Spradlin v. Pryor Cashman LLP (In re Licking River Mining, LLC)

• Decision Date: 24 March 2017
• Docket Number: Adv. No. 16–1031,Case No. 14–10201 Jointly Administered
• Citation: 565 B.R. 794
• Parties: IN RE: LICKING RIVER MINING, LLC, et al. Debtors Phaedra Spradlin, Trustee, on behalf of J.A.D. Coal Company, Inc., Licking River Resources, Inc., S.M.&J., Inc., Sandlick Coal Company, LLC, Fox Knob Coal Company, Inc., Licking River Mining, LLC, Oak Hill Coal, Inc., Harlan County Mining, LLC, U.S. Coal Marketing LLC, and U.S. Coal Corp., Plaintiffs v. Pryor Cashman LLP, Defendant
• Court: U.S. Bankruptcy Court — Eastern District of Kentucky

565 B.R. 794

IN RE: LICKING RIVER MINING, LLC, et al. Debtors

Phaedra Spradlin, Trustee, on behalf of J.A.D. Coal Company, Inc., Licking River Resources, Inc., S.M.&J., Inc., Sandlick Coal Company, LLC, Fox Knob Coal Company, Inc., Licking River Mining, LLC, Oak Hill Coal, Inc., Harlan County Mining, LLC, U.S. Coal Marketing LLC, and U.S. Coal Corp., Plaintiffs

v.Pryor Cashman LLP, Defendant

Case No. 14–10201 Jointly Administered

Adv. No. 16–1031

United States Bankruptcy Court, E.D. Kentucky, Ashland, London and Lexington Divisions .

Signed March 24, 2017

Claude R. Bowles, Jr., Louisville, KY, Daniel J. Donnellon, Alex S. Rodger, Bingham Greenebeaum Doll LLP, Cincinnati, OH, for Plaintiffs.

Ross M. Bagley, Eric M. Fishman, Gideon Cashman, New York, NY, Adam R. Kegley, Lexington, KY, for Defendant.

MEMORANDUM OPINION AND ORDER PARTIALLY DISMISSING FIRST AMENDED COMPLAINT

Trace N. Wise, Bankruptcy Judge

This matter is before the Court on Defendant's Motion to Partially Dismiss the Trustee's First Amended Complaint. [ECF No. 30 ("Motion").] In her First Amended Complaint [ECF No. 27 ("Amended Complaint" or "Am. Compl.") ], Plaintiff Phaedra Spradlin, chapter 7 trustee ("Trustee"), on behalf of debtor U.S. Coal Corporation ("U.S. Coal") and its nine co-debtor subsidiaries ("Subsidiaries"¹ ), asserts claims against Pryor Cashman LLP ("PC") for avoidance of fraudulent transfers under chapter 5 of the Bankruptcy Code² and, via § 544, under Kentucky Revised Statutes §§ 378.010 and 378.020.³ Trustee also asserts claims under chapter 5 of the Bankruptcy Code for recovery of preferential transfers, recovery of all transfers avoided, and disallowance of claims.

PC moves to dismiss Counts I through IX of the Amended Complaint, to the extent they seek to avoid and recover the transfer of money paid to PC,⁴ for failure to state a claim under Civil Rule 12(b)(6), made applicable to adversary proceedings by Bankruptcy Rule 7012(b).

BACKGROUND AND FACTS ALLEGED IN THE AMENDED COMPLAINT AND ITS EXHIBITS

Trustee filed the initial complaint commencing this adversary proceeding on June 7, 2016, asserting nine Counts on behalf of U.S. Coal and the Subsidiaries against PC under the same legal theories contained in the Amended Complaint. On July 26, PC moved to partially dismiss the claims in the initial complaint, arguing: (a) the claims relating to cash transfers failed to state a claim upon which relief could be granted as a matter of law; (b) the claims relating to cash transfers were implausible as plead; and (c) the fraud claims were not plead with requisite particularity. [ECF No. 16.] Trustee filed the Amended Complaint three weeks later, on August 16, in response to PC's first motion to dismiss.

The Amended Complaint alleges that U.S. Coal retained PC as legal counsel in July 2006 with regard to various corporate and securities matters.⁵ Between 2006 and 2011, PC rendered legal services to U.S. Coal via an employment contract that U.S. Coal alone signed. On January 12, 2007, U.S. Coal transferred 375,000 shares of stock to PC in exchange for PC's willingness to defer payment of its attorneys' fees until U.S. Coal obtained financing for the acquisition of "Licking River."⁶ [Am. Compl. ¶ 32.]

On September 2, 2011, PC filed a state court complaint against U.S. Coal for its unpaid fees. The Subsidiaries were not parties to that action and PC never tried to seek recovery of its unpaid fees directly from the Subsidiaries, even on a quantum meruit basis. On February 4, 2013, PC obtained a judgment against U.S. Coal in the amount of $2,455,478.86, plus interest from August 2011. Thereafter, PC and U.S. Coal entered into a settlement agreement in which U.S. Coal agreed to pay the full judgment amount over a five-year period, and pursuant to which U.S. Coal executed a promissory note. [ECF No. 27–3.] The promissory note called for regular monthly payments by U.S. Coal to PC of $45,000.00. [ECF No. 27–15 at 30–38.] "U.S. Coal promptly made regular payments" on the promissory note in connection with the settlement, with the exception of a payment due in May 2014 that was past due and paid "at the same time [LR Mining] was being placed into involuntary bankruptcy." [Am. Compl. ¶ 65.]

