Reagor Auto Mall, Ltd. v. Firstcapital Bank of Tex., N.A. (In re Reagor-Dykes Motors, LP)
| Decision Date | 24 August 2020 |
| Docket Number | Adversary No. 20-05002,Case No.: 18-50214-RLJ-11 |
| Parties | In re: REAGOR-DYKES MOTORS, LP, Debtors. REAGOR AUTO MALL, LTD., REAGOR-DYKES AMARILLO, LP, REAGOR-DYKES FLOYDADA, LP, REAGOR-DYKES IMPORTS, LP, REAGOR-DYKES PLAINVIEW, LP, REAGOR-DYKES MOTORS, LP, REAGOR-DYKES SNYDER, L.P., Plaintiffs, v. FIRSTCAPITAL BANK OF TEXAS, N.A. Defendant. |
| Court | United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas |
The following constitutes the ruling of the court and has the force and effect therein described.
(Jointly Administered)
The defendant, FirstCapital Bank of Texas, N.A. (FirstCapital), filed its motion under Bankruptcy Rule 7012(b) and Federal Rule of Civil Procedure 12(b)(6) seeking dismissal of all counts of Plaintiffs' Original Complaint.2 The plaintiffs—collectively referred to as Reagor-Dykes or the Debtors—filed their response opposing dismissal; in the alternative, they request an opportunity to amend the complaint. The Court has determined that Reagor-Dykes has not sufficiently pleaded the transfer element of its preference and fraudulent transfer counts and thus, if not amended, such causes, as well as Counts Three and Five, are subject to dismissal. The Court denies the motion as to Counts Four, Six, and Seven.
Rule 12(b)(6) of the Federal Rules of Civil Procedure allows dismissal of a case if a plaintiff fails "to state a claim upon which relief can be granted." This rule applies in adversary proceedings as incorporated by Bankruptcy Rule 7012(b). Rule 12(b)(6) must be read in conjunction with Rule 8(a), which requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2); see Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009). To withstand a Rule 12(b)(6) motion, a complaint must contain "enough facts to state a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. A claim satisfies the plausibility test Iqbal, 556 U.S. at 678 (internal citations omitted). While a complaint need not contain detailedfactual allegations, it must set forth "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (citation omitted).
In reviewing a Rule 12(b)(6) motion, the court must accept all well-pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff. Sonnier v. State Farm Mut. Auto. Ins. Co., 509 F.3d 673, 675 (5th Cir. 2007); Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004). In ruling on such a motion, the court cannot look beyond the pleadings. Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir. 1999). The court may also consider documents that are attached to the motion to dismiss if the documents are specifically referenced in the complaint and are "central" to the plaintiff's claim. Sullivan v. Leor Energy, LLC, 600 F.3d 542, 546 (5th Cir. 2010).
The Debtors contend that their rogue CFO, Shane Smith, collaborated with FirstCapital to, in effect, defraud the Debtors and their creditors. This was done by the daily movement of funds among the Debtor-entities' bank accounts in amounts that far exceeded the Debtors' ability to honor. FirstCapital was in the middle of Smith's scheme by allowing the Debtors to maintain large overdrafts in the Debtors' accounts at FirstCapital and by accommodating the Debtors' "perverted" use of sight drafts to create immediate credit and several days' "float" that allowed the scheme to persist. Doc. No. 1 ¶ 33.3
The Debtors allege the scheme both generally and anecdotally. Smith, "no later than February 2017, . . . began collaborating with FirstCapital in fraudulent schemes to defraud theDebtors and their creditors." Id. ¶ 16. For 2017 and 2018, RAM, with monthly sales of $14.3 million, had monthly deposits and credits of over $70 million.4 From late 2017 through August 2018, $383 million was disbursed from a RAM account to other Reagor-Dykes accounts. In March 2017, the Amarillo account at FirstCapital was overdrawn by $611,000; in January 2018, RAM, Amarillo, and Floydada's accounts were each overdrawn by almost $1.4 million.5 The complaint states that RAM's and Amarillo's average daily balances for February 2018 were a negative $3.95 million and a negative $1.328 million, respectively. And they each maintained a negative average balance every month from December 2016 through February 2018.
