Opinion
C. A. PC-2019-3654
11-06-2020
CHARTERCARE COMMUNITY BOARD (through THOMAS S. HEMMENDINGER, as Permanent Liquidating Receiver), individually and derivatively, as member of PROSPECT CHARTERCARE, LLC and as trustee of the beneficial interest of its membership interest in PROSPECT CHARTERCARE, LLC; and STEPHEN DEL SESTO, as receiver and administrator of the St. Joseph Health Services of Rhode Island Retirement Plan and as holder of the beneficial interest of CHARTERCARE COMMUNITY BOARD'S membership interest in PROSPECT CHARTERCARE, LLC, Plaintiffs, v. SAMUEL LEE; DAVID TOPPER; THOMAS REARDON; VON CROCKETT; EDWIN SANTOS; EDWARD QUINLAN; JOSEPH DISTEFANO; ANDREA DOYLE; PROSPECT EAST HOSPITAL ADVISORY SERVICES, LLC; PROSPECTCHARTERCARE, LLC; PROSPECT EAST HOLDINGS, INC.; PROSPECT MEDICAL HOLDINGS, INC.; IVY HOLDINGS INC.; IVY INTERMEDIATE HOLDING INC.; DAVID & ALEXA TOPPER FAMILY TRUST; GREEN EQUITY INVESTORS V, LP; GREEN EQUITY INVESTORS SIDE V, LP; JPMORGAN CHASE BANK, N.A. as administrative agent and collateral agent for certain lenders; ABC CORPS 1-10; JOHN DOE 1-10; and JANE DOE 1-10, Defendants.
DECISION
STERN, J.
Before this Court is Defendant JPMorgan Chase Bank, N.A.'s Motion to Dismiss the counts and claims against it by Plaintiffs, as set forth in Counts IX and X of Plaintiffs' Verified First Amended and Supplemental Complaint, pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure for failure to state a claim for which relief may be granted. Plaintiffs CharterCARE Community Board, through Thomas S. Hemmendinger, Liquidating Receiver of CharterCARE Community Board, St. Joseph Health Services of Rhode Island, and Roger Williams Hospital, and the Plan Receiver, Stephen Del Sesto, as Receiver for the St. Joseph Health Services of Rhode Island Retirement Plan, object to Defendant's Motion to Dismiss. Jurisdiction is pursuant to G.L. 1956 §§ 8-2-13 and 8-2-14.
I Facts and Travel
The facts as alleged in Plaintiffs' Verified First Amended and Supplemental Complaint (Complaint) are summarized as follows. CharterCARE Community Board (CCCB) is a minority interest holder of Defendant Prospect CharterCARE, LLC (PCC), and Defendant Prospect East Holdings, Inc. (Prospect East) is a majority interest holder of PCC and "the wholly owned subsidiary" of Defendant Prospect Medical Holdings, Inc. (PMH). (Compl. ¶¶ 1, 17 (Apr. 21, 2020); Mem. Supp. Pl. Obj. (Pl. Mem.) at 1 (Aug. 28, 2020).)
"On or about September 24, 2013, CCCB, Prospect East, and [PCC] entered into an Asset Purchase Agreement [(APA)]," from which Prospect East was obligated to make a $50 million capital contribution, guaranteed by PMH, over a four-year period following the closing of the transaction on June 20, 2014 (Long-Term Capital Commitment). (Compl. ¶¶ 36(a) and (b), 37, 39.) Pursuant to Exhibit B of the Prospect CharterCARE Operating Agreement, Prospect East's interest in PCC, which reflected an investment of $95 million, consisted of its $45 million paid at the closing and a $50 million contribution that was to be "paid in connection with the [L]ong-[T]erm [C]apital [C]ommitment." Id. ¶ 51. There is no evidence that the Long-Term Capital Commitment has been satisfied. Id. ¶¶ 41, 44. In addition, due to PMH's guaranty of Prospect East's Long-Term Capital Commitment and failure to fulfill this obligation, CCCB asserts that it is a creditor of both PMH and Prospect East (Defendant-debtors). Id. ¶¶ 42, 102.
In connection with the APA, CCCB, Prospect East, and PCC entered into an Operating Agreement commencing June 20, 2014, whereby PCC became obligated to contribute at least $10 million each year to Roger Williams Medical Center and Our Lady of Fatima Hospital, facilities which it owns and operates through its wholly owned subsidiaries. (Compl. ¶¶ 16, 43.) Plaintiffs claim that there is no evidence that this obligation has been satisfied. Id. ¶¶ 41, 44.
