Kohut v. Wayne Cnty. Treasurer (In re Lewiston)
| Decision Date | 09 April 2015 |
| Docket Number | Case No. 12–58599,Adversary Proceeding No. 14–4843–PJS |
| Citation | 528 B.R. 387 |
| Parties | In re: Richard Martin Lewiston, Debtor. Gene R. Kohut, Chapter 7 Trustee, Plaintiff, v. Wayne County Treasurer, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Michigan |
528 B.R. 387
In re: Richard Martin Lewiston, Debtor.
Gene R. Kohut, Chapter 7 Trustee, Plaintiff
v.
Wayne County Treasurer, Defendant.
Case No. 12–58599
Adversary Proceeding No. 14–4843–PJS
United States Bankruptcy Court, E.D. Michigan, Southern Division.
Signed April 09, 2015
Charles D. Bullock, Stevenson & Bullock, P.L.C., Elliot G. Crowder, Michael A. Stevenson, Southfield, MI, for Debtor.
Ryan D. Heilman, Troy, MI, for Plaintiff.
Leonora K. Baughman, Richardo I. Kilpatrick, Kilpatrick & Associates, Auburn Hills, MI, for Defendant.
Opinion Denying Motion To Dismiss
Phillip J. Shefferly, United States Bankruptcy Judge
Introduction
The Chapter 7 trustee filed a complaint against the Wayne County Treasurer (“Wayne County”) to avoid and recover $307,602.83 of alleged fraudulent transfers under § 544(b)(1) and § 550 of the Bankruptcy Code. Wayne County has moved to dismiss the complaint. For the reasons set forth in this opinion, the Court will deny Wayne County's motion.
Jurisdiction
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and 28 U.S.C. § 157(a) and (b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(H).
Facts
On August 13, 2012, Richard M. Lewiston (“Debtor”) filed this Chapter 7 case. Gene R. Kohut (“Trustee”) is the duly appointed Chapter 7 trustee. On September 12, 2014, the Trustee filed a single count amended complaint (“Complaint”) (ECF No. 3) against Wayne County. For purposes of Wayne County's motion to dismiss, the Court accepts as true all of the Complaint's well pleaded factual allegations. The Complaint alleges the following.
The Debtor was in the business of developing and managing real estate projects. The Debtor issued guarantees of various debts relating to these projects. By 2006, many of the projects had failed or were failing, the Debtor was insolvent, and the Debtor was left with an unreasonably small amount of capital to operate the projects. The Debtor knew that his liabilities exceeded his assets and that he had incurred debts beyond his ability to repay. In the six years before the Debtor filed bankruptcy, several of the projects (“Projects”) became indebted to Wayne County for the payment of taxes and fees. Each of the Projects was insolvent during the six years before the Debtor filed bankruptcy. Although not legally obligated to do so, the Debtor individually made payments to Wayne County totaling $307,602.83 during the six years before he filed bankruptcy, to pay taxes and fees owed by the Projects to Wayne County. The Debtor received no benefit in exchange for making these payments. According to the Trustee, these facts establish that the payments to Wayne County are fraudulent transfers that the Trustee may avoid under § 544(b)(1) of the Bankruptcy Code and recover under § 550 of the Bankruptcy Code.
Wayne County has moved to dismiss the Complaint on two grounds. First, Wayne County argues that the Complaint does not contain sufficient factual content to meet the Twombly –Iqbal1 pleading standard and, therefore, fails to state a claim upon which relief can be granted under Fed. R. Civ. P. 12(b)(6) (incorporated by Fed. R. Bankr.P. 7012 ). Second, Wayne County argues that the Trustee is barred from bringing the Complaint against Wayne County by the doctrine of sovereign immunity. After Wayne County's motion was fully briefed by Wayne County and the Trustee, the Court held a hearing on December 22, 2014.2 Following the hearing, the Court entered an order (ECF No. 13) rejecting Wayne County's first argument based on the Twombly –Iqbal standard. The Court took Wayne County's second argument under advisement.
