In re Senior Cottages of America, LLC

• Decision Date: 02 April 2007
• Docket Number: No. 05-3867.,05-3867.
• Citation: 482 F.3d 997
• Parties: In re SENIOR COTTAGES OF AMERICA, LLC, Debtor. Timothy D. Moratzka, Trustee of the Bankruptcy Estate of Senior Cottages of America, LLC, Plaintiff-Appellant, v. Richard Morris; Morris, Carlson, Hoelscher, P.A., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

482 F.3d 997

In re SENIOR COTTAGES OF AMERICA, LLC, Debtor Timothy D. Moratzka, Trustee of the Bankruptcy Estate of Senior Cottages of America, LLC, Plaintiff-Appellant, v. Richard Morris; Morris, Carlson, Hoelscher, P.A., Defendants-Appellees.

No. 05-3867.

United States Court of Appeals, Eighth Circuit.

Submitted: May 17, 2006.

Filed: April 2, 2007.

Shane Harr Anderson, Andrew P. Moratzka, Mackall & Crounse, Minneapolis, MN, for Plaintiff-Appellant.

Charles Edward Lundberg, David Arthur Turner, Bassford & Remele, Minneapolis, MN, Thomas Frank Miller, Wayzata, MN, for Defendants-Appellees.

Before LOKEN, Chief Judge, JOHN R. GIBSON and COLLOTON, Circuit Judges.

JOHN R. GIBSON, Circuit Judge.

The trustee for the bankruptcy estate of Senior Cottages of America, LLC, and Senior Cottages Management, LLC,¹ appeals from the district court's order denying him leave to amend his complaint. The amended complaint alleges that the lawyers for Senior Cottages, namely Richard Morris, Michael Cohen, and the firm of Morris, Carlson, Hoelscher, P.A., committed malpractice and aided and abetted the breach of fiduciary duty by Murray Klane, who was governor, manager, and majority interest owner of Senior Cottages. The complaint, as amended, alleges that the lawyers assisted Klane in looting Senior Cottages' assets. The district court held that the trustee lacked standing to bring the claim. Moratzka v. Senior Cottages of America, 2005 WL 2000185, at *3 (D.Minn. Aug.18, 2005). We reverse and remand.

The trustee's first complaint was dismissed as to Morris and the Morris, Carlson firm² by the bankruptcy court on the ground that the trustee had alleged only injury to the creditors of Senior Cottages, not to Senior Cottages itself because there was no allegation that Senior Cottages had a value in excess of creditors' claims against it. Moratzka v. Morris (In re Senior Cottages of America, LLC), 320 B.R. 895, 901 (Bankr.D.Minn.2005). The bankruptcy court added in a footnote that even if the trustee had alleged injury to Senior Cottages, the complaint "might" not have been adequate because the claims might be barred by the defense of in pari delicto.³ Id. at n. 12.

The trustee sought to amend the complaint. The proposed amended complaint alleged as follows. Senior Cottages, a limited liability company, was in the business of developing, building, and managing senior citizen housing projects, which qualified for low income housing tax credits. Murray Klane was one of the two sole governors of Senior Cottages and was also Chief Manager, in complete control of the daily operations of the company. As of April 1, 1998, Klane owned a 60% interest in Senior Cottages.⁴ In 1998, Senior Cottages was insolvent, in that it was not paying debts as they became due. The amended complaint alleges that because of its insolvency, Senior Cottages needed to sell its valuable assets (the housing projects)— presumably, to an entity that could benefit from the tax credits.⁵

Rather than finding an arm's-length buyer, Klane formed a new entity, Millennium Properties, LLC, in August 1998, and caused Senior Cottages to transfer all or substantially all of the assets of Senior Cottages to Millennium, including eleven housing projects. In return for the assets, Millennium assumed debt secured by the assets, but did not pay anything. In separate litigation brought by the minority interest-owners of Senior Cottages, a Minnesota state court found that the value of the consideration received by Senior Cottages was not reasonably equivalent to the value of the assets transferred to Millennium and that the transfer was fraudulent. The amended complaint alleges that the value of the projects was at least $4.8 million. Additionally, Klane directed cash payments to Millennium which should have been made to Senior Cottages.

Morris and his law firm were outside counsel to Senior Cottages and also represented Klane. They advised Senior Cottages to transfer the assets to Millennium and substantially assisted the transaction. The amended complaint alleges that Morris knew that the transfer was for inadequate consideration, that Klane was breaching his fiduciary duties to Senior Cottages in making the transfer, and that the transfer damaged Senior Cottages in the amount of at least $4.8 million.

The amended complaint alleged counts against Morris and his law firm for negligence and aiding and abetting Klane's breach of fiduciary duty.

