MICHAEL A. FAGONE, Bankruptcy Judge.
Since 2009, Kittery Point Partners has believed that it was harmed by certain actions of Todd Enright and Bayview Loan Servicing. In 2011, Kittery Point sued Bayview in state court. Unhappy with the results of that litigation, Kittery Point started a chapter 11 case in June 2017 and then commenced this adversary proceeding against Bayview and Enright. Both defendants have moved for dismissal under Fed. R. Civ. P. 12(b)(6). The defendants' motions will be granted.
A pleading is subject to dismissal under Rule 12(b)(6) if it fails to state a claim upon which relief may be granted. In other words, a motion under Rule 12(b)(6) tests the sufficiency of a pleading. See
Probability of success is not the standard at this juncture, but the pleading must do more than raise a mere possibility of a successful claim.
There are several exceptions to the general rules of pleading and to the corollary charge of holistic pleading construction, one of which is in play here. See
"A complaint is subject to dismissal for failure to state a claim if the allegations, taken as true, show the plaintiff is not entitled to relief."
Before applying these principles to Kittery Point's complaint, a step back is warranted. The forest should not be lost in the trees. When Rule 12(b)(6) is invoked, the point of the exercise is to identify disputes that should not be allowed to move to the discovery phase. Litigation has, over the years, become increasingly complex, time-consuming, and expensive. Rule 12(b)(6) motion practice should weed out claims that are futile, where discovery will not unearth facts that would help the plaintiff succeed on the merits. Determining whether a claim is futile, in this sense, is "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense."
The following recitation is based primarily on the factual allegations in the complaint.
Kittery Point and Bayview are both limited liability companies. Enright is an individual. Enright created Kittery Point in 2005 for the ostensible purpose of facilitating a section 1031 like-kind exchange involving certain real property in Kittery Point, Maine (the "Property"). At that time, James Austin was the owner of the Property, and Enright was a trusted advisor to James Austin and his wife, Tudor. Enright advised the Austins that they could defer their tax exposure on the Property if they transferred it to an entity for some time. But, Enright's intent behind his 1031 proposal was to swindle the Austins.
On March 1, 2005, Kittery Point did not exist as a legal entity. Nevertheless, on that day, Enright caused Kittery Point to execute a promissory note in the amount of $600,000 (the "Note") in favor of Middlebury Equity Partners ("MEP"), an entity that was owned and controlled by Enright. Enright also caused Kittery Point to grant a mortgage on the Property to MEP (the "Mortgage") as security for the Note. The Note and Mortgage were signed by Daniel Systo, a handyman for MEP and/or Enright, allegedly in Systo's capacity as a member of Kittery Point. The Mortgage contained a covenant and warranty that Kittery Point owned the Property in fee simple and had good right and title to convey that interest. However, as noted, the execution of the Note and Mortgage predated Kittery Point's creation as an entity and — as a necessary corollary — predated Kittery Point's acquisition of any assets, including any interest in the Property. Neither Kittery Point nor the Austins received any consideration in exchange for the Note and Mortgage. The Austins were not aware of and did not authorize the Note or the Mortgage at the time of execution.
On April 21, 2005, Enright created Kittery Point by filing its certificate of formation with the Delaware Secretary of State.
On May 26, 2005, at Enright's urging, James Austin transferred the Property to Kittery Point by a quitclaim deed (the "Austin Deed"). At that time, the Austins were unaware that Kittery Point had previously executed the Note and Mortgage in favor of MEP. Neither Enright nor MEP ever informed the Austins of the Note, the Mortgage, or the Assignment.
Although the Mortgage, the Assignment, and the Austin Deed all purported to affect title to the Property, none of those documents were promptly recorded. The Austin Deed was recorded on January 27, 2006, about eight months after it was executed. The Mortgage was recorded on August 15, 2007, and again on December 10, 2007, more than two years after its execution in March 2005. The Assignment, executed in April 2005, was also recorded on December 10, 2007.
