Mukamal v. Gen. Elec. Capital Corp. (In re Palm Beach Fin. Partners, L.P.)

• Decision Date: 23 August 2013
• Docket Number: CASE NO.: 09–36379–BKC–PGH,ADV. NO.: 12–01979–BKC–PGH–A
• Parties: In re: Palm Beach Finance Partners, L.P. and Palm Beach Finance II, L.P., Debtors. Barry Mukamal, Plaintiff, v. General Electric Capital Corporation, Defendant.
• Court: United States Bankruptcy Courts. Eleventh Circuit. U.S. Bankruptcy Court — Southern District of Florida

517 B.R. 310

In re: Palm Beach Finance Partners, L.P. and Palm Beach Finance II, L.P., Debtors.

Barry Mukamal, Plaintiff

v.General Electric Capital Corporation, Defendant.

CASE NO.: 09–36379–BKC–PGH

ADV. NO.: 12–01979–BKC–PGH–A

United States Bankruptcy Court, S.D. Florida, West Palm Beach Division .

Signed August 23, 2013

Michael S. Budwick, Esq., Meland Russin & Budwick, PA, Solomon B. Genet, Esq., David S. Mandel, Esq., Miami, FL, for Plaintiff.

Sean M. Berkowitz, David S. Foster, Chicago, IL, Patricia A. Redmond, Miami, FL, for Defendant.

CHAPTER 11

ORDER GRANTING IN PART AND DENYING IN PART GECC'S MOTION TO DISMISS (ECF NO. 32)

Paul G. Hyman, Chief Judge

THIS MATTER came before the Court upon the Motion to Dismiss (the “Motion to Dismiss”) (ECF No. 32) filed by General Electric Capital Corporation (“GECC”). The Motion to Dismiss seeks dismissal of the Amended Complaint (ECF No. 26) 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 part GECC's Motion to Dismiss and dismisses Counts 2 through 9 of the Amended Complaint without prejudice.

COMPLAINT ALLEGATIONS AND PROCEDURAL BACKGROUND

The following is a summary of the relevant allegations contained in the Amended Complaint. Thomas Petters (“Petters”) and his co-conspirators conspired to commit and actually did commit the third-largest financial fraud in U.S. history (the “Petters Ponzi Scheme”). GECC is one of the most sophisticated commercial lenders in the word, who at all material times through July 2, 2001, was chartered under the New York State Banking Law and subject to supervision by the State of New York banking authority. 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 Delaware limited partnerships which were formed in 2002 and 2004, respectively, to provide financing to Petters and his affiliates. In order to facilitate these financing activities, the Palm Beach Funds formed PBFP Holdings, LLC (“PBFP Holdings”).

By 1995, Petters began soliciting “investments” for his scheme. In soliciting investments, Petters represented to investors that the funds invested would be used to finance consumer electronic merchandise transactions. Petters claimed he would arrange for the sale and delivery of the consumer electronic merchandise from suppliers to “big box” retailers, such as Costco and Sam's Club. The financing would allow Petters to pay the suppliers while he awaited payment from retailers. However, unbeknownst to his investors, Petters' operation was nothing more than a Ponzi scheme—there were no true retailers, there was virtually no merchandise, the suppliers were co-conspirators, and the lenders were repaid from monies sourced from other defrauded lenders.

In 1997, Petters began to communicate with GECC about providing financing for his purchase financing operation. By 1998, GECC and Petters agreed that Petters Capital (a special purpose entity or “SPE”) would be formed to borrow $50 million on a revolving basis from GECC. According to the terms of the loan agreement, (1) the funds advanced would be used to purchase the consumer electronic merchandise, (2) GECC would be repaid from the sale of the merchandise, (3) retailers would be required to make their payments directly to a GECC-controlled lockbox, and (4) GECC would receive various forms of compensation, including interest and profit sharing “success fees.” On March 10, 1998, GECC filed a UCC–1 financing statement (“GECC Financing Statement”) with the Minnesota Secretary of State in order to perfect its security interest in the assets of Petters Capital. In 1999, GECC provided another line of credit to a Petters-controlled entity—a $ 55 million line of credit to RedtagBiz, Inc., f/k/a Redtagoutlet.com, Inc. (“Redtag”).

