filed by the parties herein.

Presently before the Court is also a motion to dismiss the Trustee's complaint and to join the other moving Defendants' motions, filed by U.S. Express Leasing, Inc. ("USXL"). Like the other motions, USXL principally relies on Fed.R.Civ.P. 8, 9, 12(b)(6), 12(e) as well as the in pari delicto doctrine to support dismissal of the Complaint. This particular motion is separately opposed by the Trustee.

A third matter before the Court is IFC's motion for leave to file supplemental legal authority in support of its motion to dismiss the Trustee's Complaint. By way of this motion, IFC seeks to draw the Court's attention to the then recent opinion issued by the U.S. Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), as it relates to an interpretation of Fed.R.Civ.P. 8(b).

A hearing on these motions was conducted on June 14, 2007 at which time this Court reserved decision. After considering the parties submissions and oral arguments, the Court denies the motions to dismiss the Adversary Complaint, but will direct the Trustee to amend the complaint. Case law interpreting Rule 12(b)(6), including Twombly, counsels against the dismissal and mandates the Court, based on R. 12(e), to order the Trustee to provide a more precise and definite statement. Regarding deepening insolvency, a review of recent Third Circuit case law leads to the conclusion that deepening insolvency is a viable, independent legal theory in New Jersey and an evaluation of whether the in pari delicto doctrine can be invoked by the Defendants as an affirmative defense requires a finding of facts unsuitable within the context of the current motions and must be reserved for summary judgment practice or trial.

The Court grants IFC's motion for leave to file supplemental legal authority. In light of Twombly, it is self-evident that a proper application of Rule 8 must be guided by that case. Thus, IFC's motion must be granted. Insight's Motion to Dismiss the Cross-Claim of Defendant Arthur S. Scuttaro for Indemnification and Contribution is also granted. The following constitutes this Court's findings of fact and conclusions of law.

PROCEDURAL HISTORY AND STATEMENT OF FACTS
A. Norvergence Bankruptcy

On June 30, 2004, ("the Petition Date"), Defendants Popular, OFC Capital, a division of Alfa Financial Corp., and Partners Equity Capital Company, LLC. filed an involuntary Chapter 11 bankruptcy petition against NorVergence under the United States Bankruptcy Code ("the Bankruptcy Code"). At a hearing held on July 14, 2004, the Debtor consented to the entry of an order for relief under Chapter 11 and for the immediate conversion of the case to a Chapter 7 liquidation proceeding. The Office of the United States Trustee appointed Charles M. Forman to serve as Trustee for Debtor's Chapter 7 Estate on that same date.

B. The Instant Adversary Proceeding and Complaint

Two years after his appointment, on July 14, 2006, the Trustee commenced the instant Adversary Proceeding4 in Debtor's bankruptcy case against forty-two (42) defendants, including eight (8) individuals and/or corporate insiders—Thomas N. Salzano ("TNS"), Debtor's managing consultant, and Peter Salzano5, Debtor's CEO and major shareholder as well as brother of TNS, Alexander Wolf, Robert Fine, Robert Wizeman, William Jean Charles, Terry Skemer and Arthur Scutarro6—and thirty four (34) leasing companies, among them Citi Capital., IFC, FirstLease., Insight, Alfa Group, Popular and USXL. See Compl., pp. 3-4. The Adversary Complaint asserts a total of twelve Counts, Counts four, five, six, seven and eight7 concern Debtor's principals and other individuals while the remaining Counts target the Leasing Companies as well as the corporate insiders.8 Since the first, second, third, ninth, tenth, eleventh and twelfth counts are the subject of the pending motions, the Court will limit its discussion accordingly.9

With regard to the named Leasing Company Defendants, the Complaint alleges the following counts:

First Count: "Actual Intent Fraudulent Conveyance Under 11 U.S.C. § 548 As Against Leasing Companies" Second Count: "Actual Intent Fraudulent Conveyance Under 11 U.S.C. § 544 And Under N.J.S.A. 25:2-25 As Against Leasing Companies"

Third Count: "Recovery Pursuant To 11 U.S.C. § 553(b) Of Certain Amounts Setoff By Leasing Companies Within The 90 Days Before The Petition Date"

Ninth Count: "Accounting And Turnover Under 11 U.S.C. § 542 As Against Salzano, William Jean Charles As Well As The Insiders And The Leasing Companies"

Tenth Count: "Breach Of Fiduciary Duty Against Salzano, Alexander Wolf, Robert Fine, Bob Wizeman, William Jean Charles, Terry Skemer and Arthur Scuttaro and Aiding And Abetting A Breach Of Fiduciary Duty Against Leasing Companies"

Tenth Count10: "Fraud Against Salzano, Alexander Wolf, Robert Fine, Robert Wizeman, William Jean Charles, Terry Skemer and Arthur Scuttaro and Aiding And Abetting A Fraud Against Defendant Leasing Companies"

Eleventh Count11: "Deepening Insolvency As Against All Defendants."

C. Norvergence's Pre-Petition Business Operations

The Trustee asserts here as follows. Debtor NorVergence was incorporated in September, 2001, by Peter Salzano, as President, CEO and major shareholder. From the start of the company through the days leading up the bankruptcy, Peter's brother, TNS, officially retained by Debtor as a consultant, assumed a managerial position with Debtor, virtually controlling all of Debtor's affairs. Some time in 2002, NorVergence commenced operations as a seller and reseller of certain telecommunications equipment and services "to small businesses, church organizations and not-for-profits, typically with a small number of employees," a clientele often without access to telecommunications or information technology staff and in-house legal counsel. Trustee Compl. ¶ 48.

1) NorVergence's Products

The Trustee further asserts that NorVergence promised substantial savings to its customers on local, long distance, and cell phone usage, as well as internet access. Debtor's core product was a device known as the Matrix Box, designed and...

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