Vieira v. Gaither (In re Gaither)

Decision Date29 November 2018
Docket NumberAdv. Pro. No. 18-80040-dd,C/A No. 18-01317-dd
Citation595 B.R. 201
CourtU.S. Bankruptcy Court — District of South Carolina
Parties IN RE: Cole Alexander GAITHER and Anita McCaslin Gaither, Debtors. Michelle L. Vieira, Chapter 7 Trustee for Cole Alexander Gaither and Anita McCaslin Gaither, Plaintiff, v. Zachary A. Gaither; Jordan Gaither Willis; Benjamin Richard Gaither; and ZJB, LLC, Defendants.

Cole Alexander Gaither, Johns Island, SC, pro se.

Anita McCaslin Gaither, Johns Island, SC, pro se.

Christine E. Brimm, Barton Brimm, PA, Murrells Inlet, SC, for Plaintiff.

Erik P. Doerring, McNair Law Firm, PA, Columbia, SC, Charles Pelot Summerall, IV, Walker Gressette Freeman & Linton, LLC, Charleston, SC, for Defendant.

ORDER

David R. Duncan, Chief US Bankruptcy JudgeThis matter is before the Court on the defendants', Zachary A. Gaither, Jordan Gaither Willis, Benjamin Richard Gaither, and ZJB, LLC (collectively "Defendants"), Motion to Dismiss pursuant to Rules 12(b)(1) and (6) of the Federal Rules of Civil Procedure.1 [Docket No. 9].

BACKGROUND

This adversary proceeding arises from a tragic accident and a subsequent civil action which resulted in a $1.3 million settlement in favor of Cole and Anita Gaither ("Debtors").

1. On August 14, 2014, Debtors' son, Matthew Gaither, died in an aviation accident.

2. On January 8, 2015, the Charleston County Probate Court named Debtors the personal representatives of Matthew's estate.

3. On January 26, 2015, Debtors filed a lawsuit against Coastal Aviation, Inc. and William Peterson for the damages resulting from Matthew's death.

4. On May 6, 2015, the Charleston County Court of Common Pleas approved a settlement of $1.3 million in favor of Debtors. The net recovery of the settlement totaled $830,183.67 ("Settlement Proceeds").

5. On the same day, Debtors disclaimed their rights to the Settlement Proceeds. As a result, the Settlement Proceeds passed to Debtors' three surviving children, and each child received $276,727.89—a one-third interest.

6. The surviving children subsequently formed ZJB, LLC (the "LLC") and deposited the Settlement Proceeds in an account owned by the LLC.

7. Debtors filed their chapter 7 bankruptcy case on March 16, 2018.

8. In an amended proof of claim, the Department of the Treasury – Internal Revenue Service ("IRS") claimed Debtors owed the federal government a total of $787,239.85.2 Of the total amount, the IRS listed $332,023.52 as the total amount of secured claims and $455,216.33 as the total amount of unsecured claims. Of the total amount of unsecured claims, the IRS listed $102,873.82 as unsecured priority claims and $352,342.51 as unsecured general claims.3

9. On June 4, 2018, the plaintiff and chapter 7 trustee, Michelle L. Vieira ("Trustee"), filed this adversary proceeding, asserting that 11 U.S.C. § 544(b) permits Trustee to avoid Debtors' transfer of the disclaimed Settlement Proceeds to Defendants.4 [Docket No. 1].

10. On July 18, 2018, Defendants filed their Motion to Dismiss, asserting that Trustee may not avoid Debtors' transfer of the Settlement Proceeds. [Docket No. 9].

11. On August 17, 2018, Trustee filed an objection to Defendants' Motion. [Docket No. 12].

12. On September 4, 2018, Defendants filed a response to Trustee's objection.5 [Docket No. 14].

13. The Court held a hearing on Defendants' Motion on October 23, 2018 and allowed Trustee to file a supplemental response to Defendants' Reply. Additionally, the Court permitted Defendants to file a final supplemental reply and Trustee to respond to Defendants' final supplemental reply.

14. On November 2, 2018, Trustee filed a supplemental response to Defendants' Reply. [Docket No. 19].

15. On November 9, 2018, Defendants filed a final response to Trustee's Supplemental Response. [Docket No. 20].

16. On the same day, Trustee filed a final supplemental reply to Defendants' Final Supplemental Response. [Docket No. 21].