Prior to entering into the APA, Defendants PMH, Prospect East, and PCC (collectively, Prospect Entities) sought regulatory exemptions from the City of Providence and the Town of North Providence, which were conditionally granted by the municipalities based on Prospect Entities' commitment to pay obligations such as the Long-Term Capital Commitment. Id. ¶¶ 49, 72, 85. For example, in 2014, Prospect Entities' counsel made several representations to the City of Providence and the Town of North Providence during public hearings in which the Prospect Entities sought ordinances that resulted in millions of dollars in tax exemptions. Id. ¶¶ 73, 86. These representations included, but were not limited to, the following: (1) that, as conditions to obtaining a state license and approval of the APA, Prospect Entities are obligated to invest $50 million into Roger Williams Medical Center and Our Lady of Fatima Hospital, which is only part of the "ninety million dollar capital commitment over four years that will be invested in the community to improve the hospitals[, ]" and (2) that PCC would invest $14 million in the "Saint Joes pension fund which [would] help a number of retirees in our community." Id. ¶¶ 68-70. In December of 2016, without CCCB's knowledge, PCC sought from the Attorney General a two-year extension to the four-year deadline to comply with the Long-Term Capital Commitment. Id. ¶ 45.
On February 22, 2018, the Prospect Entities entered into two separate loan credit agreements (Credit Agreements) with PMH as the borrower, PCC and Prospect East as guarantors, and JPMorgan Chase Bank, N.A. (JP Morgan) "as administrative agent and collateral agent[.]" Id. ¶¶ 25, 96, 97, 100. Substantial proceeds from the Credit Agreements were used to pay $457 million in dividends (2018 Dividends) to PMH stockholders. Id. ¶ 96. Plaintiffs contend that this debt was incurred with the intent to hinder, delay, or defraud existing creditors who still remain unpaid, including Plaintiffs, and without receiving in exchange reasonably equivalent value in violation of the Rhode Island Uniform Fraudulent Transfer Act, G.L. 1956, chapter 16 of title 6 (hereinafter UFTA or the Act). Id. ¶¶ 151-52, 159.
On April 21, 2020, Plaintiffs filed their Complaint which claimed, inter alia, that the transfers made in connection with the 2018 Dividends, including any transfer of assets to JP Morgan, are subject to avoidance to satisfy CCCB's claims as creditor of Defendants PMH and Prospect East pursuant to UFTA §§ 6-16-4(a)(1), 6-16-4(a)(2) and/or 6-16-5(a). Id. ¶¶ 149-165. Subsequently, JP Morgan filed a Motion to Dismiss for failure to state a claim under Rule 12(b)(6) of the Superior Court Rules of Civil Procedure. On September 21, 2020, this Court heard oral argument on JP Morgan's motion and reserved decision.
II Standard of Review
A motion to dismiss pursuant to Rule 12(b)(6) of the Superior Court Rules of Civil Procedure "has a narrow and specific purpose." Mokwenyei v. Rhode Island Hospital, 198 A.3d 17, 21 (R.I. 2018). "'[T]he sole function . . . is to test the sufficiency of the complaint,' and thus this Court need not look further than the complaint in conducting our review." Palazzo v. Alves, 944 A.2d 144, 149 (R.I. 2008) (quoting Rhode Island Affiliate, ACLU, Inc. v. Bernasconi, 557 A.2d 1232, 1232 (R.I. 1989)). The Court should only grant a Rule 12(b)(6) motion to dismiss "'when it is clear beyond a reasonable doubt that the plaintiff would not be entitled to relief from the defendant under any set of facts that could be proven in support of the plaintiff's claim.'" Id. at 149-50 (quoting Ellis v. Rhode Island Public Transit Authority, 586 A.2d 1055, 1057 (R.I. 1991); see also Builders Specialty Co. v. Goulet, 639 A.2d 59, 60 (R.I. 1994)). In examining the allegations contained in the Complaint, the Court "assumes them to be true, and views them in the light most favorable to the plaintiff." Id. at 149.
