In re S & G Financial Serv. of South Fla. Inc.

• Decision Date: 11 January 2011
• Docket Number: Bankruptcy No. 10–15516–BKC–LMI.,Adversary No. 10–3311–BKC–LMI.
• Citation: 451 B.R. 573
• Court: U.S. Bankruptcy Court — Southern District of Florida
• Parties: In re S & G FINANCIAL SERVICES OF SOUTH FLORIDA, INC., Debtor.Soneet Kapila, Plaintiff,v.S & G Financial Services, LLC and Merrick Financial Group, LLC, Defendants.

451 B.R. 573

In re S & G FINANCIAL SERVICES OF SOUTH FLORIDA, INC., Debtor.Soneet Kapila, Plaintiff,

v.S & G Financial Services, LLC and Merrick Financial Group, LLC, Defendants.

Bankruptcy No. 10–15516–BKC–LMI.

Adversary No. 10–3311–BKC–LMI.

United States Bankruptcy Court, S.D. Florida.

Jan. 11, 2011.

Scott N. Brown, Esq., Miami, FL, for Plaintiff.Luis Salazar, Esq., Coral Gables, FL, for Defendants.

ORDER DENYING MOTION TO DISMISS FILED BY DEFENDANTS S & G FINANCIAL SERVICES, LLC AND MERRICK FINANCIAL GROUP, LLC AND INTREPID FINANCIAL SERVICES, INC.

LAUREL M. ISICOFF, Bankruptcy Judge.

This matter came before the Court on the Motion to Dismiss (DE # 6) filed by the Defendants S & G Financial Services, LLC (“S and G”) and Merrick Financial Group, LLC (“Merrick”) on August 8, 2010. Intrepid Financial Services, Inc. (“Intrepid”) also filed a Motion to Dismiss (attached to its Motion to Intervene) (DE # 8) on August 10, 2010.¹ Plaintiff Soneet Kapila, as the Chapter 7 Trustee (the “Trustee”), filed his Opposition Response on September 15, 2010 (DE # 12). The Court held a hearing on the Motions to Dismiss on September 17, 2010, and subsequently took the matter under advisement. Having considered the relevant pleadings, the arguments of counsel, and the applicable law, for the reasons set forth below, the Defendants' Motions to Dismiss are denied.

JURISDICTION

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(b). The jurisdiction of the bankruptcy courts is set forth in 28 U.S.C. § 1334, which provides, in pertinent part, that “the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(b). 28 U.S.C. § 157(b) provides that “[b]ankruptcy judges may hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11, referred under subsection (a) of this section, and may enter appropriate orders and judgments, subject to review under section 158 of this title.” 28 U.S.C. § 157(b). This adversary proceeding is a core proceeding as that term is defined in 28 U.S.C. § 157(b)(2)(A), (E) and (O). Venue of this adversary proceeding in this district is proper under 28 U.S.C. § 1409(a).

BACKGROUND ²

Defendant S and G is a limited liability company organized under the laws of the State of Florida, with its principal place of business in Coral Gables, Florida. Defendant Merrick is a limited liability company organized under the laws of the State of Florida, with its principal place of business in Coral Gables, Florida. The Debtor, S & G Financial Services of South Florida, Inc., is a corporation organized under the laws of the State of Florida. Soneet Kapila is the appointed Chapter 7 Trustee.

On March 4, 2010 (the “Petition Date”), the Debtor filed a voluntary Chapter 7 bankruptcy petition.³ At the time the petition was filed, Jorge Galceran (“Mr. Galceran”) was the sole officer, director, and shareholder of the Debtor. (Compl. at ¶ 11). For at least the five-year period immediately preceding the Petition Date, the Debtor's primary business was the making of short-term mortgage loans. ( Id. at ¶ 12). The Debtor obtained the funding it needed to finance its mortgage lending activities from various individuals or entities, whom the Debtor referred to as “investors.” ( Id. at ¶ 15). The Debtor offered these investors attractive potential returns ⁴ and security on their investments in the form of a full or partial assignment of certain mortgages which the Debtor held from its mortgagors. Id.

On March 30, 2009, one of the Debtor's investors, Paul Bleustein (“Mr. Bleustein”), obtained a final judgment for $850,141.11 against the Debtor. ( Id. at ¶ 16). On May 4, 2009, Mr. Bleustein caused writs of garnishment to be served on various parties including International Finance Bank and BankUnited, FSB. ( Id. at ¶ 17). The Debtor's accounts at these two institutions were frozen after the service of these writs. ( Id. at ¶ 18).

