Wagner v. Galbreth

500 B.R. 42

Judith A. WAGNER, Chapter 11 Trustee of the Bankruptcy Estate of the Vaughan Company, Realtors, Plaintiff,

v.William GALBRETH, et al., Defendants.

No. CV–12–817 WJ/SMV.

USDC Case No. 12–cv–728 WJ/SMV.

United States District Court, D. New Mexico.

Sept. 30, 2013.

Edward A. Mazel, James A. Askew, Arland & Associates, LLC, Albuquerque, NM, for Plaintiff.

David A. Freedman, Vincent J. Ward, Freedman Boyd Hollander Goldberg Urias & Ward, PA, Albuquerque, NM, for Defendants.

MEMORANDUM OPINION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS

WILLIAM P. JOHNSON, District Judge.

THIS MATTER comes before the Court on Defendants' Motion to Dismiss, (Doc. No. 5) ¹, filed July 16, 2012. Having considered the parties' briefs and the applicable law, the Court finds that Defendants' motion is partially well-taken and is therefore GRANTED in part and DENIED in part.

Background

This case arises out of a Ponzi scheme perpetrated by Doug Vaughan. This adversary proceeding is one of many adversary proceedings initiated by the Chapter 11 Trustee seeking to recover payments made by Vaughan Company Realtors (“VCR”) to parties who invested in VCR's promissory note program. Below is a summary of the claims brought against Galbreth Defendants.²

Count 1 ³ Turnover and Accounting under 11 U.S.C. § 542;

Counts 2–5 Actual and constructive fraud under New Mexico Fraudulent Transfer Act and/or 11 U.S.C. § 548(a)(1) based on alleged transfers to Galbreth Defendants made within two years of the date of the filing of the VCR bankruptcy case;

Counts 6–13 Actual and constructive fraud under state law, N.M.S.A. § 56–10–18(A)(1) and/or 11 U.S.C. § 544 based on alleged transfers to Galbreth Defendants made within four years of the date of the filing of the VCR bankruptcy case;

Count 14 Undiscovered fraudulent transfers pursuant to state and federal law; and Count 15 Disallowance of Defendants' claims pursuant to 11 U.S.C. § 502.

Defendants make four (4) different arguments in support of their motion to dismiss. First, Defendants argue Plaintiff's attempt to avoid and recover transfers to Dr. Galbreth's pension plan is impermissible under the Employee Retirement Income Security Act of 1974 (“ERISA”). Second, Defendants allege that the Complaint does not allege specific facts showing that the Galbreth 401(k) Plan itself was a transferee from whom VCR payments can now be recovered. Third, Defendants assert the Complaint does not allege specific facts which show that VCR's transfers to Dr. Galbreth and/or the Galbreth Defined Benefit Plan were not for reasonably equivalent value. Finally, Defendants argue that the Complaint fails to meet the heightened standard set forth in Rule 9(b) which requires a showing of actual intent to hinder, delay, or defraud under federal or state actual fraudulent conveyance laws. The Court will address each argument in turn.

Discussion

I. Legal Standard

Fed.R.Civ.P. 12(b)(6) allows a defense for “failure to state a claim upon which relief can be granted.” In asserting a claim, the claimant must plead “only enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A claim challenged by a 12(b)(6) motion to dismiss does not require detailed factual allegations, but must set forth “more than labels and conclusions, and a formulaic recitation of the element of a cause of action will not do.” Id. at 555, 127 S.Ct. 1955 “The court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the [claimant's] complaint alone is legally sufficient to state a claim for which relief may be granted.” Sutton v. Utah State Sch. for the Deaf & Blind, 173 F.3d 1226, 1236 (10th Cir.1999). A 12(b)(6) motion should not be granted “unless it appears beyond doubt that the [claimant] can prove no set of facts in support of his claim which would entitle him to relief.” Conley v. Gibson, 355 U.S. 41, 45–46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957); see Ash Creek Mining Co. v. Lujan, 969 F.2d 868, 870 (10th Cir.1992). All well-pleaded factual allegations in the complaint are accepted as true, see Ash Creek Mining Co., 969 F.2d at 870, and viewed in the light most favorable to the nonmoving party, see Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974).

A 12(b)(6) motion must be converted to a motion for summary judgment if “matters outside the pleading are presented to and not excluded by the court” and “all parties ... [are] given reasonable opportunity to present all material made pertinent to such a motion by Rule 56.” Fed.R.Civ.P. 12(b). The failure to convert a 12(b)(6) motion to one for summary judgment where a court does not exclude outside materials is reversible error unless the dismissal can be justified without considering the outside materials. See Brown v. Zavaras, 63 F.3d 967, 970 (10th Cir.1995). Notwithstanding these general principles, if a plaintiff does not incorporate by reference or attach a document to its complaint, but the document is referred to in the complaint and is central to the plaintiff's claim, a defendant may submit an indisputably authentic copy to the court to be considered on a motion to dismiss. GFF Corp. v. Associated Wholesale Grocers, Inc., 130 F.3d 1381, 1384 (10th Cir.1997) (citations omitted).

