Hillen v. City of Many Trees, LLC (In re CVAH, Inc.)

570 B.R. 816

IN RE: CVAH, INC., Debtor.

Noah G. Hillen, Chapter 7 Trustee, Plaintiff,

v.City of Many Trees, LLC, Defendant.

Noah G. Hillen, Chapter 7 Trustee, Plaintiff,

v.Barclays Bank PLC, Defendant.

Noah G. Hillen, Chapter 7 Trustee, Plaintiff,

v.Idaho Power Co., Defendant.

Noah G. Hillen, Chapter 7 Trustee, Plaintiff,

v.U.S. Bank, N.A., Defendant.

Bankruptcy Case No. 14–00888–JDP

Adv. Proceeding No. 15–06030–JDP

Adv. Proceeding No. 15–06031–JDP

Adv. Proceeding No. 15–06046–JDP

Adv. Proceeding No. 16–06014–JDP

United States Bankruptcy Court, D. Idaho.

Signed May 2, 2017

Matthew Christensen, Boise, Idaho, Attorney for Plaintiff Noah G. Hillen, Chapter 7 Trustee.

Jed Manwaring, Boise, Idaho, Attorney for Defendants City of Many Trees, LLC and Idaho Power Company.

Daniel Glynn, Boise, Idaho, Attorney for Defendant U.S. Bank, N.A.

Brian Peterson, Mountain Home, Idaho, Attorney for Defendant Barclays Bank PLC.

MEMORANDUM OF DECISION

Honorable Jim D. Pappas, United States Bankruptcy Judge

Introduction

The Bankruptcy Code clothes a bankruptcy trustee with special powers to "avoid", or undo, transfers made by a debtor to others, in some situations, several years before a bankruptcy case is commenced. In designing bankruptcy proceedings to treat a debtor's creditors equitably, the trustee's avoiding powers serve to prevent a debtor from interfering with its creditor's rights to fairly share in a limited pool of assets by conveying cash or property to others without, for example, receiving reasonably equivalent value in return. In addition, giving a trustee special, federal bankruptcy avoiding powers, the Bankruptcy Code allows trustees to "step into the shoes" of existing creditors to assert their rights under "applicable law" to challenge the debtor's prebankruptcy transfers.

In these four adversary proceedings, a bankruptcy trustee seeks to avoid transfers made by a corporate debtor during the years prior to its bankruptcy. Because these cash payments did not satisfy any debts legally owed by the debtor, the trustee alleges the transfers resulted in no benefit to the debtor, and under applicable law, could have been avoided by the debtor's major current creditor, IRS. The stakes are high: by standing in the shoes of IRS, Trustee seeks to recover a combined total of about $357,000 in these four actions. The defendants who received the transfers from the debtor are resisting the trustee's efforts.

This decision examines the nearly identical motions to dismiss filed by each of the defendants in these four separate, but related, adversary proceedings prosecuted by plaintiff Noah Hillen ("Trustee"), the chapter 7¹ trustee in the bankruptcy case of debtor CVAH, Inc. ("CVAH"). See Hillen v. City of Many Trees, LLC , 15–06030–JDP, Dkt. No. 40; Hillen v. Barclays Bank PLC , 15–06031–JDP, Dkt. No. 37; Hillen v. Idaho Power Co. , 15–06046, Dkt. No. 38; Hillen v. U.S. Bank, N.A. , 16–06014–JDP, Dkt. No. 34 (collectively, "the motions"). Trustee opposes the motions. See City of Many Trees , Tr.'s Resp., Dkt. No. 55 (and identical responses filed in each of the adversary proceedings). The motions challenge Trustee's legal right to avoid what Trustee alleges were constructively fraudulent transfers made to the defendants by CVAH to pay the personal debts of its owner and others prior to its bankruptcy filing.

The Court conducted a consolidated hearing concerning the dismissal motions, at which the parties presented oral argument and responded to the Court's questions, on March 8, 2017. At the conclusion of the hearing, the Court took the issues raised by the motions under advisement. Having considered the parties' briefs, oral arguments, and the applicable law, this Memorandum of Decision explains the Court's reasons for its decision to deny the motions.

Factual Allegations

As alleged in Trustee's complaints against the defendants, CVAH was organized and operated to provide veterinary services to its customers. Compl. at 3.² CVAH's assets consisted of the income generated by the vet practice, including the cash flowing through its bank accounts, and a modest assortment of office furniture, equipment and supplies. Id. The only licensed veterinarian ever employed by CVAH was Richard Koritansky ("Koritansky"). Id. CVAH also occasionally employed members of Koritansky's family in other positions. Id.

CVAH failed to pay corporate income taxes owed to both the Internal Revenue Service ("IRS") and the Idaho State Tax Commission ("the ISTC") for calendar years 2009 through 2013. Id. at 3–5. When CVAH later failed and filed a chapter 7 bankruptcy case on May 27, 2014, CVAH owed IRS and the ISTC a total of approximately $1.5 million. Id. at 2, 5.

