Indiana Bell Telephone Co. v. Lovelady
2006 WL 485305 (W.D.Tex. 01/11/2006)
United States District Court, W.D. Texas,San Antonio Division.
INDIANA BELL TELEPHONE CO. INC., Plaintiff
Harold LOVELADY et al., Defendants.
Jan. 11, 2006.
Michael R. Fruehwald, Barnes & Thornburg, LLP, Indianapolis, IN, Javier Aguilar, San Antonio, TX,
Judith R. Blakeway, Strasburger & Price, L.L.P., Barry Snell, Bayne, Snell & Krause, S. Mark
Murray, Law Offices of S. Mark Murray, Inc., San Antonio, TX, Mark L. Perlmutter, Perlmutter &
Schuelke, LLP, C. Brooks Schuelke, Perlmutter Schuelke, LLP, Austin, TX, for Defendants.
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS
ROYAL FURGESON, J.
*1 Before the Court are (1) Defendants' Motion to Dismiss (Docket No. 32); (2) Plaintiff's Brief
Opposing Motion to Dismiss of J.P. Morgan Chase Bank, Trustee (“Indiana Bell's Response” ) (Docket
No. 36); and (3) Defendants' Reply to Plaintiff's Brief Opposing Motion to Dismiss of J.P. Morgan
Chae [sic] Bank, Trustee (Docket No. 37). A hearing was held on this matter on January 4, 2006.
Motion GRANTED IN PART AND DENIED IN PART.
This case is brought under the Uniform Fraudulent Transfer Act.FN1 Plaintiff Indiana Bell
Telephone Co. Inc. alleges that Thrifty Call, Inc. made several transfers out of its coffers to
the Defendants without receiving an equivalent value in return, to the point where it was rendered
insolvent. FN2 According to Indiana Bell, this was done with the specific intent to defraud
Indiana Bell, to whom Thrifty Call owed a large judgment debt.FN3 Pursuant to this statute,
therefore, Indiana Bell seeks to recover from the named Defendants the amount it is owed.
FN1. Texas Bus. & Com.Code, ch. 24 (2005). Specifically, § 24.005 states, “(a) A transfer made or
obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose
before or within a reasonable time after the transfer was made or the obligation was incurred, if
the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay,
or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in
exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in
a business or a transaction for which the remaining assets of the debtor were unreasonably small
in relation to the business or transaction; or (B) intended to incur, or believed or reasonably
should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they
became due.” Texas Bus. & Com.Code § 24.005 (2005).
FN2. Amended Complaint 3 (Jul. 7, 2005) (Docket No. 14).
FN3. Amended Complaint at 4.
For their part, the Defendants bringing this motion seek to have Indiana Bell's complaint
dismissed as to them. In their view, this complaint fails under Federal Rule of Civil Procedure
9(b), which requires that complaints pleading fraud state their claims with particularity.FN4
FN4. Defendants' Motion to Dismiss 2 (Aug. 19, 2005) (Docket No. 32). Specifically, Rule 9(b)
states, “In all averments of fraud or mistake, the circumstances constituting fraud or mistake
shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a
person may be averred generally.” Fed.R.Civ.P. 9(b). Defendants appear to tie their Rule 9(b)
argument to a Rule 12(b)(6) conclusion. That is, they make only a Rule 9(b) argument-that the
complaint fails to plead fraud with the requisite particularity-but then seek a dismissal of the
complaint on the 12(b)(6) ground that it fails to state a claim on which relief can be granted.
This seems roundabout and unnecessary. A claim can be dismissed for failure to satisfy Rule 9(b)
itself, without any reference to Rule 12(b)(6). Thus, this Court rules on this motion exclusively
under the framework of Rule 9(b).
This motion thus presents the question: Does Indiana Bell's pleading satisfy the particularity
requirements of Rule 9(b)?
Indiana Bell's amended complaint does not satisfy the particularity requirements of Rule 9(b).
