In re: ClassicStar v.

By order of the Bankruptcy Appellate Panel, the precedential effect
of this decision is limited to the case and parties pursuant to 6th
Cir. BAP LBR 8013-1(b). See also 6th Cir. BAP LBR 8010-1(c).
File Name: 11b0002n.06
BANKRUPTCY APPELLATE PANEL OF THE SIXTH CIRCUIT
In re: CLASSICSTAR, LLC, )
)
Debtor. )
_____________________________________ )
)
)
JAMES D. LYON, )
Chapter 7 Trustee, )
)
Appellant, ) No. 10-8059
)
v. )
)
A.G. “SANDY” RAPPAPORT, )
)
Appellee. )
)
Appeal from the United States Bankruptcy Court
for the Eastern District of Kentucky
Case No. 07-51786; Adv. No. 09-5177
Decided and Filed: February 24, 2011
Before: FULTON, HARRIS, and RHODES, Bankruptcy Appellate Panel Judges.
____________________
COUNSEL
ON BRIEF: Alisa E. Moen, BLANK ROME LLP, Philadelphia, Pennsylvania, for Appellant.
Gregory R. Schaaf, GREENEBAUM DOLL & McDONALD PLLC, Lexington, Kentucky, for
Appellee.
____________________
OPINION
____________________
ARTHUR I. HARRIS, Bankruptcy Appellate Panel Judge. James D. Lyon, Chapter 7 Trustee
for the debtor, appeals an order of the bankruptcy court dismissing an adversary proceeding with
prejudice pursuant to Federal Rules of Civil Procedure 8, 12(b)(7), and 19. For the reasons that
follow, we (1) AFFIRM dismissal to the extent it is based on a claim of actual fraud under 11 U.S.C.
§ 548(a)(1)(A); (2) REVERSE dismissal to the extent it is based on Rule 19 and Rule 12(b)(7); and
(3) REMAND for proceedings consistent with this opinion.
I. ISSUES ON APPEAL
The issues presented by the parties to this appeal are: (1) whether the bankruptcy court erred
in finding the trustee failed to plead actual fraud under § 548(a)(1)(A) with sufficient particularity
to satisfy Rule 8(a) and whether the court erred in denying the trustee leave to amend the complaint
a second time under Rule 15(a), (2) whether the bankruptcy court erred in finding there were
potentially necessary parties that were not named in the trustee’s complaint which warranted
dismissal with prejudice under Rule 19 and Rule 12(b)(7), and (3) whether the bankruptcy court
erred in denying the trustee’s motion for reconsideration of its order under Rule 60(b).
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal.
The United States District Court for the Eastern District of Kentucky has authorized appeals to the
BAP. A final order of a bankruptcy court may be appealed by right under 28 U.S.C. § 158(a)(1).
For purposes of appeal, an order is final if it “ ‘ends the litigation on the merits and leaves nothing
for the court to do but execute the judgment.’ ” Midland Asphalt Corp. v. United States, 489 U.S.
794, 798, 109 S. Ct. 1494, 1497 (1989) (citations omitted).
Conclusions of law are reviewed de novo. Mitan v. Duval (In re Mitan), 573 F.3d 237, 241
(6th Cir. 2009); Elm Rd. Dev. Co. v. Buckeye Ret. Co. (In re Hake), 419 B.R. 328, 331 (B.A.P. 6th
Cir. 2009). “Under a de novo standard of review, the reviewing court decides an issue independently
-2-
of, and without deference to, the trial court’s determination.” Palmer v. Wash. Mut. Bank (In re
Ritchie), 416 B.R. 638, 641 (B.A.P. 6th Cir. 2009) (emphasis in original) (quoting Gen. Elec. Credit
Equities, Inc. v. Brice Rd. Devs., LLC (In re Brice Rd. Devs., LLC), 392 B.R. 274, 278 (B.A.P. 6th
Cir. 2008)).
