Rizack v. Starr Indem. & Liab. Co. (In re Grandparents.com, Inc.)

614 B.R. 625

IN RE: GRANDPARENTS.COM, INC., et al.,

Debtors.

Joshua Rizack, as Liquidating Trustee, Plaintiff,

v.Starr Indemnity & Liability Company, Defendant.

Case No. 17-14711-LMI (Jointly Administered)

Adv. Case No.: 19-01289-LMI

United States Bankruptcy Court, S.D. Florida.

Signed April 10, 2020

Marty Steinberg, Miami, FL, for Defendant.

Scott A. Underwood, Esq., 401 E. Jackson Street, Tampa, FL, Stephen C Villeneuve, Fort Lauderdale, FL, for Plaintiff.

ORDER GRANTING IN PART AND DENYING IN PART STARR INDEMNITY & LIABILITY COMPANY'S MOTION TO DISMISS

Laurel M. Isicoff, Chief United States Bankruptcy Judge

THIS CAUSE came before the Court for a hearing on November 20, 2019, upon the Motion to Dismiss Adversary Complaint ("Motion to Dismiss") filed by Defendant Starr Indemnity & Liability Company's ("Starr" or "Defendant")² ; the Response filed by Plaintiff Joshua Rizack, as Liquidating Trustee ("Trustee" or "Plaintiff")³ ; and the Defendant's Reply⁴ .

After reviewing the referenced pleadings, the supplemental authority filed by the parties⁵ , having heard the argument of counsel, considering the record and for the reasons set forth below, the Court denies in part and grants in part the Motion to Dismiss.

I. Jurisdiction and Venue

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b) and 1334(b), and Administrative Order 2012-25 of the United States District Court, Southern District of Florida. Additionally, this Court has jurisdiction over this action pursuant to Sections 11.1 and 12.1(b) of the First Amended Joint Plan of Liquidation (the "Plan") (ECF #183) and Paragraph 26(ii) of the Order Confirming the Debtor's First Amended Chapter 11 Plan of Liquidation (the "Confirmation Order") (ECF #228) entered on September 20, 2019.

The Court is authorized to hear and enter final orders in this matter pursuant to 28 U.S.C. § 157(b)(2)(F), (H) and (O).

Venue is proper in this district pursuant to 28 U.S.C. §§ 1408 and 1409(a).

II. Factual Allegations

The Plaintiff filed his four count Complaint (ECF #1) on July 31, 2019. Count I seeks to avoid an allegedly fraudulent transfer pursuant to 11 U.S.C. § 548(a)(1)(B)⁶ and 726.106(1)⁷ ; Count II seeks to avoid an allegedly fraudulent transfer pursuant to 11 U.S.C. § 544⁸ and Fla. Stat. § 726.106(1) ; Count III seeks to recover property transferred or the value of such property pursuant to 11 U.S.C. § 550⁹ and Fla Stat. §§ 726.108¹⁰ and 726.109¹¹ ; and Count IV Objects to Defendant's Claim.

The Complaint alleges that Starr and Debtor entered into a Strategic Alliance Agreement ("SAA") on January 8, 2013¹² . Pursuant to the SAA, Starr was required to provide various consulting services to Debtor. The Complaint alleges that these services included helping Grandparents.com with: (i) development of a strategic business model and investment relationships; (ii) development of a comprehensive business plan; (iii) negotiation of favorable agreements with insurance carriers; (iv) development of insurance products specifically targeted to Debtor's target customer demographic; and (v) exploring the potential of Debtor forming a joint insurance carrier. These services were to be provided by specified members of Starr senior management.

The Complaint further alleges that, in exchange for these services, the Debtor agreed to pay Starr $80,000 a month plus a consulting fee if certain benchmarks were met. In addition to the monetary payments, Starr also received a five year stock warrant to purchase common shares of stock in Grandparents.com equal to 25% of the outstanding equity of Grandparents.com. The Complaint alleges that Debtor paid Defendant, in addition to the warrants, a total of $2,160,000.00 within four years of the Petition Date (the "Payments"). The Complaint states that the Debtor was insolvent or inadequately capitalized at the time these transfers occurred. The Complaint further alleges that the Debtor's liabilities exceeded its assets each year, from 2013 through 2016, referencing the Debtor's financial records, 10-K tax filings, and stating precise amounts of liabilities for each year (in excess of $1,750,000 for each year from 2014-2016).

