White Family Cos. v. PNC Bank (In re Dayton Title Agency, Inc.), Case No. 99–35768

• Decision Date: 05 February 2015
• Docket Number: Adv. No. 14–3093,Case No. 99–35768
• Citation: 527 B.R. 289
• Parties: In re: Dayton Title Agency, Inc., Debtor White Family Companies, Inc., Plaintiff v. PNC Bank, Defendant
• Court: U.S. Bankruptcy Court — Southern District of Ohio

527 B.R. 289

In re: Dayton Title Agency, Inc., DebtorWhite Family Companies, Inc., Plaintiff

v.PNC Bank, Defendant

Case No. 99–35768

Adv. No. 14–3093

United States Bankruptcy Court, S.D. Ohio, Western Division.

Signed February 5, 2015

Entered February 6, 2015

Paul H. Shaneyfelt, Troy, OH, for Plaintiff.

Marcel C. Duhamel, Cleveland, OH, Lauren N. Fromme, Vorys, Sater, Seymour and Pease LLP, Columbus, OH, for Defendant.

Decision Granting Defendant's Motion to Dismiss Complaint

Guy R. Humphrey, United States Bankruptcy Judge

I. Introduction

The White Family Companies, Inc. (“WFC”), the holder of an allowed claim in this Chapter 7 case, filed a complaint seeking to equitably subordinate the claim of another creditor, PNC Bank (“PNC”),¹ to all other non-priority unsecured creditors pursuant to § 510(c) of the Bankruptcy Code. PNC has moved to dismiss the complaint on three grounds: lack of standing, preclusion principles and failure to state a claim upon which relief can be granted. Because WFC lacks standing to pursue this particular claim for equitable subordination and because its complaint fails to state a claim for equitable subordination, the court is concurrently entering an order dismissing the complaint.

II. Procedural Background and Allegations of the Complaint

A. Procedural Background

This adversary proceeding was filed in the estate case of Dayton Title Agency, Inc. (“DTA”). The estate case was filed in 1999 and was administered as a Chapter 11 case until this court converted it to a Chapter 7 in 2008. (est.doc. 723). Ruth Slone is the Chapter 7 Trustee for the converted case (the “Trustee”).

The history of the estate case and an adversary proceeding pursued in the estate case, captioned Dayton Title Agency, Inc. v. The White Family Companies, Inc., Adv. No. 99–3664 (the “fraudulent conveyance adversary proceeding”), is well-described in the following decisions incorporated by reference: The White Family Companies, Inc. v. Slone (In re Dayton Title Agency, Inc.), 724 F.3d 675 (6th Cir.2013) ; The White Family Companies, Inc. v. Slone, 468 B.R. 268 (S.D.Ohio 2012) and In re Dayton Title Agency, Inc., 292 B.R. 857 (Bankr.S.D.Ohio 2003). The facts underlying the fraudulent conveyance adversary proceeding are central to this adversary proceeding. The fraudulent conveyance adversary proceeding was pending during most of the duration of the estate case and resulted in the estate's recovery of a judgment in the amount of $2,762,814.97 against WFC and against Nelson Wenrick for $1,379,336.41, plus an additional amount of $20,747.13 against WFC and Nelson Wenrick jointly. The separate awards against WFC and Wenrick were appealed. Those awards were originally reversed by the district court, but were later reinstated by the Sixth Circuit Court of Appeals. WFC and PNC were both parties to the fraudulent conveyance adversary proceeding. WFC was an original defendant and PNC was later added as an intervening plaintiff.

WFC initially pursued equitable subordination of PNC's claim through a motion, which the court denied without prejudice on procedural grounds, finding that Federal Rule of Bankruptcy Procedure 7001(8) requires that such relief be pursued through an adversary proceeding. WFC now pursues its equitable subordination claim through its complaint which initiated this adversary proceeding. (doc. 1). The allegations of WFC's complaint are summarized below.

B. Factual Background

PNC has a non-priority unsecured claim in the amount of $4,142,151.38. See Proof of Claim 48 (the “Proof of Claim”).² This claim arises out of PNC providing a provisional credit to DTA on a fictitious check which was the subject of the fraudulent conveyance adversary proceeding. Part of these funds were paid to WFC through DTA's IOTA account and recovered by the Trustee through the fraudulent conveyance adversary proceeding. WFC has a non-priority unsecured claim in the amount of $2,762,815. See Proof of Claim 75. This claim arises out of the Trustee's recovery of the funds paid to WFC from the provisional credit provided to DTA by PNC.

