KSB

Judge Somers

10-06246 Redmond, Brooke Trustee v. Kutak Rock, LLP et al (Doc. # 170)

Redmond, Brooke Trustee v. Kutak Rock, LLP et al, 10-06246 (Bankr. D. Kan. Sep. 30, 2011) Doc. # 170

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SO ORDERED.
SIGNED this 29 day of September, 2011.

 

Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE

Designated for on-line use but not print publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


In Re:

BROOKE CORPORATION, et. al.,
DEBTORS.

ALBERT A. RIEDERER, Chapter 7
Trustee of Brooke Corporation, Brooke
Capital Corporation, and Brooke
Investments, Inc.,

PLAINTIFF,

v.
Kutak Rock, LLP, et. al.,

DEFENDANTS.

CASE NO. 08-22786
(jointly administered)
CHAPTER 7

ADV. NO. 10-06246

MEMORANDUM OPINION AND ORDER
DENYING ROBERT D. ORR’S MOTION TO DISMISS


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The matter under advisement is the Motion by Defendant Robert D. Orr to Dismiss
Counts I, II, III and IV of the Complaint1 filed by Plaintiff Albert A. Riederer for Failure
to State a Claim Upon Which Relief May Be Granted (hereafter “Motion”).2 Robert D.
Orr (hereafter “Orr”) appears pro se. Plaintiff Albert A. Riederer, Chapter 7 Trustee of
Brooke Corporation, Brooke Capital Corporation, and Brooke Investments, Inc. (hereafter
“Trustee”) opposes the Motion and appears by Michael D. Fielding, Benjamin F. Mann,
and John J. Cruciani, of Husch Blackwell LLP. There are no other appearances. The
Court has jurisdiction.

Orr is the founder and former CEO of Brooke Corporation. He was Chairman of
the Brooke Corporation Board of Directors from 1991-2008. The First Amended
Complaint alleges four causes of action against the members of the Brooke Corporation
Board of Directors, including Orr: Count I - improper payment of dividends; count II breach
of fiduciary duty (waste of assets/dividends); count III - breach of fiduciary duty
(financial oversight); and count IV - deepening insolvency.

Orr seeks dismissal of all of the counts against him under Bankruptcy Rule
7012(b), which incorporates Federal Rule of Civil Procedure 12(b)(6). The Trustee
submits the following as a statement of the applicable standard of review for motions to

1 The Trustee has filed a First Amended Complaint (hereafter referred to in the text as “Amended
Complaint”), docket number 67. The amendment made no material changes with respect to the claims
against Robert D. Orr.

2 Dkt. 105.

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dismiss for failure to state a claim under Rule 12(b)(6), which the Court finds accurate

and therefore adopts:

On a motion to dismiss for failure to state a claim under Rule
12(b)(6) (made applicable to bankruptcy proceedings by Fed.

R. Bankr. P. 7012(b)), the Court’s function “is not to weigh
potential evidence that the parties might present at trial, but to
assess whether the plaintiff’s complaint alone is legally
sufficient to state a claim for which relief may be granted.”
Smith v. U.S., 561 F.3d 1090, 1098 (10th Cir. 2009) (internal
quotations omitted). Thus, in reviewing a Rule 12(b)(6)
motion, the Court “must accept all the well-pleaded
allegations of the complaint as true and must construe them in
the light most favorable to the plaintiff.” Pace v. Swerdlow,
519 F.3d 1067, 1073 (10th Cir. 2008) (internal quotations
omitted). “The grant of such a motion is proper only if it
appears beyond doubt that the plaintiff can prove no set of
facts in support of his claim that would entitle him to relief.”
Grider v. Texas Oil & Gas Corp., 868 F.2d 1147, 1148 (10th
Cir. 1989) (internal quotations omitted).3
Generally, a motion under Rule 12(b)(6) is decided upon the complaint, the

motion to dismiss, and the legal arguments, without consideration of extra materials. In

this case, Orr has submitted with his memorandum in support of the Motion copies of the

complaints filed in five pending cases involving Orr, Brooke Corporation, or related

companies.4 Although the Court has discretion to consider a wide range of materials if

