Joan N. Feeney, United States Bankruptcy Judge.
The matter before the Court is the Motion of the Plaintiff Joseph G. Butler, the Chapter 7 Trustee of the estate of Neil St. John Raymond (the "Debtor"), for Leave to Amend Complaint pursuant to Fed. R. Bankr.P. 7015(a) for the purposes of adding defendants and a claim for relief. The
If the Court grants the Motion for Leave to Amend, the Defendants' pending Motion to Dismiss pursuant to Fed. R.Civ.P. 12(b)(6), which Defendant Elizabeth Raymond joined by way of a document captioned, "Joinder to Motion to Dismiss," the Court then must determine whether the Motion to Dismiss is moot. According to the court in Oquendo-Claudio v. Santander Fin. Servs., Inc., No. 10-2185-GAG, 2011 WL 5163319, at *1 n. 4 (D.P.R. Oct. 31, 2011), "while it is common for district courts to deny a motion to dismiss an original complaint as moot if an amended complaint is timely filed pursuant to Rule 15(a)(1)(B), an amendment to a complaint does not automatically render moot the grounds raised in the motion to dismiss the original complaint." The court in Oquendo-Claudio noted that if the allegations and claims asserted in the original and amended complaints are substantially identical, defendants' motions to dismiss are not moot. Id. For the reasons set forth below, the Court shall grant the Trustee's Motion for Leave to Amend and address the merits of the Defendants' Motion to Dismiss because the allegations in the original Complaint and Amended Complaint are substantially identical.
The Debtor filed a voluntary Chapter 11 petition on October 24, 2013. He subsequently filed a Motion for Entry of Order Converting Debtor's Chapter 11 Case to Chapter 7, which the Court granted on November 20, 2013, and the Plaintiff, Joseph G. Butler, Esq., was appointed Chapter 7 Trustee.
On April 25, 2014, the Chapter 7 Trustee filed a Verified Complaint against the Defendants, Candlewood Road Partners, LLC ("Candlewood"),
In his original Complaint, the Trustee alleged that the Debtor, a well-known real estate developer who was involved in "a high-end golf course and housing development" in Ipswich, Massachusetts known as "Turner Hill," "treated the assets held by
Specifically, the Trustee alleged that "despite the presence of a spendthrift clause in the Buttonwood Trust ... [the Debtor] has exercised unfettered control over the assets and income of the Buttonwood Trust,
The Trustee, through his proposed Verified First Amended Complaint, seeks to add additional defendants, namely 1) Raymond Property Company LLC ("RPC"), a Massachusetts limited liability company;
Additionally, the Trustee seeks to amend the original Complaint to identify Jed and Benjamin in their capacities as co-trustees of the Buttonwood Trust and the Buttonwood Nominee Trust, and Elizabeth in her capacity as co-trustee of the Buttonwood Trust.
The Chapter 7 Trustee's original Complaint contained eight counts as follows: Count I — Declaratory Judgment (Trust Assets are Part of the Debtor's Estate — 11 U.S.C. § 541(a)); Count II — Fraudulent Transfer (Raymond Fraudulently Transferred Assets to His Children — M.G.L. c. 109A, §§ 5 and 6 and 11 U.S.C. § 544); Count III — Declaratory Judgment (Company Assets are Part of the Debtor's Estate — 11 U.S.C. § 541(a)); Count IV — Veil Piercing (Limited Liability Company Assets are Part of the Debtor's Estate);
The Trustee's Amended Complaint contains nine counts as follows: Count I — Declaratory Judgment (Trust Assets are Part of the Debtor's Estate-11 U.S.C. § 541(a)); Count II — Declaratory Judgment (Raymond Children's Trust and Related Company Assets are Part of the Debtor's estate — 11 U.S.C. § 541(a); Count III — Fraudulent Transfer (Raymond Fraudulently Transferred Assets to His Children — M.G.L. c. 109A, §§ 5 and 6 and 11 U.S.C. § 544); Count IV — Substantive Consolidation (The Assets and Liabilities of the LLCs and the Trusts Should be
In conjunction with the filing of his original Verified Complaint, the Chapter 7 Trustee filed a Motion for Temporary Restraining Order and Preliminary Injunction. On July 16, 2014, this Court denied the motion, finding that the Trustee had failed to establish a likelihood of success on the merits. In so doing, the Court, citing Murphy v. Felice (In re Felice), 494 B.R. 160 (Bankr.D.Mass.2013), stated in pertinent part:
Butler v. Candlewood Road Partners, LLC (In re Raymond), Case No. 13-16214, Adv. P. No. 14-1082, 2014 WL 3534038, at *5 (Bankr.D.Mass. July 16, 2014) (footnote omitted). This Court concluded that
Id. The Court added:
Id. at *6.
Fed.R.Civ.P. 15(a), made applicable to this proceeding by Fed. R. Bankr.P. 7015, provides:
Fed.R.Civ.P. 15(a). The standard applicable to determination of motions to amend complaints under Fed.R.Civ.P. 15(a), made applicable to this proceeding by Fed. R. Bankr.P. 7015, is succinctly set forth in Newcare Health Corp. v. Midway Health Care Ctr. (In re Newcare Health Corp.), 274 B.R. 307 (Bankr.D.Mass.2002). In that case, Judge Boroff stated:
In re Newcare Health Corp., 274 B.R. at 311.
