Bernstein v. Meyers (In re Prime Plastics, Inc.)

Thomas P. Agresti, Judge United States Bankruptcy Court

Chapter 7 Related to Doc. Nos. 11, 21, 24 MEMORANDUM ORDER

Presently before the Court in response to the Amended Complaint filed by the Chapter 7 Trustee are a Motion to Dismiss Trustee's Amended Adversary Complaint, filed by Defendant Branikas Investments, LLC ("Branikas Motion") at Doc. No. 21, and a Motion to Dismiss Trustee's Amended Adversary Complaint filed by Defendant Jacqueline Ann Meyers ("Meyers Motion") at Doc. No. 24.

In addition to these, Defendant George Retos filed an Answer in which he purported to "join in" the Branikas and Meyers Motions. See Doc. No. 35 at ¶156. At the oral argument on the Branikas and Meyers Motions, Counsel for George Retos reiterated that his client desired to raise the same arguments as to why the claims against him should be dismissed. Although the Court advised Counsel that he had followed an incorrect procedure and he should have filed a stand-alone motion to dismiss rather than raise the matter as part of his Answer (See, Fed. R.Bankr.P. 7012 , incorporating Fed.R.Civ.P. 12(b) (motion asserting defense of failure to state a claim upon which relief may be granted or failure to join a necessary party must be made before responsive pleading is filed)), despite the procedural irregularity, the Court elected to recognize that George Retos has "filed" a motion to dismiss ("Retos Motion") that tracks the Branikas and Meyers Motions. The Branikas Motion, Meyers Motion, and Retos Motion raise substantially the same issues and will collectively be referred to as "the Motions", with the three moving parties collectively referred to as "Movants".

The Motions raise two grounds as to why the Amended Complaint should be dismissed as against the respective defendants. First, they argue that certain of the claims are barred by the applicable statute of limitations such that dismissal for failure to state a claim is appropriate. This argument applies to Count I (vs. Meyers for breach of fiduciary duty), Count II (vs. G. Retos for breach of fiduciary duty), Count IV (vs. Movants for usurpation of corporate opportunity), and Count V (vs. Movants for fraudulent transfer). The second argument is that the Trustee has failed to join a necessary party, viz. Santander Bank, N.A. That argument applies to Count VIII (vs. Movants for equitable subordination of their claims). These two arguments raise distinct issues and will be addressed separately below.

STATUTE OF LIMITATIONS

The Movants correctly note that, despite the fact that the statute of limitations must be pled as an affirmative defense in responding to a pleading, see Fed.R.Bankr.P. 7008 and Fed.R.Civ.P. 8(c)(1), under the so-called "Third Circuit Rule" it can also be asserted by way of a motion to dismiss for failure to state a claim upon which relief can be granted under Fed.R.Civ. P. 12(b)(6) provided the time alleged in the statement of the claim shows that the action has not been brought within the applicable statute of limitations. See, e.g., Cibula v. Fox, ___ Fed. Appx. ___, 2014 WL 2884122 (3d Cir. June 26, 2014).

The Movants also correctly note that the transaction which underlies the Trustee's claims in Counts I, II, IV and V occurred on October 30, 2007, when the Debtor assigned an option to purchase property known as 100 Detroit Avenue, Washington, Pa. to Branikas. The Movants argue that the claims for breach of fiduciary duty or usurpation of corporate opportunity are subject to a 2-year statute of limitations under Pennsylvania law, which would thus have expired long before the bankruptcy case was filed on February 20, 2013, or the adversary was filed on April 21, 2014. They argue that the claim of fraudulent transfer is subject to a 4-year statute of repose, which would likewise have expired before the bankruptcy case or adversary were filed. The Movants argue that nothing in the Bankruptcy Code would have revived any of these claims, and that therefore the Motions should be granted.

The Trustee does not dispute the length of the relevant limitation periods, but he argues that those periods were tolled by the "adverse domination doctrine," which he says applies to toll the running of the statute of limitations when the corporate entity is controlled by the alleged wrongdoers. This doctrine is based on the premise that officers and directors who have harmed the entity cannot be expected to take legal action against themselves. As an alternative, the Trustee also argues that fraudulent concealment provides a basis to toll the running of the statute of limitations.