In the six years leading up to the petition date, CVAH made a large number of payments from its bank accounts to the four defendants in these actions. See, e.g. , Compl. at 5.³ Trustee alleges that, at the time of each of these transfers, CVAH did not owe any debts to the defendants, and that the corporation did not receive anything of value in return for the payments. Id. 5–6. Allegedly, the payments were made to satisfy debts incurred by other individuals or entities, including Koritansky and his family members. Id. at 6. Trustee alleges that, at the time the payments were made, CVAH was indebted to IRS and ISTC and could not pay its tax liabilities. Id. at 6.

Trustee claims that CVAH made the transfers with actual intent to hinder, delay, or defraud IRS and the ISTC. Id. He alleges CVAH's principals consistently failed to file required tax returns, despite knowing taxes were owed, until after the company ceased doing business. Id. at 7. He also alleges that CVAH had a history of failing to file tax returns, and avoiding tax payments through the depletion of CVAH's assets. Id. at 7. Trustee claims that, at the time the transfers were made, CVAH was insolvent, was engaged in business for which its remaining assets were unreasonably small, and that CVAH's principals believed or should have believed that it would incur debts beyond its ability to pay as they became due. Id.

Procedural Background

Based on these factual allegations, Trustee argues that, under several different statutes, he is empowered to avoid and recover the transfers made by CVAH to the defendants. See, e.g., City of Many Trees , Dkt. No. 1. In the complaints against each of the defendants, Trustee makes three claims for relief, each premised upon a different statute, or combination of such statutory provisions.

In "Claim Three" of the complaints, relying upon a trustee's avoiding power found in § 544(b)(1), Trustee cites the Idaho version of the Uniform Fraudulent Transfer Act, and in particular, Idaho Code §§ 55–913 and 55–914,⁴ as his authority to avoid and recover, as constructive fraudulent transfers, those payments made to the defendants that occurred within the four-year extinguishment period described in those state statutes leading up to the CVAH petition date. Id. at 9–10. The motions do not challenge Trustee's right to assert these claims.

However, employing a more novel legal theory, in Claims One and Two of the complaints, again asserting § 544(b)(1) powers, Trustee seeks to "step into the shoes" of the creditor IRS, and thereby, to utilize the longer "look-back" periods found in the Federal Debt Collection Procedures Act ("FDCPA"), 28 U.S.C. § 3306, and Internal Revenue Code ("IRC"), 26 U.S.C. § 6502, to recapture any transfers made by CVAH to the defendants within six years prior to the petition filing date. Id. at 7–9. The motions to dismiss argue that Trustee's Claims One and Two against them fail to state a claim upon which relief may be granted. See Rule 7012(b) (making Civil Rule 12(b) applicable in adversary proceedings). Stated simply, in the motions, the defendants argue that Trustee may not invoke either the FDCPA or the IRC, with their extended limitations or "look-back" periods, as a basis to avoid transfers under § 544(b)(1). See, e.g., City of Many Trees , Mot. to Dismiss Claims One and Two, Dkt. No. 40.⁵

Trustee filed the same opposition to each of the motions. See, e.g., City of Many Trees , Tr.'s Resp., Dkt. No. 55. Defendants filed replies. City of Many Trees , Def.'s Reply, Dkt. No 63; Barclays Bank , Def.'s Reply, Dkt. No. 56; Idaho Power , Def.'s Reply, Dkt. No. 61; U.S. Bank , Def.'s Reply, Dkt. No. 50. Via these pleadings, the legal issue is clearly framed: Under § 544(b)(1), may a bankruptcy trustee employ the transfer avoidance provisions, including the extended reach-back periods, provided in either the FDCPA and IRC? As explained below, the Court's answer to this question is "yes".

Legal Standard

Under Civil Rule 12(b)(6), a motion to dismiss a complaint may be premised upon the plaintiff's failure to state a claim upon which relief can be granted. While the defendants deny most or all of Trustee's allegations against them, for purposes of this decision, the Court must assume they are true. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The purpose of such a motion is to "test a claim's legal sufficiency." Beach v. Bank of Am. (In re Beach) , 447 B.R. 313, 318 (Bankr. D. Idaho 2011) (citing Navarro v. Block , 250 F.3d 729, 732 (9th Cir. 2001) ). To survive a Rule 12(b)(6) motion, a complaint must plead sufficient facts, which when accepted as true, support a claim that is "plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citing Twombly , 550 U.S. at 570, 127 S.Ct. 1955 ). A claim is plausible so long as it is based on a cognizable legal theory and has sufficiently alleged facts to support that theory. In re Beach , 447 B.R. at 318 (citing Johnson v. Riverside Healthcare Sys., LP , 534 F.3d 1116, 1121–22 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep't , 901 F.2d 696, 699 (9th Cir. 1988) )).

"[Under Civil Rule 12(b)(6) ], the issue is not whether a plaintiff will ultimately prevail but whether the claimant is...