Mangan v. People's United Bank, N.A. (In re Integrity Graphics, Inc.)
| Decision Date | 06 November 2020 |
| Docket Number | CASE NO. 17-21513 (JJT),ADV. PRO. NO. 19-02027 (JJT) |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — District of Connecticut |
| Parties | IN RE: INTEGRITY GRAPHICS, INC., Debtor. Bonnie Mangan, Trustee, Plaintiff v. People's United Bank, N.A., GHP Media, Inc., and Joseph Lavalla, Defendants. |
David C. Shufrin, Hurwitz Sagarin Slossberg & Knuff, LLC, Milford, CT, for Plaintiff.
Scott D. Rosen, Cohn Birnbaum & Shea P.C., Jon P. Newton, Reid and Riege PC, Hartford, CT, Barbara H. Katz, Timothy D. Miltenberger, Coan Lewendon Gulliver & Miltenberger, New Haven, CT, for Defendants.
This Adversary Proceeding was initiated by the Chapter 7 Trustee (the "Trustee") on October 31, 2019 (the "Complaint", ECF No. 1), in order to avoid and recover, pursuant to 11 U.S.C. §§ 544 and 548, the Connecticut Fraudulent Transfer Act (CUFTA)1 and Article Nine of the Uniform Commercial Code made applicable through the Connecticut General Statutes2 , certain intentional and/or constructive fraudulent transfers of the Debtor's property made to or for the benefit of the Defendants in connection with a purported secured party sale agreement ("Secured Party Sale Agreement") between Defendants People's United Bank ("People's United") and GHP Media ("GHP"). Defendants People's United, GHP and Joseph Lavalla ("Lavalla"), the principal of the Debtor at the time the Secured Party Sale Agreement was entered into, now move pursuant to Fed. R. Civ. P. 12(b)(1) and (6), as made applicable to this proceeding by Fed. R. Bankr. P. 7012(b), for dismissal of the Complaint as to Counts I and III alleging actual fraudulent transfer, Counts II and IV alleging constructive fraudulent transfer, Count VI alleging constructive trust and Count VII alleging a violation of Article Nine of the Uniform Commercial Code.3 See Motion to Dismiss (ECF No. 19, the "Motion"), p. 1. Therein, the Defendants principally argue that the material allegations in the Complaint are largely based upon "information and belief" and that the source of the information relied upon and the reasons for the Trustee's belief are not provided for in the Complaint. Id. , p. 1. Specifically, the Defendants claim that the Complaint contains a conclusory allegation that the value of the assets sold pursuant to the Secured Party Sale Agreement exceeded the purchase price and that the Complaint does not state what value or range of values the Trustee attributes to the assets, Id. , p. 2; while also failing to state any of the circumstances constituting actual fraud. Memorandum of Law in Support of the Motion (ECF No. 20, "MOL"), p. 4.
A hearing on the Motion was scheduled for March 12, 2020, however, prior to the hearing taking place, due to the Covid-19 pandemic, the hearing was continued (ECF No. 27). The hearing on the Motion was ultimately held on July 9, 2020 (ECF No. 54), whereat the Parties were able to advance their respective arguments. In order to address novel arguments presented during oral argument, the Court requested supplemental briefing and thereafter took the matter under advisement. After due consideration of the Motion, the supporting papers and the supplemental memoranda of law filed by the Parties, and as discussed herein, the Court hereby GRANTS the Defendants' Motion to Dismiss in part and hereby DENIES it in part.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b) and derives its authority to hear and determine this matter on reference from the District Court pursuant to 28 U.S.C. §§ 157(a) and (b)(1). This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (E), (F), (H) and (O). Venue is proper in this District pursuant to 28 U.S.C. §§ 1408 and 1409.
Prior to the filing of an involuntary petition by three of its trade creditors on October 3, 2017, see Main Case 17-21513, ECF No. 1; the Debtor was a full-service print and design company headquartered in Windsor, Connecticut. Complaint, ¶ 11. Lavalla was an equity holder of the Debtor and asserted control over the Debtor's business and business practices. Id. , ¶ 10. The Debtor had a commercial revolving line of credit with People's United, as well as additional loans (collectively, the "Loan") that were subject to a master credit agreement between the Debtor and People's United. Id. , ¶ 12. As consideration for the Loan, the Debtor entered into a security agreement with People's United, dated October 25, 1999 (the "Security Agreement"), whereby People's United held a blanket lien on "all Accounts, Chattel Paper, Documents, Goods, Fixtures, Securities, Documents of Title, Inventory, Instruments, Investment Property, General Intangibles, Equipment (excluding motor vehicles) and Records ...." Id. , ¶ 14. Additionally, Lavalla provided a personal guarantee for the obligations of the Debtor under said agreements. Id. , ¶ 16.
