LS Mitron: Fraudulent Transfer And Civil Conspiracy

[Riser Adkisson LLP]

LS Mitron v. Escorts, Ltd., 2012 WL 992115, 2012 NCBC 18 (N.C.Super, Unpublished, March 22, 2012).

UNPUBLISHED OPINION. CHECK COURT RULES BEFORE CITING.

Superior Court of North Carolina, Edgecombe County, Business Court.

LS MTRON, as successor to LS Cable, Plaintiff

v.

ESCORTS, LTD., directly and as successor By merger to Escorts Agrimachinery, Inc., Textron Financial Corp. and James C. Marrow, Receiver for Farmtrac North America, LLC, Defendants.

No. 09 CVS 1539.

March 22, 2012.

THIS CAUSE, designated a mandatory complex business case by Order of the Chief Justice of the Supreme Court of North Carolina, pursuant to N.C. Gen.Stat. sec. 7A45.4 (hereinafter, references to the North Carolina General Statutes will be to "G.S."), and assigned to the undersigned Chief Special Superior Court Judge for Complex Business Cases, comes before the court upon (a) Motion of Textron Financial Corporation to Dismiss (the "Textron Motion") and (b) Motion of Escorts, Ltd. to Dismiss Plaintiff's Complaint (the "Escorts Motion") (collectively, the "Motions"); and

THE COURT, after considering the Motions, arguments in support of and in opposition to the Motions, briefs in support of and in opposition to the Textron Motion, brief in opposition to the Escorts Motion FN1 and other appropriate matters of record, CONCLUDES that the Textron Motion should be GRANTED in part and DENIED in part, and the Escorts Motion should be DENIED, for the reasons stated herein.

FN1. The Escorts Motion was filed without an accompanying brief. This practice is inconsistent with Rule 15.2 of the General Rules of Practice and Procedure for the North Carolina Business Court ("BCR"), which requires that "[a]ll motions, unless made orally during a hearing or trial, shall be accompanied by a brief ...," notwithstanding certain limited exceptions. While the Escorts Motion could be denied summarily pursuant to BCR 15.11, the court, in the exercise of its discretion, decides to consider the Escorts Motion on its merits.

Wyrick Robbins Yates & Ponton LLP, by Benjamin N. Thompson, Esq. and Sarah M. Johnson, Esq., for Plaintiff LS Mtron, Ltd.

Poyner & Spruill LLP, by David Dreifus, Esq. and Andrew H. Erteschik, Esq., for Defendant Textron Financial Corporation.

Parker Hudson Rainer & Dobbs LLP, by Eric Anderson, Esq. and Ronald T. Coleman, Jr., Esq., for Defendant Textron Financial Corporation.

Smith Moore Leatherwood LLP, by Bradley Risinger, Esq., for Defendant Escorts, Ltd.

Wilson & Ratledge, PLLC, by N. Hunter Wyche, Jr., Esq. and Michael A. Ostrander, Esq., for Defendant Escorts, Ltd.

OPINION AND ORDER ON MOTIONS TO DISMISS

JOLLY, Judge.

PROCEDURAL HISTORY

*1 [1] On December 15, 2009, Plaintiff LS Mtron ("Mtron") filed its Complaint in this civil action. The Complaint alleges three (3) claims for relief ("Claim(s)"): (a) First Claim for Relief—Subordination Due To Breaches of Fiduciary Duty and Inequitable Conduct, (b) Second Claim for Relief—Civil Conspiracy and (c) Third Claim for Relief—Fraudulent Conveyances.

[2] On February 15, 2010, Defendant Textron Financial Corporation ("Textron") filed the Textron Motion, which seeks dismissal of all Claims, pursuant to Rules 12(b)(1) and 12(b)(6) of the North Carolina Rules of Civil Procedure ("Rule(s)").

[3] On May 13, 2010, Escorts Ltd. ("Escorts") filed the Escorts Motion, which seeks dismissal of all Claims, pursuant to Rule 12(b)(1); in the alternative, Escorts requests the court to compel Mtron to prepare a more definite statement of its Complaint, pursuant to Rule 12(e).

FACTUAL BACKGROUND

Among other things, the Complaint alleges that:

[4] Mtron, formerly a division of LS Cable Ltd., is a tractor manufacturer organized under the laws of the Republic of Korea, with its principal place of business in or near Seoul, Republic of Korea.FN2

FN2. Compl. para. 11.

[5] Escorts is an international industrial company based in India, which, among other things, manufactures tractors and agricultural equipment.FN3

FN3. Id. para. 1.

[6] Textron is a corporation organized under the laws of Delaware, with its principal place of business in Providence, Rhode Island.FN4

FN4. Id. para. 14.

[7] Defendant James C. Marrow (the "Receiver") is the receiver for Farmtrac North America, LLC ("Farmtrac").FN5 Farmtrac is a limited liability company organized under the laws of Delaware, and prior to the appointment of the Receiver, Farmtrac had its principal place of business in Tarboro, North Carolina.FN6

FN5. Id. para. 12.

FN6. Id.

[8] At times material, Escorts controlled and dominated Farmtrac through direct and indirect ownership.FN7 Escorts sold tractors and related equipment to Farmtrac for further sale by Farmtrac to agricultural equipment dealers throughout the United States.FN8

FN7. Id. para. 2–3.

FN8. Id. para. 2.

[9] A business relationship between Mtron and Farmtrac developed in or about 1998, when Mtron began supplying tractors and related equipment to Farmtrac on credit, pursuant to a distribution agreement.FN9

FN9. Id. para. 28.

[10] Textron financed Farmtrac operations through a revolving credit facility and through floorplan financing to Farmtrac's dealers.FN10 The floorplan financing, which resembles a purchase money loan, financed dealer purchases of Farmtrac's inventory by advancing money directly to Farmtrac upon each equipment purchase by a dealer.FN11

FN10. Id. para. 4.

FN11. Id.

[11] On May 11, 2005, Farmtrac and Mtron entered into a Distributorship Agreement (the "Distributorship Agreement"), pursuant to which Mtron continued to sell tractors and other related equipment to Farmtrac on an extension of trade credit.FN12

FN12. Id. paras. 40–41.

[12] In 2005, Escorts and Farmtrac were experiencing serious financial difficulties.FN13 Escorts and Farmtrac adopted a practice of "channel stuffing" in an effort to (a) obtain funds through the financing of equipment purchases by Farmtrac and (b) wrongfully transfer those borrowed funds to Escorts for its benefit and that of its subsidiaries.FN14 The alleged "channel stuffing" scheme was designed to "stuff" Farmtrac's "inventory channel to allow excessive purchases of equipment from Escorts." The scheme was carried out by: (a) Farmtrac creating false orders and invoices by its dealers for tractors; (b) Farmtrac submitting the false invoices to Textron, purportedly representing sales by Farmtrac to its dealers, which resulted in Textron increasing the credit base under its floor plan and revolving credit facilities with Farmtrac; (c) Textron advancing funds to Farmtrac under the revolving credit facility and the floor plan facility and (d) Farmtrac transferring the proceeds of the Textron loans to Escorts for its benefit.FN15

FN13. Id. para. 47.

