DAVID L. BUNNING, District Judge.
This matter is before the Court on Stephen and Robert Addington's Motion to Dismiss all claims against them in their individual capacities (Doc. #10), as well as Plaintiff's Motion for Leave to Amend its Complaint
This action stems from the 2009 case of GATX Corporation v. Appalachian Fuels, LLC, et al. (0:09-cv-41-DLB), where this Court entered an Agreed Judgment against Larry Addington in the amount of $2,900,000.00. In the present action, Plaintiff GATX Corporation alleges that Larry Addington anticipated he would be held liable for a substantial sum of money
GATX Corporation served as the lessor of coal mining equipment to Appalachian Fuels, LLC, pursuant to various Master Lease Agreements executed in 2005 and 2006. Appalachian Fuels ("App Fuels") is a limited liability corporation organized and existing under the laws of the Commonwealth of Kentucky. It is wholly owned by Energy Coal Resources, Inc. ("ECR"), another Kentucky corporation. Larry
On September 27, 2005, Larry Addington and others entered a Joint and Several Guaranty and Indemnity whereby they guaranteed the prompt payment of any and all debts owed by App Fuels to GATX, up to a maximum of $5,000,000.
From November 2007 to March 2009, GATX sent at least six e-mails to App Fuels giving notice that the company was behind on lease payments. Stephen, as President of App Fuels, allegedly had multiple discussions with Larry about the delinquent payments. However, App Fuels remained in arrears on its lease payments to GATX.
On May 15, 2009, GATX sued Larry
GATX responded to Larry's failure to pay by filing the present action on November 17, 2011. The Complaint alleges that between November 2007 and March 2009, Larry and Stephen had multiple discussions about App Fuel's financial condition, including the company's failure to meet its obligations under the various lease agreements with GATX. Based on these discussions, Larry anticipated that GATX would soon attempt to hold him liable for App Fuel's debts pursuant to the guaranty agreement. In a proactive effort to place
The Irrevocable Trust was officially established on December 29, 2008 and titled the "Larry Addington Irrevocable Trust f/b/o Maxwell Addington." The trust's purported purpose was to provide for Max Addington, who was seventy-seven (77) years old and suffered from cerebral palsy. By the terms of the Trust Agreement, Larry agreed that the trust was irrevocable. He also surrendered all rights to amend or revoke the trust agreement, and forfeited any incidents of ownership to any assets or interests conveyed to the trust. However, Larry retained the power to appoint any principal or income of the trust by express reference in his Last Will.
Pursuant to the Irrevocable Trust Agreement, Larry conveyed his interest in three tracts of real estate located in Boyd County, Kentucky by quit-claim deed dated December 29, 2008 to Stephen and Robert as Co-Trustees of the Irrevocable Trust. Max Addington resided in a 3,000 square foot house built on one of the three tracts of land.
GATX's Complaint alleges that Stephen drafted a "NOTE TO FILE" the day after Larry executed the Irrevocable Trust Agreement, which identifies Larry's ulterior motives. According to the complaint, the note acknowledges that the revocable trust was converted into an irrevocable trust "due to concerns by Larry." The Complaint states, "Among the `concerns' expressed by Stephen in the `NOTE TO FILE' was a concern that creditors of Larry, including GATX, were about to sue Larry for substantial obligations owed by him in connection with several coal mining businesses that were insolvent and were teetering on the verge of bankruptcy." (Compl. ¶ 58).
The Complaint's characterizations of the "NOTE TO FILE" are entirely inaccurate. First, the evidence of record shows that Stephen did not draft the note. In his October 31, 2011 deposition, Stephen testified that Crystal Slutz, Larry's secretary, drafted the note. There are no markings, signatures, or language on the note to indicate that anyone but Ms. Slutz was the one who drafted the note. Second, the note never mentions Larry's concerns about creditors, potential debts, or legal liabilities. Instead, Larry's declining health and desire to provide for his family after his death are the only "concerns" mentioned in the note.
After the Irrevocable Trust was established, Larry began transferring other personal assets to the trust. On January 2, 2009, Larry instructed Town Square Bank ("TSB") to transfer $1,000,000.00 from his personal checking account to an account maintained by the Irrevocable Trust with TSB. Although the Irrevocable Trust Agreement established that Larry shall not retain any control over trust property, the Complaint alleges that he wrote at least ten letters to TSB directing it to transfer funds from the irrevocable trust account to other entities he owned or controlled.
On November 18, 2010, more than 18 months after the 2009 suit was filed and 2 months before GATX and Larry reached a settlement in that suit, the Irrevocable Trust acquired title to three vehicles. The Complaint alleges that the vehicles were either purchased from proceeds of Larry's transfer of $1.0 million to the Irrevocable Trust, or they were initially the personal property of Larry and transferred to the Irrevocable Trust after Larry realized that he might be liable to GATX.
GATX filed the present suit on November 11, 2011 against Stephen, individually and in his capacity as Co-Trustee of the Irrevocable Trust, Robert, individually and in his capacity as Co-Trustee of the Irrevocable Trust, and Larry. Count one of the Complaint (Doc. #1) alleges that the Addington brothers participated in property conveyances with "intent to delay, hinder or defraud creditors" in violation KRS § 378.010. Count two alleges that Larry, a debtor, conveyed property of his estate without receiving valuable consideration in violation of KRS § 378.020, and that Stephen and Robert aided and abetted Larry's conveyances, thus rendering them liable under KRS § 378.020 as well.
On December 20, 2011, Stephen and Robert filed a Motion to Dismiss (Doc. #10) all claims against them in their individual capacity pursuant to Federal Rule of Civil Procedure 12(b)(6). In the Motion, Stephen and Robert argue that the Complaint does not contain a short and plain statement of the claims against them, nor does it contain any plausible factual allegations to support any claim against them in their individual capacities. Moreover, Stephen and Robert argue that there is no factual or legal basis for direct liability under either of the Kentucky fraudulent conveyance statutes because Stephen and Robert, in their individual capacities, were neither transferors or transferees of the disputed property. Likewise, Stephen and Robert assert that the Complaint fails to contain any plausible factual allegations that support an aider and abettor theory of liability.
GATX filed a timely response in opposition to the motion (Doc. #15), arguing, inter alia, that it sufficiently plead facts to state claims against Stephen and Robert for aiding and abetting fraudulent transfers, conspiracy to commit fraudulent transfers, and fraud for participating in fraudulent transfers. In the response, GATX also requested leave to amend its Complaint to state the above-mentioned claims if the Court found that the claims were insufficiently plead. (Doc. #15 at 3). Subsequently, Stephen and Robert timely filed a reply in support of their motion (Doc. #18), and the motion was submitted for the Court's review.
However, before Stephen and Robert filed their reply brief in support of their Motion to Dismiss, GATX filed a Motion for Leave to Amend its Complaint (Doc. #17). Without attaching a proposed amended complaint to the Motion, GATX asserted that an amended complaint would state the following additional claims against Larry, Stephen and Robert: (1) conspiracy to commit fraudulent transfers; (2) fraud in connection with fraudulent transfers; and (3) negligence per se under KRS § 446.070. Stephen and Robert responded in their individual capacities that the Motion should be denied because GATX failed to attach a proposed amended complaint to the motion. (Doc. #25).