The first point to note, of course, is that Rule 9(b) applies to this action. This point is
debatable under Fifth Circuit law. The Fifth Circuit has never ruled precisely on whether Rule
9(b) applies to the Texas UFTA. And some courts in other states have in fact held that it does not
apply to the UFTA in those states, for the “fraud” proscribed by the UFTA in prohibiting
fraudulent transfers is distinct from the actual and constructive “fraud” covered by Rule 9(b).FN5
This question could be subjected to debate, therefore, and one could parade all the usual
arguments for narrowly construing Rule 9(b).FN6
FN5. E.g. China Resource Products (U.S.A.) Ltd. v. Fayda Int'l, Inc., 788 F.Supp. 815, 819
(D.Del.1992) (“Because the plaintiff need not prove actual or constructive fraud under the
provisions discussed above [“Delaware's version of the Uniform Fraudulent Conveyance Act”], Rule
9(b) does not apply to pleadings made pursuant to those provisions. Rather, the general pleading
requirements of Rule 8(a) apply, requiring ‘a short and plain statement of the claim’ rather than
‘particularity.” ’) (internal citations omitted); Van-American Ins. Co. v. Schiappa, et al., 191
F.R.D. 537, 541-543 (S.D.Ohio 2000); United States v. Schofield, 152 F.Supp. 529 (D.Pa.1957).
FN6. For example-to note just a few of those arguments mentioned by Wright and Miller-(1) “the
costs of requiring particularized pleading of fraud and mistake outweigh the benefits the rule
provides”; (2) the rule “undoubtedly magnifies the need for extensive pre-institution
investigation ··· which obviously poses questions of system accessibility for many people and
groups”; (3) “there is a risk that parties will make unfounded or unnecessary motions under Rule
9(b) simply to create delays in litigation”; and (4) “Rule 9(b) often fails to achieve its
objectives of deterring groundless suits and providing defendants with sufficient information in
the complaint to enable them to prepare a defense.” C. Wright & A. Miller, 5A Federal Practice &
Procedure § 1296 (2005).
The parties here do not dispute Rule 9(b)'s applicability, however, and this Court believes that
Fifth Circuit precedent does favor applying it to the Texas UFTA anyway. In Brunswick Corp. v.
Vineberg, after all, that Court dealt with a fraudulent transfer of the same general mold as that
alleged here: “The complaint[ ] alleg[ed] a scheme to divest Bowl of all of its valuable assets
except the Brunswick equipment so that Brunswick's opportunity to collect on its debt was
diminished····” FN7 And there, the Court found Rule 9(b) applicable: “We are ··· convinced that
the specific acts of fraud alleged here satisfy the requirement of F.R.Civ.P. 9(b).” FN8
FN7. Brunswick Corp. v. Vineberg, 370 F.2d 605, 608-9 (5th Cir.1967).
FN8. Brunswick, 370 F.2d at 610 (italics supplied).
Of course, the Texas UFTA at issue here differs slightly from the Florida statutes at issue in
Brunswick.FN9 The differences in actual substance are relatively insignificant, however. And
besides, several other circuits have squarely held Rule 9(b) applicable to the UFTA.FN10
FN9. The statutes in Brunswick read (with infuriating prolixity) as follows:
608.55 Prohibited transfers to officers or stockholders; transfers after or in contemplation of
insolvency. No corporation which shall have refused to pay any of its notes or other obligations
when due, nor any of its officers or directors, shall transfer any of its property to any of its
officers, directors or stockholders, directly or indirectly, for the payment of any debt, or upon
any other consideration than the full value of the property paid in cash. No conveyance,
assignment or transfer of any property of any such corporation by it or by any officer, director
or stockholder thereof, nor any payment made, judgment suffered, lien created or security given by
it or by any officer, director or stockholder when the corporation is insolvent or its insolvency
is imminent, with the intent of giving a preference to any particular creditor over other
creditors of the corporation shall be valid. Every person receiving by means of any such
prohibited act or deed any property of a corporation shall be bound to account therefor to its
creditors or stockholders. No holder of stock not fully paid in any corporation shall transfer it
to any person in contemplation of the corporation's insolvency. Every transfer or assignment or
other act done in violation of the foregoing provision of the section shall be void except in the
hands of a purchaser for a valuable consideration without notice. The directors or officers of a