The bankruptcy court denied the motion to amend the complaint on the ground of futility, reasoning that the in pari delicto defense would bar the complaint. The trustee appealed to the district court, which affirmed on a different theory:

[T]he Court finds that Trustee lacks standing to bring the legal malpractice and aiding and abetting claims against [Morris and his firm]. As previously discussed, the Eighth Circuit has held that a trustee can only bring those claims that are "the property of the estate." [In re Ozark Rest. Equip. Co., 816 F.2d 1222, 1224 (8th Cir.1987)]. Conversely, a trustee cannot bring a claim on behalf of the creditors of a debtor corporation.

... Nowhere in the Proposed Amended Complaint is there an allegation that Debtor would have remained solvent absent the transfer. Ultimately, Trustee is unable to show that Debtor would act as anything other than a conduit of recovery for creditors under the Proposed Amended Complaint.

Moratzka v. Senior Cottages of America, LLC, 2005 WL 2000185, at *3 (D.Minn. Aug. 18, 2005).

In bankruptcy appeals, we sit as a second court of review, reviewing the bankruptcy court's decision by the same standards as the district court applies. In re Reynolds, 425 F.3d 526, 531 (8th Cir. 2005), cert. denied, ___ U.S. ___, 127 S.Ct. 46, 166 L.Ed.2d 20 (2006). Although ordinarily the decision of whether to allow a plaintiff to amend the complaint is within the trial court's discretion, when a court denies leave to amend on the ground of futility, it means that the court reached a legal conclusion that the amended complaint could not withstand a Rule 12 motion, Fed.R.Civ.P. 12; our review of that legal conclusion is de novo. Marmo v. Tyson Fresh Meats, Inc., 457 F.3d 748, 755 (8th Cir.2006); United States ex rel. Gaudineer & Comito, LLP v. Iowa, 269 F.3d 932, 936 (8th Cir.2001). In determining whether a complaint states a claim, we accept as true all factual allegations of the complaint. Mattes v. ABC Plastics, Inc., 323 F.3d 695, 698 (8th Cir.2003).

It is the duty of the trustee in bankruptcy to "collect and reduce to money the property of the estate for which such trustee serves." 11 U.S.C. § 704(1). The property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). Causes of action are interests in property and are therefore included in the estate; it follows that the trustee has standing under § 704(1) to assert causes of action that belonged to the debtor at the time of filing bankruptcy. Mixon v. Anderson (In re Ozark Rest. Equip. Co.), 816 F.2d 1222, 1225 (8th Cir.1987).

Senior Cottages is a limited liability company, not a corporation. However, Minnesota limited liability companies share many of the properties of corporations. See Minn.Stat. Ann. § 322B.01 note (West 2001) (Overview Comments, Relevance of Chapter 302A in Interpreting and Applying Chapter 322B) (most of governance and management provisions of limited liability company statute drawn from business corporation statute). Limited liability companies can sue and be sued in their own name, Minn.Stat. Ann. § 322B.20 subd. 3; their directors and managers owe the company duties of care and loyalty, Minn.Stat. Ann. §§ 322B.663 subd. 1, 322B.69; a limited liability company is an entity distinct from any of its members, Minn.Stat. Ann. § 322B.88 note; members are not subject to liability for the company's debts, Minn.Stat. Ann. § 322B.303 subd. 1; and the limitation of liability may be forfeited under the same conditions that would warrant piercing the corporate veil, Minn.Stat. Ann. § 322B.303 subd. 2. Although the Minnesota limited liability company statute does not expressly provide for derivative suits, it is likely that such suits would be recognized by the Minnesota courts. Carter G. Bishop & Daniel S. Kleinberger, Limited Liability Companies: Tax and Business Law ¶ 10.07[2] (2007) (treatise by the Chair and the Reporter of the Limited Liability Company Joint Committee of the Business Law, Tax Law and Real Property Sections of the Minnesota State Bar Association); see generally Daniel S. Kleinberger, Direct versus Derivative and the Law of Limited Liability Companies, 58 Baylor L.Rev. 63, 66-67 (2006) ("Almost all LLC cases addressing the direct/derivative distinction follow rules developed in corporate-law cases."). It is therefore appropriate to look to the law governing claims on behalf of corporations for guidance in this case.

Whether a particular cause of action arising under state law belonged to the debtor in bankruptcy or to someone else is determined by state law. See Ozark Rest. Equip., 816 F.2d at 1225. It is generally recognized that a bankruptcy trustee has authority "to bring an action for damages on behalf of a debtor corporation against corporate principals for alleged misconduct, mismanagement, or breach of fiduciary duty, because these claims could have been asserted by the debtor corporation, or by its stockholders in a derivative action." Id.

A director is a fiduciary. So is a dominant or controlling stockholder or group of stockholders. . . . While normally that fiduciary obligation is enforceable directly by the corporation, or through a stockholder's derivative action, it is, in the event of bankruptcy of the corporation, enforceable by the trustee.

Pepper v. Litton, 308 U.S. 295, 306-07, 60 S.Ct. 238, 84 L.Ed. 281 (1939) (citations and footnotes omitted). Under Minnesota law as well, "waste and...