Newtek Small Bus. Fin., LLC v. Tex. First Capital, Inc.

• Docket Number: CIVIL ACTION NO. 22-2461
• Decision Date: 07 December 2022
• Citation: Newtek Small Bus. Fin., LLC v. Tex. First Capital, Inc., 644 F.Supp.3d 113 (E.D. Pa. 2022)
• Parties: NEWTEK SMALL BUSINESS FINANCE, LLC, Plaintiff, v. TEXAS FIRST CAPITAL, INC., Defendant.
• Court: U.S. District Court — Eastern District of Pennsylvania

644 F.Supp.3d 113

NEWTEK SMALL BUSINESS FINANCE, LLC, Plaintiff, v. TEXAS FIRST CAPITAL, INC., Defendant.

CIVIL ACTION NO. 22-2461

United States District Court, E.D. Pennsylvania

Signed December 7, 2022

John J. Winter, The Chartwell Law Offices, LLP, Eagleville, PA, for Plaintiff.

Thomas R. Dominczyk, Maurice Wutscher, LLP, Flemington, NJ, for Defendant.

MEMORANDUM OPINION

Smith, District Judge

This case arises out of two creditors, burned by their common debtor, fighting over the scraps. The default rule under the Uniform Commercial Code for resolving this kind of fight is first in time, first in right. However, in certain instances, the Code cuts off a security interest to protect parties' confidence in the finality of regular commercial transactions. Here, the plaintiff seeks to claw back a completed transaction between the debtor and the defendant. But the Code is clear, without a showing of collusion, the defendant took the funds from the debtor free of the plaintiff's security interest.

The defendant has moved to dismiss the complaint because it is devoid of any facts to support a finding of collusion, misconduct, or other fraudulent intent. The court agrees and will grant the motion to dismiss. However, this dismissal will be without prejudice to the plaintiff filing an amended complaint if it can include the necessary factual allegations to maintain a plausible claim for relief.

I. ALLEGATIONS AND PROCEDURAL HISTORY

On June 23, 2022, the plaintiff, Newtek Small Business Finance, LLC ("Newtek"), filed the instant complaint against the defendant, Texas First Capital, Inc. ("Texas First"). Doc. No. 1. In the complaint, Newtek alleges that it has a security interest in, inter alia, the accounts receivable of the defunct debtor, Children First Home Health Care, Inc. ("Children First"). See Compl. at 4, Doc. No. 1. When Children First collected on the accounts receivable, it would deposit the funds into a bank account which was used to pay various business expenses. Id. at ¶ 18; see also Mot. to Dismiss at ECF p. 6, Doc. No. 4. Newtek did not have an original security interest in this deposit account but instead relied on the funds being proceeds of the accounts receivable. See Compl. at ¶¶ 4, 18, 20.

Texas First joined the fray through a series of transactions in late 2019 and early 2020 when it purchased a portion of Children First's future receivables amounting to $954,381.43 in exchange for an upfront sum of $590,878.03. See id. at ¶ 17; see also Mot. to Dismiss at ECF p. 3. Texas First collected its payments by auto-debiting Children First's bank account. See Compl. at ¶ 18; see also Mot. to Dismiss at ECF p. 6. At the time of these transactions, Children First was in financial distress. See Compl. at 8. Within six months, Maria Radwanski and Michael Little, both principals of Children First, had filed for bankruptcy. See id. at ¶¶ 9, 24.

Based on these allegations, Newtek asserts causes of action for conversion, fraudulent conveyances, and tortious interference with a contract. Id. at 11-13. Newtek also seeks a declaratory judgment that it holds a perfected first lien security interest in the accounts receivables and any proceeds, and its lien has priority over Texas First's lien. Id. at 10. In addition, Newtek seeks an injunction directing Texas First to disgorge the proceeds collected from the receivables and remit those proceeds to Newtek. Id.

In response to the complaint, Texas First filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) on August 25, 2022. Doc. No. 4. On September 14, 2022, Newtek filed a response in opposition to the motion to dismiss. Doc. No. 6. On September 21, 2022, Texas First filed a reply to the response. Doc. No. 8. The court held oral argument on the motion to dismiss in conjunction with the initial pretrial conference on November 7, 2022. See Doc. No. 10. The motion to dismiss is now ripe for review.

II. DISCUSSION

A. Standard - Motion to Dismiss

Federal Rule of Civil Procedure 12(b)(6) allows a party to move for dismissal of a complaint or a portion of a complaint for failure to state a claim upon which relief can be granted. Fed. R. Civ. P. 12(b)(6). A motion to dismiss under Rule 12(b)(6) tests "the sufficiency of the allegations contained in the complaint." Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993) (citation omitted). As the moving party, "[t]he defendant bears the burden of showing that no claim has been presented." Hedges v. United States, 404 F.3d 744, 750 (3d Cir. 2005) (citation omitted).