FN14. Id. paras. 6, 48.

FN15. Id. para. 6.

*2 [13] The alleged "channel stuffing" scheme also led Mtron to perform under the Distributorship Agreement by supplying millions of dollars worth of tractors and related equipment to Farmtrac and increasing the amount of goods to be supplied by Mtron to Farmtrac on credit.FN16 During late 2006 and 2007, the unpaid amounts due Mtron from Farmtrac increased materially. FN17

FN16. Id. para. 60.

FN17. Id.

[14] As the amount of goods allegedly purchased by Farmtrac from Escorts and Mtron grew, and the corresponding debt increased, Textron knew or should have known that the "channel stuffing" scheme existed, and it should have disclosed or stopped the scheme.FN18 Rather, Textron allowed the fraudulent practices by Escorts and Farmtrac to continue by increasing the amount of secured credit it extended to Farmtrac. By doing so, Textron maximized the benefits of the scheme to itself, to the knowing detriment of Mtron.FN19

FN18. Id. paras. 9, 51–52, 59–60.

FN19. Id.

[15] On September 30, 2006, Farmtrac owed Mtron approximately $1,626,960. FN20 On November 25, 2007, Farmtrac had an account balance due to Mtron of approximately $11,096,880, of which more than $8 million was past due. By February 27, 2008, the unpaid amount due Mtron from Farmtrac was approximately $12,349,610.88.FN21

FN20. Id. paras. 58, 60.

FN21. Id. para. 60.

[16] On or around March 2007, Escorts executed a Guarantee Agreement (the "Guarantee Agreement"), pursuant to which Escorts guaranteed payment on certain Farmtrac payment obligations to Mtron under the Distributorship Agreement. FN22

FN22. Id. para. 42.

[17] On November 27, 2007, Mtron made a formal demand for payment from Escorts under both the Guarantee Agreement and Distributorship Agreement.FN23 When Escorts failed to pay upon demand, Mtron commenced an arbitration proceeding against Escorts and Farmtrac, pursuant to the Distributorship Agreement, with the International Chamber of Commerce on November 29, 2007. FN24

FN23. Id., Ex. 2. para. 10.

FN24. Id. para. 15.

[18] On November 30, 2007, Mtron also filed a complaint in an action entitled LS Cable Ltd. v. Farmtrac North America, LLC (Edgecombe County Sup.Ct. 07–CVS–1345) (the "Receivership Case") seeking, among other things, the appointment of a receiver for Farmtrac.FN25 The court entered an order on February 27, 2008 (the "Receivership Order"), appointing James C. Marrow as the receiver for Farmtrac and authorizing the receiver to liquidate the receivership estate. FN26

FN25. Id. Ex. 2. para. 12.

FN26. Id. para. 12.

[19] Subsequently, Textron filed a proof of claim against Farmtrac in the Receivership Case for approximately $15,500,000, representing the balance of the indebtedness owed under the revolving credit facility, which was secured by a lien on substantially all of Farmtrac's assets.FN27 On or about November 21, 2008, the Receiver filed a motion with the court in the Receivership Case to allow the secured claim of Textron.FN28 On December 1, 2008, Mtron filed an objection to the allowance of Textron's secured claim. On March 2, 2009, the court entered an Order Approving Distribution to Secured Creditor (the "March 2 Order") granting the Receiver's motion and authorizing payment to Textron of approximately $11,875,000.FN29 The March 2 Order specified that the payment to Textron was made without prejudice to any objections by Mtron to Textron's claim against Farmtrac.FN30

FN27. Id. Ex. 5.

FN28. Id. para. 17.

FN29. Id. Ex. 6.

FN30. Id. para. 17.

*3 [20] Thereafter, Mtron filed the instant action on December 15, 2009. By way of this action, Mtron seeks relief, in its behalf and on behalf of "other general creditors of Farmtrac," against Textron, Escorts and the Receiver for equitable subordination, civil conspiracy and fraudulent conveyances.FN31 In substance, Mtron asks the court to determine that the funds paid to Textron as a result of the March 2 Order should be (a) returned to the Receiver as general assets of Farmtrac and (b) made available to the general creditors of Farmtrac ahead of any claims against Farmtrac by Escorts and Textron.

FN31. Id. para. 20.

DISCUSSION

Standing

[21] As a threshold matter, Defendants Textron and Escorts argue that the court lacks subject matter jurisdiction because Mtron does not have standing to bring its Claims on behalf of itself and the general creditors of Farmtrac for harm allegedly done by Textron and Escorts. Accordingly, both Motions seek dismissal of this action pursuant to Rule 12(b)(1).

[22] All the elements of standing must be met prior to a court invoking its jurisdiction in adjudicating an alleged civil dispute. Aubin v. Susi, 149 N.C.App. 320, 324 (2002); see also Estate of Apple v. Commercial Courier Express, Inc., 168 N.C.App. 175, 176 (2005) ("If a party does not have standing to bring a claim, a court has no subject matter jurisdiction to hear the claim."). The burden is on the party seeking to invoke the court's jurisdiction to establish that all elements of standing have been met. Peninsula Prop. Owners Ass'n v. Crescent Res., LLC, 171 N.C.App. 89, 92 (2005).

[23] Rule 17(a) provides that standing is not present when a party is not a "real party in interest." In the context of Rule 17(a), the "real party in interest" has been interpreted to mean the party who "by substantive law has the legal right to enforce the claim in question." Whittaker v. Furniture Factory Outlet Shops, 145 N.C.App. 169, 175 (2001) (internal quotations omitted). It is not enough that a party "merely" has an "interest in the action involved." Parnell v. Nationwide Mut. Ins. Co., 263 N.C. 445, 448 (1965) (internal citations omitted). Rather, to be the real party in interest, a party must have an interest in the subject matter of the litigation, such that the party is "entitled to receive the fruits of the litigation" in the form of damages. Goodrich v. Rice, 75 N.C.App. 530, 537 (1985); see Parnell, 263 N.C. at 449.

[24] The court may consider and weigh matters outside the pleadings when ruling on a motion to dismiss brought under Rule 12(b)(1) for lack of subject matter jurisdiction. Tart v. Walker, 38 N.C.App. 500, 502 (1978).