The Trustee contends that his Motion for Leave to Amend should be granted because "[n]either the current defendants, nor the proposed additional defendants will suffer any prejudice as a result of the Trustee's First Amended Complaint. This adversary proceeding is still in its early stages; none of the parties have taken any discovery, and the court has yet to set deadlines for discovery or briefing." He adds that although he has added a count for substantive consolidation (Count IV), the facts upon which that count is based were present in his original Verified Complaint, so there can be no surprise or prejudice to any of the Defendants. He also argues that "none of the other Foman [Foman v. Davis, 371 U.S. 178, 181-82, 83 S.Ct. 227, 9 L.Ed.2d 222 (1962)] factors exist here," citing the absence of delay or bad faith in seeking the amendment, as well as the absence of an amendment to cure deficiencies from a prior amended complaint, stating that he "merely seeks to properly and fully plead his allegations and causes of action so that he is afforded the appropriate remedy."
Additionally, the Trustee, citing Juarez v. U.S. Bank Nat. Ass'n, No. 11-10318-DJC, 2014 WL 815343, at *2 (D.Mass. March 1, 2014), asserts that he is entitled to add new parties, in particular Jed, Benjamin and Elizabeth in their capacities as trustees, as well as Attorney Brear, whom he maintains functioned as the Debtor's instrumentality and alter ego, and was the trustee of the Raymond Children's Trust when it ostensibly was terminated improperly. In seeking to add RPC, he asserts that its assets should be part of the Debtor's bankruptcy estate because of the Debtor's control over it.
The Defendants argue that the Trustee's Amended Complaint "presents little more than a formulaic recitation of certain items
The Defendants also assert that the Trustee has failed to allege harm to the Debtor with respect to Counts I-IV of his Amended Complaint, citing, inter alia, Regan v. Vinick & Young (In re Rare Coin Galleries of Am., Inc.), 862 F.2d 896, 900 (1st Cir.1988). They argue that the First Circuit assesses whether a cause of action belongs to the trustee only if there is an allegation of harm to the debtor. Id. at 900-01. If no harm is alleged, then the cause of action could not have been asserted by the debtor as of the commencement of the case, could not be property of the estate, and the trustee lacks standing to bring the claim.
The Defendants further maintain that the Trustee failed to allege any facts to support his substantive consolidation claim, noting that "[t]he applicable test for substantive consolidation requires a showing that (1) there is substantial identity between the entities to be consolidated; and (2) consolidation is necessary to avoid some harm or to realize some benefit." In re Pearlman, 462 B.R. 849, 853 (Bankr. M.D.Fla.2012). They assert that the Trustee has pled no substantive facts such that the claim can survive a motion to dismiss or a motion for summary judgment. The Defendants add that the Trustee's allegations are legally and factually insufficient to establish a valid substantive consolidation claim, and, therefore, the Trustee's proposed substantive consolidation claim should be properly denied as futile. See Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (pleadings must contain more than "labels, conclusions and formulaic recitation[s] of a cause of action's elements..."); Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955) (a complaint does not suffice if it "tenders `naked assertion[s]' devoid of `further factual enhancement.'").
The Court finds that the Trustee has satisfied his burden under Rule 15(a) and grants his Motion for Leave to Amend. Although the Trustee has named additional defendants and added an additional Count, the Court concludes that the Trustee's delay in amending his Complaint was not the result of bad faith. Under the liberal standard for the allowance of motions to amend, the Court shall exercise its discretion to allow the Motion for Leave to Amend. The Amended Complaint clarifies and, to a limited extent, expands the relief requested in the original Complaint to add a count for substantive consolidation. The Amended Complaint does not contain any new allegations, except with respect to Attorney Brear's role as the Debtor's attorney and as the former trustee of the Buttonwood Trust, the Buttonwood Nominee Trust, the 2002 Buttonwood Nominee Trust and the Raymond's Children's Trust, as well as the disclosure of the Defendants' state court complaint against Attorney Brear and C & M.
Judge Hillman succinctly set forth the standard for dismissal under Fed.R.Civ.P. 12(b)(6), made applicable to this proceeding by Fed. R. Bankr.P.7012 in Julien v. Bank of Am., N.A. (In re Julien), 488 B.R. 502 (Bankr.D.Mass.2013). He stated:
488 B.R. at 506-07 (quoting Ashcroft v. Iqbal, 556 U.S. 662, 678-679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009), and Bell Atlantic Corp. v. Twombly, 550 U.S. at 556-570, 127, 127 S.Ct. 1955 S.Ct.1955) (internal citations omitted). See also DiVittorio v. HSBC Bank, USA, N.A. (In re DiVittorio), 430 B.R. 26, 42 (Bankr. D.Mass.2010), aff'd, 670 F.3d 273 (1st Cir. 2012). Although all factual allegations must be accepted as true, legal conclusions couched as factual ones need not be accepted. In re DiVittorio, 430 B.R. at 42-43. In In re Julien, Judge Hillman also observed:
In re Julien, 488 B.R. at 507 (quoting Facey v. Dickhaut, 892 F.Supp.2d 347, 351 & n. 2 (D.Mass.2012)).
The Defendants focus on the Trustee's standing to assert alter ego and reverse veil piercing claims and the absence of any allegations of harm to the Debtor. Citing, inter alia, In re ALT Hotel LLC, 479 B.R. 781, 801 (Bankr.N.D.Ill.2012),
The Defendants also argue that standing to bring the veil piercing and alter ego claims does not exist under 11 U.S.C. § 544(a). In addition, they contend that the alleged fraudulent transfer of the assets of the Raymond Children's Trust to the children via the termination of the trust must fail because the Debtor was neither a beneficiary nor a trustee of that trust; the trust property was not his to transfer; and he did not transfer the Trust property. They point to the conduct of Attorney Brear, who was alleged to be acting as the Debtor's alter ego in distributing the assets to the children, a contention now belied by the state court complaint filed by the Debtor's children against Attorney Brear and C & M.
