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Village of Overland Pointe LLC v. Terra Bentley II LLC, 10-06025 (Bankr. D. Kan. Mar. 2, 2011) Doc. # 88
SIGNED this 02 day of March, 2011.
Dale L. Somers
UNITED STATES BANKRUPTCY JUDGE
Opinion Designated for Electronic Use, But Not for Print Publication
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
TERRA BENTLEY II, LLC,
VILLAGE OF OVERLAND POINTE,
TERRA BENTLEY II, LLC,
NRC ADVISORS, LLC,
CASE NO. 09-23107-11
ADV. NO. 10-6025
OPINION GRANTING THE DEFENDANT-DEBTOR’S MOTION FOR
JUDGMENT ON THE PLEADINGS, AND DENYING AS MOOT THE
Case 10-06025 Doc# 88 Filed 03/02/11 Page 1 of 13
PLAINTIFF’S MOTIONS TO AMEND ITS COMPLAINT
This proceeding is before the Court on a motion for judgment on the pleadings
filed by the Defendants. When the motion was filed, the Defendants were all represented
by counsel James F.B. Daniels of McDowell Rice Smith & Buchanan, but he
subsequently withdrew from representing four of them and now represents only
Defendant-Debtor Terra Bentley II, LLC. The Court recently granted a motion to dismiss
filed by NRC Advisors, LLC, Steven Seat, Eric Comeau, and Tony Bettis, so the Debtor
is now the only Defendant.1 Plaintiff Village of Overland Pointe, LLC (“Village”),
appears by counsel Steven R. Smith and Eldon J. Shields of Gates, Shields & Ferguson,
P.A., and Ronald S. Weiss and Tracee L. Stout of Berman DeLeve Kuchan & Chapman,
L.C. The Court has reviewed the relevant pleadings and is now ready to rule.
Village is a creditor of the Debtor, and is suing under the Kansas Uniform
Fraudulent Transfer Act (“the UFTA”) to avoid a mortgage the Debtor gave to another
creditor before filing for bankruptcy. Village seeks relief in three counts. The first two
counts ask to have the mortgage avoided, and the third count asks for actual and punitive
damages. The Debtor contends such causes of action belong exclusively to it as the
Chapter 11 Debtor-in-possession, and Village has no standing to pursue them. A very
liberal interpretation of Village’s response suggests the creditor is asking to be granted
1See Docket No. 84, entered Feb. 18, 2011. The Plaintiff has filed a motion to amend its
complaint to add Bentley Investments of Nevada, LLC, as a Defendant, Docket No. 27, but that motion
has not yet been ruled on. In light of the dismissal of all claims against the other four named Defendants,
the Court will refer to the motion for judgment on the pleadings as the Debtor’s motion.
Case 10-06025 Doc# 88 Filed 03/02/11 Page 2 of 13
“derivative standing” to pursue the avoidance action on behalf of the bankruptcy estate.
After giving the matter due consideration, the Court concludes Village has failed to show,
or even allege, the existence of the prerequisites for derivative standing. Consequently,
the Debtor’s motion for judgment on the pleadings will be granted.
Village brought this proceeding to try to avoid a $2,566,165.12 mortgage the
Debtor gave to Bentley Investments of Nevada, LLC, in April 2008. Village alleges the
mortgage encumbers substantially all of the Debtor’s assets.
Since filing its original complaint, Village has moved for permission to file a first
amended complaint and a second amended complaint. All the complaints assert the same
three counts with slight variations. The only significant change either amended complaint
would make is to add the recipient of the mortgage as another defendant. No version of
the complaint includes an assertion that Village seeks to pursue its complaint on behalf of
the Debtor’s bankruptcy estate, or that the Debtor was asked to pursue the claims and
refused. Village has not filed a motion in either this proceeding or the Debtor’s main case
seeking permission to pursue the claims it is asserting here.
In Count I, Village alleges the mortgage was given to Bentley Investments with the
actual intent to hinder, delay, and defraud the Debtor’s creditors, in violation of K.S.A.
33-204(a)(1) of the UFTA, so Village can avoid the mortgage under K.S.A. 33-207(a)(1).
Village also alleges that because of the Debtor’s and Bentley Investments’ common
ownership and management, Bentley Investments knew or should have known the
Case 10-06025 Doc# 88 Filed 03/02/11 Page 3 of 13
mortgage was a fraudulent transfer.