Discussion
Chapter 5 of the Bankruptcy Code authorizes a bankruptcy trustee to avoid and recover for the bankruptcy estate certain transfers made by a debtor before filing bankruptcy. For example, § 547 authorizes a trustee to avoid certain preferential transfers and § 548 authorizes a trustee to
avoid certain fraudulent transfers. Both of these sections create stand alone, statutory causes of action that exist only in a bankruptcy case. In addition, § 544(b)(1) permits a bankruptcy trustee to utilize certain causes of action that are not created by the Bankruptcy Code, but instead are available to a debtor's creditors outside of a bankruptcy case, to avoid and recover transfers for the bankruptcy estate. Section 544(b)(1) provides that a “trustee may avoid any transfer of an interest of the debtor in property ... that is voidable under applicable law by a creditor holding an unsecured claim [.]” When bringing a cause of action under § 544(b)(1), a trustee essentially stands in the shoes of an actual unsecured creditor of the debtor.
The Trustee filed the Complaint under § 544(b)(1) based on the Michigan Uniform Fraudulent Transfer Act (“MUFTA”), Mich. Comp. Laws Ann. §§ 566.31 to 566.43. Although the elements of a fraudulent transfer claim under MUFTA largely mirror the elements of a fraudulent transfer claim under § 548, there are at least two significant differences. First, MUFTA has a much longer statute of limitations. Section 548 only permits the avoidance of a fraudulent transfer if it was made within two years before the filing of the bankruptcy case. MUFTA permits the avoidance of a fraudulent transfer so long as it was made within six years before the cause of action is brought. In this case, all of the payments identified in the Complaint were made more than two years before the Debtor filed bankruptcy, but less than six years before the Trustee filed the Complaint. That explains why the Trustee filed the Complaint under § 544(b)(1) instead of § 548. Second, unlike a fraudulent transfer claim under § 548, a trustee can only bring a fraudulent transfer claim under § 544(b)(1) if the trustee can show that an actual creditor holding an unsecured claim against the debtor could have brought the fraudulent transfer claim outside of a bankruptcy case under applicable non-bankruptcy law. It is this second distinction that forms the crux of the dispute between the Trustee and Wayne County.
Wayne County argues that the Trustee may not use § 544(b)(1) to avoid and recover the payments identified in the Complaint because of the doctrine of sovereign immunity. Specifically, Wayne County asserts that it is a political subdivision of the State of Michigan and that the State of Michigan, as a sovereign, is immune from suit unless it consents. Wayne County cites the 11th Amendment and pronouncements by the Michigan Supreme Court that “any relinquishment of sovereign immunity must be strictly interpreted,” Pohutski v. City of Allen Park, 465 Mich. 675, 641 N.W.2d 219 (2002), and asserts that the State of Michigan has not relinquished the doctrine of sovereign immunity for purposes of MUFTA.
In its response to Wayne County's motion, the Trustee does not challenge Wayne County's assertion that it is a political subdivision of the State of Michigan eligible to invoke the doctrine of sovereign immunity. Accordingly, for purposes of this opinion, the Court assumes that Wayne County is an entity that is eligible to assert sovereign immunity. The Trustee's response also concedes that, absent bankruptcy, an actual unsecured creditor of the Debtor could not successfully bring a claim against Wayne County under MUFTA because of sovereign immunity.3
However, the Trustee argues that Wayne County's sovereign immunity is expressly waived for purposes of § 544(b)(1) by § 106(a)(1) of the Bankruptcy Code. Titled “Waiver of Sovereign Immunity,” § 106(a)(1) provides that: “Notwithstanding an assertion of sovereign immunity, sovereign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to the following: (1) Sections ... 544 ... of this title.” For additional support, the Trustee relies on Central Virginia Community College v. Katz, 546 U.S. 356, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006), which rejected sovereign immunity as a defense to an action brought by a trustee under § 547 to recover a preferential transfer against a Virginia state government agency. In Katz, the Supreme Court noted that “Congress has the power to enact bankruptcy laws the purpose and effect of which are to ensure uniformity in treatment of state and private creditors.” Id. at 376, n. 13, 126 S.Ct. 990. Accordingly, the enactment of § 106(a)(1) was a valid exercise of Congressional powers. Id. at 379, 126 S.Ct. 990 (“The question [ ] is whether Congress' determination that States should be amenable to such proceedings is within the scope of its power to enact ‘Laws on the subject of Bankruptcies.’ We think it beyond peradventure that it is.”). The Katz Court went on to hold that, in ratifying the Bankruptcy Clause contained in Article I, § 8, clause 4 of the Constitution, the states “acquiesced in a subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts.” Id. at 378, 126 S.Ct. 990. Based on § 106(a)(1)...
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