Kittery Point eventually defaulted on its obligations under the Note and, in 2008, Bayview took steps to foreclose the Mortgage. Bayview's counsel discovered and advised Bayview that Kittery Point did not own the Property when the Note and Mortgage were executed, and he warned that "there may be a complete failure of title in the mortgage." Nevertheless, Bayview proceeded with a civil action foreclosure in state court. Neither Enright nor Systo, who were in control of Kittery Point at that time, nor any other representative of Kittery Point appeared to contest the foreclosure. The Austins first learned of the foreclosure action on September 29, 2008, after a contractor informed them that Bayview had filed a notice of foreclosure in the registry. But, the Austins did not contest the foreclosure proceeding either. In the absence of a defense, the state court issued a judgment of foreclosure in November 2008.
"Horrified by what had happened on Enright's watch," the Austins took control of Kittery Point in January 2009. Compl. ¶ 42. Bayview informed Tudor Austin that it would sell the Property at a foreclosure action if she did not cause Kittery Point to execute a document entitled "Delinquency Repayment Agreement" (the "DRA"). The DRA contained an acknowledgement that the "Borrower," Kittery Point, had executed the Note, and that the Note was secured by the Mortgage. The DRA also contained the following provisions, in a paragraph entitled "Release":
On February 27, 2009, Tudor Austin executed the DRA on Kittery Point's behalf. Bayview subsequently dismissed the foreclosure proceedings. The DRA was never recorded in the registry or filed with the Maine Secretary of State. After the DRA was executed, Bayview demanded that Kittery Point pay certain sums allegedly due under the Note.
On June 24, 2010, Enright commenced a chapter 7 case in the United States Bankruptcy Court for the District of Vermont. Several years later, on November 18, 2013, that court denied Enright a discharge under 11 U.S.C. § 727.
Meanwhile, in August 2011, Kittery Point sued Bayview, its servicer, and Systo in state court seeking a declaratory judgment that, among other things, (a) the Note and Mortgage were invalid because they were not supported by any consideration and the allonge to the Note had not been signed by an authorized agent of MEP, and (b) Bayview was not entitled to the funds that Kittery Point paid under the Note because the Assignment had been ineffective. More than five years later, the state court entered an order granting summary judgment to Bayview (the "Superior Court Order"), concluding that Kittery Point's claims were barred by the releases in the DRA and by Bayview's status as a holder in due course, and that, even if Kittery Point's claims were not barred, Bayview was entitled to judgment as a matter of law in the absence of any evidentiary support for Kittery Point's challenges to the enforceability of the Note. Kittery Point challenged the Superior Court Order by an appeal to the Maine Law Court.
Kittery Point commenced a chapter 11 case in this Court on June 22, 2017, several days before the date set for oral argument in Kittery Point's appeal. As of the petition date, the IRS was a creditor of Kittery Point's estate. Later, this Court granted Bayview relief from stay in the chapter 11 case to permit Kittery Point's appeal to proceed. That appeal remains pending.
In Count I, Kittery Point seeks an order determining that the Note and Mortgage are null and void, and asks the Court to disallow any claims against Kittery Point, Kittery Point's estate, or the Property that may be asserted by Bayview or Bayview's affiliates. Kittery Point asserts that the Note and Mortgage are unenforceable because, "inter alia," the Note and Mortgage were unsupported by consideration and because Kittery Point did not exist when those instruments were executed. Compl. ¶ 51. Bayview asserts that these attacks on the enforceability of the Note and Mortgage are barred by the preclusive effect of the Superior Court Order.
The Court looks to Maine law to determine the preclusive effect of the Superior Court Order. See
Kittery Point and Bayview were both parties to the state court action, and the state court expressly directed the entry of a final judgment as to all claims between Kittery Point and Bayview. See Me. R. Civ. P. 54(b)(1). The first and second elements of claim preclusion are satisfied. To determine whether the third element is also satisfied, the Court considers whether the same "cause of action" at issue here was also presented in state court. See
In Count II, Kittery Point seeks to wield the trustee's avoidance powers as a hypothetical bona fide purchaser under section 544(a)(3). See 11 U.S.C. § 1107(a) (giving the debtor in possession certain rights and powers of a trustee). Kittery Point asserts that the recordation of the Mortgage would not have provided notice of Bayview's interest in the Property to a hypothetical bona fide purchaser (a) because the Mortgage was executed before Kittery Point existed or owned the Property, and (b) because there were delays in the recording of the Mortgage and the Austin Deed. Bayview seeks dismissal of Count II on the theory that the doctrine of estoppel by after-acquired property cured these alleged title defects. Kittery Point believes that doctrine is not a bar to Count II because section 544 trumps equitable and estoppel-based claims, and the cases that have applied the doctrine did not involve a conveyance purportedly executed by a non-existent grantor.
