In re Harman, 2014 WL 1410522 (Bk.N.D.Ga., March 31, 2014). http://goo.gl/dLLrgO
United States Bankruptcy Court, N.D. Georgia, Atlanta Division.
In re Joseph H. HARMAN, Debtor.
Neil C. Gordon, Plaintiff,
v.
Joseph H. Harman, Linda J. Harman, The Linda J. Harman Irrevocable Trust, J.H.H. Holdings Corporation, First Equities Partners, Inc., First Equities Partners II, Inc., Fcgi Associates, Lcc., et al., Defendants.
Bankruptcy No. 11–67522–MHM.Adversary No. 13–5211.
Signed March 31, 2014.
Attorneys and Law Firms
Neil C. Gordon, Theresa Y. Kananen, Sean Kulka, Sean C. Kulka, Arnall, Golden, Gregory LLP, Atlanta, GA, for Plaintiff.
James L. Paul, Chamberlain, Hrdlicka, White et al, Gregory S. Brow, David E. Gordon, Gary W. Marsh, McKenna Long & Aldridge, LLP, Atlanta, GA, for Defendants.
Opinion
ORDER ON MOTIONS TO DISMISS
MARGARET H. MURPHY, Bankruptcy Judge.
*1 This proceeding is before the court on Joseph H. Harman's Motion to Dismiss, filed August 28, 2013 (Doc. No. 27) ("Debtor's Motion"), and on the Motion to Dismiss of Linda J. Harman ("Mrs.Harman"), the Linda J. Harman Irrevocable Trust (the "Trust"), J.H.H. Holdings Corporation ("JHH"), First Equities Partners, Inc. ("FEP"), First Equities Partners II, Inc. ("FEP II"), and FCGI Associates, LLC ("FCGI"; together with Mrs. Harman, the Trust, JHH, FEP, FEP II, and FCGI, "Non–Debtor Movants") (Doc. No. 25) ("Non–Debtor Motion"; together with Debtor's Motion, the "Motions"). Debtor filed a Chapter 7 petition initiating the underlying case June 14, 2011 (the "Petition Date"). The Chapter 7 Trustee initiated this proceeding by filing a Complaint June 13, 2013, against Debtor and related persons and entities seeking avoidance and recovery of alleged fraudulent transfers and post-petition transfers made to the various Defendants and seeking declaratory judgment that certain Defendants are alter egos of Debtor or are otherwise invalid entities (Doc. No. 1, amended August 15, 2013 by Doc. No. 19) (as amended, the "Complaint"). Movants now assert the Complaint fails to state a claim upon which relief may be granted pursuant to Fed.R.Civ.P. 12(b)(6).
Allegations of Fact1
Trustee's Complaint alleges that each Defendant is part of a scheme by which Debtor has hidden assets from creditors while maintaining control over and reaping the benefits of those assets.
The foundation of the alleged scheme is that Mrs. Harman is a "straw man," and that assets held in Mrs. Harman's name are in fact owned by Debtor. In support, Trustee alleges that Mrs. Harman has not been employed outside the home since 1974, and her only contribution to Debtor's business dealings are "ministerial acts" such as transferring funds between accounts and writing checks at the direction of Debtor. (Complaint at para. 34). Despite this, Debtor "divert[s] all remuneration to his wife" or into entities and instrumentalities nominally titled in her name. (Complaint at para. 35).
Similarly, Trustee asserts that Debtor uses the Trust as a mechanism to place his earnings and property beyond the reach of creditors. Though the Trust instrument states that Mrs. Harman established the Trust with a $10 contribution, Trustee asserts that substantially all of the assets held in the Trust had been generated through Debtor's efforts. (Complaint at para. 100–01). More specifically, Trustee asserts the Trust was initially funded from proceeds of the sale of two companies Mr. Harman founded and managed. (Complaint at n. 8). Trustee also asserts that Debtor exercises exclusive control of the Trust. Though the preamble of the Trust names both Debtor and Mrs. Harman as Trustees, the body of the Trust provides that Mrs. Harman "shall never be permitted to serve as a Trustee or Co–Trustee hereunder...." (Complaint at para. 103). The Trust instrument designates Mrs. Harman and Debtor as co-beneficiaries, and states that Trust assets are to be used to support Mrs. Harman and Debtor. (Complaint at para. 102). Thus, Trustee asserts that the Trust is a self-settled trust, because Debtor is the settlor, trustee, and beneficiary of the Trust, and that Debtor has complete and exclusive control of all Trust assets. Trustee notes that this is corroborated by investment information of FCGI, which "assured potential investors that Debtor controls FCGI even though it is 99% owned by the Trust[.]" (Complaint at n. 9).
