Opinion
Case No. 05-32116, Adv. No. 07-3046.
November 10, 2008
DECISION DENYING DEFENDANT'S MOTION TO DISMISS PLAINTIFF'S AMENDED COMPLAINT
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This matter is before the court on the Motion to Dismiss Plaintiff's Amended Complaint filed by Defendant Day Air Credit Union ("DACU") [Adv. Doc. 61]; the Objection filed by Plaintiff Chapter 7 Trustee Paul H. Spaeth ("Trustee") [Adv. Doc. 63]; and the Reply Memorandum filed by DACU [Adv. Doc. 72]. The issue before the court is whether the amended complaint [Adv. Doc. 44] filed by the Trustee on June 16, 2008 relates back to the date the original complaint was filed on March 1, 2007 so that the preferential transfer claims asserted will not be barred by the expiration of the relevant statute of limitations. For the following reasons, the court concludes that the amended complaint relates back and, consequently, DACU's motion to dismiss is denied.
BACKGROUND
A. Procedural Background
On March 11, 2005, an involuntary Chapter 7 bankruptcy petition was filed against the Debtor, Motorwerks, Inc., ("Debtor"). The Debtor did not oppose the petition and an order for relief retroactive to March 11, 2005 was entered. The Trustee is the duly appointed Chapter 7 Trustee for the Debtor's bankruptcy estate.
On March 1, 2007, the Trustee filed an adversary complaint against DACU alleging various causes of action including avoidance and recovery of preferential and fraudulent transfers, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, equitable subordination, and a request for disallowance of claims. DACU filed a motion to dismiss the complaint for lack of standing and failure to state a claim. On July 19, 2007, the court granted, in part, and denied, in part, DACU's motion to dismiss. [Adv. Doc. 23.] The court concluded that, in accordance with its July 13, 2007 decision in State Bank and Trust Co. v. Spaeth (In re Motorwerks), Adv. No. 06-3334 and its July 16, 2007 decision in Spaeth v. Wright-Patt Credit Union (In re Motorwerks), Adv. No. 07-3049, two of the Trustee's claims (aiding and abetting fraud, aiding and abetting breach of fiduciary duty) must be dismissed for lack of standing. In addition, the court dismissed two causes of action for failure to state a claim including the Trustee's third cause of action for avoidance of preferential transfers resulting from repayment of amounts in excess of provisional credits and a cause of action for equitable subordination. In accordance with the State Bank decision, the court determined that the Trustee could proceed with the other claims for avoidance of preferential and fraudulent transfers if he amended the complaint to provide more specificity pursuant to Fed.R.Bankr.P. 7008 and 7009. More particularly, the court required the Trustee to provide information that identified the transfers to be avoided. The court gave the Trustee sixty (60) days to amend.
The parties agreed to an extended deadline for the Trustee to file an amended complaint in order for the parties to engage in settlement discussions. A settlement was not reached and the Trustee's amended complaint was filed on June 16, 2008. On July 31, 2008, DACU filed its motion to dismiss the Trustee's amended complaint arguing that it failed to relate back to the date of the original complaint pursuant to Fed.R.Civ.P. 15(c)(2) and, consequently, the claims asserted were filed after the expiration of the applicable two-year statute of limitations. The Trustee objects asserting that sufficient factual detail was provided in the original complaint so that the amended complaint "relates back" pursuant to Rule 15.
B. Allegations in the Original Complaint
Because resolution of the issue involves an analysis of the sufficiency of the allegations in the original complaint, the court will provide a detailed account thereof to be compared to the allegations in the amended complaint.
In its summary of allegations in the original complaint, the court omits some facts relevant to claims which the Trustee subsequently dropped in the amended complaint.
Prior to the involuntary bankruptcy filing, the Debtor was operated as a vehicle leasing business. [Adv. Doc. 1, ¶ 6.] Mark Van Nest was the sole owner and principal officer and director of the Debtor. [ Id., ¶ 7.]
During the time period covered in the complaint, from approximately 2003 to 2005, Debtor had a business relationship with DACU that included a lending arrangement referred to as a "floor plan." [ Id., ¶ 8.] Under the floor plan, Debtor would borrow funds by drawing upon a revolving line of credit provided by DACU purportedly for the purpose of purchasing and leasing vehicles. [ Id.] DACU made advances to the Debtor by depositing funds into a floor plan bank account in the name of the Debtor to enable the Debtor to purchase the vehicles. [ Id.] The Debtor, in turn, was to lease the vehicles to its customers. [ Id.] The leases were typically financed by various lending and financial institutions including DACU in many instances. [ Id.]