On January 31, 2012, Larry Addington provided notice that he filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code in the Eastern District of Kentucky on January 26, 2012 (No. 12-10029). (Doc. #19). The Court entered an Order (Doc. #20) on February 2, 2012, staying all claims against Larry pursuant to the automatic stay provision of 11 U.S.C. § 362(a)(1).
Larry's bankruptcy petition also prompted Stephen and Robert to file a motion for the Court to stay all claims against them as Co-Trustees of the Irrevocable Trust pursuant to 11 U.S.C. § 362(a)(3). (Doc. #28). After that motion was fully briefed (Doc. #30, 33), the Court held oral argument on March 12, 2012, to consider each of the three pending motions. Attorney Andrew W. Wood appeared on behalf of GATX. Attorneys Robert E. Maclin, III and David A. Cohen appeared on behalf of Stephen and Robert in their capacity as Co-Trustees; Attorney William C. Rambicure appeared on behalf of Stephen and Robert in their individual capacities. The proceedings were recorded by Official Court Reporter Lisa Wiesman.
On March 15, 2012, 2012 WL 896241, the Court granted Stephen and Robert's Motion to Stay proceedings against them in their capacity as Co-Trustees (Doc. #38). However, the Court concluded that the claims against Stephen and Robert in their individual capacities were not subject to the automatic stay, and allowed GATX to continue prosecuting claims against those defendants. (Id.). Thereafter, GATX filed a Proposed Amended Complaint (Doc. # 39) in support of its Motion for Leave to Amend its Complaint, to which Stephen and Robert responded (Doc. #40). Stephen and Robert's Motion to Dismiss, and GATX's Motion for Leave to Amend its Complaint have now been fully briefed and are ripe for review.
GATX has presented numerous legal theories in pursuit of a viable legal theory by which it might hold Stephen and Robert liable in their individual capacities. In GATX's Complaint, it alleged that Stephen and Robert are directly liable, and liable for aiding and abetting Larry Addington in fraudulently conveying property in violation of KRS §§ 378.010 and 378.020. (Doc. #1). In GATX's response to the motion to dismiss, its legal theory began to evolve. GATX asserted that the Complaint also plead a sufficient factual basis to support additional legal theories, namely, conspiracy to effectuate fraudulent transfers and civil fraud. (Doc. #13). Continuing its quest for a viable legal theory, GATX filed a Motion for Leave to Amend its Complaint (and subsequently filed a proposed amended complaint) with yet another legal theory — negligence per se under KRS § 446.070. (Doc. #17) However, despite these continued efforts, GATX has failed to assert a viable legal theory against Stephen or Robert in their individual capacities for which relief may be granted
Stephen and Robert move the Court to dismiss all claims against them in their individual capacities pursuant to Federal Rule of Civil Procedure 12(b)(6) for failing to state a claim upon which relief can be granted. On the face of the Complaint, Plaintiff has alleged that Stephen and Robert participated in fraudulent conveyances, and aided and abetted Larry in
When considering a motion to dismiss pursuant to Rule 12(b)(6), the court is to "construe the complaint in the light most favorable to the plaintiff" and "accept all well-pleaded factual allegations as true." La. Sch. Emps.' Ret. Sys. v. Ernst & Young, LLP, 622 F.3d 471, 477-78 (6th Cir.2010). In addition to the allegations in the complaint, the Court may also consider other materials that are referenced in and central to the plaintiff's complaint, Greenberg v. Life Ins. Co. of Virginia, 177 F.3d 507, 514 (6th Cir.1999), are public records, or are otherwise appropriate for the taking of judicial notice. Ley v. Visteon Corp., 543 F.3d 801, 805 (6th Cir.2008) (internal quotation marks and citation omitted), abrogated on other grounds by Matrixx Initiatives v. Siracusano, ___ U.S. ___, 131 S.Ct. 1309, 1323-25, 179 L.Ed.2d 398 (2011).
Under the pleading standard set forth in Federal Rule of Civil Procedure 8(a), a plaintiff must provide "a short and plain statement of the claim showing that [it] is entitled to relief." The complaint must contain more than "labels and conclusions" or "a formulaic recitation of the elements of a cause of action," Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), and instead proffer "enough facts to state a claim to relief that is plausible on its face." Id. at 570, 127 S.Ct. 1955. "Regarding culpability, the complaint must allow the court to `draw the reasonable inference that the defendant is liable for the misconduct alleged.'" Ashland, Inc. v. Oppenheimer & Co., 648 F.3d 461, 467-68 (6th Cir.2011) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1940, 173 L.Ed.2d 868 (2009)). This requires the complaint to show "more than a sheer possibility that a defendant has acted unlawfully." Id.
To the extent that GATX has asserted that Stephen and Robert are directly liable for violating the fraudulent conveyance statutes, GATX has failed to state a claim upon which relief may be granted. The purpose of the fraudulent conveyance statutes is to "put the creditors back in the same position they would have enjoyed immediately prior to the voidable conveyance." Mattingly v. Gentry, 419 S.W.2d 745, 747 (Ky.1967). To fulfill this purpose, "[t]he proper remedy in a fraudulent conveyance claim is the nullification of the transfer by returning the property at issue back to the transferor." Paradigm BioDevices, Inc. v. Viscogliosi Bros., 842 F.Supp.2d 661, 667 (S.D.N.Y.2012) (citing Grace v. Bank Leumi Trust Co. of N.Y., 443 F.3d 180, 189 (2d Cir.2006) (interpreting New York law)). The plain language of both Kentucky fraudulent conveyance statutes make this purpose abundantly clear. KRS § 378.010 states that, if the transfer is deemed fraudulent, it shall be "void as against such
While the primary remedy is to void the fraudulent conveyance, some states allow the creditor to seek compensatory damages from a transferee as an alternative form of relief. Kentucky courts have not explicitly reached this conclusion. However, the New York Supreme Court, Appellate Division has held that "a money judgment against the transferee may also be an available form of substitute relief where the transferee has disposed of the wrongfully conveyed property in some manner which makes it impossible for return." Joslin v. Lopez, 309 A.D.2d 837, 839, 765 N.Y.S.2d 895 (N.Y.App.Div.2003) (emphasis added). Likewise, in Tennessee, the fraudulent conveyance statute explicitly allows a creditor to obtain either "avoidance of the transfer or obligation to the extent necessary to satisfy the creditors's claim." T.C.A. § 66-3-308(a)(1) (emphasis added). However, in Tennessee, a money judgment is only available against "the first transferee of the asset of the person for whose benefit the transfer was made." T.C.A. § 66-3-309(b)(1); see Tareco Properties, Inc. v. Morriss, 196 Fed.Appx. 358, 362 (6th Cir.2006); see also Thompson v. Hanson, 168 Wn.2d 738, 239 P.3d 537 (2009) (en banc) (holding that, after the Washington legislature adopted the Uniform Fraudulent Transfer Act, a monetary judgment may be entered against the first transferee of the asset, the person for whose benefit the transfer was made, or subsequent transferees other than good-faith transferees).