*2 Trustee's allegations relating to the other Defendants primarily involve diverting Debtor's assets to the Trust or Mrs. Harman.For example, $200,005.46 was transferred February 28, 2008, from FCGI, an entity Trustee asserts is controlled exclusively by Debtor by virtue of Debtor's control of the Trust, to a bank account held in Mrs. Harman's name, without consideration (the "2/28/08 Transfer"). (Complaint at para. 42). Trustee asserts those funds were then used to pay for Debtor's residence, titled in Mrs. Harman's name, and household expenses. (Complaint at para. 43). Trustee also notes that, at Debtor's sec. 341 meeting of creditors held July 19, 2011, Debtor acknowledged that he has transferred money to Mrs. Harman to avoid garnishment, stating, "At the time, I was experiencing garnishment so here popped in $3,300 into an account that was still open and I transferred it to my wife so that it would not be garnished." (Complaint at para. 61).
Trustee alleges that Debtor has used the Trust as a "hiding place for his assets, and as a means of hindering, delaying, and defrauding his creditors." For example, Debtor receives monthly Social Security benefits, which he has consistently deposited into bank accounts titled in the name of the Trust (the "Social Security Transfers"). (Complaint at para. 121–22). Trustee lists a number of transfers of funds which, Trustee alleges, belonged to Debtor, should have been paid to Debtor, or over which Debtor had possession and control, but were instead transferred into accounts titled in the name of the Trust ("Miscellaneous Trust Transfers"). (Complaint at para. 145). Trustee notes that FCGI has made substantial distributions but, despite Debtor's 1% ownership, all of those distributions have been transferred into Trust accounts (the "FCGI Distribution Transfers"). (Complaint at para. 125–26).
Debtor also provides labor and services through FCGI, but is not paid directly for those services. For example, Debtor, through FCGI, provides consulting services to Stonemark Management LLC ("Stonemark"); Stonemark pays FCGI $3,000 per month, but FCGI does not pay Debtor for that or any other labor he renders on FCGI's behalf. (Complaint at para. 140–41). Instead, Trustee alleges, FCGI diverts that income into the Trust (the "Stonemark Transfers"). Id.
Trustee asserts that several entities controlled by Debtor are mere alter egos through which Debtor funnels money. For example, First Equities Realty, LLC ("FER") was originally owned by the Trust and Debtor. (Complaint at para. 127). Debtor unilaterally amended FER's operating agreement in 2004 to state that he is the managing member, entitled to 100% of certain revenues and cash flow. (Complaint at para. 128). On January 1, 2008, in what Trustee characterizes as an attempt to divert assets, Debtor, as managing member of FER, assigned all lease payments due under a lease with Nextel South Corp.—$1,983.75 per month—to the Trust for no consideration (the "Nextel Lease Income"). (Complaint at para. 129–31). However, Debtor's Schedule I indicates that Mrs. Harman, not the Trust, receives income of approximately $1,950 per month from a "Cell Tower Lease." (Complaint at para. 134).