The Court's analysis starts with the Code and then pivots to applicable nonbankruptcy law. Under section 544(a)(3), a debtor in possession "has the status of a bona fide purchaser of real property who purchased the property in a hypothetical transaction at the commencement of the bankruptcy case."
Me. Rev. Stat. Ann. tit. 33, § 201 serves as a "race-notice" recording statute,
Me. Rev. Stat. Ann. tit. 33, § 201. Under the statute, "when two parties claim the same property, a subsequent grantee obtains title to the property notwithstanding a prior conveyance" only if the subsequent grantee "recorded his deed before the first grantee recorded hers."
To determine whether a recorded deed should be deemed to provide constructive notice to a subsequent purchaser, the Maine courts have considered facts that would have been revealed by a title search conducted in compliance with the Maine Title Standards. See, e.g.,
In Maine, the doctrine of estoppel by after-acquired property generally provides that "if a grantor purports to convey land that he does not own, but to which he subsequently acquires title, such grantor's after-acquired title inures to the benefit of the grantee, provided that the conveyance has been by a full warranty deed."
As applied here, the doctrine of after-acquired title operated to vest title in the Property in the mortgagee when Kittery Point acquired the Property from James Austin. This is so, even though Kittery Point did not exist when the Mortgage was executed. There is no express requirement in Maine law that the grantor exist at the time of the initial grant. Kittery Point conceded as much at oral argument, and the Court has found no authority to the contrary. Even so, Kittery Point maintains that an entity is not bound by an act undertaken in its name before the entity is created, in the absence of some act of ratification or adoption after the entity is formed. Kittery Point urges the Court not to view the DRA as an act that validated the Note and the Mortgage because, by Kittery Point's lights, the DRA can be avoided under the Bankruptcy Code. That argument misses the point. Finding validation of the Note and Mortgage in the DRA is unnecessary: the Mortgage itself contains an acknowledgement, executed on April 27, 2005—six days after Kittery Point was formed—affirming the Mortgage as "the free act and deed of Kittery Point Partners, LLC." Compl. Ex. B, at 8. Through this acknowledgement, Kittery Point effectively adopted the Mortgage as its own. See
In sum, Maine's after-acquired property doctrine is effective to bar claims of the original grantor and subsequent purchasers, including bona fide purchasers, who would be charged with constructive notice of the original conveyance. Here, a bona fide purchaser of the Property on the petition date would have been charged with constructive notice of the Mortgage from Kittery Point to MEP and the warranty contained therein. The later deed to Kittery Point would therefore operate upon the earlier Mortgage, giving MEP and its assignee, Bayview, the benefit of the title that Kittery Point received from James Austin. See
In Count III, Kittery Point seeks to avoid the DRA as a fraudulent transfer under 11 U.S.C. § 548. Kittery Point asserts that the DRA breathed life into the invalid Note and Mortgage and therefore resulted in a transfer of Kittery Point's interest in the Property. Kittery Point also asserts that, if the releases in the DRA were valid, they effected transfers of Kittery Point's claims against Bayview related to the Note and Mortgage. According to Kittery Point, these transfers should be deemed to have occurred immediately before the petition date because the DRA was not recorded or otherwise perfected as against a bona fide purchaser. See 11 U.S.C. § 548(d)(1). Bayview replies that that DRA (a) did not accomplish a transfer within the meaning of section 548, and (b) is a "private agreement" that either could not have been perfected against third parties, or was perfected when it was executed in 2009.
As to the first issue, the Code defines the term "transfer" broadly, to mean:
The Court assumes, without deciding, that the release of claims in the DRA resulted in a transfer within the meaning of section 101(54). With this assumption in place, the question becomes whether that transfer "was made within 2 years before the date of the filing of the petition[.]" See 11 U.S.C. § 548(a)(1). For purposes of section 548:
11 U.S.C. § 548(d)(1). The Code thus pinpoints the occurrence of a section 548 transfer to the date that transfer becomes valid against a bona fide purchaser under applicable nonbankruptcy law.
