Christopher J. Panos, United States Bankruptcy Judge.
Before the Court is the Motion to Dismiss (the "Motion") filed by Moog, Inc. (the "Defendant" or "Moog"), pursuant to which Moog seeks to dismiss Counts I through XII of a seventeen-count complaint (the "Complaint") brought by Joseph H. Baldiga (the "Trustee"), as Chapter 7 Trustee for the bankruptcy estate of Comprehensive Power, Inc. (the "Debtor"), and Becana Capital ("Becana," together with the Trustee, the "Plaintiffs"). In the Complaint, the Plaintiffs seek, among other things, to: (i) re-characterize as equity "any" of Moog's claims; (ii) equitably subordinate any such claims pursuant to 11 U.S.C. § 510(c)
Moog contends that dismissal of Counts I through XII is warranted because the Plaintiffs have failed to plead sufficient facts that state facially plausible claims for relief with respect to each of the counts. Moog argues that it is merely a non-insider creditor that extended a loan to the Debtor after the parties executed financing documents memorializing the transaction, which included a security agreement granting Moog a security interest in substantially all assets of the Debtor. Moog asserts that it later enforced its rights as a secured creditor after the Debtor's default in accordance with the transaction documents and applicable law.
The Plaintiffs assert that the allegations contained in the Complaint, if taken as true, would demonstrate that the transaction was not a "loan," but rather a mechanism by which Moog improperly acquired the Debtor's business for substantially less than fair value at the expense of the Debtor's creditors. According to the Plaintiffs,
After a hearing on the Motion and consideration of the written and oral arguments of the parties, including the supplemental briefing regarding equitable subordination submitted at the Court's direction, and for the reasons set forth below, the Court grants the Motion in part, dismissing Count II, and denies the Motion in part as to Counts I and III-XII because the Plaintiffs allege sufficient facts in their Complaint to demonstrate plausible claims for relief with respect to those counts.
The following facts are taken as alleged in the Complaint and from associated exhibits,
The Debtor, a Delaware corporation, at all relevant times had its principal place of business in Marlborough, Massachusetts. Compl. ¶ 18. Among other things, it designed and manufactured high-performance permanent magnet motors, generators, controls, and drives. Id. ¶ 19.
Early in 2013, the Debtor's investment banker identified Moog as a lender to, investor in, or purchaser of the Debtor. Id. ¶ 20. In April 2013, the Debtor obtained funds in the amount of $6 million from Moog, which transaction the parties memorialized in a series of documents dated April 12, 2013, including a promissory note ("Note"), security agreement ("Security Agreement"), and option agreement ("Option Agreement"). Id. ¶ 21, Exs. A-B; Mot. Ex. 1. Pursuant to the Security Agreement, the Debtor granted Moog a security interest in substantially all of the Debtor's personal property and, upon an event of default under the Note, the right
The Plaintiffs state that Moog "drafted and insisted upon using deal documents that superficially mimic, at least in part, documents that ordinarily appear as part of traditional loan transactions" but allege that their terms belied a typical "true" loan and "laid bare the real `M & A' aspects of the deal" providing, among other things, that: (i) under the Note, the Debtor was only required to make quarterly, rather than monthly, interest payments at 4.5% to Moog and (ii) pursuant to the Option Agreement, (a) Moog retained an option to purchase the Debtor's stock or assets for a base cash payment equal to six times EBITA at any time between April 12, 2014 and April 11, 2016 (the "Option Period"); (b) Moog had the ability to appoint a director to the Debtor's Board of Directors ("Board"); and (c) the Debtor could extend the Note's maturity date for six months to October 12, 2016, if Moog declined to exercise its purchase option by October 12, 2015. Compl. ¶¶ 22-26, Ex. B.
Pursuant to the Option Agreement, if the option was exercised, the parties would negotiate the terms of a definitive acquisition agreement in good faith and Moog would not disrupt the Debtor's business before consummation of the transfer. Id. ¶ 23, Ex. B. The Option Agreement also provides that, within 90 days of its execution and delivery, Moog and the Debtor would execute a separate commercial agreement in a form mutually agreeable to the parties, pursuant to which the Debtor would develop and produce Moog-brand products using the Debtor's technology. Id. Ex. B, §§ E, 2.2.
Moog appointed Sean Gartland ("Gartland"), its employee, to serve as a director on the Debtor's Board, and he served in that capacity until September 2013. Id. ¶ 27. As a member of the Board, Gartland received confidential information about the Debtor's financial affairs, and the Plaintiffs allege that Gartland favored Moog's interests above the Debtor's. Id. ¶¶ 28-31. Specifically, the Plaintiffs allege that, after a May 2013 Board meeting, Gartland prepared and shared with Moog, without disclosing to key members of the Debtor's management or other Board members, personal notes containing confidential information relating to the Debtor's financial condition and strategy. Id. ¶¶ 27-29. Gartland's Board meeting notes included, as a follow up item to the May 2013 meeting, "[g]et[ting] a commercial CPI-Moog agreement in place and begin[ning] to extract value for Moog." Id. ¶¶ 27-29, Ex. C.