Our Supreme Court has not adopted the federal plausibility standard of pleading, whereby "'[f]actual allegations must be enough to raise a right to relief above the speculative level,' and a plaintiff must '[n]udge[] their claims across the line from conceivable to plausible.'" Chhun v. Mortgage Electronic Registration Systems, Inc., 84 A.3d 419, 422 (R.I. 2014) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Rather, Rhode Island follows a notice pleading standard; thus, "[a] pleading need not include 'the ultimate facts that must be proven in order to succeed on the complaint . . . [or] to set out the precise legal theory upon which his or her claim is based.'" Gardner v. Baird, 871 A.2d 949, 953 (R.I. 2005) (quoting Haley v. Town of Lincoln, 611 A.2d 845, 848 (R.I. 1992)). Therefore, the "pleading simply must provide the opposing party with 'fair and adequate notice of the type of claim being asserted.'" Id. (quoting Haley, 611 A.2d at 848).
III Analysis
JP Morgan moves to dismiss the claims against it, which are confined to Counts IX and X of Plaintiffs' Complaint. JP Morgan contends that Plaintiffs' allegations fail to state claims that JP Morgan's involvement in the Credit Agreements equate to a violation of UFTA because the Complaint lacks allegations that JP Morgan: had a role in determining to whom payments were made in connection with the 2018 Dividends; had an obligation or duty to Plaintiffs; had the requisite level of knowledge or intent; or engaged in acts or omissions in violation of UFTA. (Def. Mem. Law Supp. Mot. Dismiss at 2. (July 2, 2020) (hereinafter Def. Mem.).)
The Rhode Island Uniform Fraudulent Transfers Act
A brief explanation of the scope and purpose of UFTA are instructive under these circumstances. The Rhode Island Uniform Fraudulent Transfers Act, or otherwise titled the Uniform Voidable Transactions Act, codified in G.L. 1956 chapter 16 of title 6, was adopted to make the law uniform amongst the states which have also adopted the Act. Section 6-16-16 ("This chapter shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among the states enacting it.").
Being uniform in nature and where the language is substantially similar to other states' enactments of the UFTA, courts commonly look to other state's decisions in interpreting UFTA as greatly persuasive. See 37 C.J.S. Fraudulent Conveyances § 4 (2020).
Furthermore, UFTA as first enacted in 1984 and adopted by the State of Rhode Island in 1986, which then evolved into the Uniform Voidable Transfers Act, had the stated purpose of "protect[ing] unsecured creditors against transfers and obligations injurious to their rights[.]" See UFTA, § 1, cmt. 3, 7A U.L.A. 639, 646 (1984); see also UFTA, § 3, cmt. 2 ("[T]he purpose of the Act [is] to protect a debtor's estate from being depleted to the prejudice of the debtor's unsecured creditors."). That purpose remained omnipresent throughout the years, the subsequent amendments, and the courts' interpretation. What has transpired is a law "remedial in nature" and "construed broadly" to pursue the purpose of "prevent[ing] fraud and protect[ing] creditors," 37 C.J.S. Fraudulent Conveyances § 4 (2020), thus allowing the trial court "wide latitude to craft equitable remedies," United States v. Verduchi, 434 F.3d 17, 23 (1st Cir. 2006) (citing Nisenzon v. Sadowski, 689 A.2d 1037, 1050 (R.I. 1997)).
JP Morgan's contention that it cannot be held to answer as a Defendant under UFTA because there are no facts to establish JP Morgan "played any role in the transactions at issue in this case other than as a lender and as a collateral and administrative agent," assumes a very narrow scope and purpose of UFTA. (Def. Reply Mem. Supp. Mot. Dismiss at 8 (Sept. 14, 2020) (hereinafter Def. Reply Mem.).)
Fraudulent Transfer in Violation of §§ 6-16-4(a)(1) and 6-16-4(a)(2)
In February of 2018, when the Prospect Entities and JP Morgan entered into the Credit Agreements at issue, UFTA § 6-16-4(a) stated that:
"A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
"(1) With actual intent to hinder, delay, or defraud any creditor of the debtor; or
"(2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (i) [w]as engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (ii) [i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due."
As Plaintiffs' Complaint alleges that the transfer or obligation to JP Morgan took place in February 2018, it falls under pre-July 2018 UFTA, P.L. 2014, ch. 528, § 14, eff. Dec. 31, 2014.
Not only may a debtor be liable for a transfer determined to be fraudulent, but if a transfer or obligation is fraudulent under the above provisions, "the creditor may recover judgment for the value of the asset transferred . . . or the amount necessary to satisfy the creditor's claim[, and] judgment may be entered against . . . [t]he first transferee of the asset or the person for whose benefit the transfer was made[.]" Section 6-16-8(b)(1)(i). Therefore, a "transferee" of a debtor's assets or a "person for whose benefit the transfer was made" may be held liable under the Act. See id.
