In re Today's Destiny, Inc.
| Decision Date | 11 April 2008 |
| Docket Number | Adversary No. 06-3285.,Bankruptcy No. 05-90080. |
| Citation | 388 B.R. 737 |
| Parties | In re TODAY'S DESTINY, INC., Debtor. Joseph M. Hill, Plaintiff, v. Michael Day, et al., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
J. Craig Cowgill, Houston, TX, for Debtor.
On October 13, 2005, Today's Destiny, Inc. ("Debtor") filed a chapter 7 bankruptcy petition. Debtor was in the business of selling "predictive dialing equipment." "Predictive dialing equipment" is designed to increase the efficiency of telemarketers by assuring that marketing agents are connected only to "live" persons rather than to unanswered phones, voice mail, or answering machines. The chapter 7 Trustee alleges that Debtor engaged in the fraudulent sale and leasing of this equipment. The Debtor's principals ("Insiders")1 deny these allegations. The Trustee also asserts claims against lenders who financed the equipment sales and leases ("Lenders").2
On March 21, 2006, the Trustee filed an adversary complaint. The Trustee alleged that Debtor was formed and operated by various individuals and did business through its affiliates, including The Next Generation, Medicus, IBD, and Straightway. The complaint alleged that the Insiders and affiliates acted as alter egos of Debtor to fraudulently convey or conceal assets belonging to Debtor and the bankruptcy estate.
On September 22, 2006, the Trustee filed a motion to amend the First Amended Complaint and a Motion for Authority to Enter into Agreement to Prosecute Related Claims and Causes of Action. Through these motions, the Trustee sought to add Lenders as defendants and enter into a joint prosecution agreement with non-debtor individuals (the "Interveners")3 who wished to prosecute similar claims.
The Court held a hearing on the motions on October 17, 2006. During the hearing, the Trustee withdrew the joint prosecution motion, the Court denied the Trustee's motion seeking leave to file a second amended complaint, and the Court entered a Case Management Order setting deadlines for parties seeking to intervene. The Court also ordered the complaint amended to include all claims to be asserted by the putative Intervenors. Between December 27, 2006, and January 3, 2007, ten motions to intervene were filed with over 85 individuals seeking to intervene.
In early 2007, Insiders and Lenders filed motions to dismiss. The motions primarily argued:
• The Trustee lacks standing because his claims were claims owned by individual Intervenors, not the estate.
• In pari delicto bars the Trustee from bringing the claims.
• Venue is improper.
• The Court should abstain.
A substantial part of the Motions to Dismiss were based on arguments that the Trustee lacked standing to assert certain claims for injuries sustained directly by Intervenors. On July 6, 2007, the Court issued a Memorandum Opinion and Order on Motions to Intervene. Within that Opinion, the Court determined whether the Trustee or Intervenors had standing to assert claims asserted in the Trustee's complaint. The Court rejected the Trustee's assertions as to ownership of certain claims. The Court attached a chart as "Exhibit A" stating which claims the Trustee owned and which claims the putative Intervenors owned. Parties were given until August 2, 2007 to object to the Court's characterization of the claims. After consideration of the objections filed, the Court's characterizations stand.4 Pursuant to the Court's Memorandum Opinion and Order on Motions to Intervene, the Court grants Defendants' Motions to Dismiss with respect to the Trustee's standing to assert claims on behalf of Intervenors and the related venue arguments.5 Consistent with "Exhibit A" of the Memorandum Opinion, the following claims are dismissed from the Trustee's complaint:
• A portion of the Breach of Fiduciary Duties claim against Michael Day, Max K. Day, Max O. Day, Chaz Robertson, Joshua Smith, and Terry Vanderpool.
• A portion of the claim for Aiding and Abetting Breach of Fiduciary Duties against Jared Day and Lenders.
• Fraud and Fraudulent Inducement against Max K. Day, Michael Day, Max O. Day, Chaz Robertson, Jared Day, Joshua Smith, and Terry Vanderpool.
• Conspiracy to Defraud and to Breach Fiduciary Duties against Michael Day, Max O. Day, Max K. Day, Chaz Robertson, Joshua Smith, Terry Vanderpool, and Lenders.
• Rescission against Lenders.
• Violations of the Texas Deceptive Trade Practices-Consumer Protection Act against Lenders.
• A portion of the additional claims against Sterling National Bank for Aiding and Abetting Breach of Fiduciary Duties and Fraud.
• Request for Declaratory Judgment against Lenders.
Contemporaneously with this Opinion, the Court is issuing an order requiring the Trustee to file an amended complaint and the Intervenors to file initial complaints.