In addition, the Defendants assert the Trustee lacks standing, arguing
Joined by Elizabeth, the Defendants, in addition to rejecting the Trustee's claims of veil piercing, alter ego and fraudulent transfer, contend that the Trustee's claims are barred by the doctrine of in pari delicto.
The Trustee takes issue with the Defendants' arguments. In summary, he asserts the following:
The Trustee emphasizes that he "is not asserting any causes of action that he inherited from the Debtor under § 541."
Generally, the determination of whether an interest in property is property of the estate under 11 U.S.C. § 541 is a core proceeding. See, e.g., Velo Holdings, Inc. v. Paymentech, LLC (In re Velo Holdings, Inc.), 475 B.R. 367, 386-87 (Bankr. S.D.N.Y.2012); Murphy v. Felice (In re Felice), 480 B.R. 401, 418 (Bankr.D.Mass. 2012). According to the court in Olsen v. Reuter (In re Reuter), 499 B.R. 655 (Bankr.W.D.Mo.2013),
In re Reuter, 499 B.R. at 670 (emphasis supplied). The court in Stokes v. Duncan (In re Stokes), No. MT-13-1097, 2013 WL 5313412 (9th Cir. BAP Sept. 23, 2013), recognized, however, that although a declaratory relief action containing a single ground for relief may implicate and, indeed, require application of § 541, that section "defines property of the estate, but does not create a right to relief. It, therefore, follows that an action to enforce a right thereunder cannot exist." Id. at *6 (citing Wilshire Courtyard v. Cal. Franchise Tax Bd. (In re Wilshire Courtyard), 729 F.3d 1279, 1286-87 (9th Cir.2013) (fact that bankruptcy statute was implicated did not transform statute into substantive right to relief for the purposes of bankruptcy jurisdiction). In other words, section 541 of the Bankruptcy Code implicates trustees' duties under 11 U.S.C. § 704(a) to collect and reduce to money property of the estate, but it does not provide, in and of itself, a substantive claim for relief, absent invocation of the trustee's so-called "strong arm" powers under 11 U.S.C. §§ 544-551 or 11 U.S.C. § 542. Thus, while § 541 defines the extent of property of the estate, § 542 requires an entity other than a custodian to deliver the debtor's legal or equitable interests in property to the trustee. Notably, the Trustee did not mention or appear to rely upon § 542, except with respect to antique guns, artwork and collectibles in Count VI of the Amended Complaint. In this regard, the causes of action available to a Chapter 7 bankruptcy trustee are limited to those that belong to the debtor at the commencement of the case and pass to the
The doctrines of veil piercing, reverse veil piercing and alter ego are interrelated and litigants often use the terms interchangeably.
In Massachusetts, piercing the corporate veil is a well-recognized, yet fact specific, remedy. See Zimmerman v. Puccio, 613 F.3d 60, 74 (1st Cir.2010); My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 620, 233 N.E.2d 748 (1968).
There are few reported decisions addressing the availability of the reverse veil piercing doctrine under Massachusetts law, and those that do, reject reverse veil
Regardless of whether state law considers veil piercing and alter ego claims as belonging to individual creditors, or whether state law decisions reject reverse veil piercing, substantive consolidation, however, is available in federal courts as an alternative. For example, the court in In re Bonham, 226 B.R. 56, 76 (Bankr.D.Alaska 1998), aff'd, 229 F.3d 750 (9th Cir.2000), observed:
Id. at 76.
The attachments to the Trustee's original and Amended Complaints reveal that, on October 31, 1988, more than 25 years before the commencement of the Debtor's bankruptcy case, the Buttonwood Trust was amended by its trustees, Alvin S. Hochberg and Daniel V. Bakinowski, with the consent of the Debtor, to provide that the Buttonwood Trust was irrevocable
As noted above, the causes of action available to a Chapter 7 trustee are limited to those that belonged to the Debtor at the commencement of the case or are made available to the Chapter 7 trustee by provisions of the Bankruptcy Code. Based upon the Trustee's allegations in the Complaint and Amended Complaint, the Trustee has not asserted any causes of action against the Buttonwood trusts that the Debtor may have had at the commencement of the case. Moreover, as emphasized by the Defendants, the Debtor was not harmed by any pervasive control over the trusts; in fact, his use of trust assets
Through Count I, the Trustee asks this Court to determine, not whether the Debtor's beneficial interest in the Buttonwood Trust is an asset of the Debtor's estate, but whether the assets of the Buttonwood trusts are property of the Debtor's estate, a determination that must be made with reference to state law. In this regard, the Debtor's interests may include the power to revoke or amend the trusts.
In re Tosi, 383 B.R. at 10. See also In re Reuter, 499 B.R. at 670. This Court in Tosi added:
In re Tosi, 383 B.R. at 11. In Brown, the debtor was a beneficiary of a self-settled trust but could not exercise dominion over trust assets. The Eleventh Circuit stated that "[t]he issue of self-settlement is separate from the issue of control, and either can serve as an independent ground for invalidating a spendthrift provision." Id. (citing In re Spenlinhauer, 182 B.R. 361 (Bankr.D.Me.), aff'd 101 F.3d 106 (1st Cir.1996)(declining to address beneficiaries' control over trust where the trust was self-settled and, therefore, the spendthrift provision was ineffective on that basis alone).