*3 FEP was formed April 14, 1989. (Complaint at para. 64). JHH and FEP II were formed December 28, 1989. Id. Trustee asserts FEP and FEP II became fully-owned subsidiaries of JHH and, by virtue of his sole ownership of JHH, Debtor controlled all three entities. Id. A document dated January 15, 1990, and executed by Debtor as president of JHH, FEP, and FEP II, purports to transfer to Mrs. Harman "all the Assignors' [JHH's, FEP's, and FEP II's] rights and interest in their direct and indirect investment properties' refinancing and sale proceeds"; the document provided that JHH, FEP, and FEP II would retain operational proceeds. (Complaint at para. 65–66). Trustee asserts this transfer was made for no consideration, and was honored "only sporadically, and when convenient for his own needs and to enable him to hinder, delay, or defraud creditors." (Complaint at para. 70). For example, though FEP II received sales proceeds in varying amounts from 2004 to 2008, only the sales proceeds from 2004 were actually transferred to Mrs. Harman.(Complaint at para. 80–81). Trustee also asserts the document was executed well after January 15, 1990, but backdated; in support, Trustee asserts that the font used in the document—Times New Roman—was not available to the public until 1992. (Complaint at 67–68).
Trustee asserts that Debtor purported to transfer all of his stock in JHH to Mrs. Harman May 31, 2001 (the "Stock Transfer"). (Complaint at para. 73). However, Debtor filed a Chapter 7 petition initiating Case No. 99–13224 December 3, 1999, and that case was not closed until June 12, 2001. Trustee argues that, because Debtor did not receive court approval of the Stock Transfer, the Stock Transfer was void. (Complaint at para. 74). Notably, JHH's federal tax returns from 2002 through 2010 show Debtor as the 100% owner. (Complaint at para. 77). Trustee asserts that Debtor continued to receive, at all relevant times, operational proceeds from JHH, FEP, and FEP II. (Complaint at para. 82). And, according to Trustee, Debtor's accountants were not made aware of the Stock Transfer until 2012, after Debtor filed the case (11–57522) under which this proceeding arises. (Complaint at para. 84–85). The Complaint alleges that Debtor, at times, claims ownership of JHH, FEP, and FEP II, and at other times disclaims ownership.
On December 20, 1990, FEP, FEP II, and JHH became limited partners of First Concord, L.P. ("First Concord"). (Complaint at para. 112). In 2011, Terrace View, an apartment complex in Blacksburg, Virginia, was sold. (Complaint at paras. 156–59). Trustee asserts that Debtor was entitled to receive proceeds from the sale by virtue of Debtor's interests in First Concord, L.P.2 and New River Valley Associates, Ltd. ("New River Valley")3 (the "Terrace View Proceeds"). Trustee asserts that the portion of the proceeds owed to JHH through First Concord (the "First Concord Funds"), and ultimately to Debtor as 100% owner of JHH, were instead directed to Mrs. Harman, pursuant to the allegedly invalid 1990 Assignment. (Complaint at para. 165). As noted above, Trustee asserts that this assignment is invalid because it has been honored only sporadically, and because it was backdated to 1990 when it was, in fact, executed well after that time. Conveniently, the federal tax returns of JHH listed Mrs. Harman as 100% owner for the first time in 2011, though Debtor had been listed as sole owner in prior tax years.4 (Complaint at para. 83).
*4 Trustee asserts that the amount to which Debtor was entitled by virtue of his interest in New River Valley (the "NRV Funds"), was instead diverted to an account held by Shadrix Lane, P.C. ("Shadrix") in an effort to avoid garnishment. At the time, Debtor was subject to garnishment by Carolyn T. McAfee as executor of the estate of James T. McAfee ("McAfee"). (Complaint at para. 176). Smith Conerly, Debtor's long-time counsel, had been served with a summons of garnishment seeking to collect from Smith Conerly any of Debtor's property in Smith Conerly's possession.(Complaint at para. 178). Thus, Trustee alleges, Mr. Smith asked his friend, Gregory Shadrix, to hold the NRV Funds in Shadrix's trust account. (Complaint at para. 179). The Funds of $257,256.05 were transferred to Shadrix May 25, 2011. (Complaint at para. 181). Also on May 25, 2011, Smith Conerly responded to the summons of garnishment in the negative: it was not then in possession of any property of Debtor. (Complaint at para. 187). Notably, the Facsimile Transaction Receipt received by Shadrix shows the "reference for beneficiary" of the transfer as "Joe Harmon"; Shadrix's trust account ledger indicates that the funds were received from Smith Conerly. (Complaint at para. 182–83). On May 26, 2011, Smith Conerly requested that Shadrix transfer $89,202.18 of the NRV Funds to Smith Conerly, and Shadrix complied.5 (Complaint at para. 188). Trustee reports that he has recovered $168,053.87, the funds held by Shadrix at the time of the petition; however, the $89,202.18 transferred to Smith Conerly has yet to be recovered. (Complaint at para. 193–94).