3 Dkt. 110, pp. 2-3.

4 The Bank of New York Mellon, as Trustee, et al. v. Brooke Holdings, Inc., case no. 10-CV2293,
United States District Court for the District of Kansas; Fifth Third Bank, as Trustee, et. al. v.
Brooke Holdings, Inc., case no. 10-CV-2294, United States District Court for the District of Kansas; Orr

v. Riederer, case no. 10-CV-21, District Court for of Phillips County, Kansas (removed to United States
District Court for the District of Kansas, case no. 10-CV-01303); Riederer v. Brooke Holdings, Inc., et.
al., case no. 08-22786, adv. no. 10-06225, United States Bankruptcy Court for the District of Kansas;
Riederer v. The Bank of New York Mellon, et. al, case no.08-22786, adv. no 10-06243, United
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found to be substantial and comprehensive enough to facilitate disposition of the matter,5
the Court declines to consider Orr’s attachments. The complaints provide nothing of
evidentiary value which could assist the Court in determining whether the Trustee has
asserted a claim for which relief may be granted against Orr in this case.

Orr’s Arguments Regarding the Sale of Brooke Corporation’s Franchise and Loan
Units do not provide a Basis to Dismiss Counts I, II, III, or IV.

Orr’s first two arguments, presented in response to Counts I, II, III, and IV, are
based upon the alleged conversion of Brooke Corporation into a holding company in
2007 by virtue of the sale of its franchise and lending units, resulting in the formation of
Aleritas and Brooke Capital. Orr’s first argument, highly summarized, is that these sales
established that the units had value before the sales in 2007, so Brooke Corporation was
not insolvent at that time. He further argues that after the sales the Brooke Corporation
Board of Directors had no duty to prevent wrong-doing by Alertias and Brooke Capital
and was prohibited from interfering in the affairs of Alertias and Brooke Capital.

Orr is in effect asking the Court to weigh his potential evidence against the
allegations of the Amended Complaint. As stated above, this is not the Court’s function

States Bankruptcy Court for the District of Kansas.

5 5C Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 1364 (3d ed.
2004). Rule 12(d) addresses consideration of matters outside the pleadings. It provides in part, if, on a
motion under Rule 12(b)(6), “matters outside the pleadings are presented to and not excluded by the
court, the motion must be treated as one for summary judgment under Rule 56.” Under this subsection
“federal courts have complete discretion to determine whether or not to accept the submission of any
material beyond the pleadings that is offered in conjunction with a Rule 12(b)(6) motion and rely upon it,
thereby converting the motion [to one under Rule 56], or to reject it or simply not consider it.” Id. at
§1366.

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on a motion to dismiss. Further, Orr’s factual basis for his arguments is unsupported, and
he presents no legal authorities which would support dismissal, even if the facts were
established. There is no basis from which the Court can conclude that the Trustee has not
stated a claim for relief in Counts I, II, II, and IV based upon these arguments.

The Allegations of Count I of the First Amended Complaint, Improper Payment of
Dividends, States a Claim Against Orr.

Next, Orr argues that the Trustee fails to state a claim in Count I, improper
dividend payments, because the Trustee has misinterpreted Kansas law. The Trustee
alleges that Orr, and the other members of the Brooke Corporation Board of Directors,
have liability for improper declaration of common stock dividends between February
2003 and January 2008, when the board of directors paid dividends either knowing
Brooke Corporation was insolvent or when it should have known that Brooke
Corporation was insolvent. The Trustee relies upon the Kansas corporate code. K.S.A.
17-6420 provides that directors of a corporation may declare and pay dividends upon the
shares of its stock either out of surplus or, if there is no surplus, out of net profits for the
fiscal year in which the dividend is declared. K.S.A. 17-6424 provides that in the case of
any willful or negligent violation of the statute regarding the limitations on dividends, the
directors shall be jointly and severally liable, for the full amount of the dividend
unlawfully paid, with interest.