Smith and FirstCapital's representative communicated on an almost daily basis about Reagor-Dykes' abusive use of its accounts at FirstCapital. FirstCapital accommodated and took "active measures" to help Smith carry-out his "sales" and "meaningless churning of inventory between dealerships," so that Smith could obtain funds to deploy where needed at the moment. Id. ¶ 40. The allowed overdrawing of accounts and the float created by use of sight drafts constituted interest-bearing loans by FirstCapital to the Debtors.
FirstCapital benefitted by going along with Smith's electronic kiting scheme. The Debtors' deposit accounts were highly inflated and thus, as a result, so was the bank's perceived financial position. This was all happening at a time when the bank was looking to purchase another bank. It had the effect of reducing the cash needed for the purchase and avoided a"cascade of defaults" throughout the Reagor-Dykes enterprise, including a default on FirstCapital's floorplan financing of Reagor-Dykes. Id. ¶ 43.
By the complaint, the Debtors allege that the bank is an insider as to the Debtors under both the Bankruptcy Code—because Rick Dykes was one of two ultimate owners of Reagor-Dykes and a director of FirstCapital—and common law.
Last, the Debtors allege that upon the August 2018 bankruptcy filings, FirstCapital agreed, upon Rick Dykes's pledge of over $7 million of additional collateral, to provide an additional $2.1 million of floorplan financing to Reagor-Dykes. FirstCapital never provided the loan.
The Debtors assert seven grounds for recovery:
For the preference action, the Debtors allege that FirstCapital extended immediate credit to Debtors RAM, Amarillo, or Floydada under one of three scenarios: (1) whenever each presented a sight draft for payment (presumably as sellers of vehicles to another Reagor-Dykes entity); (2) whenever FirstCapital paid on a draft with a cashier's check drawn on FirstCapital'sfunds without simultaneously debiting the appropriate RAM, Amarillo, or Floydada account (presumably as buyers of vehicles); and (3) by routinely allowing multi-day overdrafts from RAM, Amarillo, and Floydada accounts at the bank. These many extensions of credit created antecedent debt. And when these Debtors subsequently paid down the "loans," such payments are voidable "transfers" under § 547 as made on account of antecedent debt. (The Debtors allege the remaining preference elements.) The suspect transfers go back a year prior to the filing of the bankruptcy cases, given FirstCapital's insider status.
The Debtors assert that RAM, Amarillo, and Floydada "made other [voidable] transfers of funds" to FirstCapital for fees and to pay conventional loans, such as floorplan loans made to RAM. Id. ¶ 82. FirstCapital's liens on these loans should, they say, be "transferred to RAM pursuant to 11 U.S.C. § 510." Id.
The Debtors label the preferential transfers as the Deposited Sight Transfers, the Paid Sight Transfers, the True Overdraft Transfers, and the Bank Transfers. Id. ¶¶ 58, 67, 76, 83.
The Debtors' fraudulent transfer claims also concern Debtors RAM, Amarillo, and Floydada. They each had accounts at FirstCapital that routinely carried negative balances which, as with the preference claims, constituted unsecured credit extensions by the bank. Deposits made by these Debtors to pay down the negative balances were made to hinder, delay, and defraud their other creditors. FirstCapital is a transferee in this scheme and thus liable under § 548(a)(1)(A) and under Texas law, Texas Business and Commerce Code § 24.005.
Under Count Three, the Debtors seek, as one of their remedies for the avoided transfers of Counts One and Two, the value of such transfers. This recovery is based on § 550(a). They also ask, per § 551, that the avoided transfers be preserved for the benefit of the bankruptcy estates.
For their Count Four claim, the Debtors assert that FirstCapital's acquiescence to Smith's scheme injured other creditors and thus it should be equitably subordinated to other creditors under §§ 510(c) and 105(a) of the Bankruptcy Code.
Count Five is the Debtors' objection to FirstCapital's claim. Two grounds support their claim objection. First, under § 502(d), until FirstCapital pays the Debtors the amount equal to any avoided transfers, plus interest and costs, its claim must be disallowed. Second, also under §...
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