The Court will not convert the instant motion into a motion for summary judgment. Plaintiff asserts that Defendant's Motion alleges facts not contained in the Complaint regarding Galbreth Defendant's intent as to the allegedly fraudulent transfers. However, the Court does not see a need to convert this Motion into a motion for summary judgment, because the Court can decide the motion without considering facts not contained in the Complaint. Accordingly, this Court will decide the motion based upon the standards set forth in Fed.R.Civ.P. 12(b)(6).

II. Plaintiff's Claims are not Barred by ERISA

Defendants contend that Section 206 of the Employee Retirement Income Security Act (“ERISA”), 29 U.S.C. § 1056(d)(1) prohibits Plaintiff from recovering transfers to the Galbreth Defined Benefit Plan, the 401(k) Plan, and the pension plan (“collectively referred to as the ‘Galbreth Benefit Plans' ”). In response, Plaintiff argues that whether ERISA applies is an affirmative defense and/or a question of fact that cannot be answered by the Complaint alone. In the alternative, Plaintiff argues ERISA does not protect fraudulently transferred funds in contravention of the Bankruptcy Code.⁴

ERISA contains a number of provisions directed at safeguarding a stream of income for pensioners and their dependents. See generally Guidry v. Sheet Metal Workers Nat. PensionFund, 493 U.S. 365, 376, 110 S.Ct. 680, 107 L.Ed.2d 782 (1990). Section 206 of ERISA, 29 U.S.C. § 1056(d)(1) mandates that “[e]ach pension plan shall provide that benefits provided under the plan may not be assigned or alienated.” This section is known as the “anti-alienation provision.”

In general, the anti-alienation provision prohibits creditors from reaching funds in an ERISA plan as a means of collecting a judgment against a beneficiary. Guidry, 493 U.S. at 372, 110 S.Ct. 680 (ERISA's anti-alienation provision prohibits garnishment of a qualified pension plan “unless some exception to the general statutory ban is applicable.”). The anti-alienation provision has been interpreted to exclude a debtor's interest in pension benefits from the bankruptcy estate. See Patterson v. Shumate, 504 U.S. 753, 765, 112 S.Ct. 2242, 119 L.Ed.2d 519 (1992) (under ERISA's anti-alienation provision, “a debtor's interest in an ERISA-qualified pension plan may be excluded from the property of the bankruptcy estate pursuant to § 541(c)(2)[.]”). See also In re Reinhart, 477 Fed.Appx. 510, 517 (10th Cir.2012) (discussing the general rule that retirement funds held in ERISA plans are not included in the bankruptcy estate). A bankruptcy trustee may not, therefore, access a debtor's interest in an ERISA plan while the funds are being held by the plan. See In re Kunz, 124 Fed.Appx. 597, 598 (10th Cir.2005) (noting that a Chapter 7 trustee may not exercise control over the debtor's interest in a qualified-ERISA plan).

Courts are highly skeptical of creating exceptions to ERISA's anti-alienation provision. See Patterson, 504 U.S. at 760, 112 S.Ct. 2242 (In construing ERISA's anti-alienation provision, courts have “vigorously ... enforced ERISA's prohibition on the assignment or alienation of pension benefits, declining to recognize any implied exceptions to the broad statutory bar.”). However, there are certain situations where creditors or other parties may reach pension benefits if permitted to do so by certain federal statutes. See e.g.26 U.S.C. § 6331(a), (c) (the IRS is authorized to levy upon all property belonging to the taxpayer, and no other federal law shall exempt property from the IRS' reach); United States v. Irving, 452 F.3d 110, 126 (2d Cir.2006) (“ERISA pension plans are not exempted from payment of taxes under 26 U.S.C. § 6334, and thus they should not be exempted from payment of criminal fines.”).

Plaintiff argues that ERISA does not prevent the recovery of a fraudulent transfer into an otherwise qualified plan. The initial inquiry, however, is whether the recovery of a fraudulent transfer constitutes an alienation or assignment prohibited by Section 206 of ERISA and the relevant sections of the Internal Revenue Code (“IRC”). The IRC regulations promulgated by the Secretary of Treasury, who has the authority to implement ERISA, define the terms “assignment” and “alienation.” Those regulations, which are entitled to deference under Chevron, U.S.A., Inc. v. Nat. Res. Def. Council, Inc., 467 U.S. 837, 844, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), provide:

For purposes of this section, the terms “assignment” and “alienation” include—

(i) Any...