A typical leasing arrangement was structured as follows. Debtor would act through Mark Van Nest or employees to locate a vehicle that a customer wished to lease. [ Id., ¶ 9.] The Debtor would purchase the vehicle using the funds advanced by DACU under the floor plan and then execute a lease with the customer. [ Id.] In many cases, the leases were purportedly assigned by the Debtor to various funding sources including DACU. [ Id.] The funding source would then pay a commission to the Debtor. [ Id.]
When the leases were assigned, the stream of payments was paid by the Debtor's customer, the lessee, to the lending institution that advanced the funds and took assignment of the lease. [ Id., ¶ 10.] In many of these lease transactions, the vehicles were titled in the name of the Debtor with liens purportedly to attach to the vehicles in favor of the lending institution advancing the funds. [ Id.] Debtor was to repay the advances from DACU which it frequently did with funds from a number of bank accounts that included amounts advanced to Debtor from different lenders funding leases. [ Id., ¶ 11.]
In order to obtain advances of funds under the floor plan to purchase particular vehicles, Debtor was required by DACU to submit certain documentation including, but not limited to, trust receipts identifying the specific vehicles to be purchased and containing such details as the Vehicle Identification Number (VIN), make, model and year of the vehicle. [ Id., ¶ 13.]
While the above describes a typical lease arrangement, the Trustee asserts that many of the transactions involving DACU were more unusual. The Trustee alleges that from September, 2003 through December, 2004, Mark Van Nest and or agents/employees of the Debtor submitted trust receipts to DACU containing "the same vehicle detail with respect to at least 310 vehicles." [ Id., ¶ 14.] In addition, during the same time period, "there were approximately 58 vehicles submitted which contained exactly the same serial number but with different vehicle models listed for each request for advance." [ Id.] An exhibit attached to the original complaint provided a description of the duplicative trust receipts discovered by the Trustee. [ Id., Ex. 1.]
Mark Van Nest and/or agents and employees submitted the same vehicle information repeatedly in order to obtain advances from DACU supposedly to purchase vehicles; in fact, however, the funds were not always used for such designated purposes. [ Id., ¶ 16.] Instead, Mark Van Nest or agents and employees of the Debtor used the funds for other purposes including but not limited to personal expenditures of Mark Van Nest and his relatives, payment of debt, and maintenance of a check kiting scheme. [ Id.] The Trustee believes that the amount of funds misappropriated to pay personal expenses of Mark Van Nest and his relatives is at least $1,127,196.52. [ Id.]
The Trustee asserts that DACU continued to advance funds to Debtor despite the multiple instances that false information was submitted. [ Id., ¶ 17.] Furthermore, the Trustee asserts that DACU continued to advance funds to the Debtor in amounts in excess of loan limitations. [ Id., ¶ 19.] The Trustee asserts that DACU did not act prudently as a floor plan financier and failed to perform due diligence by failing to monitor the Debtor and documentation submitted to DACU to ensure that the floor plan advances were used for their intended purpose. [ Id., ¶¶ 17-18.]
With respect to the Debtor's check kiting, the Trustee alleges that between March 11, 2001 and March 11, 2005, Mark Van Nest engaged in a massive and elaborate scheme with respect to numerous bank accounts of the Debtor and with a number of financial institutions. [ Id., ¶ 20.] Mark Van Nest frequently drew checks on Debtor's bank accounts that did not have sufficient funds to cover the checks. [ Id.] The checks were then deposited into other Debtor accounts. [ Id.] The scheme generally went as follows. Before the check drawn on the first account was returned to the first bank for payment, Debtor deposited a check drawn on either the second account or other account into the first account. [ Id.] Although there were insufficient funds to cover the check, the time delay in processing the check would create an artificially inflated balance. [ Id.] Mark Van Nest was then able to take advantage of the false and artificially inflated balance, the "float," during the time period of processing the checks before they cleared. [ Id.]
The Trustee asserts that the Debtor's three accounts with DACU were used by Mark Van Nest in his check kiting scheme. [ Id., ¶¶ 21-22.] Specifically, Mark Van Nest wrote checks against the accounts with DACU taking advantage of the availability of provisional credits extended by DACU when there were insufficient funds to support the checks. [ Id., ¶ 22.] Mark Van Nest would make deposits into bank accounts to cover the checks after expiration of the "float" period. [ Id.]
The Trustee asserts that the amount of the advances requested from DACU and deposited in the floor account frequently were not equal to the purchase price of various vehicles. [ Id., ¶ 24.] Instead, the advances requested from DACU were in amounts necessary to cover checks unsupported by sufficient funds. [ Id.] In other words, Mark Van Nest submitted trust receipts to DACU based on fictional proposed vehicle purchases in order to obtain advances to "cover the float" in the check kiting scheme. [ Id.]