corporation who shall violate or be concerned in violating any provision of this section shall be
personally liable to the creditors and stockholders of the corporation of which they shall be
directors of officers to the full extent of any loss such creditors and stockholders may
respectively sustain by such violation ···
726.01 Fraudulent conveyances void. Every feoffment, gift, grant, alienation, bargain, sale,
conveyance, transfer and assignment of lands, tenements, hereditaments, and of goods and chattels,
or any of them, or any lease, rent, use, common or other profit, benefit or charge whatever out of
lands, tenements, hereditaments or goods and chattels, or any of them, by writing or otherwise,
and every bond, note, contract, suit, judgment and execution which shall at any time hereafter be
had, made or executed, contrived or devised of fraud, covin, collusion or guile, to the end,
purpose or intent to delay, hinder or defraud creditors or others of their just and lawful
actions, suits, debts, accounts, damages, demands, penalties or forfeitures, shall be from
henceforth as against the person or persons, or bodies politic or corporate, his, her or their
successors, executors, administrators and assigns, and every one of them so intended to be
delayed, hindered or defrauded, deemed, held, adjudged and taken to be utterly void, frustrate and
of none effect, any pretense, color, feigned consideration, expressing of use or any other matter
or thing to the contrary notwithstanding; provided that this section, or anything therein
contained, shall not extend to any estate or interest in lands, tenements, heriditaments, (sic)
leases, rents, uses, commons, profits, goods or chattels which shall be had, made, conveyed or
assured if such estate shall be, upon good consideration and bona fide, lawfully conveyed or
assured to any person or persons, or body politic or corporate, not having at the time of such
conveyance or assurance to them made any manner of notice or knowledge of such covin, fraud or
collusion as aforesaid, anything in this section to the contrary notwithstanding.
Brunswick, 370 F.2d at 608 n. 3. The statute at issue here is presented in footnote 1.
FN10. See, e.g., In re Sharp Int'l Corp., 403 F.3d 43, 56 (2d Cir.2005) (“Pursuant to DCL § 276:
Every conveyance made ··· with actual intent, as distinguished from intent presumed in law, to
hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and
future creditors. To prove actual fraud under § 276, a creditor must show intent to defraud on the
part of the transferor···· As ‘actual intent to hinder, delay, or defraud’ constitutes fraud, it
must be pled with specificity, as required by Fed.R.Civ.P. 9(b).”) (internal quotation marks,
citations, and modifications omitted); General Electric Capital Corp. v. Lease Resolution Corp.,
128 F.3d 1074, 1078-79 (7th Cir.1997) (“GE Capital does not allege a common law fraud violation;
instead, it claims that LRC violated the Illinois Uniform Fraudulent Transfer Act···· Because this
statute creates a cause of action for constructive fraud that requires neither evidence of actual
intent to defraud nor a specific misrepresentation by the defendant, we will evaluate whether GE
Capital has plead the circumstances surrounding the elements of this statutory cause of action
with sufficient particularity to satisfy Rule 9(b).”); see also Barney J. Finberg, “Construction
and Application of Provision of Rule 9(b), Federal Rules of Civil Procedure, that Circumstances
Constituting Fraud or Mistake Be Stated with Particularity,” 27 A.L .R. Fed. 407 § 28 (2005).
*2 Given that Rule 9(b) thus applies, the next question is what it requires. The answer is that it
requires “the who, what, when, where, and how: the first paragraph of any newspaper story.” FN11
The parties cite slightly different sources and slightly different formulations of this standard
(and the Court has found a few more in conducting its own research), but they all boil down to
this same point.FN12
FN11. DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir.1990).
FN12. Defendants cite Williams v. WMX Technologies, Inc., which said that “articulating the
elements of fraud with particularity requires a plaintiff to specify the statements contended to
be fraudulent, identify the speaker, state when and where the statements were made, and explain
why the statements were fraudulent .” 112 F.3d 175, 177 (5th Cir.1997). Indiana Bell cites Form 13
of the Federal Rules of Civil Procedure, which gives an example of a proper fraudulent conveyance
pleading. This Court sees these standards as all requiring the same thing as the Seventh Circuit's
formulation, quoted above.
