DocketNumber: Case No. 13-11084 (CSS); Adv. Proc. No. 15-50273 (CSS)
Citation Numbers: 573 B.R. 121
Judges: Sontchi
Filed Date: 8/10/2017
Status: Precedential
Modified Date: 11/22/2022
OPINION
INTRODUCTION
Before the Court is a motion to dismiss the Second Amended Complaint (the “Complaint”) brought by the Chapter 7 Trustee of the above-captioned estate. The Complaint alleges preferential transfers, breach of contract, and breach of guaranty and an accounting across eight different claims. For the foregoing reasons, the Complaint is dismissed, in its entirety, as the claims are barred by either collateral estoppel or under the doctrine of res judi-cata.
FACTUAL & PROCEDURAL BACKGROUND
A. The Parties
In 2004, .James A. Ray formed Ray-Trans Distribution, Inc. (“RayTrans Distribution”) as a corporation under Illinois law. RayTrans Distribution operated as a trucking services broker, serving as an intermediary between truckers and entities seeking trucking services. Additionally, RayTrans Distribution provided freight brokerage and logistical services through a series of network transportation professionals.
RayTrans Distribution was affiliated with two other entities: RayTrans Trucking, LLC (“RayTrans Trucking”) and Universal Trans, LLC (“UniTrans”). Specifically, RayTrans Trucking and UniTrans provided various third-party owner-operators that specialized in flatbed, over-dimensional, van, and automobile shipments.
In an attempt to expand the companies’ geographic presence, various acquisitions were made in 2007. First, on April 30, 2007, RayTrans Distribution acquired certain assets of H & J Services and Joe Carter Trucking, Inc. with the aim of expanding into the southern United States.
In 2007, business and assets of Unitrans and RayTrans Trucking were intermingled with the business of RayTrans Distribution. For the financial statements for Ray-Trans Distribution for the year ending December 31, 2007, assets and business of Unitrans and RayTrans Trucking were consolidated into RayTrans Distribution.
On or about January 1, 2008, James A. Ray formed Holdings to serve as. a holding company, and thereafter transferred the stock of RayTrans Distribution, RayTrans Trucking, and UniTrans from himself to Holdings. Specifically, Holdings was formed to provide corporate and administrative support for its subsidiaries, and in doing so, “charged” its subsidiaries, including that of RayTrans Distribution. As a result of this arrangement, RayTrans Distribution accrued a “considerable” amount of intercompany debt, resulting in Holdings becoming a substantial creditor of RayTrans Distribution.
B. The Sale of the RayTrans Distribution Business
On June 2, 2009, an Asset Purchase Agreement (the “APA”) was entered into between and among Echo/RT Holdings, LLC (“Echo/RT” and the “Purchaser”), RayTrans Distribution (the “Seller”), Holdings, James A. Ray, and Echo Global Logistics, Inc. (“Echo,” and collectively with Echo/RT, the “Defendants,” or the “Echo Parties”).
Pursuant to the APA,, to ensure the continuity of business, immediately after Closing, Echo/RT agreed to offer employment to substantially all of RayTrans Distribution’s employees. Additionally, the APA provided for a Consulting Agreement between Echo/RT and James A. Ray, whereby Ray would continue as a General Manager of the RayTrans Division of Echo Global Logistics.
Under the APA, the purchase price was up to $12,550,000.00, with the additional inclusion of assumption of current liabilities. Defendants, however, paid $5,384,069 at the time of Closing.
' The Trustee alleges that defendants failed to make any of the additional payments provided for under the APA after paying the $5,384,069 at closing.
However, in late 2009, Illinois’s Secretary of State commenced the procedures for administratively dissolving RayTrans Distribution; the dissolution went into effect on May 14, 2010.
C.The Powersource Lawsuit
In 2006, Powersource Transportation, Inc. commenced a lawsuit against Uni-Trans and RayTrans Trucking in Indiana state court, seeking damages of over $4 million for certain alleged business torts and contract breaches (the “Powersource Lawsuit”).
In November 2011, a judgment was rendered in favor of Powersource and against RayTrans Trucking and UniTrans for $1,688,072.00.