On June 30, 2017, the Loan terminated by its own terms thereby making the sums owed immediately due and payable to People's United. Id. , ¶ 17. According to People's United, the Debtor owed $1,670,954.23 under the Loan (the "Loan Balance"). Id. , ¶ 13. On July 7, 2017, one week after the Loan terminated, People's United and GHP, a corporation with a place of business located in West Haven, Connecticut, entered into a certain Secured Party Sale Agreement, whereby People's United purported to sell, transfer, assign, and deliver to GHP "all of Seller's interests in the assets of the [Debtor (the "Purchased Assets") ] that are subject to the Seller's perfected security interest and described on Schedule 1.1[,]" of the transaction documents (the "Secured Party Sale"). Id. , ¶¶ 18–19.4 In exchange for the Purchased Assets, GHP paid People's United the sum of one million three hundred thousand dollars ($1,300,000) (the "Purchase Price"). Id. , ¶ 30.
On the same day as the Secured Party Sale, People's United and Lavalla entered into a mutual release agreement thereby releasing Lavalla of his personal guarantee under the Loan. Additionally, Lavalla and GHP entered into an employment agreement whereby Lavalla would be paid $200,000 per year for a fixed number of years, plus commissions and benefits. Id. , ¶¶ 26–27. Thereafter, GHP and/or Lavalla took control of all of the Debtor's assets and its bank accounts. Id. , ¶ 39.
The Complaint alleges, upon information and belief, that People's United did not obtain an appraisal of the Purchased Assets in connection with the Secured Party Sale and did not thoroughly investigate the value of the Purchased Assets, Id. , ¶¶ 35, 37; nor did it solicit bids from anyone other than GHP. Id. , ¶¶ 34, 36. The Complaint also alleges, upon information and belief, that People's United, after being introduced to GHP by Lavalla, colluded to quickly and privately transfer all of the Debtor's assets to GHP in exchange for payment to People's United, the release of Lavalla's personal guaranty, and a valuable employment contract for Lavalla. Id. , ¶ 21.
The Trustee further alleges in the Complaint that Lavalla individually signed a consent agreement (the "Consent Agreement") and caused the Debtor to sign the Consent Agreement, despite the fact that the Debtor did not receive any consideration in exchange for said Consent Agreement. Id. , ¶¶ 23–25. The Trustee alleges that the assets seized by GHP and/or Lavalla included portions of the Debtor's assets that were not part of the Purchased Assets and not covered by the Secured Party Bill of Sale, such as money in the Debtor's deposit accounts and the Debtor's motor vehicles. Id. , ¶ 40. The Trustee further alleges, upon information and belief, that the Purchased Assets were worth significantly more than both the Purchase Price and the Loan Balance, that the Debtor had equity in the Purchased Assets, Id. , ¶ 29, and that the Purchased Assets were not of the type customarily sold on a recognized market or which threatened to decline rapidly in value. Id. , ¶¶ 32–33.
The United States Supreme Court laid out a two-step test to evaluate a complaint's sufficiency. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). First, except for legal conclusions, all allegations contained in the complaint are accepted as true. Id. Second, the complaint must state a plausible claim for relief to survive dismissal. Id. at 679, 129 S.Ct. 1937. The plaintiff makes a facially plausible claim when it "pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678, 129 S.Ct. 1937 (citing Bell Atl. Corp. v. Twombly , 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do." Id. (citation and internal quotation marks omitted). "When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief." Id. at 679, 129 S.Ct. 1937. "Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id. (citation omitted).
Counts II and IV of the Complaint allege constructive fraud under 11 U.S.C. § 548 (a)(1)(B) and 11 U.S.C. § 544 pursuant to Conn. Gen. Stat. § 52-552f, respectively. Under Section 548(a)(1)(B) of the Bankruptcy Code, a plaintiff must allege that within two years of the petition date that the Debtor transferred an interest in property and: (i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such...
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