[25] Textron contends that when the court entered the Receivership Order, the Receiver became the only party legally able to bring a claim on behalf of Farmtrac's "general creditors." FN32 In support of this argument, Textron refers to the language in the Receivership Order granting the Receiver the power to "[b]ring all actions of law or in equity which cause may require." FN33

FN32. Def. Textron Mem. Supp. Mot. Dismiss 9.

FN33. Id. (citing Compl. Ex. 2.).

*4 [26] Mtron argues that the March 2 Order allows Mtron to bring its Claims.FN34 For support, Mtron cites the language in the March 2 Order that allowed the Receiver to make payment to Textron, without prejudice to Mtron's objection.FN35 Moreover, Mtron contends that the Receiver agrees with this interpretation of the March 2 Order because the Receiver answered Mtron's Complaint on March 1, 2010, by admitting paragraph 19 of the Complaint. FN36 Paragraph 19 reads:

FN34. Pl. Resp. Opp'n Def. Textron Mot. Dismiss 14.

FN35. Id.

FN36. Id.

By virtue of the [March 2] Order and other rulings of the trial court made in open court at the hearing in the Related [Receivership] Proceeding conducted on February 18, 2009, Mtron is entitled to bring this action for itself, and for the benefit of the general creditors of the estate of receivership of Farmtrac, to obtain relief against Textron and Escorts with respect to the funds which are now in the custody of Textron pursuant to the March Order.

[27] A review of the case law reveals that an individual creditor ordinarily only has standing to assert its own claim when the injury alleged is separate from the estate and independent of other creditors. Lillian Knitting Mills Co. v. Earle, 233 N.C. 74, 75–76 (1950) (holding that an individual creditor had standing to assert a claim against directors of a corporation that had been placed in receivership because the alleged misrepresentations were made directly to that individual creditor). However, an individual creditor that does not have standing to bring its claim on the basis of a particularized injury may still have standing on such a claim if the receiver has either abandoned the claim or it is shown that the receiver has no motivation for bringing the claim. Nat'l Am. Ins. Co. v. Ruppert Landscaping Co., 187 F.3d 439, 441–42 (4th Cir .1999).

[28] In the instant case, the court is persuaded that Mtron has standing to bring its Claims against Defendants for the relief sought. Mtron should not be denied such opportunity in the hope that the Receiver will pursue the Claims on behalf of Mtron. The Receiver's admission in answering Mtron's Complaint is evidence of the fact that the Receiver either has abandoned the claims or has no motivation to bring the claims that Mtron alleges. Dismissing Mtron's Complaint for lack of standing would be unfair in light of the facts and would result in Mtron being denied its day in court. For these reasons, the court CONCLUDES that Mtron has standing to bring its Claims against Textron and Escorts, and that the court has subject matter jurisdiction to decide this dispute.

[29] Therefore, the Motions, to the extent they seek dismissal pursuant to Rule 12(b)(1), should be DENIED.

Textron's Rule 12(b)(6) Motion

[30] The Textron Motion also seeks dismissal of each of Mtron's Claims under Rule 12(b)(6) for failure to state a claim upon which relief can be granted. By bringing a motion to dismiss under Rule 12(b)(6), the moving party is able to test the legal sufficiency of a complaint. Sutton v. Duke, 277 N.C. 94, 98 (1970).

*5 [31] The court, in deciding a Rule 12(b)(6) motion, should treat the well-pleaded allegations of the complaint as true and admitted, but conclusions of law or unwarranted deductions of fact are not admitted. Id. The allegations set forth in the complaint are to be treated in a light most favorable to the non-moving party. Ford v. Peaches Entm't Corp., 83 N.C.App. 155, 156 (1986).

[32] A Rule 12(b)(6) motion should be granted when either (a) the complaint on its face reveals that no law supports the plaintiff's claim, (b) the complaint on its face reveals the absence of facts sufficient to make a good claim or (c) some fact disclosed in the complaint necessarily defeats the plaintiff's claim. Jackson v. Bumgardner, 318 N.C. 172, 175 (1986). A party must state enough facts to satisfy the substantive elements of some legally recognized claim for relief to avoid dismissal under Rule 12(b)(6). Strickland v. Hedrick, 194 N.C.App. 1, 20 (2008).

[33] Documents that are attached to the complaint as exhibits and referenced therein will be considered by the court for Rule 12(b)(6) purposes. Woolard v. Davenport, 166 N.C.App. 129, 133–34 (2004).

Equitable Subordination

[34] Mtron's First Claim is entitled "Subordination Due to Breaches of Fiduciary Duty and Inequitable Conduct." Mtron contends that Textron should be estopped from asserting the status of a secured creditor under the doctrines of unclean hands and equitable subordination, because Textron allegedly engaged in inequitable conduct and aided and abetted breaches of fiduciary duty committed by Escorts.FN37 As a practical matter, Mtron is asking that the funds already paid to Textron be returned to the receivership estate of Farmtrac, and any liens upon said funds for the benefit of Escorts or Textron should be equitably subordinated to the claims of Mtron and other general creditors. FN38

FN37. Compl. para. 69.

FN38. Compl. paras. 1–4 (Prayer for Relief).

[35] Textron argues that Mtron's First Claim should be dismissed pursuant to Rule 12(b)(6) because North Carolina law does not recognize equitable subordination as a cause of action.FN39

FN39. Def. Textron Mem. Supp. Mot. Dismiss 10.

[36] In response, Mtron concedes that North Carolina courts have not addressed the availability of an equitable subordination claim, but argues that this cause of action should be adopted as consistent with North Carolina public policy.FN40 For argument, Mtron lists only two states, Alaska and Rhode Island, that have recognized a claim for equitable subordination outside the context of bankruptcy proceedings.FN41

FN40. Pl. Resp. Opp'n Def. Textron Mot. Dismiss 5–8.

FN41. Id. 7–8.

[37] The court recognizes that there is no case law or statutory basis in North Carolina for equitably subordinating a claim, other than its application in the limited context of cases involving issues of admiralty and bankruptcy. In fact, one federal court dismissed an equitable subordination claim, stating that "[t]he Court has conducted an extensive review of North Carolina law and finds that this doctrine has been applied, almost exclusively, in bankruptcy proceedings ... and admiralty matters involving ship mortgages." Bradson Merchantile, Inc. v. Vanderbilt Indus. Contracting Corp., 883 F.Supp. 37, 59–60 (W.D.N.C.1995). Since the Bradson Merchantile decision, the court finds no reported North Carolina case that has recognized an equitable subordination claim in a context similar to Mtron's First Claim.

*6 [38] When a party alleges a cause of action or seeks relief not recognized by law, the court is powerless to grant relief despite the factual allegations alleged by the party. Forrester v. Garrett, 280 N.C. 117, 122 (1971). Based on the law and authority in other jurisdictions, the court declines to extend the law and recognize a claim for equitable subordination here. Therefore, the court CONCLUDES that Mtron's First Claim fails to state a cause of action upon which relief can be granted.

