Babin v. Caddo E. Estates I, Ltd.

496 B.R. 804

Wilbur J. “Bill” BABIN, Jr., in his capacity as Trustee of the Bankruptcy Estate of Phoenix Associates Land Syndicate, Plaintiff

v.CADDO EAST ESTATES I, LTD., et al., Defendants.

Civil Action No. 10–896.

United States District Court, E.D. Louisiana.

Aug. 9, 2013.

Mark Samuel Goldstein, Alicia Martone Bendana, Lowe, Stein, Hoffman, Allweiss & Hauver, LLP, New Orleans, LA, Stan D. Broome, Broome Law Firm, PLLC, Grapevine, TX, for Plaintiff.

J. David Forsyth, Sessions, Fishman, Nathan & Israel, LLP, New Orleans, LA, Gerald P. Urbach, Jerry L. Hiersche, Russell W. Mills, Hiersche, Hayward, Drakeley & Urbach, Addison, TX, for Defendants.

ORDER AND REASONS

SUSIE MORGAN, District Judge.

Before the Court is a motion under Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6) to dismiss the claim of plaintiff Wilbur Babin, Jr. (the “Trustee”) for aiding and abetting the breach of fiduciary duty, filed by defendant George Schuler.¹ The Trustee opposes the motion.² For the following reasons, the motion is DENIED.

BACKGROUND

Wilbur Babin, Jr. is the trustee for the bankruptcy estate of Phoenix Land Associates, Inc. (“Debtor”), which has as its principals C. Paul Alonzo, Ronald L. Blackburn, and Carolyn Alonzo. Debtor filed a voluntary petition for bankruptcy under Chapter 11 on June 10, 2009, which was converted into a Chapter 7 liquidation proceeding on July 31, 2009. The Trustee was appointed on July 31, 2009, and confirmed on August 31, 2009.

On January 19, 2010, the Trustee filed the instant suit, suing Defendants other than Schuler for avoidance of fraudulent transfers on a theory of constructive fraud. On August 13, 2012, after being granted leave, he filed the second amended complaint at issue, which: (1) added Schuler as an additional defendant, accusing him of aiding and abetting the principals of the Debtor in breaching their fiduciary duties; (2) added a cause of action against Defendants for recovery of fraudulent transfers based on a theory of actual fraud under 11 U.S.C. § 548(a)(1)(A); and (3) added a cause of action against Defendants for a declaratory judgment that the transfer of Debtor's real property is a nullity under Louisiana law.

Schuler moves to dismiss the second amended complaint's claims against him, asserting that: (1) they are preempted by the Bankruptcy Code; (2) there is no cause of action under Louisiana law for aiding and abetting breach of fiduciary duty; (3) if such a cause of action exists, it is barred by Louisiana's statute of limitations; and (4) the Trustee, standing in the shoes of the Debtor, is barred from pursuing any claim by the doctrine of in pari delicto.³

STANDARD OF LAW

Pursuant to Federal Rule of Civil Procedure 12(b)(6), a district court may dismiss a complaint, or any part of it, for failure to state a claim upon which relief may be granted if the plaintiff has not set forth factual allegations in support of his claim that would entitle him to relief. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir.2007).⁴ As the Fifth Circuit explained in Gonzalez v. Kay:

“Factual allegations must be enough to raise a right to relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Supreme Court recently expounded upon the Twombly standard, explaining that “[t]o 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. Iqbal , 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955, 167 L.Ed.2d 929). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. It follows that “where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not ‘show[n]’—that the pleader is entitled to relief.” Id. at 1950 (quoting Fed.R.Civ.P. 8(a)(2)).

577 F.3d 600, 603 (5th Cir.2009).

This Court cannot look beyond the factual allegations in the pleadings to determine whether relief should be granted. See Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir.1999); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir.1996). In assessing the complaint, a court must accept all well-pleaded facts as true and liberally construe all factual allegations in the light most favorable to the plaintiff. Spivey, 197 F.3d at 774;Lowrey v. Tex. A & M Univ. Sys., 117 F.3d 242, 247 (5th Cir.1997). “Dismissal is appropriate when the complaint ‘on its face show[s] a bar to relief.’ ” Cutrer v. McMillan, 308 Fed.Appx. 819, 820 (5th Cir.2009) (per curiam) (unpublished) (quoting Clark v. Amoco Prod. Co., 794 F.2d 967, 970 (5th Cir.1986)).

