In re Total Containment, Inc.

335 B.R. 589

In re TOTAL CONTAINMENT, INC., Debtor George L. Miller, Chapter 11 trustee, Plaintiff, v. Marcel Dutil, the Canam Manac Group, Inc., Canam Steel Corporation, Finloc, Inc., Finloc Capital, Inc., Finloc US, Inc., Winston Towers 1988, Inc., Polyflow, Inc., Jay R. Wright, Jr., Bernard Gouin, and Pierre Desjardins Defendants.

Bankruptcy No. 04-13144F.

Adversary No. 05-0145.

United States Bankruptcy Court, E.D. Pennsylvania.

December 18, 2005.

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Linda J. Casey, Pepper Hamilton LLP, Philadelphia, PA, Mark J. Friedman, Piper Rudnick LLP, Baltimore, MD, Jeffrey D.

Herschman, DLA Piper Rudnic Gray Cary, Baltimore, MD, Phillip E. Wilson, Jr., Piper Rudnick LLP, Philadelphia, PA, Phillip E. Wilson, Piper Rudnick et al., Phila, PA, for Defendants.

Steven M. Coren, Kaufman, Coren & Ress, P.C., Philadelphia, PA, Alan Stuart Miller, Picadio Sneath Miller & Norton PC, Pittsburgh, PA, for plaintiff.

MEMORANDUM

BRUCE FOX, Bankruptcy Judge.

The chapter 11 trustee, George L. Miller, has commenced an adversary proceeding asserting seven counts against 11 defendants and seeking in excess of $23 million in damages along with declaratory relief. These 11 defendants have now filed various motions to dismiss all seven counts, contending that the trustee has failed to state any cause of action, and that he has failed to plead his claim of a fraudulent conveyance with the requisite specificity. The trustee opposes dismissal of any claim against any defendant. He maintains that his complaint complies with the liberal notice-pleading requirements of the federal rules of procedure, and so he has sufficiently pled all seven causes of action.

The parties have submitted lengthy memoranda in support of their respective positions and have orally argued their contentions. As these various motions to dismiss focus upon the allegations of the complaint, I shall first summarize those averments.

I.

A.

The trustee alleges that the debtor, a Pennsylvania corporation located in Oaks, Pennsylvania and referred to as TCI, "was a leading manufacturer and distributor of underground systems, products and services for the transport of petroleum and alcohol based motor vehicle fuels from underground storage tanks to aboveground fuel dispensers." Complaint, ¶ 16. At some point in 2001 and at all relevant times thereafter, TCI's liabilities were $9 million in excess of its assets, and so the company was insolvent. Id., ¶ 17. Nonetheless, its assets, which included patents and other tangible and intangible personal property, had a value estimated by the trustee to be in excess of $6.1 million. Id., ¶¶ 19, 55.

On or about March 13, 2002, "the Defendants" incorporated PolyFlow, Inc., a Pennsylvania corporation also located in Oaks, Pennsylvania. Id., ¶¶ 12, 22. The alleged purpose of establishing PolyFlow was to "divert TCI's Pipe Production Business" from the claims of TCI's creditors. Id., ¶¶ 21-22. On July 2, 2002, TCI sold all of its assets involved in this pipe production business to PolyFlow, Inc. for $3,599,913 in cash, plus PolyFlow's assumption of approximately $2.5 million of TCI's debt to defendant Finloc, Inc. Id., ¶ 23 (see also Ex. A to the Complaint). PolyFlow obtained the funds to purchase TCI's assets from defendant Finloc US, who in turn had received about 50% of those funds from defendant Finloc Capital and roughly 50% from defendant Winston Towers 1988. In connection with the transfer of funds from Finloc US, PolyFlow conveyed 100 shares of its stock to Finloc US, Inc. Id., ¶ 23. Upon receipt of the sale proceeds from PolyFlow, TCI allegedly transferred all but $9,000 back to defendants Finloc Capital, Finloc, Inc. and Winston Towers 1988. Id.

According to the trustee's complaint, Finloc, Inc. is a Canadian corporation that owned and/or controlled both Finloc US, Inc. and Finloc Capital, Inc., and is also a minority shareholder of TCI. Complaint ¶ 8. Finloc, Inc. is an affiliate of Canam Manac Group, Inc., another Canadian corporation that owned and controlled Canam Steel Corp., a Delaware Corporation. Id. Finloc Capital, Inc. is a shareholder of Finloc US, Inc., as is Winston Towers 1988, Inc. Finloc US, Inc. is the majority shareholder of TCI and the sole shareholder of PolyFlow. Id., ¶¶ 6-11.