Factual findings underlying the bankruptcy court’s ruling are reviewed for clear error. In re
Mitan, 573 F.3d at 241. “A finding of fact is clearly erroneous ‘when although there is evidence to
support it, the reviewing court on the entire evidence is left with the definite and firm conviction that
a mistake has been committed.’ ” Riverview Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.),
486 F.3d 940, 944 (6th Cir. 2007) (quoting Anderson v. City of Bessemer City, 470 U.S. 564, 573,
105 S. Ct. 1504 (1985)).
III. FACTS
On September 14, 2007, ClassicStar, LLC (the “debtor”) filed a voluntary petition under
chapter 11 of the Bankruptcy Code. On April 14, 2008, the case was converted to chapter 7, and
James Lyon was appointed interim trustee. Pursuant to 11 U.S.C. § 546, the last day to file § 548
actions was September 14, 2009. The trustee filed numerous adversary proceedings on the eve of
the expiration of the statute of limitations. On September 10, 2009, pursuant to §§ 548 and 550, the
trustee filed an adversary proceeding against “Taylor & Rappaport.” The claim was based on three
entries in the debtor’s ledger in which payments were made to third parties on Taylor & Rappaport’s
behalf. The ledger listed the following: on November 3, 2005, the debtor made two payments to
Key Bank, totaling over $2 million, and on November 30, 2005, the debtor made a $2 million
payment to “Payment from Investment A.” (Adv. Proc. Docket #1, Ex. A). On October 27, 2009,
Sandy A.G. Rappaport (“Rappaport”) filed an answer to the original complaint. (Adv. Proc. Docket
#7). On November 20, 2009, Rappaport filed a motion to dismiss the complaint for failure to plead
actual fraud and constructive fraud with particularity. (Adv. Proc. Docket #9). On
February 24, 2010, the bankruptcy court overruled the motion to dismiss, found constructive fraud
was pled with particularity but actual fraud was not, and gave the trustee 30 days to amend the
complaint to plead actual fraud under § 548(a)(1)(A). (Adv. Proc. Docket #18).
On March 26, 2010, the trustee filed an amended complaint. (Adv. Proc. Docket #19). The
amended complaint failed to cite § 548(a)(1)(A) or make any allegation of actual fraud. (Id.). On
-3-
April 13, 2010, Rappaport filed a motion to dismiss the amended complaint on the grounds that the
trustee had not sought leave to file an amended complaint pursuant to Rule 15(a)(2), that the
amended complaint still failed to plead actual fraud, and that a party in interest, Taylor & Rappaport,
was not joined as required by Rule 19. (Adv. Proc. Docket #20). On April 20, 2010, the trustee filed
exhibits to the amended complaint. (Adv. Proc. Docket #21). The exhibits to the first amended
complaint were filed late. (Id.). The exhibits are designated in the record of appeal and include:
Exhibit A, Mare Lease and Breeding Agreement;1 Exhibit B, Rappaport Discovery Responses; and
Exhibit C, Listing of Checks totaling $4,050,000.00. (Adv. Proc. Docket #47). In his discovery
responses, Rappaport admitted that: “Key Bank received payments from the Debtor made on
[Rappaport’s] behalf.” (Adv. Proc. Docket #21, Ex. B at 4, ¶ 5). Rappaport also stated that he was
“not a party to a joint venture, partnership or any other business formation with ‘Taylor’ ” and that
ClassicStar did not “fully perform as required by the mare lease.” (Id. at 7, ¶ 17). According to
Rappaport:
In November 2003, ClassicStar made payments to Key Bank on
behalf of Rappaport in the amount of $2,033,972.22. The payments
were made in lieu of providing mare lease services as required by the
mare lease agreement with Rappaport. ClassicStar received a dollar-
for-dollar reduction in the antecedent debt owed to Rappaport for
each dollar paid to Key Bank on Rappaport’s behalf.
(Id.).