The petition initiating the underlying case was filed June 14, 2011. Trustee asserts that, even during the pendency of this bankruptcy case, Debtor has continued to attempt to divert assets beyond the reach of creditors. For example, in late 2011, after a contractual hold-back period had expired for a portion of the Terrace View proceeds, FEP II was entitled to receive additional funds from the sale (the "Held–Back Concord Funds"). (Complaint at para. 197). Instead of being distributed to Debtor, as Trustee asserts it should have been, the Held–Back Concord Funds were diverted to Mrs. Harman under the 1990 Assignment. (Complaint at para. 199). Debtor also received additional disbursements by virtue of his interest in New River Valley (the "Held–Back NRV Funds"; together with the Held–Back Concord Funds, the "Held–Back Funds"). (Complaint at para. 200).
On December 31, 2012, Debtor and Mrs. Harman caused JHH to sell its 9.9% interest in First Concord, LP and its 6.65% interest in Mark Monro Associates, Ltd., and caused FEP II to sell its 9.9% interest in First Concord, LP and its 0.33% interest in Alpine Self Storage, Ltd., (Complaint at para. 90). At the same time, Mrs. Harman sold her 9.9% interest in First Concord, LP, her 0.432% interest in Alpine Self Storage, Ltd., and her 20% interest in Stonemark Management, LLC. Id. In December 2012, JHH, FEP, FEP II, and Mrs. Harman sold interests for a total of $987,500 (the "December 2012 Sale Proceeds), of which $236,205.88 was attributable to the sale of JHH's, FEP's, and FEP II's interests. (Complaint at para. 93). Trustee asserts the entire amount of the December 2012 Sale Proceeds are property of the estate.
Deficiencies in Debtor's Motion
*5 As an initial matter, Debtor's Motion is deficient. It baldly states that the Complaint fails to state a claim pursuant to Fed.R.Civ.P. 12(b)(6), and offers, "This motion to dismiss is supported by the Memorandum of Law in Support of Motion to Dismiss ... submitted by [Mrs. Harman, the Trust, JHH, FEP, FEP II, and FCGI].
Pursuant to Fed.R.Civ.P. 7(b), made applicable by Fed.R.Bankr.P 7007, every motion requesting a court order must "state with particularity the grounds for seeking the order." Bankr.Local Rule 7007–1 (N.D.Ga.) dictates that motions "shall be accompanied by a memorandum of law that cites supporting authority." Debtor's failure to provide support for his requested relief is fatal to Debtor's Motion.
Moreover, the brief of Non–Debtor Movants does not address Counts XXII or XXIII against Debtor, because those counts are not directed at Non–Debtor Movants. In attempting to use Non–Debtor Movants' brief as support for dismissing claims which that brief does not address, Debtor's Motion appears to be frivolous. And, even assuming arguendo that Non–Debtor Movants' brief applied to Debtor's Motion to the extent the claims against the two parties overlapped, Debtor's Motion would be denied for the reasons stated below.
The Complaint
The Complaint asserts twenty four counts against the various Defendants.
In Count I, Trustee seeks declaratory judgment that the Trust is invalid. Trustee argues that Debtor exercises exclusive control of the Trust, is a beneficiary of the Trust, and is the settlor of the Trust; accordingly, Trustee asserts the Trust is invalid. Trustee further alleges that Debtor disregards the formalities of the Trust's form, and uses the Trust to defraud Debtor's creditors.
