N. Ave. Capital, LLC v. United States

Decision Date10 April 2023
Docket NumberCIVIL SAG-22-03240
PartiesNORTH AVENUE CAPITAL, LLC, et al., Plaintiffs, v. UNITED STATES OF AMERICA, et al., Defendants.
CourtUnited States District Courts. 4th Circuit. United States District Court (Maryland)
MEMORANDUM OPINION

STEPHANIE A. GALLAGHER, UNITED STATES DISTRICT JUDGE

Plaintiffs/Counter-Defendants North Avenue Capital, LLC (NAC) and Newtek Small Business Finance, LLC (“Newtek” and together with NAC, the Plaintiffs) filed this action to foreclose their interests in certain real and personal property (“the Collateral”) owned by Defendants Moon Group, Inc. (“Moon Group”), Moon Landscaping, Inc. (“Landscaping”), Moon Nurseries, Inc. (“Nurseries”), Moon Site Management, Inc. (“Site Management”), Moon Wholesale, Inc., (“Wholesale”) and Rickert Landscaping, Inc. (“Rickert” and collectively the “Moon Entities”). Plaintiffs have also named as Defendants various parties-including Defendants/Counter-Plaintiffs Legalist DIP GP, LLC; Legalist DIP SPV II, LP; and Legalist DIP Fund I, LP (collectively “Legalist”)-that assert, or may assert, liens and interests in the Collateral.[1]

Two motions are pending. First, Plaintiffs have filed a motion seeking approval to engage an auctioneer to conduct a judicial sale of certain machinery and equipment (“the Equipment”) owned by the Moon Entities, with all liens on the Equipment to attach to the proceeds of the sale. ECF 52. Legalist opposed that motion, ECF 56, and Plaintiffs replied, ECF 58. Second, Plaintiffs have filed a motion to dismiss Legalist's counterclaims, which seek to set aside Plaintiffs' security interests in the Collateral as fraudulent conveyances. ECF 54. That motion is also fully briefed. ECF 54-1, 57, 59. No hearing is necessary to resolve these motions. See Loc. R. 105.6 (D. Md. 2021). For the reasons that follow, both motions will be granted.

I. FACTUAL BACKGROUND

The Moon Entities operated a nursery and landscaping business in Chesapeake City, Maryland. ECF 1 ¶ 30. Plaintiffs are creditors who made loans to the Moon Entities in June, 2019. See ECF 1 ¶¶ 43, 62; ECF 44 ¶ 1. NAC extended a term loan to the Moon Entities in the principal amount of $10 million, ECF 1 ¶ 43, while Newtek extended a term loan in the principal amount of $5 million, id. ¶ 62. In exchange for those loans, the Moon Entities granted Plaintiffs security interests in the Collateral, which includes parcels of land in Cecil County, Maryland, along with the Moon Entities' inventory, parts, and the Equipment. Id. ¶¶ 43-82. ECF 44 ¶¶ 2, 3. Plaintiffs and the Moon Entities also entered into an intercreditor agreement, whereby Plaintiffs agreed to share a co-equal first lien position on the Collateral in the proportion of the outstanding balance on their respective loans. ECF 1 ¶¶ 83-86. As of the filing of the Complaint in this case, Plaintiffs allege that the Moon Entities owe them more than $15.9 million combined in connection with the loans described above, including principal, interest, late charges, and costs. ECF 1 ¶¶ 130, 135.

On August 12, 2021, the Moon Entities each filed voluntary petitions for Chapter 11 bankruptcy relief in the United States Bankruptcy Court for the District of Delaware. Id. ¶ 105; see In re Moon Group, Inc., et al., No. 21-11140-JKS (Bankr. D. Del. 2021). Subsequent to the bankruptcy filings, the Moon Entities entered an agreement to obtain $8 million in debtor-in-possession financing from Legalist. ECF 1 ¶ 106. The bankruptcy court issued a final order authorizing that debtor-in-possession financing agreement on December 15, 2022 (the “DIP Order”). ECF 01-16; see also In re Moon Group, Inc., Dkt. 241. The DIP Order permitted the Moon Entities to grant Legalist various automatically perfected liens in the real and personal property of the Moon Entities, including junior liens on Moon Entities' property “subject to Permitted Senior liens,” pursuant to 11 U.S.C. § 364(c)(3). ECF 01-16 ¶ 4(ii); In re Moon Group, No. 21-11140-JKS, Dkt. 241.

The Chapter 11 bankruptcy proceedings were eventually converted to Chapter 7 liquidation proceedings. See In re Moon Group, No. 21-11140-JKS, Dkt. 530, 607. On July 21, 2022, the bankruptcy court issued an order (the “Lift Stay Order”) granting a joint consent motion by Plaintiffs and Legalist to (1) lift the automatic stay on the case with respect to the Collateral, and (2) abandon the Collateral so as to allow the parties to exercise their remedies pursuant to the loan agreements and liquidate the Collateral outside of bankruptcy. ECF 1-18 at 2-3; see also In re Moon Group, No. 21-11140-JKS, Dkt. 671.

