In re Park South Securities, LLC.

• Decision Date: 08 April 2005
• Docket Number: No. 03-8024RDD.,Adv. No. 04-4272RDD.,03-8024RDD.
• Citation: 326 B.R. 505
• Parties: In re: PARK SOUTH SECURITIES, LLC, Debtor. Irving H. Picard, Trustee for the Liquidation of Park South Securities, LLC, Plaintiff, v. Laurance Taylor and Patricia Taylor Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

326 B.R. 505

In re: PARK SOUTH SECURITIES, LLC, Debtor.

Irving H. Picard, Trustee for the Liquidation of Park South Securities, LLC, Plaintiff, v. Laurance Taylor and Patricia Taylor Defendants.

No. 03-8024RDD.

Adv. No. 04-4272RDD.

United States Bankruptcy Court, S.D. New York.

April 8, 2005.

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Paduano & Weintraub, LLP, New York City, by Leonard Weintraub, for the Defendants.

Gibbons, Del Deo, Dolan, Griffinger & Vecchione, Newark, NJ, by Gerlandine E. Ponto, for the SIPA Trustee.

Trustee for Park South Securities, by Irving H. Picard.

Securities Investor Protection Corporation, by Kevin H. Bell.

MEMORANDUM OPINION AND ORDER ON DEFENDANTS' MOTION TO DISMISS THE COMPLAINT

ROBERT D. DRAIN, Bankruptcy Judge.

In his complaint in this adversary proceeding (the "Complaint"), Irving H. Picard, as trustee (the "Trustee") under the Securities Investor Protection Act ("SIPA"), 15 U.S.C. §§ 78aaa et seq. ("SIPA"), for Park South Securities, LLC ("Park South" or the "Debtor"), seeks under various fraudulent transfer statutes, as well as on the basis of unjust enrichment, to avoid and recover transfers made to the defendants, Laurance and Patricia Taylor (the "Defendants" or the "Taylors"). The Defendants have moved to dismiss the Complaint under Fed.R.Civ.P. 9(b), 12(b)(1) and 12(b)(6), made applicable to this adversary proceeding by Bankruptcy Rules 7009 and 7012, for the following reasons: (1) the Trustee does not have standing, at least in the absence of the Securities Investor Protection Corporation ("SIPC") as a co-plaintiff, and, therefore, this Court lacks subject matter jurisdiction; (2) the transferred assets were not property of the Debtor's estate and, therefore, are not the proper subject of a fraudulent transfer claim; (3) Park South's complicity in the transfers bars the Trustee's claims under the Second Circuit's Wagoner Rule, or the in pari delicto doctrine; and (4) the Trustee has not pled his fraud claims with the particularity required by Rule 9(b).

The Trustee and SIPC argue in response that the Trustee has direct authority to avoid the transfers under 15 U.S.C. §§ 78fff-1(a) and 78fff-2(c)(3) and 11 U.S.C. §§ 544 and 548(a). For the same reason, they contend that the Wagoner Rule is not implicated. In addition, they argue that the Trustee has standing either (a) because Park South's customers assigned their claims against the Defendants to him when the customers' claims against Park South were paid by SIPC, (b) because SIPC is statutorily subrogated to the claims of customers that SIPC has paid, and the Trustee can pursue those customers' state law unjust enrichment claims against the Taylors in furtherance of SIPA's broad remedial purpose, or (c) as a bailee of customer property. Finally, the Trustee and SIPC assert that the Trustee has pled his fraud claims with sufficient particularity to satisfy Fed.R.Civ.P. 9(b).

The Court issued a preliminary ruling at the hearing on the Defendants' motion on December 14, 2004. This memorandum opinion states in greater detail and with finality the Court's reasons for denying the Defendants' motion with the exception of dismissing the Trustee's unjust enrichment claim and his intentional fraudulent transfer claim under section 276 of the New York Debtor-Creditor Law (but granting the Trustee leave to re-plead on or before thirty days from the date hereof).

Background

The facts are taken from the Trustee's Complaint. In the context of a motion to dismiss, which tests the legal sufficiency of the Complaint, not the weight of the evidence, the Complaint's factual allegations are accepted as true and all reasonable inferences drawn from them are viewed in the light most favorable to the Trustee. Square D Co. v. Niagara Frontier Tariff Bureau, Inc., 476 U.S. 409, 411, 106 S.Ct. 1922, 90 L.Ed.2d 413 (1986). "The issue is not whether the a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), abrogated on other grounds, 457 U.S. 800, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982).¹

On February 5, 2003, the Securities and Exchange Commission filed a complaint in the United States District Court for the Southern District of New York against Park South and Todd Eberhard, Park South's principal, among others, alleging fraud and misappropriation of funds in connection with brokerage accounts under their control. Complaint ¶ 5.