Pursuant to §§ 6-16-1(2), 6-16-1(12), and 6-16-1(16), respectively, "Asset" is defined as "property of a debtor"; "Property" is defined as "anything that may be the subject of ownership"; and "Transfer" is defined as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with an asset or an interest in an asset, and includes payment of money, . . . and creation of a lien or other encumbrance."
A
Whether Plaintiffs' Complaint Sufficiently Alleges That JP Morgan is a Transferee
JP Morgan asserts that Plaintiffs' claims in Counts IX and X fail to allege that JP Morgan is an entity that is liable to them on a claim under § 6-16-4(a)(1). (Def. Mem. at 5.) Specifically, JP Morgan asserts that Plaintiffs' Complaint fails to allege that JP Morgan is either a debtor or transferee-from which Plaintiffs would have a claim-under § 6-16-1, respectively as an entity that is either "liable on a claim" or has "directly or indirectly received property of the debtor." (Def. Mem. at 5.) Plaintiffs make no claim that JP Morgan is a debtor. However, Plaintiffs allege that JP Morgan is a transferee. (Compl. ¶ 153 ("[A]ssets of Defendants . . . were transferred to . . . JP Morgan.").)
This Court has recognized that "a cause of action for fraudulent conveyance may lie against a transferee just as it would as against the debtor who fraudulently transferred assets." M2 Multihull, LLC v. West, No. KC 10-1530, 2012 WL 3279463, at *8 (R.I. Super. Aug. 7, 2012) (citing Rohm & Haas Co. v. Capuano, 301 F.Supp.2d 156, 161 (D.R.I. 2004)). JP Morgan's contention that Plaintiffs did not allege that JP Morgan is a transferee in connection with the alleged fraudulent transfers is mistaken. Plaintiffs allege in the Complaint (1) that "CCCB had 'claims' against and was a 'creditor' of Defendants"; (2) that "[f]raudulent transfers were made in connection with the 2018 Dividends . . . with the actual intent . . . to hinder, delay, or defraud" Plaintiffs; (3) that those "transfers are subject to avoidance to the extent necessary to satisfy CCCB's claims"; and (4) that "CCCB is entitled to attachment against all of the assets of Defendants [Prospect Medical Holdings and Prospect East]. . . that were transferred to . . . JP Morgan[.]" (Compl. §§ 150-153) (emphasis added).
A "transfer" under UFTA is broadly defined as "every mode, direct or indirect . . . of disposing of or parting with an asset or an interest in an asset, and includes payment of money . . . and creation of a lien or other encumbrance." Section 6-16-1(16); see Gemma v. Sweeney, No. PC-2018-3635, 2019 WL 5396136, at *10 (R.I. Super. Oct. 15, 2019) ("RIUFTA's definition of what constitutes a 'transfer' is an expansive one[.]") (emphasis added). Although only instructive authority on this issue, both parties cite to Gemma. In Gemma, the court found that under the expansive definition of transfer, because a plaintiff may proceed against a transferee of an asset under § 6-16-8(b)(1)(i)-(ii) and plaintiff alleged defendants were transferees, plaintiff's complaint against the transferee-defendants was sufficiently plead to survive a motion to dismiss. Gemma, 2019 WL 5396136, at *10-11.
Here, Plaintiffs allege that JP Morgan's role in the Credit Agreements transaction was that of an administrative and collateral agent, and, because of that role, it is a transferee. (Compl. ¶ 25.) A collateral agent is one that takes a security interest in an asset on behalf of a lender. Because a transfer under UFTA can be a direct or indirect parting of an interest in an asset by creation of a lien, the giving of an interest in an asset such as a security interest can be considered a "transfer" under UFTA, and, as a result, the agent's taking of a security interest on behalf of a lender would make a collateral agent a transferee. Plaintiffs properly allege in their Complaint that JP Morgan is a collateral agent, and JP Morgan does not contest that fact; thus, assuming this to be true, when Defendants-PMH as borrower and Prospect East and PCC as guarantors-received funds under the Credit Agreements and incurred an obligation to JP Morgan in exchange for giving something of value to JP Morgan, such as an interest in an asset via a security interest, the Defendant-debtors transferred assets to JP Morgan, making JP Morgan a transferee. (Compl. ¶¶ 25, 100, 153.)