D. Debtor’s $50,000 Transfer to Echo
Notwithstanding the alleged outstanding payments owed by Echo under the APA, Holdings made one or more payments to Echo subsequent to the transfer of the RayTrans Distribution and prior to its bankruptcy filing.
The Trustee alleges that 1) Holdings was not indebted to Echo when the aforementioned transfer occurred, and, 2) nor did Echo furnish reasonably equivalent value, or any value, to Holdings in exchange for the wire transfer of $50,000.
E. Holdings’ Chapter 7 Bankruptcy
On April 25, 2013, Holdings filed for chapter 7 bankruptcy protection. On Holdings’ Schedule F, James A. Ray listed
As of the Petition Date, Holdings had approximately $3,126,000.00 in liabilities, all of which were unsecured. Assets were listed as $0.00. Holdings also listed stock interests in its two subsidiary companies, RayTrans Trucking and Unitrans. It is argued that Holdings’ stock interest in RayTrans Distribution was omitted because that company was administratively dissolved by the State of Illinois prior to the Petition Date.
F. Chancery Court Litigation
The procedural background of the instant adversary proceeding began prior to the Petition Date, when Spring Capital Real Estate, LLC (“Spring Capital”), a creditor of Holdings, commenced a lawsuit in the Court of Chancery against the Echo Defendants and RayTrans Distribution on October 31, 2012, seeking to void as fraudulent conveyances the transfers made to defendants by Holdings and RayTrans Distribution.
The Trustee, pursuant to authority granted under the Bankruptcy Code, joined the fraudulent transfer action previously commenced by Spring Capital in the Chancery Court. On November 3, 2014, the Trustee, by amended cross-claims, asserted cross-claims against the defendants in the Chancery Court action, pursuant to De. Ch. R. 13(g), “seeking to assert the estate’s interest in, and to void as fraudulent conveyances, the transfers made to defendants by Holdings under Delaware and Illinois state law that were being challenged by Spring Capital. As recoverable by a creditor holding an unsecured claim.”
On December 31, 2013, the Court of Chancery dismissed Spring Capital’s claims with prejudice.
On January 20, 2015, the Echo Defendants filed a Motion to Dismiss the Amended Cross-Claims and Opening Brief in Support Thereof (“Motion to Dismiss”). The Echo Defendants’ Motion to Dismiss was granted on February 18, 2016, and the Court of Chancery both dismissed the Trustee’s entire Amended Cross-Claim with prejudice and denied the Trustee’s request for leave to amend (the “Dismissal Order”).
First, the APA provided reasonably equivalent value for the assets transferred. Although Echo/RT paid only $6,050,000, the APA provided for a purchase price of up to $12,550,000, provided certain earn-outs were accomplished. Further, the $11,148,009 valuation of RayTrans Distribution’s assets took place on December 31, 2007, eighteen months before entering into the APA. Finally, whether RayTrans Distribution properly allocated the proceeds of the transfer to its creditors is of no consequence to whether the payment received in consideration for its assets was reasonably equivalent in value.39
The Court of Chancery also found that the Trustee failed to allege adequately that RayTrans possessed any intent to defraud its creditors when it entered into the APA and subsequently transferred its assets to the Echo Defendants.
On December 12, 2016, the Delaware Supreme Court rejected the appeals filed by the Trustee and Spring Capital and affirmed the Dismissal Order.
While the Echo Defendants’ Motion to Dismiss was pending, and before the Court of Chancery granted the Motion to Dismiss, the Trustee filed the instant adversary proceeding against the Echo Defendants on April 24, 2015. Specifically, the Complaint asserted (i) three counts for avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550, (ii) a count for avoidance of preferential transfer pursuant to 11 U.S.C. § 547, (iii) one count for recovery of an avoided transfer pursuant to 11 U.S.C. § 550, and (iv) disallowance of all claims pursuant to 11 U.S.C. § 502(d) and (j).
Following the Court of Chancery’s Dismissal Order, and subsequent affirmation by the Delaware Supreme Court, on November 7, 2016, the Trustee sought leave to amend his complaint.