The Complaint alleges that the Debtor did not receive reasonably equivalent value for these payments, because the staffing on the Debtor's account was reduced from four individuals to one individual who was not part of Starr's senior management; that Starr did not provide the requisite level of service; and that the value of the services actually provided by Starr were less than contemplated in the SAA and were less than the reasonably equivalent value of the dollars paid by the Debtor for those services. The operative documents upon which the Plaintiff relies are the SAA and its First Amendment.¹³

The Defendant filed its Motion to Dismiss on September 30, 2019. Starr asserts that the Complaint should be dismissed pursuant to Fed.R.Civ.P. 8(a) and Fed.R.Civ.P. 12(b)(6)¹⁴ because the Complaint fails to adequately plead the relief to which the Plaintiff claims he is entitled. For the reasons set forth below, the Court grants the Motion to Dismiss Count II of the Complaint, and denies the Motion to Dismiss Counts I, III and IV of the Complaint.

III. Conclusions of Law

A. Legal Standard

" Federal Rule of Civil Procedure 8(a)(2) requires only ‘a short and plain statement of the claim showing that the pleader is entitled to relief,’ in order to ‘give the defendant fair notice of what the ... claim is and the grounds upon which it rests. While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the ‘grounds’ of his ‘entitle[ment] to relief’ requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do. Factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact)." Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555-56, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (internal citations omitted).

To survive a motion to dismiss, the complaint must "state a claim to relief that is plausible on its face." Id. at 570, 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." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

On a motion to dismiss, a court must construe the complaint in the light most favorable to the plaintiff and accept the plaintiff's factual allegations as true. Brooks v. Blue Cross & Blue Shield of Fla., Inc. , 116 F.3d 1364, 1369 (11th Cir. 1997). "The scope of review on a motion to dismiss under Rule 12(b)(6) is limited to the four corners of the complaint." Bencomo Enterprises v. United Specialty Ins. Co. , 345 F. Supp. 3d 1401, 1404 (S.D.Fla. 2018).

B. Legal Analysis

Existence of a contract does not bar a claim for constructive fraud

The Defendant argues that the Plaintiff's constructive fraud case is just a breach of contract claim in disguise, and that, because the Debtor never gave Starr notice and an opportunity to cure any alleged contract default, the claim is barred. Moreover, the Defendant argues, a breach of contract claim can never give rise to a fraudulent conveyance claim because all of the money paid by the Debtor was paid pursuant to a valid contract and payment under a contract always constitutes reasonably equivalent value - the payment is made pursuant to a bargained for exchange. Thus, the Defendant argues, unless the contract itself is set aside as a fraudulent transfer (relief not sought and timebarred by the Plaintiff in this adversary proceeding), payments under the contract cannot be avoided as constructively or actually fraudulent.

The existence of a binding contract does not foreclose a fraudulent conveyance claim if the elements of the cause of action for constructive fraud are met. "A transfer may be fraudulent even if it is made in accordance with the terms of a contract." EBC I, Inc. v. America Online, Inc. (In re EBCI I Inc.) , 356 B.R. 631, 640 (Bankr.D.Del. 2006). See also United States v. S. Capital Construction Inc. , 758 Fed. Appx. 676, 679 (11th Cir. 2018) ( affirming trial court's finding that a spouse, who was labelled president, CEO, and director of an entity, received actual and constructive fraudulent transfers more than $650,000 where the spouse had little entity involvement and provided no services for the payments); Mellon Bank, N.A. v. Official Comm. Of Unsecured Creditors of R.M.L. (In re R.M.L.) , 92 F.3d 139, 147-48 (3rd Cir. 1996) (court upheld lower court judgment that payment for a loan commitment letter was recoverable as a fraudulent conveyance. "Because the commitment letter was so conditional that the chances of the loan closing were minimal, we agree that [the debtor] did not receive value that was reasonably equivalent to the fees it paid Mellon Bank.").

A transfer made under the terms of a contract is not always for "reasonably equivalent value"

A transfer made pursuant to a contract may still be avoidable as a fraudulent transfer if the evidence demonstrates the exchange is not for reasonably equivalent value. Despite the Defendant's arguments to the contrary, whether a transfer is made pursuant to the terms of a contract is not necessarily dispositive of the issue. If that were the case then any payment that is otherwise constructively or actually fraudulent would be insulated by the existence of a contract. See Kipperman v. Onex Corp. , 411 B.R. 805, 853 (N.D. Ga. 2009) (In an order denying defendants' motion for summary judgment the district court ruled that whether the defendants provided reasonably equivalent value to the debtor with respect to payments made for services to be provided under the terms of...