The Plaintiffs allege in their Complaint that Gartland and Moog engaged in activities to "extract value" from the Debtor for Moog. Specifically, the Plaintiffs allege that Gartland shared the Debtor's confidential information with Moog executives, without the Debtor's knowledge, and used that information to advance Moog's interests. Id. ¶ 30. Further, the Plaintiffs allege that Gartland injected himself into the Debtor's operations, including reviewing equipment designs and going on at least one customer visit, during which the customer was informed that Moog would be stepping in as the Debtor's successor to "continue the business." Id. ¶ 31.
By August and September 2013, the Debtor's financial condition had worsened and management sought additional capital from Moog. Id. ¶ 32. "Despite Moog [having provided] a substantial capital infusion of $6,000,000 in April 2013, the Debtor [had] depleted those funds within a few short months and was faced with an imminent need for further cash." Id. ¶ 49(c). Ultimately, "[t]he Debtor [ ] defaulted on its obligations to Moog less than ten months after the April 2013 transaction."
On or about "October 11, 2013[,] Moog and the Debtor executed a Collateral Surrender and Consent to Sale Agreement ("Surrender Agreement")." Id. ¶ 33. Through the Surrender Agreement, the Plaintiffs contend that Moog effectively had assumed control over virtually every aspect of the Debtor's business. In authorizing the execution and delivery of the Surrender Agreement, the Plaintiffs also allege that the Debtor's directors abdicated their responsibilities and breached their duties, thereby ensuring "that Moog would consolidate its control over the Debtor." Id. ¶¶ 33, 34, 36.
Among other things, the Surrender Agreement accelerated all amounts due to Moog under the Note and required the Debtor to cease operations, turnover all cash accounts upon demand to Moog, and provide Moog with access to all of the Debtor's books and records. Id. ¶ 34. On November 1, 2013, Moog sent the Debtor a notice to terminate operations pursuant to the Surrender Agreement, directing the Debtor to cease operations and surrender possession by November 11, 2013. Id. ¶ 38; Mot. Ex. 2. The Plaintiffs allege that the Surrender Agreement also operated to deprive the Debtor of its potential six-month "runway" to find additional financing or take other measures. Id. ¶¶ 26, 34. The Plaintiffs point to this short ten-day window for the Debtor to take action with respect to repayment as supporting their allegation that Moog did not act as a traditional lender. Id. ¶ 38.
On November 8, 2013, the Debtor terminated all of its employees. Moog later offered jobs to at least fourteen of the Debtor's former employees, including some at management-level and others with unique technical skills. Id. ¶¶ 39-40. Among the former employees who accepted positions with Moog were the Debtor's founder, Frank Jones, and CEO, Charles Cuneo. Id. ¶ 40. The Plaintiffs allege, upon information and belief, that Moog planned to set up a large manufacturing facility in Marlborough, Massachusetts for production of motors and products similar to the Debtor's business. Id. The Plaintiffs also allege that, during this transition, Moog "pursu[ed] and develop[ed] the Debtor's existing and prospective customer relationships with Becana, Evolution Well Services, Lockheed Martin, Raytheon, and others[, and] continued to make assurances to the Debtor's customers that Moog would be able to complete the Debtor's obligations [ ] using the Debtor's former employees to help accomplish [that task]." Id. ¶ 41. Additionally, the Plaintiffs allege that at certain times Moog controlled which expenses of the Debtor would be paid, monitored the Debtor's cash flow, and continued to incur liabilities under the Debtor's name. Id. ¶¶ 36, 42.
On January 28, 2014, Moog notified the Debtor of its intent "to conduct a secured party sale of [its collateral, including] equipment, inventory, patents, general intangibles, and other personal property[, by public auction] on February 11, 2014." Id. ¶ 43. Moog, through Jones, "notified the Debtor's former customers that the Debtor (which was now effectively operating under Moog's control) was winding down its operations and would cease manufacturing activities as of January 30, 2014." Id. ¶ 44.
On April 22, 2014, certain of the Debtor's creditors, including Becana, filed an involuntary petition against the Debtor. The Court entered an order for relief under Chapter 7 of the Bankruptcy Code on May 23, 2014. The Office of the United States Trustee subsequently appointed the Trustee as the Chapter 7 Trustee of the Debtor. In its Schedules, the Debtor listed Moog as holding a disputed, contingent, and unliquidated claim. Moog has not filed a proof of claim in this case and the bar date has expired.
Rule 8 of the Federal Rules of Civil Procedure ("Civil Rules"), made applicable to this proceeding by Bankruptcy Rule 7008, requires only that a complaint contain "a short and plain statement of the grounds for the court's jurisdiction[;] a short and plain statement of the claim showing that the pleader is entitled to relief; and [ ] a demand for the relief sought." Fed. R. Civ. P. 8(a)(1)-(3). When fraud is pleaded, Civil Rule 9(b) requires a plaintiff to plead fraud with particularity, but that standard is relaxed when such claims are brought by a trustee who must plead from second-hand knowledge. See Fed. R. Civ. P. 9(b) (providing that "[i]n alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake[; m]alice, intent, knowledge, and other conditions of a person's mind may be alleged generally"); Gowan v. Patriot Grp., LLC (In re Dreier LLP), 452 B.R. 391, 408 (Bankr. S.D.N.Y. 2011) (holding "[f]or claims brought by a bankruptcy trustee, courts take a more liberal view when examining allegations of actual fraud ... in the context of a fraudulent conveyance, since a trustee is an outsider to the transaction who must plead fraud from second-hand knowledge") (internal quotations and citations omitted).