Regardless of the remedy sought, a direct liability fraudulent conveyance claim is only actionable against the transferor or transferee. See Paradigm BioDevices, Inc., 842 F.Supp.2d at 667-68. Although Kentucky courts are silent on this issue, other states have interpreted similar fraudulent conveyance statutes and held that they "do[] not provide for recovery other than recovery of the property transferred or its value from one who is, directly or indirectly, a transferee or recipient thereof." Mack v. Newton, 737 F.2d 1343, 1361 (5th Cir.1984) (emphasis added); see also Elliott v. Glushon, 390 F.2d 514, 516-17 (9th Cir.1967) (holding that a fraudulent conveyance action is properly brought against a party who received the transferred property); Paradigm BioDevices, Inc., 842 F.Supp.2d at 667-68; Lowell Staats Mining Co. v. Philadelphia Elec. Co., 878 F.2d 1271, 1276 n. 1 (10th Cir. 1989) ("`[C]ourts have generally held as to fraudulent conveyances that a person who assists another to procure one, is not liable in tort to the insolvent's creditors.'") (internal citation omitted); Mack v. Newton, 737 F.2d 1343, 1361 (5th Cir.1984) (holding that Texas law, like the Bankruptcy Act, does not allow fraudulent transfer actions against one who is not, directly or indirectly, a transferee or recipient of the property).
Neither Kentucky statutory nor case law explicitly defines a "transferee." However, according to Black's Law Dictionary, a "transferee" is "one to whom a property interest is conveyed." Black's Law Dictionary 1536 (8th ed.1999). In the context of a fraudulent conveyance action under federal law, the Seventh and Ninth Circuits define a "transferee" even more narrowly, distinguishing a "transferee" from a "conduit." These circuits agree that a "transferee" is one who not only receives property, but has "dominion over the money or other asset, [and] the right to put the money to one's own purpose." Bonded Fin. Serv. v. European Am. Bank, 838 F.2d 890, 893 (7th Cir.1988); See also In
Here, the Complaint does not allege that any property was conveyed to Stephen or Robert in their individual capacities. Instead, the Complaint alleges that the property at issue was conveyed to the Irrevocable Trust, or to Stephen and Robert in their capacity as Co-Trustees. The Complaint also alleges that Stephen and Robert, as Co-Trustees, exercised control over the property. Thus, Stephen and Robert were not "transferees," and therefore cannot be directly liable for violating the fraudulent conveyance statutes.
GATX cannot prevail on an aiding and abetting fraudulent conveyances theory. Contrary to GATX's assertion, courts generally do not recognize aiding and abetting a fraudulent conveyance as a viable cause of action against a non-transferee. While Kentucky courts have not addressed this issue, the Court believes that Kentucky would follow the overwhelming majority of states that hold such cause of action does not exist.
GATX cites Time Warner Entertainment Co. v. Six Flags Over Georgia, 245 Ga.App. 334, 537 S.E.2d 397, 407 (2000), for the proposition that Georgia "explicitly acknowledges an aiding and abetting cause of action in ... fraudulent conveyances." However, as the Eleventh Circuit later explained, the Time Warner opinion directly addressed aiding and abetting in the breach of a fiduciary duty. Chepstow Ltd. v. Hunt, 381 F.3d 1077, 1088 (11th Cir. 2004). The Eleventh Circuit further held that any mention of the viability of an action for aiding and abetting fraudulent conveyance in Time Warner was merely dicta. Id. Ultimately, the Eleventh Circuit concluded that, as a matter of Georgia law, one who aids and abets a debtor in carrying out a fraudulent transfer cannot be liable if it is neither a debtor nor a transferee. Id.
Other states are in agreement with Georgia law that a non-transferee cannot be liable for aiding and abetting a fraudulent conveyance. For example, New York courts have consistently held that New York law does not recognize a cause of action against parties for aiding and abetting a fraudulent conveyance. Paradigm BioDevices, 842 F.Supp.2d at 667-68; Roselink Investors, L.L.C. v. Shenkman, 386 F.Supp.2d 209, 227 (S.D.N.Y.2004); Geren v. Quantum Chem. Corp., 832 F.Supp. 728, 737 (S.D.N.Y.1993), aff'd, 99 F.3d 401, 1995 WL 737512 (2d Cir.1995); Fed. Deposit Ins. Corp. v. Porco, 75 N.Y.2d 840, 552 N.Y.S.2d 910, 552 N.E.2d 158, 159 (1990). In Federal Deposit Insurance Corp. v. Porco, New York's highest court interpreted the plain language of New York's fraudulent conveyance statutes and held that "a creditor's remedy for the transfer of its debtor's assets, where undertaken prior to a judgment on the debt, is still to obtain a nullification of the conveyance and, where undertaken after judgment, additionally to secure the assets in satisfaction of the debt." 75 N.Y.2d 840, 552 N.Y.S.2d 910, 552 N.E.2d 158, 159 (1990). The Porco Court concluded that the statutes "did not, either explicitly or implicitly, create a creditor's remedy for money damages against parties who ... were neither transferees of the assets nor beneficiaries of the conveyance." Id.
Likewise, the Supreme Court of Florida has held that the Uniform Fraudulent Transfer Act does not create a cause of action against a non-transferee for aiding and abetting a fraudulent transfer. Freeman v. First Union Nat'l Bank, 865 So.2d 1272, 1277 (Fla.2004) (reaching this conclusion upon the issue being certified
Indeed, the United States District Court for the District of Delaware has recognized that it is clearly the majority approach that "liability cannot be imposed on non-transferees under [an] aiding and abetting... theor[y]." Magten Asset Mgmt. Corp. v. Paul Hastings Janofsky & Walker LLP, No. Civ.A.04-1256, 2007 WL 129003, at *3 (D.Del. Jan. 12, 2007). The Delaware court's assertion that this is the majority approach is supported by cases interpreting Arizona, Indiana, Maine, and Texas law. See Mann v. GTCR Golder Rauner, L.L.C., 483 F.Supp.2d 884, 919 (D.Ariz. 2007) (holding that the a cause of action for aiding and abetting a fraudulent transfer is not recognized under the AUFTA); Baker O'Neal Holdings, Inc. v. Ernst & Young LLP, No. 1:03-cv-0132, 2004 WL 771230, at *14 (S.D.Ind. Mar. 24, 2004) (holding that the Indiana fraudulent transfer act did not support accessory liability); Fed. Deposit Ins. Corp. v. S. Prawer & Co., 829 F.Supp. 453, 457 (D.Me.1993) (holding that the Maine fraudulent transfer act does not recognize liability for aiding and abetting a fraudulent conveyance); Fed. Deposit Ins. Corp. v. White, No. 3:06-cv-0560, 1998 WL 120298, at *2 (N.D.Tex. Mar. 5, 1998) (holding that the Texas fraudulent conveyance act only allows recovery against one who is in receipt of the fraudulently conveyed property). Each court held that the plain language of the respective state fraudulent conveyance laws did not support a claim for aiding and abetting a fraudulent conveyance.
Likewise, federal courts have consistently held that there is no such thing as liability for aiding and abetting a fraudulent conveyance as a matter of federal law under Section 548 of the Bankruptcy Code. In re Fedders N. Am., Inc., 405 B.R. 527, 549 (Bankr.D.Del.2009); See In re McCook Metals LLC, 319 B.R. 570, 591 (Bankr. N.D.Ill.2005); In re Ampat Southern Corp., 128 B.R. 405, 410-11 (Bankr.D.Md. 1991). The plain language of Section 548 indicates that it only reaches recipients of the property in question. In re Magnesium Corp. of America, 399 B.R. 722, 771 (Bankr.S.D.N.Y.2009). To impose secondary liability on those that have not received transferred property would be writing a remedy into a statute by judicial construction, which federal courts have refused to do. Id.