In general, a complaint is legally sufficient if it contains "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). "The touchstone of [this] pleading standard is plausibility." Bistrian v. Levi, 696 F.3d 352, 365 (3d Cir. 2012). Although Rule 8(a)(2) does "not require heightened fact pleading of specifics," it does require the recitation of "enough facts to state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 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, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citation omitted). In other words, "[t]he plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quotation omitted). "In ruling on a 12(b)(6) motion, courts can and should reject legal conclusions, unsupported conclusions, unwarranted references, unwarranted deductions, footless conclusions of law, and sweeping legal conclusions in the form of actual allegations." Bright v. Westmoreland Cnty., 380 F.3d 729, 735 (3d Cir. 2004) (citation and internal quotation marks omitted). Ultimately, a complaint must contain facts sufficient to nudge any claim "across the line from conceivable to plausible." Twombly, 550 U.S. at 570, 127 S.Ct. 1955. "The defendant bears the burden of showing that no claim has been presented." Hedges, 404 F.3d at 750 (citation omitted).

B. Analysis

As indicated above, Newtek asserts the following causes of action in the complaint: (1) fraudulent conveyance pursuant to 12 Pa. C.S. § 5101; (2) conversion of its secured collateral; and (3) tortious interference with contract. Compl. at 11-13. It also asserts a separate count where it seeks a declaratory judgment pursuant to 28 U.S.C. § 2201 and injunctive relief. Id. at 10. Texas First has moved to have the court dismiss these causes of action and requests for relief. See generally Mot. to Dismiss. The court will address each of these causes of action and requests for relief in turn.

1. Count I: Declaratory Judgment

Newtek seeks a declaration from this court that the money paid from Children First to Texas First is rightfully owed to it. See Compl. at 10-11. The Declaratory Judgment Act ("DJA") provides that "[i]n a case of actual controversy within its jurisdiction, . . . any court of the United States, . . . may declare the rights and other legal relations of any interested party seeking such declaration, whether or not further relief is or could be sought." 28 U.S.C. § 2201(a); see also Dianoia's Eatery, LLC v. Motorists Mut. Ins. Co., 10 F.4th 192, 196 (3d Cir. 2021) (discussing DJA).

As is typical with understanding U.C.C. provisions, the court starts with the definitions of the terms of art. The Pennsylvania U.C.C. defines an "[a]ccount" as "a right to payment of a monetary obligation, whether or not earned by performance: (i) for property which has or is to be sold, leased, licensed, assigned, or otherwise disposed of; [and] (ii) for services rendered or to be rendered[.]" 13 Pa. C.S. § 9102(a). The Code also defines "[p]roceeds" as "[w]hatever is acquired upon the sale, lease, license, exchange or other disposition of collateral." Id. The Code further defines a "[d]eposit account" as "[a] demand, time, savings, passbook or similar account maintained with a bank. The term does not include investment property or accounts evidenced by an instrument." Id.

Newtek asks the court to declare that the transfer was improper under two theories: (1) Newtek had a senior perfected security interest in, inter alia, the "[r]eceivables and the proceeds thereof" and thus its lien should be paid before Texas First is entitled to any of the funds; or in the alternative (2) the transfer from Children First's deposit account involved collusion between Children First and Texas First and should be clawed back. See Compl. at 7, 8. The first theory fails as a matter of law while the second theory fails for lack of sufficient facts pled in the complaint.

The first theory fails because it incorrectly assesses Newtek's interest in the funds after the funds are transferred from the deposit account to Texas First. The U.C.C. states that "[a] transferee of funds from a deposit account takes the funds free of a security interest in the deposit account unless the transferee acts in collusion with the debtor in violating the rights of the secured party." 13 Pa. C.S. § 9332(b). Thus, without a showing of collusion, Texas First took the contested funds free of any security interest in the deposit account held by Newtek.

The situation here is similar to that in Cortland Savings and Banking Co. v. Platinum Rapid Funding Group, Ltd., 182 N.E.3d 1259 (Ohio Ct. App. 2021). In Courtland Savings, the plaintiff-bank took a security interest in a third party's accounts. Id. at 1262. The third party then sold a percentage of the future accounts receivable to the defendant. Id. The court held that the defendant took the money free of the plaintiff's security interest, "if there was no collusion." Id. at 1264. The court explained that Ohio's equivalent of section 9332(b) "permits [the defendant], as the...