On May 10, 2010, the bankruptcy court heard argument on Rappaport’s motion to dismiss.
In the hearing transcript, Rappaport’s counsel stated:
as far as having the right parties in the pleading . . . [t]he amended
complaint does put Mr. Rappaport into the caption. What it doesn’t
do, though, is it doesn’t fix Exhibit A. Exhibit A is where it says the
entity, Taylor & Rappaport, whatever that is. Mr. Rappaport is not
involved in an entity called Taylor & Rappaport. Mr. Rappaport is
not involved with Taylor. I think Taylor should have been Taylor
Investment Partners. They filed Claim 113 in this case.
1
According to counsel for the trustee, the debtor was engaged in a mare leasing program, in which the debtor
would sell lease rights to thoroughbred mares during their breeding seasons and investors would have the right to any
resulting offspring. (Adv. Proc. Docket #35 at 7-8). Rappaport and the debtor entered into such a lease agreement. (Adv.
Proc. Docket #21, Ex. A).
-4-
(Adv. Proc. Docket #35 at 4, lines 4-13). Rappaport’s counsel also noted that the payment to
Key Bank on behalf of Rappaport was for about half of the amount listed in the debtor’s ledger, and
that maybe “two payments were made to Key Bank to benefit two different parties, but that’s
speculation.” (Id., lines 14-20).
The court asked trustee’s counsel to explain Exhibit A to the amended complaint, which still
listed Taylor & Rappaport as the payee. Trustee’s counsel responded it was “apparently a misnomer,
and the allegation is now made against Mr. Rappaport.” (Id. at 10-11). When asked about the
necessity of bringing claims against other parties, such as Key Bank, trustee’s counsel responded:
the fraudulent conveyance statute in Section 550(a) allows you to
bring a complaint against any immediate or [mediate] transferees.
And, you know, it also allows you to bring the action against any
party who benefits from the transfer. And, certainly, he [Mr.
Rappaport] benefitted from this because he got his debt reduced by $2
-- well $4 million dollars.
(Id. at 11, lines 5-12). Rappaport’s counsel responded that “Mr. Rappaport is not a transferee. He
doesn’t fit the definition of a transferee. That’s somebody who has control over the -- over the
transfer, and that was Key Bank. There is nothing in § 548 that allows you to sue the beneficiary.”
(Id. at 12, lines 19-23).
On May 14, 2010, the bankruptcy court entered an order granting Rappaport’s motion to
dismiss and dismissed the case with prejudice. (Adv. Proc. Docket #30). On May 18, 2010, the
trustee filed a motion to vacate the court’s order and grant the trustee leave to amend the complaint
a second time. (Adv. Proc. Docket #34). The trustee argued that under Bankruptcy Rule 9024, the
bankruptcy court may have overlooked facts that reasonably would have altered its decision
including the fact that: “Mr. Rappaport admitted that the Transfer, as outlined in Exhibit A of the
Amended Complaint, was made, at least with respect to $2,033,972.22, for his benefit to pay off
Mr. Rappaport’s Loan to Key Bank in November 2005.” (Id. at 2, ¶5). The trustee’s motion to
reconsider also noted that “Federal Rule of Civil Procedure 19 only requires joinder of parties that
are indispensable or necessary to an action” and that the “Sixth Circuit employs a three-step process
to determine whether an action should be dismissed for failure to join an indispensable party.” (Id.
¶7). On June 8, 2010, Rappaport filed an objection. (Adv. Proc. Docket #36). Rappaport’s
objection consisted of three main arguments: that Rule 60(b) did not support the motion to
-5-
reconsider, that indispensable parties were not named, and that denial of leave was justified because
the amended complaint could not survive a motion to dismiss. (Id. at 3-15). On July 16, 2010, the
bankruptcy court heard argument on the trustee’s motion to reconsider. On August 6, 2010, the
bankruptcy court overruled the trustee’s motion, “finding the reasoning asserted in Rappaport’s
Response and Objection (Doc 36) compelling.” (Adv. Proc. Docket #40). On August 17, 2010, the
trustee timely filed a notice of appeal seeking reversal of the bankruptcy court’s May 14 and August
6 orders. (Adv. Proc. Docket #42); Fed. R. Bankr. P. 8002(b)(1).