Although a Kentucky court has yet to address this specific issue, GATX has provided no reason for the Court to deviate from the consistent conclusion of other states that non-transferees may not be liable for aiding and abetting a fraudulent conveyance. Like New York's Court of Appeals decided in Porco, and Florida's Supreme Court decided in Freeman, the plain language of Kentucky's fraudulent conveyance statutes clearly indicates that they are intended to void fraudulent conveyances, and not to impose in personam liability. KRS Section 378.010 states, in part:
KRS § 378.020 (emphasis added). Therefore, to the extent that GATX has plead that Stephen and Robert aided and abetted a fraudulent conveyance, that claim is dismissed. Furthermore, GATX has requested leave to amend its complaint so that it may assert this claim if it was not properly plea in the original Complaint. Having concluded that such a claim is not viable as a matter of law, it would be futile to grant GATX's motion to the extent it wishes to assert a claim for aiding and abetting a fraudulent transfer.
In GATX's Proposed Amended Complaint, it seeks to allege three additional claims against Stephen and Robert in their individual capacities. In Count 1 of the Proposed Amended Complaint, GATX alleges that Stephen and Robert are liable for fraud for participating in fraudulent transfers.
Federal Rule of Civil Procedure 15(a)(2) requires the Court to freely grant leave when justice so requires. However, a motion to amend may be denied where there is "undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc." Riverview Health Inst. LLC v. Med. Mut. of Ohio, 601 F.3d 505, 520 (6th Cir. 2010) (quoting Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)). "A proposed amendment is futile if the amendment could not withstand a Rule 12(b)(6) motion to dismiss." Id.
In Count 1 of GATX's Proposed Amended Complaint, the company alleges that Stephen and Robert are liable for fraud for participating in fraudulent transfers made by Larry Addington. Kentucky law recognizes two types of fraud — fraud by misrepresentation and fraud by omission. Marrowbone Pharmacy, Inc. v. Johnson, No. 2010-CA-00429-MR, 2011 WL 6004345, at *5 (Ky.Ct.App. Dec. 2, 2011). Because GATX has failed to clearly identify which type of fraud allegedly occurred, the Court will analyze the facts presented in the Proposed Amended Complaint under both theories.
To establish a prima facie case of fraud by misrepresentation, the plaintiff must allege facts to support the following six elements: (1) that the declarant made
Here, GATX has failed to allege sufficient facts to establish a prima facie case of fraud by misrepresentation. The Proposed Amended Complaint alleges that Stephen and Robert were both aware that App Fuels was failing to meet its contractual obligations under the GATX lease. The Amended Complaint also alleges that Stephen "kept L. Addington up to speed on the general status of the App Fuels/GATX relationship, and gave him updates on the status of App Fuels' conversations with GATX relative to trying to satisfy GATX's requirements and payment terms." (Doc. #39, ¶ 118). Additionally, the Amended Complaint asserts that Stephen and Robert "knowingly participated in and condoned L. Addington's transfer of the Assets to the Trust for the purpose of defrauding L. Addington's creditors, including GATX." (Id.).
However, these facts are insufficient to allege fraud by misrepresentation. Aside from alleging that Stephen and Robert potentially knew about and condoned Larry's actions, GATX has failed to allege the most basic element of this tort — a misrepresentation. In fact, GATX has failed to even allege that Stephen or Robert ever made any representation to GATX, truthful or not, that GATX reasonably relied on to its detriment. These facts simply do not support the tort of fraud by misrepresentation.
If GATX is attempting to allege that Stephen and Robert are liable for fraud by omission, that attempt has also failed. Kentucky law also recognizes the tort of fraud by omission, which includes the following four elements: (1) that the defendants had a duty to disclose a fact or facts, (2) that the defendants failed to disclose such fact, (3) that the failure to disclose induced the plaintiff to act, and (4) that the plaintiff suffered actual damages therefrom. Rivermont Inn, Inc. v. Bass Hotels & Resorts, Inc., 113 S.W.3d 636, 641 (Ky.Ct.App.2003). "However, a duty to disclose is only created where a fiduciary or confidential relationship exists between the parties, where such duty is imposed by statute, or where the defendant has already partially disclosed facts creating the impression that a full disclosure has been made." Marrowbone Pharmacy, Inc., 2011 WL 6004345, at *5 (citing Rivermont Inn, Inc., 113 S.W.3d at 641).
Again, GATX has failed to plead sufficient facts to support this tort. Most notably, GATX has not alleged that Stephen or Robert had a duty to disclose any facts to GATX. Having reviewed the facts alleged in the Proposed Amended Complaint, it does not appear that Stephen or Robert had a fiduciary or confidential relationship with GATX, nor had Stephen or Robert partially disclosed facts to GATX that would have created the impression that full disclosure had been made. Likewise, Stephen and Robert were not under a statutory duty to disclose any facts to GATX. Moreover, GATX has not alleged that it relied on any factual omission which caused it to suffer damages. Therefore, amending the Complaint to add a claim for fraud by omission would be futile as such a claim would not survive a Rule 12(b)(6) motion to dismiss.
Notwithstanding Kentucky case law clarifying that two types of fraud are recognized
Daniels, 300 S.W.3d at 215. As this quotation makes clear, it was the defendant, not the court, that proposed this rule of law based on its faulty reliance on Johnson.
A review of Johnson v. Cormney shows that the "rule" proposed by GATX is both imprecise and supports only a portion of the fraud by omission tort. In Johnson, the defendant challenged the following jury instruction pertaining to a charge of fraud:
Johnson, 596 S.W.2d at 26, overruled on other grounds by Marshall v. City of Paducah, 618 S.W.2d 433 (Ky.App.1981). The defendant argued that the trial court's use of the word "condoned" erroneously allowed the jury to find him liable without finding that he committed affirmative acts to the detriment of the plaintiffs. Id.
The Court of Appeals began by highlighting that the complaint alleged that the defendant was liable for omitted and overt fraudulent acts. Id. The court then held that contrary to the defendant's assertion, "fraud and deceit are not limited to active or affirmative acts when the circumstances surrounding a transaction impose a duty or an obligation upon one of the parties to disclose material facts known to him and not known to the other party." Id. (citing Hall v. Carter, 324 S.W.2d 410 (1959)). The jury instruction's mention of "condoned" did not mislead the jury about the requirements of the fraud by omission tort because it conveyed the idea that the defendant must have "condon[ed] ... the acts of another ... both with the knowledge of the acts and with his intent to ... cheat, hinder or delay creditors." Id.
As the Johnson case makes clear, the "rule" proposed by GATX only encompasses a part of the tort of fraud by omission. A party may only be liable for this tort if he had a duty or obligation to disclose material facts to the opposing party to a transaction. Id. Without having some pre-existing duty, a party cannot be liable for fraud by omission simply because he condoned the acts of another with the intent to cheat, hinder or delay creditors. See id. As explained above, GATX has not alleged that Stephen or Robert had any duty to disclose facts to the company. Therefore, GATX has not alleged a sufficient factual basis to support a claim of fraud by omission.
GATX seeks leave to amend its Complaint so that it may allege that
Kentucky law has not addressed whether a cause of action exists for conspiring to effect a fraudulent conveyance. In GATX's response to the Motion to Dismiss, GATX represents that states are largely in accord with the proposition that non-transferees may be liable for conspiring to effect fraudulent conveyances. GATX relies on the Eleventh Circuit Court of Appeals' decision in Chepstow Ltd. v. Hunt, 381 F.3d 1077 (11th Cir.2004), to support this proposition. In Hunt, the Eleventh Circuit held that Georgia law recognized a claim against non-transferees for conspiring with a debtor to effect fraudulent transfers. Id. at 1091.
