Douglas D. Dodd, United States Bankruptcy Judge
Chapter 7 trustee Diane G. Reed (the "
BFN Operations LLC ("
Frederick Walton, a sole proprietor doing business as Walton Farms, hauled for and delivered inventory to the Debtor.
Walton argues first that the complaint should be dismissed because the Trustee did not properly name him as a defendant. He claims that he is an individual who operates under the "DBA name of Walton Farms"
The Trustee responds
In support of his argument for summary judgment as alternative relief, Walton contends:
The Trustee responds that Walton has failed to produce admissible evidence to rebut the presumption of insolvency under 11 U.S.C. § 547(f) or support any of his affirmative defenses.
This memorandum opinion explains the reasons for denying Walton's motion to dismiss and motion for summary judgment and granting the Trustee leave to amend the complaint to name Walton as the defendant.
A motion to dismiss under Rule 12(b)(6) for failure to state a claim upon which relief can be granted tests the formal sufficiency of the plaintiff's statement of its claim for relief. A Rule 12(b)(6) motion is appropriate if the plaintiff has not provided fair notice of his claim with factual allegations that, when accepted as true, are plausible and not merely speculative. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009);
Rule 15(a) permits a plaintiff to amend a complaint once as a matter of course at any time before a responsive pleading is served. Fed. R. Civ. P. 15(a).
Walton urges dismissal under Rule 12(b)(6) based solely on his contention that he operates individually, did business with the debtor prepetition as an individual, and that Walton Farms is nothing more than a name. Specifically, Walton asserts that Walton Farms is a family name he merely "assumed" when his father retired,
Ohio law permitted the Trustee to rely on Walton's use of the assumed name Walton Farms and Walton cannot hide behind the fiction to avoid potential liability for the prepetition transfers. His use of the name without registering it with the Ohio Secretary of State is not dispositive, and may infer liability against Walton, personally. Specifically, Ohio Revised Code § 1329.10 permits a plaintiff to sue an individual who engages in business using a trade or fictitious name. Ohio Rev. Code § 1329.10(C). See also Family Medicine Found., Inc. v. Bright, 96 Ohio St.3d 183, 772 N.E.2d 1177, 1180 (2002). Fictitious name is defined in relevant part as a "name used in business or trade that is fictitious and that the user has not registered or is not entitled to register as a trade name." Ohio Rev. Code § 1329.01(A)(2) (emphasis added). The Ohio Supreme Court has construed these statutes to permit a plaintiff to sue a party named only by its fictitious name specifically if the plaintiff had no knowledge that the entity was doing business using a fictitious name. Bright, 96 Ohio St.3d at 186-87, 772 N.E.2d 1177 (emphasis added).
Although there is no evidence in the record by either party indicating whether Walton Farms is or is not a legal entity, documents filed in the underlying bankruptcy case suggested that the debtor had cause to believe that the individual Frederick Walton, rather than an entity named Walton Farms, was providing services to it before bankruptcy. The court takes judicial notice of these documents
Regardless of the Trustee's ability to continue prosecuting her claims against the fictitious entity Walton Farms rather than the individual Frederick Walton, the Trustee seeks to amend the complaint to name Walton individually. Whether she should be permitted to do so now depends on whether an amendment would expose Mr. Walton to the risk of unfair prejudice, "the touchstone of the inquiry under rule 15(a)." In re Kilroy, 357 B.R. 411, 419 (Bankr. S.D. Tex. 2006) (citing Lowrey v. Texas A & M Univ. Sys., 117 F.3d 242, 246 (5th Cir. 1997)).
Walton's response to the complaint plainly evidences his knowledge of the Trustee's lawsuit. Walton's Motion to Dismiss or Alternative Summary Judgment too reveals that he knew or should have known that the Trustee's claims related to his own pre- and post-petition dealings with the Debtor, especially because he conceded that no entity named Walton Farms exists. Walton thus had sufficient notice of the claims so that the Trustee's amendment of the complaint to name him as a defendant personally will not prejudice him.
Accordingly, dismissal pursuant to Rule 12(b)(6) is not appropriate. The Trustee is granted leave to amend the original complaint within fifteen days of the entry of this order to name Frederick Walton as the defendant.