The Trustee argues that he has standing under 11 U.S.C. § 541(a) to bring a reverse veil piercing claim against the Buttonwood Trusts, adding that he also has standing under 11 U.S.C. § 544, although he did not reference that section of the Bankruptcy Code in either his original or Amended Complaint with respect to Count I. Moreover, he distinguishes cases involving a trustee asserting a cause of action belonging either to the debtor or creditors, arguing that "an action under § 541 seeking to collect assets for the Debtor's estate is an action belonging solely to a trustee."
In evaluating the status of trusts, there are essentially two lines of cases. In the first line of cases, courts analyze and rely upon the trustee's ability to pierce a trust veil using an alter ego analysis. See, e.g., Babitt v. Vebeliunas (In re Vebeliunas), 332 F.3d 85 (2d Cir.2003) (considering New York law with respect to issue of whether courts may disregard the form of a trust where the trust was not formed for an illegal purpose and there was a separation between the beneficiary and the trustee; piercing the trust veil not required primarily because there was no evidence that the trust was used to conceal assets from the debtor's creditors, where the debtor's wife purchased the assets of the trust with her own funds, sharing assets between spouses is common, and debtor did not exercise complete domination and control over the trust); and Pergament v. Maghazeh Family Trust (In re Maghazeh), 315 B.R. 650 (Bankr.E.D.N.Y.2004) (trust was alter ego of debtor where the trust was used to engage in a fraudulent conveyance to shield the debtor's interest in mortgages purchased by the debtor from a limited liability company; the trust became a vehicle to shield the debtor's assets from his creditors, and where all of the property owned by the trust was acquired with debtor's funds). In the second line of cases, courts focus on the debtor's powers, as settlor, to amend or revoke, in relation to the trust. See, e.g., Braunstein v. Beatrice (In re Breatrice), 277 B.R. 439 (Bankr.D.Mass.2002), aff'd, 296 B.R. 576 (1st Cir. BAP 2003); In re Reuter, 499 B.R. at 680.
With respect to the first cases, represented by the decisions in Vebeliunas and Maghazeh, the court in Pergament v. Yerushalmi (In re Yerushalmi), 487 B.R. 98 (Bankr.E.D.N.Y.2012), considered the transfer by the debtor of his interest in a residence to his spouse in March of 1996. The debtor's spouse then conveyed her 100% interest to a qualified personal residence trust (QPRT),
In Yerushalmi, the debtor argued that the QPRT was formed for a legitimate estate planning purpose and was not used
Similarly, in Gugino v. Clark's Crystal Springs Ranch, LLC (In re Clark), 525 B.R. 107 (Bankr.D.Idaho 2014), the court, after a trial on the merits, considered the Chapter 7 trustee's complaint for declaratory judgment that an LLC and a trust were "invalid entities," and alter egos of the debtor, as well as for a declaration that the trust was revocable and a judgment for the substantive consolidation of the assets and liabilities of the debtor, an LLC and a trust. Id. at 110. The court first considered the trust which required the trustee to distribute for the benefit of the grantor, the debtor, "`such sums from income and principal as the Grantor may at any time request.'" 525 B.R. at 111 (emphasis in original). Although the trust contained a spendthrift clause and was characterized as irrevocable and not subject to amendment, it contained other provisions that permitted the grantor to amend the trust at any time and to revoke it in whole or in part. Id. The trust, which was created in 2008, was amended in 2010. The amendment identified a limited liability company of which the debtor was the sole member as trust property and made the trust irrevocable, although the power to amend remained. Id. at 112. According to the court, prepetition, the trust did not have a bank account, did not maintain any records and did not prepare or file tax returns; similarly, prepetition, the debtor did not reference the trust from which he received distributions on his tax return. Id. at 114.
According to the court in Clark, the trustee contended that the creation of the trust and the limited liability company was part of a "scheme" to hinder, delay and and "invalid" entities, contentions which the court rejected for lack of evidence as to the debtor's intention when the trust was created and the LLC was formed. Id. at 124. The court, however, addressed the trustee's assertion that reverse veil piercing should be used to disregard legal and financial structures. The court endorsed the holding of Grimmett v. McCloskey (In re Wardle), No. S-01-1000, Adv. P. No. S-03-01467, 2006 WL 6811026, at *7 (9th Cir. BAP Jan. 31, 2006),
In re Clark, 525 B.R. at 126. Citing In re Bonham, 229 F.3d 750 (9th Cir.2000), and weighing the evidence, the court in Clark entered a judgment for the "substantive consolidation" of the assets and liabilities of debtor, the LLC and the trust. In re Clark, 525 B.R. at 130.
