Warfield v. Solomon Glob. (In re Solomon)

1

In re: GARY CRAIG SOLOMON BOBBIE SUE SOLOMON, Debtors.

LAWRENCE J. WARFIELD, TRUSTEE, Plaintiff, v. SOLOMON GLOBAL, LLC, AARON JACKSON SOLOMON, TRICIA KILLEN AKA TRICIA SOLOMON, Defendants.

No. 2:21-bk-02622-DPC

Adversary No. 2:22-ap-00048-DPC

United States Bankruptcy Court, D. Arizona

August 31, 2022

Not for Publication^[1]

Chapter 7 Proceedings

UNDER ADVISEMENT ORDER RE DEFENDANTS' MOTION TO DISMISS ADVERSARY COMPLAINT

Before this Court is the Motion ("Motion to Dismiss")^[2] of Defendants Solomon Global, LLC ("Solomon Global"), Aaron Jackson Solomon ("Aaron"), and Tricia Solomon^[3] (collectively "Defendants") to dismiss this Adversary Proceeding. Plaintiff, Trustee Lawrence Warfield ("Plaintiff") filed a Response ("Response")^[4] to the Motion to Dismiss, and Defendants filed their Reply ("Reply").^[5] On June 6, 2022, the Court held a hearing on the Motion to Dismiss and took this matter under advisement.^[6] After considering the parties' oral arguments and briefs, this Court now grants Defendants' Motion to Dismiss with leave to amend Plaintiff's Complaint for the reasons stated below.

I. BACKGROUND

On April 9, 2021, Gary Craig Solomon ("Gary Solomon") and Bobbie Sue Solomon (collectively "Debtors") filed their chapter 7 bankruptcy petition.^[7] On March 16, 2022, Plaintiff commenced this Adversary Proceeding by filing the complaint ("Complaint").^[8] Plaintiff's Complaint seeks to avoid the 2020 transfers of two parcels of real property to Aaron from Solomon Global, a nondebtor entity, under § § 548(a)(1)(A), 548(a)(1)(B)(ii)(I) and (II), 544, and A.R.S. § 44-1004(A)(1) and (A)(2), and A.R.S. § 44-1005 ("Fraudulent Transfer Claims").^[9] The Fraudulent Transfer Claims are predicated on Plaintiff's request that the Court determine that Solomon Global is nothing more than a "sham entity" and/or Debtors' alter ego and, therefore, the assets of Solomon Global are Debtors' assets and property of this chapter 7 bankruptcy estate ("Bankruptcy Estate").^[10]

A. Debtors' Interests in Solomon Global

Debtors live at 2898 W. Papermill Road Taylor, AZ (the "Papermill House") and have lived there for not less than 45 years.^[11] On June 1, 2011, Debtors transferred title to the Papermill House and five other parcels of real estate ("Properties") to Solomon Global for no consideration.^[12] Solomon Global is a multi-member Arizona limited liability corporation formed in April 2011.^[13] In April 2011, Debtors were members of Solomon Global, as were Debtors' daughter, Karen Godfrey ("Karen"), and Debtors' son Aaron, and other members who appear to be related to Debtors.^[14] Gary Solomon reportedly told Karen that Solomon Global was formed to "protect assets."^[15]

B. The State Court Litigation

On September 28, 2011, Jason Hatch and Hatch Development (collectively "Hatch") filed a lawsuit ("Hatch Litigation") in Navajo County Superior Court ("State Court") against the Debtors.^[16] Around November 2013, the State Court denied Debtors' motion to reconsider an order granting summary judgment to Hatch.^[17] On January 24, 2014, two months after the State Court's unfavorable ruling, Debtors gave up their membership interests in Solomon Global.^[18] By the time the Hatch Litigation finally culminated in a money judgment ("Judgment") against Debtors for $318,813.55, Debtors had no interest in Solomon Global or the Papermill House or the Properties owned by Solomon Global.^[19]

Hatch later transferred the Judgment to GHB Construction, LLC ("GHB").^[20] On October 4, 2016, in an effort to collect its Judgment against Debtors, GHB filed a complaint in the State Court alleging that Debtors' transfer of the Papermill House and Properties to Solomon Global in 2011 was a fraudulent transfer.^[21] The State Court dismissed GHB's complaint, finding GHB's fraudulent transfer avoidance claims were barred by the statute of limitations. The Arizona Court of Appeals affirmed.^[22]

C. Debtors' Continued Control Over Solomon Global's Assets

Since Debtors transferred the Papermill House to Solomon Global, Debtors continue to live in the Papermill House for free and continue to make all decisions relative to it, including the decision that Solomon Global pay the real estate taxes from the sale proceeds of other Properties owned by Solomon Global.^[23] In 2015 and 2019, Solomon Global sold two of the Properties for $30,000 each.^[24] Prior to the 2019 sale, Debtors received the rental income from the tenants of that property.^[25] With respect to both sales, Gary Solomon allegedly told Karen that he "really needed the money."^[26]

