Zazzali v. 1031 Exch. Grp. LLC (In re DBSI, Inc.)

• Decision Date: 01 August 2012
• Docket Number: Adversary No. 10–54648(PJW).,Bankruptcy No. 08–12687(PJW).
• Citation: 476 B.R. 413,56 Bankr.Ct.Dec. 240
• Parties: In re DBSI, INC., et al., Debtors. James R. Zazzali, as Trustee for the Debtors' Jointly–Administered Chapter 11 Estates and/or as Litigation Trustee for the DBSI Estate Litigation Trust, Plaintiff, v. 1031 Exchange Group LLC, et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Delaware

476 B.R. 413

56 Bankr.Ct.Dec. 240

In re DBSI, INC., et al., Debtors.James R. Zazzali, as Trustee for the Debtors' Jointly–Administered Chapter 11 Estates and/or as Litigation Trustee for the DBSI Estate Litigation Trust, Plaintiff,

v.1031 Exchange Group LLC, et al., Defendants.

Bankruptcy No. 08–12687(PJW).

Adversary No. 10–54648(PJW).

United States Bankruptcy Court, D. Delaware.

Aug. 1, 2012.

Jami Nimeroff, Brown Stone Nimeroff, LLC, Attorneys at Law, Wilmington, DE, Monte Neil Stewart, Craig C. Taylor, Belnap Stewart Taylor & Morris, PLLC, Boise, ID, for Certain Defendants Listed on Exhibit A.

Natasha M. Songonuga, Christopher Viceconte, Gibbons P.C., Wilmington, DE, Dale E. Barney, Mark B. Conlan, Gibbons P.C., Newark, NJ, for James R. Zazzali, Litigation Trustee for the DBSI Estate Litigation Trust.

John D. Demmy, Maria Aprile Sawczuk, Stevens & Lee, P.C., Wilmington, DE, for Certain Defendants Listed on Exhibit A and Defendants PMZ Real Estate and Carter Commercial Group, Inc.

Garvan F. McDaniel, Bifferato Gentilotti LLC, Wilmington, DE, Anne R. Myers, Kaufman Dolowich Voluck & Gonzo LLP, Blue Bell, PA, for Certain Defendants Listed on Exhibit A.

James S. Yoder, White and Williams LLP, Wilmington, DE, for Defendant Prudential Dunn Realtors and Montoya Development LC.

Stephen W. Spence, Stephen A. Spence, Phillips, Goldman & Spence, P.A., Wilmington, DE, Steven J. Mitnick, Mitnick & Malzberg, P.C., Frenchtown, NJ, Co–Counsel and Conflicts Counsel to James R. Zazzali, Litigation Trustee for the DBSI Estate Litigation Trust.

MEMORANDUM OPINION

PETER J. WALSH, Bankruptcy Judge.

This opinion is with regard to the motion to dismiss or for deconsolidation (the “Motion”) filed by certain defendants (the “Movants”) ¹ in this adversary action.² (Doc. # 144.) For the reasons described below, I will deny the Motion in part and grant it in part.

Background

This adversary proceeding arose from the bankruptcy cases of DBSI, Inc. (“DBSI”) and a number of its affiliates (collectively, “Debtors”), filed on or about November 10, 2008. FOR 1031 LLC (“FOR 1031”), a DBSI affiliate, filed on November 10, 2008. The history of the DBSI bankruptcy cases has been extensively chronicled in prior decisions from this Court ³, so only a brief summary of the facts relating to this adversary will be provided here.

This action was commenced by James R. Zazzali, Litigation Trustee for the DBSI Estate Litigation Trust (“Trustee”) on November 5, 2010. (Doc. # 1.) Trustee subsequently filed an amended complaint on November 10, 2010 (the “Amended Complaint”). (Doc. # 3.) In the Amended Complaint, Trustee asserts causes of action for the avoidance and recovery of fraudulent transfers under sections 544, 548, 550, and 551 of the Bankruptcy Code and Idaho state law; declaratory judgment related to the Securities Act of 1933 (the “'33 Act”) and the Securities Exchange Act of 1934 (the “'34 Act”); unjust enrichment; rescission; and disallowance of claims pursuant to section 502 of the Bankruptcy Code. Exhibit A to the Amended Complaint lists the name and city/state/zip code of each defendant, including Movants. Exhibit B lists several hundred transfers (the “Transfers”) from FOR 1031 and other DBSI entities to Movants and other defendants. For each Transfer, Trustee lists the amount, date, and number of each check or transaction, and the names of the transferee/defendant and the transferor.

Movants are seeking to dismiss the Amended Complaint in its entirety for failure to state a claim, pursuant to Fed.R.Civ.P. 12(b)(6)⁴. In the alternative, Movants request deconsolidation due to improper joinder of defendants under Fed.R.Civ.P. 20(a)(2)⁵. After briefing from Movants and Trustee (Docs. 145, 243, 259), this matter is ripe for decision.