Mr. Galceran has, at all relevant times, been the sole member and manager of S and G. ( Id. at ¶ 19). At some point after the writs of garnishment were served, S and G opened a bank account at CNL Bank and began depositing checks payable to the Debtor into the S and G account. ( Id. at ¶ 21). Mr. Galceran also has, at all relevant times, operated as the sole member and manager of Merrick. ( Id. at ¶ 27). During this time frame, Mr. Galceran instructed certain of the Debtor's mortgagors to make checks payable to Merrick in order to circumvent the writs of garnishment. ( Id. at ¶ 29).

The Trustee commenced this adversary proceeding on July 9, 2010 by filing a two-count complaint (the “Complaint”) against S and G and Merrick. Count I of the Complaint is a claim for substantive consolidation of S and G and the Debtor under 11 U.S.C § 105. The Trustee alleges that the Debtor's financial statements never accurately reflected the sums due to the Debtor based on mortgage receivables and other assets of the Debtor which were allegedly diverted by Mr. Galceran to S and G. ( Id. at ¶ 35). The Trustee further alleges that Mr. Galceran owns 100% of the equity of both the Debtor and S and G, and that S and G had no legitimate business purpose independent of the Debtor. ( Id. at ¶¶ 37–38). The Trustee contends that because the assets of the Debtor and S and G are so intermingled, equity dictates consolidation of the two business entities for purposes of this bankruptcy proceeding. ( Id. at ¶¶ 39–43). Count II is a claim for substantive consolidation of Merrick and the Debtor under 11 U.S.C. § 105. As with S and G, the Trustee alleges that Mr. Galceran is the sole shareholder of both Merrick and the Debtor and that Merrick's finances are so intermingled with the Debtor, equity also dictates consolidation of the two entities for purposes of this bankruptcy case. ( Id. at ¶¶ 47–52).

PARTIES' ARGUMENTS

The Defendants argue that the Complaint should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) ⁵ because substantive consolidation is not an appropriate cause of action against non-debtor parties. The Defendants contend that the Court cannot invoke its equitable powers under 11 U.S.C. § 105 to establish jurisdiction over a non-debtor entity not in bankruptcy.⁶ The Defendants conclude that allowing such a cause of action would impermissibly allow a rule of equity to re-define the Defendants' property interests which are defined by applicable state law. Rather, the Defendants contend, the Trustee has procedural alternatives at his disposal such as filing involuntary petitions against each of the Defendants under 11 U.S.C. § 303 ⁷ or avoidance actions under 11 U.S.C. § 548 ⁸ to seek the same results as substantive consolidation. Moreover, the Defendants argue, even if the Court were to recognize a substantive consolidation cause of action under its equitable powers, the Trustee has failed to state such a claim in his Complaint. In support of their argument, the Defendants argue that the Trustee has barely touched on the factors courts typically use to determine whether substantive consolidation is appropriate.

In response, the Trustee argues there is ample case law supporting the proposition that the bankruptcy court has the authority, under its equitable powers, to substantively consolidate debtor and non-debtor entities. Having argued that substantive consolidation is a valid cause of action, the Trustee highlights the allegations of his Complaint that adequately plead facts demonstrating that substantive consolidation would, in fact, be appropriate in this case. These allegations include the transfers of assets between the Debtor and the Defendants without observing corporate formalities, the commingling of assets and business functions between the Debtor and Defendants, and the fact that the Debtor and the non-debtor entities have a sole common principal, owner, and manager—Mr. Galceran. The Trustee also argues, similar to state law “alter ego” claims, that the Defendants had no independent existence and that these entities were formed solely to hinder, delay or defraud creditors. Finally, the Trustee addresses the argument made by the Debtor that the Trustee could achieve his goals by seeking to bring the Defendants into bankruptcy under 11 U.S.C. § 303; the Trustee argues that substantive consolidation is a remedy entirely independent of the involuntary petition remedy.

ANALYSIS

A. MOTION TO DISMISS STANDARD

Federal Rule of Civil Procedure 12(b)(6), as made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 7012(b), provides a mechanism by which a party may seek to dismiss a complaint for “failure to state a claim upon which relief may be granted.” In order to survive a motion to dismiss, a plaintiff must allege more than “labels and conclusions,” or simply recite the elements of a cause of action. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The complaint must contain sufficient factual matter to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, ––– U.S. ––––, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). A claim is considered factually plausible when “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. This plausibility standard is not synonymous with a “probability requirement,” but it “asks for more than a sheer possibility that a defendant has acted unlawfully.” Id.

Failure to state a claim for relief is a purely legal question. Sinaltrainal v. Coca–Cola Co., 578 F.3d 1252, 1270 n. 19 (11th Cir.2009). While the court must accept well-pled facts as true, the court is “not required to accept a plaintiff's legal conclusions.” Id. at 1260. The courts...