Reed v. Walton (In re BFN Operations LLC.), BANKR. CASE NO. 16-32435-BJH

• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Northern District of Texas
• Writing for the Court: Douglas D. Dodd, United States Bankruptcy Judge
• Citation: 607 B.R. 551
• Parties: IN RE: BFN OPERATIONS LLC., Debtor. Diane G. Reed, as Chapter 7 Trustee of BFN Operations LLC, Plaintiff, v. Frederick Walton d/b/a Walton Farms, Defendant.
• Docket Number: BANKR. CASE NO. 16-32435-BJH,ADV. PROC. NO. 18-03202
• Decision Date: 29 November 2018

607 B.R. 551

IN RE: BFN OPERATIONS LLC., Debtor.

Diane G. Reed, as Chapter 7 Trustee of BFN Operations LLC, Plaintiff,
v.
Frederick Walton d/b/a Walton Farms, Defendant.

BANKR. CASE NO. 16-32435-BJH
ADV. PROC. NO. 18-03202

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed November 29, 2018

607 B.R. 555

Kara E. Casteel, Brigette G. McGrath, Joseph L. Steinfeld, Jr., ASK, LLP, St. Paul, MN, David W. Elmquist, Reed & Elmquist, P.C., Waxahachie, TX, for Plaintiff.

Frederick Walton, Upper Sandusky, OH, pro se.

MEMORANDUM OPINION ON MOTION TO DISMISS ADVERSARY PROCEEDING

Douglas D. Dodd, United States Bankruptcy Judge

Chapter 7 trustee Diane G. Reed (the "Trustee ") sued Frederick Walton d/b/a Walton Farms ("Walton ") to recover prepetition transfers under 11 U.S.C. § 547 and 548 and to disallow Walton's claim. See 11 U.S.C. § 502(d). Walton responded by moving to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6), made applicable by Bankruptcy Rule 7012, AP [ECF No. 6].¹ Alternatively, Walton sought summary judgment under Fed. R. Civ. P. 56, incorporated by Fed. R. Bankr. P. 7056. Id. The Trustee opposes the motion. AP [ECF No. 9].

I. FACTUAL AND PROCEDURAL HISTORY

A. The Parties

BFN Operations LLC ("Debtor ")² ran a profitable wholesale nursery business until 2016, when unanticipated inclement weather damaged its plant inventory and led to reduced sales. At the same time the Debtor faced a prescheduled reduction in its pre-petition credit agreements borrowing base. The combination led the Debtor to file chapter 11 on June 17, 2016 (the "Petition Date "). The court later authorized the sale of substantially all the Debtor's assets³ after which the case converted to a chapter 7 liquidation.⁴

Frederick Walton, a sole proprietor doing business as Walton Farms, hauled for and delivered inventory to the Debtor.⁵

B. Walton's Motions

1. Motion to Dismiss

Walton argues first that the complaint should be dismissed because the Trustee did not properly name him as a defendant. He claims that he is an individual who operates under the "DBA name of Walton Farms"⁶ but that Walton Farms "is not a corporation, owns nothing, has no farms, produces or sells NO agricultural products and provided no goods of any kind to Debtor..."⁷ He contends that Walton Farms has no legal standing and therefore

607 B.R. 556

cannot legally be indebted.⁸ This, along with Walton's ordinary course, contemporary exchange and subsequent new value defenses asserted in his motion, make the Trustee's complaint "without a foundation in fact ... wherein no relief could be granted.

The Trustee responds⁹ that she had no reason to suspect that "Walton Farms" was merely a trade name for a sole proprietorship; and that as a matter of law, she relied on Walton's use of the fictitious name. She reasons that because the trade name Walton Farms was not registered with the Ohio Secretary of State, it must be treated as a "fictitious name"¹⁰ under Ohio Rev. Code § 1329.01. The Trustee contends that she correctly named Walton Farms a defendant under Ohio law because the trade name Walton Farms was not registered and that she did not know the identity of the person who had used the trade name in prebankruptcy dealings with the Debtor.¹¹ The Trustee argues in the alternative that Federal Rule of Civil Procedure 15(c) permits amending the complaint to name Frederick Walton, individually , as the defendant.¹²

2. Motion for Summary Judgment

In support of his argument for summary judgment as alternative relief, Walton contends:

(1) the Trustee cannot prove that the Debtor was insolvent on the date of the alleged transfers;

(2) the transfers were "made in the ordinary course of business or financial affairs of the debtor and the transferee" pursuant to 11 U.S.C. § 547(c)(2)(A) ;

(3) the transfers were a contemporaneous exchange for new value under 11 U.S.C. § 547(c)(1) ; and

(4) Walton provided subsequent new value to the Debtor pre-petition under 11 U.S.C. § 547(c)(4).¹³

The Trustee responds that Walton has failed to produce admissible evidence to rebut the presumption of insolvency under 11 U.S.C. § 547(f) or support any of his affirmative defenses.