In Count II, Village alleges the Debtor gave the mortgage without receiving “any
reasonably equivalent value” in return, in violation of K.S.A. 33-204(a)(2) of the UFTA.
When the Debtor gave the mortgage, Village further alleges, the Debtor was engaged in
business for which its remaining assets were unreasonably small in relation to its
business, and the Debtor believed or reasonably should have believed it would incur debts
beyond its ability to pay as they became due, and the mortgage was therefore a fraudulent
transfer as defined by K.S.A. 33-204(a)(2)(A) and (B). Village again alleges the Debtor’s
and Bentley Investments’ common management means Bentley Investments knew or
should have known the mortgage was a fraudulent transfer under those provisions.
Village concludes Count II by alleging it is entitled to avoid the mortgage under K.S.A.
33-207(a)(1). This type of claim is often referred to as a constructively fraudulent
transfer claim because no actual fraudulent intent is required.
In Count III, Village alleges the giving of the mortgage involved the following
circumstances: (1) the transfer was to an insider of the Debtor because the Debtor and
Bentley Investments are both owned by Gary Hall and managed by NRC Advisors, which
has the same managers as the Debtor; (2) the Debtor remained in possession and control
of Mission Corner after giving the mortgage; (3) the Debtor did not disclose the mortgage
to Village; (4) the Debtor had been sued by Village in state court before it gave the
mortgage; (5) the mortgage encumbers substantially all the Debtor’s assets; (6) Bentley
Investments gave the Debtor no consideration for the mortgage; (7) the Debtor claims it
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became insolvent shortly after giving the mortgage; and (8) the mortgage was given
shortly after the state court granted partial summary judgment on Village’s counterclaims
against the Debtor. Village alleges that as a direct and proximate result of the Debtor
giving the mortgage to Bentley Investments, Village sustained actual damages in excess
of $75,000, and that the Debtor and Bentley Investments2 are liable to it under the UFTA
for actual and punitive damages.
On July 27, 2010, the Debtor filed its motion for judgment on the pleadings,
contending causes of action to avoid fraudulent transfers it might have made before filing
for bankruptcy belong to it exclusively as the Debtor-in-possession. The Debtor adds that
it has proposed a plan that would treat Bentley Investments’ mortgage as effective to
secure only an amount the creditor actually paid for grading, engineering, and other work
on the Debtor’s property, estimated to be approximately $850,000, and not the
$2,566,165 shown as the full amount of the debt on the Debtor’s “Schedule D —
Creditors Holding Secured Claims.” In the plan, the Debtor states it will take such action
as may be necessary to have Bentley Investments’ secured claim treated in that manner.
In response to the Debtor’s motion, Village concedes claims for fraudulent
transfers generally belong to the Chapter 11 debtor-in-possession, but argues it can and
should be granted derivative standing to pursue the claims it is making in this proceeding.
Villages says, “[B]ecause of the relationships among the individuals and entities
2As noted earlier, the Court recently dismissed the claims against the other four Defendants, and
Village has not yet been allowed to add Bentley Investments as a Defendant.
Case 10-06025 Doc# 88 Filed 03/02/11 Page 5 of 13
involved in the Mortgage sought to be set aside, it would be difficult and highly unlikely
that the [Debtor] would prosecute an action to set aside a fraudulent transfer.”3 Village
cites a number of cases in which courts have granted “derivative standing” to enable
parties other than the trustee or debtor-in-possession to pursue avoidance actions in
A. The standard governing a ruling on a motion for judgment on the pleadings.
Federal Rule of Civil Procedure 12(c) provides that “After the pleadings are
closed . . . a party may move for judgment on the pleadings.”4 The Tenth Circuit has
explained that the standard for ruling on a motion under Rule 12(c) is the same as that for
a motion to dismiss under Rule 12(b)(6) for failure to state a claim for relief.5 In recent
years, the Supreme Court has twice addressed the question of what a complaint must do
to survive a motion under Rule 12(b)(6). In Bell Atlantic Corporation v. Twombly,6 the
Court described the standard that must be met in pleading a claim for relief this way:
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
to “give the defendant fair notice of what the . . . claim is and the grounds
upon which it rests,” Conley v. Gibson[,] 355 U.S. [41,] 47 (1957). While a
complaint attacked by a Rule 12(b)(6) motion to dismiss does not need
3Docket no. 48 at 4.