ANALYSIS

I. Preemption

Schuler asserts that the Trustee's claim for aiding and abetting breach of fiduciary duty must be dismissed because it is a “veiled claim for aiding and abetting a fraudulent transfer, and such a claim is preempted by the Bankruptcy Code.” ⁵ In the first instance, the cases Schuler cites bearing on preemption hold only that claims for aiding and abetting a fraudulent transfer are preempted, not claims for aiding and abetting breach of fiduciary duty. See In re Fedders N. Am., Inc., 405 B.R. 527, 547–49 (Bankr.D.Del.2009) (preemption); In re Brentwood Lexford Partners LLC, 292 B.R. 255, 275 (Bankr.N.D.Tex.2003) (preemption); In re Hamilton Taft & Co., 176 B.R. 895, 902 (Bankr.N.D.Cal.1995) (reaching a preemption result using a standing analysis).⁶ In fact, one of the cases Schuler cites allowed a claim for aiding and abetting breach of fiduciary duty to go forward, despite holding that the claim for aiding and abetting a fraudulent transfer was preempted. In re Fedders, 405 B.R. at 543–44, 547–49. Many other cases have allowed such claims to proceed as well. See, e.g., In re CDX Liquidating Trust, 640 F.3d 209, 219–20 (7th Cir.2011); In re U.S. Bank Nat'l Assoc., 817 F.Supp.2d 934, 944 (N.D.Tex.2011); In re Yazoo Pipeline Co., 459 B.R. 636, 656 (Bankr.S.D.Tex.2011); In re TOCFHBI, Inc., 413 B.R. 523, 536 (Bankr.N.D.Tex.2009).⁷

Moreover, the reasoning behind preempting claims for aiding and abetting fraudulent transfers—that “the trustee's remedy for an avoided transfer is addressed by a specific statutory provision, section 550, and that provision only allows the trustee to recover” the property or the value of the property “from a transferee, or a party for whose benefit the transfer was made”—does not apply to claims for aiding and abetting breach of fiduciary duty. Id. at 548. The Bankruptcy Code does not provide its own exclusive remedy for breaches of fiduciary duty, so a claim for aiding and abetting such conduct does not “lead to a result that expands remedies beyond” those prescribed by Congress. In re Brentwood, 292 B.R. at 275. That is, a claim for aiding and abetting a fraudulent transfer addresses only the injury of a fraudulent transfer, one for which the Bankruptcy Code provides a remedy. But a claim for aiding and abetting breach of fiduciary duty—even when the effect of the breach is a fraudulent transfer—addresses the separate kind of injury a breach of fiduciary duty inflicts, an injury for which the Bankruptcy Code does not provide a remedy.

To hold otherwise (by focusing on the loss of property to the corporation rather than the nature of claim brought based on the transfer) would result in a kind of roving preemption where any state law claim could be preempted so long as the transaction giving rise to it could also be characterized as a fraudulent transfer. If this were the case, debtors and those with whom they deal could limit their exposure to disgorgement for claims based not just on breach of fiduciary duty, but also on contract, breach of regulatory requirements (such as inadequate capitalization), and the like. If Congress had intended this result—a significant curtailment of traditional remedies commonly available—it would have spoken more clearly. The Trustee's claim is not preempted.

II. The State Law Applicable

The parties dispute the appropriate choice of law governing the Trustee's aiding and abetting claim. Schuler asserts that Louisiana law applies, and since Louisiana law does not recognize a claim for aiding and abetting breach of fiduciary duty (and if it does, the claim has prescribed), the Trustee's claim must be dismissed.⁸ The Trustee asserts that either Nevada or Texas law applies, both of which recognize a claim for aiding and abetting and consider this claim timely.⁹

Federal courts sitting in diversity apply the choice of law rules of the state in which the court is located. Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941). ¹⁰ The parties suggest that four of Louisiana's choice of law articles could be applicable to this case: the general or residual choice of law provision in Article 3515 of the Louisiana Civil Code; the tort (delict) provision in Article 3542; the “standards of conduct and safety” tort sub-rule in Article 3543; and the “loss distribution and financial protection” tort sub-rule in Article 3544. They also suggest a fifth option, the so-called “internal affairs” doctrine. Torch Liquidating Trust v. Stockstill, 561 F.3d 377, 386 n. 7 (5th Cir.2009) (“Under Louisiana law, the law of the place where the corporation was incorporated governs disputes regarding the relationship between the officers, directors, and shareholders and the officers' and directors' fiduciary duties.”). The doctrine is really a particular example of the policies in Article 3515, one that recognizes the needs of the interstate system will always demand that corporations be subject to one set of laws when it comes to their internal affairs so as to avoid...