Keith L. Phillips, United States Bankruptcy Judge.
This matter is before the Court on the motion of Jeffrey D. Katz ("Katz"), Christopher L. Young ("Young") and JDKatz,
On June 10, 2016, Rescue Rangers, LLC, (the "Debtor") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code.
On May 19, 2017, the Trustee filed a complaint (the "Complaint") against the Katz Defendants, Rescue Rangers, LLC, Delaware ("Rescue Rangers Delaware"), and Office Dispatch, LLC ("Office Dispatch"), seeking to avoid and recover transfers pursuant to §§ 544, 548, and 550 of the Bankruptcy Code, seeking turnover of property of the estate, seeking a declaration that Rescue Rangers Delaware and Office Dispatch are the successors to the Debtor, seeking a declaration that Office Dispatch is the alter ego of the Debtor, and seeking to hold the Katz Defendants liable for aiding and abetting the fraudulent transfer of the Debtor's assets to Rescue Rangers Delaware (the "Transfer") and for conspiring to fraudulently transfer the Debtor's assets.
The Katz Defendants moved to dismiss Counts IX and X of the Complaint (the "Motion to Dismiss") for failure to state a claim upon which relief can be granted, asserting that as a matter of law they could not be liable for aiding, abetting, or conspiring to make the Transfer because they were neither transferors nor transferees in the Transfer. In Count IX of the Complaint, the Trustee had alleged that the Katz Defendants aided and abetted the fraudulent transfers by counseling and assisting the Debtor in fraudulently transferring the assets and operations of the Debtor to Rescue Rangers Delaware. In Count X of the Complaint, the Trustee had alleged that the Katz Defendants conspired with the Debtor's principal and Rescue Rangers Delaware to commit a fraud by agreeing to a scheme to transfer the Debtor's assets to Rescue Rangers Delaware for no consideration.
On August 1, 2017, after the Court had taken the Motion to Dismiss under advisement, the Trustee amended the Complaint (the "Amended Complaint") by adding two additional counts pursuant to §§ 548 and 550, seeking to avoid and recover payments made to JDKatz in the two years preceding the debtor's bankruptcy filing.
The Court granted the Amended Motion, ruling that Counts IX and X of the Amended Complaint did not sufficiently state a cause of action under Virginia law.
The Trustee timely filed the "Second Amended Complaint" on October 30, 2017. The Second Amended Complaint essentially includes the same first eight counts as the Amended Complaint but adds Suero as a defendant in Count VII, the alter ego count.
The prayer in the Second Amended Complaint also asks for an award of "costs and disbursements incurred by the Trustee" in this adversary proceeding.
On November 13, 2017, the Katz Defendants filed a motion to dismiss Counts IXA (breach of fiduciary duty), X (aiding and abetting breach of fiduciary duty), XI (statutory business conspiracy), and XII (legal malpractice) of the Second Amended Complaint (the "Katz Motion"). On December 4, 2017, Suero filed a motion to dismiss Counts IX (conversion) and XI (statutory business conspiracy) (the "Suero Motion" and together with the Katz Motion, the "Motions.") The Trustee has responded to the Motions, and the Katz Defendants have filed a supplemental response. A hearing on the Motions was held on December 20, 2017, after which the Court took the Motions under advisement.
The Second Amended Complaint seeks an award of damages against Office Dispatch, Rescue Rangers Delaware, the Katz Defendants and Suero. The recovery of damages would affect the amount of property available for distribution to creditors, making the claims "related to" the Debtor's bankruptcy estate. Therefore, pursuant to 28 U.S.C. §§ 157 and 1334(b) and the general order of reference for the U.S. District Court for the Eastern District of Virginia dated August 15, 1984, this Court has subject matter jurisdiction.
Under Rule 12(b)(6), all well-pleaded factual allegations in a complaint are taken as true, and all reasonable inferences are drawn in favor of the complaining party. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007); Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955) (citation omitted). "[L]egal conclusions, elements of a cause of action, and
The following are the facts as pled in the Second Amended Complaint.