While adverse domination has not been adopted as a tolling principle in Pennsylvania state courts, neither has it been rejected. The doctrine has been applied by federal courts applying Pennsylvania law, based on the prediction that the Pennsylvania Supreme Court would adopt it due to its strong similarity to the "discovery rule" which has long been recognized in this state as a basis for tolling. This is the position followed by Chief Judge Jeffery A. Deller of this Court. See, In re O.E.M./Erie, Inc., 405 B.R. 779 (Bankr. W.D. Pa. 2009). Additionally, in O.E.M./Erie Chief Judge Deller found that all that is required to defeat a motion to dismiss based on limitation grounds is that the plaintiff plead equitable tolling. 405 B.R. at 787 (citing Oshiver v. Levin, Fishbein, Sedran and Berman, 38 F.3d 1380, 1391 (3d Cir. 1994)). The Court agrees with these conclusions as reached in O.E.M./Erie.

Assuming the facts alleged in the Amended Complaint to be true, and drawing all factual inferences in favor of the Trustee as the non-moving party, the Court concludes that a sufficient basis for equitable tolling based on adverse domination and/or fraudulent concealment has been pleaded so as to defeat the Motions as to the breach of fiduciary and usurpation of corporate authority claims in Counts I, II, and IV. The Movants can assert the statute of limitations as an affirmative defense in their answers, but any decision as to its viability must await development of the record.

This same issue with respect to Count V is a bit more complicated because the Movants contend that fraudulent transfer claims under the Pennsylvania Uniform Fraudulent Transfer Act ("PaUFTA"), 12 Pa.C.S.A. §5101, et seq., are subject to a 4-year statute of repose, not just limitation, which would mean that the period could not be extended by equitable tolling principles. The relevant provision under PaUFTA states as follows:

A cause of action with respect to a fraudulent transfer or obligation under this chapter is extinguished unless action is brought:

(1) under section 5104(a)(1) (relating to transfers fraudulent as to present and future creditors), within four years after the transfer was made or the obligation was incurred or, if later, within one year after the transfer or obligation was or could reasonably have been discovered by the claimant; or
(2) under section 5104(a)(2) or 5105 (relating to transfers fraudulent as to present creditors), within four years after the transfer was made or the obligation was incurred.

12 Pa. C.S.A. §5109
. The statute on its face thus seems to draw a distinction for limitations purposes between fraudulent transfer claims based on actual fraud, and those based on constructive fraud. At least one court has specifically recognized the existence of such distinction:

Under PUFTA, there are two (2) potentially applicable limitations periods. For constructive fraud claims, the plaintiff is limited to a four (4) year lookback period. See 12 Pa.C.S. § 5109(2). For claims based on actual fraud, the lookback period potentially is longer: the plaintiff may avoid transactions going back four (4) years prior to the filing of the complaint or "within one year after the transfer or obligation was or could reasonably have been discovered." 12 Pa.C.S. § 5109(1).

In re Polichuk, 506 B.R. 405, 419 (Bankr. E.D. Pa. 2014). The Movants are thus correct that the 4-year limitation period functions as a statute of repose with respect to constructive fraudulent transfer claims, and thus any such cause of action with respect to the transfer of the purchase option would have expired as of October 30, 2011, without any possibility of tolling to extend the date.

The Movants are incorrect, however, with respect to actual fraudulent transfer claims since Section 5109(1) expressly contemplates that the four-year period can potentially be extended based on the discovery rule principle. The Parties vigorously disagree as to when the transfer could reasonably have been discovered, with the Movants arguing that the date should be set at January 5, 2012 (one year after the entry of a judgment in favor of actual creditor Shaw Polymers, LLC), while the Trustee argues that the transfer could not have reasonably been discovered until after he was appointed. Both sides make good points in their arguments, but the Court need not fully consider them and make a decision at this time because under the O.E.M./Erie rationale this is clearly the sort of limitation/ tolling issue that should not be decided on a motion to dismiss.

To sum up the limitations issue: The Motions will be denied with respect to Counts I, II, and IV. The Motions will be granted in part with respect to Count V insofar as that Count sets forth a claim based on constructive fraudulent transfer, and denied in part as to a claim based on actual fraudulent transfer.

FAILURE TO JOIN NECESSARY PARTY

The Movants assert that Santander Bank, N.A. is a necessary party pursuant to Fed.R.Civ.P. 19 with respect to the Count VIII claim for equitable subordination because Santander has filed a limited objection to the Application by Branikas for an administrative rent claim. See Doc. Nos. 355, 364. They point out that Santander has a properly perfected interest in the rents receivable by Branikas from the Debtor, as "enhanced" in the cash collateral order which also gives Santander a replacement lien, and argue that:

...to prevail against Branikas, the Trustee must also prevail against Santander. By failing to join Santander, the Trustee is impeding Santander's ability to protect its interests while simultaneously exposing Branikas to the risk of incurring significant excess liabilities to Santander.

Branikas Brief at 8, Doc. No. 22.