4Fed. R. Bankr. P. 7012(b) makes Civil Rule 12(b) apply in adversary proceedings.
5Corder v. Lewis Palmer School Dist. No. 38, 566 F.3d 1219, 1223-24 (10th Cir. 2009).
6550 U.S. 544 (2007).
Case 10-06025 Doc# 88 Filed 03/02/11 Page 6 of 13
detailed factual allegations, ibid.; [additional citation omitted], a plaintiff's
obligation to provide the “grounds” of his “entitle[ment] to relief” requires
more than labels and conclusions, and a formulaic recitation of the elements
of a cause of action will not do, [citation omitted]. Factual allegations must
be enough to raise a right to relief above the speculative level, [citation and
footnote omitted], on the assumption that all the allegations in the complaint
are true (even if doubtful in fact), [citations omitted].7
The Court further explained in Iqbal v. United States:
Two working principles underlie our decision in Twombly. First, the
tenet that a court must accept as true all of the allegations contained in a
complaint is inapplicable to legal conclusions. Threadbare recitals of the
elements of a cause of action, supported by mere conclusory statements, do
not suffice. [Citation omitted]. Rule 8 marks a notable and generous
departure from the hyper-technical, code-pleading regime of a prior era, but
it does not unlock the doors of discovery for a plaintiff armed with nothing
more than conclusions. Second, only a complaint that states a plausible
claim for relief survives a motion to dismiss. [Citation omitted].
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. [Citation omitted]. 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.”8
The Court also rejected an assertion that Twombly was limited to antitrust complaints,
saying that the ruling was its interpretation and application of Civil Rule 8 and that Civil
Rule 1 states that the Rules apply “in all civil actions and proceedings” in federal trial
Twombly and Iqbal require Village’s complaint to state a plausible claim for relief
in order to withstand the Debtor’s motion for judgment on the pleadings. Since the
7Id. at 555-56. Fed. R. Bankr. P. 7008(a) makes Civil Rule 8 apply in adversary proceedings.
8___ U.S. ___, 129 S.Ct. 1937, 1949-50, 173 L.Ed.2d 868 (2009).
Case 10-06025 Doc# 88 Filed 03/02/11 Page 7 of 13
Debtor’s motion asserts that the Bankruptcy Code gives it the exclusive right to pursue
the claims Village is making here, Village’s argument that it is entitled to pursue the
claims must be plausible under the Code.
B. Case Law about Derivative Standing to Pursue Avoidance Actions
Village correctly points out that in bankruptcy cases, many courts have found an
implied but qualified right under certain circumstances for creditors, through “derivative
standing,” to pursue avoidance claims that otherwise belong exclusively to the trustee or
the debtor-in-possession.9 Sometimes, the courts have explained such derivative standing
to be similar to a shareholder’s derivative lawsuit on behalf of a corporation.10 In In re
Racing Services, Inc., the Eighth Circuit joined the Second, Third, Fifth, Sixth, Seventh,
and Ninth Circuits in recognizing an implied right for a creditor or a creditors’ committee
to be granted permission to pursue avoidance actions on behalf of the bankruptcy estate
9See In re Racing Servs, Inc., 540 F.3d 892, 898 (8th Cir. 2008) (citing Smart World Techs., LLC
v. Juno Online Servs., Inc. (In re Smart World Techs., LLC), 423 F.3d 166, 176 (2d Cir.2005) (creditors’
committee may be granted standing to pursue cause of action when debtor-in-possession’s refusal to do so
was unjustifiable); Official Comm. of Unsecured Creditors v. Chinery (In re Cybergenics Corp.), 330
F.3d 548, 553 (3d Cir.2003) (en banc) (derivative standing available to creditors’ committee when debtorin-
possession’s refusal to pursue avoidance action was unreasonable); Fogel v. Zell, 221 F.3d 955, 965
(7th Cir.2000) (trustee’s refusal to pursue claim must be unjustifiable for creditor to be granted derivative
standing to pursue it); Avalanche Maritime, Ltd., v. Parekh (In re Parmetex, Inc.), 199 F.3d 1029, 1031
(9th Cir.1999) (creditors had standing to bring avoidance action where Chapter 7 trustee agreed and
bankruptcy court approved agreement); Canadian Pac. Forest Prods. Ltd. v. J.D. Irving, Ltd. (In re
Gibson Group, Inc.), 66 F.3d 1436, 1440-46 (6th Cir.1995) (creditor can be granted permission to pursue
avoidance action if debtor-in-possession’s refusal to do so was unjustified); Louisiana World Exposition
v. Federal Ins. Co., 858 F.2d 233, 247-52 (5th Cir.1988) (creditors’ committee could be granted
derivative standing to sue corporate debtor’s officers on behalf of corporation where debtor’s refusal to do
so was unjustified).
