In re Senior Cottages of America, LLC, 00-32012. No. 03-3132.

CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota
Citation320 B.R. 895
Docket NumberNo. 00-32012. No. 03-3132.,00-32012. No. 03-3132.
PartiesIn re SENIOR COTTAGES OF AMERICA, LLC, Debtor. Timothy D. Moratzka, Trustee of The Bankruptcy Estate of Senior Cottages of America, LLC and Senior Cottage Management, LLC, Plaintiff, v. Richard Morris, Morris, Carlson, Hoelsher, P.A., and Michael Cohen, Defendants.
Decision Date18 February 2005

Robert C. Black, III, Black Law Office, Edina, MN, for Debtor.



This adversary proceeding came on before the Court for hearing on the motion of Defendants Richard Morris and Morris, Carlson, Hoelsher, P.A. ("MCH") for dismissal of the Plaintiffs complaint. The movants appeared by their attorney, Charles E. Lundberg (Thomas F. Miller, on the brief). The Plaintiff appeared in opposition to the motion. Upon the moving and responsive documents, the text of the Plaintiffs complaint, and the arguments of counsel, the Court makes the following order.

The Parties.

This adversary proceeding arose out of the bankruptcy cases of Debtors Senior Cottages of America, LLC ("Senior Cottages") and Senior Cottage Management, LLC ("Cottage Management"). The Plaintiff is the trustee of the bankruptcy estates in both cases.1 Defendants Morris and Cohen are attorneys at law. Defendant MCH is a law firm in which Defendant Morris is a principal.

Relevant Portions of Plaintiff's Complaint.

The Plaintiff commenced this adversary proceeding in his capacity as trustee. In the first and second paragraphs of the "Introduction" to his complaint, he announced:

1. This Complaint seeks to recover for the estates sic of Senior Cottages more than $7,000,000.00 in damages caused by a fraudulent transaction scheme in which Defendants substantially assisted the transferor and its principals. The scheme caused secured creditors to be deprived of collateral and unsecured creditors to be left without a payment source.
2. The scheme was devised by Murray R. Klane ("Klane"), a Chapter 7 Debtor, and the Defendants. Klane and Morris were friends and business partners. Cohen was in-house counsel for Senior Cottages.

In the remainder of the "Introduction," the Plaintiff goes on to identify one Murray R. Klane as an attorney-at-law, since disbarred in the State of Minnesota. He states that Klane invested in Senior Cottages and then became increasingly involved in its operations and governance, eventually becoming "the CEO or Chief Manager" of Senior Cottages and ultimately gaining "at all relevant points in time,... complete control of the daily operations of both" Senior Cottages and Cottage Management. He alleges that, by the spring of 1998, Senior "Cottages was unable to meet its obligations as they became due," though "many of its transactions and projects were midstream with high profit potential." After that, he states:

8. Sometime in the Summer of 1998, the Defendants advised Klane, Senior Cottages and others that a scheme to transfer Senior Cottages' assets to a new entity, MPLLC, would free assets from claims of creditors.
9. Using this scheme, with the knowledge and assistance of the Defendants as counsel for several parties, Senior Cottages knowingly transferred the assets of Senior Cottages to MPLLC. 11. Eventually MPLLC could not find private investors or institutional financing. Senior Cottages, MPLLC, Klane and other related companies filed a Chapter llsic on May 2, 2000, which cases were later converted to a Chapter 7.2

In a later section entitled "Background Facts," the Plaintiff fleshes out the summary of transactional history in his "Introduction" with more detailed fact allegations. In pertinent part, he pleads:

26. Senior Cottages were sic insolvent in 1998.... Klane and Defendants knew of the insolvency. Klane recognized the potential value in the development fees, management fees and transferable tax credits.
27. In 1998, up to and including the time of the transfer complained of, Defendants were attorneys for and represented Senior Cottages and MPLLC. Defendants Morris and MCH were also attorneys for Klane. Klane needed time and money to preserve the potential value. Creditors were in the way of that goal and were demanding payment.
28. In August or September of 1998, Senior Cottages transferred all of its assets to MPLLC. The purported consideration was the assumption of secured debt.
29. MPLLC, Senior Cottages and Klane were all represented by Morris and MCH at the time of and during the transfer to MPLLC of all of Senior Cottages' assets. MPLLC and Senior Cottages were also represented by Cohen at that time.
30. Senior Cottages and MPLLC were advised by Morris, MCH, and Cohen to conclude the transfer of assets and assumption of debt, and Morris, MCH, and Cohen substantially assisted the transfer.

