Seitz v. James Mccauley, Mccauley Assocs. Ltd. (In re Marchese)

• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania
• Writing for the Court: ERIC L. FRANK U.S. BANKRUPTCY JUDGE
• Decision Date: 16 July 2018
• Docket Number: Adv. No. 17-189,Bky. No. 16-13810 ELF
• Citation: Seitz v. McCauley (In re Marchese), Adv. No. 17-189, Bky. No. 16-13810 ELF (Bankr. E.D. Pa. Jul 16, 2018)
• Parties: IN RE: DAVID C. MARCHESE Debtor. GARY F. SEITZ, Chapter 7 Trustee, Plaintiff, v. JAMES MCCAULEY, MCCAULEY ASSOCIATES LIMITED PARTNERSHIP, GERALD MULLANEY, HOPWOOD FARMS LLC, nominal defendant, Defendants.

IN RE: DAVID C. MARCHESE Debtor.

GARY F. SEITZ, Chapter 7 Trustee, Plaintiff, v. JAMES MCCAULEY, MCCAULEY ASSOCIATES LIMITED PARTNERSHIP,GERALD MULLANEY, HOPWOOD FARMS LLC, nominal defendant, Defendants.

Bky. No. 16-13810 ELF

Adv. No. 17-189

UNITED STATES BANKRUPTCY COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA

Entered: July 17, 2018

July 16, 2018

Chapter 7

MEMORANDUM

I. INTRODUCTION

Debtor David Marchese ("the Debtor") filed this chapter 7 bankruptcy case on May 26, 2016. Prior to the commencement of the case, the Debtor held a membership interest in Hopwood Farms LLC ("Hopwood"). Hopwood's only valuable asset was a parcel of real estate ("the Property"). Hopwood lost the Property in a prepetition foreclosure sale conducted by McCauley Associates Limited Partnership ("MALP"), an entity controlled by James McCauley ("McCauley"). McCauley and/or MALP also held a membership interest in Hopwood.

In this adversary proceeding, the chapter 7 trustee, Gary Seitz ("the Trustee"), asserts that McCauley, MALP and another Hopwood member, Gerald Mullaney ("Mullaney"), are liable for damages for breach of contract - i.e., for breach of Hopwood's operating agreement ("the Operating Agreement") - and for breach of their fiduciary duties owed to Hopwood and to the Debtor. The Trustee also requests the imposition of a constructive trust, which he has styled as a "claim."

Essentially, the Trustee alleges that McCauley and MALP engineered the foreclosure against the Property for their benefit and to the detriment of the Debtor, Hopwood and the bankruptcy estate. The Trustee also alleges that Mullaney actively colluded with McCauley or permitted the collusive foreclosure to occur through neglect. As a result of the alleged wrongful conduct, the Trustee asserts that the Debtor and Hopwood suffered substantial economic loss.¹

The Trustee's causes of action closely parallel the claims the Debtor asserted on his own behalf in state court pre-petition litigation. The claims are made both as direct claims of the Debtor (to which the Trustee succeeded as the representative of the Debtor's bankruptcy estate), as well as derivative claims on behalf of Hopwood.

The Defendants have filed a Motion to Dismiss ("the Motion") under Fed. R. Civ. P. 12(b)(1) and 12(b)(6) asserting:

1. All claims against Mullaney are barred by the expiration of the applicable statutes of limitation.

2. The Trustee has no standing to bring this suit because the relevant component of the Debtor's membership in Hopwood is not estate property.²

3. The facts stated in the Amended Complaint fail to state a plausible claim for relief.

As explained below, with respect to the statute of limitations issue as to Defendant Mullaney, I will treat the Motion as a motion for summary judgment, as required by Fed. R. Civ. P. 12(d) (incorporated by Fed. R. Bankr. P. 7012). Based on the current state of the summary judgment record on this issue, I will deny the Motion as to the Trustee's breach of contract claim, but defer a ruling with respect to the breach of fiduciary duty claim in order to give the Trustee the opportunity to present evidence in opposition to the Motion.

Also, as explained below, the constructive trust claim will be dismissed.

Based on the current record, I am satisfied that the Trustee has standing to prosecute the claims he has asserted and that the facts pled in the Amended Complaint are sufficient to state a plausible claim for relief. Therefore, the balance of the Motion will be denied.³

II. PROCEDURAL HISTORY

The litigation among the parties has a long and somewhat odd history.

On November 5, 2011, the Debtor filed suit against McCauley, MALP, and Hopwood in Montgomery County ("the State Court Action"), alleging a number of business torts and contract breaches. After preliminary objections were overruled, the Defendants filed an answer and new matter. The action then languished until June 14, 2016 when it was "terminated" by the state court, apparently due to docket inactivity. By that time, the Debtor had filed his chapter 7 bankruptcy case (on May 26, 2016).

On June 15, 2016, the day after the termination of the State Court Action, the Debtor filed a motion to reinstate the action. The Trustee intervened in the State Court Action and joined in the Debtor's reinstatement request. On December 14, 2016, the state court reinstated the action.