The Trustee responds by arguing that he is not by this adversary proceeding attempting to subordinate Santander's claim, or strip or otherwise modify any liens or encumbrances against assets of the Debtor except as set forth in the Amended Complaint. He goes on to assert that the Branikas Application for administrative rent claim can serve as a vehicle to determine the value of the rent to which Santander is entitled, if and when it becomes necessary to do so, and that Santander is therefore not a necessary party to this adversary proceeding.

Rule 19(a)(1) provides:

(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 a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest.

Fed.R.Civ.P. 19(a)(1)
. The Movants bear the burden of showing that Santander is a necessary party to this action under this standard. See, In re Community Bank of Northern Virginia Mortgage Lending Practices, 954 F. Supp. 2d 360, 383 (W.D. Pa. 2013).

The Movants do not appear to rely on Rule 19(a)(1)(A), and in any event the Court sees no basis for invoking it under the facts of the case since clearly the Court can accord complete relief among existing parties without Santander being joined as a party. As to Rule 19(a)(1)(B), it is written in the disjunctive, so that either prong will suffice to find an absent party to be a necessary party. See, General Refractories Co. v. First State Ins. Co., 500 F.3d 306, 312 (3d Cir. 2007).

In order for Rule 19(a)(1)(B)(i) to apply, it must be shown that some outcome of this case that is reasonably likely can preclude Santander with respect to an issue material to its rights or duties under standard principles governing the effect of prior judgments. General Refractories, 500 F.3d at 316. The mere "persuasiveness" of any decision reached in the absence of Santander would not be a sufficient ground to find it to be a necessary party if Santander would not be bound by the judgement under principles of issue preclusion or res judicata. Id. at 317 (citing Janney Montgomery Scott, Inc. v. Shepard Niles, Inc., 11 F.3d 399 (3d Cir. 1993). The Movants have not met their burden of showing how Santander's ability to protect its interests would be impaired or impeded under this standard.

That leaves Rule 19(a)(1)(B)(ii) as a possible basis for finding Santander to be a necessary party. Branikas asserts that proceeding in the case without Santander as a party may expose Branikas to the risk of incurring significant excess liabilities to Santander, but it offers no further explanation in support of that assertion. The Court takes judicial notice that Branikas and the Debtor were co-borrowers on the loans that form the basis for Santander's claim in this case. See the loan documents which are attached as part of Proof of Claim No. 34. In other words, both are liable on the debt. Presumably, therefore, if the Trustee were to prevail on Count VIII, such that the Branikas pre-petition rent claim and/or administrative rent claim were equitably subordinated, that could have a negative impact on Santander's recovery on its claim in this case, potentially resulting in Santander pursuing recovery from Branikas outside this bankruptcy in an amount larger than it otherwise might have. That is a lot of supposition, but even accepting it as a real possibility for purposes of the Motions, the additional burden on Branikas would not seem to be the type of "double, multiple or otherwise inconsistent obligation" as contemplated by Rule 19(a)(1)(B)(ii), but rather just a normal incident of joint and several liability. General Refractories, 500 F.3d at 318-19. The other two Movants, Meyers and G. Retos, have not even made any argument as to how they might be exposed to double, multiple or otherwise inconsistent obligations if Santander is not a party. As such, the Court is compelled to find that the Movants have not met their burden of showing that Santander is a necessary party under Rule 19(a)(1)(B)(ii).

AND NOW, this 2^nd day of September, 2014, for the foregoing reasons, it is ORDERED, ADJUDGED and DECREED that,

(1) The Motions are DENIED in part with respect to the statute of limitations defense as to Counts I, II, IV and the portion of Count V asserting an actual fraudulent transfer.

(2) The Motions are DENIED in part with respect to the contention the Santander Bank, N.A. is a necessary party as to Count VIII.

(3) The Motions are GRANTED in part with respect to the statute of limitations defense as to the portion of Count V asserting a constructive fraudulent transfer claim, and Paragraph 109 of the Amended Complaint is STRICKEN.

(4) On or before September 18, 2014, the Movants shall file their answers to the Amended Complaint.

/ s /_________

Thomas P. Agresti, Judge

United States Bankruptcy Court
Case administrator to serve:

Arthur Zamosky, Esq.

John P. Vetica, Jr., Esq.

Louis P. Vitti, Esq.

Brian C. Thompson, Esq.

Christopher P. Furman, Esq.

Section 5104(a)(1) describes transfers made with an actual intent to hinder, delay or defraud, while Section 5104(a)(2) and 5105 describes certain transfers made without receiving a reasonably equivalent value in return, so-called constructive fraudulent transfers. The Trustee appears to be proceeding under both theories. See Amended Complaint at ¶¶108, 109.