Lugo-Mender v. Equus Entertainment Corp.

Citations: 388 B.R. 469; 2008 U.S. Dist. LEXIS 41601Docket: Civil No. 07-1818 (JAG)

Court: District Court, D. Puerto Rico; March 19, 2008; Federal District Court

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The Court denies the Motion to Dismiss filed by Equus Entertainment Corporation, Equus, and James Wilson, collectively referred to as "Defendants." The case involves a complaint by Wigberto-Lugo-Mender, the Litigation Trustee for the El Commandante Racetrack Litigation Trust, against the Defendants for allegedly engaging in fraudulent transfers under 11 U.S.C. §§ 544, 547, 548, and 550, as well as applicable Puerto Rico laws. The Plaintiff claims that the Defendants were aware of the Debtors' insolvency and still facilitated payments of debts that were solely owed by Equus, harming the Debtors' creditors.

Specifically, the Plaintiff alleges that between October 15, 2000, and October 15, 2004, the Debtors made transfers of property to Defendant Equus, which were subsequently transferred to insiders, including Wilson, who is characterized as an insider due to his roles with the Debtors. The Defendants had previously filed a Motion to Withdraw Reference, which was granted, followed by their Motion to Dismiss, to which the Plaintiff did not respond.

The Court reviews the Motion to Dismiss under the standard established in Bell Atlantic Corp. v. Twombly, which requires a complaint to present a "plausible entitlement to relief." The Court emphasizes that while factual allegations are accepted as true, mere speculative assertions or unsupported conclusions do not suffice. The Defendants contend that the Plaintiff's claims regarding Wilson's insider status and the nature of the transfers do not meet the requirements of Federal Rule of Civil Procedure 8(a).

Defendants argue that Plaintiffs’ allegations of fraudulent transfer under 11 U.S.C. § 548 do not meet the requirements of Federal Rule of Civil Procedure 9(b), which mandates that fraud claims be stated with particularity. It is established that Rule 9(b) applies to § 548 claims, requiring detailed allegations regarding the fraudulent transfers, including specifics about the transfers and the defendants' roles. The court finds that Plaintiffs’ complaint meets this standard, as it includes exact dates, dollar amounts, and check numbers related to the transfers, thus providing Defendants with adequate notice of the alleged misconduct.

Regarding Federal Rule of Civil Procedure 8(a), which requires a "short and plain statement" to give fair notice of claims, the court concludes that Plaintiffs’ allegations of preferential transfers under 11 U.S.C. § 547 also comply with this standard. The complaint identifies each debtor and transferee, the form of transfers, and the total amount involved, offering sufficient detail to inform Defendants of the claims against them.

Finally, to classify someone as an insider, the individual must have the authority to dictate corporate policy and asset disposition. This definition highlights the criteria necessary for identifying insiders in the context of preferential transfers.

A corporate debtor's insiders include controlling persons, their relatives, partnerships where the debtor is a general partner, and the debtor's general partners. Corporate officers and directors are deemed insiders due to their influence on corporate decisions. Merely alleging a "close relationship" is inadequate to establish the necessary control; however, claims that an individual is a corporate director, officer, or person controlling the debtor suffice to classify them as an insider. In the case at hand, the Plaintiff argued that Wilson was an insider based on his role as a director, officer, or individual in control of the Debtors, which meets the liberal pleading standards of Rule 8(a). Consequently, the Court denied the Defendant's Motion to Dismiss. The Debtors filed for Chapter 11 bankruptcy on October 15, 2004, with their plan confirmed on January 3, 2007, and the "Effective Date" occurring the following day. The confirmed plan transferred all causes of action, including avoidance actions under various sections of the Bankruptcy Code, to the Litigation Trustee, appointed by the Plaintiff. Additionally, the excerpt references the purposes of Rule 9(b), emphasizing the need for defendants to have adequate notice and protection against frivolous claims and reputational harm. The definition of "insider" under 11 U.S.C. 101(31) is also reiterated, clarifying the categories of individuals included in that classification.