In order to survive a motion to dismiss under Civil Rule 12(b)(6), made applicable to this proceeding by Bankruptcy Rule 7012, a complaint must state a claim upon which relief can be granted. See Fed. R. Civ. P. 12(b)(6). Allegations contained in the Complaint "must contain sufficient factual matter, accepted as true, to `state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556, 127 S.Ct. 1955); see also Watterson v. Page, 987 F.2d 1, 3 (1st Cir. 1993) (holding that, in the context of a motion to dismiss under Civil Rule 12(b)(6), "a court must take the allegations in the complaint as true and must make all
"[F]actual allegations must be enough to raise a right to relief above the speculative level." Twombly, 550 U.S. at 555, 127 S.Ct. 1955. "[B]ald assertions, unsupportable conclusions, periphrastic circumlocutions, and the like need not be credited." Aulson v. Blanchard, 83 F.3d 1, 3 (1st Cir. 1996). "Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the ... court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679, 129 S.Ct. 1937.
The focus of a Civil Rule 12(b)(6) inquiry "is not whether plaintiff[ ] will ultimately prevail, but whether [it is] entitled to offer evidence to support [its] claims." Day v. Fallon Cmty. Health Plan, Inc., 917 F.Supp. 72, 75 (D. Mass. 1996). Dismissal is appropriate if a plaintiff's allegations do not "possess enough heft to show that plaintiff is entitled to relief." Ruiz Rivera v. Pfizer Pharm., LLC, 521 F.3d 76, 84 (1st Cir. 2008) (internal quotation marks and original alterations omitted). The Court should not attempt to forecast a plaintiff's likelihood of success on the merits; "a well-pleaded complaint may proceed even if ... a recovery is very remote and unlikely." Twombly, 550 U.S. at 556, 127 S.Ct. 1955 (internal quotation marks omitted); see also id. at 563 n. 8, 127 S.Ct. 1955 ("[W]hen a complaint adequately states a claim, it may not be dismissed based on a district court's assessment that the plaintiff will fail to find evidentiary support for his allegations or prove his claim to the satisfaction of the factfinder."). The relevant inquiry focuses on the reasonableness of the inference of liability that the plaintiff is asking the court to draw from the facts alleged in the complaint. Sufficient pleading "[does] not require heightened fact pleading of specifics, but only enough facts to state a claim to relief that is plausible on its face." Ocasio-Hernandez v. Fortuño-Burset, 640 F.3d 1, 8 (1st Cir. 2011) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955).
In Count I of the Complaint, the Trustee has brought a claim against Moog requesting relief in the form of the equitable remedy of recharacterization. Although the Bankruptcy Code does not expressly provide for the recharacterization of claims, the parties do not dispute the general proposition that a bankruptcy court has authority to recharacterize a purported loan transaction as an equity contribution.
"A bankruptcy court may recharacterize debt as equity where a `creditor has contributed capital to a debtor in the form of a loan, but the loan has the substance
While there is no controlling precedent in the First Circuit, courts generally employ a multi-factor test to determine if recharacterization is appropriate. See, e.g., Wolverine, 527 B.R. at 832 (collecting cases). As noted by the Third Circuit Court of Appeals, such "an overarching inquiry [enables the court] to discern whether the parties called an instrument one thing when in fact they intended it as something else." SubMicron, 432 F.3d at 456. The parties' intent is inferred "from what the parties say in their contracts, from what they do through their actions and from the economic reality of the surrounding circumstances. Answers lie in facts that confer context case-by-case." Id.
In considering factors relevant to the recharacterization analysis and allegations in the Complaint relating thereto, the Court has utilized the factors identified by the Third and Fourth Circuits for the reasons set forth in Wolverine. See 447 B.R. at 30 ("The Fourth Circuit's focus on whether the transaction is `arms-length based on a multi-factor approach in Dornier Aviation, or the Third Circuit's "overarching inquiry" as to intent in SubMicron permit a more thorough evaluation of the substance of the challenged loan and the parties' intent than the rule espoused by the Eleventh Circuit in N & D Properties."). These factors are:
Dornier, 453 F.3d at 233 (quoting AutoStyle, 269 F.3d at 749-50). "None of these factors is dispositive and their significance may vary depending upon circumstances." Dornier, 453 F.3d at 234 (quoting Sender v. Bronze Group, Ltd. (In re Hedged-Invs. Assocs., Inc.), 380 F.3d 1292, 1298-99 (10th Cir. 2004)).
