Mukamal v. Bmo Harris Bank N.A. (In re Palm Beach Fin. Partners, L.P.)

• Decision Date: 26 February 2013
• Docket Number: Adversary No. 11–03015–BKC–PGH–A.,Bankruptcy No. 09–36379–BKC–PGH.
• Citation: 488 B.R. 758
• Parties: In re PALM BEACH FINANCE PARTNERS, L.P. and Palm Beach Finance II, L.P., Debtors. Barry Mukamal, Plaintiff, v. BMO Harris Bank N.A. as Successor by Merger to M & I Marshall & Ilsley Bank and Christopher Flynn, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Florida

488 B.R. 758

In re PALM BEACH FINANCE PARTNERS, L.P. and Palm Beach Finance II, L.P., Debtors.Barry Mukamal, Plaintiff,

v.BMO Harris Bank N.A. as Successor by Merger to M & I Marshall & Ilsley Bank and Christopher Flynn, Defendants.

Bankruptcy No. 09–36379–BKC–PGH.

Adversary No. 11–03015–BKC–PGH–A.

United States Bankruptcy Court,

S.D. Florida,

West Palm Beach Division.

Feb. 26, 2013.

Michael S. Budwick, Esq., for Barry Mukamal.

Charles W. Throckmorton, Esq., Miami, FL, for BMO Harris Bank.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

PAUL G. HYMAN, JR., Bankruptcy Judge.

THIS MATTER came before the Court upon the Motion to Dismiss (the “Motion to Dismiss”) (ECF No. 72) filed by BMO Harris Bank N.A. as Successor by Merger to M & I Marshall & Ilsley Bank (“M & I” or “Defendant M & I”) and Christopher Flynn (“Flynn” or “Defendant Flynn,” and together with M & I, the “Defendants”). The Motion to Dismiss seeks dismissal of the Amended Complaint (ECF No. 65) filed by Barry Mukamal (the “Plaintiff”) in his capacity as Liquidating Trustee for the Palm Beach Finance Liquidating Trust and the Palm Beach Finance II Liquidating Trust. For the reasons discussed below, the Court grants in part and denies in the Defendants' Motion to Dismiss.

COMPLAINT ALLEGATIONS AND PROCEDURAL BACKGROUND

According to the allegations of the Amended Complaint, Palm Beach Finance Partners, L.P. (“PBF I”) and Palm Beach Finance II, L.P. (“PBF II” and together with PBF I, the “Palm Beach Funds”) were investors in the purchase financing operation run by Thomas Petters and Petters Company, Inc. (collectively, “Petters”). To facilitate these investing activities, the Palm Beach Funds created an affiliated entity, PBFP Holdings, LLC (“PBFP Holdings”). In soliciting investments, Petters represented to investors that investment funds would be used to finance consumer electronic merchandise transactions. Petters claimed he would arrange for the sale and delivery of consumerelectronic merchandise from suppliers to “big box” retailers, such as Costco and Sam's Club. Based upon these representations, the Palm Beach Funds and other investors wired funds directly to the bank accounts of two purported suppliers. After receiving these wire transfers, the suppliers were expected to ship the consumer electronic merchandise to retailers. The retailers were then to send payment for the merchandise to one of Petters' depository accounts (the “PCI Account”), which was maintained at M & I. In theory, those retailer funds were to be used first, to re-pay investors and second, to pay a commission to Petters.

Petters, however, was not operating a legitimate purchase financing operation. Petters was running a Ponzi scheme ¹—there were no purchase orders, no merchandise, no retailers, no sales to any retailers, and no payments from any retailers. Instead, according to the allegations, after receiving wire transfer funds from investors, the suppliers would deduct a commission and then remit the remaining funds to the PCI Account. Thereafter, the funds were allegedly used to repay earlier investors and to fund Petters' lavish lifestyle.

The Plaintiff alleges that M & I, as Petters' primary depository bank, received fraudulent transfers, knew of Petters' fraud, and engaged in wrongdoing which allowed Petters' fraud to continue undetected. Central to the Plaintiff's allegations of wrongdoing is the Deposit Account Management Agreement (“DAMA”), attached to the Amended Complaint as Exhibit 1, executed by Petters and M & I for the stated purpose of providing assurance to certain parties (the “Protected Parties”), which included PBFP Holdings and PBF I, that deposits into the PCI Account which should have been paid to a Protected Party would be properly transferred to the Protected Party.² Furthermore, the Plaintiff alleges that Defendant Flynn, an employee of M & I who was primarily responsible for the Petters relationship and who executed the DAMA on behalf of M & I, also knew of Petters' fraud and engaged in wrongdoing which allowed Petters' fraud to continue undetected. Finally, the Plaintiff alleges that as a result of the Defendants' wrongdoing, the Palm Beach Funds entered into hundreds of millions of dollars in new transactions and thus lost more money than they otherwise would have lost.