Shortly thereafter, SIPC submitted an application to the District Court to liquidate Park South under SIPA, and the SEC consented to the consolidation of its action with SIPC's. Id. ¶ 6. Park South's liquidation proceeding was then removed to this Court pursuant to 15 U.S.C. § 78eee(b)(4), and the Trustee, with SIPC's cooperation, has managed Park South's liquidation, including the recovery of customer property pursuant to 15 U.S.C. §§ 78fff(a)(3) and 78lll(4). Id. ¶ 7.

The Defendants had accounts at Park South. Through Park South's clearing agent, from December 2001 through January 2003 they received $238,000 from Park South in $17,000 monthly installments. Id. ¶ 20. The value of the Defendants' joint account with Park South was, however, $88,000 less than the sum of these periodic payments. Id. ¶¶ 21-22. From June 10, 2002 through January 24, 2003, within a year before this SIPA proceeding, Park South caused its clearing agent to make up that shortfall with four transfers to the Defendants in the aggregate amount of $88,000 (the "Transfers"). Id. ¶¶ 22-26. Park South caused each Transfer to be made from the account of another customer without such customer's consent. Id. The Park South customers from whose accounts the funds were transferred to the Defendants eventually filed claims for customer protection in this SIPA proceeding in the amount of the Transfers. Id. ¶ 28.

Not all customer claims under 15 U.S.C. § 78fff-2(c)(1)(A)-(D) and SIPC's claim for reimbursement for cash advances under 15 U.S.C. § 78fff(3)(a)(1) will be satisfied in this proceeding by the "customer fund" under SIPA. Id. ¶ 30. On the other hand, as a result of the Transfers, the Defendants received more than their maximum net equity, as defined in 15 U.S.C. § 78lll(11).² Id. ¶ 37.

Discussion

I. The Trustee's Standing.

Defendants move to dismiss the Complaint under Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction, on the basis that the Trustee lacks standing. (It is otherwise clear that this Court has jurisdiction under 15 U.S.C. §§ 78eee(b)(2)(A) and (b)(4) and the District Court's order dated February 10, 2003 referring the Debtor's case to this Court, and that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A)).

"Whether a claimant has standing is the threshold question in every federal case, determining the power of the court to entertain the suit." Leasing by Paolo v. Sinatra (In re Gucci), 126 F.3d 380, 387-88 (2d Cir.1997) (quoting Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)). A plaintiff's standing depends, first, on whether the plaintiff has made out a "case or controversy" between the plaintiff and the defendant within the meaning of Article III § 2 cl. 1 of the Constitution, see Warth v. Seldin, 422 U.S. at 498-499, 95 S.Ct. 2197, that is, whether the plaintiff can show that it has personally suffered an "injury in fact," or a "distinct and palpable injury." Ass'n of Data Processing Serv. Orgs. v. Camp, 397 U.S. 150, 152, 90 S.Ct. 827, 25 L.Ed.2d 184 (1970); Valley Forge Christian College v. Americans United for Separation of Church and State, 454 U.S. 464, 472, 102 S.Ct. 752, 70 L.Ed.2d 700 (1982). More specifically, to have standing the Trustee must "[1] allege a personal injury [2] fairly traceable to the defendant's allegedly unlawful conduct and [3] likely to be redressed by the requested relief." Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1091 (2d Cir.1995).

Here, the "case or controversy" requirement is easily satisfied with respect to twelve of the thirteen claims asserted in the Complaint, because those claims seek to avoid the Transfers as either constructively or intentionally fraudulent under sections 544(b) (which incorporates applicable state fraudulent transfer law) or 548(a) of the Bankruptcy Code and to recover the proceeds or the value thereof for the benefit of the Debtor's estate and creditors under section 550 of the Bankruptcy Code. Complaint ¶¶ 41-88. The Trustee's standing to pursue the final claim, which seeks to recover the Transfers under 11 U.S.C. § 105(a) on an unjust enrichment theory, id. ¶¶ 85-88, is more problematic, however.

A. The Trustee's Fraudulent Transfer Claims.

Sections 544 and 548(a) of the Bankruptcy Code give a trustee (and through 15 U.S.C. § 78fff-1(a), the Trustee)³ standing to avoid fraudulent transfers. Apparently not disputing this proposition, the Defendants note, though, that section 544 enables a trustee to avoid and recover only a "transfer of property of the debtor," 11 U.S.C. § 544(a), or "of an interest of the debtor in property," id. § 544(b) (emphasis added), and that section 548(a) similarly limits the trustee to causes of action to avoid transfers of "an interest of the debtor." 11 U.S.C. § 548(a) (emphasis added). Because the Transfers were made from customers' accounts, rather than from Park South's own funds, the Defendants contend, therefore, that the Trustee does not have standing to pursue his twelve fraudulent transfer claims.

SIPA, however, specifically defines the Debtor's "interests in property" to include property that was previously transferred from a customer's account. Thus, 15 U.S.C. § 78fff-2(c)(3) provides:

Whenever customer property is not sufficient to pay in full the claims set forth in subparagraphs (A) through (D) of paragraph (1), the trustee may recover any property transferred by the debtor which,...