LEGAL STANDARD

Defendants filed their Motion to Dismiss pursuant to Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure, which are made applicable to this adversary proceeding by Rule 7012 of the Federal Rules of Bankruptcy Procedure. Dismissal is appropriate under Rule 12(b)(1) where the court lacks subject-matter jurisdiction. A party bringing a motion to dismiss under Rule 12(b)(1) contends that the complaint fails to state facts upon which jurisdiction can be founded. When a defendant brings a Rule 12(b)(1) motion, the burden is on the plaintiff to prove jurisdiction, and the court must regard the allegations in the pleadings as "mere evidence on the issue, and may consider evidence outside the pleadings without converting the proceeding to one for summary judgment." Richmond, Fredericksburg & Potomac R.R. Co. v. United States , 945 F.2d 765, 768 (4th Cir. 1991).

Under Rule 12(b)(6) of the Federal Rules of Civil Procedure, a party may move to dismiss a complaint for failure to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) motion, a plaintiff must provide "more than mere labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A pleading that states a claim for relief must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2) ; Fed R. Bankr. P. 7008. Moreover, the statement must include "enough facts to state a claim to relief that is plausible on its face." Twombly , 550 U.S. at 570, 127 S.Ct. 1955. "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." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted) (citing Twombly , 550 U.S. at 556, 127 S.Ct. 1955 ).

DISCUSSION

In her adversary complaint, Trustee contends that § 544(b) permits her to step into the shoes of the IRS and employ the Federal Debt Collection Procedures Act6 ("FDCPA") to avoid the transfer of the disclaimed Settlement Proceeds to Defendants. Under 11 U.S.C. § 544(b),

[T]he trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.

11 U.S.C. § 544(b)(1) (emphasis added).

In an action under the FDCPA, "the United States ... may obtain avoidance of the transfer or obligation to the extent necessary to satisfy the debt to the United States." 28 U.S.C. § 3306(a)(1). Such an action may be brought where a debtor fraudulently transfers funds. 28 U.S.C. § 3304. A fraudulent transfer occurs when a debtor transfers funds with the "actual intent to hinder, delay, or defraud a creditor" or where "the debtor makes the transfer ... without receiving reasonably equivalent value in exchange." Id.

In their Motion to Dismiss, Defendants contend that the IRS is not an allowable "creditor holding an unsecured claim," for purposes of § 544(b). More specifically, Defendants argue that "Trustee is not authorized to bring claims which may only be asserted by the IRS," and thus "Trustee lacks standing." [Docket No. 9]. Additionally, Defendants argue that, even if § 544(b) permits a trustee to step into the shoes of the IRS, the FDCPA is not "applicable law" for purposes of § 544(b).

Therefore, issues before the Court are (1) whether Trustee may step into the shoes of the IRS under § 544(b) and utilize federal law and (2) whether the FDCPA is "applicable law" for purposes of § 544(b).

A) Section 544(b) permits Trustee to step into the shoes of the IRS.

Since 1931, when the Supreme Court decided Moore v. Bay , 284 U.S. 4, 52 S.Ct. 3, 76 L.Ed. 133 (1931), courts have almost universally held that trustees may step into the shoes of actual unsecured creditors, exercise the powers available to those creditors, and entirely avoid a transfer for the benefit of all the creditors in the bankruptcy estate. This is so even under state fraudulent transfer recovery schemes that benefit only a particular creditor. Thus, the 28 U.S.C. § 3306(a)(1) limitation on recovery—"to the extent necessary to satisfy the debt to the United States"—is not a limitation under § 544(b).

The first issue this Court must decide is whether the IRS holds an allowable unsecured claim for purposes of § 544(b) such that Trustee may step into the shoes of the IRS and employ the collection powers available to it. Under § 544(b)(1), a trustee "may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim ." 11 U.S.C. § 544(b)(1) (emphasis added). The rights of the trustee are "dependent on the rights of actual creditors possessing claims that are allowable in bankruptcy." Campbell v. Deans (In re J.R. Deans Co.) , 249 B.R. 121, 129 (Bankr. D.S.C. 2000).

Where a trustee asserts the rights of any one creditor, the trustee does so not only for the benefit of that single creditor, but for the benefit of all the creditors. See Charles Tabb, Law of Bankruptcy 484 (4th ed. 2016) (citing Moore v. Bay , 284 U.S. at 4, 52 S.Ct. 3 ). Put another way, "the extent of the trustee's avoidance will not be limited to the amount the creditor could have avoided; instead, the entire transfer will be avoided." Id.

In the present matter, Debtors transferred the Settlement Proceeds by means of a disclaimer. Under South Carolina law, a disclaimer has the effect of avoiding a transfer such that the interest disclaimed "is considered never to have been transferred to the disclaimant." S.C. Code Ann. § 62-2-801(d)(1). However, in Drye v. United States , 528 U.S. 49, 59, 120 S.Ct. 474, 145 L.Ed.2d 466 (1999), the United States...

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