Contrary to GATX's assertion, Georgia law is in the clear minority.
Some states have reached the more broad conclusion that there is no such cause of action for civil conspiracy to effect a fraudulent conveyance. This line of cases holds that there can be no action for civil conspiracy to effect a fraudulent conveyance when the plaintiff would not be entitled to recover money damages from the defendant for the underlying fraudulent conveyance. Where courts have discussed this holding in detail, they began their analysis by defining the elements of a civil conspiracy claim. Fed. Deposit Ins. Corp. v. S. Prawer & Co., 829 F.Supp. 453, 456 (D.Me.1993); Efessiou v. Efessiou, et al., 41 Va. Cir. 142, 1996 WL 1065637, at *4 (Va.Cir.Ct. Nov. 12, 1996). For example, in Efessiou v. Efessiou, the court explained that a "civil conspiracy requires two or more persons combined to accomplish,
In Efessiou, the court held that, with limited exception, there can be no in personam liability for a fraudulent conveyance action; therefore, a party cannot circumvent the limitations of a fraudulent conveyance action by bringing a civil conspiracy claim seeking in personam liability. Efessiou, 1996 WL 1065637, at *4.
Other courts have held more specifically that there is no cause of action against a non-transferee for conspiring to effect a fraudulent conveyance.
The United States Bankruptcy Court for the District of Maryland reached a similar conclusion in In re Minh Vu Hoang, No. 05-21078-TJC, 2012 WL 195316 (Bankr. D.Md. Jan. 23, 2012). Like the courts in Efessiou and S. Prawer & Co., the Bankruptcy Court noted that "conspiracy is not an independent tort," but must be premised on an underlying, actionable tort. Id. at *5. Furthermore, conspiracy liability presupposes that the coconspirator may be liable for the underlying tort. Id. at *4. The court then turned to the Maryland fraudulent conveyance statute and determined that only the transferee and transferor may be liable for a fraudulent conveyance. Id. Thus, the court concluded that a nontransferee may not be liable for conspiring to effect a fraudulent conveyance, regardless of its participation in the conspiracy, because that third party cannot be liable for the underlying fraudulent conveyance. Id.; But see Qwest Communications Corp. v. Weisz, 278 F.Supp.2d 1188, 1192-1193 (S.D.Cal.2003) (holding that a coconspirator must be legally capable of committing the underlying tort, and that in limited instances a non-transferee may be legally capable of committing a fraudulent conveyance).
No Kentucky court has been asked to determine whether a claim for conspiring to effect a fraudulent conveyance is recognized as a matter of Kentucky law. However, the majority approach appears to be in line with the goals of Kentucky's fraudulent conveyance statutes; therefore, Kentucky would likely adopt the majority approach. Like the fraudulent conveyance statutes at issue in Efessiou and S. Prawer & Co., the purpose of Kentucky's fraudulent conveyance statutes is to "put the creditors back in the same position they would have enjoyed immediately prior to the voidable conveyance." Mattingly v. Gentry, 419 S.W.2d 745, 747 (Ky.1967). To fulfill this purpose, the plain language of both statutes allows a creditor to void the fraudulent conveyance. However, neither the plain language of the statutes or Kentucky case law suggests that a defendant can be personally liable for fraudulently conveying property. Therefore, as the court held in Efessiou, a plaintiff may not circumvent the limitations of the fraudulent conveyance action by bringing a civil conspiracy claim seeking an in personam judgment.
Moreover, even if Kentucky recognized a claim of conspiring to effect a fraudulent conveyance, it appears that Kentucky would follow the well-reasoned holding of In re Minh Vu Hoang that a nontransferee cannot be liable for conspiring to effect a fraudulent conveyance. The Kentucky Supreme Court has held that in order to prevail on a claim of civil conspiracy, the proponent must show an unlawful/corrupt combination or agreement between the alleged conspirators to do by some concerted action an unlawful act. Montgomery v. Milam, 910 S.W.2d 237, 239 (Ky.1995). As has already been explained, supra III(B)(2), a nontransferee cannot be directly liable for a fraudulent conveyance and, thus, cannot engage in an underlying unlawful act as described by Montgomery. Therefore, it is legally impossible for a non-transferee to conspire to effect a fraudulent conveyance. See In re Minh Vu Hoang, 2012 WL 195316, at *4 (holding that one may not be liable for civil conspiracy unless he is legally capable of committing the underlying tort); Applied Equip. Corp. v. Litton Saudi Arabia Ltd. et al., 7 Cal.4th 503, 28 Cal.Rptr.2d 475, 869 P.2d 454, 457 (1994). As a result, GATX's Motion for Leave to Amend its complaint to add a claim for conspiring to effect a fraudulent conveyance is denied because such an amendment would be futile.
GATX's Proposed Amended Complaint also asserts a negligence per se claim against Stephen and Robert under KRS § 446.070. That statute states:
GATX intends to assert that the Addingtons violated the fraudulent conveyance statutes, which caused GATX to sustain financial damages, rendering the Addingtons liable for negligence per se. However, this is not a viable legal theory and leave will not be granted for GATX to add this claim.
KRS § 446.070 codifies the common-law doctrine of "negligence per se" in Kentucky. Young v. Carran, 289 S.W.3d 586, 589 (Ky.App.2008). Negligence per se "is merely a negligence claim with a statutory standard of care substituted for the common law standard of care." Id. (internal quotation marks and citation omitted). The negligence per se statute "creates a private right of action in a person damaged by another person's violation of any statute that is penal in nature and provides no civil remedy." Hargis v. Baize, 168 S.W.3d 36, 40 (Ky.2005). Additionally, "in order for a violation to become negligence per se, the plaintiff must be a member of the class of persons intended to be protected by the regulation, and the injury suffered must be an event which the regulation was designed to prevent." Alderman v. Bradley, 957 S.W.2d 264, 267 (Ky.Ct.App.1997).
GATX's proposed negligence per se claim against Stephen and Robert would not withstand a 12(b)(6) motion for two reasons. First, the plain text of KRS § 446.070 states, "[a] person injured by the violation of any statute may recover from the offender such damages as he sustained by reason of the violation...." As has already been discussed, Stephen and Robert, as non-transferees, cannot "violate" the fraudulent conveyance statutes. Only the debtor and transferees may be liable under either statute. Second, and ever more problematic, negligence per se claims borrow the statutory standard of care from statutes that "provide no inclusive remedy." Young, 289 S.W.3d at 589. Both of the fraudulent conveyance statutes already provide a remedy — voiding the fraudulent conveyance. Thus, GATX's attempt to find a viable legal theory under KRS § 446.070 is flawed. KRS § 446.070 provides no relief for violations of the fraudulent conveyance statutes. As such, GATX's Motion for Leave to Amend its Complaint to add a negligence per se claim against Stephen and Robert in their individual capacities is denied.