Count II seeks turnover of all property of the estate held by any Defendant pursuant to 11 U.S.C. sec. 542. In so seeking, Trustee asserts that the Trust is either invalid or an alter ego of Debtor and that FEP II and JHH are alter egos of Debtor; therefore, Trustee argues, the assets of the Trust, FEP II, and JHH are property of the bankruptcy estate, and Trustee is entitled to recover those assets on behalf of the estate from any entity now holding such assets. Specifically, Trustee alleges that the Trust assets include the Social Security Transfers; FCGI Distributions Transfers; the Nextel Lease Income; the Stonemark Transfers; the December 2012 Sale Proceeds; the Miscellaneous Trust Transfers; and any other property, money, or assets Debtor caused to be placed in the Trust (collectively, the "Trust Transfers"). Trustee alleges the FEP II assets include the First Concord Funds and the Held–Back Concord Funds. Trustee also seeks turnover of the NRV Funds and the Held–Back NRV Funds.
Under sec. 542,
"an entity ... in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease under section 363 of this title ... shall deliver to the trustee, and account for such property or the value of such property, unless such property is of inconsequential value or benefit to the estate."
*6 sec. 363 authorizes trustee to use, sell, or lease property of the estate, with certain exceptions and restrictions. Thus, sec. 542 directs any entity in possession of property of the estate to turn over such property to Trustee. By arguing that certain entities are mere alter egos of Debtor, Trustee argues that property of those entities is property of the estate, recoverable under sec. 542.
Count III seeks avoidance of post-petition transfers of assets held by the Linda J. Harman Irrevocable Trust (the "Trust") on the Petition Date; Count IV seeks recovery of those avoided transfers. Having argued in Count I that the Trust assets are, in fact, Debtor's assets, Trustee asserts in Count III that any assets held by the Trust on the Petition Date are estate assets. Thus, Count III seeks to avoid any post-petition transfers of assets held by the Trust on the Petition Date and Count IV seeks to recover those assets for the benefit of the estate.
11 U.S.C. sec. 549(a) provides
"[T]rustee may avoid a transfer of property of the estate—(1) that occurs after the commencement of the case; and (2)(A) that is authorized only under section 303(f) or 542(c) of this title; or (B) that is not authorized under this title or by the court."
Thus, Trustee may avoid any post-petition transfer that is not authorized by the court or Title 11. 11 U.S.C. sec. 550 provides
"[T]o the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from—(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee."
Once Trustee establishes that a transfer is avoidable under sec. 549, sec. 550 allows Trustee to recover the value of such transfer from an initial, immediate, or mediate transferee, or the entity for whose benefit the transfer was made.
In Counts V, VI, and VII, Trustee identifies three types of transfers Debtor or his alter egos made into the Trust: Trust Transfers made within ten years of the Petition Date ("Ten–Year Trust Transfers"), Trust Transfers made within four years of the Petition Date ("Four–Year Trust Transfers"), and Trust Transfers made within two years of the Petition Date ("Two–Year Trust Transfers"; together with the Ten–Year Trust Transfers and the Four–Year Trust Transfers, the "Alleged Fraudulent Transfers"). Trustee seeks to avoid the Ten–Year Trust Transfers pursuant to 11 U.S.C. sec. 548(e)6, the Four–Year Trust Transfers pursuant to sec. 5447 and O.C.G.A. sec. 18–2–74(a)(1)8, and the Two–Year Trust Transfers pursuant to sec. 548(a)(1)(A)9.Pursuant to sec. 550, Count VIII seeks to recover the value of the Alleged Fraudulent Transfers from each Defendant to the extent that such Defendant is the person or entity for whose benefit the Alleged Fraudulent Transfers were made, or to the extent that such Defendant is the immediate or mediate transferee of any of the Alleged Fraudulent Transfers. Trustee asserts, "On information and belief, one or more Defendants ... may be the entities or persons for whose benefit the Trust Transfers, the Four Year Trust Transfers, and the Two Year Trust Transfers were made or the immediate or mediate transferees of the initial transferees...."