IV. DISCUSSION
A. The Trustee Failed to State a Claim under § 548(a)(1)(A)
The court did not err when it held that the first amended complaint failed to state a claim for
actual fraud under § 548(a)(1)(A) and declined to give the trustee a third attempt to state a claim for
actual fraud through further amendment.
1. First Amended Complaint Fails to State a Claim for Actual Fraud
Section 548(a)(1) of Title 11 has two subparts: subpart (A), which requires proof of actual
fraud and subpart (B), which requires proof of constructive fraud. Under § 548(a)(1)(A), the trustee
may avoid any transfer if the debtor made “such transfer or incurred such obligation with actual
intent to hinder, delay, or defraud” a creditor. Under § 548(a)(1)(B), the trustee may avoid a transfer
if the debtor “received less than reasonably equivalent value in exchange for such transfer or
obligation” and was insolvent at the time of transfer. In the original complaint, the trustee pled fraud
under § 548(a), but only addressed the elements required by § 548(a)(1)(B), alleging the debtor
received less than reasonably equivalent value and that the debtor was insolvent at the time of
transfer. After expressly noting this deficiency, the bankruptcy court gave the trustee 30 days to
amend the complaint to plead actual fraud. Nevertheless, the amended complaint once again failed
to plead any of the elements of § 548(a)(1)(A) and did not even make a bare-bones allegation that
the debtor made the transfer with the intent to hinder, delay, or defraud a creditor.
Pleading standards in bankruptcy adversary proceedings are governed by Rule 8. Fed. R.
Bankr. P. 7008 (incorporating Fed. R. Civ. P. 8). “Federal Rule of Civil Procedure 8(a)(2) requires
only ‘a short and plain statement of the claim showing that the pleader is entitled to relief,’ in order
-6-
to ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.’ ”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 1964 (2007) (quoting Conley v.
Gibson, 355 U.S. 41, 47, 78 S. Ct. 99 (1957)). A complaint must also “state a claim to relief that
is plausible on its face.” Twombly, 550 U.S. at 570. The Supreme Court has stated that a “claim has
facial plausibility when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, __
U.S. __, 129 S. Ct. 1937, 1949 (2009) (citing Twombly, 550 U.S. at 556). The Supreme Court has
also noted that:
Determining whether a complaint states a plausible claim for relief
will . . . be a context-specific task that requires the reviewing court to
draw on its judicial experience and common sense. But where the
well-pleaded facts do not permit the court to infer more than the mere
possibility of misconduct, the complaint has alleged-but it has not
“show[n]”-“that the pleader is entitled to relief.”
Iqbal, 129 S. Ct. at 1950 (citations omitted). Under the new pleading standards set forth in Iqbal and
Twombly, a complaint must allege more than a mere “formulaic recitation” of the elements of a claim
to withstand a 12(b)(6) challenge. NM EU Corp. v. Deloitte & Touche LLP (In re NM Holdings
Co.), 622 F.3d 613, 623 (6th Cir. 2010) (citing Iqbal, 129 S. Ct. at 1949). See also Albrecht v.
Treon, 617 F.3d 890, 893 (6th Cir. 2010).
Because the amended complaint did not even allege a “mere formulaic recitation” of the
elements of a § 548(a)(1)(A) claim, we affirm the bankruptcy court’s dismissal with prejudice to the
extent the amended complaint failed to plead actual fraud.
