Field v. Trashmasters, LLC (In re Rolloffs Haw., LLC)

In re ROLLOFFS HAWAII, LLC, Debtor.

DANE S. FIELD,Chapter 7 Trustee of the Estate of Rolloffs Hawaii, LLC, Plaintiff, v. TRASHMASTERS, LLC, et al., Defendants.

Case No. 16-01294

Adv. Pro. No. 18-90035

UNITED STATES BANKRUPTCY COURT DISTRICT OF HAWAII

June 25, 2019

Chapter 7

Dkt. 19, 25, 29

MEMORANDUM OF DECISION ON MOTION TO DISMISS COMPLAINT

In this adversary proceeding, the chapter 7 trustee of Rolloffs Hawaii, LLC (the "Debtor") asserts fraudulent transfer and other claims against the Debtor's sole member, Trashmasters LLC, and related parties. In essence, the trustee argues that the defendants failed adequately to capitalize the Debtor, stripped it of funds and assets for their benefit, and left it unable to pay its creditors. In contrast, the defendants essentially contend that all of the challenged transactions were normal for private equity deals, that it was proper to make the Debtor liable for the debt incurred to acquire the assets that the Debtor ended up owning, and that the defendants are not legally responsible for the Debtor's failure. Some of the defendants have moved to dismiss the complaint¹ and other defendants have joined in the motion.²

For the reasons that follow, I will grant the motion in part and grant the trustee leave to file an amended complaint.

A. Attachments to Motion and Responses

In addition to a 106 page memorandum, the moving defendants filed with their motion two declarations and thirteen exhibits. In response, the trustee filed a 96 page memorandum, one declaration, and sixteen exhibits. The defendants' reply memorandum is 84 pages long and accompanied byanother declaration and five more exhibits.

If, on a motion under Rule 12(b)(6) or 12(c), matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56. All parties must be given a reasonable opportunity to present all the material that is pertinent to the motion.³

The court has "complete discretion to determine whether or not to accept the submission of any material beyond the pleadings that is offered in conjunction with a Rule 12(b)(6) motion and rely on it, thereby converting the motion [to a motion for summary judgment], or to reject it or simply not consider it."⁴

Considering the volume of the proferred material and the fact that discovery has barely begun, I choose not to consider any materials outside the pleadings.⁵

B. Particularity of Allegations

1. Intentional fraudulent transfer claims

The complaint states claims⁶ for intentional fraudulent transfers under Haw. Rev. Stat. § 651C-4(a)(1):

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation . . . with actual intent to hinder, delay, or defraud any creditor of the debtor . . . .

Section 544(b)(1) of the Bankruptcy Code permits the trustee to assert claims under this provision. That section provides that, subject to an exception that is not applicable here, "the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an [allowable] unsecured claim . . . ." In effect, section 544(b) allows the creditor to step into the shoes of an actual creditor of the debtor and assertavoidance claims that the creditor could bring.⁷

"In all averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity."⁸ The particularity requirement applies to intentional fraudulent transfer claims.⁹

In their pleadings, Plaintiffs must include the time, place, and nature of the alleged fraud; mere conclusory allegations of fraud are insufficient to satisfy this requirement. However, malice, intent, knowledge, and other condition of mind of a person may be averred generally.¹⁰

The defendants argue that the complaint does not satisfy the particularity requirement because it does not specifically identify each challenged transfer by date, amount, name of transferor and transferee, and consideration (if any). I agree. The trustee must amend the complaint to add these facts, to the extent known.

The defendants also argue that the complaint does not allegefraudulent intent with sufficient particularity. I disagree. Rule 9(b) states explicitly that "intent . . . and other condition of a person's mind may be alleged generally," and the complaint has enough information to satisfy the rule. The complaint makes the gist of the trustee's position clear: he alleges that the Debtor was deliberately structured and financed in a way that left it insolvent and exposed its creditors to risk, while allowing the defendants to extract all of the benefits of the Debtor's operations. Contrary to the defendants' argument, the particularity requirement does not require that the complaint include an analysis of each of the badges of fraud or lay out all of the circumstantial evidence that might support a finding of fraudulent intent. (I analyze the plausibility of these allegations in section C.1 below.)

The defendants argue that the complaint does not allege the Debtor's insolvency or the insider status of certain defendants with the requisite particularity. But insolvency and insider status are not independent elements of an intentional fraudulent transfer claim. Insolvency and insider status are among the "badges of fraud," meaning that they are pieces of circumstantial evidence that may be probative of fraudulent intent, but that the trustee need not include all such evidence in the complaint.

2. Constructive fraudulent transfer claims

The complaint also states claims for "constructive" fraudulenttransfers,¹¹ meaning (in summary) transfers that are avoidable based largely on the objective circumstances and effects of the transfers, and without proof of actual intent to hinder, delay, or defraud creditors.

Specifically, Haw. Rev. Stat. § 651C-4(b) provides that:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

* * *

(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:

(A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or

(B) Intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor's ability to pay as they became due.

Haw. Rev. Stat. § 651C-5 creates two additional constructivefraudulent transfer claims:

(a) 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 becomes insolvent as a result of the transfer or obligation.

(b) A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for other than a present, reasonably equivalent value, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.

The defendants argue that the particularity requirement of rule 9(b) applies to these claims, and that the complaint must specifically identify each challenged transfer. The trustee cites cases holding that the particularity requirement does not apply to such claims. The defendants do not respond to this argument in their reply memorandum. I agree with the trustee, and with many other courts,¹² that the particularity requirementdoes not apply to these claims.

C. Plausibility of Allegations

The defendants argue that most of the claims asserted in the complaint fail the test of plausibility. This standard cannot be stated concisely and is hard to apply in practice.

Following Iqbal and Twombly, we have attempted to reconcile the plausibility standard as set out in those rulings with the more lenient pleading standard the Court has also, at times, applied. While recognizing some tension among the Court's pleading-standards cases, we have settled on a two-step process for evaluating pleadings:

First, to be entitled to the presumption of truth, allegations in a complaint or counterclaim may not simply recite the elements of a cause of action, but must contain sufficient allegations of underlying facts to give fair notice and to enable the opposing party to defend itself effectively. Second, the factual allegations that are taken as true must plausibly suggest an entitlement to relief, such that it is not unfair to require the opposing party to be subjected to the expense of discovery and continued litigation.

In all cases, evaluating a complaint's plausibility is a context-specific endeavor that requires courts to draw on . . . judicial experience and common sense.¹³

1. Intent

Many of the claims stated in the complaint require the trustee to prove the defendants' intent or other state of mind. The defendants argue that these allegations are not plausible. I disagree. Reading the complaint as a whole, the trustee's basic story is that the defendants deliberately organized the Debtor in a way that left the Debtor in a precarious financial condition and put all of the risk of loss on the Debtor's creditors, while reserving for the defendants all of the upside potential if the risks did not come home to roost. The Defendants say that the structure was typical for private equity deals and that the Debtor's failure is not their fault....