Se Prop. Holdings, LLC v. Stewart (In re Stewart)

• Decision Date: 17 August 2017
• Docket Number: ADV No. 16-1117-JDL,Case No. 15-12215-JDL
• Parties: In re: DAVID A. STEWART and TERRY P. STEWART, Debtors. SE PROPERTY HOLDINGS, LLC, Plaintiff, v. DAVID A. STEWART, TERRY P. STEWART, et al., Defendants, KIRKPATRICK BANK, Intervenor.
• Court: U.S. Bankruptcy Court — Western District of Oklahoma

In re: DAVID A. STEWART and TERRY P. STEWART, Debtors.SE PROPERTY HOLDINGS, LLC, Plaintiff, v. DAVID A. STEWART, TERRY P. STEWART, et al., Defendants,KIRKPATRICK BANK, Intervenor.

Case No. 15-12215-JDL

ADV No. 16-1117-JDL

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF OKLAHOMA

August 17, 2017

The following is ORDERED:

Ch. 7

Jointly Administered

MEMORANDUM OPINION AND ORDER GRANTING MOTIONS TO DISMISS

I. Introduction

This matter comes on for consideration upon the Motion to Dismiss Amended Complaint and Brief in Support filed by Intervenor, Kirkpatrick Bank ("Kirkpatrick"), on June 1, 2017 ("Motion(s)") [Doc. 150], the Motion to Dismiss Amended Complaint with Brief in Support filed on June 1, 2017 by the Defendants¹ ("Motion(s)") [Doc. 151], SE Property Holdings, LLC's Response to Defendants' Motion to Dismiss Amended Complaint and Brief in Support filed by SE Property Holdings, LLC ("SEPH") on June 15, 2017 (the "Response") [Doc. 154], and SE Property Holdings, LLC's Response to Kirkpatrick Bank's Motion to Dismiss Amended Complaint filed on June 15, 2017 (the "Response") [Doc. 155].

David A. Stewart and Terry P. Stewart (individually and collectively referred to as "Stewarts") are the Debtors in these related cases which are jointly administered. This adversary proceeding was commenced by SEPH's filing of its original Complaint for Substantive Consolidation and Accounting Pursuant to 11 U.S.C. § 105 on November 22, 2016. [Doc. 1]. By this adversary proceeding SEPH seeks to add eight (8) non-debtor entities (the "Non-Debtors") to the jointly administered case relying upon the theory of substantive consolidation. These are eight (8) entities in which Stewart acts in a managerial capacity, holds, or at one time held, an interest, or in the case of a Trust held an interest in the trust res. SEPH is not a creditor of any of the eight (8) Non-Debtors.

II. Jurisdiction

The Court has jurisdiction over this proceeding under 28 U.S.C. §§ 157(a) and 1334(b). This is a core proceeding under 28 U.S.C. § 157(b)(2)(A) and (O). Venue of this adversary proceeding in this district is proper under 28 U.S.C. § 1409(a).

III. The Previous Motion to Dismiss and Ruling

On January 29, 2017, Intervenor Kirkpatrick filed its Motion to Dismiss Adversary Proceeding [Doc. 104] arguing that the Complaint should be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim asserting that substantive consolidation was not an appropriate cause of action against the Non-Debtors.² Specifically, Kirkpatrick contended that (1) the Court cannot invoke its equitable powers under 11 U.S.C. § 105 to establish jurisdiction over a non-debtor entity not in bankruptcy, (2) SEPH as a non-creditor of the Non-Debtors did not have standing to force the Non-Debtors' assets into Stewarts' bankruptcy estate, and (3) SEPH's failure to join indispensable parties, i.e. creditors of the Non-Debtors, constituted a denial of due process to such creditors compelling dismissal.³ After the filing of a Response by SEPH, a Reply by Kirkpatrick and a Sur-Reply by SEPH, on May 3, 2017, the Court entered its Memorandum Opinion and Order Granting Motion to Dismiss (the "Order") dismissing SEPH's Complaint but granting SEPH fifteen (15) days from the date of the Order within which to file an amended complaint should it so choose. [Doc. 141].

In its Order, the Court reluctantly recognized that under very limited circumstances it had the discretion, to be exercised sparingly on a highly fact-specific case-by-case basis, to substantively consolidate a debtor's estate with non-debtors. To do so however, a partyseeking to do so must show (1) a substantial identity between the entities (assets of the entities in question are "hopelessly co-mingled"), (2) consolidation is necessary to avoid some harm or to realize some benefit, (3) that if a creditor objects on the grounds that it relied on the separate credit of one of the entities to its prejudice consolidation may be ordered only if the benefits heavily outweigh the harm, and (4) that consolidation was for the benefit of all creditors and that benefits of consolidation outweigh any resulting harm to general creditors of the entities. [Order, Doc.141, pgs. 15-18]; Helena Chemical Company v. Circle Land and Cattle Corporation (In re Circle Land and Cattle Corporation), 213 B.R. 870, 876 (Bankr. D. Kan. 1997); In re Archdiocese of St. Paul and Minneapolis, 553 B.R. 693 (Bankr. D. Minn. 2016).

