Faulkner v. Aimbank (In re Reagor-Dykes Motors, LP)

In re: REAGOR-DYKES MOTORS, LP,

Debtors.

DENNIS FAULKNER, Trustee of Reagor-Dykes Auto Group Creditors Liquidating Trust, Plaintiff, v. AIMBANK, Defendant.

Case No.: 18-50214-RLJ-11

Adversary No. 20-05039

UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF TEXAS LUBBOCK DIVISION

March 30, 2021

The following constitutes the ruling of the court and has the force and effect therein described.

(Jointly Administered)

MEMORANDUM OPINION

The defendant, AimBank, filed its motion under Bankruptcy Rule 7012(b) and Rules 12(b)(1) and 12(b)(6) of the Federal Rules of Civil Procedure seeking dismissal of all counts of Plaintiff's Second Amended Complaint (the Complaint).² The plaintiff, Dennis Faulkner, Trustee of the Reagor-Dykes Auto Group Creditors Trust, filed his response opposing dismissal; alternatively, he requests an opportunity to amend the Complaint.

I.

A dismissal motion brought under Rule 12(b)(1) is a challenge to the court's jurisdiction. See Fed. R. Civ. P. 12(b)(1). "A case is properly dismissed for lack of subject matter jurisdiction when the court lacks the statutory or constitutional power to adjudicate the case." Home Builders Ass'n of Miss., Inc. v. City of Madison, Miss., 143 F.3d 1006, 1010 (5th Cir. 1998). In ruling on the motion, all factual allegations in the plaintiff's complaint must be accepted as true. See Den Norske Stats Oljeselskap As v. HeereMac Vof, 241 F.3d 420, 424 (5th Cir. 2001). A dismissal for lack of subject-matter jurisdiction is only appropriate when "it appears certain that the plaintiff cannot prove any set of facts in support of his claim that would entitle the plaintiff to relief." Ramming v. United States, 281 F.3d 158, 161 (5th Cir. 2001). The burden of proof regarding the existence of jurisdiction always rests with the plaintiff. Id.

Rule 12(b)(6) allows dismissal of a case if a plaintiff fails "to state a claim upon which relief can be granted." This rule applies in adversary proceedings as incorporated by Bankruptcy Rule 7012(b). Rule 12(b)(6) must be read in conjunction with Rule 8(a), which requires "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2); see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009). To withstand a Rule 12(b)(6) motion, a complaint must contain "enough facts tostate a claim to relief that is plausible on its face." Twombly, 550 U.S. at 570. A claim satisfies the plausibility test "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. [Twombly's] plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 556 U.S. at 678 (internal citations omitted). While a complaint need not contain detailed factual allegations, it must set forth "more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555 (citation omitted).

In reviewing a Rule 12(b)(6) motion, the court must accept all well-pleaded facts in the complaint as true and view them in the light most favorable to the plaintiff. Sonnier v. State Farm Mut. Auto. Ins. Co., 509 F.3d 673, 675 (5th Cir. 2007); Martin K. Eby Constr. Co. v. Dallas Area Rapid Transit, 369 F.3d 464, 467 (5th Cir. 2004). "Because a complaint must be liberally construed in favor of the plaintiff, a motion to dismiss under Rule 12(b)(6) is generally viewed with disfavor and is rarely granted." Ins. Distrib. Consulting, LLC v. Freedom Equity Grp., LLC, No. 20-cv-00096, 2020 WL 5803249, at *2 (S.D. Tex. Sept. 4, 2020) (citing Harrington v. State Farm Fire & Cas. Co., 563 F.3d 141, 147 (5th Cir. 2009)). In ruling on such a motion, the court looks only at the complaint. Spivey v. Robertson, 197 F.3d 772, 774 (5th Cir. 1999). The court may also consider documents incorporated into the complaint by reference and matters of which a court may take judicial notice. See Walker v. Beaumont Indep. Sch. Dist., 938 F.3d 724, 735 (5th Cir. 2019); Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC, 594 F.3d 383, 387 (5th Cir. 2010).

II.

The Complaint

A.

The Court reviews the Complaint and addresses the factual allegations as true. For this, the Court refers to the plaintiff, Dennis Faulkner, Trustee of the Reagor-Dykes Auto Group Creditors Liquidating Trust, as Trustee; the debtors will be collectively referred to as Debtors or the Reagor-Dykes entities.

