First Fin. Bank v. Fox Capital Grp., Inc.

692 F.Supp.3d 762

FIRST FINANCIAL BANK, Plaintiff, v. FOX CAPITAL GROUP, INC., Defendant.

Case No. 1:21cv691

United States District Court, S.D. Ohio, Western Division

Filed September 14, 2023

Jeffrey M. Hendricks, Susan Moeller Argo, Bricker Graydon LLP, Cincinnati, OH, for Plaintiff.

Daniel A. DeMarco, Colten Joseph Siedlarczyk, Hahn Loeser & Parks LLP, Cleveland, OH, for Defendant.

OPINION & ORDER

Michael R. Barrett, United States District Judge

This matter is before the Court upon Defendant's Motion to Dismiss Plaintiff's Amended Complaint (Doc. 16), Plaintiff's opposition thereto (Doc. 18), and Defendant's Reply (Doc. 19).

I. BACKGROUND

Plaintiff is an Ohio banking corporation. (Doc. 12, ¶ 1). In 2018, Plaintiff entered into a series of agreements with Shining Knight Realty which created loan obligations on the part of Shining Knight ("Loan Agreements"). (Id., ¶ 6). As part of the security for the obligations, Shining Knight signed a mortgage agreement ("Mortgage"). (Id., ¶ 8). The mortgage granted Plaintiff a first-priority security interest in the following:

1.1.7 all moneys, credits, and other property of any nature whatsoever of Mortgagor now or hereafter in the possession of, in transit to or from, under the custody or control of, or on deposit with (whether held by Mortgagor individually or jointly with another) Mortgagee or any affiliate of Mortgagee, including but not limited to cash collateral accounts, construction disbursement accounts and reserve accounts (but excluding fiduciary accounts, if any) . . .

(Id., ¶ 9) (referred to hereinafter as "Collateral"). Because it is the depository bank where the accounts are maintained, Plaintiff has control of Shining Knight's deposit accounts (Id., ¶ 10). Plaintiff filed a Uniform Commercial Code ("U.C.C.") Financing Statement with the Ohio Secretary of State to perfect its security interest in the Collateral. (Id.).

Plaintiff also entered into a series of agreements with The Wexford Place, Inc. and Wexford Care Center Inc., including a Guaranty pursuant to which the companies jointly and severally guaranteed the full and prompt payment of all obligations owed by Shining Knight. (Id., ¶ 14). As security, Plaintiff and the Wexford Companies entered into a security agreement dated January 26, 2018 ("Security Agreement"). (Id., ¶ 15). The Security Agreement granted Plaintiff a first-priority security interest in all business assets of the Wexford Companies, including, but not limited to, all accounts receivable, deposit accounts, cash proceeds documents, and general intangibles, whether then existing or thereafter acquired, and all proceeds and products thereof (also referred to hereinafter as "Collateral"). (Id., ¶ 15-16). Plaintiff filed a U.C.C. Financing Statement with the Ohio Secretary of State against the Wexford Companies. (Id., ¶ 17). Plaintiff also has control over the Wexford Companies' deposit accounts. (Id.)

Shining Knight and the Wexford Companies (collectively, the "Obligors") are now in default on these obligations. (Id., ¶ 19). Plaintiff is owed approximately $3 million on the obligations. (Id., ¶ 21). Plaintiff has filed suit against the Obligors in Hamilton County Court of Common Pleas in order to collect on the sums due. (Id., ¶ 20).

Plaintiff discovered that the Obligors entered into a factoring agreement with Defendant. (Id., ¶ 24). As part of these factoring agreements, the Obligors sold or pledged certain of their accounts receivables and all proceeds thereof ("Receivables") to Defendant without the consent of Plaintiff. (Id., ¶ 23-24). The Security Agreement, Loan Agreements, and Mortgage expressly prohibited the Obligors from selling, pledging, encumbering, or otherwise disposing of any Collateral without the prior written consent of Plaintiff. (Id., ¶ 23).