As noted above, Massachusetts courts, and, in particular, the Supreme Judicial Court have not expressly recognized reverse veil piercing with respect to corporations or trusts. Indeed, the Supreme Judicial Court has rejected insider reverse veil piercing claims. Were the Supreme Judicial Court to consider such claims, this Court predicts it would view reverse veil piercing, like direct veil piercing, as a remedy, not a cause of action and would apply it sparingly. Despite the lack of recognition of reverse veil piercing, however, Massachusetts courts have permitted trustees to reach the assets of trusts under certain circumstances. In Braunstein v. Beatrice (In re Beatrice), 277 B.R. 439 (Bankr. D.Mass.2002), aff'd, 296 B.R. 576 (1st Cir. BAP 2003), this Court, relying upon Wolfe v. Wolfe, 21 Mass.App.Ct. 254, 486 N.E.2d 747 (1985)(co-settlor retained broad powers to revoke or amend the trust and trustee could pay net income and such sums of principal in their sole discretion); ITT Comm. Fin. Corp. v. Stockdale, 25 Mass.App.Ct. 986, 521 N.E.2d 417 (1988) (settlor retained power to amend and revoke the trust and to substitute beneficiaries); State Street Bank and Trust Co. v. Reiser, 7 Mass.App.Ct. 633, 389 N.E.2d 768 (1979) (when a person places property in trust and reserves right to amend and revoke, or to direct disposition of principal and income, the settlor's creditors may, following settlor's death, reach in satisfaction of settlor's debts to them, to extent not satisfied by settlor's estate, those assets owned by trust over which settlor had such control at time of his death as would have enabled settlor to use trust assets for his own benefit), and Markham v. Fay, 74 F.3d 1347 (1st Cir.1996), determined that the trust res was property of the bankruptcy estate because the debtor/settlor retained broad powers to control the trust, including the ability to distribute income in his sole discretion, to add or eliminate beneficiaries, and to terminate the trust, and because the beneficiaries' interest had not vested as the trustee had the power to eliminate their interests at any time. This Court also determined that the beneficiaries' rights were severely limited by the trust and the debtor retained incidents of property ownership, including residing in the trust property, maintaining it and paying taxes with respect to it. See generally Murphy v. Felice (In re Felice), 494 B.R. 160 (Bankr.D.Mass.2013) (discussing cases). See also In re Cowles, 143 B.R. at 9 (where debtor/settlor held pervasive power with regard to trust, the assets of the trust must be made available for satisfaction of the creditors' claims). Cf. In re
In view of the authorities discussed in detail above, this Court concludes that the Trustee in Count I has not stated a plausible claim to relief, see Bell Atl. Corp. v. Twombly, 550 U.S. at 556-70, 127 S.Ct. 1955, under either a Beatrice-type analysis or under a reverse veil piercing analysis. The Trustee cannot rely upon the remedy of reverse veil piercing, even assuming such a remedy were to exist under Massachusetts law, in the absence of a substantive claim for relief. The Debtor does not have a legal or equitable claim to the assets of the Buttonwood trusts — he has a personal property interest as the beneficiary of the Buttonwood Trust.
The Court concludes that the did not plead any facts that would permit this Court to find any fraudulent purpose in 1975 when the Buttonwood Trust was created, or over 25 years ago in 1988 when it was amended to make it irrevocable, to limit the trustee's powers to amend its provisions with the Debtor's consent, and to prevent the trustees from invading the trust corpus for the Debtor's benefit. See, e.g., In re Clark, 525 B.R. at 125-26 (refusing to grant declaratory relief under veil piercing or alter ego theories, but entering judgment substantively consolidating debtor's assets and liabilities with those of non-debtor trust and LLC).
Although the Trustee has emphasized the Debtor's pervasive control over assets of the Buttonwood trusts, and his use of their assets for his personal benefit, the Debtor was not the settlor of the trusts, and the Trustee did not allege that the mortgages on the Buttonwood Trust properties, which would be a matter of public record, and the sale of conservation and preservation restrictions to the Trust for Public Land, were designed to defraud creditors in view of the spendthrift clause which would have precluded creditors from reaching the assets of the Buttonwood Trust. Rather, the only harm the Trustee effectively alleged was harm to the remainder beneficiaries who have commenced an action in state court against Attorney Brear and C & M.
According to the court in Scott v. NG U.S. 1, Inc., 450 Mass. 760, 881 N.E.2d 1125 (2008), in a discussion about corporate formalities which is relevant to the Buttonwood trusts,
450 Mass. at 766, 881 N.E.2d 1125. Other than an opaque reference to Attorney Brear as the Debtor's instrumentality in defrauding creditors, the Trustee simply did not allege any specific fraudulent or injurious consequences from the Debtor's alleged control over the assets of the Buttonwood trusts, see In re Ontos, Inc., 478 F.3d [427] at 432 [(1st Cir.2007)] ("Under Massachusetts law, a claim may be brought against the `alter ego' of a corporation when `there is active and direct participation by the representatives of one corporation, apparently exercising some form of pervasive control ... and there is some fraudulent or injurious consequence
Similarly, under Beatrice and the cases cited therein, the facts alleged in the Trustee's Complaints summarized above, as well as the evidence gleaned from the exhibits attached to the Complaints, establish that the Debtor, in his individual capacity, was not the settlor and was never the sole trustee of the Buttonwood Trust, although his alleged alter ego, Attorney Brear, was the sole trustee beginning on April 23, 1998. That circumstance distinguishes the Massachusetts decisions cited above and in In re Schwarzkopf, 626 F.3d 1032 (9th Cir.2010), where the debtor was the settlor of the trusts whose veils were pierced, one of which was funded with assets procured in fraud on creditors. Thus, in the absence of any clear recognition of the reverse veil piercing remedy in Massachusetts with respect to trusts, and the pendency of Count IV, the Court shall dismiss Count I.
In his Amended Complaint, the Trustee claims that the Raymond Children's Trust was a sham trust, Without mentioning 11 U.S.C. § 550, the Trustee further claims that, upon its dissolution, the transfer of its property to the Debtor's children was, in effect, an allegedly constructive or intentionally fraudulent transfer of the Debtor's property while he was insolvent, thereby entitling him to recover the property once held in the Raymond Children's Trust or its value from the Debtor's children or Candlewood. The Trustee elaborates that the trust was a sham "from the start," as the Debtor "retained the right to take and consume the trust assets whenever he wished." In addition, the Trustee alleged the Debtor never relinquished control over the assets of the Raymond Children's Trust, which most recently were a 99% interest in RPC, which the Debtor allegedly sold to the Trust in 2009; a 62.89% interest in Maplecroft; a 99% interest in Canal Street; and 230,720 shares of stock in First Ipswich Bancorp.