[39] Accordingly, to the extent it seeks dismissal of Mtron's First Claim pursuant to Rule 12(b)(6), Textron's Motion should be GRANTED.FN42

FN42. Textron argues that even if equitable subordination was recognized by this court, Mtron's Complaint does not sufficiently allege the elements of an equitable subordination claim. Because the court concludes that equitable subordination is not a recognized cause of action under North Carolina law, the court need not address the substantive elements of Mtron's Claim.

Fraudulent Conveyances FN43

FN43. Although Mtron alleges fraudulent conveyances as its Third Claim, the court elects to discuss said Claim out of turn because Mtron's Second Claim (Civil Conspiracy) is derivative of the Third Claim.

[40] Mtron's Third Claim alleges fraudulent conveyances, presumably under the North Carolina Uniform Fraudulent Transfers Act ("NCUFTA"), pursuant to G.S. 39–23.4(a) and 39–23.5(a).FN44

FN44. Mtron's Complaint does not clarify whether its fraudulent conveyances Claim is alleged under the NCUFTA. Instead, Mtron, in its response to the Textron Motion, asserts that its Third Claim satisfies the elements of a fraudulent conveyance under the NCUFTA.

[41] The NCUFTA sets forth the statutory elements that must be pleaded by a party to allege sufficiently a cause of action for fraudulent transfer. Specifically, G.S. 39–23.4(a) provides that a transfer is fraudulent as to present and future creditors if the debtor made the transfer:

(1) with 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 that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

[42] Additionally, G.S. 39–23.5(a) sets forth additional grounds under which a transfer is fraudulent as to present creditors if:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made or the obligation was incurred if the debtor made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor was insolvent at that time or the debtor became insolvent as a result of the transfer or obligation.

[43] Mtron's Complaint sufficiently sets forth a cause of action under both applicable provisions of the NCUFTA dealing with fraudulent transfers.

[44] Mtron alleges that Farmtrac and Escorts engaged in their "channel stuffing" scheme with the "actual intent to hinder, delay, or defraud" Mtron. It alleges that, with the assistance of both Escorts and Textron, Farmtrac was able to continue its operations and increase its credit obligations when there was no "realistic chance that Farmtrac would be able to pay its general creditors." FN45 The Complaint further alleges that the transfers caused Farmtrac to incur "debts far beyond the ability of Farmtrac to pay as those debts became due ...," FN46 resulting in insolvency during the time period these disputed transfers were made .FN47 Mtron alleges that the transfers from Farmtrac to Textron of the fabricated accounts receivable were made without Farmtrac receiving a reasonably equivalent value from Textron because Textron knew or should have known that the funds transferred to Farmtrac in exchange for security rights on equipment and accounts receivable were being diverted from Farmtrac to Escorts and its subsidiaries.FN48 Mtron alleges that these actions were done as part of the scheme to benefit Farmtrac, Escorts and Textron.

FN45. Compl. para. 77.

FN46. Id. para. 78–81.

FN47. Id. paras. 62, 64, 75, 78, 80.

FN48. Id. para. 78.

*7 [45] Accepting the allegations as true and in the light most favorable to Mtron, the court CONCLUDES that the Complaint alleges sufficient facts to satisfy the substantive elements of a claim for fraudulent conveyance under the NCUFTA and states a cause of action under either G.S. 39–23.4(a) or 39–23.5(a).FN49

FN49. Mtron's allegations that Textron extended loan proceeds to Farmtrac in exchange for lien rights and interest payments, see id . paras. 43, 50–53, 58, 65, 77–79, would ordinarily be fatal to a cause of action for fraudulent conveyance on the basis that such allegations on their face establish that Textron gave reasonably equivalent value for the transfers. However, because Mtron sufficiently alleges that Textron acted in bad faith and knew or should have known that Farmtrac was diverting to Escorts the funds received from Textron and that Textron was benefitted by such actions, see id. paras. 50–51, 58–59, 71–73, 78–80, Mtron has alleged enough facts at this early stage in the proceedings to avoid dismissal on Rule 12(b)(6) grounds.

[46] Accordingly, to the extent it seeks dismissal of Mtron's Third Claim pursuant to Rule 12(b)(6), Textron's Motion should be DENIED.FN50

FN50. Mtron's Complaint seeks equitable subordination as its relief under both its fraudulent conveyance and civil conspiracy Claims. As discussed above, equitable subordination is not a recognized cause of action or remedy under North Carolina law. However, this is not fatal to Mtron's Third Claim. Whether or not the proper relief has been demanded specifically by Mtron in its prayer for relief, the court concludes that it would be just and proper to permit Mtron to pursue the statutory remedies of a creditor set forth in G.S. 39–23.7 under the NCUFTA.

Civil Conspiracy

[47] Mtron's Second Claim seeks relief based on an allegation of civil conspiracy.

[48] To state a cause of action for civil conspiracy, it must be alleged that there was: "[a] an agreement between two or more individuals; [b] to do an unlawful act or to do a lawful act in an unlawful way; [c] resulting in injury to plaintiff inflicted by one or more of the conspirators; and [d] pursuant to a common scheme." Piraino Bros., LLC v. Atl. Fin. Grp., Inc., No. COA10–831, 2011 N.C.App. LEXIS 703, 14 (N.C.Ct.App. Apr. 19, 2011) (quoting Privette v. Univ. of North Carolina, 96 N.C.App. 124, 139 (1989)); see also Norman v. Nash Johnson & Sons' Farms, Inc., 140 N.C.App. 390, 416 (2000) ("In order to state a claim for civil conspiracy, a complaint must allege a conspiracy, wrongful acts done by certain of the alleged conspirators, and injury.") (citation omitted). However, because there is no independent cause of action for civil conspiracy, the tort claim for civil conspiracy must be based on some underlying wrongful, overt act. Dove v. Harvey, 168 N.C.App. 687, 690 (2005). "The charge of [civil] conspiracy itself does nothing more than associate the defendants together and perhaps liberalize the rules of evidence to the extent that under proper circumstances the acts and conduct of one might be admissible against all." Id. (quoting Fox v. Wilson, 85 N.C.App. 292, 301 (1987)).

[49] Here, Mtron alleges in its Second Claim that while Farmtrac was insolvent, Farmtrac, Escorts and Textron acted in concert to increase the amount of collateral that secured the amount owed from Farmtrac to Textron by falsifying orders and invoices when there were no bona fide buyers and diverting money from Farmtrac to Escorts and its subsidiaries.FN51 As a result of this scheme, Mtron alleges that, to its detriment, it continued to send additional equipment to Farmtrac and is now unable to recover the money it is owed by Farmtrac as a result of the alleged conspiratorial actions of Farmtrac, Escorts and Textron.