STANDARD OF REVIEW
A. Rule 12(b)(6)
The defendants seek dismissal of various Claims brought by the Trustee in the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable here by Federal Rule of Bankruptcy Procedure 7012, for “failure to state a claim upon which relief can be granted.” Fundamentally, a motion under Rule 12(b)(6) of the Federal Rules of Civil Procedure serves to test the sufficiency of the factual allegations in the plaintiffs complaint.
With the Supreme Court’s decisions in Bell Atlantic Corp v. Twombly
Following Twombly and Iqbal, in Fowler, the Third Circuit articulated a two-part analysis to be applied in evaluating a complaint.
B. Res Judicata
This Court.has previously held that, fundamentally, “[t]he essence of res judicata, or claim preclusion, is ‘that a party who once has had a chance to litigate a claim before an appropriate tribunal usually ought not to have another chance to do so.’ ”
C. Collateral Estoppel
Collateral estoppel, derived from the constitutional protection against double jeopardy,
The relevant state court judgments relied upon by the defendants were rendered in Delaware, therefore, this Court will apply Delaware law to determine whether or not collateral estoppel bars relitigation in the instant adversary proceeding.
DISCUSSION
A. Counts I and II Are Barred by the Doctrine of Collateral Estoppel
Count I of the Trustee’s Second Amended Complaint, alleged against all defendants, seeks avoidance of fraudulent transfers pursuant to 11 U.S.C. §§ 548 and 550. At issue is the December 2012 $50,000 wire transfer made from the Debtor to Echo Global. Count II, alleged against all defendants, seeks avoidance of fraudulent
This Court finds that Counts I and II are barred by the doctrine of collateral estoppel. As previously mentioned, this Court -will use Delaware law in the instant collateral estoppel analysis. When determining the appropriateness of applying collateral estoppel, Delaware state courts must determine whether:
1. the issue previously decided is identical with the one presented in the action in question;
2. the prior action has been finally adjudicated on the merits;
3. the party against whom the doctrine is invoked was a party or in privity with a party to the prior adjudication; and
4. the party against whom the doctrine is raised had a full and fair opportunity to litigate the issue in the prior action.64
With respect to Count I, under 11 U.S.C. § 548(a), the Trustee must sufficiently allege that payments made to the Echo Defendants were not made in exchange for reasonably equivalent value.
Second, the Cross-Claims are insufficient to support a reasonable inference that RayTrans Distribution intended to defraud its creditors. Such intent can be inferred from -certain factors listed in Delaware’s and Illinois’s fraudulent transfer statutes. The Cross-Claims allege that the facts summarized above support the Trustee’s argument that the transfer was intentionally fraudulent. These facts, however, do not provide a sufficient basis from which the Court may infer that the APA was entered into with the intent to fraudulently transfer RayTrans Distribution’s assets. While post-transaction insolvency may suggest that a transfer is fraudulent, the transfer here was for reasonably equivalent value, and as stated, what the debtor does with the money it receives has no bearing on the adequacy of the consideration. Further, that Holdings’ or Ray-Trans Distribution’s creditors may not*131 have known of the APA is not itself sufficient to infer that the APA was intended to defraud RayTrans Distribution’s creditors, especially where the value received was reasonably equivalent to the value of the assets sold. Therefore, because RayTrans Distribution had no intent to defraud its creditors and received reasonably equivalent value in return for its assets, the APA did not amount to a fraudulent transfer.67
The transfer in question was made to satisfy a debt and occurred under the APA.
B. Counts III and IV are Dismissed for Failure to State a Claim
Count III seeks avoidance of preferential transfer pursuant to 11 U.S.C. § 547 and Count IV seeks recovery of avoided transfers pursuant to 11 U.S.C. § 550. With respect to Count III, Section 547 of the Bankruptcy Code allows a trustee to recover a prepetition transfer of an interest of the debtor in property:
(1)to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.69
Furthermore, the,trustee must prove each element by a preponderance of the evidence.
The Trustee’s Complaint alleged—without any factual support—that at the time of the transfer, the defendants were “insiders” of Holdings.
The Trustee did no more than recite the word “insider”—no evidence has been given, nor facts provided, that would establish that the defendants were insiders, whether statutory or otherwise, within the meaning of the Code. Control, as enumerated in section 101(31)(B)(iii), is the only potentially applicable part of the definition of insider that would render the defendants statutory insiders. Delaware courts have held that “activities such as monitoring the Company’s business and attending board meetings are not sufficient to show control over the day-to-day operations.”