On July 3, 2017, the Trustee commenced this adversary proceeding by removing the State Court Action to the bankruptcy court. On July 25, 2017, the Trustee filed another Complaint in this adversary, raising transfer avoidance causes of action based on 11 U.S.C. §§544, 548 and 550, but not the business torts described in the complaint in the State Court Action. ⁴ The Defendants filed a motion to dismiss, which I granted on November 28, 2017, with leave to amend.

On December 15, 2017, the Trustee filed an Amended Complaint, which mainly revives the State Court Action, but adds Mullaney as a Defendant.

The Defendants filed the instant Motion on January 19, 2018. After the parties briefed the issues, I held oral argument on April 19, 2018. The Motion is ready for decision.

III. RULE 12(b)(1) AND 12(b)(6) LEGAL STANDARDS

The Defendants have moved to dismiss the Amended Complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6) (made applicable in adversary proceedings by Fed. R. Bankr. P. 7012).

A motion to dismiss under Fed. R. Civ. P. 12(b)(6) tests the legal sufficiency of the factual allegations of a complaint, see Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir. 1993), and determines whether the plaintiff is entitled to offer evidence to support the claims, Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 563 n.8 (2007). A defendant is entitled to dismissal of a complaint only if the plaintiff has not pled enough facts to state a claim for relief that is plausible on its face. Twombly, 550 U.S. at 547. A claim is facially plausible where the facts set forth in the complaint allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).

In evaluating the plausibility of the plaintiff's claim, the court conducts a context-specific evaluation of the complaint, drawing from its judicial experience and common sense. See, e.g., Fowler v. UPMC Shadyside, 578 F.3d 203, 211 (3d Cir. 2009); In re Universal Mktg, Inc., 460 B.R. 828, 834 (Bankr. E.D. Pa. 2011) (citing authorities). In doing so, the court is required to accept as true all allegations in the complaint and all reasonable inferences that can be drawn therefrom, viewing them in the light most favorable to the plaintiff. See, e.g., Hishon v. King & Spalding, 467 U.S. 69, 73 (1984); Taliaferro v. Darby Twp. Zoning Bd., 458 F.3d 181, 188 (3d Cir. 2006). The court is not bound to accept as true a legal conclusion couched as a factual allegation. Iqbal, 556 U.S. at 678; Twombly, 550 U.S. at 555.

The Defendants also raise the issue of standing, which is a challenge to this court's jurisdiction and an invocation of Rule 12(b)(1). See Ballentine v. United States, 486 F.3d 806, 810 (3d Cir. 2007). The standard of review for a Rule 12(b)(1) facial challenge to the court's subject matter jurisdiction is the same as the Rule 12(b)(6) standard - the allegations in the complaint are accepted as true and all inferences are drawn in favor of the plaintiff. In re Star Grp. Communic's, Inc., 568 B.R. 616, 622 (Bankr. D.N.J. 2016); In re Merritt, 529 B.R. 845, 858-59 (Bankr. E.D. Pa. 2015), aff'd, 2016 WL 930696 (E.D. Pa. Mar. 10, 2016); In re Funches, 381 B.R. 471, 483 (Bankr. E.D. Pa. 2008).

IV. FACTS

The well-pled facts of the Amended Complaint are summarized below.

A. Hopwood and the Alleged Collusive Foreclosure

In 2005, the Debtor, McCauley, Mullaney and two (2) other parties formed Hopwood in order to acquire and develop real estate. The Debtor owned a 50% interest in Hopwood. McCauley or MALP,⁵ Mullaney and the other two individuals each owned 12.5%. Mullaney was the manager of Hopwood.

In order to fund Hopwood, the Debtor contributed $500,000.00, and McCauley contributed $182,895.65.

Hopwood purchased 172 Hopwood Road ("the Property") for $1,900,000.00, by applying the capital contributions and financing the balance of the purchase price through a loan in the amount of $1,235,000.00. The loan, provided by Harleysville National Bank ("Harleysville"), was evidenced by a note guaranteed by Mullaney and secured by a mortgage on the Property. For a period of time, the Debtor paid the monthly mortgage payments, making a total of around $200,000.00 in payments, which were added to his capital account balance.

The members of Hopwood were to be compensated according to terms laid out in their Operating Agreement. If the investment made a profit, Hopwood would distribute money to members with an outstanding capital account balance. Once the capital contributions had been fully returned, additional profits would be allocated to the members according to their ownership interest. In effect, this meant that the Debtor would obtain 80% of the first million dollars in profits, and 50% of all profits thereafter.

In early 2011, Hopwood began negotiations to purchase the note and mortgage on the Property from the holder at a discount. At that point, McCauley was tasked with negotiating a buy-out of the outstanding note and mortgage on the Property by Hopwood. Instead, McCauley negotiated on his own behalf and, through MALP, purchased the note and mortgage from the holder⁶ for approximately $500,000.00,⁷ without informing the Debtor or securing his approval as a 50% owner of Hopwood.

On September 6, 2012, MALP, now a creditor of Hopwood, filed a foreclosure action against Hopwood. Mullaney accepted service of the foreclosure complaint. Neither Mullaney nor McCauley informed the Debtor of the foreclosure, and neither defended the foreclosure.⁸

On November 5, 2012, while the foreclosure action was pending, the...