Here, drawing reasonable inferences in his favor, the Trustee has pleaded sufficient facts in support of at least six of the recharacterization factors, sufficiently stating a plausible claim for recharacterization of Moog's debt. While the Trustee admits that the names given to the documents align with traditional naming constructs for financial instruments, he argues that, overall, there were components of the
With respect to the source of repayments, the Trustee alleges that parties contemplated that the Moog financing could be repaid through Moog's acquisition of the Debtor's assets or stock, which could potentially support a claim for recharacterization. Id. Exs. A-B. As to the adequacy or inadequacy of capitalization, the Trustee alleges that the Debtor was undercapitalized and/or insolvent during relevant times, including at the time of the Surrender Agreement. Id. ¶¶ 32-34. The Trustee supports the allegation that the Debtor was undercapitalized and/or insolvent by further alleging that the Debtor (i) suffered losses in 2012 and 2013 that would have bankrupted the Debtor if it did not receive cash advances; (ii) encountered cash flow problems just months after receiving "advances" from Becana and others; (iii) had "trouble keeping pace with payments owed to employees, vendors and others"; (iv) depleted the $6 million in funding received from Moog in just a few months; and (v) defaulted on obligations to Moog less than ten months after the financing transaction. Id. ¶ 49. Whether evidence supporting these allegations could contradict the Trustee's theories regarding the value of the Debtor's business at the time of the transactions with Moog is a consideration that is more appropriately addressed when the record has been developed.
Regarding the Debtor's ability to obtain financing from outside lending institutions, the Trustee alleges that the Debtor encountered cash flow problems and required further cash only months after receiving $6 million from Moog, suggesting the Debtor would be unlikely to obtain a traditional loan because of its cash flow issues. Id. ¶¶ 49, 51. The Trustee further alleges that no sinking fund was available to the Debtor to provide repayments, which Moog acknowledges, but argues is a "neutral" factor with respect to recharacterization. Mot. ¶ 61.
In sum, taken together, the factual allegations and the inferences drawn in favor of the Trustee are sufficient to state a plausible recharacterization claim. Additionally, while the Court recognizes that Moog has not filed a proof of claim, the filing of a claim by Moog is not necessary under the circumstances of this case for the Trustee to assert a recharacterization claim, which is an equitable remedy consistent with this Court's authority under § 105(a) to determine the nature and extent of the Debtor's obligations to Moog in the context of the fraudulent conveyance and other related claims asserted by the Trustee. The Court must determine whether transfers made to Moog by the Debtor were transfers on account of "true" indebtedness or a disguised equity investment.
Count II alleges that Moog's conduct has resulted in injury to creditors of the Debtor and conferred an unfair advantage to Moog in violation of § 510(c)(1). Section 510(c) provides:
11 U.S.C. § 510(c).
"The essential purpose of equitable subordination is to undo any inequality in the claim position of a creditor that will produce injustice or unfairness to other creditors in terms of distribution of the estate." In re Mid-Am. Waste, Inc., 284 B.R. 53, 68 (Bankr. D. Del. 2002) (citing Burden v. U.S., 917 F.2d 115, 117 (3d Cir. 1990)). The First Circuit Court of Appeals has adopted the standards for equitable subordination articulated by the Fifth Circuit in Benjamin v. Diamond (In re Mobile Steel Co.), 563 F.2d 692 (5th Cir. 1977). See Merrimac Paper Co., Inc. v. Harrison (In re Merrimac Paper Co., Inc.), 420 F.3d 53, 59 (1st Cir. 2005).
In order to exercise the power of equitable subordination, a court must find that: (1) the creditor engaged in some type of inequitable conduct or fraud, (2) such conduct resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the creditor, and (3) equitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code. See Mobile Steel
In its Motion, Moog argues that the Trustee had not pleaded sufficient facts to demonstrate that its conduct was inequitable and shocks the conscience. At the hearing on the Motion and in its further briefing on the equitable subordination count, Moog also argued that it has not filed any claim against the Debtor and, therefore, there is no claim to subordinate and no relief available to the Trustee under the plain language of § 510(c), which specifically references subordination of an "allowed" claim for distribution purposes. See 11 U.S.C. § 510(c)(1). The Trustee counters that the fraudulent transfer claims in Counts III through VIII and the equitable subordination claim in Count II are based on the same intertwined operative facts and that by allowing them to go forward together, this Court can consider all claims "in the interest of prudence and judicial economy," citing Gredd v. Bear, Stearns Sec. Corp. (In re Manhattan Inv. Fund Ltd.), 310 B.R. 500, 513 (Bankr. S.D.N.Y. 2002). Pls.' Suppl. Br. 3-4; Gredd, 310 B.R. at 513 (holding that as the "factual basis for this [equitable subordination] claim is closely entwined with the factual bases of Count I [fraudulent conveyance]... in the interest of prudence and judicial economy, the Court will consider the issue in conjunction with the Trustee's other claims").
"[However, t]he great weight of authority is that `[§] 510(c) does not permit subordination absent an allowed claim.'" Dreier, 452 B.R. at 451 (quoting Tronox Inc. v. Anadarko Petroleum Corp. (In re Tronox, Inc.), 429 B.R. 73, 109 (Bankr. S.D.N.Y. 2010)). While the factual basis may overlap, the request for subordination is premature, at best, given that Moog has filed no "claim" and no "distribution" is contemplated to Moog that could be subordinated. The Trustee's contention that Moog could assert a claim under Bankruptcy Rule 3002(c)(3) upon entry of a final judgment in the Trustee's favor on any of the fraudulent transfer counts, providing a claim to be preemptively subordinated should the Trustee also prevail on Count II, is too speculative a proposition. This is particularly true where Moog has stated that it has no intention of filing a claim and is willing to stipulate it will waive its right to do so. Def.'s Suppl. Br. ¶ 9 n.3.