The Plaintiff then alleges that the Senior Cottages-MPLLC transfer "hindered and delayed creditors of Senior Cottages because the main purpose of the transfer was to avoid unsecured creditors," that "the transfer was in bad faith" and "was fraudulent," and that

... Klane breached his fiduciary duties in his various capacities as attorney, certified public accountant, member, governor, chief manager and partner in planning and completing the fraudulent transfer. Defendants knew these facts.

In the final fact allegations relevant to the motion at bar, the Plaintiff asserts that "the total value of the ongoing projects of Senior Cottages was therefore ... not less than $4,845,284.00," and that the amount of damages he may recover from the Defendants "has been established" accordingly.

The Plaintiff goes on to identify his causes of action in three separate counts of the complaint. In Count I, "Breach of Duty of Due Care and Negligence," he pleads:

41. Defendants had a duty to advise Senior Cottages of any proposed transactions that may adversely, or illegally, affect the rights of creditors of their clients.
42. Defendants' conduct in failing to advise Senior Cottages that the transactions were to an insider, were to be concealed, were by an insolvent entity and were therefore fraudulent, was a breach of reasonable duty to exercise due care and diligence.
43. As a direct result of Defendants' conduct, Plaintiff estate is subject to creditors' claims, interest and attorney fees to administer the estate in an amount of at least $7,000,000.

In Count II, "Aiding and Abetting Fraudulent Transfer," the Plaintiff states:

... Defendants provided substantial assistance to Senior Cottages, Klane and MPLLC in effecting the fraudulent transfer of Senior Cottages assets and the control of MPLLC.

He states that the Defendants knew of the financial effect of the transfers as well as Klane's "several conflicts of interest and... breach of his fiduciary duties," and that

48. Defendants' conduct in failing to advise Senior Cottages of the breach of duties and in not refusing to aid and abet the fraudulent transfer was a breach of duty to exercise reasonable care and diligence.
49. Defendants, by breaching that duty, enabled Klane to conceal his actions and are liable to the beneficiaries of the fiduciary duty owed.

Finally, in Count III, "Equitable Subordination," the Plaintiff requests that the "Defendants' claims, if any, in Senior Cottages' or the bankruptcy case of any affiliate of Senior Cottages, ... be equitably subordinated to all other claims and interests holders sic."

Motion at Bar.

Defendants Morris and MCH elected to respond to the Plaintiffs complaint by making the motion at bar, rather than by serving an answer. The motion sounds under Fed.R.Civ.P. 12(b)(1) and (6), which are made applicable to this adversary proceeding by Fed. R. Bankr.P. 7012(b).3 The movants advanced three different theories for their request for dismissal. The first two both go to Counts I and II of the Plaintiffs complaint; the third goes to Count III.


1. Counts I and II: Standing.

The centerpiece of the motion is the argument that Counts I and II do not recite facts that would establish the Plaintiffs standing to sue the movants under the legal theories of those counts. This argument is properly raised through a motion under Rule 12(b)(6). When it is, the focus is on the adequacy of the facts pled in the complaint, which are to be assumed as true. Pennell v. City of San Jose, 485 U.S. 1, 7, 108 S.Ct. 849, 99 L.Ed.2d 1 (1988) (citing Worth v. Seldin, 422 U.S. 490, 501, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975)). The movants argue that binding precedent conclusively denies the Plaintiff standing to maintain these causes of action, even assuming the truth of those facts that the Plaintiff has pled.

In the Eighth Circuit, the principal case on this issue is In re Ozark Restaurant Equip. Co., Inc., 816 F.2d 1222 (8th Cir. 1987), cert, denied, 484 U.S. 848, 108 S.Ct. 147, 98 L.Ed.2d 102 (1987). Ozark arose out of an adversary proceeding brought by a trustee against the individual and corporate principals of the debtor-corporation. In that adversary proceeding, the trustee invoked the "alter ego" doctrine under state law, seeking a judgment piercing the corporate veil of the debtor. His goal was to have the principals held individually liable for the debtor's debts. In so suing, the trustee purported to act "on behalf of all of Ozark's creditors," 816 F.2d at 1223, and to use a right of action available under Arkansas state law to individual creditors of a corporation when its "corporate structure was illegally or fraudulently abused to the detriment of a third person," 816 F.2d at 1224 (citation and added emphasis omitted).

The bankruptcy court ordered judgment against the Ozark principals on the trustee's alter ego cause of action.4 On their appeal, the district court reversed.5 On the trustee's appeal from the district court, the Eighth Circuit focused on the issue of standing. It rejected all three statutory bases that the trustee argued for his...

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