Courts considering motions for summary judgment must determine whether a genuine issue of material fact
"After the movant has presented a properly supported motion for summary judgment, the burden then shifts to the nonmoving party to show with `significant probative evidence' that there exists a genuine issue of material fact." Hamilton v. Segue Software Inc., 232 F.3d 473, 477 (5th Cir. 2000) (internal citation omitted).
Finally, in deciding whether an issue of material fact exists, the court must view facts and inferences drawn from the evidence in the light most favorable to the non-moving party. Berquist v. Washington Mut. Bank, 500 F.3d 344, 349 (5th Cir. 2007).
The Trustee's complaint alleged that the Debtor's transfers to Walton in exchange for his services were preferential payments avoidable under Bankruptcy Code section 547(b).
Bankruptcy Code section 547 empowers a trustee to avoid preferential transfers of property made from a debtor's estate in a designated period prior to the filing of a bankruptcy case. Recovery of preferences discourages creditors from "racing to the courthouse to dismember the debtor during his slide into bankruptcy," and facilitates "the prime bankruptcy policy of equality of distribution among creditors of the debtor." In re Vartec Telecom, Inc., 2008 WL 376284, at *2 (Bankr. N.D. Tex. Feb. 11, 2008).
To establish the existence of a preferential transfer under 11 U.S.C. § 547(b), the Trustee must prove:
11 U.S.C. § 547(b); Union Bank v. Wolas, 502 U.S. 151, 154-55, 112 S.Ct. 527, 116 L.Ed.2d 514 (1991) (emphasis added). The Trustee must prove each element of § 547(b) in order to prevail. In re Studdard, 2007 WL 2254332, at *5 (Bankr. N.D. Miss. Aug. 2, 2007).
A debtor must be insolvent at the time of an allegedly preferential transfer for that transfer to be avoidable. Cage v. Baker Hughes Oilfield Operations, Inc. (In re Ramba, Inc.), 416 F.3d 394, 403 (5th Cir. 2005). The Trustee's burden of proof is made lighter by Bankruptcy Code section
Bankruptcy Code section 547(f) thus shifted to Walton the burden of producing evidence of the Debtor's solvency on the dates of the challenged transfers. Id.; see also Sandoz v. Fred Wilson Drilling Co. (In the Matter of Emerald Oil Co.), 695 F.2d 833, 839 (5th Cir.1983) (party seeking to rebut the presumption must introduce some evidence to show that the debtor was solvent at the time of the transfer; mere speculative evidence of solvency is not enough).
Walton contended that the Trustee's claims must fail because the Trustee failed to adduce evidence that shows the Debtor was insolvent.
Walton's arguments all fail because section 547(f) imposed on Walton the obligation to produce non-speculative evidence to rebut the statutory presumption of insolvency,
Walton is not entitled to summary judgment on the issue of the Debtor's insolvency.
Walton also seeks summary judgment on several affirmative defenses to the preference claim. Specifically, he argued that he is entitled to summary judgment because the services he rendered to the Debtor prepetition were (1) a contemporaneous
Walton's affidavit explained that he only transported nursery stock for the Debtor and never bought or sold its products before bankruptcy.
The Trustee counters that the documents Walton submitted as evidence were insufficient to support his defenses.
To prevail on his section 547(c)(2) ordinary course of business defense, Walton had to prove that the challenged transfers were:
11 U.S.C. § 547(c). See also Matter of Gulf City Seafoods, Inc., 296 F.3d 363 (5th Cir. 2002). Once again, the creditor/transferee bears the burden of proof with respect to all three elements. See 11 U.S.C. § 547(g).
Courts evaluate the ordinary course of business defense using both a subjective test [§ 547(c)(2)(A)] and an objective test [§ 547(c)(2)(B)].
Walton has failed to establish an ordinary course of business defense under either test. Even if Walton's affidavit provided a basis for their admission, the invoice records and Letter Agreement are not evidence of the timing of the Debtor's payments to Walton or the historical course of dealing between Walton and the Debtor. Nor do they in any other way
To prevail on his section 547(c)(1) contemporaneous exchange defense, Walton was required to prove that the challenged transfers were "(A) intended by the debtor and the creditor to or for whose benefit such transfer was made to be a contemporaneous exchange for new value given to the debtor; and (B) in fact a substantially contemporaneous exchange." 11 U.S.C. § 547(c)(1); see also 11 U.S.C. § 547(g).