The Raymond Children's Trust was settled by the Debtor on December 7, 1981, over thirty years ago. Norman A. Bikales was the original trustee. The provisions of the Trust, which is attached to the Trustee's Complaints, directed the trustee to pay or apply so much of the net income and principal of the trust to or for the benefit of one or more of the Debtor's children in such amounts and proportions, as the trustee would determine in his "absolute discretion." The trustee was granted broad power and authority to retain, sell and invest property, as well as "[t]o borrow money if this shall be deemed necessary or advisable, and to secure any such loan by mortgage or pledge." At the inception of the Raymond Children's Trust, pursuant to Article Four, the entire initial contribution was to be invested in a limited partnership, identified as Beverage Associates. The Trust instrument provides:
In addition, the Raymond Children's Trust was irrevocable and "not subject to modification or amendment." In May of 1996, Attorney Brear became trustee of the trust. The Trustee, while conceding that the trust was "legitimate on paper," alleged that the Debtor abused the trust and pledged its shares of common stock in First Ipswich Bancorp in July of 2004 to Eyk Van Otterloo for a personal obligation.
On August 31, 2011, Attorney Brear resigned as trustee and the trust was terminated. The document terminating the Trust was executed by Attorney Brear, the Debtor and the Debtor's four children. Candlewood was formed approximately seven months later as a Delaware limited liability company. The Debtor's children are its members and Jed is its manager. Each member contributed a 24.75% membership interest in Canal Street, a 15.7225% interest in Maplecroft and a 24.975% interest in RPC for their equitable interests in Candlewood.
Before the Court can consider the sufficiency of the Trustee's allegations as to the fraudulent transfer of "an interest of the debtor in property," the Court must determine whether the Trustee has stated a plausible claim that the Raymond Children's Trust was a sham at its inception and that its assets are actually the Debtor's assets. Count II of the Trustee's Amended Complaint (Raymond Children's Trust and Related Company Assets are Part of the Debtor's Estate) upon which Count III of the Amended Complaint is based, is predicated upon alter ego/reverse veil piercing doctrines, which are remedies not claims under Massachusetts law. Kraft Power Corp. v. Merrill, 464 Mass. 145, 149, 981 N.E.2d 671 (2013). See also Grimmett v. McCloskey (In re Wardle), No. S-01-1000, Adv. P. No. S-03-01467, 2006 WL 6811026, at *8 (9th Cir. BAP Jan. 31, 2006). Because the Debtor was the settlor of Raymond Children's Trust, and the Trustee alleges that it was a sham entity from its inception, an allegation that must be accepted as true for purposes of this Motion, the Court must consider whether the Trustee has stated a plausible claim for relief under Counts II and III of his Amended Complaint. The Court concludes that he has not.
The Trustee's allegation that the trust was a sham from its inception is conclusory and devoid of factual and supporting allegations that the Raymond Children's Trust was created with the motive or purpose of defrauding creditors, and thus can be disregarded as a legally valid entity. See In re Schwarzkopf, 626 F.3d at 1037. Although a motion to dismiss tests the sufficiency of the pleadings and cannot be used to resolve factual issues or the merits of the case, the Court observes, as noted above, that although the Trustee alleged that the Raymond Children's Trust was "a sham from the start," he did not allege any additional facts to support that allegation, as the first alleged misuse of trust assets did not occur until 2004, 23 years after the trust was settled. The Trustee did not allege any facts to support his allegation that the trust was a sham, that it was formed for an illicit purpose in 1981, or that the Debtor did not intend to create the separate entity, the Raymond Children's
The Trustee, through Count V of his Amended Complaint, seeks a declaratory judgment that assets held in certain limited liability companies, namely Candlewood, Canal Street, Maplecroft, and RPC are property of the estate. He also requests a declaratory judgment that the assets of RPC should be part of the Debtor's estate. Both Complaints contain allegations that the Debtor had unfettered control of the limited liability companies.
The Debtor, on Schedule B, listed a .5% interest in RPC, a 37.11% interest in Maplecroft, which in turn owned a 1% interest in the assets of Canal Street (which he states were liquidated in 2013) and a potential tax refund of $20,000. Candlewood allegedly owns the balance of the membership interests in RPC, Canal Street and Maplecroft. Ninety-nine percent of the membership interests in Canal Street are owned by Candlewood. Other than alleging that Canal Street is a single purpose entity, the Trustee, as noted above, did not clearly or cogently set forth in either his original Complaint or Amended Complaint, information about when and by whom the limited liability companies were formed and what their assets and liabilities are. Although the Trustee alleged that the Debtor exercised control over Candlewood and caused Canal Street to execute a mortgage and a non-recourse guaranty of amounts owed by the Debtor and the Buttonwood Nominee Trust, the Canal Street property was sold in December of 2012. In addition, the Trustee alleged that in 2007 Maplecroft, which owned real estate in Vermont, executed a fraudulent mortgage in favor of the Raymond Children's Trust, granted a mortgage on real estate in Vermont to C & M, and used the assets of the Buttonwood Trust and the Buttonwood Nominee Trust to secure a $1.95 million letter of credit to the Bank of New England, the proceeds of which allegedly were used to satisfy the Debtor's tax obligations.