Despite this prohibition, Plaintiff believes that between November of 2019 and May 2020, Defendant collected approximately $588,463.00 in Receivables from the Obligors. (Id., ¶ 25). Plaintiff believes that Defendant and Obligors worked together to usurp Plaintiff's priority interest and Obligors purposely concealed that they sold and/or pledged the Collateral in violation of the Security Agreement, to the detriment of Plaintiff. (Id., ¶ 29-30). Plaintiff believes that Defendant purposefully concealed that they had been granted ownership and/or a security interest in Plaintiff's collateral by failing to file any U.C.C. Financing Statement, thus thwarting Plaintiff's ability to ensure the Collateral was not sold and/or pledged in violation of the Security agreement. (Id., ¶ 31-32). Plaintiff explains that Obligors violated Section 6 of the Security Agreement when they permitted Defendant to wire funds from deposit accounts controlled by Plaintiff. (Id., ¶ 33). Plaintiff explains that Obligors also violated Sections 4 and 6 of the Security Agreement, as well as Ohio law, by failing to account to Plaintiff for the proceeds of such sale and/or pledge of Collateral. (Id., ¶ 34).

Plaintiff claims that the Receivables are Collateral subject to Plaintiff's perfected first-priority security interest. (Id., ¶ 35). Plaintiff never consented to or approved the Factoring Agreements, or the sale and/or transfer of the Receivables to Defendant. (Id., ¶ 36). Plaintiff has made a formal demand to Defendant for the return of the sums collected, but Defendant has failed to do so. (Id., ¶ 27).

The Court dismissed Plaintiff's original complaint (Doc. 2) without prejudice to allow Plaintiff to identify any allegations which would constitute collusion. (Doc. 10). The Amended Complaint (Doc. 12) added paragraphs 26-34. These paragraphs further describe the relationship between Defendant and Obligors, which was missing from the original complaint. The Amended Complaint also added allegations to Count One (Conversion) that Defendant's company is geared toward financially distressed companies with immediate cash needs; and Defendant operates through a system of brokers and charges large fees at the initial funding to offset the risk of taking on financially distressed companies. (Doc. 2, ¶ 41-42). Paragraph 44 of the amended complaint adds that Plaintiff believes the "purchase price" identified in Defendant's contract with the Obligors is not the purchase price actually paid; and the contracts are purposely misleading to hide the fees that reduce the up-front funding and/or "purchase price." (Id., ¶ 43).

The Amended Complaint also added Count Two (Fraudulent Transfer - Ohio Revised Code § 1336.04). Plaintiff accuses Defendant of making two types of fraudulent transfers. The first involves actual fraud. Plaintiff alleges that the sale and/or pledge of the Receivables and/or Withdrawals were made with actual intent to hinder, delay, or defraud Plaintiff. (Id., ¶ 54). The second involves constructive fraud. Plaintiff claims that there was not adequate consideration between Obligors and Defendant because Defendant deposited the sum of $17,832.22 with Wexford Care yet withdrew $588,436.26. (Id., ¶ 56).

This matter is now before the Court on Defendant's Motion to Dismiss Plaintiff's Amended Complaint. (Doc. 16). Defendant maintains that Plaintiff's claims for conversion and actual fraudulent transfer do not meet heightened pleading standard required by Federal Rule of Civil Procedure 9(b); and Plaintiff has failed to state a claim for constructive fraudulent transfer.

II. ANALYSIS

A. Standard of Review

1. Federal Rule of Civil Procedure 12(b)(6)

To survive a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), "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, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). Although particular detail is not generally necessary, the factual allegations "must be enough to raise a right to relief above the speculative level" such that the claim "is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556-57, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice." Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955). "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. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955).

2. Federal Rule of Civil Procedure 9(b)

Federal Rule of Civil Procedure 9(b) requires that "in alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake." To satisfy Rule 9(b) at the motion to dismiss stage, "the plaintiff must allege (1) the time, place, and content of the alleged misrepresentation, (2) the fraudulent scheme, (3) the defendant's fraudulent intent, and (4) the resulting injury." Smith v. General Motors LLC, 988 F.3d 873, 883 (6th Cir. 2021) (quoting Wall v. Mich. Rental, 852 F.3d 492, 496 (6th Cir. 2017) (internal quotation marks omitted)). However, "Rule 9(b)'s special requirements should not be read as a mere formalism, decoupled from the general rule that a pleading must only be so detailed as is necessary to provide a defendant with sufficient notice to defend against the pleading's claims." U.S. ex rel. SNAPP, Inc. v. Ford Motor Co., 532 F.3d 496, 503 (6th Cir. 2008).

B. Conversion

Defendant argues that because collusion is an element of the conversion claim, Plaintiff must meet the heightened pleading standard required by Rule 9(b). Plaintiff responds that it has not brought a stand-alone claim of collusion, and therefore it only needs to plead sufficient facts to support its claim of conversion.

Under Ohio law, the elements of a conversion claim are: "1) plaintiff's ownership or right to...