Wagner v. Wilson (In re Vaughan Co.)

In re: VAUGHAN COMPANY, REALTORS, Debtor.JUDITH A. WAGNER, Chapter 11 Trustee Of the bankruptcy estate of the Vaughan Company, Realtors, Plaintiff,

v.KATHLEEN WILSON, Defendant.

No. 11-10-10759 JA

Adversary No. 12-01142 J

UNITED STATES BANKRUPTCY COURT DISTRICT OF NEW MEXICO

Date entered on docket: March 11, 2013

MEMORANDUM OPINION

THIS MATTER is before the Court on the Defendant's Motion to Dismiss ("Motion to Dismiss"). Plaintiff Judith Wagner, Chapter 11 Trustee of the bankruptcy estate of the Vaughan Company Realtors (the "Trustee") filed a response and a supplemental response in opposition to the Motion to Dismiss. See Docket Nos. 9 and 19. This adversary proceeding is one of many adversary proceedings initiated by the Trustee seeking to recover payments made by Vaughan Company Realtors ("VCR") to parties who invested in VCR's promissory note program. The Trustee asserts that VCR operated as a Ponzi scheme. She seeks to recover certain transfers made to Defendant Kathleen Wilson under several theories, including avoidance of transfers under the actual fraud and constructive fraud provisions of 11 U.S.C. § 548 and applicable state law. After consideration of the Motion to Dismiss and the response thereto, and being otherwise sufficiently informed, the Court finds that the Motion to Dismiss should be granted as to theTrustee's claims for turnover (Count 1) and for fraudulent transfers under state law based on insider status (Count 7) and denied as to all remaining claims.

APPLCIABLE STANDARDS FOR EVALUATING A MOTION TO DISMISS

A motion to dismiss for failure to state a claim is governed by Rule 12(b)(6), Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7012, Fed.R.Bankr.P. In considering a motion to dismiss under Rule 12(b)(6), the Court accepts as true all well pleaded facts and evaluates those facts in the light most favorable to the plaintiff. Moore v. Guthrie, 438 F.3d 1036, 1039 (10th Cir. 2006). The applicable standard for assessing a motion to dismiss for failure to state a claim under Rule 12(b)(6) is found in Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Under Twombly, in order to survive a motion to dismiss under Rule 12(b)(6) the complaint must contain enough facts to state a cause of action that is "plausible on its face." Twombly, 550 U.S. at 570. In other words, the plaintiff must "nudge [his] claims across the line from conceivable to plausible." Id. "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." Iqbal, 556 U.S. at 678) (citing Twombly, 550 U.S. at 556).

The Court takes a two-step approach in evaluating a motion to dismiss: first, the Court must accept as true all of the allegations contained in a complaint disregarding legal conclusions "clothed in factual garb;"¹ Iqbal, 129 S.Ct. at 1949; Khalik v. United Air Lines, 671 F.3d 1188, 1190 (10th Cir. 2012); and second, "only a complaint that states a plausible claim for relief survives a motion to dismiss." Iqbal, 129 S.Ct. at 1950; Khalik, 671 F.3d at 1190. "Thus, mere'labels and conclusions' and 'a formulaic recitation of the elements of a cause of action' will not suffice." Khalik, 671 F.3d at 1191(quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955). Accordingly, in examining a complaint under Rule 12(b)(6), the Court will disregard conclusory statements and look only to whether the remaining, factual allegations plausibly suggest the defendant is liable.

Consistent with Fed.R.Civ.P. 12(b)(6), "a defendant may raise an affirmative defense by a motion to dismiss for the failure to state a claim. If the defense appears plainly on the face of the complaint itself, the motion may be disposed of under this rule." Miller v. Shell Oil Co., 345 F.2d 891, 893 (10th Cir. 1965). For example, it may be appropriate to consider whether a complaint is barred by a statute of limitations "when the dates given in the complaint make clear that the right sued upon has been extinguished." Aldrich v. McCulloch Properties, Inc., 627 F.2d 1036, 1041 n. 4 (10th Cir. 1980). On the other hand, if the affirmative defense is based on matters outside the complaint, a disposition of the defense under Rule 12(b)(6) is improper. Miller v. Shell Oil Co., 345 F.2d at 893.

With these principles in mind, the Court will evaluate the sufficiency of the Complaint in light of the Motion to Dismiss.