The Complaint contains numerous counts seeking to avoid "all payments and transfers" to or on behalf of Moog (the "Transfers"), including the transfer of assets to Moog "at the purported secured party sale" as being fraudulent under §§ 544(b) (applying M.G.L. ch. 109A, §§ 5 and 6) and 548. Compl. ¶ 58 (defining transfers in the Complaint as follows: "[a]ll payments and transfers to Moog on account of Moog's alleged claims against the Debtor (including, without limitation, the Debtor's assets Moog purportedly acquired at the purported secured party sale) were transfers of one or more interests of the Debtor in property"). To the extent avoided, the Trustee also seeks to recover the Transfers or the value of such Transfers pursuant to § 550 and M.G.L. ch. 109A, §§ 8 and 9. The Trustee asserts that the Transfers effected by Moog through its secured party sale constituted fraudulent conveyances that depleted the Debtor's assets to the detriment of the Debtor's creditors.
Section 548(a)(1) of the Bankruptcy Code provides that a trustee may avoid any transfer of a debtor's interest in property made within two years before the filing of a bankruptcy petition if the transfer was actually or constructively fraudulent. 11 U.S.C. § 548(a)(1). Section 548(a)(1) recognizes as fraudulent those transfers made by a debtor with actual intent to hinder, delay or defraud creditors, as well as any transfer that is deemed to be constructively fraudulent because it was made for less than reasonably equivalent value when a debtor is, or is rendered, insolvent, undercapitalized, or unable to pay its debts as they become due. See Max Sugarman Funeral Home, Inc. v. A.D.B. Inv'rs, 926 F.2d 1248, 1254 (1st Cir. 1991) ("The transfer of any interest in the property of a debtor, within [the applicable statutory period] of the filing of a petition in bankruptcy, is voidable by the trustee in bankruptcy if the purpose of the transfer was to prevent creditors from obtaining satisfaction of their claims against the debtor by removing the property from their reach."); Richardson v. United States (In re Anton Noll, Inc.), 277 B.R. 875, 878 (1st Cir. BAP 2002). "The Trustee carries the burden of proving each of the [associated] elements [under § 548(a)(1)] by a preponderance of the evidence." Tri-Star Techs. Co. v. Pitocchelli (In re Tri-Star Techs. Co., Inc.), 260 B.R. 319, 323 (Bankr. D. Mass. 2001).
With respect to avoiding fraudulent transfers made with "actual" intent, "[t]he trustee may avoid any transfer ... of an interest of the debtor in property ... made or incurred on or within 2 years before the date of the filing of the petition, if the debtor ... made such transfer ... with actual intent to hinder, delay or defraud" any creditor. 11 U.S.C. § 548(a)(1)(A). Actual fraudulent transfer claims pursuant to § 548(a)(1)(A) generally must satisfy the pleading requirements of Civil Rule 9(b) and turn on the intent of a debtor. See In re Indrescom Sec. Tech.
Because direct evidence of fraudulent intent is often unavailable, courts usually rely on circumstantial evidence to infer fraudulent intent and have developed certain "badges of fraud" to establish actual intent to hinder, delay, or defraud creditors under § 548. See Max Sugarman Funeral Home, 926 F.2d at 1254-55. The First Circuit has set out five factors to assess fraudulent intent:
Id. at 1254 (internal citations omitted). While the presence or absence of any single badge of fraud is not conclusive, "the confluence of several [of these factors] can constitute conclusive evidence of an actual intent to defraud, absent `significantly clear' evidence of a legitimate supervening purpose." Id. at 1254-55.
To assert a "constructively" fraudulent transfer claim under the Bankruptcy Code,
Tri-Star, 260 B.R. at 323 (citing § 548(a)(1)(B)). Accordingly, the Trustee must have alleged facts sufficient to allow the court to draw a reasonable inference that the Debtor did not receive "reasonably equivalent value" for the purported transfers. See 11 U.S.C. § 548(a)(1)(B).
The Trustee also asserts claims under § 544(b), which permits the avoidance of transfers that would be voidable under applicable state law by a creditor holding an unsecured claim that is allowable under § 502 or that is not allowable only under § 502(e). See id. at § 544(b). The "applicable state law" pursuant to which the Trustee brings his § 544(b) claim to avoid the Transfers is the UFTA as adopted in Massachusetts, M.G.L. ch. 109A, §§ 5(a) and 6(a).
With respect to both §§ 5 and 6 of M.G.L. ch. 109A, the Trustee carries the burden of proving each element of by a preponderance of the evidence. See Lassman v. Reilly, Jr. et al. (In re Feeley), 429 B.R. 56, 62 (Bankr. D. Mass. 2010).
In determining actual intent under paragraph (1) of subsection (a), consideration
M.G.L. ch. 109A, § 5(b). For purposes of § 5(b)(5), an "asset" is defined as "property of a debtor," but the term does not include property encumbered by a valid lien. Id. § 2
The analysis of what constitutes "reasonably equivalent value" under the relevant sections of the Massachusetts UFTA mirrors the analysis of "reasonably equivalent value" under 11 U.S.C. § 548, see Tri-Star, 260 B.R. at 324; Riley v. Countrywide Home Loans Inc. et al. (In re Duplication Mgmt., Inc.), 501 B.R. 462, 481-84 (Bankr. D. Mass. 2013), which has been described as follows:
Tri-Star, 260 B.R. at 325-26 (internal citations omitted).