With respect to non-statutory insider status, in In re Winstar Communications, Inc.,
Given Counts I and II are barred by the doctrine of collateral estoppel, and Count III is dismissed for failure to state a claim, Count IV for recovery of avoided transfers cannot survive, and is dismissed by this Court as well.
C. Counts V, VI, VII, and VIII Are Dismissed Under Res Judicata
The Counts discussed herein are:
• Count V: Breach of Contract and Judicial Estoppel
• Count VI: Breach of Contract
• Count VII: Accounting
• Count VIII: Breach of Guaranty and Attorney’s Fees (Against Defendant Echo)
As the judgment of a state court must have the same preclusive effect in federal court as it would have within that state’s courts under the law of the state, it is necessary to look to Delaware law on res judicata. In LaPoint v. AmerisourceBergen Corp., the Delaware Supreme Court reiterated the relevant elements of res ju-dicata:
Res judicata operates to bar a claim where the following five-part test is satisfied: (1) the original court had jurisdiction over the subject matter and the parties; (2) the parties to the original action were the same as those parties, or in privity, in the case at bar; (3) the original cause of action or the issues decided was the same as the case at bar; (4) the issues in the prior action must have been decided adversely to the appellants in the case at bar; and (5) the decree in the prior action was a final decree.80
Each of the elements of res judicata have been satisfied in the instant case, as has been more than evident through’ the facts and extensive Court of Chancery and Delaware Supreme Court litigation.
The parties are adversaries for purposes of res judicata. “Parties are adversaries if they have ‘opposing interests, ... interests for the preservation of which opposition is essential.’”
Furthermore, the basis of the entire adversary proceeding, and the prior Court of Chancery litigation, was the APA. Even if claims were not raised until after the state court litigation had commenced,
[i]f the pleadings framing the issues in the first action would have permitted the raising of the issue sought to be raised in the second action, and if the facts were known, or could have been known to the plaintiff in the second action at the time of the first action, then the claims in the second action are precluded.83
Most information relied upon by the Trustee derives from public filings by the defendants. That the Trustee might have been unaware of their public nature, due to a failure to realize that the Echo Parties were, in fact, public companies, neither renders the information any less public, nor any less accessible to the Trustee for
CONCLUSION
This Court, in its previous Remand Order, observed that the Trustee’s attempt to remove the Chancery Claims to federal court was “a clear case of forum shopping.”
. "The court is not required to state findings or conclusions when ruling on a motion under Rule 12..Fed. R. Bankr. P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.
. Adv. Pro. No. 15-50273, D.I. 81, ¶ 12.
. Id. at ¶ 14.
. Id. at ¶ 16,
. Id. at ¶ 17.
. Id. at ¶ 20.
. Id. at ¶ 21.
. Id. at ¶ 26.
. Id. at ¶ 37,
. Id. at ¶ 19, 38.
. Id. at ¶ 42.
. Id. at ¶ 45.
. Id. at ¶ 46.
. Id. at ¶ 48-54.
. Id. at ¶ 55.
. Id. at ¶ 56-59.
. Id. at ¶ 60-61.
. Id. at ¶ 63.
. Id. at ¶ 64-65.
. Id. at ¶ 70.
. Id. at ¶ 19.
. Id. at ¶ 38.
. Id. at ¶ 78.
. Id. at ¶ 80.
. Id. at ¶ 81.
. Id. at ¶ 83-84.
. Id. at ¶ 86.
. Id. at ¶ 91.
. Id. at ¶ 90.
. Id. at ¶ 92.
. Id. at ¶ 94.
. Spring Real Estate, LLC v. Echo/RT Holdings, LLC, 2013 WL 6916277 (Del. Ch. Dec. 31, 2013).
. See Adv. Pro. No. 14-50249, D.I. 1.
. Adv. Pro. No. 14-50249, D.I. 4.
. Adv. Pro. No. 14-50249, D.I. 14.
. Id. at ¶ 6.
. D.I. 82-5, Exhibit D.