2. The Court Did Not Err in Denying the Trustee Leave to Amend
We hold the court did not abuse its discretion when it denied the trustee leave to file a
second amended complaint to the extent this denial was based on the trustee’s failure to plead actual
fraud in the first amended complaint. The court “should freely give leave to amend when justice so
requires.” Fed. R. Bankr. P. 7015 (incorporating Fed. R. Civ. P. 15(a)(2)). “Denial may be
appropriate, however, where there is ‘undue delay, bad faith or dilatory motive on the part of the
movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice
to the opposing party by virtue of allowance of the amendment, futility of the amendment, etc.’ ”
Morse v. McWhorter, 290 F.3d 795, 800 (6th Cir. 2002) (quoting Foman v. Davis, 371 U.S. 178,
-7-
182, 83 S. Ct. 227 (1962)). See also EEOC v. Ohio Edison Co., 7 F.3d 541, 546 (6th Cir. 1993)
(“where a more carefully drafted complaint might state a claim, a plaintiff must be given at least one
chance to amend the complaint before the district court dismisses the action with prejudice.”)
(quotation omitted). Generally, a denial of a motion for leave to amend a complaint is reviewed
using an abuse of discretion standard. Kottmyer v. Maas, 436 F.3d 684, 691-92 (6th Cir. 2006);
Crawford v. Roane, 53 F.3d 750, 753 (6th Cir. 1995).
As the Sixth Circuit noted in another case involving an attempt to cure deficiencies by
amendment, “The relevant issues in our inquiry are (1) whether [the party seeking amendment] had
sufficient notice that his amended complaint was deficient, and (2) if so, whether [he] had an
adequate opportunity to cure the deficiencies.” U.S. ex rel. Bledsoe v. Cmty. Health Sys., Inc.,
342 F.3d 634, 644 (6th Cir. 2003). Here, the trustee had both sufficient notice of the deficiency and
an opportunity to cure. After identifying the deficiency with the original complaint, the court gave
the trustee 30 days to file an amended complaint to assert a claim for actual fraud under
§ 548(a)(1)(A). On March 26, 2010, the 30th day after the court’s order granting leave to amend,
the trustee filed an amended complaint that failed to comply with the court’s order. The trustee also
failed to file the exhibits to the first amended complaint until April 20, 2010. The trustee has not
given a satisfactory explanation why he could not have alleged the elements for an actual fraud claim
in the first amended complaint after the deficiency was specifically brought to his attention by the
court as well as by the defendant’s November 20, 2009 motion to dismiss the original complaint.
See Perkins v. Am. Elec. Power Fuel Supply, Inc., 246 F.3d 593, 605 (6th Cir. 2001) (court did
not abuse its discretion in denying motion to amend after court previously gave plaintiff opportunity
to cure deficiency and plaintiff declined to do so). Therefore, the court did not abuse its discretion
when it declined to give the trustee a third attempt to state a claim for actual fraud through further
amendment. Such a dismissal is properly on the merits. See Fed. R. Bankr. P. 7041 (incorporating
Fed. R. Civ. P. 41(b), which states “any dismissal not under this rule . . . operates as an adjudication
on the merits”).
B. The Bankruptcy Court Erred in its Rule 19 Analysis
In its May 14, 2010, order the bankruptcy court failed to go through the three-step Rule 19
analysis adopted by the Sixth Circuit. For the reasons that follow, we reverse the bankruptcy court’s
-8-
dismissal of the complaint with prejudice pursuant to Rule 19 and Rule 12(b)(7) and remand for
proceedings consistent with this opinion.
The Sixth Circuit has established a three-step analysis for determining whether a case should
proceed in the absence of a particular party. See PaineWebber, Inc. v. Cohen, 276 F.3d 197, 200
(6th Cir. 2001); Keweenaw Bay Indian Cmty. v. Michigan, 11 F.3d 1341, 1345 (6th Cir. 1993).
A court must first determine “whether a person is necessary to the action and should be joined if
possible.” Soberay Mach. & Equip. Co. v. MRF Ltd., Inc., 181 F.3d 759, 763-64 (6th Cir. 1999).
