Joel I. Sher in His Capacity for TMST, Inc. v. Funding (In re TMST, Inc.), Case Nos. 09-17787

• Court: U.S. Bankruptcy Court — District of Maryland
• Writing for the Court: NANCY V. ALQUIST, U.S. BANKRUPTCY JUDGE
• Citation: 610 B.R. 807
• Parties: IN RE: TMST, INC., f/k/a Thornburg Mortgage, Inc., et al., Debtors Joel I. Sher in his capacity as Chapter 11 Trustee for TMST, Inc., f/k/a Thornburg Mortgage, Inc., et al., Plaintiff v. JPMorgan Chase Funding, et al., Defendants
• Decision Date: 17 December 2019
• Docket Number: Case Nos. 09-17787,Adv. Proc. No. 11-340 NVA,Jointly Administered Under Case No. 09-17787 NVA,17790-17792 NVA

610 B.R. 807

IN RE: TMST, INC., f/k/a Thornburg Mortgage, Inc., et al., Debtors

Joel I. Sher in his capacity as Chapter 11 Trustee for TMST, Inc., f/k/a Thornburg Mortgage, Inc., et al., Plaintiff
v.
JPMorgan Chase Funding, et al., Defendants

Case Nos. 09-17787
17790-17792 NVA
Jointly Administered Under Case No. 09-17787 NVA
Adv. Proc. No. 11-340 NVA

United States Bankruptcy Court, D. Maryland, (Baltimore Division).

Signed December 17, 2019

610 B.R. 812

Matthew C. Behncke, Stuart V. Kusin, Colin Watterson, Mark L. D. Wawro, Susman Godfrey, Houston, TX, Joel I. Sher, Daniel Joseph Zeller, Shapiro Sher Guinot & Sandler, Richard L. Costella, Alan M. Grochal, Tydings and Rosenberg LLP, Baltimore, MD, for Plaintiff.

Amy L. Barton, Elizabeth M. Sacksteder, Paul, Weiss, Rifkind, Wharton & Garrison, Israel Dahan, King & Spalding LLP, New York, NY, Joseph Michael Selba, Tydings & Rosenberg LLP, Matthew G. Summers, Ballard Spahr LLP, Michelle McGeogh, Todd Michael Brooks, Whiteford Taylor & Preston LLP, Baltimore, MD, Abigail Bortnick, King & Spalding, Michael J. Baratz, Steven K. Davidson, Molly Bruder Fox, Steptoe & Johnson LLP, Washington, DC, Thaddeus D. Wilson, King & Spalding LLP, Atlanta, GA, Paige Barr Tinkham Blank Rome LLP, Chicago, IL, Daniel C. Spurlock, Katten Muchin Rosenman LLP, Washington, DC, Sheldon T. Zenner, Katten Muchin Rosenman LLP, Chicago, IL, for Defendants.

MEMORANDUM OPINION IN SUPPORT OF ORDER DENYING DEFENDANTS' MOTION [ECF NO. 423] TO DISMISS COUNTS 3, 10, 16, AND 20 OF THE SECOND AMENDED COMPLAINT

NANCY V. ALQUIST, U.S. BANKRUPTCY JUDGE

In this adversary proceeding, the Trustee seeks to avoid as fraudulent transfers certain agreements entered into between the Debtors and the Defendant Banks (including liability releases given to the Banks) and the transfer of hundreds of millions of dollars paid under certain of these agreements. The Trustee also seeks to disallow claims of the Banks. The Trustee advances two theories as to why the transfers and obligations are avoidable under § 548(a)(1)(A) of the Bankruptcy Code.¹

First, the Trustee alleges that the Banks did not comply with contractual obligations, did not comport themselves within appropriate standards, failed to properly value the collateral, improperly dominated and controlled the Debtors, and essentially caused the precipitous decline in the Debtors' fortunes resulting in their bankruptcies. The Trustee maintains that the Banks' actions reduced the Debtors to mere instrumentalities, with no free will, which then acted at the behest of the Banks to make the challenged transfers of monies and releases to the Banks. The Trustee alleges that in these circumstances, the intent and actions of the Banks (the transferees) may be imputed to

610 B.R. 813

the Debtors (the transferors) for purposes of § 548(a)(1)(A).

Second, the Trustee maintains that the intent and actions of a single officer/agent of the Debtors (purportedly acting in his own self-interest) may be imputed to the Debtors and may stand as a separate basis for avoiding the transfers under § 548(a)(1)(A). The parties refer to the Trustee's second theory as one in which the alleged liability is based on the "Debtors' own intent," as opposed to the first theory, in which it is based on the Banks' imputed intent.