. Spring Real Estate, LLC v. Echo/RT Holdings, 2016 WL 769586 (Del. Ch. Feb. 18. 2016).
. Id. at *5 (footnotes omitted).
. Id.
. Klauder v. Echo/RT Holdings, LLC, 2016 WL 7189917, at *1 (Del. Dec. 12, 2016).
. D.I. 63, 64.
. D.I. 80.
. D.I. 81.
. Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993).
. Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974), abrogated on other grounds by Harlow v. Fitzgerald, 457 U.S. 800, 814-15, 102 S.Ct. 2727, 73 L.Ed.2d 396 (1982).
. 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).
. 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).
. Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir.2009).
. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
. Iqbal, 129 S.Ct. at 1949 (citing Bell Atlantic v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)).
. Twombly, 550 U.S. at 562, 127 S.Ct. 1955.
. Fowler, 578 F.3d at 210-11.
. Id.
. Id.
. In re Ins. Brokerage Antitrust Litig., 618 F.3d 300 (3d Cir.2010).
. In re AMC Investors, LLC, 524 B.R. 62, 71 (Bankr. D.Del. 2015) (quoting 47 Am.Jur.2d Judgments § 464).
. McLaughlin v. Bd. Of Trustees of Nat’l Elevator Indus. Health Benefit Plan, 686 Fed.Appx. 118, 122 (3d Cir. 2017) (citing In re Mullarkey, 536 F.3d 215, 225 (3d Cir. 2008).
. Southern Cross Overseas Agencies, Inc. v. Wah Kwong Shipping Group Ltd., 181 F.3d 410, 426 (3d Cir. 1999); see also Buck v. Hampton Tp. School Dist., 452 F.3d 256, 260 (3d Cir. 2006).
. Kremer v. Chem. Constr. Corp., 456 U.S. 461, 466, 102 S.Ct. 1883, 72 L.Ed.2d 262 (1982).
. In re Moran, 413 B.R. 168, 180 (Bankr. D.Del. 2009) (citing Green v. U.S., 355 U.S. 184, 78 S.Ct. 221, 223, 2 L.Ed.2d 199 (1957)).
. Id.
. Id. at 181.
. Betts v. Townsends, Inc., 765 A.2d 531, 535 (Del. 2000) (quoting State v. Machin, 642 A.2d 1235, 1239 (Del.Super.Ct.1993)).
. 11 U.S.C. § 548(a)(1)(B), [t]he trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(B)
(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and (ii)
(I)was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured; or made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.
. See Spring Real Estate, LLC v. Echo/RT Holdings, 2016 WL 769586, at *5 (Del. Ch. Feb. 18, 2016).
. Id. (emphasis added).
. See D.I. 96 at p. 17 ("Indeed, the APA itself, attached to the Second Amended Complaint, makes it clear that Holdings/Debtor was a guarantor under the APA.”) (footnotes omitted).
.11 U.S.C. § 547(b).
. See In re Opus East, LLC, 528 B.R. 30, 90 (Bankr. D. Del. 2015).
. D.I. 81, ¶ 131.
. Id. at § 132.
. 11 U.S.C. § 101(31)(B).
. United States v. State Street Bank and Trust Co., 520 B.R. 29, 81 (Bankr.D.Del.2014) (citations omitted).
. Id. (citing In re Radnor Holdings Corp., 353 B.R. 820, 841 (Bankr.D.Del.2006)
. 554 F.3d 382 (3d Cir.2009).
. Id. at 396.
. Id. at 397 (quoting In re U.S. Med., Inc., 531 F.3d 1272, 1277 (10th Cir. 2008)).
. Brooks-McCollum v. Emerald Ridge Serv. Corp., 563 Fed.Appx. 144, 145 (3d Cir. 2014).
. 970 A.2d 185, 192 (Del. 2009) (citation omitted).
. CoreStates Bank, N.A. v. Huls America, Inc., 176 F.3d 187, 201 (3d Cir. 1999).
. Executive Arts Studio, Inc. v. City of Grand Rapids, 391 F.3d 783, 795 (6th Cir. 2004) (internal citations omitted).
, Id. at 193 (emphasis added and citations omitted).
. D.I. 82 at 28.
. Id. at ¶ 6.