Collateral agent is:
"Also known as a security agent. The financial institution that holds the collateral on behalf of the lenders under a syndicated loan agreement as security for performance of the borrower's obligations under the loan agreement. The borrower grants a security interest in the collateral to the collateral agent on behalf of the lenders, and the collateral agent, as secured party under the UCC, takes all necessary administrative and enforcement actions with respect to the collateral on behalf of the lenders." Collateral Agent, Practical Law: Glossary (2020), https://content.next.westlaw.com/Document/I03f4daf0eee311e28578f7ccc38dcbee/View/ FullText.html?contextData=(sc.Default)&transitionType=Default&firstPage=true (last visited Nov. 5, 2020) (emphasis added).
An asset under UFTA need not be tangible property. Equitable interests and intangible property may be considered assets for purposes of UFTA. See 37 C.J.S. Fraudulent Conveyances § 15 ("Any equitable right or interest may be the subject of a fraudulent conveyance, and may be reached by creditors albeit in the hands of the fraudulent transferee.") (citing Cadle Co. v. Ogalin, 495 F.Supp.2d 278 (D. Conn. 2007) (applying Connecticut law); In re Brun, 360 B.R. 669 (Bankr. C.D. Cal. 2007) (applying California law); In re SMTC Mfg. of Texas, 421 B.R. 251 (Bankr.W.D.Tex. 2009) (applying Texas law)); see also 37 C.J.S. Fraudulent Conveyances § 11 ("For purposes of a creditor's action to set aside a debtor's fraudulent conveyance, intangible property may be fraudulently transferred[.]") (citing Jones v. Tauber & Balser, P.C., 503 B.R. 162 (N.D.Ga. 2013), order modified on other grounds, 503 B.R. 510 (N.D.Ga. 2013) (applying Georgia law)). In addition, a party acting as a lender-assignor may be a transferee under UFTA. See U.S. v. Tabor Court Realty Corp., 803 F.2d 1288, 1295-96 (3rd Cir. Oct. 22, 1986).
JP Morgan narrowly interprets UFTA to mean that because they did not transfer the funds-the 2018 Dividends-to the subsequent recipients, but only provided the funds to Defendant-debtors, JP Morgan cannot be considered a "transferee" under the meaning of the statute. (Def. Reply Mem. at 4.) Specifically, JP Morgan states that "[i]t is common sense that a lender is not a 'transferee.'" Id. at 5. As discussed earlier, a transfer can be a parting with an interest in an asset by creation of a lien. UFTA § 6-16-1. Therefore, under UFTA, the transfer is whatever JP Morgan obtained from Defendant-debtors in exchange for the funds JP Morgan provided to Defendant-debtors. It is more so "common sense" under the terms of UFTA that, as a lender, JP Morgan was transferred an asset as part of the benefit of the bargain under the Credit Agreements, and Plaintiffs need not establish at the pleading stage what exactly was transferred to JP Morgan in the transaction.
Assuming these allegations in the Complaint to be true and viewing them in the light most favorable to the Plaintiffs, it is not clear beyond a reasonable doubt that Plaintiffs would not be entitled to relief from JP Morgan under any set of facts that could be proven in support of Plaintiffs' claim that JP Morgan in its role as a collateral agent was transferred some asset under the Credit Agreements. In addition, Plaintiffs' allegations in the Complaint provide fair and adequate notice to JP Morgan that, in its role as a lender and/or collateral agent in connection with the Credit Agreements, Plaintiffs are asserting that under UFTA JP Morgan is a transferee of some asset of Prospect East and/or PMH, an asset which likely could not be discovered pre-suit. Therefore, Plaintiffs have sufficiently alleged, certainly under a notice pleading standard, that JP Morgan was a transferee under UFTA in connection with the obligations the Prospect Entities incurred.
B
Whether Plaintiffs' Complaint Sufficiently Alleges That JP Morgan is a Person for Whose Benefit the Transfer was Made
JP Morgan contends that Plaintiffs' statement in its Complaint that JP Morgan is a "person for whose benefit the transfers were made" is conclusory and cannot be "taken as true for purposes of [Rule 12(b)(6)]." (Def. Mem. at 6.) JP Morgan asserts that Plaintiffs' claim that JP Morgan was "an administrative agent and collateral agent" under the Credit Agreements is insufficient to establish that JP Morgan benefited from transfers because its role confers administrative responsibilities not beneficiary status. (Def. Mem. at 6 (citing Compl. ¶¶ 25, 96)).
Collateral agent, supra note 5.