In 2008, the Debtor started a business providing roadside assistance to customers of various insurance companies and auto clubs. The Debtor's dispatchers would receive calls from customers needing services such as jump-starting car batteries, unlocking vehicles, delivering fuel and changing flat tires and would send employees of the Debtor to perform these services. The insurance companies and motor clubs would pay the Debtor a flat rate, and the Debtor would pay a portion of this amount to its roadside assistance employee who performed the service. The Debtor's gross receipts grew steadily and peaked at $4,300,000 in 2014.
In 2012, the Debtor's dispatch employees were transferred to Office Dispatch, a Virginia limited liability company with its principal place of business in Fredericksburg, Virginia. The Debtor and Office Dispatch were treated as the same entity, with the Debtor paying substantially all of Office Dispatch's expenses. In addition to paying the expenses of Office Dispatch, the Debtor paid a significant portion of the personal expenses of its sole owner, George Dante Suero ("Suero").
On November 2, 2015, a collective action suit was filed against the Debtor and Suero in the U.S. District Court for the Eastern District of Virginia (the "Collective Action") seeking damages for unpaid overtime wages owed to the Debtor's employees performing roadside assistance. On November 17, 2015, the Debtor wrote a check in the amount of $12,000 to JDKatz for "Attorney Retainer."
In 2016, the Debtor transferred its operations to Rescue Rangers Delaware, a Delaware limited liability company with its principal place of business in Fredericksburg, Virginia. As part of the transfer, Rescue Rangers Delaware signed new contracts with the auto clubs that previously were parties to assistance contracts with the Debtor. The Debtor directed the insurance companies and auto clubs to make future requests for roadside assistance to Rescue Rangers Delaware and to deposit future payments for services into new bank accounts in the name of Rescue Rangers Delaware. In addition, all of the Debtor's roadside assistance technicians were required to sign new employment agreements with Rescue Rangers Delaware. Rescue Rangers Delaware took over use of all of the Debtor's intellectual property, including its name and logo.
In December, 2016, Young advised the Debtor's insurance carriers that JDKatz was corporate counsel to "Rescue Rangers," that Rescue Rangers, LLC, had reorganized and was in the process of winding down its business operations, and that all "property, assets, debts, and liabilities are currently in the process of being sold from Rescue Rangers as a Virginia LLC to Rescue Rangers as a Delaware LLC." Young further requested that the insurance companies cause their records to reflect new corporate and tax information, including a new employer identification number.
On July 12, 2016, the Debtor filed its schedules and statement of financial affairs, listing total assets of $1,341.11 and total liabilities of $2,879,200.84. In Schedule E/F, the Debtor listed the Internal Revenue Service, Amex, and "Dwayne Vaughan, et al" as the only creditors. The Debtor did not list its contracts with the insurance companies and auto clubs on Schedule G, which requires a debtor to
In its statement of financial affairs, the Debtor disclosed that it had $4.2 million in revenue in 2014 and $3.2 million in 2015. The Debtor stated that it did not give any insider value in any form during the one year period prior to the petition date but disclosed that it paid $43,776.25 for attorney's fees to "Jeffrey David Katz, JDKATZ, P.C." between June 2015 and June 2016.
During the Debtor's July 20, 2016, meeting of creditors, Suero, acting as the Debtor's designee, testified that the Debtor stopped operating on June 10, 2016, the petition date. At the Debtor's continued meeting of creditors on January 23, 2017, Suero testified that:
The transfer of the Debtor's assets to Rescue Rangers Delaware was accomplished by Suero to separate the Debtor's assets from its liabilities for tax purposes and because the Collective Action was pending in the Virginia District Court.
On June 10, 2016, the same date the Debtor filed its bankruptcy case, Suero filed an individual Chapter 7 bankruptcy petition in the Alexandria Division of this Court.
The Katz Motion seeks dismissal of four counts of the Second Amended Complaint. Those counts are Count IXA (breach of fiduciary duty), Count X (aiding and abetting breach of fiduciary duty), Count XI (statutory business conspiracy), and Count XII (legal malpractice). In the alternative, the Katz Motion seeks to have the Court compel arbitration and stay proceedings pending arbitration. Docket 36 at 7, n.9.