Accordingly, for the reasons stated herein,
GATX Corporation, a judgment creditor, brings this state-law fraudulent conveyance
This matter is before the Court on Plaintiff GATX Corporation's motion for a final judgment and certification for appeal (Doc. # 42) of the Court's May 9, 2012 Memorandum Opinion and Order (Doc. # 41) dismissing all claims against Stephen and Robert Addington in their individual capacities. The matter has been fully briefed (Docs.# 43, 45), and is now ripe for review.
On November 17, 2011, Plaintiff GATX Corporation ("GATX") filed a Complaint against Larry, Stephen and Robert Addington, alleging that the Addington brothers participated in various fraudulent conveyances that must be declared void pursuant to KRS §§ 378.010 and 378.020. (Doc. # 1). Specifically, the Complaint alleges that Larry transferred real and personal property to Stephen and Robert as Co-Trustees of an irrevocable trust with the intent to delay, hinder or defraud GATX, a judgment creditor of Larry. The Complaint also alleges that Larry did not receive adequate consideration for the transfers. As a result, GATX contends that the transfers should be declared void under KRS §§ 378.010 and 378.020. Additionally, GATX maintains that Larry, as transferor, and Stephen and Robert, in their capacity as Co-Trustees and in their individual capacity, are liable for compensatory and punitive damages.
Stephen and Robert filed a Motion to Dismiss all claims against them in their individual capacities (Doc. # 10), and offered six arguments in support of their motion: (1) the Complaint did not comply with Federal Rule of Civil Procedure 8(a)(2) in that it did not contain a short and plain statement of the claims against them in their individual capacities; (2) the Complaint contained no material factual allegations against them in their individual capacities; (3) there is no legal basis for finding them liable under KRS §§ 378.010 or 378.020 because they did not receive any of the property at issue; (4) the Complaint contained no plausible factual allegations supporting aider and abettor liability; (5) punitive damages are not available for violating either statute; and (6) GATX failed to show how it was defrauded out of money with respect to two of the transfers at issue. (Id.).
While the motion to dismiss was being briefed, GATX filed a Motion for Leave to Amend its Complaint. (Doc. # 17). In that motion, GATX argued that its original complaint sufficiently alleged that Stephen and Robert in their individual capacities were liable for fraud, conspiracy to commit fraudulent transfers, and aiding and abetting fraudulent transfers based on their participation in the allegedly fraudulent transfers. GATX sought leave to "break its claims for fraud, conspiracy to commit fraudulent transfers, and aiding and abetting fraudulent transfers out into separate counts." (Doc. # 17-1, p. 5). GATX also indicated that it would add a negligence per se claim against Stephen and Robert in their individual capacities.
Three days after GATX filed its Motion for Leave to Amend the Complaint, Larry Addington gave notice that he had filed a voluntary petition in Bankruptcy under
Prompted by Larry's bankruptcy petition, Stephen and Robert, in their capacity as Co-Trustees, subsequently filed a motion to stay the fraudulent conveyance claims against them as well. (Doc. # 28). They argued that the state-law fraudulent conveyance claims against them were essentially property of Larry's bankruptcy estate and thus subject to the automatic stay provision of 11 U.S.C. § 362(a)(3). GATX opposed that motion in its entirety (Doc. # 30), but its argument in opposition more directly expressed concerns about staying claims against Stephen and Robert in their individual capacities.
On March 12, 2012, the Court held oral argument on all three of the pending motions. At the conclusion of the hearing, the Court ordered that the Motion to Dismiss and Motion to Stay stand submitted. Additionally, the Court ordered GATX to file a Proposed Amended Complaint in response to Stephen and Robert's concerns that they had been unable respond to the merits of the Motion for Leave to Amend the Complaint without reviewing the proposed amendments. After GATX filed the Proposed Amended Complaint (Doc. # 39), Stephen and Robert filed a response in opposition arguing, inter alia, that the proposed amendments would be futile because they could not withstand a motion to dismiss under Rule 12(b)(6). (Doc. # 40).
On May 9, 2012, the Court issued its Memorandum Opinion and Order granting Stephen and Robert's Motion to Dismiss and denying GATX's Motion for Leave to Amend its Complaint. 879 F.Supp.2d 633. The opinion centered on the legal viability of the fraudulent conveyance claims asserted against Stephen and Robert as non-transferees. The Court decided four matters of first impression in Kentucky law and applied well-settled Kentucky law to a fifth claim. Id. at 639-40. First, the Court held that non-transferees cannot be directly liable for violating Kentucky's fraudulent conveyance statutes. Id. at 641-43. Similarly, consistent with the majority of states that have decided the issue, the Court held that non-transferees cannot be liable under Kentucky law for aiding and abetting, or conspiring to effect, a fraudulent conveyance. Id. at 642-45, 647-51. As the final matter of first impression, the Court concluded that a violation of Kentucky's fraudulent conveyance statutes cannot give rise to a negligence per se claim under KRS § 446.070. Id. at 650-51. Finally, applying well-settled Kentucky law, the Court held that GATX failed to allege sufficient facts to support a claim of fraud against Stephen and Robert in their individual capacities. Id. at 644-48.
Shortly after the Court dismissed all claims against Stephen and Robert in their individual capacities, the Bankruptcy Court converted Larry's Chapter 11 case to a case under Chapter 7 of the Bankruptcy Code. (Doc. # 42-1). According to GATX, Mark T. Miller has been appointed as the trustee of Larry's bankruptcy estate, with the right to pursue any and all claims on behalf of Larry's creditors. (Id.).
GATX now moves the Court to certify its May 9, 2012 Memorandum Opinion and Order ("Order") as a final and appealable judgment pursuant to Federal Rule of Civil Procedure 54(b). (Doc. # 42). GATX argues that there is no just reason for delay in certifying the Order as a final judgment, particularly given the "unusual posture of this action." (Id.). Stephen and Robert have responded in opposition
GATX has moved the Court to enter a final judgment and certify for appeal its May 9, 2012 Memorandum Opinion and Order ("May 9th Order") dismissing all claims against Stephen and Robert Addington in their individual capacities. (Doc. # 41). GATX argues that the Court's prior Order disposes of all claims against Stephen and Robert Addington in their individual capacities and that there is no just reason for the Court to delay certification of its Order.
Federal Rule of Civil Procedure 54(b) permits courts dealing with multiple claims or multiple parties to direct the entry of a final judgment as to fewer than all of the claims or parties. The rule states in pertinent part:
Fed.R.Civ.P. 54(b).
This Rule was adopted in "response to the need created by the liberal joinder provisions for the Federal Rules of Civil Procedure to revise `what should be treated as a judicial unit for purposes of appellate jurisdiction.'" Corrosioneering, Inc. v. Thyssen Envtl. Sys., Inc., 807 F.2d 1279, 1282 (6th Cir.1986) (quoting Sears, Roebuck & Co. v. Mackey, 351 U.S. 427, 432, 76 S.Ct. 895, 100 L.Ed. 1297 (1956)). "It attempts to strike a balance between the undesirability of piecemeal appeals and the need for making review available at a time that best serves the needs of the parties." Id. (internal quotations omitted). Ultimately, the rule allows the district court to act as a "dispatcher," and exercise its discretion in the interest of sound judicial administration in "releas[ing] for appeal final decisions ... for fewer than all the parties." Id. (internal quotations omitted).
The Sixth Circuit instructs district courts to exercise the power conferred by Rule 54(b) only "in the infrequent harsh case as an instrument for the improved administration of justice." Id. (internal quotations omitted). Accordingly, "Rule 54(b) is not to be used routinely, or as a courtesy or accommodation to counsel." Id. (internal quotations omitted). Instead, it is only to be used when there is "no just reason for delay." Id.