The Trustee alleges that Debtor paid in excess of $4,789,502.00 to DACU between December 14, 2004 and December 31, 2004 purportedly for the repayment of funds advanced under the floor plan. [ Id., ¶ 15.] The Trustee acknowledges that the exact amount repaid during the ninety days prior to the bankruptcy filing, between December 12, 2004 and March 11, 2005 is unknown and to be determined through discovery. [ Id.] The Trustee asserts that transfers made during these periods constitute preferential transfers to the extent that the transfers repaid debt for which collateral was nonexistent or to the extent that they allowed an improvement in DACU's position pursuant to § 547. [ Id., ¶¶ 34-35.]
For leases assigned to DACU in the ninety days prior to bankruptcy, the Trustee asserts that any funds received by DACU on account of vehicle dispositions or residual value payments are preferential to the extent that any notation of the lien on the vehicles subject to the leases occurred more than ten days after execution of the security agreement or more than 20 days after the Debtor constructively took possession of the leased vehicles if the court construes them as purchase money. [ Id., ¶¶ 45-46.] Furthermore, the stream of lease payments received by DACU during the ninety days prior to the bankruptcy filing are preferential to the extent DACU failed to perfect by obtaining possession of the leases themselves as chattel paper within ten days of the execution of the applicable security agreements or within 20 days of the funding and assignment if purchase money. [ Id., ¶¶ 47-48.] The Trustee asserts that any payment received by DACU with regard to the assigned leases where no security agreements were executed would also be preferential as would leases executed within the ninety days prior to the bankruptcy filing date. [ Id., ¶¶ 49-50.]
C. Allegations in the Amended Complaint
In the amended complaint, the Trustee dropped his fraudulent transfer claims. [Adv. Doc. 44.] The Trustee reduced the claims in the amended complaint to: 1) avoidance of preferential transfers; 2) avoidance of preferential and post-petition transfers related to specific leased vehicles; and 3) objection to or disallowance of claims. [ Id.]
Many of the factual allegations in the amended complaint are identical to those in the original complaint including the allegations about the Debtor's business, the floor plan arrangement with DACU, the lease assignments, the check kiting scheme and the advances given by DACU to the Debtor based on the Debtor's allegedly fraudulent trust receipts and the Debtor's misuse of advances for purposes other than the purchase and lease of vehicles. [ Id., ¶¶ 1-23.]
As in the original complaint, the Trustee alleges in the amended complaint's first cause of action that funds transferred from the Debtor to DACU in the ninety days prior to bankruptcy were avoidable preferences because DACU's alleged collateral was actually nonexistent making the payments unsecured. [ Id., ¶¶ 26-27.] The amount of the alleged preferential payments was increased in the amended complaint from $4,789,502.00 to $5,924,328.73 and the Trustee provides a detailed itemization of known payments that was not provided with the original complaint. [ Id., ¶¶ 15, 25 and Ex. 3.]
Also, the amended complaint, like the original complaint, contains a second cause of action for recovery of preferential transfers on leased vehicles based on the failure to perfect the security interest in the time period required by § 547(e)(2)(B) and § 547(c)(3) (pre-BAPCPA). [ Id., ¶¶ 34-56.] Although the general fact scenario relevant to this cause of action is the same in the original and amended complaint, the Trustee adds the specific identity of two leases on which the liens are to be avoided and payments recovered in the amended complaint. [ Id., ¶¶ 42-43, 56.] Further, the amended complaint adds a new alternative cause of action for avoidance of one of the vehicle leases as a post-petition transfer pursuant to 11 U.S.C. § 549. [ Id., ¶ 55.]
As a final cause of action in the amended complaint, the Trustee objects to or requests disallowance of all the proofs of claim filed by DACU pursuant to 11 U.S.C. § 502. [ Id., ¶¶ 57-59.] The claim is identical to the claim in the original complaint. [ See Adv. Doc. 1, ¶¶ 103-105.]
LEGAL ANALYSIS
The focus of this proceeding is whether the amended complaint filed by the Trustee relates back to the filing date of the original complaint pursuant to Fed.R.Civ.P. 15(c)(2) or is, instead, time-barred by the expiration of the applicable statute of limitations in 11 U.S.C. § 546. Rule 15(c)(2), made applicable in bankruptcy adversary proceedings pursuant to Fed.R.Bankr.P. 7015, provides that "[a]n amendment of a pleading relates back to the date of the original pleading when . . . the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading[.]" DACU argues that the Trustee's amended pleading does not relate back because it asserts newly identified transactions as the basis for the Trustee's preferential transfer claims.
