Zazzali v. AFA Fin. Grp., LLC (In re DBSI, Inc.), Bankruptcy No. 08–12687 (PJW).

• Court: U.S. Bankruptcy Court — District of Delaware
• Citation: 477 B.R. 504
• Docket Number: Bankruptcy No. 08–12687 (PJW).,Adversary No. 10–54524 (PJW).
• 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. AFA Financial Group, LLC, et al., Defendants.
• Decision Date: 27 August 2012

477 B.R. 504

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.
AFA Financial Group, LLC, et al., Defendants.

Bankruptcy No. 08–12687 (PJW).
Adversary No. 10–54524 (PJW).

United States Bankruptcy Court,
D. Delaware.

Aug. 27, 2012.

[477 B.R. 507]

Christopher Viceconte, Natasha M. Songonuga, William R. Firth, III, Gibbons P.C., Wilmington, DE, Dale E. Barney, Mark B. Conlan, Gibbons P.C., Newark, NJ, for Plaintiff.

AFA Financial Group, LLC, pro se.

Francis A. Monaco Jr., Womble Carlyle Sandridge & Rice, William F. Taylor, Jr., McCarter & English LLP, Thomas F. Driscoll, III, Bifferato LLC, Regina M. Matozzo, Ferry, Joseph & Pearce, P.A., Artemio C. Aranilla, Marshall Dennehey Warner Coleman & Gog, Lucian Borders Murley, Saul Ewing LLP, Garvan F. McDaniel, Bifferato Gentilotti LLC, Theodore J. Tacconelli, Ferry, Joseph & Pearce, P.A., Katharine L. Mayer, McCarter & English, LLP, Jeffrey R. Waxman, Morris James LLP, Michael J. Farnan, Saul Ewing LLP, Wilmington, DE, Cliff G. Anderson, Michaels, Ward & Rabinovitz, LLP, Boston, MA, Derek C. Anderson, Michaels, Ward & Rabinovitz, LLP, Boulder, CO, Denis C. Dice, Esq., Marshall Dennehey Warner Coleman Goggin, Joel M. Wertman, James A. McGovern, Marshall, Dennehey, Warner, Coleman, Philadelphia, PA, Alan M. Wolper, Locke Lord Bissell & Liddell LLP, David A. Baugh, Baugh, Dalton, Carlson & Ryan, LLC, Erin M. Korrison, Helen Din, Locke Lord Bissell & Liddell LLP, Chicago, IL, Gregg Breitbart, Kaufman Dolowich Voluck & Gonzo LLP, Boca Raton, FL, Jennie L. Clegg, David C. Johnson, George J. Marcus, Marcus Clegg & Mistretta, P.A., Portland, ME, Mark F. Raymond, Michael A. Shafir, Braod and Cassel, Miami, FL, Carla B. Minckley, Birge & Minckley, P.C., Centennial, CO, for Defendants.

MEMORANDUM OPINION
PETER J. WALSH, Bankruptcy Judge.

This opinion concerns the motion to dismiss this adversary proceeding (“the Motion”) filed by certain defendants (the “Movants”).¹ (Doc. # 123.) For the reasons described below, I will deny the Motion in part and grant it in part.

Background

This adversary proceeding arose in the chapter 11 bankruptcy cases of DBSI, Inc. (“DBSI”) and numerous of its affiliates (collectively, “Debtors”), filed in November 2008. DBSI Securities Corporation (“DBSI Securities”), 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 ², so only a brief summary of

[477 B.R. 508]

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 4, 2010. (Doc. # 1.) The complaint (the “Complaint”) asserts causes of action for the avoidance and recovery of actually fraudulent, preferential, and post-petition transfers pursuant to 11 U.S.C. §§ 544, 547, 548, 549, 550, 551, and applicable state ³ fraudulent transfer law; unjust enrichment; and disallowance of claims pursuant to 11 U.S.C. § 502(d). Over 100 broker-dealer defendants are named in the action. The identities and residences of the defendants are listed on Exhibit A to the Complaint. Exhibit B lists numerous transfers (the “Transfers”) made by DBSI Securities to the defendants, and includes the amount, date, and check number for each Transfer.

Movants filed this Motion to dismiss the Complaint in its entirety for failure to state a claim upon which relief can be granted, pursuant to Fed.R.Civ.P. 12(b)(6). After briefing from the parties, 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 core matters under § 157(b)(2)(B), (F), (H), and (0).

Standard of Review

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)⁴, 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, “factual allegations 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).

Discussion Count One: Avoidance of Actually Fraudulent Transfers under 11 U.S.C. § 548(a)(1)(A), 550, and 551

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.

[477 B.R. 509]

11 U.S.C. § 548(a)(1)(A). 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 a plaintiff bringing a cause of action for fraud to “state with particularity the circumstances constituting fraud or mistake.” This standard is relaxed where the plaintiff is a trustee in bankruptcy, 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 mere legal conclusions and cannot simply repeat the elements of the 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) (citing Twombly, 127 S.Ct. at 1964–65).

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 ⁵ 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.” (Compl.¶ 20.)

• “During the four-year period preceding the [p]etition [d]ate (the ‘Four Year Period’), the Debtors were facing severe cash shortages and were largely dependent on new investor money to provide cash for operations and to fund payments to prior investors.” (Id.¶ 21.)

• 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. ¶¶ 22–24.)

• “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.¶ 42.)

[477 B.R. 510]

• “[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.¶ 43.)

This Court has previously found that, because the DBSI cases have been substantively consolidated, Trustee need not allege that the particular transferor entity (here, DBSI Securities Corporation) 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 DBSI Securities, 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 list of badges of fraud is not exclusive, and so the Court may consider other factors. Here, Trustee raises a number of allegations regarding Debtors' financial condition and their attempts to obscure the true status of their balance sheets. In particular, Trustee alleges that Debtors, including DBSI Securities Corporation, were part of a Ponzi scheme. Trustee alleges that the DBSI enterprise as a whole “took on the characteristics of a Ponzi scheme” around 2004. (Compl.¶...