Walton's sole basis for this defense is that "Defendant hauled and delivered Debtors [sic] nursery plants [sic] flowers, etc [sic] to retail outlets such as Wal-Mart, Lowes, Home Depot, etal [sic]."
Walton next argues that the transfers were not avoidable because he gave the Debtor new value after he received the payments, thus insulating the payments from avoidance under section Bankruptcy Code 547(c)(4). That defense requires proof that after the transfers, Walton "gave new value to or for the benefit of the debtor—(A) not secured by an otherwise unavoidable security interest; and (B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor." 11 U.S.C. § 574(c)(4); see also 11 U.S.C. § 547(g).
Walton's new value defense rests on his claim that the Debtor sold product he hauled for a sum well in excess of the amounts he was paid for his services.
Walton's new value defense does not entail merely netting the payments between the parties during the preference period: it requires a more detailed analysis of whether the "new value"—as defined by Bankruptcy Code section 547(a)
The Letter Agreement refers only to payment of expenses the Debtor incurred after the Petition Date to be paid in the ordinary course of business as provided in the Bankruptcy Code.
In sum, even if the documents accompanying Walton's motion were admissible, they do not establish his subsequent new value defense.
In conclusion, Walton has failed to establish his right to summary judgment under section 547(c) on any of the defenses he claimed to the Trustee's preference claim.
The Trustee's fraudulent transfer claim under section 548(a)(1)(B) requires proof that:
11 U.S.C. § 548 (emphasis added).
Frederick Walton as the party seeking summary judgment "bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact." Davis v. Ft. Bend Cty., 765 F.3d 480, 484 (5th Cir. 2014) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). The party seeking summary judgment may meet its initial responsibility by demonstrating that nonmovant will be unable to produce any evidence at trial supporting an essential element of her claim. Celotex, 477 U.S. at 325, 106 S.Ct. 2548; Stagliano v. Cincinnati Ins. Co., 633 Fed. App'x 217, 219 (5th Cir. 2015). However, "it is not enough to move for summary judgment without supporting the motion in any way or with a conclusory assertion that the plaintiff has no evidence to prove his case." Celotex, 477 U.S. at 328, 106 S.Ct. 2548 (White, J., concurring); In re Anderson, 562 B.R. 135, 138 (Bankr. S.D. Tex. 2016).
Walton's demand for summary judgment rests on his contention that the Debtor was solvent on the dates of its transfers to him because it was paying employees for their services two weeks before the bankruptcy filing.
Nor does Walton allege, much less prove, his right to an affirmative defense under section 548
Thus, Walton's motion for summary judgment as to the fraudulent transfer claim is denied.
Section 550 prescribes the rights and liabilities of a transferee of an avoided transfer and authorizes the Trustee to recover the property or value of the property transferred. 11 U.S.C. § 550(a). Subsection (a) permits a trustee to recover property transferred, or value of the property transferred, from the initial transferee of an avoided transfer or any immediate or mediate transferee — the "subsequent transferee" — of the initial transferee. 11 U.S.C. § 550(a)(1) and (2). The statute provides an avenue of recovery for a trustee prevailing in an avoidance section, which enables the trustee to maximize the assets available for distribution to creditors and equalizes the distribution of those assets among the creditors.
Walton's request for summary judgment on the Trustee's section 550 recovery claim is premature until the avoiding actions are tried.
Finally, the Trustee's complaint in count IV seeks disallowance of Walton's claims pursuant to 11 U.S.C. § 502(d), which directs the court to "disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 724(a) of this title." Section 502(d) disallows the claims of creditors who have received avoidable transfers unless the creditor relinquishes the transfer. 11 U.S.C. § 502(d). See also Smith v. Am. Founders Fin., Corp., 365 B.R. 647, 659 (S.D. Tex. 2007).
Because this claim cannot be determined until the avoidance actions are adjudicated, Walton's motion for summary judgment on count IV is denied as premature.
Walton's motion to dismiss and for summary judgment are denied, and the Trustee's claims will proceed to trial. Counsel for the Trustee shall amend the original complaint to name Frederick Walton as the defendant and shall submit a proposed form of order denying the Defendant's motion within fifteen (15) days from the entry of this memorandum opinion. Counsel for the Trustee must also confer with the Defendant and submit an amended scheduling