FN51. Compl. paras. 71–73.

[50] Accepting the allegations as true and in the light most favorable to Mtron, the court CONCLUDES that Mtron has alleged sufficient facts to satisfy the substantive elements of a claim for civil conspiracy.FN52 Accordingly, to the extent it seeks dismissal of Mtron's Second Claim pursuant to Rule 12(b)(6), Textron's Motion should be DENIED.

FN52. Whether a forecast of admissible evidence will support this Claim may be tested later pursuant to Rule 56.

Escorts' Rule 12(e) Motion

[51] The Escorts Motion seeks, in the alternative to its Rule 12(b)(1) standing argument, an order compelling Mtron to file a more definite statement of its Complaint, pursuant to Rule 12(e). The Escorts Motion contends that Mtron's Complaint "is so vague, ambiguous and filled with confusing allegations, Escorts cannot reasonably prepare a responsive pleading." FN53

FN53. Def. Escorts Mot. Dismiss.

*8 [53] Mtron's Complaint satisfies the pleading requirements of Rule 8. It gives Escorts notice of the series of transactions or occurrences that Mtron intends to prove. Stated broadly, Mtron alleges that Farmtrac, Escorts and Textron together acted fraudulently and in bad faith to benefit each other to the detriment of Mtron and other general creditors of Farmtrac. Accordingly, the court CONCLUDES that Mtron's Complaint gives Escorts notice of the transaction, occurrences, or series of transactions or occurrences intended to be proven by Mtron. Escorts Motion for a more definite statement pursuant to Rule 12(e) should be DENIED.

NOW THEREFORE, based on the foregoing, it hereby is ORDERED that:

[54] The Motion of Textron Financial Corporation to Dismiss, pursuant to Rule 12(b)(1), is DENIED.

[55] With regard to Plaintiff's First Claim, the Motion of Textron Financial Corporation to Dismiss, pursuant to Rule 12(b)(6), is GRANTED; and the First Claim is DISMISSED.

[56] With regard to Plaintiff's Second and Third Claims, the Motion of Textron Financial Corporation to Dismiss, pursuant to Rule 12(b)(6), is DENIED.

[57] The Motion of Escorts, Ltd. to Dismiss Plaintiff's Complaint, pursuant to Rule 12(b)(1), including its alternative motion for a more definite statement, pursuant to Rule 12(e), is DENIED.

[52] A motion for a more definite statement is not favored by the courts and should not be granted if the pleading complies with the notice theory of pleading as required by Rule 8. See Ross v. Ross, 33 N.C.App. 447, 454 (1977). "Under the 'notice theory' of pleading a statement of claim is adequate if it gives sufficient notice of the claim asserted 'to enable the adverse party to answer and prepare for trial.' " Sutton, 277 N.C. at 102 (internal quotations omitted). A pleading complies with Rule 8 if the opposing party is given notice of the "transactions, occurrences, or series of transactions or occurrences intended to be proved."

N.C.Super.,2012.

LS Mtron v. Escorts, Ltd.

Not Reported in S.E.2d, 2012 WL 992115 (N.C.Super.), 2012 NCBC 18

END OF DOCUMENT

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Janvey v. Libyan Investment Authority, Slip Copy, 2012 WL 1059028 (N.D.Tex., Slip Copy, Feb. 12, 2012).

United States District Court, N.D. Texas, Dallas Division.

Ralph S. JANVEY, Plaintiff,

v.

LIBYAN INVESTMENT AUTHORITY, et al., Defendants.

Civil Action No. 3:11–CV–1177–N.

Feb. 29, 2012.

ORDER

DAVID C. GODBEY, District Judge.

*1 This Order addresses the Receiver's motion for preliminary injunction [2]. For the reasons that follow, the Court denies the Receiver's motion. FN1

FN1. The Court also grants the Receiver's motion for leave to file reply brief in excess of page limits [49], denies the Receiver's motion to strike declarations of Mohamed Layas and Nagmeddin Hemali Mokhtar [50], grants the Receiver's unopposed motion for leave to amend complaint [53], denies the Receiver's motion to strike [67], grants Defendants' motion to withdraw unauthorized filings and agreements [36], and denies Defendants' motion to reopen the evidentiary record [64]. As discussed in this Order, the Court does not consider any new evidence or arguments in the parties post-hearing briefs besides the research that the Court requested. See infra note 8. The Court orders the Receiver to file his amended complaint, amended only as requested, within seven (7) days of the date of this Order.

I. Origins of the Preliminary Injunction Request

This case presents another dispute arising out of the Securities and Exchange Commission's (the "SEC") ongoing securities fraud action against R. Allen Stanford, his associates, and various entities under Stanford's control ("Stanford"). As part of that litigation, this Court "assume[d] exclusive jurisdiction and t[ook] possession" of the "Receivership Assets" and "Receivership Records" (collectively, the "Estate"). See Second Am. Order Appointing Receiver, July 19, 2010 [1130] (the "Receivership Order"), in SEC v. Stanford Int'l Bank, Civil Action No. 3:09–CV–0298–N (N.D. Tex. filed Feb. 17, 2009). The Court appointed Ralph S. Janvey to serve as Receiver of the Receivership Estate and vested him with "the full power of an equity receiver under common law as well as such powers as are enumerated" in the Receivership Order. Id. at 3.

Among these enumerated powers, the Court "authorized [the Receiver] to immediately take and have complete and exclusive control, possession, and custody of the Receivership Estate and to any assets traceable to assets owned by the Receivership Estate." Id. at 4. Additionally, the Court "specifically directed and authorized [the Receiver] to ... [c]ollect, marshal, and take custody, control, and possession of all the funds, accounts, mail, and other assets of, or in the possession or under the control of, the Receivership Estate, or assets traceable to assets owned or controlled by the Receivership Estate, wherever situated," id., and to file in this Court "such actions or proceedings to impose a constructive trust, obtain possession, and/or recover judgment with respect to persons or entities who received assets or records traceable to the Receivership Estate," id. at 5.