Although none of the Subsidiaries executed the note, PC "forced" the Subsidiaries to pledge their assets to secure payment of the note for which Trustee asserts the Subsidiaries received no value. [Id . ¶ 61]. Between March 2013 and May 2014, when the first involuntary petitions were filed, U.S. Coal paid PC $1,275,000.00, of which $135,000.00 was paid within ninety days prior to the entry of the U.S. Coal Order for Relief.⁷ [Id . ¶¶ 65, 66.]

The Amended Complaint seeks, inter alia , to recover funds U.S. Coal paid to PC between July 2010 and May 2014 totaling $1,633,286.18 ("Cash Transfers"). Trustee partly bases her fraudulent transfer claims on allegations that PC rendered no legal services to the Subsidiaries and they received no benefit from PC's services, yet U.S. Coal used the Subsidiaries' funds to pay PC's fees. Trustee asserts that U.S. Coal generated no income of its own and took payments from the Subsidiaries to pay U.S. Coal's operating expenses. [Id . ¶ 31.]

The Amended Complaint asserts several causes of action relating to the Cash Transfers:

a. Counts I and III allege actual fraud premised on the theory the Cash Transfers U.S. Coal made to PC were from the Subsidiaries' funds and not U.S. Coal's.

b. Counts II, IV, V and VI allege constructive fraud also premised on the argument that the Cash Transfers belonged to the Subsidiaries.

c. Count VII is an alternate count alleging that payments in the amount of $135,000.00 made to PC within ninety days of the "Petition Date" are avoidable as preferential transfers under § 547 (the "Preference Payments").

d. Count VIII seeks to recover any avoided transfers on theories that, unde § 550, PC either was the initial transferee, the immediate or mediate transferee, or the entity for whose benefit the transfers were made.

e. Count IX seeks to disallow PC's claims against the debtors under § 502(d).⁸

JURISDICTION

The Court has jurisdiction of this matter. 28 U.S.C. § 1334(b). This is a core proceeding. 28 U.S.C. § 157(b)(2)(F), (H). Venue is proper. 28 U.S.C. § 1409.

MOTION TO DISMISS STANDARD

Civil Rule 8(a)(2), made applicable in adversary proceedings via Bankruptcy Rule 7008(a), requires "a short and plain statement of the claim showing that the pleader is entitled to relief." FED. R. CIV. P. 8(a)(2). In analyzing the pleading requirements of Civil Rule 8(a)(2) in connection with a Civil Rule 12(b)(6) motion to dismiss, the Supreme Court stated, "[t]o survive a [Civil Rule 12(b)(6) ] 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.’ " Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "A pleading that offers ‘labels and conclusions' or ‘a formulaic recitation of the elements of a cause of action will not do.’ Nor does a complaint suffice if it tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’ " Id . (quoting Twombly , 550 U.S. at 555, 557, 127 S.Ct. 1955 ). In defining the "plausibility" standard, the Supreme Court stated,

A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a "probability requirement," but it asks for more than a sheer possibility that a defendant has acted unlawfully. Where a complaint pleads facts that are "merely consistent with" a defendant's liability, it "stops short of the line between possibility and plausibility of ‘entitlement to relief.’ "

...

In keeping with these principles a court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth. While legal conclusions can provide the framework of a complaint, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity, and then determine whether they plausibly give rise to an entitlement to relief.

Id . at 678–79, 129 S.Ct. 1937 (citations omitted) (quoting Twombly , 550 U.S. at 556, 557, 127 S.Ct. 1955 ). Thus, as to each count, the Court must determine whether the Amended Complaint contains sufficient factual matter as to each element necessary to state a claim to relief that is plausible on its face.

In determining whether a complaint states a plausible claim for relief, the Court may consider the facts alleged in the pleadings, documents attached as exhibits or incorporated by reference in the pleadings, and matters of which the Court may take judicial notice.

Haney v. Educ. Credit Mgmt. Corp. (In re Haney) , Ch. 13 Case No. 97-70937, Adv. No. 11-7024, 2011 WL 6000886, at *2 (Bankr. E.D. Ky. Nov. 30, 2011) (citations omitted), appeal dismissed as untimely , 2012 WL 3683533 (E.D. Ky. Aug. 27, 2012) ; see also Century Indemnity Co. v. Special Metals Corp. (In re Special Metals Corp.), 317 B.R. 326, 329 (Bankr. E.D. Ky. 2004) (stating that, in evaluating a motion to dismiss, "[t]he court is generally not to look beyond the pleadings, but may consider documents incorporated by reference into the pleadings, even if those documents are not attached to the pleadings.") (citation omitted); In re Ludwick , 185 B.R. 238, 240 n.3 (Bankr. W.D. Mich. 1995) (stating that Federal Rule of Evidence 201 permits a court to take judicial notice of its own court records).

LAW AND ANALYSIS

Trustee seeks to avoid the Cash Transfers to PC and to recover from PC as a transferee. "[A]voidance and recovery are distinct concepts and processes" that "are addressed in two separate sections...