This memorandum opinion explains the reasons for denying Walton's motion to dismiss and motion for summary judgment and granting the Trustee leave to amend the complaint to name Walton as the defendant.

II. RULE 12(B)(6) MOTION TO DISMISS

Motion to Dismiss Standard

A motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted tests the formal sufficiency of the plaintiff's statement of its claim for relief. A Rule 12(b)(6) motion is appropriate if the plaintiff has not provided fair notice of his claim with factual allegations that, when accepted as true, are plausible and not merely speculative. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) ;

607 B.R. 557

Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555-56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Motions to dismiss for failure to state a claim are generally viewed with disfavor. Collins v. Morgan Stanley Dean Witter , 224 F.3d 496, 498-99 (5th Cir. 2000).

Rule 15(a) permits a plaintiff to amend a complaint once as a matter of course at any time before a responsive pleading is served. Fed. R. Civ. P. 15(a).¹⁴ Because Mr. Walton has already answered the complaint the Trustee as plaintiff must obtain leave from the court to amend, which the Federal Rules declare should be granted freely "when justice so requires." Id. ; see also In re Kilroy , 357 B.R. 411, 419 (Bankr. S.D. Tex. 2006).

Legal Analysis

Walton urges dismissal under Rule 12(b)(6) based solely on his contention that he operates individually, did business with the debtor prepetition as an individual, and that Walton Farms is nothing more than a name. Specifically, Walton asserts that Walton Farms is a family name he merely "assumed" when his father retired,¹⁵ which "sometimes help[s] with purchasing discounts."¹⁶ He represents that Walton Farms is not a corporation and has never "sold any [p]roduct to Debtor nor purchased [p]roduct from Debtor;¹⁷ rather, Frederick Walton admits that he individually provided services for the Debtor before its chapter 11 filing, albeit using the assumed name Walton Farms.¹⁸

Ohio law permitted the Trustee to rely on Walton's use of the assumed name Walton Farms and Walton cannot hide behind the fiction to avoid potential liability for the prepetition transfers. His use of the name without registering it with the Ohio Secretary of State is not dispositive, and may infer liability against Walton, personally. Specifically, Ohio Revised Code § 1329.10 permits a plaintiff to sue an individual who engages in business using a trade or fictitious name. Ohio Rev. Code § 1329.10(C). See also Family Medicine Found., Inc. v. Bright , 96 Ohio St. 3d 183, 772 N.E.2d 1177, 1180 (2002). Fictitious name is defined in relevant part as a "name used in business or trade that is fictitious and that the user has not registered or is not entitled to register as a trade name." Ohio Rev. Code § 1329.01(A)(2) (emphasis added). The Ohio Supreme Court has construed these statutes to permit a plaintiff to sue a party named only by its fictitious name specifically if the plaintiff had no knowledge that the entity was doing business using a fictitious name. Bright , 96 Ohio St.3d at 186–87, 772 N.E.2d 1177 (emphasis added).¹⁹

607 B.R. 558

Critical to the Ohio court's analysis was that the plaintiff lacked knowledge of the defendant's use of a fictitious name in its dealings. This factor is especially relevant here because the Trustee claims that she had no knowledge that Walton Farms was merely a trade name for Walton, individually.

Although there is no evidence in the record by either party indicating whether Walton Farms is or is not a legal entity, documents filed in the underlying bankruptcy case suggested that the debtor had cause to believe that the individual Frederick Walton, rather than an entity named Walton Farms, was providing services to it before bankruptcy. The court takes judicial notice of these documents²⁰ and concludes that it was reasonable for the Trustee to rely on the name "Walton Farms." For example, the exhibit to Debtor's Schedule E/F listing unsecured creditors refers to Walton as "Walton Farms." Walton has provided no evidence to support a belief that he ever sought to correct the name under which he was doing business with the Debtor.²¹ Nor does the June 28, 2016 Letter Agreement addressed to Fred Walton and Walton Farms suggest otherwise.

Regardless of the Trustee's ability to continue prosecuting her claims against the fictitious entity Walton Farms rather than the individual Frederick Walton, the Trustee seeks to amend the complaint to name Walton individually. Whether she should be permitted to do so now depends on whether an amendment would expose Mr. Walton to the risk of unfair prejudice, "the touchstone of the inquiry under rule...