This Memorandum Opinion considers the Motions to Dismiss with respect to the Trustee's surviving claims. The Court divides the Motions to Dismiss into two categories: (1) Motions to Dismiss filed by the Insiders; and (2) Motions to Dismiss filed by the Lenders. The primary issues remaining include whether: (1) the doctrine of in pari delicto bars the Trustee from asserting his claims; (2) the Trustee may bring contribution claims under the Texas Civil Practice and Remedies Code; and (3) the Court should abstain.6
Motions to Dismiss filed by Insiders
A default judgment has been entered against Chaz Robertson and Joshua Smith. The Court addressed the Motion to Dismiss by Terry Vanderpool at a separate hearing on July 26, 2007.7 Therefore, only the following claims survive in the Trustee's Second Amended Complaint as to the Insiders:
• Breach of Fiduciary Duties against Michael Day, Max K. Day, Max 0. Day, Chaz Robertson, Joshua Smith, and Terry Vanderpool.
• Defendants' Liability as Alter Egos or for Sham to Perpetrate a Fraud against Michael Day, Max K. Day, Max O. Day, Medicus Marketing, IDB, and Joshua Smith.
• Denuding the Corporation and Conspiracy to Denude the Corporation against Michael Day, Max K. Day, and Max O. Day.
Michael Day, Max K. Day, Max 0. Day, and Jared Day filed a joint Motion to Dismiss. The Insider's primary argument in their Motion to Dismiss and stated at the hearing is based on Rule 7009. Prior to the July 12, 2007 hearing, the Court issued a scheduling order in which it stated that it would not consider Rule 7009 issues at the July 12, 2007 hearing. There was little argument asserted by the Insiders under Rule 7012(b)(6).8 Insiders' Motion contains two remaining defenses the Court considers in this Opinion: in pari delicto and abstention.9
Motions to Dismiss filed by the Lenders
The remaining causes of action asserted by the Trustee against the Lenders include:
• Aiding and abetting breach of fiduciary duties.
• Contribution.
Lenders' Motions contain three remaining defenses the Court considers in this Opinion: in pari delicto, invalidity of the Trustee's contribution claims, and abstention.10
The Court has subject matter jurisdiction pursuant to § 1334. As established in the Court's Memorandum Opinion on Motions to Intervene, this is a "related to" proceeding. Venue is proper in this District pursuant to 28 U.S.C. § 1409.
A motion asserting a 12(b)(6) defense allows for dismissal due to a "failure to state a claim upon which relief can be granted." FED.R.CIV.P. 12(b)(6). The issue in a 12(b)(6) motion is whether a plaintiff is entitled to offer evidence to support its claim. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974). The Court must determine, "in the light most favorable to the plaintiff, whether the complaint states any valid claim for relief." Cinel v. Connick, 15 F.3d 1338, 1341 (5th Cir.1994). All well-pleaded allegations contained in the plaintiffs complaint must be accepted by the court as true. Albright v. Oliver, 510 U.S. 266, 268 114 S.Ct. 807, 127 L.Ed.2d 114 (1994). In addition, all facts pled must be specific, not merely conclusory. Guidry v. Bank of LaPlace, 954 F.2d 278, 281 (5th Cir.1992). When evaluating Rule 12(b)(6) motions, the Court should not grant a dismissal "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45^6, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957).
To determine whether the in pari delicto defense is proper, the Court must consider whether:
• In pari, delicto exists in Texas despite the enactment of the Proportionate Responsibility Statute.
• This proceeding is a proper venue to assert the defense.
• In pari delicto applies to a Trustee asserting claims that benefit the estate's creditors rather than a party who committed wrongdoing.
The Trustee contends that in pari delicto was abolished by passage of Chapter 33 of the Texas Civil Practice and Remedies Code (the "Proportionate Responsibility Statute"), last amended in 1995.
The Court rejects the Trustee's argument. The Texas legislature did not include within the Proportionate Responsibility statute a provision excluding tortfeasors who engaged in criminal conduct. Moreover, Texas state courts, and the Fifth Circuit applying Texas law, have continued to apply in pari delicto after the statute's passage and most recent amendment. See Rico v. Flores, 481 F.3d 234 (5th Cir.2007); Gladu v. Wallace, No. 11-02-00211-CV, 2003 WL 2010946 (Tex. App.-Eastland May 1, 2003, no pet.); Villanueva v. Gonzalez, 123 S.W.3d 461, 467 (Tex.App.-San Antonio, 2003, no pet.); Int'l Bank of Commerce-Brownsville v. Int'l Energy Dev. Corp., 981...
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