In support of the assertion that Plaintiffs' claim is a mere conclusory statement because the "Complaint appears to base claims against JPMC solely on this language" that JP Morgan was a person that benefited, JP Morgan cites M2 Multihull, LLC, cited supra. (Def. Mem. at 6.) The court in M2 Multihull, LLC found that defendant was not a debtor from the alleged capacity as alter-ego of the actual debtor because the alter-ego theory does not extend to relationships between individuals, and the complaint was devoid of evidence that defendant owned any part of the corporation. M2 Multihull, LLC, 2012 WL 3279463, at *5, 8-9. As a result, the court rejected the claim that plaintiff was an alter-ego of debtor. Id. Without evidence that defendant was the alter-ego of debtor, the statement that defendant was a debtor of plaintiff was conclusory. See id.
In addition, the court also found that notwithstanding debtor's bankruptcy petition, the plaintiff may have been able to recover from the defendant as transferee of the alleged fraudulent transfers; however, that claim was in the purview of the bankruptcy trustee. M2 Multihull, LLC, 2012 WL 3279463, at *9 (citing Rohm & Haas Co., 301 F.Supp.2d at 161).
In this case, Plaintiffs claim that JP Morgan's role in the Credit Agreements was that of an administrative and collateral agent. Unlike in M2 Multihull, LLC, where the dispute was whether the party was a debtor from its capacity as the alter-ego of debtor, Plaintiffs here allege that in JP Morgan's capacity as collateral agent, JP Morgan benefited from a fraudulent transaction. See id. at *8-9. In M2 Multihull, LLC, the allegation that defendant was a debtor was only conclusory because there was no evidence to support the alter-ego theory. See id. The alter-ego doctrine, in and of itself, is a theory that must be proven. Id. at *5. Whereas here, Plaintiffs support the claim that JP Morgan was a collateral agent-by providing PMH's Consolidated Financial Statements that, in fact, list JP Morgan as a collateral agent-and JP Morgan does not deny the claim that it is a collateral agent. (Compl. ¶ 96; Def. Mem. at 1 ("JPMC is named solely in its capacity as an administrative agent and collateral agent in connection with a loan and credit agreement entered into with other named co-defendants.").)
Collateral agent, supra note 5.
In addition, a collateral agent, by its very nature, generally obtains an interest in collateral from a debtor and on behalf of a lender. See Collateral Agent, supra note 5. Therefore, a collateral agent is a secured party who not only has administrative responsibilities, but also has the authority to pursue enforcement actions with respect to the collateral on behalf of the lender. Id. A collateral agent status is not akin to a theory or doctrine that must be established, such as an alter-ego theory. In any event, JP Morgan does not contest its status as a collateral agent. As such, JP Morgan's reliance on M2 Multihull, LLC is misplaced.
At the motion to dismiss stage, without discovery related to how JP Morgan benefited from being a collateral agent, and in viewing the Complaint in the light most favorable to Plaintiffs, the allegation that JP Morgan benefited from its status as collateral agent in the transaction is sufficient to state a claim. It is conceivable from this set of facts that JP Morgan in its capacity as collateral agent in the Credit Agreements that financed millions of dollars did not do the job for free. Here, Plaintiffs did not plainly allege that JP Morgan benefited from the transfer or obligation incurred by the Prospect Entities, which alone would be conclusory. Rather, Plaintiffs' claims in the Complaint state that JP Morgan was a collateral agent and, thus, benefited from the obligation incurred by the Prospect Entities in connection with the Credit Agreements and in order to hinder, delay, or defraud creditors.
Therefore, Plaintiffs have stated a claim that JP Morgan is an entity, as a transferee or one that benefited from a transfer, that could be liable to Plaintiffs and for which relief could be granted under the UFTA at §§ 6-16-4(a)(1) or 6-16-4(a)(2).
C
Whether Plaintiffs' Claim Must Allege that JP Morgan had an Actual Intent to Hinder, Delay, or Defraud Creditors
JP Morgan argues that Plaintiffs' claims against it must fail because Plaintiffs failed to allege any actual intent on JP Morgan's part, which JP Morgan suggests is required to state a claim under § 6-16-4(a)(1). Section 6-16-4(a)(1) states that a "transfer made or obligation incurred by a debtor is fraudulent as to a creditor . . . if the debtor made the transfer or incurred the obligation . . . [w]ith actual intent to hinder, delay, or defraud any creditor." (Emphasis added.)