Two independent requirements must be met before a district court may certify an order for immediate appeal. First, the district court must "expressly direct the entry of final judgment as to one or more but fewer than all the claims or parties in a case." Downie v. City of Middleburg Heights, 301 F.3d 688, 693 (6th Cir.2002) (quoting Gen. Acquisition, Inc. v. GenCorp., Inc., 23 F.3d 1022, 1026 (6th Cir.1994)). Second, the district court must expressly determine that there is no just reason to delay appellate review. Id. With this general framework in mind, the Court turns to the merits of Plaintiff's motion.
Under the first requirement, the Court must determine whether the case includes either multiple claims or parties. 10 Wright & Miller, Federal Practice and Procedure § 2656, 2655. It must then consider whether one or more but fewer than all the claims have been decided or
Next, the Court must consider whether there is "just reason for delay." Fed.R.Civ.P. 54(b). In making this determination, the Court must weigh the needs of the parties in seeking an immediate appeal against the efficiency of having one appeal at the conclusion of the case in its entirety. GenCorp, Inc. v. Olin Corp., 390 F.3d 433, 442 (6th Cir.2004). The Sixth Circuit has provided a nonexhaustive list of five factors that a court should consider when making this determination:
Corrosioneering, 807 F.2d at 1283.
GATX and the Addington brothers offer drastically different analyses of each factor. Their disagreement apparently stems from their divergent opinions regarding the present and future impact of Larry's bankruptcy proceeding on this case. GATX argues that it no longer has standing to pursue the unadjudicated claims against Larry and the Co-Trustees because they are now property of the bankruptcy estate, and that any adjudication on those claims in the bankruptcy proceeding will have no impact on its derivative fraudulent conveyance claims against the Addington brothers. The brothers, on the other hand, argue that the fraudulent conveyance claims against Larry and the Co-Trustees are legally and factually similar, if not identical, to the direct and derivative fraudulent conveyance claims that have been adjudicated in this matter. According to the Addington brothers, an adjudication of the underlying fraudulent conveyance claims in the bankruptcy proceeding could potentially "moot" the need for an appeal in this case. With these underlying arguments in mind, the Court must now consider the Corrosioneering factors to determine whether there is just reason for delay in certifying the Court's May 9th Order as a final judgment.
On May 9, 2012, the Court dismissed all claims against Stephen and Robert Addington in their individual capacities, finding that non-transferees could not be directly
In Lowery v. Federal Express Corp., 426 F.3d 817 (6th Cir.2005), the Sixth Circuit offered guidance on how this first factor should be considered. In that case, the district court granted summary judgment in favor of the defendant on the plaintiff's Title VII adverse employment action, but denied summary judgment as to a breach of contract claim. Id. at 820. The plaintiff then moved the court to certify its judgment on the Title VII claim under Rule 54(b), which the court granted, finding no just reason for delay because the Title VII and breach of contract claims possessed separate and distinct elements. Id. at 822. On appeal, however, the Sixth Circuit dismissed the appeal, finding that the district court should have focused on the similarity of the factual basis between the adjudicated and unadjudicated claims under the first factor. Id. at 823. The appellate court stated, "the greater the overlap in the factual basis between the adjudicated and unadjudicated claims, the greater the possibility that this court will have to revisit the same facts under a different theory in a second appeal." Id.
Lowery lends considerable support to the conclusion that the adjudicated and unadjudicated claims in this case share a strong relationship. Much like Lowery, the adjudicated and unadjudicated claims in this matter share an identical factual basis. In fact, as the Court suggested during the March 12, 2012 oral argument on Stephen and Robert's motion to dismiss, GATX has had difficulty separating the factual allegations against Stephen and Robert as Co-Trustees from the allegations against Stephen and Robert in their individual capacities. More importantly, both claims center on Larry's actions in conveying property to the irrevocable trust. As such, the factual basis for the adjudicated and unadjudicated claims is quite similar.
Similarly, in Corrosioneering, Inc. v. Thyssen Environmental Systems, Inc., 807 F.2d 1279 (6th Cir.1986), the Sixth Circuit also suggests that the district court should consider whether the adjudicated claim is dependent on the unadjudicated claims. In that case, Corrosioneerring sued Thyssen Environmental Systems for breach of contract. Id. In turn, Thyssen filed a counterclaim against Corrosioneering for installing a defective product. Id. at 1281. Corrosioneering then filed a third-party complaint against distributors Ashland and Berton, arguing that they breached express and implied warranties on the quality of products they sold to Corrosioneering that were later used during the installation process. Id. Based on those warranties, Corrosioneering argued that Ashland and Berton must indemnify it for any liability it may have on the counterclaim. Id.
The district court held a bench trial on the counterclaim and third-party complaint. Id. The court found that Corrosioneering was liable on the counterclaim, but determined that Ashland and Berton made no express or implied warranties to Corrosioneering and, thus, did not have to indemnify Corrosioneering. Id. The court subsequently entered a final judgment in favor of Ashland and Berton, dismissing the third-party complaint and certifying the indemnity issue for appeal under rule 54(b). Id.
The Sixth Circuit held that certification under Rule 54(b) was improper for a number
Like Corrosioneering, the adjudicated claims in this case are dependent on the unadjudicated fraudulent conveyance claims. In the May 9th Order, this Court held that, as matter of Kentucky law, a non-transferee cannot be directly or derivatively liable for participating in a fraudulent transfer. Therefore, the Court dismissed all direct and derivative claims against the Addington brothers in their individual capacity. The derivative claims by their very nature are dependent on the underlying, unadjudicated fraudulent conveyance claims.
Despite the clear factual and legal relationship between the underlying fraudulent transfer claims and the derivative claims against Stephen and Robert, GATX argues the claims have no relationship. Specifically, GATX notes that it does not presently have standing to pursue the unadjudicated claims because they have been stayed pending the dismissal of Larry's bankruptcy case. GATX then states in conclusory fashion that its lack of standing means there is no clear relationship between the claims. While GATX's standing to pursue the unadjudicated claims is certainly important to the Court's ultimate determination, and will be given proper consideration, GATX's argument fails to focus on the proper issue under this factor — whether the claims are legally and factually related.
Although the Court will consider the impact of Larry's bankruptcy case in more detail below, GATX's argument under this factor merits one additional comment. GATX focuses on its present lack of standing to pursue the unadjudicated fraudulent transfer claims against Larry and the Co-Trustees. This focus fails to recognize the possibility, however slight, that GATX might later regain standing to pursue those claims. For example, if the Bankruptcy Trustee chooses not to pursue the fraudulent transfer claims, GATX might petition the bankruptcy court for derivative standing to pursue those claims on behalf of all creditors.
Under the second factor, the Court must determine whether future developments in this Court might moot the issue GATX seeks to appeal. GATX argues that this factor weighs in its favor. Specifically, GATX asserts that it is unlikely to receive full payment from Larry for his debts, and thus "it is extremely unlikely that appellate review of the Dismissal Order will be mooted by future developments in this Court." (Doc. # 42-1, p. 9). However, this argument improperly focuses on GATX's ability to recover Larry's debt when it should focus on how developments in this Court or Larry's bankruptcy case might moot the need to appeal the adjudicated claims.