Solomon Global does not have its own bank account and does not file its own tax returns.^[27] Karen also never received a K-1 from Solomon Global.^[28]

D. The Alleged Fraudulent Transfers

In August 2020, Solomon Global transferred to Aaron: (1) the construction yard at 915 W. Papermill Road, where Gary Solomon operated a construction business and kept construction equipment; and (2) Parcel No. 404-04-016B, where Aaron now lives. Solomon Global did not receive any consideration for either transfer.^[29] Plaintiff is apparently barred by the statute of limitations from challenging the 2011 transfer of the Papermill House and Properties to Solomon Global or the 2014 release of Debtors' membership interests back to Solomon Global.

E. Motion to Dismiss

i. Defendants' Motion to Dismiss

Defendants' Motion to Dismiss makes several arguments as to why Plaintiff's Complaint should be dismissed.^[30] First and foremost, Defendants argue that the Complaint fails to state a claim for which relief can be granted.^[31] Defendants assert that the Trustee's avoidance powers under §§ 544 and 548 are limited to transfers of Debtors' interests in property.^[32] Plaintiff's Complaint does not allege that any property of Debtors was transferred to Defendants.^[33] As a result, Defendants argue that this Court lacks subject matter jurisdiction^[34] because Trustee lacks standing to pursue the Fraudulent Transfer Claims set forth in the Complaint.^[35]

Second, Defendants argue that the Court lacks personal jurisdiction. Defendants note that subject matter jurisdiction is a prerequisite to personal jurisdiction, and since the Court lacks the former, no personal jurisdiction exists over Defendants.

Third, Defendants argue that Trustee cannot cure his lack of standing through his alter ego or "sham" theories.^[36] Defendants assert that, regardless of how the Trustee frames his theory of liability, the Trustee is requesting the Court to reverse pierce the corporate veil and find that assets owned by Solomon Global are, in fact, assets of the Debtors.^[37] Defendants contend that the Trustee cannot pierce the corporate veil of a nondebtor entity in which Debtors have no membership interest and, therefore, under no circumstances can the Trustee bring the Fraudulent Transfer Claims.^[38]

ii. Plaintiff's Response

First, Plaintiff's Response refutes Defendants' view that this is "a fraudulent transfer case."^[39] Plaintiff's Complaint requests the Court to determine that all of Solomon Global's assets, not just the assets transferred to Aaron, are assets of the Debtors.^[40]

Second, Plaintiff argues that Solomon Global is nothing more than Debtors' alter ego, which, pursuant to the Court's under advisement order in In re Star Mountain Resources, Inc.,^[41] "expands the debtor's assets to include the property of the alter ego."^[42]

Third, Plaintiff argues that Solomon Global is merely a "sham and an artifice."^[43]Plaintiff asserts that Debtors are the "true owners" of the assets titled in Solomon Global's name and have always exercised dominion and control over Solomon Global's assets. Plaintiff contends that, under Arizona law, actual "ownership" or "equitable ownership" may exist independent of record title.^[44]

Finally, Plaintiff argues that the Court could substantively consolidate Solomon Global with the Debtors' Bankruptcy Estate based on the facts alleged.^[45]

II. JURISDICTION

The Court has jurisdiction over this bankruptcy case and this Adversary Proceeding pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A), (H), & (O).

III. ISSUE

Whether Plaintiff's Complaint sets forth a cognizable claim under Arizona law where that Complaint seeks to recover the assets owned by or transferred by a nondebtor LLC, in which Debtors hold no membership interests in that LLC.

IV. ANALYSIS

A. Motion to Dismiss Standard

Bankruptcy Rule 7008 and 7012 apply Rule 8 and Rule 12 of the Federal Rules of Civil Procedure, respectively. Rule 8(a)(2) requires that a complaint contain a "short and plain statement of the claim, showing that the pleader is entitled to relief." ^[46] Although detailed factual allegations are not required, the facts in the complaint, when accepted as true, must "state a claim to relief that is plausible on its face." ^[47] A Rule 12(b)(6) dismissal may be based on either the lack of a cognizable legal theory or the absence of sufficient facts to support a cognizable legal theory.^[48]

Here, Plaintiff's Complaint alludes to multiple legal theories, including alter ego, instrumentality, and "sham transactions." Legal theories and/or labels aside, Plaintiff, at bottom, requests the Court ignore Solomon Global's separate legal existence and find that the assets ostensibly owned by Solomon Global are assets of the Debtors and, therefore, property of this Bankruptcy Estate. In essence, Plaintiff requests the Court to pierce the corporate veil of Solomon Global.

At the June 6, 2022 hearing, both parties raised the Court's Star Mountain Order. The Court discussed on the record why it believed its Star Mountain Order and the cases cited therein were not applicable to the case at bar. First, the alleged alter ego in Star Mountain was the...