In Count IXA, the Trustee cites Virginia Code § 13.1-1024.1(A)'s proviso that "[a] manager shall discharge his or its duties as a manager in accordance with the manager's good faith business judgment of the limited liability company." The Trustee alleges that Suero breached his fiduciary duty to the Debtor by "fraudulently transferring all of the Debtor's valuable assets and operations for no consideration to Rescue Rangers Delaware, leaving the Debtor with substantial debts and no assets with which to repay those debts."
In Count X, the Trustee claims that the Katz Defendants assisted Suero with the fraudulent transfer of assets from the Debtor to Rescue Rangers Delaware. Further, the Trustee argues that the Katz Defendants, knowing of Suero's fiduciary obligations to the Debtor, advised Suero to transfer the assets to Rescue Rangers Delaware for the purpose of avoiding the Debtor's tax obligations and the pending Collective Action, thus aiding and abetting Suero in breaching his fiduciary obligations to the Debtor. The Trustee asserts that the Debtor and its estate have been damaged in the amount of the transferred assets and the costs of recovering those assets and seeks damages therefor. The Trustee also seeks an award of punitive damages, alleging that the actions of the Katz Defendants were willful and wanton.
In Count XI, the Trustee alleges that collaborative actions of Suero and the Katz
In Count XII, the Trustee alleges that the Katz Defendants, by advising and assisting Suero to fraudulently transfer Debtor's assets to Rescue Rangers Delaware, breached their duties to the Debtor and also breached their contract to provide legal services to the Debtor, thus causing the Debtor's loss of its assets. Count XII appears to base its claim both on negligence and upon breach of contract. The Trustee seeks an award of the same damages sought in Count X and also seeks an award of punitive damages, asserting that the actions of the Suero and the Katz Defendants were willful and wanton.
As a preliminary matter, the Court notes that Count IXA does not seek relief against the Katz Defendants. The Katz Motion requests that the count be dismissed "[t]o the extent [the Katz Defendants] are named as parties." Although Count IXA as set forth in the Second Amended Complaint does not assert liability on the part of the Katz Defendants for breach of fiduciary duty, the prayer for relief is less clear. The prayer seeks a judgment against the Katz Defendants and Suero, jointly and severally, for "breach of fiduciary duty and aiding and abetting and [sic] breach of fiduciary duty." However, because Count IXA itself does not allege any breach of fiduciary duty by the Katz Defendants, it fails to state a cause of action against them and must be dismissed as to them. Therefore, the Katz Motion as to Count IXA will be granted and that count will be dismissed as to the Katz Defendants.
The Katz Defendants assert that the remaining three counts at issue should be dismissed for a lack of subject matter jurisdiction and for failure to state a claim. Alternatively, they request that the Court compel arbitration on any counts asserted against them. In support of their position, they point to the arbitration provision of the October 1, 2014, engagement agreement (the "Engagement Agreement") between the parties. A copy of the Engagement
The Trustee counters that the Arbitration Provision is inapplicable because of the further qualification found in the Retainer Letter that "[t]he scope of this engagement does not include any representation on any other matter, trial, or any appeal, should there be any. These would also be the subject of separate engagements, should they ever become necessary." The Trustee argues that any advice on the transfer of assets would not have been covered by the Engagement Letter and thus the Arbitration Provision contained therein would not apply to advice as to the transfer of assets.
While it is true that the Court may not require a party to submit to arbitration if that party has not agreed to do so,
The Katz Defendants point to the strong public policy in favor of arbitration that is set forth in the Federal Arbitration Act, 9 U.S.C. §§ 1-307. In Moses v. CashCall, Inc., 781 F.3d 63 (4th Cir. 2015), the Fourth Circuit stated that "[t]o be sure, the arbitration policies implemented by the Federal Arbitration Act are to be robustly followed." Id. at 71 (citation omitted).