*7 In Count IX, Trustee seeks to make the Trust, JHH, FEP, FEPII, FCGI, and various John Doe defendants liable for Debtor's debts as mere alter egos of Debtor (the "Alter–Ego Defendants"). To state a claim for alter ego liability, Trustee must establish
(1) "that [Debtor's] disregard of the corporate entity made it a mere instrumentality for the transaction of [his] own affairs;"
(2) "that there is such unity of interest and ownership that the separate personalities of the corporation and [Debtor] no longer exist;" and
(3) "To adhere to the doctrine of corporate identity would promote injustice or fraud."
Dearth v. Collins, 441 F.3d 931 (11th Cir.2006)(applying Georgia law, and quoting McLean v. Cont'l Wingate Co., 212 Ga.App. 356, 359 (1994)).
In Count X, Trustee seeks a declaratory judgment that Debtor is the sole owner of JHH, FEP, and FEP II, and that Debtor is entitled to any proceeds from the sale of stock of any such entity. Specifically, Trustee asserts that Debtor's attempt to transfer his interest in JHH to Mrs. Harman in 2001 was void ab initio because such transfer was attempted, without court approval, while Debtor was a debtor in a previous bankruptcy case. Also, Trustee notes that Debtor's representations on tax returns from 2002 to 2010 show that he is the owner of JHH, and that Debtor has received proceeds from JHH, FEP, and FEP II consistent with his ownership of those entities.
Similar to Counts VI and VII, Counts XI and XII seek to avoid transfers made in the four years and two years preceding the Petition Date, respectively. In Count XI, Trustee asserts that the Alter–Ego Defendants have transferred assets to Mrs. Harman during the four year period prior to the Petition Date (the "Mrs. Harman Transfers"), and, having alleged that the assets of the Alter–Ego Defendants are, in fact, Debtor's assets, Trustee asserts that he may avoid transfers of those assets for less than reasonably equivalent value pursuant to O.C.G.A. 18–2–74(a)(1). Specifically, Trustee asserts those transfers include transfers of the First Concord Funds, the 2/28/08 Transfer, miscellaneous transfers to Mrs. Harman's accounts over the relevant years, the $3,300 Transfer acknowledged by Debtor in his deposition, and any other transfer not yet discovered. Trustee further alleges that the transfers were made "with actual intent to hinder, delay, or defraud Debtor's creditors." In Count XII, Trustee asserts that he can avoid such transfers made within two years of the petition date under 11 U.S.C. sec. 548(a)(1)(A), which provides
"[T]rustee may avoid any transfer ... of an interest of the debtor in property ... that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—(A) made such transfer ... with actual intent to hinder, delay, or defraud any entity to which the debtor was ... indebted[.]"
Pursuant to sec. 550, Count XIII seeks to recover those transfers or the value of those transfers from Mrs. Harman as the initial transferee and the entity for whose benefit the transfers were made.
*8 In Count XIV, Trustee seeks "substantive consolidation" of the estate of Debtor with the estates of the Trust, Mrs. Harman, and the Alter Ego Defendants. Trustee argues that "a substantial identity of interests" exist between Debtor, the Trust, Mrs. Harman, and the Alter Ego Defendants, and that the Court may, pursuant to sec. 105, substantively consolidate their estates. Trustee asserts that such consolidation is necessary "to avoid injustice to creditors."
Count XV seeks declaratory judgment that assets nominally titled in Mrs. Harman's name are, in fact, owned by Debtor, as Debtor "exercises complete dominion and control" over the assets. In turn, Count XVI seeks turnover of those assets as property of the estate. Count XVII seeks to avoid, pursuant to sec. 549(a), any post-petition transfer of those assets, along with the December 2012 Sale Proceeds and the Held–Back Funds. Count XVIII seeks to recover the value of such transfers from the initial, immediate, or mediate transferees, or the entities for whose benefit such transfers were made.
