In re Student Finance Corp.

• Decision Date: 22 December 2005
• Docket Number: Adversary No. 04-56423-PBL.,Bankruptcy No. 02-11620-JBR.,Civ.A. No. 04-1551-JJF.
• Parties: In re STUDENT FINANCE CORPORATION, Debtor. Charles A. Stanziale, Jr., Chapter 7 Trustee of Student Finance Corporation, Plaintiff, v. Pepper Hamilton LLP, et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

335 B.R. 539

In re STUDENT FINANCE CORPORATION, Debtor Charles A. Stanziale, Jr., Chapter 7 Trustee of Student Finance Corporation, Plaintiff, v. Pepper Hamilton LLP, et al., Defendants.

Bankruptcy No. 02-11620-JBR.

Adversary No. 04-56423-PBL.

Civ.A. No. 04-1551-JJF.

United States Bankruptcy Court, D. Delaware.

December 22, 2005.

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Peter C. Hughes, Dilworth Paxson LLP, Wilmington, DE, of Counsel: James J. Rodgers, Derrick A. Dyer, Dilworth Paxson LLP, Philadelphia, PA; Schwartz, Tobia, Stanziale, Becker, Rosensweig & Sedita, P.A., Montclair, NJ, for Plaintiff Charles A. Stanziale, Jr., Chapter 7 Trustee of Student Finance Corporation.

William H. Sudell, Jr., Donna L. Culver, Morris, Nichols, Arsht & Tunnell, Wilmington, DE, of Counsel: Elizabeth K. Ainslie, Nicholas J. LePore, III, Bruce P. Merenstein, Stephen J. Shapiro, Schnader Harrison Segal & Lewis LLP, Philadelphia, PA, for Defendants Pepper Hamilton LLP and W. Roderick Gagne in his capacity as an attorney practicing at Pepper Hamilton LLP.

Karen Lee Turner, Eckert Seamans Cherin & Mellot, LLC, Wilmington, DE, of Counsel: Neil G. Epstein, Carol L. Press, Eckert Seamans Cherin & Mellot, LLC, Philadelphia, PA, for Defendants W. Roderick Gagne, Robert L. Bast, Pamela Bashore Gagne, and W. Roderick Gagne in his capacity as trustee of various trusts.

MEMORANDUM OPINION

FARNAN, District Judge.

Pending before the Court are two Motions to Dismiss: the Motion Of Pepper Hamilton LLP And W. Roderick Gagne, In His Capacity As An Attorney Practicing At Pepper Hamilton LLP, For The Dismissal Of Counts I, II, III, IV, And IX Of The Trustee's Complaint In Their Entirety And For The Partial Dismissal Of Count X Of The Trustee's Complaint (D.I. 19); and the Motion To Dismiss Of W. Roderick Gagne, Robert L. Bast, Pamela Bashore Gagne And The Trusts (D.I. 21). Together, the two Motions request dismissal or partial dismissal of all eleven Counts in the Complaint. For the reasons set forth below the Court will grant the Motions in part and deny the Motions in part.

BACKGROUND

This action was filed by Charles A. Stanziale, Jr. (the "Trustee"), the Chapter 7 Trustee of Student Finance Corporation ("SFC"). The action was originally filed in the Bankruptcy Court of the District of Delaware as Adversary Proceeding No. 04-56423-PBL in Bankruptcy Case No. 02-11620-JBR. On January 7, 2005, this Court granted Defendants' uncontested Motion to withdraw the reference to the Bankruptcy Court. (D.I. 5.)

SFC is a Pennsylvania corporation with its principal place of business in New Castle, Delaware. SFC is currently in Chapter 7 bankruptcy proceedings. Andrew Yao ("Yao") was SFC's Chief Executive Officer, Treasurer, and sole shareholder. Defendant Pepper Hamilton LLP ("Pepper") is a law firm organized as a Pennsylvania Limited Liability General Partnership, with its principal place of business in Philadelphia, Pennsylvania. Throughout the relevant time period, Pepper represented SFC. Defendant W. Roderick Gagné ("Gagné") is an attorney and partner at Pepper and was primarily responsible for Pepper's representation of SFC. Defendant Pamela Bashore Gagné is Gagné's wife. Defendant Robert L. Bast is Gagné's uncle. Gagné is also named as a defendant in his capacity as trustee of seven different trusts whose beneficiaries are Gagné or relatives of Gagné. The Court will follow the Trustee's practice of using the term "the Family" to refer collectively to Defendants Pamela Bashore Gagné, Robert L. Bast, and Gagné in his capacity as trustee of the various trusts.

DISCUSSION

By their Motions, Defendants contend that all eleven Counts of the Complaint should be dismissed or partially dismissed, for a variety of reasons, under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). After a brief discussion of the applicable legal standards, the Court will address each Count of the Complaint in turn.