In Moses v. CashCall, the Fourth Circuit found that "forcing [a debtor] to arbitrate her constitutionally core claim would inherently conflict with the purposes of the Bankruptcy Code." Id. at 73. However, it further held that the refusal to send a non-core claim to arbitration requires more than a finding that arbitration would potentially conflict with the purposes of the Bankruptcy Code. Rather, the conflict must be inherent and "sufficient to override by implication the presumption in favor of arbitration." Id. at 89 (quoting U.S. Lines, Inc. v. Am. S.S. Owners Mut. Prot. & Indem. Ass'n (In re U.S. Lines), 197 F.3d 631, 640 (2d Cir. 1999)). The Fourth Circuit explained core and non-core claims and the role of the bankruptcy courts as to each:
781 F.3d at 70.
Counts X, XI, and XII here are not statutorily core claims in that jurisdiction over them does not arise under 28 U.S.C. § 157(b). Therefore, the Court must perform further analysis to determine whether there is a conflict between the purposes of the Federal Arbitration Act and the Bankruptcy Code in this case.
In Moses v. CashCall, the Fourth Circuit set forth a three-part test to determine whether there is a congressional intent that would "preclude a waiver of judicial remedies for the statutory rights at issue." 781 F.3d at 71. That intent must be discernable from "(1) the statute's text; (2) its legislative history; or (3) `an inherent conflict between arbitration and the statute's underlying purposes.'" Id. at 71 (quoting Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 227, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987)).
The Trustee has not provided the Court any persuasive basis upon which to find that there is an irreconcilable conflict between the provisions of the Bankruptcy Code and the Arbitration Provision; he has
A more difficult question arises as to Counts XIII and XIV, the only other counts asserted against any of the Katz Defendants. While the Katz Motion does not seek dismissal of Counts XIII and XIV, the Katz Defendants argue that all issues alleged against them in the Second Amended Complaint are arbitrable. While Counts X, XI, and XII are non-core matters, Counts XIII and IV, asserted against JDKatz, are statutorily core under 28 U.S.C. § 157(b)(2)(H) because in them, the Trustee seeks to set aside and recover damages from a fraudulent conveyance. It remains for the Court to determine whether that alone suffices to override the Arbitration Provision.
The case of McCarthy v. Wells Fargo Bank, N.A. (In re El-Atari), No. 1:11cv1091, 2011 WL 5828013 (E.D. Va. Nov. 18, 2011), informs the Court's decision in this matter. In El-Atari, the trustee in the debtor's chapter 7 case filed multiple adversary proceedings based upon § 548 of the Bankruptcy Code. One of the defendants moved to withdraw the reference of the adversary proceeding pursuant to 28 U.S.C. § 157(d), arguing that the bankruptcy court lacked constitutional authority to hear and decide the matter. The district court found that based upon the Supreme Court's ruling in Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), fraudulent conveyance actions are not constitutionally core proceedings and bankruptcy courts have no jurisdiction to issue final orders in such proceedings.
The Trustee seeks a money judgment against the Katz Defendants under § 548 of the Bankruptcy Code. Under the analysis of El-Atari, the claim is statutorily core but not constitutionally core, since it seeks to enhance the bankruptcy estate but does not arise through the claims allowance process.
Accordingly, the Court grants the parties such relief from the automatic stay of the Bankruptcy Code, 11 U.S.C. § 362(a), as may be necessary to enable arbitration of Counts X, XI, XII, XIII, and XIV, and further action in this Court to recover against the Katz Defendants on the claims asserted against them in Counts X, XI, XII, XIII, and XIV is stayed pending the outcome of arbitration.
The Suero Motion seeks dismissal of two counts of the Second Amended Complaint. Those counts are Count IX (conversion) and Count XI (statutory business conspiracy). In Count IX, the Trustee alleges that Suero and Rescue Rangers Delaware converted the Debtor's assets and operations by transferring them to Rescue Rangers Delaware. The Trustee seeks an award in the amount of the value of the transferred assets and the costs of recovering those assets. The business conspiracy allegations of Count XI as to Suero are the same as the allegations against the Katz Defendants that are summarized above.