Defendants Dutil, Desjardins, Gouin, and Wright were allegedly officers and/or directors of TCI, and they were knowing participants in the alleged scheme to remove the assets from TCI. Id., ¶¶ 5, 13-15, 21, 23. Mr. Dutil is also asserted to be the CEO and majority shareholder of Canam Manac Group, Inc., as well as president of Winston Towers, chairperson of Finloc, Inc. and a director of Finloc US, Inc. Id., ¶ 5. It is further alleged that defendant Canam Steel Corporation "directed, aided and abetted and benefitted" from the alleged misconduct of the various defendants. Id., ¶ 7.

Attached to the trustee's complaint as an exhibit to ¶ 23 is a flow chart illustrating the purported facts surrounding TCI's July 2, 2002 sale of assets to PolyFlow. According to the trustee, Finloc Capital transferred $1,965,000 to Finloc US, and Winston Towers transferred to Finloc U.S. $1,785,000, for a total transfer of $3,750,000. Finloc U.S. then purchased 100 shares of PolyFlow stock for $3,750,000. PolyFlow thereafter paid TCI $3,599,913, and assumed $2,550,000 in debt owed to Finloc, Inc., for the former's pipe production assets. After receiving these funds from PolyFlow, TCI paid $1,753,137.50 to Finloc Capital, $1,783,579.86 to Winston Towers and $53,923 to Finloc, Inc., totaling $3,590,640.36 in distributions. Id., ¶ 23, Ex. A. Although not expressly alleged, one can infer that TCI had outstanding obligations to Finloc, Inc., Finloc Capital and Winston Towers prior to July 2, 2002.¹

If the trustee's allegations are proven, the result of the July 2nd asset sale is as follows: TCI transferred its pipe production assets to PolyFlow and reduced its debt to Finloc, Inc. by about $2.6 million in cash and assigned debt, and reduced its debt to Winston Towers and Finloc Capital by about $3.75 million. Winston Towers exchanged a receivable due from TCI in the amount of $1.785 million either to a capital contribution or a debt due in virtually the same amount from Finloc US. Finloc Capital exchanged its $1.965 million receivable due from TCI again either for a capital contribution or a debt in that amount due from Finloc US.

The trustee alleges that these sale and payment transactions "had no legitimate purpose or benefit to TCI," Complaint, ¶ 23, and were undertaken to keep TCI's pipe production assets from recovery by the debtor's creditors and under the control of the defendants. Id., ¶ 21. The trustee further asserts in his complaint that the "Defendants structured a relationship in which they kept TCI going to mislead creditors into believing that TCI ... was continuing as a going concern...." Id., ¶ 25. The trustee also contends that the "Defendants diverted more than $1 Million from TCI ... to PolyFlow" and that the debtor's insolvency increased by more than $17 million as a result of the alleged transfers and continuation of TCI's business. Id., ¶¶ 27(f), 32.

Finally, the trustee avers that the individual defendants wrongfully caused TCI to fail to defend against lawsuits brought by Murphy Oil USA, Inc. and PISCES OPW, Inc., causing damages in excess of $5 million. Id., ¶¶ 35-46.

B.

The trustee's first claim is that all defendants breached their fiduciary duties to TCI, subjecting them to damages. His second claim is that all defendants were participants in a fraudulent conveyance of TCI's assets with the July 2, 2002 sale and transfers of proceeds, warranting liability of more than $6.1 million. The trustee's third claim is that defendant PolyFlow be declared the successor in liability and assets as to all current creditors of TCI. The trustee's fourth and fifth claims allege that the individual defendants are liable for negligence as well as breaches of fiduciary duty in connection with the two judgments entered against TCI in the Murphy Oil and PISCES litigations.

The trustee's sixth claim is asserted against all defendants for "deepening [the] insolvency" of TCI. And the seventh and final claim, also against all defendants, seeks a declaration that defendants' conduct justifies the disallowance or subordination of all claims they may assert against TCI.

II.

As mentioned earlier, the defendants have sought to dismiss each count of the chapter 7 trustee's complaint for failure to state a cause of action under Fed. R. Bankr.P. 7012. Federal Rule of Bankruptcy Procedure 7012(b) incorporates Fed.R.Civ.P. 12(b)-(h). It is well understood that in order to dismiss a claim for failure to state a cause of action under Rule 12(b)(6), the claim should not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts in support of that claim which would entitle him to relief. E.g., Conley v. Gibson, 355 U.S. 41, 45, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957). A trial court must accept as true all of the well-pleaded facts alleged in the complaint and any reasonable inferences therefrom. Scheuer v. Rhodes, 416 U.S. 232, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974); Conley v. Gibson.

A motion to dismiss pursuant to Rule 12(b)(6) may be granted only if, accepting all well pleaded allegations in the complaint as true, and viewing them in the light most favorable to plaintiff, plaintiff is not entitled to relief. Bartholomew v. Fischl, 782 F.2d 1148, 1152 (3d Cir.1986). "The issue is not whether a plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974).

In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1420 (3d Cir.1997).

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