Plaintiffs filed this action on December 15, 2022. ECF 1. In the Complaint, Plaintiffs assert that they have perfected, first-priority security interests in portions of the Collateral. ECF 1 ¶¶ 11921. They attach various loan documents and financing statements which allegedly support their first-priority status. See, e.g., ECF 1-06, 1-07, 1-11, 1-12, 1-13. The Complaint asks this Court to: (1) enter judgment for Plaintiffs against the Moon Entities for breach of the loan agreements (Counts I and II); (2) enter judgments of foreclosure and order the sale of the Collateral free and clear of all liens, with all such liens attaching to the net proceeds of the sales (Counts III-V); (3) adjudicate the validity and priority of the parties' liens (Counts VI, VII); and (4) distribute the proceeds of the sales referenced above to the lienholder parties in their respective orders of priority (Count VIII). Id. ¶¶ 125-176. Defendants Kore Capital Corporation, the United States of America, and Legalist all filed answers. ECF 29, 44, 50. Legalist also asserted three counterclaims pursuant to provisions of the Maryland Uniform Fraudulent Conveyance Act (MUFCA), Md. Code Ann., Comm. Law §§ 15-201, et seq., contending Plaintiffs did not provide fair consideration to the Moon Entities in exchange for their security interests in the Collateral. ECF 44, pp. 21-23, ¶¶ 118.

II. LEGAL STANDARDS

Under Federal Rule of Civil Procedure 12(b)(6), a defendant may test the legal sufficiency of a complaint by way of a motion to dismiss. See In re Birmingham, 846 F.3d 88, 92 (4th Cir. 2017); Goines v. Valley Cmty. Servs. Bd., 822 F.3d 159, 165-66 (4th Cir. 2016); McBurney v. Cuccinelli, 616 F.3d 393, 408 (4th Cir. 2010), aff'd sub nom., McBurney v. Young, 569 U.S. 221 (2013); Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999). A Rule 12(b)(6) motion constitutes an assertion by a defendant that, even if the facts alleged by a plaintiff are true, the complaint fails as a matter of law “to state a claim upon which relief can be granted.”

Whether a complaint states a claim for relief is assessed by reference to the pleading requirements of Federal Rule of Civil Procedure 8(a)(2). That rule provides that a complaint must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” The purpose of the rule is to provide the defendants with “fair notice” of the claims and the “grounds” for entitlement to relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56 (2007).

To survive a motion under Rule 12(b)(6), a complaint must contain facts sufficient to “state a claim to relief that is plausible on its face.” Id. at 570; see Ashcroft v. Iqbal, 556 U.S. 662, 684 (2009) (“Our decision in Twombly expounded the pleading standard for all civil actions[.]) (quotation omitted); see also Willner v. Dimon, 849 F.3d 93, 112 (4th Cir. 2017). However, a plaintiff need not include “detailed factual allegations” in order to satisfy Rule 8(a)(2). Twombly, 550 U.S. at 555. Further, federal pleading rules “do not countenance dismissal of a complaint for imperfect statement of the legal theory supporting the claim asserted.” Johnson v. City of Shelby, 574 U.S. 10, 11 (2014) (per curiam).

Nevertheless, the rule demands more than bald accusations or mere speculation. Twombly, 550 U.S. at 555; see Painter's Mill Grille, LLC v. Brown, 716 F.3d 342, 350 (4th Cir. 2013). If a complaint provides no more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action,” it is insufficient. Twombly, 550 U.S. at 555. Rather, to satisfy the minimal requirements of Rule 8(a)(2), the complaint must set forth “enough factual matter (taken as true) to suggest” a cognizable cause of action, “even if . . . [the] actual proof of those facts is improbable and . . . recovery is very remote and unlikely.” Twombly, 550 U.S. at 556.

In reviewing a Rule 12(b)(6) motion, a court “must accept as true all of the factual allegations contained in the complaint” and must “draw all reasonable inferences [from those facts] in favor of the plaintiff.” E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011) (citations omitted); see Semenova v. Md. Transit Admin., 845 F.3d 564, 567 (4th Cir. 2017); Houck v. Substitute Tr. Servs., Inc., 791 F.3d 473, 484 (4th Cir. 2015); Kendall v. Balcerzak, 650 F.3d 515, 522 (4th Cir. 2011), cert. denied, 565 U.S. 943 (2011). However, a court is not required to accept legal conclusions drawn from the facts. See Papasan v. Allain, 478 U.S. 265, 286 (1986). “A court decides whether [the pleading] standard is met by separating the legal conclusions from the factual allegations, assuming the truth of only the factual allegations, and then determining whether those allegations allow the court to reasonably infer” that the plaintiff is entitled to the legal remedy sought. A Soc'y Without a Name v. Virginia, 655 F.3d 342, 346 (4th Cir. 2011), cert. denied, 566 U.S. 937 (2012).

Furthermore claims that sound in fraud implicate the heightened pleading standard of Federal Rule of Civil Procedure 9(b). That rule states: “In alleging fraud or mistake, a party must state with particularity...

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