Pursuant to those powers, the Receiver filed this fraudulent transfer suit to recover approximately $55 to $101 million in alleged proceeds of Stanford International Bank, Ltd. ("SIB") certificates of deposit ("CDs") allegedly held by Defendants Libyan Investment Authority ("LIA") and Libyan Foreign Investment Company ("LFICO") (collectively the "Defendants"). The Receiver applied for a temporary restraining order ("TRO") freezing funds in the amount of $54,823,740.83 and moved for a preliminary injunction enjoining Defendants from dissipating those funds, currently held in accounts at Citibank, N.A. The Court issued a TRO on June 6, 2011[10] and conducted a hearing on the Receiver's motion for preliminary injunction on January 27, 2012.FN2 At the hearing, the Court took the Receiver's motion for preliminary injunction under advisement and directed the parties to submit post-hearing briefs on a choice of law issue. Defendants' U.S.-based assets generally, including those at issue in this action, are currently frozen by an executive order entered by President Obama in response to the 2011 Libyan civil war. See Exec. Order No. 13,566, 76 Fed.Reg. 11,315 (Feb. 25, 2011).

FN2. The parties extended the TRO by agreement.

II. Preliminary Injunction Standard

*2 The decision to grant or deny a preliminary injunction lies within the sound discretion of the district court. Miss. Power & Light Co. v. United Gas Pipe Line Co., 760 F.2d 618, 621 (5th Cir.1985). A preliminary injunction is "an extraordinary and drastic remedy, not to be granted routinely, but only when the movant, by a clear showing, carries the burden of persuasion." Harris Cnty. v. CarMax Auto Superstores, Inc., 177 F.3d 306, 312 (5th Cir.1999) (quoting White v. Carlucci, 862 F.2d 1209, 1211 (5th Cir.1989)). To obtain a preliminary injunction, the movant must establish the following: (1) a substantial threat that the movant will suffer irreparable injury if the Court denies the preliminary injunction; (2) that the potential injury to the movant outweighs whatever damage the proposed injunction may cause the opposing party; (3) a substantial likelihood that the movant will ultimately prevail on the merits; and (4) that granting the preliminary injunction will not disserve the public interest. Guy Carpenter & Co. v. Provenzale, 334 F.3d 459, 464 (5th Cir.2003) (citing Canal Auth. of Fla. v. Callaway, 489 F.2d 567, 572 (5th Cir.1974)).

The Court must balance the likelihood of success with the comparative injuries of the parties. See Canal Auth., 489 F.2d at 576. The balancing that takes place "is often referred to as a 'sliding scale,' " 11A Charles Alan Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure sec. 2948.3, at 195 (2d ed.1995), meaning that the movant's standard for showing a likelihood of success is lower where the hardship to the plaintiff is greater, see Canal Auth., 489 F.2d at 576. However, extreme hardship does not eliminate the movant's burden to show a probability of success on the merits. See id.

III. The Receiver Has Not Shown That He Is Likely to Succeed on the Merits of His Claim

A. The Court Must Perform a Veil–Piercing Analysis

The Receiver centers his claim against Defendants on LFICO's investment in SIB CDs. The Receiver alleges that LFICO "knew or should have known" that Stanford was running a Ponzi scheme and that LFICO's knowledge precludes a good faith defense to liability under the Texas Uniform Fraudulent Transfer Act ("TUFTA"). FN3 The Court will assume that the Receiver is correct in his recitation of TUFTA law,FN4 at least to the extent that Defendants' foreign status does not interfere.FN5 However, here he seeks to "clawback" funds held by LIA, LFICO's sole shareholder, not funds held by LFICO itself. All parties agree that LIA did not invest in SIB CDs.

FN3. The parties dispute whether Texas law applies to the Receiver's fraudulent transfer claims. See, e.g., Defs.' Br. Opp'n to Receiver's Appl. Prelim. Inj. 9[40]; Receiver's Reply Supp. Appl. Prelim. Inj. Against Libyan Inv. Auth. & Libyan Foreign Inv. Co. 28–31[50]. However, because the Court concludes in this Order that the Receiver has not shown that LFICO is LIA's alter ego, an antecedent question, it is unnecessary for the Court to resolve this particular choice of law issue.

FN4. See, e.g., Warfield v. Byron, 436 F.3d 551, 558–560 (5th Cir.2006) (stating that transfers from Ponzi schemes are presumptively fraudulent under TUFTA, so that nonmovant can preclude liability only by showing both reasonably equivalent value and objective good faith).

FN5. Defendants argue that they are immune from suit under the Foreign Sovereign Immunities Act ("FSIA"). The general rule under the FSIA is that foreign states, including their agencies and instrumentalities, are immune from suit brought in U.S. courts unless one of the statute's exceptions applies. See 28 U.S.C. sec. 1604. The Receiver seeks to apply the "commercial activity" exception, which provides that foreign states are not immune from actions based on commercial activity that has a jurisdictional nexus with the United States. See 28 U.S.C. sec. 1605(a)(2). Given the information available to the Court at this time, the Court need not decide whether LFICO's actions fall under the commercial activities exception.

The parties also dispute whether a preliminary injunction falls within the scope of FSIA's prohibition of "attachment." The FSIA provision at issue states: "[P]roperty in the United States of a foreign state shall be immune from attachment[,] arrest[,] and execution except as provided in sections [not applicable here]." 28 U.S.C. sec. 1609. The Fifth Circuit has interpreted an injunction to be an unlawful "attachment" under the statute. See Atwood Turnkey Drilling, Inc. v. Petroleo Brasileiro, S.A., 875 F.2d 1174 (5th Cir.1989) (equating "prejudgment attachment" with "an injunction or more traditional methods of attachment" (emphasis added)). Again, the Court does not reach this issue because it holds that the Receiver has not otherwise shown a likelihood of success on the merits.

The Court notes that if it were to reach the FSIA issues, it would most likely hold that the FSIA provision does not apply. The FSIA bars attachments of foreign property. However, the very premise of a TUFTA suit is that the transferee does not rightfully own the funds at issue. Rather, because the transfer was fraudulent, legal and equitable title did not pass to the transferee with the funds. Thus, if the Receiver had shown a likelihood of success on the merits of the fraudulent transfer claim, the Court would likely not afford FSIA anti-attachment protection. Cf. Brenntag Int'l Chems., Inc. v. Bank of India, 175 F.3d 245, 252 (2d Cir.1999) (holding no FSIA anti-attachment protection where defendant had no legal right to the property at issue).