"It is a fundamental principle [of statutory interpretation] that, 'when the language of a statute is clear and unambiguous, this Court must interpret the statute literally and must give the words of the statute their plain and ordinary meanings.'" State v. Diamante, 83 A.3d 546, 548 (R.I. 2014) (quoting Accent Store Design, Inc. v. Marathon House, Inc., 674 A.2d 1223, 1226 (R.I. 1996)). The Act plainly reads that the intent element is relative to a debtor, not a debtor's transferees. See § 6-16-4(a)(1). There is no language in the UFTA that suggests that the transferee must also have the actual intent to hinder, delay, or defraud creditors. See generally UFTA. Rather, "if the debtor made the transfer or incurred the obligation . . . [w]ith actual intent to hinder, delay, or defraud any creditor[, ]" then the transfer or obligation is fraudulent. Section 6-16-4(a)(1) (emphasis added). Therefore, Plaintiffs need not allege that anyone other than Defendant-debtors had intent to hinder, delay, or defraud Plaintiffs when incurring an obligation to JP Morgan.
D]
Whether Plaintiffs Sufficiently Plead Defendant-debtors' Failure to Receive Reasonably Equivalent Value in the Credit Agreements Transactions with JP Morgan
JP Morgan contends that Plaintiffs' claim that Defendant-debtors incurred an obligation without receiving a reasonably equivalent value in exchange is a bare legal conclusion. (Def. Reply Mem. at 6.) JP Morgan asserts that Defendant-debtors "received 'full value' in that they received the bargained-for funds[, ]" and simply because Defendant-debtors distributed those funds as dividends "does not mean that [JP Morgan] did not provide its borrower with full value." Id.
"A[n] . . . obligation incurred by a debtor is fraudulent as to a creditor . . . if the debtor . . . incurred the obligation . . . [w]ithout receiving a reasonably equivalent value in exchange for the . . . obligation, and the debtor:
"(i) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
"(ii) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due"; or
"(a) "[W]as insolvent at that time or the debtor became insolvent as a result of the transfer or obligation." Sections 6-16-4(a)(2) and 6-16-5(a).
First, the "reasonably equivalent value" element of UFTA is not an analysis of whether a lender provided debtor with full value, but rather whether debtor "receiv[ed] reasonably equivalent value." See id. Taking the position at the pleading stage that a debtor simply "did not benefit" from a transaction is sufficient to state a claim. See Zahn v. Yucaipa Capital Fund, 218 B.R. 656, 674-75 (D.R.I. 1998). Plaintiff need not "prove [its] case in the Complaint" by citing the details of the transaction because "that is a matter for discovery and later proof." Id. at 674; see also Gardner, 871 A.2d at 953 (finding that "[a] pleading need not include 'the ultimate facts that must be proven in order to succeed on the complaint'") (quoting Haley, 611 A.2d at 848).
Here, Plaintiffs claimed that PMH and Prospect East, along with other guarantors, incurred obligations to JP Morgan pursuant to the Credit Agreements in the "principal amount of . . . $1, 120 million" at an interest rate of 7.625 percent and for an additional "revolving commitment" between $250 and $325 million at a variable rate of interest, which was used, inter alia, to pay dividends of $457 million, an undisclosed amount of expenses for refinancing, and $40 million of pension liabilities unrelated to St. Joseph Health Services of Rhode Island Pension Plan which the Prospect Entities represented as their commitment to pay while in front of the Providence City Council. (Compl. ¶¶ 68, 96-100.) Plaintiffs allege that Defendant-debtors did not receive reasonably equivalent value for the obligation to JP Morgan which was incurred to pay the 2018 Dividends. At this point, exactly what was given by Defendant-debtors in exchange for the approximately $1, 370 million or greater obligation incurred to JP Morgan is a matter for discovery and later proof.
Under a notice pleading standard, the Complaint does not need to include the ultimate facts of what the value was and why the value received was or was not "reasonably equivalent value." Zahn, 218 B.R. at 675. Prior to discovery, it is unlikely that Plaintiffs-pre-suit-would have the documentation that they need to determine if Defendant-debtors incurred the obligation to JP Morgan without receiving a reasonably equivalent value in exchange for the obligation, including information about what was exchanged and the value thereof.
