Kohut v. Serra (In re Munivest Servs., LLC), Bankruptcy No. 10–71403.

• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Michigan
• Writing for the Court: PHILLIP J. SHEFFERLY
• Citation: 500 B.R. 487
• Decision Date: 15 October 2013
• Docket Number: Adversary No. 12–05921–PJS.,Bankruptcy No. 10–71403.
• Parties: In re MUNIVEST SERVICES, LLC, et al., Debtor. Gene R. Kohut, Chapter 7 Trustee for MuniVest Services, LLC, et al., Plaintiff, v. Metzler Locricchio Serra & Company, P.C., Defendant.

500 B.R. 487

In re MUNIVEST SERVICES, LLC, et al.,¹ Debtor.
Gene R. Kohut, Chapter 7 Trustee for MuniVest Services, LLC, et al., Plaintiff,
v.
Metzler Locricchio Serra & Company, P.C., Defendant.

Bankruptcy No. 10–71403.
Adversary No. 12–05921–PJS.

United States Bankruptcy Court,
E.D. Michigan,
Southern Division.

Oct. 15, 2013.

[500 B.R. 490]

Adam L. Kochenderfer, Anthony J. Kochis, Scott A. Wolfson, Wolfson Bolton PLLC, Troy, MI, for Plaintiff.

Fred Karl Herrmann, Patrick Warren Hunt, Matthew Powell, Detroit, MI, for Defendant.

Opinion Denying In Part And Granting In Part Defendant's Partial Motion For Dismissal
PHILLIP J. SHEFFERLY, Bankruptcy Judge.
Introduction

The debtors in these jointly administered Chapter 7 bankruptcy cases operated a Ponzi scheme in which investors lost millions of dollars. The Chapter 7 trustee filed a 16 count complaint against an accounting firm that provided services to the debtors. The accounting firm filed a motion requesting dismissal of 11 counts of the complaint. For the reasons explained in this opinion, the Court concludes that the motion should be granted as to eight of those counts and denied as to three of those counts. Specifically, the Court grants the motion as to counts eight through ten and twelve through sixteen, and denies the motion as to counts six, seven and eleven.

Jurisdiction

This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a). Counts six and seven of the complaint are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(H), and counts eight through sixteen are core proceedings pursuant to § 157(b)(2)(O). In its motion, the defendant accounting firm challenges the Court's jurisdiction over counts six through sixteen based on

[500 B.R. 491]

Waldman v. Stone, 698 F.3d 910 (6th Cir.2012). The Court will address that challenge in a separate section of this opinion.

Facts

For the purposes of the motion to dismiss, the Court accepts as true the following allegations of fact in the complaint filed on November 2, 2012 (ECF No. 1).

Dante DeMiro was the founder and managing director of a business known as MuniVest Services, LLC (“MuniVest”). DeMiro operated MuniVest as a Ponzi scheme. DeMiro perpetrated the scheme by falsely promising investors that he would invest their funds in certificates of deposit and other investment vehicles. To entice investors, DeMiro promised them a rate of return that exceeded similar investments in the marketplace. Once an investor made an investment, DeMiro would generate and transmit financial statements to the investor showing that the investor's principal had earned large amounts of interest that DeMiro had promised. These statements were false. The investors' funds were not used to purchase certificates of deposit and other investment vehicles. Instead, the funds were used to pay for personal luxury expenses of DeMiro and to pay for MuniVest's business expenses necessary to keep the Ponzi scheme going.

DeMiro hired an accounting firm, Metzler Locricchio Serra & Company, P.C. (“Metzler”) to assist him with respect to an offer in compromise of a tax debt with the Internal Revenue Service (“IRS”). Metzler analyzed MuniVest's financial records, prepared tax returns for DeMiro and MuniVest, and provided other accounting services. Stephen Johnson, an experienced accountant and senior manager at Metzler, was responsible for DeMiro's and MuniVest's tax returns. Johnson knew that MuniVest purported to invest funds for its investors, but that it did not do so. Johnson reviewed line by line the general ledgers that MuniVest's bookkeeper forwarded to him. The general ledgers did not show that the funds received by MuniVest were invested for its customers as promised, but instead showed that the funds were repeatedly used to pay business expenses of MuniVest and to pay personal luxury expenses of DeMiro. Metzler prepared tax returns for DeMiro and MuniVest for 2008 and 2009 using these general ledgers, even though the information contained on them was inconsistent and incorrect. Metzler's accounting services enabled DeMiro and MuniVest to temporarily evade detection of their Ponzi scheme by the IRS and others. Metzler violated IRS regulations by signing DeMiro's and MuniVest's tax returns because Metzler knew or should have known that they were incorrect. Metzler also failed to comply with the standards governing the preparation of tax returns established by the American Institute of Certified Public Accountants (“AICPA”).

The IRS conducted an audit of DeMiro's and MuniVest's tax returns for 2008 and 2009 and discovered that the returns significantly understated their tax obligations. The IRS assessed substantial penalties against DeMiro exceeding $2.6 million for the years 2008 and 2009.