Kittery Point suggests that the DRA should have been recorded—either with the Maine Secretary of State or in the registry of deeds—and that Bayview's failure to record the DRA amounts to a failure to perfect any transfers that the DRA accomplished. Yet, Kittery Point has failed to identify any principles of Maine law requiring the recordation of a release of claims before that release can be given effect as to third parties. Cf.
In Count IV, Kittery Point seeks to avoid the Note, the Mortgage, and the DRA on the theory that it can step into the shoes of the IRS under 11 U.S.C. § 544(b), utilize the ten-year collection period set forth in IRC § 6502(a), and avoid the Note, the Mortgage, and the DRA under IRC § 6901 and Me. Rev. Stat. Ann. tit. 14, § 3576. Bayview seeks dismissal of Count IV on three grounds. First, Bayview contends that section 544 does not permit Kittery Point to step into the IRS's shoes. Doing so, says Bayview, would frustrate, rather than promote, state law. Next, Bayview observes that the Note and the Mortgage were executed more than ten years before the petition date and are therefore insulated from challenge by the IRS. Finally, Bayview contends that even if Kittery Point could wield the IRS's powers, avoidance would only be available "to the extent necessary to satisfy the creditor's claim." Bayview MTD, at 21 (quoting Me. Rev. Stat. Ann. tit. 14, § 3578(1)(A)).
Before tackling the basic legal theory of Count IV, it is helpful to narrate the factual allegations germane to that count as a starting point. As of the petition date, June 22, 2017, the IRS was a creditor of Kittery Point (although the IRS was not listed on the creditor matrix and its claim was not included on the schedules). Almost two months after the filing of Kittery Point's chapter 11 petition, the IRS assessed penalties against Kittery Point. Specifically, on August 14, 2017, the IRS assessed penalties for the tax period ending in December 2016. A few months later, on October 9, 2017, the IRS assessed penalties for the tax periods ending in 2011, 2012, 2013, 2014, and 2015. The IRS's proof of claim does not seek to recover for taxes or interest. In its proof of claim, the IRS asserts an unsecured claim of $25,350.
Kittery Point's legal theory deserves careful explication. Under section 544(b), a trustee can:
11 U.S.C. § 544(b)(1). The trustee's powers under section 544(b)(1) are derivative; they allow the trustee to assume the position of an unsecured creditor to recover transfers that creditor would have been able to avoid but for the bankruptcy. See
For now, the Court assumes that Kittery Point could use the IRS as its "golden creditor" under section 544. If Kittery Point were to walk in the IRS's shoes, it would soon founder. Kittery Point would not benefit from the IRS's collection rights under IRC § 6502 for at least two reasons. First, a timely assessment is necessary to trigger the 10-year collection period in IRC § 6502(a).
If the IRS's assessments against Kittery Point were timely made, section 6502 would permit the IRS to collect the tax by beginning a proceeding in court, but only if such proceeding was begun "within 10 years after the assessment of the tax[.]" IRC § 6502(a)(1). Here, the assessments were made in August and October 2017. So, if the assessments were timely made, the IRS would have 10 years after the assessments, or until August and October 2027, to collect the penalties assessed. During that time, the IRS would have certain rights to assess and collect from the taxpayer's transferee. See IRC § 6901(a). Specifically, the IRS would be empowered to assess and collect the income tax liability of the taxpayer from a transferee of the taxpayer's property "subject to the same . . . limitations as in the case of the taxes with respect to which the liabilities were incurred[.]"
A cause of action under section 3576(1) is barred if not brought "within 6 years after the transfer was made or the obligation was incurred." Me. Rev. Stat. Ann. tit. 14, § 3580(2). To the extent that the Note, the Mortgage, and the DRA (or any of them) effectuated transfers of Kittery Point's assets, those transfers took place more than six years before the filing of Kittery Point's chapter 11 case. Kittery Point does not cite any controlling authority establishing that the IRS can assess a tax (or here, a penalty) after a bankruptcy case is filed, and thereby permit the trustee to look back more than six years prior to the petition date to avoid transfers. The IRS's rights are no more potent in Kittery Point's hands than they are in the IRS's hands. The allegations of the complaint demonstrate that Kittery Point's attempt to avoid the Note, the Mortgage, and the DRA is barred by the applicable statute of limitations. Consequently, Count IV will be dismissed.