In Spradlin v. Beads and Steeds Inns, LLC (In re Howland), 516 B.R. 163 (Bankr.E.D.Ky.2014), the court addressed "whether the Trustee failed to state a claim upon which relief may be granted pursuant to 11 U.S.C. § 548(a)(1)(B) and K.R.S. § 378.020 through 11 U.S.C. § 544(b)." 516 B.R. at 164. The court observed that resolution of the issue turned on whether the trustee could prove that the debtors made a fraudulent transfer of their interest in property by using a "reverse veil piercing" theory that would enable him to treat the debtors and their wholly owned limited liability company as the same. Because Kentucky has not adopted reverse veil piercing, the court held that the trustee could not proceed under that theory but afforded him an opportunity to amend his complaint to seek substantive consolidation. The court stated:
In re Howland, 516 B.R. at 169-70. See also In re Clark, 525 B.R. at 125-26.
The court in In re Clark, determined that a limited liability company organized shortly after the creation of a trust was a single member, member-managed limited liability company whose sole member and manager was the trust; that from its inception through the date of conversion of the debtor's Chapter 12 case to Chapter 7, the debtor exercised total and sole control over the LLC's operations and frequently failed to honor the limited liability structure and identify himself as the member/manager; that the debtor conflated the LLC's assets and his own in his bankruptcy schedules; that the identity of the LLC's assets was difficult to ascertain because of the debtor's actions, that the debtor testified that he was employed by the LLC but did not receive a salary but took "draws" from the LLC, although the trust was the sole member/manager; that draws were used to pay the debtor's and his ex-wife's personal expenses; and that income from the LLC was reported on the debtor's personal income tax return. Id. at 114-25. Nevertheless, the court refused to treat the reverse veil piercing claim as an independent cause of action.
This Court agrees with the rationales advanced by the courts in Howland and Clark and shall dismiss Count V of the Amended Complaint. Moreover, if the Trustee succeeds in his claims under Counts II and III of the Amended Complaint, he will have, in effect, obtained the relief sought in Count V.
With respect to Count IV, the Trustee seeks substantive consolidation of
Id. at 398.
In Logistics Info. Sys., Inc. v. Braunstein (In re Logistics Info. Sys., Inc.), 432 B.R. 1 (D.Mass.2010), the Chapter 7 trustee filed an adversary proceeding on behalf of the estate against Logistics Information Systems, Inc., its principal, William Sperbeck, and Arclogix, Inc. in which he alleged that there had been fraudulent conveyances under state law. The trustee asserted claims for turnover under bankruptcy law and sought to establish successor liability and the usurpation of corporate opportunity. In addition, he sought to pierce the corporate veil and to reach and apply assets held by Sperbeck and Arclogix. He also filed, in the main case, a motion to substantively consolidate the non-debtor Arclogix with the debtor Logistics, which motion was consolidated with the adversary proceeding for trial.
In re Logistics Info. Sys., Inc., 432 B.R. at 10-12 (footnote omitted). In Logistics, the district court referenced Woburn Assocs. v. Kahn (In re Hemingway Transp., Inc.), 954 F.2d 1 (1st Cir.1992), in which the First Circuit stated:
In re Hemingway Transp., Inc., 954 F.2d at 12 n.15 (citations omitted).
Accordingly, under any of the tests employed by the Courts of Appeal in Auto-Train, Augie/Restivo Baking Co., or Owings Corning, the Court concludes that the Trustee's Amended Complaint fails to
Through Count VI, the Trustee seeks turnover and sale of antique guns, collectibles and artwork belonging to the Debtor. The Debtor listed those assets on Schedule B. In addition, he disclosed that some of the items were co-owned with his spouse. Under those circumstances, the Trustee has stated plausible claims for relief for turnover and sale of those assets under 11 U.S.C. § 363(h), to the extent the Debtor has not claimed them as exempt. Accordingly, the Court shall deny the Defendants' Motion to Dismiss Counts VI and VII.
Through Counts VIII and IX of his Amended Complaint, the Trustee seeks to reach and apply the Debtor's "beneficial, equitable ownership and other interests" in the Buttonwood trusts and the limited liability companies, pursuant to Mass. Gen. Laws ch. 214, § 3(6).
In re Rare Coin Galleries of Am., Inc., 862 F.2d at 904 (footnote omitted).
In view of the applicable law set forth in Rare Coin Galleries, and the absence of an underlying debt, the Court shall grant the Defendants' Motion to Dismiss Counts VIII and IX without prejudice.
In view of the foregoing, the Court shall enter an order dismissing Counts I, II, III, IV, V, VIII, and IX of the Amended Complaint. The Court shall issue a pretrial order with respect to Counts VI and VII.
On amended Schedule B — Personal Property, the Debtor listed a .5% membership interest in Raymond Property Company LLC; a 37.11% ownership interest in Maplecroft Partners, LLC, whose assets were disclosed as a 1% interest in 53-85 Canal Street LLC and a potential tax refund of $20,000. The Debtor listed an account receivable from 41-45 Broad Street LLC in the sum of $50,000, as well as an account receivable from the Buttonwood Trust, "stemming from Trust expenses paid by Debtor personally" and "[p]otentially subject to setoff by Trust." In addition, the Debtor listed his interest in the Buttonwood Trust, and possible claims against the law firm of Craig & McCauley, P.C., and "Buttonwood Trust Trustee, Joseph Brear." The Debtor disclosed a 23.08% interest in 41-45 Broad Street LLC, as well as a number of other entities which the Chapter 7 Trustee did not mention in his Verified Complaint. The Debtor also disclosed a joint ownership interest with his spouse, Elizabeth Raymond, in antique firearms and other collectibles but ascribed no value to them. In addition, he disclosed an interest in the Buttonwood Trust, described as the net income from trust assets and the right to reside in the residence located on real property owned by the trust.