On September 3, 1999 Invesco, LTD (“Invesco”) delivered to WFC a promissory note, which was personally guaranteed by Michael S. Karaman. On October 20, 2009 WFC received payment from a check on DTA's “IOTA account.”³ WFC presented the check and exchanged the check for an official check drawn on and endorsed by PNC. PNC honored the official check and paid WFC $3,260,000. However, the basis for honoring the check was a $5,000,000 check presented to DTA by Krishan Chari drawn on a fictitious bank account. PNC credited DTA's IOTA account with a “provisional credit” in the amount of $5,000,000. The result was DTA's account was overdrawn. DTA filed bankruptcy when PNC seized the funds in DTA's accounts.

The essence of PNC's and WFC's claims in this proceeding can be winnowed down to the following: PNC has a claim against DTA because it provisionally loaned DTA money on a check written from a fictitious account, with the basis of that claim being described on the proof of claim as a “Checking account overdraft” and WFC has a claim against DTA because it was initially paid the money that was provisionally loaned by PNC. WFC had to return those funds to DTA after the Sixth Circuit Court of Appeals affirmed the bankruptcy court's judgment against WFC in the fraudulent conveyance adversary proceeding. Underlying all of this is the fact that the only function which DTA played in these transactions was to serve as the entity which negotiated the fictitious check and issued two checks of its own based upon that fictitious check—one to WFC and one to Nelson Wenrick. Thus, DTA in effect served as the middleman for repayment of a loan owed by an outside party to another outside party, with the claims of both PNC and WFC arising because of the use of DTA and its IOTA account in this role.

The complaint alleges “NCB broke its rules relating to the DTA's IOTA account and its own policies regarding ‘large dollar holds' when it allowed the checks from DTA's IOTA Account to be paid to WFC and Wenrick from the provisional credit and before the underlying funds were available.” Complaint, ¶ 17. The complaint also refers to PNC's failure to follow “its own rules and regulations” in transactions related to the IOTA account that go back to November 1998. Complaint, ¶ 19. For example, WFC asserts that “[b]etween November 1998 and 1999, DTA disbursed more than $8,000,000 from its IOTA Account in Chari related transactions before receiving any of the actual funds for the disbursements, and many of the unsupported disbursements bore no relation to the real estate transactions.” Complaint, ¶ 20. In addition, the complaint alleges that “[i]n September, 1999, DTA made five disbursements from its IOTA account to Chari, or on his behalf while only one ($68,000 for the purchase of a medical building) was related to real estate financing.” Complaint, ¶ 21. The complaint further alleges that PNC allowed “other disbursements” to be made from DTA's accounts to Chari or on Chari's behalf “which amounted to personal loans of trust fund beneficiaries' funds....” Complaint, ¶ 22.

The complaint further asserts that personnel at PNC had knowledge of Chari's improper use of DTA's IOTA account. Specifically, the complaint alleges that:

In January, 1999 PNC's Loss Prevention and Loss Avoidance and Investigation departments became aware of DTA's improper involvement with Chari after the return of a $2,950,000 Chari check against which disbursement from the IOTA Account had been made.

Prior to this time, PNC had closed Chari's personal accounts for suspected check kiting.

* * *

Loss Prevention expressed serious concerns about Chari's activity through the IOTA on numerous occasions, but Loss Prevention's warnings were disregarded.

Complaint, ¶¶ 23, 24 & 27.

The complaint relies upon all of those assertions to aver that PNC “was complicit in permitting or refusing to stop the lengthy fraud perpetrated by Chari ... through the use of DTA's IOTA Account ... [and that] [d]espite [its] knowledge of Chari's fraudulent actions and the multi-million [s] of dollars of overdrafts in DTA's IOTA Account resulting from Chari, ... did nothing to stop or impede the continuing fraudulent actions of Chari and DTA.” Complaint, ¶¶ 31 and 32. The Complaint's ultimate conclusion is that “PNC's failure to stop ... Chari's check kiting and fraudulent transactions constitutes gross misconduct, and a finding that PNC was a participant in the perpetuation of Chari's fraud.” Complaint, ¶ 33.

III. Legal Analysis

A. Jurisdiction and Standard of Review

No party has contested the jurisdiction of the court, nor its authority to enter a final judgment in this adversary proceeding. The court finds that it has jurisdiction pursuant to 28 U.S.C. § 1334, that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) and (O), and that it has the constitutional authority to enter final judgment in this adversary proceeding.

A motion to dismiss an adversary proceeding for “failure to state a claim upon which relief can be granted” is governed by Federal Rule of Civil Procedure 12(b)(6) (applicable by Bankruptcy Rule 7012(b)). The factual allegations must put the defendant on notice as to the claims being alleged and provide a sufficient factual predicate to make the allegations plausible, and not merely possible. Ashcroft v. Iqbal, 556 U.S. 662, 676–77, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Federal courts are not obligated to accept as true legal conclusions couched as factual allegations. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). While detailed factual allegations are not necessary, the allegations must be sufficiently detailed to create more than speculation of a cause of action. Id. A claim is plausible if the factual allegations are sufficient to allow “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.”...