Presently before the Court is the Banks' motion to dismiss the counts of the Second Amended Complaint that raise the Trustee's second theory. Specifically, the Banks seek dismissal of counts 3, 10, 16, and 20 "to the extent they address the Debtors' own intent" as attributed to them through the actions of their officer. The Banks maintain that these counts must be dismissed under Rule 12(b)(6) because they fail to state a claim for relief and because the Trustee's allegations are not specific enough under Rule 9(b). The Banks urge that the Trustee does not sufficiently plead intent, that he fails to plead the badges of fraud, and that he fails to meet the standard for imputing an agent's actions or intent in a corporate principal-agent relationship. They also maintain that the Trustee's second theory is fatally inconsistent with his first.

The Court has determined that the Trustee states a plausible claim in counts 3, 10, 16, and 20 of the Second Amended Complaint and that these amended counts may proceed to trial.

I. Background

This adversary proceeding was commenced on April 30, 2011 by Joel I. Sher, the chapter 11 trustee (the "Trustee") against certain investment banks² (the "Banks") with which the Debtors had pre-petition dealings. Although certain of the claims were already dismissed,³ the Trustee retains claims against the Banks in the aggregate amount of approximately $1 billion.⁴

610 B.R. 814

The Trustee amended his original complaint for the first time on June 8, 2011 [ECF No. 15] (the "Amended Complaint"). Some six years later, the parties were still involved in conducting paper discovery and were having discovery disputes. More issues arose when the Banks received interrogatory responses from the Trustee that revealed that the parties had a different understanding of the meaning of certain counts of the Amended Complaint and the Trustee's legal theories. The Banks brought this dispute to the Court's attention by filing their Motion for an Order to Show Cause Why the Trustee Should Not be Denied Leave to Amend the Complaint and Why His Interrogatory Responses Should Not Be Stricken [ECF No. 309].

Although the deadline to amend the complaint had long passed,⁵ after a hearing, the Court granted leave to the Trustee to further amend only counts 3, 10, 16, and 20 of the Amended Complaint (to add/clarify allegations of "Debtors' actual fraudulent intent"), subject to the Banks' right to move to dismiss them. The Court hoped to bring clarity to the Trustee's theories, the Banks' defenses, and the issues pending for trial. Accordingly, the Trustee filed his Second Amended Complaint [ECF No. 421] (the "Second Amended Complaint"). The Banks now move to dismiss the amended counts.

The Banks acknowledge that the Trustee has always made clear that he intends to prosecute fraudulent transfer claims based on the theory that the Banks' alleged fraudulent intent may be imputed to the Debtors. Indeed, the sufficiency of that claim has already been tested by the Court.⁶ The Banks object because the Second Amended Complaint now makes clear that the Trustee also intends to prosecute fraudulent transfer claims on the theory that the Debtors harbored a legally sufficient intent to defraud based on the self-serving actions of one of the Debtors' own officers. The Trustee alleges in the amended

610 B.R. 815

counts that a single officer (Larry Goldstone) who acted with improper motive (to make himself rich) was able to cause the Debtors to do his bidding, and that his bad intent became the Debtors' own for fraudulent transfer purposes.

In the instant Joint Motion to Dismiss [ECF No. 423] (the "Motion to Dismiss"), the Banks claim that the Second Amended Complaint goes too far by advancing theories and causes of action that were never contemplated in the Amended Complaint. They assert that this is an eleventh-hour U-turn by the Trustee because he now realizes that he will be unable to prove his original theories. The Banks seek dismissal of the Trustee's claims in counts 3, 10, 16, and 20 "to the extent they are based on the Debtors' own intent" to hinder, delay, or defraud the Debtors' creditors. They argue that the Trustee fails to plead claims upon which relief can be granted. (The Court will hereinafter refer to the amended allegations of counts 3, 10, 16, and 20 as the "Amended Counts.").

II. The Amended Counts

The Amended Counts plead that Mr. Goldstone harbored actual intent to hinder, delay, or defraud, which can be imputed to the Debtors and form a basis for avoidance of transfers by the Debtors under § 548(a)(1)(A).⁷

In particular, the Second Amended Complaint alleges that Mr. Goldstone, the former CEO and President of the Debtors, caused or acceded to the transfer of hundreds of millions of dollars and other consideration to the Banks that harmed the Debtors in order to further his own financial interests. Second Amended Complaint at ¶¶ 49–59, 61–62, 77–78, 112–15, 133, 143. It alleges that Mr. Goldstone knew that the Banks' demands were improper, that the Banks were demanding an excessive turnover of collateral, and that the Debtors were being left in a position such that they could not pay other creditors if the Banks were paid. Second Amended Complaint at ¶¶ 112–15, 154–55, 158, 218. Nonetheless, the Second Amended Complaint alleges that Mr. Goldstone transferred (or permitted to be transferred) millions of dollars to the Banks to preserve his personal interest in Thornburg Mortgage Advisory Corporation ("TMAC"), a related entity that received millions from the Debtors and that Goldstone hoped would survive bankruptcy and make him truly wealthy. Second Amended Complaint at ¶¶ 26–29, 112–15.

The Second Amended Complaint alleges that Mr. Goldstone, among others, devised a strategy to preserve assets known as the "Thrift Strategy." Under...