Shuford v. Etaros Actuarial Servs., LLC (In re JTR1, LLC), Case No. 20-30141

644 B.R. 473

IN RE: JTR1, LLC, Debtor.

A. Burton Shuford, Trustee of the Bankruptcy Estate of JTR1, LLC f/d/b/a JTR, LLC, Plaintiff,

v.Etaros Actuarial Services, LLC; Traci Christian; and Witkow Baskin, Defendants.

Case No. 20-30141

Adversary Proceeding No. 22-3013

United States Bankruptcy Court, W.D. North Carolina, Charlotte Division.

Signed August 12, 2022

Melanie D. Johnson Raubach, Hamilton Stephens Steele Martin PLLC, Charlotte, NC, for Plaintiff.

Rory Delaney Whelehan, Whelehan Law Firm, LLC, Greenville, SC, for Defendants.

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS’ MOTION TO DISMISS

J. Craig Whitley, United States Bankruptcy Judge THIS MATTER is before the court on the Defendants’ Motion to Dismiss. On February 4, 2022, the Plaintiff filed a Complaint seeking to avoid and recover certain prepetition transfers from the Defendants. On April 8, 2022, Defendants Etaros Actuarial Services, LLC ("Etaros") and Traci Christian ("Christian" and collectively with Etaros, the "Etaros Defendants") filed a motion pursuant to Federal Rule of Civil Procedure 12(b)(6), seeking to dismiss certain causes of action for failure to state a claim upon which relief can be granted (the "Motion").¹ For the reasons set forth below, the court grants the Motion in part and denies the Motion in part.

BACKGROUND

The overarching facts relevant to this adversary proceeding are outlined in a previous order and need only be summarized. See generally Shuford v. Kearns et al. (In re JTR1, LLC), No. 20-30141, Adv. No. 22-3008, 643 B.R. 403 (Bankr. W.D.N.C. July 28, 2022) (the " Kearns Order").

From 2012-2014, Freedom Communications, Inc. ("Freedom"), a California media and newspaper company, retained Richard Covelli and his corporation JTR1, Inc. (the "Debtor") to assist it in boosting the book value of Freedom's underfunded pension plan (the "Freedom Plan"). Covelli and the Debtor retained several other entities, including the Etaros Defendants, to aid them in providing these services. Covelli and the Debtor were paid at least $13 million for their services. The efforts of the Debtor and Covelli ultimately failed to boost the book value of the Freedom Plan and potentially were illegal. Under pressure from the Pension Benefit Guaranty Corporation (the "PBGC"), Freedom filed Chapter 11 case no. 8:15-bk-15311-TA in the Central District of California (the "Freedom Bankruptcy").

The unsecured creditor's committee (the "Committee") in the Freedom Bankruptcy then commenced an adversary proceeding (the "Committee Lawsuit") on January 26, 2017, against Covelli, the Debtor, and several other entities involved in the funding transactions, including the Etaros Defendants. The Committee Lawsuit asserted three causes of action against the Etaros Defendants: 1) aiding and abetting breach of fiduciary duty; 2) avoidance of fraudulent transfers pursuant to 11 U.S.C. § 548(a)(1)(B) ; and 3) avoidance of specified fraudulent transfers pursuant to 11 U.S.C. § 544(b) and California Civil Code §§ 3439.04, 3439.05 and 3439.07. Thereafter, the Committee assigned their claims to the PBGC.

The parties reached a settlement of the Committee Lawsuit in January of 2020, and the California Bankruptcy Court entered an order approving this settlement (the "Settlement Order") between the parties on March 20, 2020. The Settlement Order, however, did not immediately resolve the matter because the Committee Lawsuit had previously been withdrawn to the U.S. District Court for the Central District of California (the "DCCC") and consolidated with a separate lawsuit filed by the PBGC against the same general group of defendants. The parties in the Committee Lawsuit had failed to obtain prior settlement approval from the DCCC, and as a result, the DCCC vacated the Settlement Order.

The Etaros Defendants subsequently filed an Offer of Judgment of $600,000, and the DCCC entered the Judgment on May 19, 2020. The Etaros Defendants then entered into a settlement agreement (the "Judgment Settlement") with the PBGC on June 18, 2020, which released them from all liabilities under the Judgment in exchange for a negotiated sum of $120,000. On October 22, 2020, a Notice of Satisfaction of Judgment was filed with the DCCC evidencing the Etaros Defendants’ payment in satisfaction of the Judgment.

Between 2014 and 2019, after Freedom paid the Debtor, the Debtor made various cash transfers to other entities that had provided services related to the Freedom Plan transactions. Specifically, the Debtor transferred approximately $626,416 to Etaros between December 31, 2014 and December 31, 2015 (the "Etaros Transfers") and approximately $105,961.94 to Defendant Witkow Baskin ("Witkow") between August 22, 2017 and July 9, 2019 (the "Witkow Transfers" and collectively with the Etaros Transfers, the "Transfers") for a total sum of $732,377.94 to the Defendants between December 31, 2014 and July 9, 2019. The Debtor paid Witkow in connection with its representation of the Etaros Defendants in the legal proceedings that occurred in California.

