Whittaker v. Groves Venture, LLC (In re Bolon), Case No. 11–61613

538 B.R. 391

In re: Thomas M. Bolon, Jr., Debtor.

David M. Whittaker, Chapter 7 Trustee, Plaintiff

v.Groves Venture, LLC, et al., Defendants.

Case No. 11–61613

Adv. Pro. No. 13–2405

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus .

Signed September 30, 2015

Kenneth C. Johnson, Bricker & Eckler, LLP, David M. Whittaker, Columbus, OH, for Plaintiff.

Christal Caudill, Powell, OH, Richard K. Stovall, Myron N. Terlecky, Columbus, OH, for Defendants.

MEMORANDUM OPINION GRANTING DEFENDANTS' (A) MOTION TO DISMISS COMPLAINT (DOC. 16) AND (B) MOTION TO DISMISS CROSS-CLAIM (DOC. 34)

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

In this adversary proceeding, the Chapter 7 trustees of two separate bankruptcy estates seek to avoid the same alleged fraudulent transfer of a membership interest in a limited liability company and to recover the value of the transferred interest from the defendants. One trustee included these requests for relief in his complaint commencing the adversary proceeding (the “Complaint”) (Adv.Doc. 1), while the other trustee made them in her cross-claim (the “Cross-claim”) (Adv.Doc. 27). The trustee who filed the Complaint alleged that the membership interest was property of the debtor whose estate he serves, but the allegation is contrary to the undisputed facts and the law. And the trustee who filed the Cross-claim likewise did not allege facts sufficient to raise a plausible claim for avoidance of the transfer. Because both trustees have failed to state a claim upon which relief can be granted, the Court grants the defendants' motions to dismiss the Complaint and the Crossclaim.

II. Jurisdiction and Constitutional Authority

The Court has jurisdiction to hear and determine this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(H).

Because none of the defendants filed a proof of claim, the Court might have lacked the authority under Article III of the Constitution to enter final judgment on the trustees' fraudulent transfer claims absent the consent of the parties. See, e.g., Exec. Benefits Ins. Agency v. Arkison (In re Bellingham Ins. Agency, Inc.), 702 F.3d 553, 562–63 (9th Cir.2012) (holding that bankruptcy courts lack the constitutional authority after Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), to enter final judgment on fraudulent transfer claims against defendants that have not filed proofs of claim), aff'd, ––– U.S. ––––, 134 S.Ct. 2165, 189 L.Ed.2d 83 (2014). Cf. Onkyo Europe Elecs. GMBH v. Global Technovations Inc. (In re Global Technovations Inc.), 694 F.3d 705, 722 (6th Cir.2012) (“In our case, Onkyo filed a proof of claim against GTI's bankruptcy estate.... It is crystal clear that the bankruptcy court had constitutional jurisdiction under Stern to adjudicate whether the sale of GTI was a fraudulent transfer, because it was not possible ... to rule on [Onkyo's] proof of claim without first resolving the fraudulent-transfer issue.”) (internal quotation marks omitted). But “Article III is not violated when the parties knowingly and voluntarily consent to adjudication by a bankruptcy judge.” Wellness Int'l Network, Ltd. v. Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 1939, 191 L.Ed.2d 911 (2015). Here, the parties have consented to the Court's entry of final judgment. The Court accordingly has constitutional authority to enter final judgment in this adversary proceeding.

III. Background

The reason two Chapter 7 trustees are involved in this adversary proceeding is that it is associated with two separate bankruptcy cases. The first, No. 11–61613 (the “Bolon Case”), is the Chapter 7 case that Thomas M. Bolon, Jr. (“Bolon”) commenced when he filed a voluntary petition for relief on November 18, 2011 (the “Bolon Petition Date”). The membership interest that Bolon owned in Groves Venture, LLC (“Groves Venture”) became property of his bankruptcy estate on the Bolon Petition Date, and David Whittaker (the “Bolon Trustee”) was appointed as the Chapter 7 trustee in the Bolon Case. The second case, No. 14–52677 (the “Groves Venture Case”), is the Chapter 7 case that the Bolon Trustee commenced on behalf of Groves Venture on April 17, 2014 (the “Groves Venture Petition Date”). Christal Caudill is the Chapter 7 trustee of the Groves Venture estate (the “Groves Venture Trustee”). Given that this matter is before the Court on motions to dismiss, the facts set forth below are construed in the light most favorable to the Bolon Trustee and the Groves Venture Trustee.

Prior to the Bolon Petition Date, Bolon was the sole member of Groves Venture, which held a 50% membership interest (the “Membership Interest”) in another company, Novotec Recycling LLC (“Novotec”).¹ Compl. ¶¶ 7, 10, 13; Cross-cl. ¶¶ 5, 7.² Novotec's other 50% owner was Onsri Enterprises LLC (“Onsri”). Compl. ¶ 11; Cross-cl. ¶ 8. Bolon authorized Groves Venture to transfer the Membership Interest to Onsri, and the transfer was made on or about June 30, 2011. Compl. ¶ 14; Cross-cl. ¶ 10. Novotec's net equity exceeded $270,000 at the end of the calendar year 2010, and its net income for the entire calendar year 2011 was $1,235,000, resulting in net equity exceeding $933,000 by the end of 2011. Compl. ¶¶ 17–18; Cross-cl. ¶¶ 12–13. Based on these numbers, it appears that the value of Groves Venture's interest in Novotec would have been significantly higher than the approximately $40,000 that Groves Venture received in exchange for transferring the Membership Interest to Onsri. Compl. ¶ 14; Cross-cl. ¶ 11.