The Court is ultimately being asked to forecast various developments in this Court or Larry's bankruptcy case that could moot the need for appellate review on the adjudicated claims. This was a straightforward task for the Corrosioneering Court. In that case, the court acknowledged that there had yet to be a determination on whether Corrosioneering was liable on the defendant's counterclaim. Corrosioneering, 807 F.2d at 1284. The court concluded that if Corrosioneering were found not to be liable for providing a defective product, there would be no need to consider whether the third-party defendants were obligated to indemnify Corrosioneering on appeal. Id. Thus, the court held that future developments regarding the counterclaim could moot the need for appellate review on the adjudicated indemnity issue. Id.
Unlike Corrosioneering, the posture of this case does not allow for a straightforward application of this factor. The Addington brothers argue that if the conveyances-at-issue are litigated in the bankruptcy proceeding and found to not be fraudulent, that result will moot the need for appellate review on the adjudicated claims at issue herein. GATX responds that the Bankruptcy Trustee is the only party with standing to pursue those claims, and any judgment on those claims achieved by the Trustee will not bind GATX. Accordingly, the Court must consider the various ways that the underlying claims might be pursued, and
In light of Larry's bankruptcy case, the underlying fraudulent conveyance claims against Larry and the Co-Trustees might be pursued in at least two ways. First, the bankruptcy trustee might pursue those claims under 11 U.S.C. § 544 in an adversary proceeding before the bankruptcy court. Second, as previously discussed, if the bankruptcy trustee chooses not to pursue the claims, GATX might seek derivative standing from the bankruptcy court to pursue the claims on behalf of all of Larry's creditors. In re Trailer Source, Inc., 555 F.3d 231 (6th Cir.2009).
In the event that the fraudulent conveyance claims are found to lack merit in either of those proceedings,
GATX acknowledges that the Court must consider the applicability of collateral estoppel in making this determination, but ultimately contends that collateral estoppel would not preclude it from appealing or re-litigating the claims against the Addington brothers. In support, GATX argues that the Addington brothers would not be able to meet the Sixth Circuit's four-part test for determining whether collateral estoppel bars relitigation of an issue.
Collateral estoppel, commonly referred to as issue preclusion, is an affirmative defense "which prohibits issues [that] were adjudicated in a previous lawsuit from being relitigated in a subsequent lawsuit." Miller v. Admin. Office of the Courts, 361 S.W.3d 867, 871 (Ky.2011). This defense is "properly asserted by a person who was not a party to the former action nor in privity with such a party." Id. at 872 (internal quotations omitted). It permits the non-party to a use the prior outcome against a party to that prior action, "so as to preclude the relitigation of an issue determined in the prior action." Id. (quoting Moore v. Commonwealth of Kentucky, 954 S.W.2d 317, 319 (Ky.1997)).
The Kentucky Supreme Court has identified five elements that must be met before a party may assert defensive collateral estoppel: (1) at least one party to be bound in the second case must have been a party in the first case; (2) the issue in the second case must be the same as the issue in the first case; (3) the issue must have been actually litigated; (4) the issue was actually decided in that action; and (5) the decision on the issue in the prior action must have been necessary to the court's judgment and adverse to the party to be bound. Miller, 361 S.W.3d at 872.
Assuming that the underlying fraudulent conveyance claims are actually litigated in Larry's bankruptcy case, the second through fifth elements would likely be met. If GATX were successful on appeal of the May 9th Order, on remand it would seek to prove that the Addington brothers are individually liable for participating in fraudulent transactions between Larry and the Co-Trustees. Thus, the underlying issue on remand of whether a fraudulent conveyance occurred would be identical to the issue potentially decided in Larry's bankruptcy case. Moreover, a decision on whether fraudulent conveyances occurred would be central to the judgment rendered in Larry's bankruptcy case. Because the second through fifth elements would likely be met, the potential applicability of collateral estoppel turns on the first element — at least one party to be bound in the second case must have been a party in the first case.
GATX argues that this first element will not be met because it will not be a party to the litigation in Larry's bankruptcy case. However, that argument is not necessarily true. As previously stated, if the bankruptcy trustee decides not to pursue the fraudulent conveyance claims, GATX might seek derivative standing to pursue those claims on behalf of all creditors. If that were to happen, GATX would certainly be a party to the prior case, and the first element would be met.
Even if the bankruptcy trustee pursues the underlying fraudulent conveyance claims in an adversary proceeding, GATX might potentially be bound by an adverse decision in that suit. Although GATX would not be a party to that proceeding, Kentucky law would permit the Addington brothers to assert collateral estoppel against GATX if it were in privity with the bankruptcy trustee. Harris v. Jackson, 192 S.W.3d 297, 303 (Ky.2006). Privity is "founded upon such an identity of interest that the party to the judgment represented the same legal right." Waddell v. Stevenson, 683 S.W.2d 955, 959 (Ky.Ct.App.1984) (quoting State Farm Mut. Auto. Ins. Co. v. Shelton, 368 S.W.2d 734, 737 (Ky.1963)).
In conclusory fashion, GATX argues it would not be a privy of the trustee. The Court sees reason to doubt the validity of that argument. Pursuant to 11 U.S.C. § 544(b)(1), the bankruptcy trustee is granted the sole authority to "avoid any transfer of an interest of the debtor in
In the May 9th Order, the Court held as a matter of Kentucky law that non-transferees cannot be directly or derivatively liable for participating in a fraudulent conveyance. The Court made no determination on whether the transfers were in fact fraudulent under either of the Kentucky fraudulent conveyance statutes. Thus, on appeal, the Circuit Court would only be asked to determine whether Kentucky law recognizes direct or derivative claims against non-transferees for participating in a fraudulent conveyance. That issue is not pertinent to the unadjudicated fraudulent conveyance claims against Larry and the Co-Trustees and, thus, there is no possibility that the Circuit Court would be asked to consider it a second time.
The Addington brothers argue, however, that this factor weighs in their favor because there is a risk that the Sixth Circuit's decision would be merely advisory. They contend there is a possibility that the underlying fraudulent transfer claims will be found to lack merit, and, thus, any appellate decision on the adjudicated claims will be merely advisory. However, this argument is simply an extension of the argument presented under the second factor, which the Court has considered at great length. While the Court agrees with the Addington brothers, their argument is not appropriate here.
The Addington brothers do not address this factor and, thus, apparently concede that the factor weighs in favor of GATX. Additionally, the Addington brothers have not asserted a counterclaim against GATX that could result in set-off against the judgment. Thus, the Court finds that this factor weighs in favor of certifying the May 9th Order as a final judgment.
All of the unadjudicated claims in this matter have been stayed pending the resolution of Larry's bankruptcy proceeding.
Although three factors weigh in favor of certifying the May 9th Order for immediate appeal, on balance, the Court finds that an immediate appeal is unwarranted here. The adjudicated claims share a strong factual and legal relationship with the unadjudicated claims. Moreover, there is a possibility that future developments might moot the need for appellate review of the adjudicated claims. Each of these factors control the Court's conclusion.
Ultimately, because of the posture of this case vis-à-vis Larry's bankruptcy proceeding, the Court finds there are just reasons for delaying immediate appeal. This is not the "infrequent harsh case" that the Sixth Circuit instructs is appropriate for certification under Rule 54(b). Instead, in the interest of sound judicial administration, an appeal of this case is more appropriate once all claims have been adjudicated. Accordingly,