In addition, with respect to pleading the elements of a fraudulent conveyance, when claiming that the debtor incurred an obligation without receiving reasonably equivalent value, plaintiff need only "specify in sufficient detail the who, what, where, and when of the challenged transfers." Foisie v. Worcester Polytechnic Institute, 967 F.3d 27, 50 (1st Cir. 2020). Because a claim of whether a debtor incurred an obligation without receiving reasonably equivalent value does not "fall within the 'who, what, where, and when' taxonomy[, ]" the claim need only give defendant fair and adequate notice. Id. (finding that the allegation need only meet the federal plausibility standard in federal court and no further particularity requirement was necessary).
Here, Plaintiffs provided sufficient information regarding "who, what, where, and when" by claiming that in February of 2018 Defendant-debtors incurred an obligation to JP Morgan for Credit Agreements amounting to debt looming over $1, 370 million, for which Plaintiffs claim Defendant-debtors did not receive reasonably equivalent value. Additionally, Plaintiffs assert that fraudulent transfers were made under the meaning of UFTA "in connection with the 2018 Dividends and in connection with amounts borrowed by [PMH] on senior secured borrowings and credit facilities, and the guaranties given to secure the indebtedness[.]" (Compl. ¶ 159.) If the obligation was incurred without reasonably equivalent value, under the meaning of UFTA, Plaintiffs' request is that the transaction be avoided to the extent necessary to satisfy its own claims against the Prospect Entities. Id. ¶¶ 160-61. Such information is sufficient to give JP Morgan fair and adequate notice of the claim.
E
Whether the Remedies Plaintiffs Seek Properly Lie Against Other Parties and Not Against JP Morgan
JP Morgan contends that it is not a proper party because the remedies that Plaintiffs seek "properly lie against parties other than [JP Morgan, ]" such as injunctive relief against further advances made to PMH or Prospect East under the Credit Agreements. (Def. Mem. at 8.) Section 6-16-7(a) specifies remedies available to a creditor, such as "[a]voidance of the . . . obligation"; "attachment . . . against the asset transferred"; and "[a]n injunction against further disposition by the debtor or a transferee, or both[.]"
As aforementioned, the trial court has "wide latitude to craft equitable remedies" in pursuit of UFTA's purpose of protecting unsecured creditors from a debtor's fraudulent transfers. Verduchi, 434 F.3d at 23. Additionally, "Rhode Island's adoption of the UFTA did not preempt common law remedies applicable to fraudulent transactions." In re Valente, 360 F.3d 256, 262 (1st Cir. 2004); see also § 6-16-15 (effective July 2, 2018) (expressly stating the intent that "[u]nless displaced by the provisions of this chapter, the principles of law and equity . . . supplement its provisions.").
Although Plaintiffs may be able to accomplish their claims to relief through the Defendant-debtors or recipients of funds, the Act does not limit Plaintiffs' claim to relief against the Defendant-debtors or the recipients of the funds. In fact, the Act expressly provides a remedy against the transferee of assets. Section 6-16-8(b)(1) ("[T]he creditor may recover judgment for the value of the asset transferred . . . or the amount necessary to satisfy the creditor's claim[, and] judgment may be entered against . . . [t]he first transferee of the asset or the person for whose benefit the transfer was made[.]"). Also, because the Court has broad discretion to craft remedies and access to common law remedies applicable to fraudulent conveyances, there may be remedies available to a plaintiff against a lien holder that are not available against a debtor or against the recipients of the funds. See § 6-16-7(a)(3)(i) (providing for "[a]n injunction against further disposition [of advances under the Credit Agreements] by . . . a transferee").
The Act is not intended to be punitive in nature; rather, it is a remedial law to protect creditors' rights and interests. Therefore, to the extent needed to satisfy Plaintiffs' claims against Defendant-debtors, pursuant to the Act and common law principals of law and equity, Plaintiffs may have remedies available to them that properly lie not solely against the other Defendants but also against JP Morgan.
IV Conclusion
Based on the forgoing and viewing the facts in the light most favorable to Plaintiffs, Plaintiffs sufficiently plead that (1) JP Morgan is a transferee and could be considered an entity that is liable to Plaintiffs on a claim under UFTA; (2) due to JP Morgan's collateral agent status, JP Morgan is a person for whose benefit the transfers were made; and (3) a transfer was made without receiving reasonably equivalent value. In addition, Plaintiffs need not plead JP Morgan's intent to defraud because the intent element is only relevant to the debtor in the transaction. Finally, because of its remedial nature and because the Act provides that Plaintiffs may have remedies against a transferee, Plaintiffs need not limit the action to debtors and the ultimate recipients of the 2018 Dividends. JP Morgan's motion to dismiss the claims against it with respect to Count IX and X is DENIED.