The allegations in the Complaint are sufficient to state plausible claims that the Transfers to Moog were both "constructively" and "actually" fraudulent, although it is a closer determination regarding whether the Trustee pleaded sufficient facts to state a plausible claim with respect to the "actual" fraudulent conveyance counts.
Where actual fraudulent transfer claims are asserted by a trustee, pleading standards for fraud are more liberal, even though such latitude does not extinguish the particularity requirement entirely. See, e.g., Indrescom, 559 B.R. at 317.
As to the "constructive" fraudulent conveyance claims, the Trustee has alleged sufficient facts to support a claim that Moog effected a "voluntary" or involuntary transfer of the Debtor's assets for less than fair and reasonably equivalent consideration at a time when the Debtor was insolvent or rendered insolvent. Id. ¶¶ 32, 34, 38, 55. Without deciding whether Civil Rule 9(b), rather than Civil Rule 8(a), applies to constructive fraud claims under state law and the Bankruptcy Code, the Court concludes that, under either pleading standard, the Complaint sufficiently pleads insolvency to survive Moog's Motion and allow discovery to proceed on these counts. As such, the Court shall deny the Motion as to dismissal of the § 548(a)(1)(B) count (Count IV) and related state law counts (Counts VI and VII) of the Complaint.
Massachusetts courts generally do not impose the liabilities of a corporation
In determining whether de facto merger has occurred, courts generally consider four factors:
DeJesus v. Park Corp., 530 Fed.Appx. 3, 6 (1st Cir. 2013) (quoting Cargill, Inc. v. Beaver Coal & Oil Co., 424 Mass. 356, 676 N.E.2d 815 (1997)). "[T]he Supreme Judicial Court of Massachusetts has repeatedly instructed that no single factor [of these four] is necessary or sufficient to establish a de facto merger." DeJesus, 530 Fed. Appx. at 6 (internal quotations omitted). Additionally, the First Circuit Court of Appeals has specifically concluded that summary judgment cannot be based exclusively on the absence of continuity of ownership. See id. at 7; see also Cargill, 676 N.E.2d at 819 (holding that "there is no requirement that there be complete shareholder identity between the seller and a buyer before corporate successor liability will attach").
In addition to a de facto merger theory, the Plaintiffs also seek to impose liability on Moog for debts of the Debtor under an alter ego theory. Under Massachusetts
My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 233 N.E.2d 748, 752 (1968).
The Plaintiffs contend that the allegations that support their de facto merger successor liability theory also support their alter ego theory. While there is no allegation that there was a continuity of shareholders between the Debtor and Moog, the Plaintiffs allege there was continuity with respect to employees, as Moog offered employment to at least fourteen of the Debtor's former employees, including management-level employees. Compl. ¶¶ 39-40. The Plaintiffs also allege that, upon information and belief, Moog planned to set up a large manufacturing facility in Marlborough, Massachusetts for production of motors and products similar to the Debtor's business and "pursu[ed] and develop[ed] the Debtor's existing and prospective customer relationships with Becana, Evolution Well Services, Lockheed Martin, Raytheon, and others [and] continued to make assurances to the Debtor's customers that Moog would be able to complete the Debtor's obligations and would be using the Debtor's former employees to help accomplish that task." Id. ¶¶ 40-41. The Plaintiffs further allege that Moog-related Board member Gartland attempted to "extract value" for Moog and that the secured party sale was the culmination of Moog's efforts to transition the Debtor's business, and not just its assets, to Moog. Id. ¶¶ 28-30, 90. Additionally, the Plaintiffs allege that Moog controlled which expenses of the Debtor would be paid and continued to incur liabilities under the Debtor's name. Id. ¶¶ 36, 42. Based on the foregoing allegations, viewed in the light most favorable to the Plaintiffs, and considering the First Circuit's admonition with respect to de facto merger claims that, while continuity of shareholders/stock ownership can be a substantial component regarding a successor liability claim, "no single factor is necessary or sufficient to establish a de facto merger" and "that summary judgment cannot be based exclusively on the absence of continuity of ownership," the Plaintiffs have sufficiently pleaded a successor liability claim in their Complaint to survive Moog's Motion.
Additionally, based on the allegations (i) regarding the continuity of business enterprise necessary to establish a de facto merger claim, (ii) that Moog controlled the Debtor from at least the fourth quarter of 2013 through the UCC sale, and (iii) that
Moog also argues that the Trustee, one of the co-Plaintiffs with respect to Count X, should be dismissed for lack of standing to assert the claim.