I. Legal Standards

A. Federal Rule of Civil Procedure 12(b)(1)

A motion to dismiss under Rule 12(b)(1) challenges the jurisdiction of the court to address the merits of the plaintiff's complaint. Fed.R.Civ.P. 12(b)(1). The motion should be granted where the asserted claim is "insubstantial, implausible, foreclosed by prior decisions of this Court, or otherwise completely devoid of merit as not to involve a federal controversy." Coxson v. Comm. of Pennsylvania, 935 F.Supp. 624, 626 (W.D.Pa.1996) (citations omitted). Under Rule 12(b)(1), a court may also dismiss an action for lack of subject matter jurisdiction if the plaintiff lacks standing to bring his claim. Kwan v. United States, 84 F.Supp.2d 613, 617 n. 2 (E.D.Pa.2000). A motion to dismiss under 12(b)(1) may present either a facial or factual challenge to subject matter jurisdiction. See Mortensen v. First Fed. Sav. and Loan, 549 F.2d 884, 891 (3d Cir.1977). In considering a facial challenge, a court must accept as true, all allegations in the complaint. Id. In contrast, when considering a factual challenge, a court is free to weigh the evidence and no presumption of truthfulness attaches to the plaintiff's allegations. Id.

B. Federal Rule of Civil Procedure 12(b)(6)

Pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court may dismiss a complaint for failure to state a claim upon which relief may be granted. Fed.R.Civ.P 12(b)(6). The purpose of a motion to dismiss is to test the sufficiency of a complaint, not to resolve disputed facts or decide the merits of the case. Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993). When considering a motion to dismiss, a court must accept as true all allegations in the complaint and must draw all reasonable factual inferences in the light most favorable to the plaintiff. Neitzke v. Williams, 490 U.S. 319, 326, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989); Piecknick v. Pennsylvania, 36 F.3d 1250, 1255 (3d Cir.1994). The Court is "not required to accept legal conclusions either alleged or inferred from the pleaded facts." Kost, 1 F.3d at 183. Dismissal is only appropriate when "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claims which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). The burden of demonstrating that the plaintiff has failed to state a claim upon which relief may be granted rests on the movant. Young v. West Coast Industrial Relations Assoc., Inc., 763 F.Supp. 64, 67 (D.Del.1991) (citations omitted).

II. Analysis

A. Count I: Breach Of Fiduciary Duty

In Count I, the Trustee alleges that Pepper and Gagné, as counsel to SFC, breached their fiduciary duty by engaging in improperly waived, and unwaivable conflicts of interest. (Adv. Pro. No. 04-56423, D.I. 1 at 36.) Among many purported conflicts with Pepper and Gagné's representation of SFC, the Trustee alleges that Pepper and Gagné simultaneously represented SFC and various other individuals and entities whose interests were adverse to those of SFC, permitted Gagné and the Family to loan millions of dollars to SFC and to become equity holders in SFC, elevated the interests of Gagné and the Family above those of SFC and its creditors, and represented or considered the Family's interests in transactions with SFC and Yao. (Id.)

Defendants Pepper and Gagné contend that Count I should be dismissed under Rule 12(b)(1) because the Trustee lacks standing to bring this claim. Defendants contend that the Trustee does not have standing under 11 U.S.C. § 541 because this claim belongs to SFC's creditors and not to SFC. (D.I. 20 at 16.) Defendants also contend that the Trustee does not have standing under 11 U.S.C. § 544 because that section does not give a trustee standing to bring tort claims. (Id.) Defendants further contend that Count I should be dismissed under Rule 12(b)(6) because the Trustee's claim is barred by the doctrine of in pari delicto. (Id. at 17.) In response, the Trustee contends that he has standing to bring this claim under both § 544(a) and § 541. (D.I. 15 at 13.) He further contends that Defendants' assertion of in pari delicto is premature at the stage of a Motion to Dismiss under Rule 12 (Id. at 17), that the doctrine is inapplicable because Defendants are insiders of SFC (Id. at 20), and that the doctrine does not apply to the allegation of breach of fiduciary duty (Id. at 25).

The estate of a bankrupt debtor 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). This definition includes legal causes of action. Board of Trustees of Teamsters Local 863 Pension Fund v. Foodtown, Inc., 296 F.3d 164 (3d Cir.2002). Therefore, under § 541, the trustee of a bankrupt debtor may bring any cause of action that the debtor could have brought under state law as of the commencement of the case.¹ Id. n. 5. Count I alleges a breach of the fiduciary duty that arose from Pepper and Gagné's attorney-client relationship with SFC. Thus, this is a cause of action that SFC could have brought on its own behalf. Moreover, the Trustee alleges that the conflicts of interest constituting the breach began well before the commencement of the bankruptcy case. Therefore, the Court concludes that the Trustee has standing to bring Count I under 11 U.S.C. § 541(a)(1).

Defendants next contend that, even if the Trustee has standing, Count I must be dismissed under Rule 12(b)(6) because it is barred by the doctrine of in pari delicto. In pari delicto is an equitable doctrine providing "that a plaintiff may not assert a claim against a defendant if the plaintiff bears fault for the claim." Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 354 (3d Cir.2001). The Court of Appeals for the Third Circuit has held that the doctrine may be applied to bar a bankruptcy trustee who has stepped into the shoes of a wrongdoing debtor from bringing an action...