Sergeant v. OneWest Bank, FSB (In re Walter)

• Decision Date: 07 November 2011
• Docket Number: Adversary No. 11–09024.,Bankruptcy No. 10–03352.
• Citation: 462 B.R. 698
• Parties: In re Michael J. WALTER and Carol D. Walter, Debtor.David A. Sergeant, in his sole capacity as Chapter 7 Trustee, Plaintiff, v. OneWest Bank, FSB, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Iowa

462 B.R. 698

In re Michael J. WALTER and Carol D. Walter, Debtor.David A. Sergeant, in his sole capacity as Chapter 7 Trustee, Plaintiff,

v.OneWest Bank, FSB, Defendant.

Bankruptcy No. 10–03352.

Adversary No. 11–09024.

United States Bankruptcy Court, N.D. Iowa.

Nov. 7, 2011.

Eric W. Lam, Cedar Rapids, IA, for Plaintiff.

Jason C. Palmer, Jeffrey D. Goetz, Bradshaw, Flowler, Proctor & Fairgrave, Des Moines, IA, for Defendant.

ORDER RE: MOTION FOR PARTIAL DISMISSAL

THAD J. COLLINS, Chief Judge.

This matter came before the Court in a telephonic hearing on Defendant OneWest Bank's Motion for Partial Dismissal. Defendant moved to dismiss two counts of Trustee's Complaint to Avoid Transfer. Jason C. Palmer and Thomas M. Boes represented Defendant. Eric W. Lam represented the Chapter 7 Trustee. The Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O).

STATEMENT OF THE CASE

Michael Walter signed two promissory notes now held by Defendant OneWest Bank. To secure the promissory notes, both Michael and Carol Walter signed and recorded deeds of trust, also now held by Defendant. According to Trustee, around the time Debtors recorded the second deed of trust, Debtors became indebted to the Internal Revenue Service (IRS). Trustee filed the Complaint to avoid the deeds of trust as fraudulent transfers under 11 U.S.C. § 544. Trustee attempts to step into the shoes of the IRS and utilize the transfer avoidance provisions of state law and federal nonbankruptcy law to recover for the Estate.

Defendant moves to dismiss the two lien-avoidance counts of Trustee's Complaint. Defendant asserts that Trustee fails to state a plausible claim to avoid fraudulent transfers under the Supreme Court's pleading standards set forth in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). After reviewing the record and hearing the parties' arguments, the Court denies Defendant's Motion for Partial Dismissal.

PLEADINGS AND FACTUAL ALLEGATIONS

The following factual allegations are taken from the Trustee's Complaint. Debtors Michael and Carol Walter were married in 1974. In March 1995, they purchased a second home (non-homestead property) in Osage Beach, Missouri (the “Missouri Property”). They paid $435,000.

Michael sold his share of a business in 1995, which resulted in a payment of $1,000,000, or more, to Michael. He and Carol used approximately $300,000 of those funds to improve the Missouri Property. They also used some of the funds to pay off the mortgage on the Missouri Property.

Michael later acquired an ownership interest in two limited liability companies: Retlaw's Riverside Sports Bar & Grille, L.C. (“RRSBG”) and John W. Enterprises, L.C., d/b/a Retlaw's at the Lake (“JWE”). The Missouri Property was used as collateral for purchases made by the business. In 2001, RRSBG purchased a bar in Charles City, Iowa. RRSBG borrowed the funds from First Citizens National Bank. Michael personally guaranteed the loan and pledged the Missouri Property as collateral. In addition, Carol signed an unlimited guarantee in favor of First Citizens National Bank with respect to all debts.

In 2005, JWE purchased a bar and restaurant in Clear Lake, Iowa. JWE also obtained financing from First Citizens National Bank. Michael again personally guaranteed the loan and offered the Missouri Property as collateral. Even though the two limited liability companies operated both bars, Michael used his and Carol's personal savings and assets to run the bars because they were operating at a loss.

In 2006, IndyMac Bank, FSB (“IndyMac”) approached Michael and offered to loan him $1,000,000. This offer was based on an appraisal of the Missouri Property showing a value of $1,600,000. IndyMac did not ask for tax returns from Michael or Carol or perform other analysis regarding Michael's financial strength to repay IndyMac.

On July 13, 2006, Michael signed a $1,000,000 promissory note in favor of IndyMac. Carol did not sign a promissory note. To secure the note, Michael and Carol both signed a deed of trust on the Missouri Property in favor of IndyMac, which was recorded on July 20, 2006.

Michael used the $1,000,000 loan to retire debt, to operate the bars/restaurants, and to make the loan payments to IndyMac. He used $477,000 to pay off the two First Citizens National Bank mortgages on the Missouri Property.