10E.g., Smart World Techs., 423 F.3d at 176; Fogel v. Zell, 221 F.3d at 965-66; Louisiana World
Exposition, 858 F.2d at 247-52.
Case 10-06025 Doc# 88 Filed 03/02/11 Page 8 of 13
when the trustee or debtor-in-possession refuses to do so.11 These cases acknowledge,
however, that the trustee or debtor-in-possession ordinarily has the exclusive right to
control avoidance actions, and require the creditor or creditors’ committee to show that
the trustee or debtor-in-possession abused its discretion by unjustifiably refusing to
pursue the proposed claims, giving specific reasons why the refusal is unjustified.12 The
Tenth Circuit has apparently not yet ruled on the question. No Circuit court appears to
have concluded derivative standing for creditors is never permissible, though, and the
Court sees no reason to believe the Tenth Circuit would disagree with the unanimous
view of the Circuits that have decided the question.
In Racing Services, the Eighth Circuit set out standards for bankruptcy courts to
apply in deciding whether to grant derivative standing to creditors. It said:
We therefore hold, to establish derivative standing, a creditor must
show: (1) it petitioned the trustee to bring the claims and the trustee
refused; (2) its claims are colorable; (3) it sought permission from the
bankruptcy court to initiate an adversary proceeding; and (4) the trustee
unjustifiably refused to pursue the claims. We expect in most cases
creditors will readily satisfy the first three elements without much
difficulty — petitioning the trustee and bankruptcy court ought to be mere
formalities. And a creditor’s claims are colorable if they would survive a
motion to dismiss. The real challenge for the creditor will be to persuade
the bankruptcy court that the trustee unjustifiably refuses to bring its claims.
To satisfy its burden, the creditor, at a minimum, must provide the
11See cases cited at note 9.
12The Third Circuit said the refusal must be “unreasonable” rather than “unjustified,”
Cybergenics, 330 F.3d at 553, but this difference is unlikely to lead to a different result in any actual case.
The Ninth Circuit ruled only that derivative standing was effective when the Chapter 7 trustee agreed
creditors could bring the action and the bankruptcy court approved that agreement, Parmetex, 199 F.3d at
1031, and did not address the situation where the trustee or debtor-in-possession opposed the creditors’
effort to bring the avoidance action.
Case 10-06025 Doc# 88 Filed 03/02/11 Page 9 of 13
bankruptcy court with specific reasons why it believes the trustee’s refusal
is unjustified. A creditor thus does not meet its burden with a naked
assertion that ‘the trustee’s refusal is unjustified.’ If presented with nothing
more than this, the bankruptcy court may properly deny a creditor’s motion
without explanation. The creditor, not the bankruptcy court, has the onus of
establishing the trustee unjustifiably refuses to bring the creditor's claim.13
The Sixth Circuit set out similar but somewhat different standards in In re Gibson Group,
We decide, therefore, that a bankruptcy court may permit a single creditor
in a Chapter 11 case to initiate an action to avoid a preferential or fraudulent
transfer instead of the debtor-in-possession if the creditor: 1) has alleged a
colorable claim that would benefit the estate, if successful, based on a
cost-benefit analysis performed by the bankruptcy court; 2) has made a
demand on the debtor-in-possession to file the avoidance action; 3) the
demand has been refused; and, 4) the refusal is unjustified in light of the
statutory obligations and fiduciary duties of the debtor-in-possession in a
Chapter 11 reorganization. We also hold that, while the creditor has the
initial burden to allege facts showing that the refusal to file suit is
“unjustified,” the debtor-in-possession must rebut the presumption if the
creditor carries its initial burden. Contrary to the district court's view, we
believe that a creditor need not plead facts alleging the debtor-in-
possession’s reason or motive for the inaction, but may meet its burden to
allege unjustified inaction through notice pleading by alleging the existence
of an unpursued colorable claim that would benefit the estate. See
Fed.R.Civ.P. 8; Fed.R.Bankr.P. 7008 (making Fed.R.Civ.P. 8 applicable in
bankruptcy adversary proceedings). If the debtor-in-possession gives no
reason for its inaction when a demand is made, the bankruptcy court may
presume that its inaction is an abuse of discretion (“unjustified”) if the
complaint alleges a colorable claim.14
With these standards in mind, the Court can only conclude Village has not shown that it
should be granted derivative standing so it can pursue this proceeding.