The Court found that SEPH had alleged sufficient facts, accepted as true for motion to dismiss purposes, as to the alter ego or piercing-of-the-veil elements sufficient to disregard the separateness of the entities for substantive consolidation. However, the Court found that SEPH's conclusory allegations that "substantive consolidation would benefit all of the estates' creditors" failed to allege sufficient facts as to why or how the creditors of the Non-Debtors were benefitted, whether the creditors of the Non-Debtors were also creditors of Stewart, whether such creditors were relying upon the credit of Stewart or even who the creditors of the Non-Debtors were.⁴ Accordingly, the Court dismissed the Complaint with leave for SEPH to amend. On May 18, 2017, SEPH timelyfiled its First Amended Complaint for Substantive Consolidation and Accounting Pursuant to 11 U.S.C. §105 (the "Amended Complaint") [Doc. 144].

IV. The Standard for a Motion to Dismiss

Under Federal Rule of Civil Procedure 12(b)(6)⁵, a claim may be dismissed because of plaintiff's "failure to state a claim upon which relief can be granted". The Court must evaluate the motion to dismiss to determine whether the complaint alleges sufficient facts supporting all the elements necessary to establish an entitlement to relief under the claims raised. Lane v. Simon, 495 F.3d 1182, 1186 (10^th Cir. 2007). In reviewing a complaint under Rule 12(b)(6), all allegations of material fact are taken as true and construed in the light most favorable to the non-moving party. Casanova v. Ulibarri, 595 F.3d 1120, 1124 (10^th Cir. 2010); Barenberg v. Burton (In re Burton), 463 B.R. 142 (10^th Cir. BAP 2010) (unpublished).

To avoid a Rule 12(b)(6) dismissal, "a complaint must contain sufficient factual matter, accepted as true, to state a claim that is plausible on its face". Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009); Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A dismissal under Rule 12(b)(6) may be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Bare legal conclusions and simple recitations of the elements of a cause of action do not satisfy this standard. Twombly, 550 U.S. at 555. As the Tenth Circuit has stated:

"To survive dismissal under Rule 12(b)(6) for failure to state a claim, plaintiffs must "nudge their claims across the line from conceivable to plausible." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct.1955,167 L.Ed.2d 929 (2007). While factual assertions are taken as true, legal conclusions are not. A plaintiff is "not required to set forth a prima facie case for each element, [but] is required to set forth plausible claims." Khalik, 671 F.3d at 1193. "A claim has facial plausibility when the [pleaded] factual content ... 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)."

Cook v. Baca, 512 Fed.Appx. 810, 821 (10^th Cir. 2013); See also, Lamar v. Boyd, 508 Fed. Appx. 711 (10^th Cir. 2013).

The Tenth Circuit has interpreted the "plausibility" requirement to mean "that if [allegations] are so general that they encompass a wide swath of conduct, much of it innocent, then the plaintiffs have not nudged their claims across the line from conceivable to plausible". Robbins v. State of Oklahoma, ex rel., Department of Human Services, 519 F.3d 1242, 1247 (10^th Cir. 2008). "The allegations must be enough that, if assumed to be true, the plaintiff plausibly (not just speculatively) has a claim for relief". Id. It is well recognized that "granting a motion to dismiss is a harsh remedy and must be cautiously studied, not only to effectuate the spirit of the liberal rules of pleadings but also to protect the interests of justice". Dias v. City and County of Denver, 567 F.3d 1169, 1178 (10^th Cir. 2009). The courts have the authority to "fully resolve any purely legal question" on the motion to dismiss and consequently, there is no "inherent barrier to reach the merits [claim] at the Rule 12(b)(6) stage." Marshall County Health Care Authority v. Shalala, 988 F.2d 1221, 1226 (D.C. Cir. 1993).

Generally, the sufficiency of a complaint must rest on its contents alone. SeeCasanova v. Ulibarri, 595 F.3d 1120, 1125 (10th Cir. 2010); Gossett v. Barnhart, 139 Fed. Appx. 24, 24 (10^th Cir. 2004) (unpublished) ("In ruling on a Rule 12(b)(6) motion to dismiss, the District Court is limited to the facts pled in the complaint."); Carter v. Daniels, 91 Fed. Appx. 83 (10^th Cir. 2004) (unpublished) ("The district court must determine if the complaint alone is sufficient to state a claim; the district court cannot review matters outside of the complaint.").

There are three limited exceptions to this general principle: (1) documents that the complaint incorporates by reference, see Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499 (2007); (2) "documents referred to in the complaint if the documents are central to the plaintiff's claim and the parties do not dispute the documents' authenticity," Jacobsen v. Deseret Book Co., 287 F.3d 936, 941 (10^th Cir. 2002); and (3) "matters of which a court may take judicial notice," Tellabs, Inc., 551 S.Ct. at 322; Front Row Technologies, LLC v. NBA Media Ventures, LLC, 163 F.Supp.3d 938 (D. N.M. 2016). Furthermore, the...