On February 6, 2020, the Debtor filed a Chapter 7 bankruptcy in this judicial district. Burt Shuford was appointed Chapter 7 Trustee (the "Trustee") for the Debtor's estate. In February 2022, the Trustee commenced an adversary proceeding against the Defendants, as well as actions against other participants in the alleged scheme. In his Complaint, the Trustee maintains that the Transfers are fraudulent conveyances that may be avoided and recovered under 11 U.S.C. §§ 544(b), 548, and 550.

The Defendants subsequently filed the Motion. The Defendants also joined in motions to dismiss filed by defendants Kearns and Mullady, which were filed in related adversary proceedings with similar sets of causes of action. See generally id. The motions to dismiss filed by Kearns and Mullady contend that the Trustee lacks standing to bring the avoidance actions pursuant to § 544(b). See id. at *3. Kearns and Mullady also argue that a bankruptcy a trustee is not permitted to step into the shoes of the PBGC as a Section 544(b) "golden creditor" to assert the FDCPA provisions. Id. In the Motion, the Defendants further allege that the Complaint fails to satisfy the pleading requirements under Rule 12(b)(6). Finally, among other related arguments, the Defendants assert that the Committee Lawsuit and Judgment Settlement entered in the DCCC preclude the Trustee from asserting avoidance claims against the Defendants in this adversary proceeding.

The Motion, and similar motions in several like adversary proceedings, first came on for hearing on April 25, 2022. After two continuances to allow for additional briefing to address new issues identified at the hearing, the Motion came back on for a continued hearing on June 14, 2022. The court announced a ruling partially resolving the Motion at the June 14 hearing, and the parties requested a continuance to confer on how to proceed given the commonality of issues between the various adversary proceedings. The Motion came back on for hearing a third time on June 22, 2022. After hearing additional arguments, the matter was taken under advisement.

DISCUSSION

For the reasons previously outlined in the Kearns Order, the Trustee may not employ the FDCPA provisions to avoid and recover any of the Transfers. Id. at *6. As a result, Counts I–VII of the Complaint are dismissed in their entirety. The Defendants’ additional arguments are addressed in turn below.

I. The PBGC is an Appropriate Creditor Pursuant to § 544(b)

The first issue is whether the Trustee may step into the shoes of the PBGC pursuant to 11 U.S.C. § 544(b) for purposes of pursuing a claim for the benefit of a debtor's estate. In other words, the issue is whether is the PBGC is an appropriate creditor for a trustee to step into the shoes of under 11 U.S.C. § 544(b) regardless of the applicable law used to recover the targeted transfers.

In arguing that the Trustee cannot step into the shoes of the PBGC, the Defendants primarily rely on a case from the Eleventh Circuit, which holds that a bankruptcy trustee, standing in the shoes of a corporate debtor, cannot assert a claim directly under ERISA to recover from a contributing sponsor for liabilities arising from the termination of a pension plan. See Durango-Georgia Paper Co. v. H.G. Est., LLC, 739 F.3d 1263, 1272–73 (11th Cir. 2014). In that case, the debtor's previous owner was a contributing sponsor of the terminated pension plan and was potentially liable for unpaid plan benefits. Id. at 1267–68. The trustee appointed in that case commenced a cause of action under 29 U.S.C. § 1369 against the debtor's former owner for its liability to the PBGC and the terminated plan's beneficiaries. Id. at 1268. The Eleventh Circuit concluded that the trustee could not bring this cause of action because ERISA's funding requirements were put in place for the benefit of the terminated plan's beneficiaries, not for the benefit of the bankruptcy estate's unsecured creditors. See id. at 1273.

Durango-Georgia Paper is inapposite to this case. In Durango-Georgia Paper, the trustee asserted a cause of action held by the debtor against a third party. These types of causes of action are estate property under 11 U.S.C. § 541. Conversely, the issue in this case is whether the Trustee may step into the shoes of the PBGC as a creditor under § 544(b) to avoid and recover certain targeted transfers. Avoidance actions pursuant to § 544(b) are not strictly property of the estate under § 541 of the Bankruptcy Code. They also allow a trustee to step into the shoes of an individual creditor to avoid transfers injurious to that individual creditor on behalf of the estate. See DBMP v. Those Parties Listed on Appendix a to Complaint (In re DBMP LLC), No. 20-30080, 2021 WL 3552350, at *4 (Bankr. W.D.N.C. Aug. 11, 2021). The holding in Durango-Georgia Paper makes no mention of avoidance actions under § 544(b) ; it only analyzes whether a trustee may bring certain estate...