13540 F.3d 892, 900.
14Canadian Pacific Forest Products, Ltd., v. J.D. Irving, Ltd. (In re Gibson Group, Inc.), 66 F.3d
1436, 1439-40 (6th Cir. 1995).
Case 10-06025 Doc# 88 Filed 03/02/11 Page 10 of 13
Village’s Complaints and Response to Motion for Judgment on the Pleadings
Although Village cited a number of cases about derivative standing, it made little
effort to comply with any of the standards the decisions offered for determining whether
derivative standing should be granted. For the following reasons, the Court concludes
Village has not shown derivative standing is appropriate here.
First, in all three versions of its complaint, Village phrased the claims to avoid
Bentley Investments’ mortgage, and to recover actual and punitive damages from the
Debtor and Bentley Investments as though they belonged to it alone. Village made no
suggestion that it was trying to act on behalf of the Debtor’s bankruptcy estate. Even if
the Court were inclined to grant derivative standing, Village would have to amend its
complaint again to make clear it was pursuing derivative relief for the estate, and not
relief solely for its own benefit.
Second, Village has not alleged that it asked the Debtor to pursue the claims and
the Debtor refused. Instead, in its response to the Debtor’s motion, Village in effect
asked the Court to assume the Debtor would not attack Bentley Investments’ mortgage,
saying, “In our case, because of the relationships among the individuals and entities
involved in the Mortgage sought to be set aside, it would be difficult and highly unlikely
that the Defendant would prosecute an action to set aside a fraudulent transfer.”15
15Docket no. 48 at 4.
Case 10-06025 Doc# 88 Filed 03/02/11 Page 11 of 13
Third, the Debtor asserts it is in fact seeking, through its plan of reorganization, to
avoid more than two-thirds of Bentley Investments’ mortgage, despite the relationships
Village thought made any such effort unlikely. This is hardly an unjustified refusal to
pursue the claims Village has asserted. It can barely be called a refusal at all.
Fourth, the Debtor says the part of the mortgage it is not attacking secures
$850,000 that Bentley Investments provided to pay for grading, engineering, and other
work that was done on the Debtor’s property. Under the UFTA, K.S.A. 33-208(d)
provides that a good faith transferee of an otherwise avoidable fraudulent transfer is
entitled to retain a lien to the extent of any value it gave the debtor for the transfer.
Village’s claims to avoid the mortgage would be subject to this potential defense for
Bentley Investments, reducing the likelihood Village’s efforts would produce a better
result for the estate than the Debtor’s plan proposal. So long as Bentley Investments
could show it was a good faith transferee of the mortgage, the mortgage would remain
effective to the extent of the $850,000 it provided to fund the Debtor’s construction
obligations even if the mortgage was otherwise found to be a fraudulent transfer under the
UFTA. Village has not disputed the Debtor’s assertion that Bentley Investments paid for
work on its property, or otherwise explained why the Debtor’s decision to attack the
mortgage only to the extent it exceeded the amount allegedly paid for that work is
Fifth, the Court notes that derivative standing could not be granted for Village to
try to recover anything on behalf of the bankruptcy estate from the Debtor itself, because
Case 10-06025 Doc# 88 Filed 03/02/11 Page 12 of 13
such a recovery could provide no benefit to the estate. Everything a Chapter 11 debtor
that is an artificial entity has is already property of the estate.
Sixth, since the Debtor still owns the property that is subject to Bentley
Investments’ mortgage, the property rights the Debtor transferred by giving the mortgage
could easily be returned to the estate, and the only monetary recovery that might be
obtained would be punitive damages. The Debtor could not sue itself to try to recover
punitive damages for the estate, so derivative standing could not authorize Village to do
For these reasons, the Court concludes Village has not shown that derivative
standing is appropriate in this case. The Debtor’s motion for judgment on the pleadings
will therefore be granted. This ruling means Village’s motions to amend its complaint are
now moot, and must be denied.
A judgment based on this ruling will be entered on a separate document as
required by Federal Rule of Bankruptcy Procedure 7058 and Federal Rule of Civil
# # #
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