In addition to his arguments as to each specific count, Suero also argues that he should be dismissed as a party defendant in this adversary proceeding. He argues that the Trustee was tardy in asserting his claims against Suero and that "myriad claims that have already been filed in this case makes filing another claim unnecessary." The Trustee points out that Suero was a debtor in this Court until October 16, 2017, and could not have been named a defendant at the inception of the adversary proceeding because of the automatic stay of § 362 of the Bankruptcy Code. In addition, the Trustee points to Rule 15 of the Federal Rules of Civil Procedure, Fed. R. Civ. P. 15, made applicable here by Bankruptcy Rule 7015, Fed. R. Bankr. P. 7015, which provides that leave to amend a complaint should be granted freely "when justice so requires."
In this instance, the Court is of the opinion that adding Suero as a party defendant does not prejudice him in any significant way. The proceeding is not so far advanced that adding Suero at this stage will put him at a disadvantage. This is especially true because Suero was the sole owner of the Debtor and is the sole owner of Rescue Rangers Delaware. As such, he has already been involved in this adversary proceeding and will not be coming into this adversary proceeding unaware of its substance. Thus, the court finds that formally adding him as a party defendant will not be unduly prejudicial. Contrary to Suero's contention, the fact that the Trustee has asserted claims against other entities does not relieve Suero of potential liability. Accordingly, the motion to dismiss him as a party defendant will be denied.
Suero next asserts that Count IX, the conversion claim, should be dismissed
In Mar Tech, the Virginia court did not say that return of property was the only remedy in a conversion action, only that a conversion claim arises when a defendant has deprived a plaintiff of property to which the plaintiff had an immediate right of possession. The court found that under the facts before it, the plaintiff had stated a claim for contractual damages and not one for conversion, the defendant having not deprived the plaintiff of a specific res but rather having failed to perform under its contract.
The law in Virginia is that "the measure of damages for conversion is the `value of the property converted at the time and the place of conversion.'" Marsteller v. ECS Fed., Inc., No. 1:13cv593 (JCC/JFA), 2013 WL 4781786, at *8 (E.D. Va., Sept. 5, 2013) (quoting Straley v. Fisher, 176 Va. 163, 10 S.E.2d 551 (1940)). See also E.I. du Pont de Nemours and Co. v. Kolon Indus., Inc., Civ. No. 3:09cv58, No. 2011 WL 4625760, at *2 (E.D. Va. Oct. 3, 2011). In Count IX, the Trustee has not alleged a claim for breach of contract, as was the case in Mar Tech, but one for conversion. Therefore, Suero's motion to dismiss Count IX will be denied.
In Count XI, the Trustee argues that the Katz Defendants and Suero conspired, in violation of Va. Code Ann. § 18.2-499, to fraudulently transfer the assets and operations of the Debtor to Rescue Rangers Delaware. Suero has moved to have this count dismissed against him, arguing that the facts do not support this claim. He argues that he was acting as agent for the Debtor when causing the transfer of assets to Rescue Rangers Delaware and as such he could not have conspired with the Debtor, as an agent may not conspire with its principal. This is generally true under Virginia law. See Stradtman v. Republic Services, Inc., No. 1:14cv1289, 2014 WL 6698946, at *6 (E.D. Va. Nov. 25, 2014). However, viewing the facts as pled in the light most favorable to the Trustee, it is possible that Suero and the Katz Defendants were acting not as agents for the Debtor but perhaps as agent for Rescue Rangers Delaware. (See Complaint ¶¶ 25, 33 as well as Exhibit A).
Because it is possible that Suero and/or the Katz Defendants were not acting as agents of the Debtor, the Second Amended Complaint contains sufficient allegations to allow the Court to draw the reasonable inference that Suero is liable. This satisfies the standard set forth in Iqbal, and dismissal is not proper. In light of the questions that exist as to the capacity in which Suero may have been acting, the Court need not yet further discuss the Virginia intracorporate immunity doctrine, undertaking
The Court notes that the numbering of the counts is slightly out of order in the Second Amended Complaint.