Under TUFTA, courts can hold liable both original transferees and persons "for whose benefit the transfer was made." See Tex. Bus. & Com.Code sec. 24.009(b)(1). The Receiver argues that this provision eliminates the need to show that LFICO is LIA's alter ego in order to enjoin LIA for LFICO's actions. Cf. Carroll v. Stettler, 2010 WL 4611450, at *3 (E.D.Pa.2010) (refusing to do veil-piercing analysis under Pennsylvania's uniform fraudulent transfer act where plaintiff alleged that individual defendants received monetary profits from the transfer to defendant corporation); Esse v. Empire Energy III, Ltd., 333 S.W.3d 166, 180–81 (Tex.App.-Hous.2010, pet.denied) (finding liable controlling shareholders under TUFTA without doing a veil-piercing analysis). However, other than LIA's status as LFICO's shareholder, the Receiver made no showing that LIA was an entity "for whose benefit the transfer was made." There is no evidence that LIA directed LFICO to redeem the CDs, and there is no evidence that LFICO redeemed the CDs specifically to benefit LIA. Indeed, the evidence indicates that LFICO redeemed the CDs to improve its own liquidity in the face of poor investment performance of other investments in an economic downturn. See Direct Testimony Karyl Van Tassel, Ex. KVT–19, at 7 [46–10]; Tr. of Prelim. Inj. Hr'g, Jan. 27, 2012, at 65–66. There is no evidence that LFICO distributed any CD proceeds upstream to LIA as dividends, and there certainly is no evidence that any of the frozen funds represent CD proceeds. On this record, the Court simply cannot find that a parent-subsidiary relationship alone is enough to establish that LFICO redeemed its CDs for LIA's benefit.

*3 Moreover, the Court is unconvinced that the TUFTA provision grants courts license to disregard the corporate separateness of entities without an adequate showing that the Court can pierce the corporate veil. See In re Hansen, 341 B.R. 638, 644–46 (Bankr.N.D.Ill.2006) (collecting cases nationwide and ultimately holding that like-worded provision in Bankruptcy Code requires alter ego showing).

The Court finds the Bankruptcy Judge's opinion in In re Hansen to be well-reasoned. It explains:

The problem with ... the few other decisions authorizing this sort of status-based recovery is that they ignore the fundamental nature of corporations.... [A] corporation is a legal entity separate from its shareholders, officers, and directors.... Only rarely will that separate existence be disregarded.

Nothing in section 550(a)(1) [of the Bankruptcy Code, exactly worded like the TUFTA provision at issue,] indicates that corporate form can be thrust aside and all voidable transfers to a corporation recovered from its shareholders on the mere assumption that shareholders somehow automatically 'benefit' from such transfers. If corporate existence is to be observed, transfers cannot be recovered even from a shareholder who by virtue of his majority ownership ostensibly 'controls' the corporation. Something more than mere status as a shareholder, officer, or director must be shown.

The better view—and the one consistent with corporate law—is that shareholders, officers, and directors are not liable for transfers to their corporation unless they actually received distributions of the transferred property ... or a showing can be made to pierce the corporate veil.

Id. at 645–46 (internal citations omitted). In fact, the two Uniform Fraudulent Transfer Act cases that hold otherwise are factually distinguishable.FN6 Thus, the Court proceeds to a veil-piercing analysis.

FN6. In Esse, the controlling shareholders who were found liable controlled both the transferor company and the transferee company. See Esse, 333 S.W.3d at 181. Here, there is no evidence that LIA controlled LFICO or directed the CD redemption. In Carroll, plaintiffs alleged that the individual defendants received $54,000 and $37,001 in profits from the fraudulent transfers. Carroll, 2010 WL 4611450, at *3. Here, there is no evidence that LIA received any of the CD proceeds.

B. In its Veil Piercing Analysis, the Court Applies the Law of the Forum

Defendants argue that the Court should perform the veil piercing analysis under Libyan law. See Tr. of Prelim. Inj. Hr'g 51–52; Defs.' Surreply Opp'n to Receiver's Appl. Prelim. Inj. 9 [54–1]. As the party asserting the propriety of foreign law, Defendants have the burden of proving its substance with reasonable certainty. See, e.g., In re Avantel, S.A., 343 F.3d 311, 321–22 (5th Cir.2003) (citing Banque Libanaise Pour Le Commerce v. Khreich, 915 F.2d 1000, 1006 (5th Cir.1990)); Starlek, L.L.C. v. Arnold, 2000 WL 330186, at *2 (Tex.App.-Dallas 2000, no pet.) (citing Weatherly v. Deloitte & Touche, 905 S.W.2d 642, 650 (Tex.App.-Hous. [14th Dist.] 1995, writ dism'd w.o.j.), abrogated on other grounds by Tracker Marine, L.P. v. Ogle, 108 S.W.3d 349 (Tex.App.-Hous. [14th Dist.] 2003, no pet.).FN7 However, because Defendants did not provide any proof as to the content of Libyan law before the Court closed the evidentiary record,FN8 the Court applies the law of the forum. See, e.g., id. at 322 ("[W]e[, the Fifth Circuit,] previously noted that it is generally agreed that 'the law of the forum should apply when foreign law is not proved.' " (quoting Seguros Tepeyac, S.A., Compania Mexicana de Seguros Generales v. Bostrom, 347 F.2d 168, 174–75 n. 3 (5th Cir.1965))); Banque Libanaise, 915 F.2d at 1006 ("The law clearly states that absent sufficient proof to establish with reasonable certainty the substance of the foreign principles of law, the district court should apply the law of the forum." (citing authorities)); Ogletree v. Crates, 363 S.W.2d 431, 435 (Tex.1963) (presuming Alabama law on res judicata is same as Texas law where movant did not present proof as to substance of Alabama law or request, as is possible in Texas state court, that the court take judicial notice of Alabama's law). Thus, the Court will apply Texas alter ego law.

FN7. It is unclear whether this is a matter of proof governed by the Federal Rules of Civil Procedure or Texas choice of law rules. Compare Int'l Interests, L.P. v. Hardy, 448 F.3d 303, 306 (5th Cir.2006) ("[A] federal court must follow the choice of law rules of the forum state ....") with Fed. R. Civ. P. 44.1. In any event, the result would be the same, so the Court will not decide this issue.

FN8. The comments to Federal Rule of Civil Procedure 44.1 state that the Court is free to insist on a complete presentation of the substance of foreign law by counsel, and that the Court is not obligated to take judicial notice of foreign law. See 1966 Advisory Committee Notes, Fed. R. Civ. P. 44.1. The Court closed the evidentiary record at the preliminary injunction hearing on January 27, 2012. See Tr. of Prelim. Inj. Hr'g 29. While the Court granted the parties leave to file post-hearing letters or briefs, it limited the scope of such documents to the legal question of how to proceed under foreign law in the absence of evidence of the content of such law. See Tr. of Prelim. Inj. Hr'g 93 ("If anybody wants to provide supplemental authority on what I do if I determine that foreign law applies but there is no proof in front of me as to the content of the foreign law, why don't y'all do that ...."). Accordingly, the Court will not consider the parties' post-hearing attempts to prove the content of Libyan law. The Court notes that even if it were to consider the content of Libyan law, it would not change the result the Court reaches because Libyan law recognizes corporate veil-piercing only in the bankruptcy context. See Decl. Aref Kashar, App. Supp. Defs.' Post–Hr'g Brief Addressing Issues Raised at Prelim. Inj. Hr'g 59–60[65].