By the Complaint, the Trustee contends that the Reagor-Dykes entities' rogue CFO, Shane Smith, collaborated with AimBank to defraud the Debtors and their creditors. The fraud results from a massive kiting scheme in which deposits were made in and among certain Debtor-entities' bank accounts in amounts that, at the time the deposits were made, far exceeded the Debtors' ability to generate or honor. From August 1, 2017 through August 1, 2018, $449,069,845.15 passed through the two bank accounts of Reagor-Dykes Snyder, L.P. (RD Snyder) and Reagor-Dykes Motors, LP (RD Lamesa). The vast majority of these funds represented deposits in and outgoing checks to and from other Reagor-Dykes entities. In January 2018, more than $29 million dollars were deposited and debited from the RD Snyder and RD Lamesa bank accounts, with approximately 95% of all outgoing checks made to other Reagor-Dykes entities. In February, March, and April of 2018, over $109 million dollars went in and out of the RD Snyder account at AimBank. RD Snyder's annual sales for all of 2017 were $47,715,224.00. This practice generated millions of dollars of float for the Debtors. Additionally, while the numbers suggest the fraudulent nature of the practice, AimBank's own records show that RD Snyder sold the same car for the same price multiple times to differentReagor-Dykes entities—an example of how funds were generated but with no ability to honor the credit given.

The other way in which Smith, with AimBank's acquiescence, created "float" was through the perverted use of sight drafts. The Complaint describes how the use of sight drafts should work in a "normal" deal where one dealer is buying a vehicle from another unrelated dealer. It involves three main steps. First, the selling dealership deposits a draft and the original certificate of title for the vehicle with its own bank. Second, the selling dealership's bank presents the draft and original certificate of title to the purchasing dealership's bank for payment. The draft contains certain instructions, such as payment amount and time of payment, which is usually seven days after presentment. The buying dealership's bank inspects the certificate of title to ensure authenticity. Third, if the title is good and the buying dealership has sufficient funds in its account to pay for the vehicle, the buying dealership's bank issues and delivers a cashier's check for payment on the draft to the selling dealership's bank. At that time, the buying dealership's bank debits the payment from the buyer's bank account and the selling dealership's bank deposits the money into the seller's bank account upon receipt of the cashier's check. According to the Trustee, the use of sight drafts is an antiquated process that was more appropriate "to buy and sell herds of cattle between far-flung ranches in the 19th century" instead of between car dealerships—particularly related dealerships. ECF No. 39 ¶ 39.³

The Debtors, however, corrupted the use of sight drafts. Instead of delivering the original certificates of title, RD Snyder, for example, would submit photocopies of such documents with the draft. Upon submission, AimBank would give immediate credit to RD Snyder's account.⁴ AimBank would then present the draft and photocopies to the purchasing dealership's bank—arelated Reagor-Dykes dealership. At the end of the draft period, the purchasing dealership's bank would issue a cashier's check to AimBank, drawn on the funds of the related Reagor-Dykes entity, and AimBank would retain the funds of the cashier's check as repayment for the immediate credit.

The Trustee alleges that in early January 2017, AimBank acquiesced to this modified sight-draft process by agreeing to give RD Lamesa immediate credit on deposited sight drafts. This "agreement" was evidenced by an email sent by Mike Tibbit, who handled "the relationship" between the Debtors and AimBank and was Senior Vice President of AimBank. On March 4, 2017, Mr. Tibbit authorized this same process for RD Snyder. (At some point, AimBank ceased requiring that the dealerships tender original certificates of title, allowing photocopies to be summitted instead, though it is not clearly alleged in the Complaint when this happened.)

The Trustee says that AimBank knew that Smith was engaged in a massive kiting scheme. The sheer magnitude of the scheme would have been apparent to the bank. The accounts were held at AimBank; the bank, as a lender to Reagor-Dykes, regularly received financial information from Reagor-Dykes; the bank's own analytic software program would have detected the scheme; the day-to-day knowledge of certain bank personnel of what Smith was doing would have revealed that there was a problem; and, also, the bank's actual accommodation and participation in the corrupted use of sight drafts reflect that the bank knew what Smith was doing.

AimBank benefited from its participation in Smith's fraudulent schemes. In December of 2017, AimBank's holding company AIM Bancshares, Inc. announced a merger with Platinum Bancshares of Texas, Inc. and its wholly owned subsidiary Platinum Bank. The merger wascompleted on April 27, 2018, when AimBank's parent company acquired all the issued and outstanding stock of Platinum Bancshares of Texas, Inc. and its wholly owned subsidiary Platinum Bank. The merger was structured as a share-for-share purchase instead of a cash purchase. The...