Count V seeks a declaratory judgment that the Superior Court Order is "null and void." This count appears to be predicated on the notion that the Superior Court Order lacks legal force and effect because the DRA can be avoided under 11 U.S.C. § 548.
A federal court has discretion to grant declaratory relief under the Declaratory Judgment Act, 28 U.S.C. § 2201, in certain circumstances. See
Count VI is based on fraud under Maine common law. Kittery Point consents to dismissal of this count as to Bayview. That leaves the fraud count intact as to Enright, who seeks dismissal on the grounds that the complaint fails to state a claim for fraud against him, and that any such claim would be barred by the statute of limitations.
Under Maine law, an action for fraud will lie where the defendant:
In the Court's estimation, Kittery Point's fraud claims against Enright are premised upon allegations that (a) Enright told the Austins that they could obtain a tax advantage by transferring the Property to an entity; (b) Enright caused Kittery Point to execute the Note and Mortgage on the Property in favor of his entity, MEP, and did so without informing the Austins or causing either the Austins or Kittery Point to receive any consideration for those instruments; (c) MEP assigned the Mortgage to Bayview in exchange for hundreds of thousands of dollars, without informing the Austins of the assignment; (d) Enright persuaded James Austin to transfer the Property to Kittery Point, without informing him of the Note and Mortgage; and (e) Enright, while in control of Kittery Point, failed to make payments under the Note and failed to contest Bayview's foreclosure of the Mortgage. Compl. ¶¶ 11, 13, 15, 16, 18, 26, 29, 30, 34, 35, 39. The only representation alleged is that Enright told the Austins that they could obtain a tax advantage by transferring the property to an entity. There is no allegation that Enright made any false representations to Kittery Point, the only plaintiff in this proceeding. Further, even if the Court could infer that Enright made false representations to Kittery Point related to the Note, the Mortgage, or the Assignment, there are no allegations of the time, place, or content of any such false representations. Kittery Point has failed to plead its fraud claims against Enright with particularity. As a result, Count IV will be dismissed without prejudice. See Wright & Miller, 5A Fed. Prac. & Proc. Civ. § 1300 (3d ed.) (explaining that when a pleading is deemed deficient under Rule 9(b), the pleader is ordinarily granted leave to amend under the liberal amendment provisions of Fed. R. Civ. P. 15, unless it appears that an amendment would be futile).
In Count VII, Kittery Point seeks relief against Enright and Bayview for alleged violations of, and conspiracy to violate, the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968. Enright and Bayview each challenge this count by asserting the expiration of the applicable limitations period. Kittery Point counters that the limitations period was tolled by fraudulent concealment. Enright also contends that dismissal of Count VII is warranted because Kittery Point has failed to plead the predicate acts of mail and wire fraud with the requisite degree of particularity. Enright's particularity argument finds some traction, as does Bayview's limitations defense.
The complaint fails to plead the predicate acts that provide the basis for Kittery Point's RICO claims with the requisite degree of particularity. To unpack this conclusion, the Court begins with the language of the relevant statute. Although the complaint does not identify the statutory predicates for Count VII, the Court presumes that the operative section for the alleged RICO violations is section 1962(c), which provides that:
18 U.S.C. § 1962(c). To state a claim under section 1962(c), a plaintiff must allege "(1) conduct (2) of an enterprise (3) through a pattern (4) of racketeering activity."
Compl. ¶ 98. There are no allegations of when or where Enright used the mail or interstate wires in furtherance of the alleged scheme, or of the content of those alleged communications. "It is not enough for a plaintiff to file a RICO claim, chant the statutory mantra, and leave the identification of predicate acts to the time of trial."
The question then becomes whether this pleading deficiency warrants dismissal as to Enright with or without prejudice. A RICO mail and wire fraud case is not subject to automatic dismissal upon a determination that Rule 9(b) was not satisfied.