On amended Schedule F-Creditors Holding Unsecured Nonpriority Claims, the Debtor listed some of the defendants as creditors, including both the Buttonwood Nominee Trust and the 2002 Buttonwood Nominee Trust with contingent, unliquidated, and disputed claims in unknown amounts; Candlewood Road Partners, LLC with a contingent, unliquidated claim in an unknown amount, Elizabeth Raymond with a claim arising from liquidation of certain stock, as well as other potential claims in unknown amounts, and Neil St. John Raymond, Jr. ("Jed Raymond") with a claim in the sum of $20,000. Notably, Jed Raymond filed a proof of claim in that amount. The Buttonwood Nominee Trust, through its trustee, Jed Raymond, filed a claim in the sum of $2,569,653.38 with respect to "loans," and Candlewood Road Partners, LLC, through its manager, Jed Raymond, filed a proof of claim in the sum of $2,104,086.70 with respect to "loans," as well.
According to the Trustee, Raymond is the primary beneficiary of the trust, with the remainder of the trust property going to his wife and children. The original Declaration of Trust provides for payment of net income generated from the trust property to Raymond for his lifetime "quarterly or otherwise as he may from time to time direct in writing." It also provided that Raymond could receive the principal, or corpus, of the trust in the discretion of the trustees.
The Trustee alleged that none of the Trust amendments were signed by the settlor of the trust. The Debtor signed all the amendments. The first three amendments (in 1980, 1987 and 1988) amended the successor trustee provisions or permitted the Debtor to appoint a trustee of his choice. The fourth amendment, dated October 31, 1988, deleted the provision allowing the trustees to use the corpus or principal of the trust for the Debtor's benefit, relegating him to the status of an income-only beneficiary. The fourth amendment also made the Buttonwood Trust irrevocable. The Buttonwood Trust includes a spendthrift clause which provides, in part, that "[n]o interest or principal payable to or for the use of any beneficiary shall be liable for the debts or obligations of any beneficiary, regardless of when incurred, nor be subject to assignment, alienation, anticipation or encumbrance by any beneficiary ..."
The Debtor resigned as co-trustee of the Buttonwood Trust in 1987. In 1998, Attorney Brear was appointed successor trustee. Attorney Brear resigned as trustee on August 1, 2013 and was subsequently replaced by two of the Debtor's sons, Jed and Benjamin, and his wife, Elizabeth.
The Court notes that the Declaration of Trust for the Buttonwood Trust provided at Article Eighth that "The Trust may be altered, amended or revoked, in whole or in part, at any time, or from time to time, by the Trustees, but only with the consent of Neil ..." On October 31, 1988, Article Eighth was amended to make the trust irrevocable. The amended Article granted the trustee "the right to amend any of the administrative provisions..., provided, however, that no such amendment shall increase or decrease the beneficial interest of any person hereunder. Accordingly, there was no need for the settlor to sign the amendments. Moreover, the Buttonwood Trust has been irrevocable for over twenty-five years.
In re ALT Hotel LLC, 479 B.R. at 801-802. See also In re Denton, 203 F.3d 834 (10th Cir.2000).
Id. at 1038. The Ninth Circuit concluded:
626 F.3d at 1039-40 (citations omitted, emphasis supplied).
192 F.3d at 101.
In re Harman, 512 B.R. at 341-42.
896 F.2d at 1576-1577 (emphasis added). The court added:
Id. at 1578.
Id. (footnote omitted).
Spaneas, 423 Mass. at 354, 668 N.E.2d 325.
74 F.3d at 1366 (citations omitted).
In re Am. Bridge Prods., Inc., 328 B.R. at 351-52 (footnote omitted).
In re Yerushalmi, 487 B.R. at 101.
In re Yerushalmi, 487 B.R. at 104-105.
Braunstein v. Sperbeck (In re Logistics Information Sys., Inc.), Adv. P. No. 04-1188 Slip op. at *4, 2009 WL 722023 (Bankr.D.Mass. March 18, 2009).
2 Hon. Joan N. Feeney, Hon. Michael G. Williamson, and Michael J. Stepan, Esq., Bankruptcy Law Manual § 11:44 (5th ed.2014). The court in Auto-Train noted that when courts authorize substantive consolidation they do so "typically to avoid the expense or difficulty of sorting out the debtor's records to determine the separate assets and liabilities of each affiliated entity." 810 F.2d at 276. The court added: "[B]ecause every entity is likely to have a different debt-to-asset ratio, consolidation almost invariably redistributes wealth among the creditors of the various entities. This problem is compounded by the fact that liabilities of consolidated entities inter se are extinguished by the consolidation." Id. (citations omitted). The Second Circuit in In re Augie/Restivo Baking Co., Ltd., 860 F.2d at 518, adopted a two-part test, focusing first on reliance:
2 Feeney, et al., supra. Finally, the Third Circuit in In re Owens Corning, limited the availability of substantive consolidation requiring a proponent of substantive consolidation to prove either that:
2 Feeney, et al., supra.
323 B.R. at 812.
Mass. Gen. Laws ch. 214, § 3(6).
