O'Toole v. Karnani (In re Trinsum Grp., Inc.)

• Decision Date: 29 November 2011
• Docket Number: 10–03305,10–03313 (AJG).,Bankruptcy No. 08–12547 (AJG).Adversary Nos. 10–03304
• Citation: 460 B.R. 379
• Parties: In re TRINSUM GROUP, INC., et al., Debtors.Marianne T. O'Toole as Distributing Agent for Trinsum Group, Inc., et al., v. Ramesh Karnani, Peter W. Kontes, Robert S. Ruotolo, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

460 B.R. 379

In re TRINSUM GROUP, INC., et al., Debtors.Marianne T. O'Toole as Distributing Agent for Trinsum Group, Inc., et al.,

v.Ramesh Karnani, Peter W. Kontes, Robert S. Ruotolo, Defendants.

Bankruptcy No. 08–12547 (AJG).Adversary Nos. 10–03304

10–03305

10–03313 (AJG).

United States Bankruptcy Court, S.D. New York.

Nov. 29, 2011.

Silvermann Acampora, LLP, By: Gerard R. Luckman, Esq., Jay S. Hellman, Esq., Katina Brountzas, Esq., Jericho, NY, for Plaintiff.

Bond, Schoeneck & King, PLLC, By: Stephen A. Donato, Esq., Louis Orbach, Esq., Syracuse, NY, for Defendants.

OPINION REGARDING DEFENDANTS' MOTIONS TO DISMISS THE AMENDED COMPLAINTS

ARTHUR J. GONZALEZ, Chief Judge.

Before the Court are motions to dismiss (the “Motions to Dismiss”) the respective amended complaints (the “Amended Complaints”) brought by Marianne T. O'Toole (the “Distributing Agent” or the “Plaintiff”) as distributing agent for Trinsum Group, Inc. (collectively with its affiliates, the “Debtors” or “Trinsum”), against Ramesh Karnani (“Karnani”), Peter W. Kontes (“Kontes”), and Robert S. Ruotolo (“Ruotolo”) (collectively, the “Defendants”). In the Amended Complaints, the Distributing Agent seeks to avoid certain cash transfers made by the Debtors to the Defendants between 2003 and 2008, and alleges that the transfers are constructive fraudulent conveyances under applicable state law and provisions of title 11 of the United States Code (the “Bankruptcy Code”). Additionally, the Distributing Agent alleges that these transfers unjustly enriched the Defendants.

Based on the pleading standard set forth in Iqbal¹ and Twombly, ² the Court finds that the Amended Complaints lack sufficient factual allegations to adequately plead the causes of action brought by the Distributing Agent. Therefore, the Court grants the Motions to Dismiss in their entirety. The section 548 claims are dismissed with prejudice. The remaining claims, however, are dismissed without prejudice and the Court grants the Plaintiff leave to amend the complaints within forty five (45) days in order to allege sufficient facts to survive the motion to dismiss standard. In the event that the Plaintiff fails to properly re-plead within the specified time period, the Court will grant the Motions to Dismiss with prejudice in their entirety.

Jurisdiction and Venue

The Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. § 1334, and the proceedings were referred to this Court pursuant to 28 U.S.C. § 157(a) and under the July 10, 1984 “Standing Order of Referral of Cases to Bankruptcy Judges” of the United States District Court for the Southern District of New York (Ward, Acting C.J.). The claims are core proceedings as defined in 28 U.S.C. §§ 157(b)(1), 157(b)(2)(E), 157(b)(2)(H), and 157(b)(2)(O). Venue is proper in the Court pursuant to 28 U.S.C. § 1409.

Background

A. Overview and Procedural History

The Debtors operated an international strategic and financial advisory firm that advised major corporations around the world. (Amended Complaint against Karnani [the “Karnani Amended Complaint”], Case No. 10–03304, ECF No. 13, ¶ 7; Amended Complaint against Kontes [the “Kontes Amended Complaint”], Case No. 10–03305, ECF No. 13, ¶ 7; Amended Complaint against Ruotolo [the “Rutolo Amended Complaint”], Case No. 10–03313, ECF No. 13, ¶ 7). In 2007, Marakon Associates, Inc. (“Marakon”) and Integrated Finance Limited (“IFL”) merged to form Trinsum Group, Inc. (“Trinsum Group”). (Karnani Amended Complaint, ¶ 8; Kontes Amended Complaint, ¶ 8; Ruotolo Amended Complaint, ¶ 8). The newly formed company, however, was not as successful as anticipated, and on July 3, 2008, an involuntary chapter 7 petition was filed against Trinsum Group. Id. at ¶¶ 9–10. On January 28, 2009, the Debtors moved to convert the chapter 7 case to a chapter 11 case. Id. at ¶ 11. The Court granted the motion and converted the case to a chapter 11 on January 29, 2009. Id.

On February 24, 2009, IFL filed a voluntary chapter 11 petition with the Court, and subsequently the IFL and Trinsum cases were jointly administered pursuant to a March 6, 2009 order. Id. at ¶¶ 13–14.