Thus, it only remains to be answered whether Indiana Bell's amended complaint satisfies this
requirement. The answer is that it does not. Indiana Bell's amended complaint provides particulars
respecting the alleged fraudulent conveyance in only one place-Paragraph 12:
Thrifty Call has made transfers of funds in the nature of distributions of cash to its
shareholders after July 7, 2000, in an amount of at least $5,425,000. Thrifty Call made transfers
of funds to defendant Jerry James after July 7, 2000, in the amount of at least $70,000 in
addition to funds paid to him as shareholder. Thrifty Call made transfers of funds to defendant
Lovelady Management, Inc., after July 7, 2000, in an amount of at least $1,000,000. FN13
FN13. Amended Complaint at 3.
And this is not very specific, particularly as to the defendants bringing these motions. The
complaint does note elsewhere that “Michael Rainosek [and] [t]he trustees ··· are or were
shareholders of Thrifty Call,” and Paragraph 12 does state that “Thrifty Call has made transfers
of funds in the nature of distributions of cash to its shareholders.” FN14 But this is too vague.
The Defendants here were only a few of the many Thrifty Call shareholders. Which distributions
went to which shareholders, and in particular, which distributions went to these specific
shareholders, are left unanswered by the complaint.
FN14. Amended Complaint at 3.
Naturally, the amended complaint also fails to specify when exactly these distributions were made,
and how much money they involved. Paragraph 12 merely states that the fraudulent conveyances
occurred sometime “after July 7, 2000,” and “in an amount of at least $5,425,000.” But again, this
is too vague; it fails to give a specific “when” and “what” as to the Defendants bringing this
Indiana Bell makes one point worth noting: “There can be no doubt that the Bank Trustee has
adequate notice of the claim and knows the details of the asset transfers which Indiana Bell has
not been able to specify. There were only 3 or 4 transfers of funds from Thrifty Call to each of
the trusts after July 7, 2000, and the Bank Trustee undoubtedly has records of the dates and
amounts of each such receipt.” FN15 Thus, Indiana Bell argues, at least some of the Defendants
here had proper notice, even if the amended complaint was vague in itself. But merely ensuring
notice to defendants is not enough for Rule 9(b). While giving defendants notice is one purpose of
the rule, there are several other purposes that require more.FN16 For example, Rule 9(b) is also
premised on the goals of weeding out unmeritorious claims and eliminating fishing expeditions. And
achieving these goals requires not only providing notice to defendants, but also ensuring that the
Court knows what specific conduct is being criticized. Indiana Bell must also provide a specific
complaint for the Court's sake, therefore, and that it fails to do here.
FN15. Indiana Bell's Response at 6.
FN16. See C. Wright & A. Miller, 5A Federal Practice & Procedure § 1296 (2005) (“First, ··· the
requirement in Rule 9(b) is necessary to safeguard potential defendants from lightly made claims
charging the commission of acts that involve some degree of moral turpitude···· Second, ···
allegations of fraud or mistake frequently are advanced only for their nuisance or settlement
value and with little hope that they will be successful on the merits···· Thus, unfounded fraud
claims should be identified and disposed of early. Third, since assertions of fraud or mistake
often are involved in attempts to reopen completed transactions or set aside previously issued
judicial orders, courts are unwilling to entertain charges of this type unless they are based on
allegations that are sufficient to show whether the alleged injustice is severe enough to warrant
the risks and difficulties inherent in a re-examination of old and settled matters···· Fourth, ···
the greater pleading specificity required by Rule 9(b) ··· guards against the institution of a
fraud-based action in order to discover whether unknown wrongs actually have occurred-the classic
fear of ‘fishing expeditions.’ Fifth, fraud and mistake embrace such a wide variety of potential
conduct that a defendant needs a substantial amount of particularized information about the
plaintiff's claim in order to enable him to understand it and effectively prepare a responsive
pleading and an overall defense of the actions. Finally, ··· the old cliché ··· that actions or
defenses based upon fraud are disfavored and therefore must be scrutinized by the courts with
great care because claims of this type often form the basis for ‘strike suits' still retains
*3 The Court thus finds that Indiana Bell's complaint cannot stand against the requirements of
Rule 9(b). Accordingly, it GRANTS IN PART Defendants' motion and orders Indiana Bell to amend its
complaint to bring it into compliance with Rule 9(b). At the same time, this Court declines to
actually dismiss the complaint. As such, it DENIES IN PART Defendants' motion.