C. The Receiver Has Not Shown That LFICO is LIA's Alter Ego

*4 In Texas, piercing the corporate veil requires a showing that the owner is "using the corporate entity as a sham to perpetrate a fraud, to avoid personal liability, avoid the effect of a statute, or in a few other exceptional situations." Bell Oil & Gas Co. v. Allied Chem. Corp., 431 S.W.2d 336, 340 (Tex.1968) (quoting Drye v. Eagle Rock Ranch, Inc., 364 S.W.2d 196, 202 (Tex.1962)). "There must be something more than mere unity of financial interest, ownership and control for a court to treat the subsidiary as the alter ego of the parent and make the parent liable for the subsidiary's tort." Lucas v. Tex. Indus., Inc., 696 S.W.2d 372, 374 (Tex.1984) (quoting Hanson Sw. Corp. v. Dal–Mac Constr. Co., 554 S.W.2d 712 (Tex.App.-San Antonio 1966, writ ref'd n.r.e.)) (italics omitted). Indeed, plaintiff must show that the subsidiary "is organized and operated as a mere tool or business conduit of [its parent] corporation," Castleberry v. Branscum, 721 S.W.2d 270, 272 (Tex.1986), superseded in part on other grounds by Tex. Bus. Corp. Act art. 2.21 as recognized in W. Horizontal Drilling, Inc. v. Jonnet Energy Corp., 11 F.3d 65, 68 (5th Cir.1994),FN9 so that "there exists such unity between [the two corporations] that [they] cease[ ] to be separate." Mancorp, Inc. v. Culpepper, 802 S.W.2d 226, 228 (Tex.1990) (citing Castleberry, 721 S.W.2d at 272). Alter ego liability is appropriate where "holding only the [subsidiary] corporation liable would result in injustice." SSP Partners v. Gladstrong Inv. (USA) Corp., 275 S.W.3d 444, 454 (Tex.2008) (quoting Castleberry, 721 S.W.2d at 272).

FN9. On January 1, 2010, the Texas Business Corporation Act art. 2.21 was recodified as the Texas Business Organizations Code secs. 21.223–21.226. Via these provisions, in 1989 the Texas legislature abrogated Castleberry to the extent that a veil-piercing analysis now requires a showing of actual fraud in cases involving a corporation's contractual obligations. See, e.g., Acceptance Indem. Ins. Co. v. Maltez, 619 F.Supp.2d 289, 301 (S.D.Tex.2008) (discussing the Texas legislature's response to Castleberry ). Because this case sounds in tort, rather than contract, see, e.g., In re Tex. Am. Express, Inc., 190 S.W.3d 720, 725 (Tex.App.-Dallas 2005, no pet.) ("The fraudulent transfer of assets is a tort."), Castleberry's alter ego standard is instructive.

Here, as evidence of alter ego status, the Receiver points to (a) bank records from LIA's Citibank account that list LFICO as an "a.k .a." of LIA, (b) United Nations and United Kingdom documents stating the same thing, (c) the fact that Abdulfatah Sharif was Stanford's single point of contact for both LIA and LFICO, (d) the fact that LIA owns 100% of LFICO, and (e) Libyan government documents that set out LIA's duty to manage and invest LFICO's assets and include LFICO's assets in LIA's assets. However, the Court is not persuaded that this evidence establishes an alter ego relationship between LIA and LFICO. The Court gives little, if any, weight to the documents listed in items (a) and (b) because the Receiver did not present any evidence as to the information the alleged authors relied upon in characterizing LFICO as an alias of LIA. Additionally, item (c) is unpersuasive because Defendants produced evidence that Sharif was part of neither LIA nor LFICO, but rather was associated with another Libyan entity. See Tr. of Prelim. Inj. Hr'g 73–74. The rest of the evidence is similarly insufficient to show a relationship any greater than that which is normally associated with parent and subsidiary companies.

In contrast, Defendants produced the affidavits of Mohamed Layas, LIA's Chairman [39], and Nagmeddin Hemali Mokhtar, LFICO's Chairman and Managing Director [56]. Layas testifies that:

*5 LIA and LFICO have separate boards of directors and there are no interlocks in the boards of directors of LIA and LFICO. LIA is not responsible for controlling or managing specific activities or transactions at the subsidiary level. These tasks are the responsibility of LFICO's own board of directors and management, which have independent authority to conduct LFICO's investment activities.... LIA did not play any role in connection with LFICO's investment with [Stanford]. LIA is the account holder of the bank accounts at Citibank N.A.... LFICO is not and has never been a joint or co-account holder of those accounts. LFICO has no interest in or control over those accounts.

Aff. Mohamed Layas 2–3. Mokhtar avers the same, see Aff. Nagmeddin Hemali Mokhtar 2–3, and the Receiver has not shown otherwise.

On this record, the Court finds Defendants' evidence more persuasive. Layas and Mokhtar directly address the pertinent alter ego factors and demonstrate that LFICO is not LIA's alter ego. The Receiver's evidence is, at best, secondary evidence that might support an inference of some degree of control greater than a normal parent-subsidiary relationship. While the Court acknowledges the difficulty the Receiver faces in obtaining evidence regarding Libyan institutions during the current turmoil in Libya, the Court must nonetheless decide the issues based on the evidence before it. On this record the Court must find that LFICO is not LIA's alter ego.

Thus, the Receiver has not clearly shown that he is likely to succeed on the merits of his claim. Because the Receiver has failed to meet prong (3) of the preliminary injunction standard, the Court need not address the remaining factors. See Canal Auth., 489 F.2d at 572 (describing the four factors as "prerequisites" to the issuance of a preliminary injunction).

Conclusion

The Court does not decide this in a vacuum. The Court is acutely aware of the dire plight of many of the Stanford investors and is equally aware of the importance of the frozen assets to the Receiver's hopes to distribute funds to those investors. However, if the Court were to rule in favor of the Receiver solely for those reasons, the Court would be nothing more than a judicial Robin Hood—well-meaning, but nonetheless a thief. Moreover, notwithstanding LFICO's efforts to redeem its CDs, it still remains the biggest net loser investor in the Stanford scheme.

The Court is not called on to determine who, in good conscience, most deserves or needs the money. Rather, the Court must decide based on the law and evidence before it. Because the Receiver has failed to show that he is likely to succeed on the merits of his claim, the Court denies his motion for preliminary injunction.


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Posted by Jay D. Adkisson, a co-author along with Chris Riser of Asset Protection: Concepts & Strategies (McGraw-Hill 2003) with main website http://www.assetprotectionbook.com and blog at http://www.assetprotectionblog.com see also http://www.jayadkisson.com and http://www.risad.com

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