"Section 541 is construed broadly to bring any and all of [a] debtor's property rights within the bankruptcy court's jurisdiction and the umbrella of protections granted by the Bankruptcy Code, and to promote the goal of equality of distribution." Abboud v. Ground Round, Inc. (In re The Ground Round, Inc.), 335 B.R. 253, 259 (1st Cir. BAP 2005), aff'd, 482 F.3d 15 (1st Cir. 2007) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 205 n.9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983)). The question of whether an interest is "property of the estate" is a federal question to be decided by federal law; however, courts must look to state law to determine whether and to what extent the debtor has any legal or equitable interests in such property as of the commencement of the case. See Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
The Trustee indisputably has standing to assert causes of action that belong to the Debtor's estate, including those causes of action arising under the Bankruptcy Code. See, e.g., 11 U.S.C. §§ 541(a), 542, 544, 548, 704. In Regan v. Vinick & Young (In re Rare Coin Galleries of Am., Inc.), after affirming a trustee's ability to prosecute
City Sanitation, LLC v. Allied Waste Servs. of Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 90 (1st Cir. 2011) (internal citations and quotation marks omitted).
In Ontos, the First Circuit determined in the context of approval of a settlement and related releases sought by the trustee regarding certain claims brought by former officers on behalf of the debtor that "[b]ecause the fraudulent transfer and breach of fiduciary duty claims the trustee wishes to settle are derivative in nature, the same claims pursued against an alter ego or successor corporation must be derivative in nature as well. Given that such derivative claims are properly the property of the estate, the bankruptcy court did not err in finding that the trustee had the power to settle them." 478 F.3d at 433.
With respect to fraudulent transfer claims generally, the Court noted:
478 F.3d at 431. The Court then recognized the similarity of the successor liability remedy to the fraudulent transfer remedy, and likewise determined the trustee could have asserted such claim and that it was not error to approve settlement of such a claim. Id. at 433 n.2 (holding that the particular alter ego claims settled by the trustee were property of the estate, while expressing no view on the contours of alter ego claims and generally acknowledging that "[t]he primary roadblock to finding the alter ego and successor liability claims to be part of the estate is that a corporation generally may not pierce its own veil").
Accordingly, even though a successor liability claim may not usually be part of a debtor's estate, see, e.g., McCarthy v. Azure, 22 F.3d 351, 363 (1st Cir. 1994), such a claim may, nonetheless, be part of the estate where a successor liability claim addresses generalized harm to all creditors and is so intertwined with other claims held by the estate such that it is a claim appropriately pursued by a trustee. Cf. Ontos, 478 F.3d at 433; 5 COLLIER ON BANKRUPTCY ¶ 541.07 n.1 (16th ed. 2017) (noting that estate created pursuant to § 541(a) includes causes of action belonging
Because the alter ego and successor liability claims as alleged are sufficiently entangled with other general, derivative-type claims asserted by the Trustee seeking recovery for the collective benefit of all creditors as contemplated by Ontos, under the circumstances of this case and based on the allegations in the Complaint, the Trustee has standing to pursue those claims.
To the extent Moog is determined to be a lender to the Debtor, the Trustee brings an alternative claim for violation of Article 9 of the UCC, alleging that Moog failed to use commercially reasonable efforts with respect to the secured party sale it conducted and through which it acquired all of the Debtor's assets for a credit bid of $2.1 million.
Under New York, Massachusetts, or Delaware law,
Wells Fargo Bus. Credit v. Environamics Corp., 77 Mass.App.Ct. 812, 934 N.E.2d 283, 289 (2010) (citing 4 White & Summers, Uniform Commercial Code § 34-11, 464-466 (6th ed. 2010)); see also Hicklin v. Onyx Acceptance Corp., 970 A.2d 244, 252 (Del. 2009) (stating that "[a]lthough obtaining a satisfactory price is the purpose of requiring a secured party to resell collateral in a commercially reasonable way, price is only one aspect" and explaining that a sale "to the highest bidder at a poorly publicized, sparsely attended, and inconveniently located auction would not be meaningful; but a sale to the highest bidder at a highly-publicized, well-attended auction run by a highly-regarded auctioneer in a convenient location would be"). "In this regard, adjudication of the `commercially reasonable' standard ... produces inquiry into the competence and aggressiveness of the marketing effort." Environamics, 934 N.E.2d at 289 (citing Pemstein v. Stimpson, 36 Mass.App.Ct. 283, 630 N.E.2d 608, 614 (1994)). With respect to New York law, "[t]he New York Court of Appeals has implicitly validated two tests for determining whether a disposition of property was commercially reasonable under [Article 9], one focusing on the procedures employed, and the other on maximizing resale price." European Am. Bank v. Sackman Mortg. Corp. (In re Sackman Mortg. Corp.), 158 B.R. 926, 936 (Bankr. S.D.N.Y. 1993) (describing the tests employed as follows: "[t]he procedural test examines the methods employed to dispose of the property [and i]f the secured creditor makes certain that conditions of the sale, in terms of the aggregate effect of the manner, method, time, place and terms employed conform to commercially reasonable standards, it should be shielded from the sanctions contained in Article 9 [and t]he fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the secured party is not of itself sufficient to establish that the sale was not made in a commercially reasonable manner"; whereas the "proceeds test ... declare[s] that optimizing resale price is the prime objective of the code's default mechanisms and that the other factors listed are merely designed to ensure that the highest price is achieved.") (citations and internal quotations omitted).