Jurisdiction

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334. This proceeding involves both core matters under § 157(b)(2)(B), (F), (H), (O) and non-core matters.⁶

Discussion

The Motion raises two main issues: 1) whether the Amended Complaint alleges sufficient facts to state claims for relief against Movants; and 2) whether Movants have been improperly joined. Because I need not reach the joinder issue if I determine that the Amended Complaint should be dismissed, I will first consider the Rule 12(b)(6) dismissal issue and then turn to the joinder issue.

I. Dismissal under Rule 12(b)(6)

In order to survive a motion to dismiss under Rule 12(b)(6), “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)). Under the pleading requirements imposed by Fed.R.Civ.P. 8(a)⁷, the plaintiff must provide more than “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555, 127 S.Ct. 1955. Rather, “factualallegations must be enough to raise a right to relief above the speculative level.” Id. See also Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir.2009) (“To prevent dismissal, all civil complaints must now set out ‘sufficient factual matter’ to show that the claim is facially plausible. This then ‘allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ ”) (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937). The court will “accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.” Phillips v. Cnty. of Allegheny, 515 F.3d 224, 233 (3d Cir.2008).

A. Count One—Avoidance and Recovery of Actual Fraudulent Transfers under 11 U.S.C. §§ 548(a)(1)(A), 550(a), and 551

Actions to avoid actually fraudulent transfers under § 548(a)(1)(A) are subject to the Fed.R.Civ.P. 9(b) heightened standard of pleading. Official Comm. of Unsecured Creditors of Fedders N. Am. v. Goldman Sachs Credit Partners (In re Fedders N. Am., Inc.), 405 B.R. 527, 544 (Bankr.D.Del.2009). Rule 9(b) requires that a plaintiff bringing a cause of action for fraud “state with particularity the circumstances constituting fraud or mistake.” This standard is relaxed where the plaintiff is a trustee, because “of the trustee's ‘inevitable lack of knowledge concerning acts of fraud previously committed against the debtor, a third party.’ ” Id. (citing Schwartz v. Kursman (In re Harry Levin, Inc. t/a Levin's Furniture), 175 B.R. 560, 567 (Bankr.E.D.Pa.1994)). Nonetheless, even under the more relaxed Rule 8(a) standard, the plaintiff must provide more than “labels and conclusions, and a formulaic recitation of the elements of a cause of action.” Mervyn's LLC v. Lubert–Adler Grp. IV (In re Mervyn's Holdings, Inc.), 426 B.R. 488, 494 (Bankr.D.Del.2010) (quoting Twombly, 127 S.Ct. at 1964–65).

Section 548(a)(1)(A) provides that a trustee may avoid a transfer “made with actual intent to hinder, delay or defraud” creditors, provided that the transfer was made within two years before the petition date. Because of the difficulty in proving actual fraudulent intent, the court can infer the necessary intent from the circumstances of the case, particularly the presence or absence of “badges of fraud.” Fedders, 405 B.R. at 545. The traditional badges of fraud include (but are not limited to): “(1) the relationship between the debtor and the transferee; (2) consideration for the conveyance; (3) insolvency or indebtedness of the debtors; (4) how much of the debtor's estate was transferred; (5) reservation of benefits, control or dominion by the debtor over the property transferred; and (6) secrecy or concealment of the transaction.” Id. No single badge of fraud is dispositive, and the court may consider other factors. Id.

Trustee pleads that the collective DBSI enterprise was insolvent at the time of the Transfers. Specifically, Trustee makes the following allegations:

• “Marketing, transactional and organizational costs in the TIC syndication business prevented [DBSI] from generating sufficient profit to support the DBSI enterprise. At some point in or after 2004, the DBSI enterprise took on the characteristics of a Ponzi scheme, in which the guaranteed returns to the old investors could only be satisfied by the flow of funds from the new investors.” (Am. Compl. ¶ 27.)

• “During the four-year period preceding the Petition Date (the “Four Year Period”), the Debtors were facing severecash shortages and were largely dependent on new investor money to provide cash for operations and to fund payments to prior investors.” ( Id. ¶ 28.)

• DBSI commingled funds among the various entities and routinely transferred cash from one entity to another without regard for the original source of the funds. ( Id. ¶¶ 29–31.)

• “By late 2006, cash shortages were such an acute problem that management was consumed by the machinations of managing and obtaining cash. From early 2005, management met frequently to address cash-flow needs.” ( Id. ¶ 49.)

• “[D]espite massive flows of cash in and out of [the DBSI enterprise's] accounts, a snapshot on any given day would show either a very meager cash balance or a collective deficit.” ( Id. ¶ 50.)

This Court has previously found that, because the DBSI cases have been substantively consolidated, Trustee need not allege that the particular transferor entity (here, FOR 1031) was insolvent. Zazzali v. Mott (In re DBSI, Inc.), 447 B.R. 243, 248 (Bankr.D.Del.2011). As a result, the allegations regarding the insolvency of the DBSI enterprise as a whole are sufficient. From Trustee's assertions listed above, it is plausible that Debtors, including FOR 1031, were unable to pay their debts as they came due.

Insolvency is the only traditional badge of fraud that Trustee includes in his pleading. But the...