A few months later, IndyMac loaned another $150,000 to Michael. On September 28, 2006, Michael signed a promissory note for this second loan. This was characterized as a home equity line of credit. To secure this second note, both Michael and Carol signed a second deed of trust on the Missouri Property in favor of IndyMac. The second deed of trust was recorded sometime in 2007. Defendant, OneWest Bank, now holds the $1,000,000 note, the $150,000 note, and the two deeds of trust.

Trustee's focus in this case is the effect of these transactions and transfers on Carol's financial condition. Trustee specifically alleges that after the first deed of trust (on the Missouri Property) was recorded in July 2006, Carol's remaining non-exempt, unencumbered assets were worth less than the debts for which Carol was liable. If Carol had not pledged her interest in the Missouri Property in that deed of trust, that interest would have been available to her creditors. The second deed of trust, according to Trustee, had similar or compounding effect.

In 2007, Debtors incurred a debt to the IRS. Three years later, on December 17, 2010, Debtors filed a voluntary Chapter 7 Petition. As of the Petition date, the penalty balance owing to the IRS was $4,750, plus interest.

On May 3, 2011, Trustee filed this three-count Complaint to avoid the Deeds of Trust on the Missouri Property. Trustee alleges in all counts that Carol received nothing in return for signing away her interest in the Missouri Property in the first and second deed of trust. Trustee alleges the deed of trust transactions should be set aside as to Carol for failure of consideration (Count I), and as fraudulent transfers Trustee can avoid under his § 544 powers (Counts II & III). In Count II, Trustee asks the Court to declare the Deeds of Trust voidable as fraudulent conveyances under 28 U.S.C. §§ 3301–3308. In Count III, he asks the Court to declare the Deeds of Trust voidable under Iowa Code Chapter 684.

Defendant moved to dismiss the two fraudulent conveyance counts in the Complaint. Defendant argues Trustee failed to state a claim on which relief may be granted. According to Defendant, Trustee failed to cite the legal authority that forms the basis for Trustee's claim, Trustee failed to satisfy the heightened pleading requirements of Fed.R.Civ.P. 9, and Trustee failed to provide sufficient plausible factual assertions to support the elements of the claims under the Rule 8 pleading standards as interpreted by the Supreme Court's opinions in Iqbal and Twombly. Defendant also suggests any right Trustee has to recover is limited to the $4,750 amount of the IRS debt.

Trustee resists. Trustee argues that he has specified the legal basis for his claim. Trustee argues the pleading standards for actual fraud in Rule 9 do not apply to claims for constructively fraudulent transfer, and that his Complaint satisfies Iqbal and Twombly.

CONCLUSIONS OF LAW

A. Motion to Dismiss Standard

The Bankruptcy Rules follow the Federal Rules of Civil Procedure standards for dismissal and requirements for pleading. Bankruptcy Rule 7012 specifically notes: “Rule 12(b)-(i) F.R.Civ.P. applies in adversary proceedings.” Defendant moves for dismissal under Rule 12(b)(6) for “failure to state a claim upon which relief can be granted.” Id.

In order to determine whether a complaint states a “claim upon which relief can be granted,” courts look to what a party is required to plead. Again, Bankruptcy Rule 7008(a) provides: “Rule 8 F.R.Civ.P. applies in adversary proceedings.” Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.”

As this Court recently discussed in detail in Sarachek v. Right Place, Inc. ( In re Agriprocessors, Inc.), No. 08–02751, Adv. No. 10–09123, 2011 WL 4621741 (Bankr.N.D.Iowa Sept. 30, 2011), the standard for ruling on a motion to dismiss under the Federal Rules has received new attention from the Supreme Court in the last few terms. “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Iqbal, 556 U.S. at ––––, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955) (emphasis added). The Supreme Court now applies a two-pronged approach in evaluating a motion to dismiss. First, the Court identifies “pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.” Id. at 1950. Second, to the extent that the complaint contains factual allegations, the Court assumes the truth of those facts and determines whether they plausibly give rise to an entitlement to relief. Id. Additionally, the Supreme Court noted that pleadings should be evaluated in context. “Determining whether a complaint states a plausible claim is context-specific, requiring the reviewing court to draw on its experience and common sense.” Iqbal, 129 S.Ct. at 1940 (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).

The decisions in Iqbal and Twombly provide the minimum standard of pleading required to survive a motion to dismiss. Defendant initially appears to argue that Trustee's Complaint is deficient because Trustee failed to state his legal theory. In particular, Defendant argues Trustee failed to provide precise code sections in his Complaint. Iqbal and Twombly, however, did not modify the Federal Rules' liberal pleading standard for...