ALLEGATIONS AND CLAIMS CONTAINED IN THE COMPLAINT

The Complaint contains eighty six numbered paragraphs and consists of nine separate counts. Paragraphs 1 through 48 include allegations regarding the nature of the proceeding, jurisdiction and venue, the alleged transfers, and the fraudulent Ponzi scheme allegedly perpetrated by Douglas Vaughan and his company, VCR. The allegations relating to Ms. Wilson's actions include the following:²

From 2000 through 2010, Ms. Wilson invested $70,000.00 into VCR's promissory note program with a promised rate of return of 18% per annum. Complaint, ¶¶ 29-30. VCR made payments on Ms. Wilson's promissory notes for the benefit of Ms. Wilson. Complaint, ¶ 32. Ms. Wilson received at least $65,940.95 in transfers from VCR. Complaint, ¶ 33. Ms. Wilson received at least $32,915.43 in transfers from VCR from February 22, 2006 through the date that VCR filed its voluntary bankruptcy petition (the "Petition Date"). Complaint, ¶ 34. Ms. Wilson received at least $20,315.39 in transfers from VCR from February 22, 2008 through the Petition Date. Complaint, ¶ 35. The interest rate that Ms. Wilson was to receive on her investment was unrealistically high. Complaint, ¶ 36. Ms. Wilson knew or should have known that the alleged interest payments on her note(s) did not reflect legitimate profits from the operation of VCR and that Douglas Vaughan was using VCR to operate a Ponzi scheme. Complaint, ¶¶ 37 and 39. Ms. Wilson ignored clear signs and "red flags" that Mr. Vaughan was causing VCR to operate a Ponzi scheme. Complaint, ¶ 42.

Paragraphs 49 through 86 incorporate paragraphs 1 through 48 by reference and set forth each claim as a separate count. The counts are:

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

Count 2 Actual Fraud under 11 U.S.C. § 548(a)(1)(A) based on alleged transfers to Ms. Wilson made within two years of the date of the filing of the VCR bankruptcy case

Count 3 Constructive Fraud under 11 U.S.C. § 548(a)(1)(B) based on alleged transfers to Ms. Wilson made within two years of the date of the filing of the VCR bankruptcy case

Count 4 Actual Fraud under state law, N.M.S.A. § 56-10-18(A)(1) based on alleged transfers to Ms. Wilson made within four years of the date of the filing of the VCR bankruptcy caseCount 5 Constructive Fraud under state law, N.M.S.A. § 56-10-18(A)(2) based on alleged transfers to Ms. Wilson made within four years of the date of the filing of the VCR bankruptcy case

Count 6 Fraudulent transfer (present creditors) under state law, N.M.S.A. § 56-10-19(A) and/or 11 U.S.C. § 544 as to Ms. Wilson

Count 7 Fraudulent transfer (past creditors) under state law, N.M.S.A. §56-10-19(B) and/or 11 U.S.C. § 544 as to Ms. Wilson

Count 8 Undiscovered fraudulent transfers based on state law

Count 9 Disallowance of Ms. Wilson's Claims under 11 U.S.C. § 502(d), or, alternatively, Equitable Subordination of her Claims under 11 U.S.C. § 510(c)

DISCUSSION

The Trustee consents to the dismissal, without prejudice, of her claim for turnover based on 11 U.S.C. § 542.³ Accordingly, the Court will dismiss Count 1.

1. Whether the Trustee has standing to pursue her fraudulent transfer claims

As an initial matter, Ms. Wilson contends that the Trustee lacks constitutional standing to pursue the fraudulent transfer claims under 11 U.S.C. §§ 544 and 548. Ms. Wilson argues that the Trustee lacks standing because VCR did not have an interest in the funds it transferred to Ms. Wilson. Ms. Wilson reasons that VCR never took title to the "stolen money" it obtained from investors and therefore suffered no injury by using the money it stole from one investor to pay another investor. The Court will confine its ruling on standing to Ms. Wilson's contention that VCR never held a valid interest in the funds the Trustee seeks to recover.

To satisfy the standing requirements under Article III of the United States Constitution, a plaintiff must show:

(1) it has suffered an "injury in fact" that is (a) concrete and particularized and (b) actual or imminent, not conjectural or hypothetical; (2) the injury is fairly traceable to the challenged action of the defendant; and (3) it is likely, as opposed to merely speculative, that the injury will be redressed by a favorable decision.

Southern Utah Wilderness Alliance v. Palma , --- F.3d ---, 2013 WL 71780, *7 (10th Cir. 2013) (quoting Friends of the Earth, Inc. v. Laidlaw Envtl. Servs. (TOC), Inc., 528 U.S. 167, 180-180, 120 S.Ct. 693, 145 L.Ed.2d 610 (2000)).

One of the requirements for avoiding a transfer under Sections 544 and 548 of the Bankruptcy Code is that the transfer was a "transfer of an interest of the debtor in property." 11 U.S.C. § § 544(b) and 548(a)(1). Ms. Wilson is, in effect, arguing that VCR had no interest in the property (i.e. funds) it transferred to her because VCR procured the funds by fraud. The Tenth Circuit Court of Appeals considered a similar argument in In re Ogden, 314 F.3d 1190 (10th Cir. 2002) in the context of a preferential transfer claim under 11 U.S.C. § 547. Like Sections 544 and 548, one of the requirements for avoiding a preferential transfer under Section 547 is a "transfer of an interest of the debtor in property." 11 U.S.C. § 547(b). Courts generally view the terms "interest of the debtor in the property" and "property" broadly in the bankruptcy context. Id. at 1197. "Interest of the debtor in property," as that phrase is used in ...