On September 16, 2010, DeMiro was arrested by federal agents for orchestrating a Ponzi scheme that defrauded numerous investors. On October 7, 2010, a federal grand jury indicted DeMiro on three counts of bank fraud and two counts of wire fraud. On October 12, 2010, Mona Shores Public Schools, which had invested $3.5 million in the Ponzi scheme, and was the largest victim of the Ponzi scheme, filed involuntary Chapter 7 bankruptcy petitions against both DeMiro and MuniVest (collectively, the “Debtors”). On November 5, 2010, the Bankruptcy Court entered orders for relief granting both involuntary

[500 B.R. 492]

bankruptcy petitions. Gene R. Kohut (“Trustee”) was appointed as the Chapter 7 trustee.

On July 12, 2011, DeMiro was sentenced following a guilty plea in which he admitted that he:

• is the founder and managing director of MuniVest;

• dominated and controlled MuniVest, and the MuniVest entities were all alter egos of DeMiro;

• operated a bank and wire fraud Ponzi scheme using the MuniVest entities;

• falsely promised investor clients that he would invest their funds in various certificates of deposit in furtherance of the Ponzi scheme; and

• did not invest their funds as promised, but instead used those funds to purchase personal items, real property, gamble, make payments to other investors in the same Ponzi scheme and make loans to several individuals and a local jewelry store.

DeMiro admitted guilt to all five counts of the indictment. He has now been sentenced and imprisoned.

On September 14, 2011, the Bankruptcy Court entered an order granting the Trustee's motion to approve a coordination agreement between the Trustee and the United States Attorney's Office for the Eastern District of Michigan. The coordination agreement expressly provides that the Trustee may pursue avoidance actions in these bankruptcy cases and that such avoidance actions, including the Trustee's action against Metzler, are excluded from those assets forfeited by the Debtors to the United States. As allowed by the coordination agreement, the Trustee filed this adversary proceeding and other similar adversary proceedings to recover assets for the benefit of the victims of the Ponzi scheme and the creditors of these bankruptcy estates.

Trustee's complaint

The Trustee's complaint contains two broad categories of claims against Metzler. The first category consists of claims asserted by the Trustee on behalf of the Debtors' bankruptcy estates. The following counts in the complaint consist of claims within this category:

Count one: turnover and accounting—§ 542

Count two: preferential transfers—§§ 547(b), 550(a) and 551

Count three: claim disallowance—§ 502

Count four: actual fraudulent transfers—§§ 548(a)(1)(A), 550(a) and 551

Count five: constructive fraudulent transfers—§§ 548(a)(1)(B), 550(a) and 551

Count six: actual fraudulent transfers—Michigan law and §§ 544, 550 and 551

Count seven: constructive fraudulent transfers—Michigan law and §§ 544, 550(a) and 551

Count eight: accounting malpractice—Michigan law and § 544

Count ten: aiding and abetting fraud—Michigan law and § 544

Count twelve: negligence—Michigan law and § 544

Count fourteen: breach of fiduciary duty—Michigan law and § 544

Count fifteen: aiding and abetting breach of fiduciary duty—Michigan law and § 544

The second category of claims consists of claims not held by the Debtors' bankruptcy estates, but instead held by five separate investors: Mona Shores Public School District; Boilermakers Local 85; American Postal Workers Union Local 480–81; County of Lapeer; and United Service Credit Union (collectively referred

[500 B.R. 493]

to in the complaint as the “Assignors”). All of the Assignors were victims of the Debtors' Ponzi scheme. Their damages total approximately $7 million. Each of the Assignors entered into a written agreement with the Trustee to assign their claims against Metzler to the Trustee to prosecute for the benefit of the bankruptcy estates. The assignment agreements each state that any proceeds recovered by the Trustee from prosecution of the assigned claims are property of the Debtors' bankruptcy estates, and will be distributed by the Trustee to all creditors in the bankruptcy cases in accordance with the applicable provisions of the Bankruptcy Code. The following counts in the complaint consist of claims of the Assignors against Metzler:

Count nine: Michigan law—accounting malpractice

Count eleven: Michigan law—aiding and abetting fraud

Count thirteen: Michigan law—negligence

Count sixteen: Michigan law—aiding and abetting breach of fiduciary duty

Applicable standards under Rule 12(b)(1) and (6)

Metzler has moved to dismiss eleven of the sixteen counts in the Trustee's complaint under Fed.R.Civ.P. 12(b)(1) and (b)(6), as incorporated in this adversary proceeding pursuant to Fed. R. Bankr.P. 7012.

Fed.R.Civ.P. 12(b)(1) allows a party to assert a “lack of subject matter jurisdiction” defense by motion. If a court determines that it lacks subject matter jurisdiction, it must dismiss the action. Fed.R.Civ.P. 12(h)(3).

Fed.R.Civ.P. 8(a)(2), incorporated by Fed. R. Bankr.P. 7008(a), requires that a pleading contain “a short and plain statement of the claim showing that...