At base, the inquiry into commercial reasonableness is a fact-intensive one that requires an examination of all circumstances of the sale. See, e.g., Matter of Excello Press, Inc., 890 F.2d 896, 905 (7th Cir. 1989) ("[w]hether a sale was commercially unreasonable is, like other questions about reasonableness, a fact-intensive inquiry; no magic set of procedures will
The Trustee has pleaded sufficient facts to support a claim under Article 9 of the UCC, including that: (i) Moog did not employ a process intended to generate a reasonable sale price and the sale price obtained was substantially less than that which the parties had previously valued the Debtor's assets and less than the assets would have been appraised for if an appraisal conducted; (ii) Moog conducted the auction sale as a formality to consolidate its control the Debtor's assets; (iii) Moog failed to adequately market the property; (iv) Moog was the sole bidder at a sale conducted on only fourteen days' notice and other potential purchasers were deprived from acquiring the Debtor's assets; and (v) Moog deprived the Debtor of six-month "runway" to obtain alternative financing and the Debtor was damaged as a result. Compl. ¶ 95. Accordingly, the Court will deny the Motion as to Count XI.
Pursuant to Count XII of the Complaint, the Trustee alleges a violation of section 11 of M.G.L. ch. 93A, which provides for a cause of action to "[a]ny person who ... suffers any loss of money or property ... as a result of the use or employment by another person who engages in any trade ... of an unfair method of competition or an unfair or deceptive act or practice." M.G.L. ch. 93A, § 11. To survive dismissal of a ch. 93A claim, the Trustee is required to have alleged sufficient facts to demonstrate that Moog used or employed an unfair or deceptive act or practice that: "(1) falls within the penumbra of some common-law, statutory, or other established concept of unfairness; (2) is immoral, unethical, oppressive, or unscrupulous; and (3) causes substantial injury to [consumers or other businesspersons]." FAMM Steel, Inc. v. Sovereign Bank, 571 F.3d 93, 107 (1st Cir. 2009) (citations and internal quotation marks omitted).
Furthermore, a ch. 93A claim may not be brought "unless the actions and transactions constituting the alleged unfair method of competition or the unfair or deceptive act occurred primarily and substantially in the commonwealth." M.G.L. ch. 93A, § 11. For purposes of a motion to dismiss, a "section eleven cause of action... should survive a `primarily and substantially' challenge so long as the complaint alleges that the plaintiff is located, and claims an injury in Massachusetts." Back Bay Farm, LLC v. Collucio, 230 F.Supp.2d 176, 188 (D. Mass. 2002); see also Amcel Corp. v. Int'l. Exec. Sales, Inc., 170 F.3d 32 (1st Cir. 1999). The claim occurred "primarily and substantially" in Massachusetts for purposes of the Motion as the Debtor is located in Massachusetts and the alleged damages manifested themselves
Moog asserts that, because the Debtor had defaulted on its quarterly interest payments under the Note, it was entitled to enforce its rights under the express terms of the financing documents such that the Trustee cannot allege adequate facts regarding ch. 93A claim. The Trustee, however, has alleged sufficient facts to raise the specter of coercion and unfair or deceptive practices when the totality of the alleged circumstances is considered. In the Complaint, the Trustee made the following allegations in direct support of its claim: the parties were engaged in conduct of trade or commerce in Massachusetts; the parties' written agreements and business concerned property and business operations in Massachusetts; and the Debtor suffered losses to property and business in Massachusetts. The Trustee further alleges that Moog: (i) having agreed to a six-month "runway" if it did not exercise its option to acquire the Debtor, it changed the deal and expedited its ability to take over control of the Debtor through the Surrender Agreement, "strong-arming" the Debtor into signing the Surrender Agreement; (ii) used its knowledge of the Debtor's financial condition and its role in the Debtor's operation in a scheme to acquire the business of the Debtor; (iii) exercised improper control of the debtor in furtherance of a loan to own scheme; and (iv) effected a scheme that enabled it to acquire the Debtor's assets for less than fair value. Compl. ¶¶ 32, 34, 38, 100, 101. These allegations set forth in the Complaint, and reasonable inferences therefrom, support a plausible claim that Moog engaged in unfair or deceptive acts and/or practices that were potentially willful and knowing and violations of M.G.L. ch. 93A.
While the Trustee may ultimately fall short of establishing that Moog's conduct was within "`the penumbra of some common law, statutory, or other established concept of unfairness' or was `immoral or unethical, oppressive or unscrupulous,'" see, e.g., DeGiacomo v. Raymond C. Green, Inc. (In re Inofin Inc.), 512 B.R. 19, 87 (Bankr. D. Mass. 2014) (quoting Levings v. Forbes & Wallace, Inc., 8 Mass.App.Ct. 498, 396 N.E.2d 149, 153 (1979)), the claim survives a request for dismissal at this stage.
In view of the foregoing, taking the Complaint's well-pleaded, non-conclusory allegations as true and drawing all reasonable inferences in favor of the Plaintiffs to determine if they plausibly narrate a claim for relief, Moog's Motion is granted in part as to Count II, which count is dismissed, and denied in part with respect to Counts I and III-XII. A separate order shall enter in accordance with this decision.
11 U.S.C. § 548(a)(1)(B).
M.G.L. ch. 109A, § 5. In addition, M.G.L. ch. 109A, § 6 provides in pertinent part:
M.G.L. ch. 109A, § 6.