Ransel v. Libertyville Bank & Trust Co. (In re Holco Capital Grp., Inc.)

Decision Date25 September 2013
Docket NumberPROC. NO. 12-3023,CASE NO. 10-30006 HCD
PartiesIN THE MATTER OF HOLCO CAPITAL GROUP, INC., DEBTOR. J. RICHARD RANSEL, TRUSTEE, PLAINTIFF, v. LIBERTYVILLE BANK AND TRUST COMPANY; WELLS FARGO BANK, N.A.; HSL FINANCIAL, LLC, and SL FINANCIAL OF ILLINOIS, LLC, DEFENDANTS.
CourtU.S. Bankruptcy Court — Northern District of Indiana

CHAPTER 7

Appearances:

J. Richard Ransel, Esq., Trustee, Thorne, Grodnik LLP, 228 West High Street, Elkhart, Indiana 46516;

James R. Byron, Esq., and Lisa Gilkey Schoetzow, Esq., counsel for Trustee, Thorne, Grodnik LLP, 228 West High Street, Elkhart, Indiana 46516;

Rebecca Hoyt Fischer, Esq., counsel for Libertyville Bank and Trust Company, 401 East Colfax, Suite 305, South Bend, Indiana 46617;

Carl A. Greci, Esq., and Ryan G. Milligan, Esq., counsel for Wells Fargo Bank, N.A., Faegre Baker Daniels LLP, 202 South Michigan Street, Suite 1400, South Bend, Indiana 46601; and

Stephen Scallan, Esq., counsel for HSL Financial, LLC, and SL Financial of Illinois, LLC, Staes & Scallan, P.C., 111 West Washington, Suite 1631, Chicago, Illinois 60602.

MEMORANDUM OF DECISION

At South Bend, Indiana, on September 25, 2013.

Before the court is a Motion to Dismiss filed by the four defendants in this adversary proceeding, Libertyville Bank and Trust Company ("Libertyville"), Wells Fargo Bank, N.A. ("Wells Fargo"), HSLFinancial, LLC ("HSL"), and SL Financial of Illinois, LLC ("SL"). Consolidating their positions and jointly adopting the Motion of Wells Fargo,1 they seek dismissal of the Amended Complaint2 filed by J. Richard Ransel, Trustee ("Trustee") of the chapter 7 debtor Holco Capital Group, Inc. ("Holco" or "debtor"), pursuant to Federal Rule of Civil Procedure 12(b)(6) and Federal Rule of Bankruptcy Procedure 7012. Following the Trustee's response in objection to the Motion and the defendants' replies, the court took the matter under advisement.3 For the reasons that follow, the court grants the defendants' Motion to Dismiss in part and denies it in part.

BACKGROUND

For the purposes of this Motion to Dismiss, the underlying factual allegations in the Trustee's Amended Complaint are deemed to be true. It is worth adding, however, that the material facts in this case are not in dispute. Before the court are legal challenges to the Trustee's standing and authority to bring this adversary proceeding and his failure to state a claim upon which relief can be granted.

Kukui Gardens Corporation ("Kukui") is a Hawaii non-profit corporation formed to provide housing for low and moderate income families in Hawaii. In February 1969, Kukui obtained a $16 million loan from The Ford Foundation, endorsed and insured by the United States Department of Housing and Urban Development ("HUD"), to build its housing development. As a condition of receiving the loan, Kukuibecame subject to a HUD regulatory agreement requiring Kukui to establish two accounts, a Replacement Reserve Fund and a Residual Receipts Fund ("the Funds").

On January 1, 1998, Kukui and HUD contracted with Holco to service Kukui's loan (the promissory note, the mortgage, and the Funds) related to Kukui's housing development in Honolulu, Hawaii. Holco, an Indiana corporation whose president, sole officer, and sole stockholder was Kevin Horton ("Horton"), became the servicer for Kukui pursuant to the HUD regulatory agreement. Kukui's property manager was responsible for collecting the rent payments and depositing them in a Funds account. Holco provided reports to the property manager and managed the Funds for the benefit of Kukui. The Funds accounts were located at Wells Fargo and Libertyville banks and were listed in Holco's name.

In December 2007, Kukui entered into an agreement for the sale of its property. It asked Holco to release the mortgage on the property and the Funds from the two accounts. Holco refused to release the Funds, contending that it was owed $4 million for obtaining HUD's approval for prepayment of the note and for servicing the mortgage for 21 years. Kukui denied Holco's claim and argued that Holco had converted the Funds. HUD demanded the return of the balance of the Funds. After setoffs and adjustments, Kukui asserted it still was owed at least $2,703,561.77 (approximately $2.7 million).