As noted above, Bolon commenced his bankruptcy case in November 2011. In March 2012 Onsri merged with Novotec, and the owners of Onsri—Preecha Inthisarn, Mayling Inthisarn and L. Ronald Inthisarn Inthisarns (collectively, the “Inthisarns”)—became the owners of Novotec. Compl. ¶ 19; Cross-cl. ¶ 9. About five months after the Onsri–Novotec merger, Groves Warehouse LLC (“Groves Warehouse”), whose members were the Inthisarns and Bolon, was formed. Compl. ¶¶ 20–22.

On July 1, 2013, the two-year look-back period for § 548 fraudulent transfer actions on account of the transfer of the Membership Interest passed without the Bolon Trustee having yet filed the Groves Venture Case. More than four months later, in November 2013, the Bolon Trustee filed the Complaint, naming Onsri, Novotec, Groves Warehouse and the Inthisarns (collectively, the “Moving Defendants”)—as well as Groves Venture—as defendants. In his Complaint, the Bolon Trustee alleges that the transfer of the Membership Interest constituted a transfer of Bolon's interest in property because Bolon was the sole member of Groves Venture. Compl. ¶¶ 10, 27. Based on this allegation, the Bolon Trustee seeks to avoid Groves Venture's transfer of the Membership Interest as a fraudulent transfer under § 544(b) of the Bankruptcy Code and Ohio's Uniform Fraudulent Transfer Act, Ohio Rev.Code Ann. §§ 1336.01 –1336.11 (West 2015) (the “UFTA”), as well as under § 548 of the Bankruptcy Code (Count I) and to preserve the transfer for the benefit of Bolon's bankruptcy estate (Count II). Id. ¶¶ 26–41. He also requests a money judgment under § 550(a) of the Bankruptcy Code (Count III) against the Moving Defendants (other than Groves Warehouse, with whom he has settled)³ and a judgment for interest and costs (Count V). Id. ¶¶ 42–44, 52–54. The only other count of the Complaint was Count IV, in which the Bolon Trustee requested a determination that Bolon's membership interest in Groves Warehouse was property of his bankruptcy estate.Id. ¶¶ 45–51. The Bolon Trustee previously dismissed Count IV after Bolon paid $40,000 to the Bolon Trustee in connection with the settlement with Groves Warehouse. See Adv. Doc. 38 at 2; Doc. No. 83 in the Bolon Case (order authorizing settlement).

The Moving Defendants filed a motion to dismiss the Complaint for failure to state a claim upon which relief can be granted (the “First Dismissal Motion”) (Adv.Doc. 16). In the First Dismissal Motion, the Moving Defendants point out that while both § 544(b) of the Bankruptcy Code (which makes the UFTA applicable) and § 548(a) permit the Bolon Trustee to “avoid any transfer of an interest of the debtor [that is, Bolon] in property,” the transfer of the Membership Interest was not a transfer of Bolon's interest in property, but instead was a transfer of Groves Venture's interest in property. First Dismissal Mot. at 5–7. The Moving Defendants contend that the Bolon Trustee's claim under the UFTA must fail for the additional reason that Bolon was not a creditor of Groves Venture. Id. at 7–9. The Bolon Trustee filed a memorandum contra to the First Dismissal Motion (Adv.Doc. 21) (the “Mem. Contra”) in which he continued to assert that the transfer of the Membership Interest was a transfer of an interest of Bolon in property, Mem. Contra at 7, and the Moving Defendants filed a reply (Adv.Doc. 22) in which they argued that this was not the case. The Groves Venture Trustee also filed a response to the First Dismissal Motion (Adv.Doc. 28).

On June 30, 2014, the Groves Venture Trustee filed her Cross-claim against the Moving Defendants, alleging that the transfer of the Membership Interest constituted a transfer of Groves Venture's interest in property. Cross-cl. ¶ 15. The Groves Venture Trustee alleges that the “transfer of the Membership Interest was made on or within two (2) years prior to the Petition Date,” but defines “Petition Date” to mean the Bolon Petition Date (November 18, 2011), not the Groves Venture Petition Date (April 17, 2014). Id. ¶¶ 4, 16. Like the Bolon Trustee, she seeks to avoid the transfer of the Membership Interest as a fraudulent transfer under § 548 of the Bankruptcy Code (Count I) and under § 544(b) of the Bankruptcy Code and the UFTA (Count II), id. ¶¶ 22–26, 28, and she also requests preservation of the transfer for the benefit of the estate of...