Here, the complaint alleges that Enright was engaged in a scheme to defraud Kittery Point, and that Enright used interstate communication facilities in that scheme. However, it appears that Kittery Point was itself engaged in some of the relevant communications, such that it should be charged with knowledge of the time, place, and content of at least some of the alleged instances of mail and wire fraud. On one hand, Kittery Point's apparent involvement in the transactions weighs in favor of a dismissal with prejudice. On the other hand, the liberal policy of permitting amendments and trying cases on their merits weighs in favor of a dismissal without prejudice. When that liberal policy meets Kittery Point's suggestion that it is now in possession of information obtained in discovery in the state court action and is thus positioned to replead Count VII with particularity, it seems best to permit Kittery Point to use that state court discovery to amend Count VII as to Enright. Count VII will therefore be dismissed as to Enright without prejudice.
As to Bayview, the four-year period of limitations is an insuperable bar to Count VII. The Supreme Court has held that the four-year statute of limitations of the Clayton Act, governs the timeliness of civil RICO claims. See
The complaint clearly shows that the four-year statute of limitations began running as to Bayview in 2011 at the latest, and was not thereafter tolled. Kittery Point began litigating with Bavyiew in state court in 2011. That litigation focused on the very same common nucleus of operative facts that are the focus of this adversary proceeding. When Kittery Point sued Bayview on those facts in 2011, it knew or should have known of the factual basis for its RICO claims against Bayview. The complaint establishes that the four-year limitations period expired as to Bayview in 2015, at the latest. There is no indication that, if given leave to amend, Kittery Point might be able to state a RICO claim against Bayview that is not barred by the statute of limitations. Count VII will therefore be dismissed as to Bayview with prejudice.
In Count VIII, Kittery Point asserts that it made payments to Bayview "for no consideration, pursuant to the Note and Mortgage, which are and were at all times null and void, and those funds constitute property of Kittery Point's estate." Compl. ¶ 102. In its prayer for relief, Kittery Point asks the Court to enter an order "compelling the turnover of all funds paid . . . to Bayview" and "compelling turnover of the Note and Mortgage[.]" Bayview seeks dismissal of Count VIII on the theory that the requested relief is barred by principles of res judicata, and that the count otherwise fails to state a claim.
Although the complaint does not identify any statutory foundation for Count VIII, the Court assumes that this count is premised upon 11 U.S.C. § 542, which generally deals with turnover of property of the estate. Section 542 only applies to property of the estate; it does not apply to property that has been fraudulently transferred before the petition date "because such property does not become property of the estate until it has been recovered by the estate."
Bayview's motion additionally seeks mandatory or discretionary abstention with respects to Counts I, VI, and VIII. There is no need to consider Bayview's request with respect to Counts VI or VIII because both of those counts will be dismissed as to Bayview. The last count for which Bayview seeks abstention is Count I, the objection to claim. Although that count will also be dismissed, that dismissal is without prejudice to Kittery Point's ability to contest Bayview's claim on grounds other than the state law theories of lack of consideration and lack of corporate existence. To the extent that Count I is resurrected in the future, the Court will not abstain from determining it. Properly viewed, an objection to claim under 11 U.S.C. § 502 is a core matter that should not, and indeed cannot, be determined in some other forum.
Enright's motion to dismiss also contains an alternative basis for dismissal of the two counts asserted against him: he also seeks dismissal under Fed. R. Civ. P. 12(b)(5) due to insufficient service of the summons and complaint. Specifically, Enright contends that the original summons to him was deposited in the mail 12 days after it was issued, in violation of the seven-day deposit requirement of Fed. R. Bankr. P. 7004(e). Enright concedes that Rule 7004(e) provides a remedy short of dismissal—i.e., the issuance of another summons—if the original summons is not deposited in the mail within seven days after it is issued. See id. However, he urges the Court not to consider the curative effects of remedial service because he believes that the complaint "is fatally flawed and must be dismissed with prejudice[.]" Enright MTD ¶ 35. The Court will not dismiss the counts against Enright under Rule 12(b)(5). Kittery Point did engage in remedial service on Enright in December 2017, after Enright filed his motion to dismiss. More fundamentally, the Court cannot conclude at this point that the deficiencies in the Kittery Point's claims against Enright are irreparable.
A separate order will issue memorializing the Court's disposition of the motions to dismiss and establishing certain procedures for further activity in this proceeding.