Orr alleges the Complaint fails to state a claim for improper payment of dividends
because the Trustee alleges insolvency rather than lack of surplus and net profits. The

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Court finds this distinction immaterial. Although the Amended Complaint does not use
the words “surplus” or “net profits,” it does allege that Brooke Corporation was insolvent
from 2003 through the date when it filed for bankruptcy in 2008. Under Delaware law,
after which the Kansas corporate code is patterned, a stock dividend is illegal if made
when the corporation was insolvent.6 Interpreting the Amended Complaint in the light
most favorable to the Trustee, the Court finds the Trustee sufficiently alleges a violation
of Kansas statutes regarding declaration and payment of dividends.

Next, Orr argues that Count I should be dismissed based upon good faith reliance
of the directors on professional advisers, including codefendants Kutak Rock and
underwriters. This good faith reliance defense is codified in K.S.A. 17-6422. It
inherently raises issues of fact outside the Amended Complaint and therefore is not a
basis for dismissal for failure to state a claim.

 Finally, Orr argues that the Trustee is improperly seeking to hold the directors
liable for dividends paid more than three years before the Complaint was filed. He notes
that under K.S.A. 17-6424, the directors may only be held liable for unlawful dividends
within three years of when those dividends were paid. The Trustee shows this defense is
not a valid ground for dismissal of Count I for two reasons. First, the Bankruptcy Code
provides the Trustee with a two year grace period in which to bring claims existing at the
time of filing, making the improper dividend claim timely as to any unlawful dividends

6 EBS Litigation LLC v. Barclays Global Investors, N.A., 304 F.3d 302, 305 (3rd Cir. 2002).
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paid after October 28, 2005. Second, the Trustee raises the adverse domination doctrine,
which operates to toll the running of the statute of limitations when directors charged with
wrongful conduct dominate the board of the corporation to the extent that there are no
directors who have knowledge of the facts giving rise to possible liability who could have
or would have induced the corporation to act.7 It applies to claims for negligence and
breach of fiduciary duty.8 If this fact based theory is proven, the directors would have
liability for all illegal dividends alleged in the Complaint, not withstanding the three year
limits of K.S.A. 17-6424.

Orr’s Arguments that the Trustee’s Insolvency Calculations do not Conform with
Applicable Law Fail to Provide a Basis to Dismiss Counts I, II, III, and IV.

Next Orr challenges the Trustee’s insolvency calculations. First, citing paragraph
125 of the Amended Complaint, he contends the Trustee erroneously consolidates the
assets and liabilities of Brooke Corporation, Aleritas, and Brooke Capital when applying
the Bankruptcy Code balance sheet definition of insolvency as stated in 11 U.S.C. §
101(32)(A). However, paragraph 125 of the Amended Complaint does not reference the
bankruptcy definition of insolvency, but rather alleges that if Brooke Corporation had
properly followed GAAP and relevant SEC guidelines, its equity for 2003 through 2007
would have been negative.

7 Resolution Trust Corp. v. Scaletty, 257 Kan. 348, 349-50, 891 P.2d 1110, 1112 (1995).

8 Id., 257 Kan. at 359, 891 P.2d at 1117.

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Orr questions additional accounting practices of the Trustee, including the

application of GAAP values for solvency calculations and the failure to use market values
determined by the sale of Brooke Corporation’s franchise and loan units. These
contentions raise only factual matters which cannot be the basis for a motion to dismiss.

Orr’s Argument that the Complaint was Filed for Improper Purpose Provides no
Basis for Dismissal under Rule 12(b)(6).

Orr argues that the Amended Complaint should be dismissed in full because the
Trustee filed action for improper purposes. No legal authorities are cited suggesting that
wrongful motivation is a basis to dismiss under Rule 12(b)(6) or even a defense to a civil
claim. Even if improper motivation is a defense, its consideration would be absolutely
contrary to the limited inquiry of Rule 12(b)(6), under which the Court must consider the
well pleaded allegations of the complaint as true and not weigh evidence which might be
presented at trial.
Conclusion.

Application of the standards for determining a motion to dismiss under Rule
12(b)(6) leave no doubt that the Motion must be denied. Counts I, II, III, and IV of the
Amended Complaint state claims upon which relief may be granted against Orr.
The Motion to Dismiss is denied.

IT IS SO ORDERED.
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