Forman v. Deutsch Atkins, P.C. (In re Russ Cos.)

In Re: THE RUSS COMPANIES, INC., et al., Debtors.CHARLES M. FORMAN, in his capacity as Chapter 7 Trustee, Plaintiffs,

v.DEUTSCH ATKINS, P.C., Defendant.

Case No.: 11-22471 (DHS)

Adv. No.: 13-01432 (DHS)

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW JERSEY

Filed: August 5, 2013

NOT FOR PUBLICATION

Judge: Donald H. Steckroth, U.S.B.J.

OPINION

APPEARANCES:

Forman Holt Eliades & Youngman LLC

Kim R. Lynch, Esq.

Matteo Percontino, Esq.

Counsel for Charles M. Forman,

Chapter 7 Trustee for the Debtors

Norgaard O'Boyle

John O'Boyle, Esq.

Counsel for Defendant, Deutsch Atkins, P.C.

THE HONORABLE DONALD H. STECKROTH, BANKRUPTCY JUDGE

Before the Court is the motion filed by the defendant law firm, Deutsch Atkins, P.C. ("Deutsch Atkins" or "Defendant"), to dismiss the adversary complaint ("Motion") filed by Charles Forman, the chapter 7 trustee ("Trustee") for The Russ Companies, Inc., et al. ("Debtors"),¹ pursuant to Federal Rule of Civil Procedure 12(b)(6). The Trustee filed a two-count complaint against Deutsch Atkins seeking: (i) avoidance of preferential transfers paid to Deutsch Atkins for the benefit of David Moll, a creditor of the Debtors, pursuant to section 547(b) of the Bankruptcy Code and (ii) recovery of the voidable transfers pursuant to section 550(a) of the Code.

The Defendant submits the following arguments in support of its motion to dismiss: (i) the transfer was of property belonging to a third party, not the Debtors; (ii) the transfers were not made on account of an antecedent debt because: (a) the debt was not the Debtors', but rather a third party's, or alternatively (b) if the debt is one of the Debtors', the transfers were made contemporaneously with incurring the debt; (iii) the Trustee is not permitted to pursue two adversary proceedings to recover the transferred funds from two different parties; and, lastly, (iv) the Debtors received new value for the transfers.

The Court has jurisdiction over this motion pursuant to 28 U.S.C. §§ 1334(b), 157(a), and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984 as amended September 18, 2012. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E), (F), and (H). Venue is proper under 28 U.S.C. §§ 1408 and 1409(a). Thefollowing shall constitute the Court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.

BACKGROUND AND RELEVANT FACTS

Considering the nature of the Defendant's motion, one seeking dismissal of the complaint pursuant to Rule 12(b)(6), for purposes of this hearing, the factual record comprises the facts as presented in the Trustee 's Complaint.

The Debtors were in the business of designing and marketing gifts, collectibles, and home decor. Between October, 2006 and July, 2009, David Moll served as Vice President for the Debtors. Mr. Moll was subsequently terminated and prior to the petition date filed an arbitration demand ("Arbitration Action") against the Debtors seeking unpaid severance payments that had accrued. Deutsch Atkins represented Mr. Moll in that arbitration.

On March 8, 2011, the Debtors and Mr. Moll resolved the Arbitration Action by entering into a settlement agreement ("Settlement Agreement"), whereby the following payments were to be made by the Debtors:

• $66,666.67 on March 10, 2011 to Mr. Moll;

• $33,333.33 on March 10, 2011 to Deutsch Atkins;

• $36,666.66 on April 10, 2011 to Mr. Moll;

• $18,333.34 on April 10, 2011 to Deutsch Atkins;

• $36,666.66 on May 10, 2011 to Mr. Moll; and

• $18,333.34 on May 10, 2011 to Deutsch Atkins;

The actual payments made to the Defendant included:

• $33,333.33 on March 8, 2011;

• $5,987.50 on March 17, 2011; and

• $18,333.34 on April 11, 2011.

The Debtors filed independent voluntary petitions for relief under chapter 7 on April 21, 2011. On the same day, the Trustee was appointed by the Court to act as chapter 7 trustee for each of the Debtors' estates. The matters were procedurally consolidated. Thereafter, the Trustee initiated this adversary proceeding seeking to avoid the payments made to Deutsch Atkins.