Relevant to this case is 11 U.S.C. § 546's two year statute of limitations for a preference action that begins upon the entry of the order for relief. The preferential transfer claims in the amended complaint filed by the Trustee would be time-barred by this statute of limitations if the amended complaint does not relate back to the date of the filing of the original complaint pursuant to Rule 15(c)(2). DACU does not take issue with the Trustee's newly added claim for recovery of post-petition transfers pursuant to § 549.
The Sixth Circuit considered the parameters of Rule 15(c)(2) and relation back in Miller v. American Heavy Lift Shipping, 231 F.3d 242, 248 (6th Cir. 2000). The court noted that:
'The rule is based on the notion that once litigation involving particular conduct or a given transaction or occurrence has been instituted, the parties are not entitled to the protection of the statute of limitations against the later assertion by amendment of defenses or claims that arise out of the same conduct, transaction, or occurrence as set forth in the original pleading.'
Miller v. American Heavy Lift Shipping, 231 F.3d 242, 248 (6th Cir. 2000) (citing Brown v. Shaner, 172 F.3d 927, 932 (6th Cir. 1999)). As such, the "thrust of Rule 15 is to reinforce the principle that cases 'should be tried on their merits rather than the technicalities of pleadings.'" Id. (further citation omitted). Based on this liberal standard, a party is permitted to add a new claim or legal theory as long as it arises out of the same transaction or occurrence stated in the original complaint. Id. Similarly, a plaintiff may amend the complaint to allege added events leading up to the same injury. Id.
In the Miller case, the Sixth Circuit compared amended pleadings brought pursuant to the Jones Act and general admiralty and maritime law that added factual detail and specificity to the circumstances surrounding injuries to five deceased seamen in the original complaints. Id. at 249. In the original complaints, the plaintiff, the administrator of the deceased seamen's estates, asserted that the decedents suffered "exposure to hazardous substances other than asbestos" while serving as mariners on vessels owned by the defendant shipowners and operators and, the seamen "sustained injuries" as a result. Id. at 245, 249. The amended complaints added specific factual detail by noting that the hazardous substances were "chemical carcinogens including benzene" and that the exposure caused leukemia. Id. at 249. The amended complaints further detailed the particular benzene containing substances to which the decedents were allegedly exposed. Id. The Sixth Circuit concluded that the amended complaints "simply plead with more specificity that which appeared in the original complaints: Shippers' liability for exposing decedents to a hazardous substance." Id. The Sixth Circuit held that the amended complaints related back. Id. at 249-50 (noting that to require more specificity in the original complaints regarding the particular pathologies of a given carcinogen is far too formalistic and specific for the general, non-technical requirements of Rule 15).
More factually relevant to the case at hand is Gold v. Nova Industries, Inc. (In re NM Holdings Co., LLC), 376 B.R. 194 (Bankr. E.D. Mich. 2007). In NM Holdings, the bankruptcy court followed the liberal approach to Rule 15(c) articulated by the Sixth Circuit in the Miller case within the context of a preferential transfer adversary proceeding initiated by a Chapter 7 trustee. Id. at 200-02. In a motion to dismiss, the defendants asserted that the trustee's amended complaint, containing detailed information about each alleged preferential transfer, did not relate back to the date the original complaint was filed and was time-barred by the statute of limitations in § 546. Id. at 200. The defendants argued that the only factual information provided in the original complaint consisted of aggregate totals of transfers alleged to have been made by certain debtors to each of the defendants and that the rest of the allegations were recitals of statutory elements. Id. at 202. In its analysis, the court cited with approval the liberal pleading rules articulated in Miller and other cases that "'shift the focus away from motions directed at the pleadings and towards discovery and motions for summary judgment or other dispositions on the merits.'" Id. at 203 (further citation omitted). The court concluded that the amended complaint did not plead new claims but provided more detail about the transactions previously alleged in the original complaint and, consequently, related back. Id. at 206.
The court also takes into consideration a case from the Northern District of Illinois, Brandt v. Gerardo (In re Gerardo Leasing, Inc.), 173 B.R. 379 (Bankr. N.D. Ill. 1994). In Gerardo Leasing, the bankruptcy court held that a Chapter 7 trustee's amended complaint for preferential and fraudulent transfers related back when it added transactions or payments because the newly added transactions were part of a common scheme or pattern of conduct detailed in the original complaint. Gerardo Leasing, 173 B.R. at 389-91. The bankruptcy court concluded that if the transactional pattern or fraudulent scheme that was laid out as the basis for fraudulent or preferential transfers in the original complaint is the same as in the amended complaint, then the amended complaint's addition of transfers falling within the scheme or pattern of conduct will relate back. Id.