CONCLUSIONS OF LAW

I. Preliminary matters

A. Motion to dismiss standard

i. General pleading standard—Rules 8(a) and 12(b)(6)

In order to state a claim for relief under Federal Rule of Civil Procedure 8(a)³ and thus survive a Rule 12(b)(6)⁴ motion to dismiss, the factual allegations of the Plaintiff's Amended Complaint must “state a claim to relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 663, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). In determining facial plausibility, a court should not assume the veracity of mere legal conclusions or threadbare recitals of the elements of a cause of action. Id. at 679, 129 S.Ct. 1937. However, 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 664, 129 S.Ct. 1937. If a plaintiff's allegations do “not nudge[ ] their claims across the line from conceivable to plausible, [the] complaint must be dismissed.” Twombly, 550 U.S. at 570, 127 S.Ct. 1955.

ii. Pleading special matters—Rule 9(B)

When a plaintiff asserts claims based upon fraud or mistake, simply meeting the pleading requirements of Rule 8(a) is insufficient to survive a Rule 12(b)(6) motion to dismiss. In addition, Federal Rule of Civil Procedure 9(b)⁵ requires that “[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” Rule 9(b) “serves an important purpose in fraud actions by alerting defendants to the ‘precise misconduct with which they are charged’ and protecting defendants ‘against spurious charges of immoral and fraudulent behavior.’ ” Durham v. Bus. Mgmt. Assoc., 847 F.2d 1505, 1511 (11th Cir.1988) (quoting Seville Indus. Mach. Corp. v. Southmost Mach. Corp., 742 F.2d 786, 791 (3d Cir.1984), cert. denied,469 U.S. 1211, 105 S.Ct. 1179, 84 L.Ed.2d 327 (1985)). The Eleventh Circuit Court of Appeals has held that:

Rule 9(b) is satisfied if the complaint sets forth “(1) precisely what statements were made in what documents or oral representations or what omissions were made, and (2) the time and place of each such statement and the person responsible for making (or, in the case of omissions, not making) same, and (3) the content of such statements and the manner in which they misled the plaintiff, and (4) what the defendants obtained as a consequence of the fraud.”

Mizzaro v. Home Depot, Inc., 544 F.3d 1230, 1237 (11th Cir.2008) (quoting Tello v. Dean Witter Reynolds, Inc., 494 F.3d 956, 972 (11th Cir.2007)). However, “Rule 9(b) does not require a plaintiff to allege specific facts related to the defendant's state of mind.” Id. “[M]alice, intent, knowledge, and other conditions of a person's mind” may be pled generally. FED.R.CIV.P. 9(b).

“In construing allegations of actual fraud in an action brought by a bankruptcy trustee, the ‘particularity’ standard of ... Rule 9(b) is somewhat relaxed.” Cox v. Grube (In re Grube), Adv. No. 10–8055, 2013 WL 343459, at *9 (Bankr.C.D.Ill. Jan. 29, 2013) (citing Zazzali v. AFA Fin. Grp., LLC (In re DBSI, Inc.), 477 B.R. 504 (Bankr.D.Del.2012)); see also, Ivey v. First–Citizens Bank and Trust Co. (In re Whitley), Adv. No. 12–02028, 2013 WL 486782, at *13 (Bankr.M.D.N.C. Feb. 7, 2013); Wiand v. EFG Bank, No. 8:10–CV–241–T–17MAP, 2012 WL 750447, at *6 (M.D.Fla. Feb. 8, 2012); Tolz v. U.S. (In re Brandon Overseas, Inc.), Adversary No. 09–01971–RBR, 2010 WL 2812944, at *5 (Bankr.S.D.Fla. July 16, 2010). Thus, when a trustee brings a claim for fraud, Rule 9(b)'s particularity requirement is met “ ‘if the person charged with fraud will have a reasonable opportunity to answer the complaint and has adequate information to frame a response ... or if it identifies the circumstances constituting fraud so that the defendant can prepare an adequate answer from the allegations.’ ” In re Brandon Overseas, 2010 WL 2812944, at *5 (quoting In re Arizen Homes, 2009 WL 393863, at *2).

“Such flexibility afforded to trustees in bankruptcy with respect to the pleading requirements is [usually] appropriate ‘[g]iven the inevitable lack of knowledge concerning the acts of fraud previously committed against the debtor, a third party.’ ” In re Arizen Homes, 2009 WL 393863, at *2. However, when a trustee does not suffer from this lack of knowledge, the need to relax Rule 9(b)'s heightened pleading requirements does not exist. In such cases, the trustee will be held to the usual Rule 9(b) standard. See Roberts v. Balasco (In re Ernie Haire Ford, Inc.), 459 B.R. 824, 837 (Bankr.M.D.Fla.2011).

iii. Rule 9(b) and allegations based upon information and belief

Generally, allegations of fraud based on information and belief ⁶ do not satisfy Rule 9(b)'s heightened standard of pleading. Hekker v. Ideon Grp., Inc., No. 95–681–Civ–J–16, 1996 WL 578335, at *4 (M.D.Fla. Aug. 19, 1996) (citing Leisure Founders, Inc. v. CUC Int'l, Inc., 833 F.Supp. 1562, 1574 (S.D.Fla.1993)). “However, where the subject matter of the fraud is uniquely within the adverse party's knowledge or control, allegations of fraud based upon information and belief may be acceptable.” Id. (citing Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 645 (3d Cir.1989)); see also, Hill v. Morehouse Med. Assocs., Inc., No. 02–14429, 2003 WL 22019936, at *3 (11th Cir. Aug. 15, 2003). In such circumstances,...