In Count XIX, Trustee asserts that the transfer of the NRV Funds to Shadrix was made with the actual intent to hinder, delay, or defraud Debtor's creditors, and that such transfer either was made when Debtor was insolvent or rendered Debtor insolvent. Specifically, Trustee asserts that the transfer was made "on the eve of this Bankruptcy Case," while Debtor and Smith Conerly were subject to garnishment. Trustee asserts that $168,053.87 of the NRV Funds have been turned over to Trustee, but $89,202.13 remain outstanding. Accordingly, Count XIX seeks to avoid the transfer pursuant to 11 U.S.C. sec. 548(a)(1)(A).
In Count XX, Trustee asserts that the transfer of the NRV Funds to Shadrix was made at a time when Debtor was insolvent or that Debtor became insolvent as a result of the transfer, and that the transfer was for less than reasonably equivalent value. Thus, Trustee seeks to avoid the transfer of NRV funds to Shadrix under 11 U.S.C. sec. 548(a)(1)(B), which provides
"[T]rustee may avoid any transfer ... of an interest of the debtor in property ... that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)(I) was insolvent on the date that such transfer was made ... or became insolvent as a result of such transfer or obligation[.]"
Having attempted to avoid the transfer of the NRV Funds to Shadrix in Counts XIX and XX, Trustee seeks, in Count XXI, to recover the NRV Funds under sec. 550. Count XXI seeks to recover the value of the transfer from Shadrix as initial transferee, from Smith Conerly as immediate or mediate transferee of the initial transferee, and from any Defendant which subsequently received funds as mediate transferee of the initial transferee.
Counts XXII and XXIII are not raised against Non–Debtor Movants and thus are not discussed in Non–Debtor Movants' brief. As Debtor failed to support his Motion with a separate brief, Debtor's attempt to dismiss Counts XXII and XXIII is unsupported. Accordingly, Counts XXII and XXIII will not be discussed, or dismissed, in this order.
*9 Count XIV seeks an accounting, from all Defendants, "of any and all property contributed to the Trust, or into bank accounts titled in the name of the Trust, Debtor's assets, Mrs. Harman's assets, and the assets of JHH, FCGI, FEP, [FEP II], First Concord, Smith Conerly, Huck Smith, and the various John Doe Defendants which are believed to be entities owned and/or controlled by Debtor or co-conspirators with Debtor.
Discussion
Bankruptcy Rule 7008 applies Rule 8 of the Federal Rules of Civil Procedure to adversary proceedings.
A pleading which sets forth a claim for relief, whether an original claim, counterclaim, cross-claim, or third-party claim, shall contain ... a short and plain statement of the claim showing that the pleader is entitled to relief.
Fed.R.Civ.P. 8(a)(2). "To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Igbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim is plausible on its face when the complaint contains "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. The standard "calls for enough fact to raise a reasonable expectation that discovery will reveal evidence" of liability. Id . at 556. "The pleadings are construed broadly, and ... the allegations in the complaint are viewed in the light most favorable to the plaintiff." Watts v. Florida Int'l University, 495 F.3d 1289, 1295 (11th Cir.2007) (internal citations omitted).
A pleading that offers "labels and conclusions" or "a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. Nor does a complaint suffice if it tenders "naked assertion[s]" devoid of "further factual enhancement." Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 557). "Factual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555.