See Fed. R. Bankr. P. 7019 (incorporating Fed. R. Civ. P. 19). “If the party is deemed necessary for
the reasons enumerated in Rule 19(a), the court must next consider whether the party is subject to
personal jurisdiction and can be joined without eliminating the basis for subject matter jurisdiction.”
PaineWebber, 276 F.3d at 200 (citing Keweenaw, 11 F.3d at 1345-46; Fed. R. Civ. P. 19(a)). “The
third step involves an analysis under Rule 19(b) to determine whether in equity and good conscience
the action should proceed among the parties before [the court], or should be dismissed, the absent
party [being] thus regarded as indispensable.” Id. (internal quotations omitted). “Dismissal should
occur only if an indispensable party is not subject to personal jurisdiction or cannot be joined without
eliminating the basis for subject matter jurisdiction. If a necessary party is not deemed indispensable
pursuant to Rule 19(b), that potential party need not be joined and the action can proceed with the
original litigants.” Id. at 200-01 (internal citations omitted).
When an indispensable party is not joined, the appropriate action is to dismiss the case
without prejudice. See Fed. R. Bankr. P. 7041 (incorporating Fed. R. Civ. P. 41(b), which states
“any dismissal not under this rule–except one for lack of jurisdiction, improper venue, or failure to
join a party under Rule 19–operates as an adjudication on the merits”) (emphasis added); Dredge
Corp. v. Penny, 338 F.2d 456, 464 (9th Cir. 1964) (dismissal for failure to join an indispensable
party should rarely if ever result in dismissal of the action with prejudice); 9 Charles A. Wright, et
al., Federal Practice and Procedure § 2373 at 752-54 (3d. ed. 2008) ( Rule 41’s “basic principle
quite appropriately explicitly does not apply to a dismissal for lack of various forms of jurisdiction,
for improper venue, or for failure to join a party under Federal Rule 19”). See also Costello v.
United States, 365 U.S. 265, 285-86, 81 S. Ct. 534, 544-45 (1961) (Rule 41(b) is not intended to
change the common law principle that “dismissal on a ground not going to the merits” does not bar
“a subsequent action on the same claim”).
-9-
On appeal, Rule 19(a) determinations are reviewed using an abuse of discretion standard, and
Rule 19(b) determinations are reviewed using a de novo standard. PaineWebber, 276 F.3d at 200.
The bankruptcy court dismissed the trustee’s amended complaint on Rule 19 and Rule 12(b)(7)
grounds because “the Amended Complaint fail[ed] to name indispensable parties” and did “not
identify potentially necessary parties to the alleged transfers.” Because the bankruptcy court did not
go through a proper Rule 19 analysis, this opinion will assume the bankruptcy court found “Taylor
& Rappaport” was a necessary party.
1. “Taylor & Rappaport” Was Not a Necessary Party
We must review the bankruptcy court’s finding of fact that “Taylor & Rappaport” was a
necessary party under an abuse of discretion standard. The Sixth Circuit has noted that under an
abuse of discretion standard, the reviewing court must affirm a court’s Rule 19(a) analysis unless it
is “left with a definite and firm conviction that the trial court committed a clear error of judgment.”
Id. at 201 (quoting Cincinnati Ins. Co. v. Byers, 151 F.3d 574, 578 (6th Cir. 1998)). Even under an
abuse of discretion standard, we find the bankruptcy court erred in finding “Taylor & Rappaport”
was a necessary party.2
In reviewing the May 14, 2010 order, this Panel may consider both the exhibits, including
Rappaport’s discovery responses, and the May 10, 2010 hearing transcript because both were
designated in the record of appeal. The bankruptcy court also considered the May 10 hearing in
making its decision. This consideration was proper since a trial court may consider materials outside
the pleadings in ruling on a motion to dismiss under Rule 12(b)(7). Fed. R. Bankr. P. 7012
(incorporating Fed. R. Civ. P. 12(b)(7)). See Dumann Realty, LLC v. Faust, 267 F.R.D. 101, 101
n.1 (S.D.N.Y. 2010) (“when reviewing a motion to dismiss under Rule 12(b)(7), the court may
consider documents and facts outside the pleadings”); Three Affiliated Tribes of the Fort Berthold
Indian Reservation v. United States, 637 F. Supp. 2d 25, 29 (D.D.C. 2009) (same); 5C Wright, et al.,
supra, § 1359 at 68 (in a Rule 12(b)(7) consideration, “[t]he district judge is not limited to the
pleadings”).