Over time, GECC and Petters developed an unusually close relationship, evidenced in part by (1) the profit sharing “success fees” arrangement, (2) the issuance on January 4, 2000, of GECC's recommendation letter praising Petters in his personal and business capacities (the “Recommendation Letter”), (3) GECC's overlooking of Petters' noncompliance with the terms of the loan agreement, (4) GECC's deviation from its standard procedures, and (5) the close relationship between Petters and Richard Menczynski (an Assistant Vice President with GECC who later left GECC to become RedTag's Vice President of Finance). In particular, the Recommendation Letter was an extraordinary departure from the typical “reference letter” issued by GECC to a borrower's specific vendor. The Recommendation Letter described Petters Capital as an “excellent customer”—a status which was exclusive to and created for Petters Capital. It also contained the atypical and extraordinary statement that on a personal level, Petters was “of high character and possess[ed] strong moral values.” Finally, the Recommendation Letter was not addressed to a specific individual or company, but rather was addressed “To whom it may concern,” indicating an understanding on the part of GECC that the Recommendation Letter would be distributed to multiple individuals.

In late 2000, GECC uncovered the fraudulent nature of the Petters Ponzi Scheme, including that Petters and his co-conspirators were engaged in a conspiracy to defraud their lenders. This discovery resulted in part from GECC's direct communication with Costco, one of Petters' supposed retailers, during which Costco stated that it had not entered into any purchase orders with Petters as Petters had represented. Upon making this discovery, GECC agreed to keep silent and not disclose its knowledge of the Petters Ponzi Scheme to anyone outside of GECC. Instead, GECC elected to accept a payoff from Petters of the revolving credit line, including payment of the “success fees,” and to otherwise join, encourage, aid, abet, facilitate, and substantially assist Petters' conspiracy.

In 2002, the Palm Beach Funds became involved with Petters through Frank Vennes (“Vennes”). Petters, acting through Vennes, used his former relationship with GECC as a selling point to entice the Palm Beach Funds to become lenders/investors in Petters' purchase financing operations. Additionally, Vennes, who was familiar with and influenced by GECC's Recommendation Letter, gave his own positive recommendation of Petters to the Palm Beach Funds. The Palm Beach Funds eventually agreed to become lenders to Petters and filed a UCC–1 financing statement in the Minnesota public records to ensure its position as first lienholder in the collateral it financed. Upon inspection of the public records, the Palm Beach Funds discovered that the GECC Financing Statement was still in effect. Accordingly, the Palm Beach Funds requested the GECC Financing Statement be terminated. Petters, in turn, asked GECC to terminate its Financing Statement. GECC agreed and appointed Petters Capital as its agent to terminate the GECC Financing Statement. Petters, through Petters Capital, filed a UCC–3 financing statement termination (“GECC Termination Statement”) on March 5, 2003. The Palm Beach Funds then went ahead with its loans to Petters.

Upon the implosion of the Petters Ponzi Scheme in September 2008, the Palm Beach Funds suffered damages in excess of $1 billion and eventually filed for chapter 11 bankruptcy protection on November 30, 2009. On September 3, 2010, the Plaintiff, as the Palm Beach Funds' Chapter 11 Trustee, filed a Second Amended Joint Plan of Liquidation¹ (the “Plan of Liquidation”), which the Court confirmed on October 21, 2010, in the Order Confirming the Joint Plan of Liquidation² (the “Confirmation Order”). Subsequently on September 29, 2012, the Plaintiff filed the instant adversary proceeding against GECC, seeking recovery on nine counts: (1) civil conspiracy to commit fraud, (2) aiding and abetting fraud, (3) fraud by omission, (4) fraudulent misrepresentation, (5) fraudulent concealment, (6) conspiracy to commit fraudulent concealment, (7) negligent misrepresentation, (8) fraud, and (9) negligence. In response, GECC filed the Motion to Dismiss now before the Court.

CONCLUSIONS OF LAW

I. Motion to dismiss standard

A. 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.

B. 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) ...