In this case, the Chapter 7 Trustee's amended complaint specifically identifies preferential transfers that were only generally discussed in the original complaint and also adds transactions. However, these additional facts and transactions fall within the pattern of conduct discussed in great detail within the original complaint. With respect to the first claim, both the original and amended complaint include allegations that funds transferred from the Debtor to DACU in the ninety days prior to bankruptcy were avoidable preferences because DACU's alleged collateral was actually nonexistent making the payments unsecured. The factual events causing the collateral to be allegedly nonexistent, including the lending relationship between the parties and the Debtor's submission of fraudulent trust receipts to DACU to obtain funds used for purposes other than the purchase and lease of vehicles, are pleaded in both the original and amended complaint. While the amended complaint raises the amount of the alleged preferential transfers from $4,789,502.00 to $5,924,328.73 and provides a detailed itemization of known payments, the general fact pattern in the original complaint provided DACU with sufficient notice of the particular conduct and type of transactions at issue for relation back to occur under the liberal standard in Rule 15(c)(2) and the Sixth Circuit's Miller decision.
Similarly, the Trustee amends his second cause of action to itemize the type of preferential transfers described in the original complaint: transfers respecting leased vehicles on which DACU's liens were not properly perfected in the time period required by § 547(e)(2)(B) and § 547(c)(3). The original complaint provided sufficient detail with respect to the course of conduct and types of transactions at issue for the second claim in the amended complaint to relate back.
DACU urges this court to consider three cases in support of a more stringent test of relation back: Pardo v. Gonazba (In re APF Co.), 308 B.R. 183 (Bankr. D. Del. 2004), Valley Media, Inc. v. Borders, Inc. (In re Valley Media, Inc.), 288 B.R. 189 (Bankr. D. Del. 2003), and Birdwell v. U.S. West Newvector Group, Inc. (In re Cellular Express of Arizona, Inc.), 275 B.R. 357 (Bankr. D. Ariz. 2002). However, two of the three cases are not on point. APF Co. and Valley Media focus on the lack of sufficiency of the original complaint under Fed.R.Civ.P. 8 and 9; these decisions do not provide the standard for relation back of an amended complaint pursuant to Rule 15(c)(2). See APF Co., 308 B.R. 183; Valley Media, 288 B.R. 189.
In the third case cited by DACU, Cellular Express, the bankruptcy court concluded that a trustee's amended complaint asserting preferential and fraudulent transfers did not relate back when the original complaint did nothing more than assert statutory elements. Cellular Express, 275 B.R. at 360. However, in that case, the original complaint contained so little factual information that even the types of transfers sought to be avoided could not be determined. Id. at 363-64. Although dicta, the court noted that it may not be necessary for an initial complaint to identify each transfer by date, check number and amount if the types of transfers, such as transfers by cash or check or DePrizio-type transfers, are specified in the original complaint. Id. at 363. In the case at hand, the Trustee's original complaint details the types of transfers to be avoided. Thus, in this court's view, the Cellular Express opinion actually supports that the Trustee's amended complaint relates back to the original one.
To the extent that any of these courts would advocate one of the more stringent tests for relation back, as DACU suggests, those narrow and restrictive tests have been rejected by the Sixth Circuit in its Miller decision. Miller, 231 F.3d at 249 n. 6. In Miller, the Sixth Circuit explicitly rejects as "too mechanical for the liberal approach of Rule 15(c)" tests for relation back that require either: 1) that the evidence offered in support of the original claim would prove the new claim; or 2) a determination that the new claim does not alter the "when, where, what or how" of the alleged injury. Id. See also Rowland v. Walls (In re Walls), 375 B.R. 399, 408 (Bankr. S.D. Ohio 2007).
The Trustee's amendments itemizing the preferential transfers falling within the course of conduct explained in the original complaint "simply plead with more specificity" that which appeared in the original complaint. Under the liberal relation back standard articulated by the Sixth Circuit that promotes deciding cases on their merits rather than on mere technicalities, the court concludes that the Trustee's amended complaint relates back to the date that his original complaint was filed. DACU's motion to dismiss is therefore denied. SO ORDERED. This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio. IT IS SO ORDERED.
DACU also asserts that the Trustee should have requested leave to amend the original complaint. However, the court specifically granted the Trustee leave to file an amended complaint in its prior decision. [Adv. Doc. 23.] Consequently, no request was necessary.