2
Although Rappaport argues on appeal that Key Bank is also an indispensable party, the bankruptcy court did
not rely on the failure to join Key Bank in its analysis under Rule 19. To the extent that Key Bank is a “necessary” party
under Rule 19(a), the bankruptcy court’s analysis would still fail under step two of the Sixth Circuit’s three-part test
because there is no explanation why Key Bank could not be joined as a party.
-10-
Rule 19 provides in pertinent part:
(a) PERSONS REQUIRED TO BE JOINED IF FEASIBLE.
(1) Required Party. A person who is subject to service of
process and whose joinder will not deprive the court of
subject-matter jurisdiction must be joined as a party if:
(A) in that person’s absence, the court cannot
accord complete relief among existing parties; or
(B) that person claims an interest relating to the
subject of the action and is so situated that disposing
of the action in the person’s absence may:
(i) as a practical matter impair or impede
the person’s ability to protect the interest; or
(ii) leave an existing party subject to
substantial risk of incurring double, multiple,
or otherwise inconsistent obligations because
of the interest.
Fed. R. Bankr. P. 7019 (incorporating Fed. R. Civ. P. 19).
We hold the bankruptcy court abused its discretion in finding Taylor & Rappaport was a
necessary party. “Taylor & Rappaport” is not a necessary party because it does not fall within the
definition of a necessary party as articulated by subparts (A) and (B) of Rule 19(a)(1). Complete
relief can be accorded among the parties–the trustee and Rappaport–without joining any other
“potentially necessary party,” including Taylor & Rappaport. Fed. R. Civ. P. 19(a)(1)(A). Rappaport
admitted in his discovery responses that the debtor made payments to Key Bank on his behalf and
that the debtor received a “dollar-for-dollar reduction in the antecedent debt owed to Rappaport for
each dollar paid to Key Bank on Rappaport’s behalf.” Rappaport also admitted that he was “not a
party to a joint venture, partnership or any other business formation with ‘Taylor.’ ” There is no joint
or several liability between “Taylor” of Taylor & Rappaport and Sandy A.G. Rappaport because, by
Rappaport’s own admission, he was not affiliated with an individual or entity named Taylor. Since
Rappaport can be found liable on his own under § 548(a)(1)(B), there is no reason why Rappaport’s
liability cannot be limited to the portion of money or benefit that he alone received. There is also
no indication that Taylor & Rappaport or Taylor Investment Partners has any interest that will be
affected by the litigation or that an adjudication solely between the trustee and Rappaport will leave
either existing party subject to a substantial risk of multiple or inconsistent obligations. See Fed. R.
-11-
Civ. P. 19(a)(1)(B); 5C Wright, et al., supra, § 1359 at 65 (“a Rule 12(b)(7) motion will not be
granted because of a vague possibility that persons who are not parties may have an interest in the
action”).
2. If a Necessary Party, Taylor & Rappaport Should Have Been Joined
Even if Taylor & Rappaport is a “necessary” party, the proper remedy should be to order that
it be joined. See Fed. R. Civ. P. 19(a)(2) (“If a person has not been joined as required, the court must
order that the person be made a party.”). The court erred in failing to go through the second step in
the Sixth Circuit’s three-step analysis under Rule 19. The bankruptcy court provided no explanation
why Taylor & Rappaport could not be joined. See Bakia v. County of Los Angeles, 687 F.2d 299,
301-02 (9th Cir. 1982) (“a trial court’s resolution of a Rule 19 issue requires a comprehensive
statement of the facts and reasons upon which the decision is based”; “The trial court had important
issues to resolve under Rule 19(a) before making a determination on the factors listed in 19(b).”);
7 Wright, et al., supra, § 1604 at 68 (“If the court does exercise its discretion to dismiss the suit . . .
it must be careful to provide a full record of why it so ruled so that the decision can be adequately
reviewed by the appellate court.”).