Also in December 2007, Holco borrowed funds from Libertyville and Wells Fargo in order to make loans to Horton's other business entities unrelated to Holco. In early January 2008, Holco and Kevin Horton used Kukui's Funds to pay the following creditors of Holco:

$1,442,972.50 to Libertyville
$2,086,716.08 to Wells Fargo
$ 754,099.62 to SL Financial of Illinois
$ 400,000.00 to HSL Financial, LLC
$ 300,000.00 to Kevin Horton
$ 300,000.00 to Kevin Horton
$5,283,788.20 TOTAL4

R. 52, Amended Complaint, at II, ¶ 29.5 The Funds were used to pay Holco's debts in full. The payments also released the personal guarantees made on the loans by Horton, Holco's president. According to the Amended Complaint, the transfers were made while Holco was insolvent and unable to pay Holco's creditors.

On May 25, 2008, Kukui filed a lawsuit against Holco and Horton in the United States District Court for the District of Hawaii. On October 15, 2009, that court granted Kukui's motion for partial summary judgment and held that Holco had converted $2.7 million of Kukui's funds. See R. 52 ¶ 17; Ex. A at 34; see also Kukui Gardens Corp. v. Holco Capital Group, Inc., HC Mortgage Co., Inc., and Kevin C. Horton, 2009 WL 3365853 at *12 (D.Haw. Oct. 15, 2009) (unpub'd). It specifically determined that Holco owed a fiduciary duty to Kukui and that Holco held the Funds in trust for Kukui's benefit.6 Id. ¶ 19.

On January 4, 2010, Kukui, as a petitioning creditor, filed an involuntary chapter 7 bankruptcy petition for relief against Holco. On March 29, 2011, this court entered its order for relief and consolidated the later-filed voluntary chapter 7 case into the earlier involuntary case.7 On that date, as well, J. Richard Ransel was appointed Trustee. The court's docket indicates that Kukui filed a proof of claim as an unsecured creditor in the amount of $2.7 million on September 27, 2011.

As Trustee, Ransel brought this adversary proceeding against the defendants to recover the money transferred by Holco to certain creditors, namely the defendants, using the Funds. He claimed that the transfers were avoidable under 11 U.S.C. § 548 and Indiana law. The Amended Complaint alleged thatthe payments made by Holco to the defendants constituted fraudulent transfers under § 548(a)(1)(A) and (B) that could be recovered under Indiana Code § 32-18-2-1 et seq. (the Uniform Fraudulent Transfer Act) and as converted Funds in which the defendants could have no ownership interest. See R. 52, Cts. I, II, III. Count IV alleged that Holco, by breaching its fiduciary duty to Kukui, caused the defendants to be unjustly enriched by those transfers. It demanded turnover of the transferred payments by the defendants to the Trustee under a constructive trust theory. In addition, because the defendants had refused the Trustee's earlier requests for turnover, it sought treble damages and other costs pursuant to Indiana Code § 34-24-3-1. See id., Ct. V. Finally, the Amended Complaint charged that the debtor's transfers to the defendants also constituted transfers under § 548(e). See id., Ct. VI.

Wells Fargo filed a reply brief in support of its Motion to Dismiss, see R. 46, and renewed its Motion to Dismiss with regard to the Amended Complaint.8 See R. 53. The other defendants renewed their joinders in Wells Fargo's Motion. See R. 54-56. The court then granted the parties' stipulated motion and ordered that no further responsive pleading to the Amended Complaint would be required before the court's ruling on the pending Motion to Dismiss. See R. 59. The court then took the Motion to Dismiss under advisement.

DISCUSSION

Wells Fargo Bank and the joining defendants have moved to dismiss the Trustee's Amended Complaint for "failure to state a claim upon which relief can be granted" pursuant to Federal Rule 12(b)(6) of the Federal Rules of Civil Procedure, which is made applicable in adversary proceedings by Federal Ruleof Bankruptcy Procedure 7012(b). Motions to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) are reviewed under the Supreme Court's directives established in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L.Ed.2d 929 (2007), and Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 173 L.Ed.2d 868 (2009). Those decisions dictate that a complaint must be dismissed if its allegations do not "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Iqbal, 556 U.S. at 678, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 570). The phrase "plausible on its face" means that "the plaintiff must have pled 'factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'" G & S Holdings LLC v. Continental Cas. Co., 697 F.3d 534, 537 (7th Cir. 2012) (quoting Iqbal, 556 U.S. at 678). In addition, when a party alleges fraud in the complaint, he "must state with particularity the circumstances constituting fraud." Fed. R. Civ. P. 9(b); Fed. R. Bankr. P. 7009; see also Cincinnati Life Ins. Co. v. Beyrer, 722 F.3d 939, 948 (7th Cir. 2013).

The court is mindful that, when weighing whether to grant a motion to dismiss, it "must accept as true all of the factual allegations contained in the complaint." Erickson v. Pardus, 551 U.S. 89, 94, 127 S. Ct. 2197, 167 L.Ed.2d 1081 (2007); see also Seidel v. Byron, 405 B.R. 277, 284 (N.D. Ill. 2009). A court may also consider documents referenced in the plaintiff's complaint and central to the plaintiff's claims. See Seidel, 405 B.R. at 284. In addition, a court may take judicial notice of the records in its own cases. See In re Fink, 351 B.R. 511, 517 n. 1 (Bankr. N.D. Ill. 2006) (noting documents...

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