On June 7, 2010, the Debtors commenced adversary proceedings against the Defendants, as well as approximately eighteen additional alleged former officers of the Debtors. (Karnani Memorandum of Law in Support of Motion to Dismiss the Amended Complaint [the “Karnani Memo of Law”], ECF No. 22, 1; Kontes Memorandum of Law in Support of Motion to Dismiss the Amended Complaint [the “Kontes Memo of Law”], ECF No. 22, 1; Ruotolo Memorandum of Law in Support of Motion to Dismiss the Amended Complaint [the “Ruotolo Memo of Law”], ECF No. 22, 1). In the original complaints (the “Original Complaints”), the Debtors brought constructive fraudulent conveyance actions under sections 548 and 544 of the Bankruptcy Code against the Defendants. (Original Complaint against Karnani, ECF No. 1; Original Complaint against Kontes, ECF No. 1; Original Complaint against Ruotolo, ECF No. 1). In particular, the Debtors alleged that the Defendants and the Debtors executed subordinated promissory notes which required the Debtors to pay the Defendants in exchange for their shares of stock. Id.

On November 10, 2010, the Court issued an order confirming the Debtors' liquidation plan. (Case No. 08–12547, ECF No. 358). The plan provided that Marianne O'Toole would be appointed the Distributing Agent, and upon the confirmation date, she would be considered a successor to the Debtors. Id. at § 2(g). Accordingly, she took over all actions the Debtors had commenced before plan confirmation, including these adversary proceedings.

On March 9, 2011, the Defendants filed motions to dismiss the Original Complaints. (Karnani Motion to Dismiss the Original Complaint, ECF No. 9; Kontes Motion to Dismiss the Original Complaint, ECF No. 9; Ruotolo Motion to Dismiss the Original Complaint, ECF No. 9). The Defendants argued that the Original Complaints failed to state a claim for which relief could be granted. (Memorandum of Law in Support of Defendant Karnani's Motion to Dismiss the Original Complaint, ECF No. 10, 1; Memorandum of Law in Support of Defendant Kontes' Motion to Dismiss the Original Complaint, ECF No. 10, 1; Memorandum of Law in Support of Defendant Ruotolo's Motion to Dismiss the Original Complaint, ECF No. 10, 1). The Defendants alleged that the Original Complaints did not meet the pleading standard set forth in Bell Atlantic Corp. v. Twombly. Id.

On March 30, 2011, the Distributing Agent filed a response to these motions and also amended the Original Complaints. (Plaintiff's Response to Defendant Karnani's Motion to Dismiss the Complaint, ECF No. 12; Plaintiff's Response to Defendant Kontes' Motion to Dismiss the Complaint, ECF No. 12; Plaintiff's Response to Defendant Ruotolo's Motion to Dismiss the Complaint, ECF No. 12; Karnani Amended Complaint; Kontes Amended Complaint; Ruotolo Amended Complaint). The Distributing Agent, in amending the Original Complaints, alleged additional factual information and included another cause of action for unjust enrichment against the Defendants. (Karnani Amended Complaint, ¶¶ 52–54; Kontes Amended Complaint, ¶¶ 51–53; Ruotolo Amended Complaint, ¶¶ 50–52).

On May 25, 2011, the Defendants moved to dismiss the Amended Complaints for failure to state a claim upon which relief can be granted. (Karnani's Motion to Dismiss the Amended Complaint, ECF No. 21; Kontes' Motion to Dismiss the Amended Complaint, ECF No. 21; Ruotolo's Motion to Dismiss the Amended Complaint, ECF No. 21). The Defendants argue that the Distributing Agent's Amended Complaints still contain “boiler plate allegations” and formulaic recitations of the elements of the causes of actions alleged. (Karnani Memo of Law, 1; Kontes Memo of Law, 1; Ruotolo Memo of Law, 1). Furthermore, the Defendants allege that the unjust enrichment claim, which was not present in the Original Complaints, “is just as bald and conclusory and time-barred.” Id.

In her response, the Distributing Agent opposes the dismissal and argues she has sufficiently stated plausible fraudulent conveyance and unjust enrichment claims against the Defendants under the applicable pleading standards. (Plaintiff's Memorandum of Law in Opposition to Defendant Ramesh Karnani's Motion to Dismiss, ECF No. 25, 2; Plaintiff's Memorandum of Law in Opposition to Defendant Peter Kontes' Motion to Dismiss, ECF No. 25, 2; Plaintiff's Memorandum of Law in Opposition to Robert Ruotolo's Motion to Dismiss, ECF No. 25, 2). Specifically, the Distributing Agent asserts that the Amended Complaints “provide[ ] ample detail in support of the fraudulent conveyance and unjust enrichment claims including allegations regarding the specific transfers made by the Debtor to the Defendant, the nature of the transactions underlying the transfers, the amount of the transfers, and factual allegations concerning the Debtors' insolvency.” Id.

A hearing was held on the matter on July 20, 2011.

After the hearing, the Court issued an order on October 5, 2011, directing the parties to submit a written statement as to whether they consented to the Court entering a final order regarding the matters at issue. (ECF No. 32). In a letter dated October 14, 2011, the Distributing Agent consented to entry of final orders. (ECF No. 33). The Defendants, however, submitted a letter dated October 14, 2011 and stated they did not consent to entry of final orders with respect to any of the matters at issue. (ECF No. 34).³

B. Allegations Set Forth in the Amended Complaints

In the Amended Complaints, the Distributing Agent alleges that the Defendants “converted shares of Trinsum stock into notes obligating Trinsum to re-pay” the Defendants and “authorize[d] and/or accept[ed] such note re-payments, at a time when Trinsum was insolvent or which payments rendered Trinsum insolvent.” (Karnani Amended Complaint, ¶ 2; Kontes Amended Complaint, ¶ 2; Ruotolo...