Under the second step of the Sixth Circuit’s Rule 19 analysis, if a party is deemed
“necessary” under Rule 19(a), “the court must next consider whether the party is subject to personal
jurisdiction and can be joined without eliminating the basis for subject matter jurisdiction.”
PaineWebber, 276 F.3d at 200. Because the bankruptcy court had personal jurisdiction over
potentially necessary parties and could have joined them without eliminating subject matter
jurisdiction under 28 U.S.C. § 1334, it should have ordered joinder instead of dismissing the
complaint with prejudice. See Shiloh Indus., Inc. v. Rouge Indus., Inc. (In re Rouge Indus., Inc.),
326 B.R. 55 (Bankr. D. Del. 2005).
Here, there is no indication why the bankruptcy court would not have personal jurisdiction
over Taylor & Rappaport or Taylor Investment Partners. Bankruptcy Rule 7004(d) provides for
nationwide service of process, and the standard to determine if personal jurisdiction exists is the
national contacts analysis. See United Liberty Life Ins. Co. v. Ryan, 985 F.2d 1320 (6th Cir. 1993)
(concluding that the federal statute providing for nationwide service of process requires a
determination only that a party has contacts with the United States, not a particular state, for personal
-12-
jurisdiction); accord Med. Mut. of Ohio v. deSoto, 245 F.3d 561, 566-68 (6th Cir. 2001) (same).
Taylor Investment Partners filed a proof of claim in the bankruptcy case. (Bankruptcy Case No. 07-
51786, Claim 113-2). The claim is sufficient to establish contacts with the United States because
Taylor Investment Partners availed itself of the U.S. bankruptcy court and listed a Kentucky address
where notices should be sent.
Furthermore, unlike the more typical scenario where joining a necessary party might defeat
diversity jurisdiction under 28 U.S.C. § 1332, in the present case the court’s subject matter
jurisdiction to hear avoidance actions by the trustee arising under the Bankruptcy Code pursuant to
28 U.S.C. § 1334 is unaffected by the joinder of any necessary parties. See In re Rouge Indus., Inc.,
326 B.R. at 59-61 (bankruptcy court ordered joinder of necessary party because its joinder was
feasible and denied debtor’s motion to dismiss adversary complaint under Rules 12(b)(7) and 19).
Thus, under the Sixth Circuit’s three-step analysis, the bankruptcy court had no reason to determine
under step three whether “Taylor & Rappaport” was indispensable to the action under Rule 19(b).
Rather, the proper remedy, if Taylor & Rappaport were indeed a “necessary” party, simply would
have been to order that it be joined.
C. Motion to Reconsider Is Moot
Because this Panel reverses the bankruptcy court’s May 14, 2010 order and remands for
proceedings consistent with its opinion on a proper Rule 19 analysis, the court’s August 6, 2010
order denying the trustee’s motion to vacate is moot. The trustee did not argue in his motion to
reconsider that leave to amend should be granted to pursue a claim against Rappaport for actual fraud
under § 548(a)(1)(A). (Adv. Proc. Docket #34 at 5-6, ¶ 10).
V. CONCLUSION
For the foregoing reasons, we (1) AFFIRM dismissal to the extent it is based on a claim of
actual fraud under § 548(a)(1)(A); (2) REVERSE dismissal to the extent it is based on Rule 19 and
Rule 12(b)(7); and (3) REMAND for proceedings consistent with this opinion.
-13-