"In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally." Fed.R.Civ.P. 9(b). Whereas the purpose of Fed.R.Civ.P. 9(b) is to ensure that defendants have notice of the conduct complained of in a plaintiff's claim, the Rule may be satisfied where the "complaint sufficiently describes the acts and provides defendants with sufficient information to answer the allegations." General Cigar Co., Inc. V. CR Carriers, Inc., 948 F.Supp. 1030, 1037 (M.D.Ala.1996). However, in the Northern District of Georgia, "a heightened pleading standard under Rule 9(b) applies to all claims of actual fraud ... but not constructive fraud claims." Alliant Tax Credit Fund 31–A, Ltd. V. Murphy, 2011 WL 3156339 (N.D.Ga. July 26, 2011); accord Kipperman v. Onex Corp., 2007 WL 2872463 (N.D.Ga. Sept. 26, 2007). Also, in Kipperman, the Northern District of Georgia recognized relaxed Rule 9(b) pleading standards for bankruptcy trustees. 2007 WL 2872463 at *23. "Courts generally take a liberal approach when reviewing allegations of fraud pled by a trustee in bankruptcy because, as an outside party to the transactions in issue, the trustee must plead the claim of fraud for the benefit of the estate and its creditors based upon secondhand knowledge." Id.; see, also, Picard v. Madoff, 458 B.R. 87 (Bankr.S.D.N.Y.2011) (when a bankruptcy trustee brings a fraudulent transfer claim, "courts in this district take a more liberal view [to Rule 9(b) standards] ... since a trustee is an outsider to the transaction who must plead fraud from second-hand knowledge" (internal quotation marks omitted)); Official Committee of Unsecured Creditors of Fedders N. Am. Inc. v. Goldman Sachs Credit Partners, 405 B.R. 527, 544 (Bankr.D.Del.2009) ("The requirements of Rule 9(b) are relaxed and interpreted liberally where a trustee ... is asserting the fraudulent transfer claims.").
*10 The District Court in Kipperman declined to dismiss fraudulent transfer claims for which the trustee failed to allege a date, amount, or description of the relevant transfers. Other courts applying this type of relaxed standard have held that a pleading is sufficient if it gives the defendant "a reasonable opportunity to answer the complaint and ... adequate information to frame a response[.]" Tolz v. United States, 2010 WL 2812944 at *5 (Bankr.S.D.Fla.2010).
A. Trustee's Motion for Leave to File a Sur–Reply
Non–Debtor Movants filed their Motion August 28, 2013. Trustee filed a response to Non–Debtor Motion September 23, 2013 (Doc. No. 36). Non–Debtor Movants replied to the response October 14, 2013 (Doc. No. 48). On October 25, 2013, Trustee filed a Motion for Leave to File a Sur–Reply, and attached as an exhibit a sur-reply (Doc. No. 51) (the "Sur–Reply Motion"). Non–Debtor Movants filed their Opposition to Trustee's Motion for Leave to File Sur–Reply November 5, 2013.
"[T]o permit the filing of a surreply is purely discretionary and should generally only be allowed when 'a valid reason for such additional briefing exists.' " First Specialty Ins. Corp. v. 633 Partners, Ltd., 300 Fed.Appx. 777 (11th Cir.2008) (quoting Fedrick v. Mercedes–Benz USA, LLC, 366 F.Supp.2d 1190, 1197 (N.D .Ga.2005)). Valid reasons include "where the movant raises new arguments in its reply brief." Id.
Trustee argues that a sur-reply is necessary because Non–Debtor Movants raised new issues in their reply brief: (1) the effect of a Georgia Court of Appeals case—Holiday Hospitality Franchising, Inc. v. Noons, 2013 WL 5422188 (Ga.App. Sept. 30, 2013)—decided after Trustee's response brief was due; and (2) Non–Debtor Movants' "accusations that Trustee misrepresented the law."
Non–Debtor Movants apparently concede that new caselaw might justify a surreply in certain circumstances, but argue that Trustee overstepped his bounds in two respects. First, Non–Debtor Movants argue that Noons is a one-page decision that applies a prior Georgia Supreme Court decision and requires little additional briefing; NonDebtor Movants assert that Trustee instead uses the bulk of the sur-reply to rehash previously briefed arguments. Second, Non–Debtor Movants object to Trustee filing the sur-reply as an exhibit to the Sur–Reply Motion, because doing so is tantamount to filing the sur-reply without leave of the Court.10
Non–Debtor Movants argue that the latter of Trustee's "new issues"—"accusations that Trustee misrepresented the law"—is not a new issue; rather, Trustee is referring to Non–Debtor Movants' discussion on the interpretation of relevant law. Non–Debtor Movants assert that the Sur–Reply is an attempt by Trustee to get "second bite at the apple" to argue in favor of Trustee's interpretation of the law.
After considering the parties' respective arguments, the sur-reply will considered only to the extent it discusses Noons.11 The parties' disagreement over application of the law is not a "new issue" which warrants supplemental briefing.