DISCUSSION

I. Standard of Review

Federal Rule of Civil Procedure 12(b)(6) permits a party to seek dismissal of a complaint for failure to state a claim upon which relief may be granted. Bankruptcy Rule 7012 provides that Rule 12(b)(6) applies in adversary proceedings. Federal Rule of Civil Procedure 8 provides that pleadings must contain "a short and plain statement of the claim showing that the pleader is entitled to relief, in order to give fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). Upon considering a 12(b)(6) motion to dismiss, courts "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief." Phillips v. County of Allegheny, 515 F.3d 224, 233 (3d Cir. 2008) (citation and quotations omitted). The factual allegations contained in the complaint "must be enough to raise the right to relief above the speculative level." Twombly, 550 U.S. at 555.

Furthermore, "[t]he allegations of the complaint should 'plausibly suggest' the pleader is entitled to relief." Wilkerson v. New Media Tech. Charter Sch. Inc., 522 F.3d 315, 321 (3d Cir. 2008) (citing Twombly, 127 S. Ct. at 1966). The Supreme Court clarified the "plausibility" standard in Ashcroft v. Iqbal by holding that in order "[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) (citation omitted). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant acted unlawfully." Id. Indeed, mere "labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly, 550 U.S. at 555. Thus, Rule 8 "requires a 'showing,' rather than a blanket assertion, of entitlement to relief." Twombly, 550 U.S. at 555 n.3.

II. Factual Record Before the Court

As a threshold matter, the Trustee contends that many of the Defendant's arguments rely on facts introduced by counsel's certification in opposition and are outside the four corners of the Complaint. These facts include that Mr. Moll worked as Vice President for Russ Berrie & Company, Inc. until December 2008 when he was transferred to Russ Berrie U.S. Gift, Inc., and was terminated from Russ Berrie U.S. Gift, Inc. in or about July, 2009.

The Court cannot consider the extraneous facts introduced by the Defendant unless those facts can be found in documents relied on by the Trustee is forming the allegations contained in the Complaint. See In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1424-25 (3d Cir. 1997) (when ruling on a motion to dismiss, the Court is not permitted to go beyond the facts alleged in the Complaint and the documents on which the claims made therein were based). For this reason, theCourt will look no further than the four corners of the Complaint, the Debtors' disbursement receipts, and the Settlement Agreement entered into by Mr. Moll and the Debtors resolving the Arbitration Action.

III. Count I - Preferential Transfers

To succeed, the Trustee must adequately plead that the Debtors' interest in property was transferred and that the subject transfers: (1) were to or for the benefit of a creditor; (2) were for or on account of antecedent debt owed by the debtor before such transfer was made; (3) were made while the debtor was insolvent; (4) were made on or within 90 days before the date of the filing of the petition; and (5) enabled the creditor to receive more than such creditor would receive under a chapter 7 distribution if the transfers had not been made. 11 U.S.C. § 547(b).

The Defendant challenges, first, that the funds transferred do not constitute an interest of the Debtors in property, and, second, that the transfers were not on account of an antecedent debt. Finally the Defendant seeks dismissal based on a procedural argument and an affirmative defense. Each is discussed in turn.

A. Interest of the Debtors in Property

The Defendant argues the funds transferred by the Debtors were not property of the Debtors, but rather Mr. Moll because Mr. Moll was required to declare the funds transferred to the Defendant as his own income. (See Settlement Areement) The Trustee counters that this is the kind of extraneous fact THAT cannot be considered by the Court in determining a motion to dismiss. This is incorrect, however, since the Settlement Agreement, relied upon by the Trustee, does require such an acknowledgment. However, the Court still must determine whether the Trustee has sufficiently alleged that the property transferred was an interest of the Debtors' in property.

The Bankruptcy Code does not define the phrase: "an interest of the debtor in property." Jacobs v. Matrix Capital Bank (In re AppOnline.com, Inc.), 315 B.R. 259, 272 Bankr. E.D.N.Y. (2004). Courts have concluded, however, that the term is equivalent to the term: "property of the estate," pursuant to 11 U.S.C. § 541. See Begier v. Internal Revenue Serv., 496 U.S. 53, 59-60 (1990); AppOnline.com, 315 B.R. at 272. Courts turn then to § 541 in order to determine the scope of property interests that are recoverable under §§ 544, 547, and 548. See Begier, 496 U.S. at 59-60, 110.

Because the purpose of the avoidance provision is to preserve the property includable within the bankruptcy estate—the property available for distribution to creditors—"property of the debtor" subject to the preferential transfer provision is best understood as that property that would have been part of the estate

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