Court: District Court, D. Kansas; January 12, 2012; Federal District Court
The Court addressed the motion to dismiss filed by The Progressive Corporation regarding claims made by the Bankruptcy Trustee in the amended complaint. The motion was partially granted and partially denied. Specifically, Counts I and IV of the amended complaint were dismissed, while Counts II and III were allowed to proceed. The Trustee was permitted to file a second amended complaint by January 27, 2012, to present a viable claim for fraudulent transfer.
The plaintiff, as the Bankruptcy Trustee for Brooke Corporation and its affiliates, alleged that Brooke operated a franchise model for selling insurance policies and mismanaged premium funds. Brooke commingled customer premium payments with its own funds and, in some instances, paid insurers premiums without having received corresponding payments from customers. The Trustee's complaint outlined Brooke’s financial difficulties leading to its bankruptcy in late 2008 and included details of over $80 million in transfers from Brooke to Progressive between 2006 and 2008, with specific emphasis on $2.3 million transferred in the ninety days before bankruptcy.
The Trustee aimed to invalidate these transfers as fraudulent under 11 U.S.C. § 548 and as preferences under 11 U.S.C. § 547. The Court clarified the standard for a motion to dismiss, stating that a complaint can only be dismissed if the allegations do not plausibly support a claim. The Court emphasized the need for sufficient factual support rather than mere labels or conclusions, and it affirmed that the allegations should be taken as true for the purpose of the motion. The focus was on whether the plaintiff was entitled to present evidence for the claims, not on the likelihood of success.
Count I alleges fraudulent transfers by Brooke to the defendant under 11 U.S.C. § 548(a)(1)(B) and K.S.A. §§ 33-204(a)(2) and 33-205(a), which permit the avoidance of transfers where the debtor received less than a reasonably equivalent value (REV). The definition of "value" includes the satisfaction of an antecedent debt. The Trustee must demonstrate that Brooke received less than REV, and the Court requires a factual examination rather than a blanket rule that any payment for an antecedent debt constitutes REV. The defendant contends that Brooke's transfers were made to satisfy an antecedent debt under an agency agreement and guarantee with BASC, thereby constituting REV. The Trustee identifies two categories of payments: those where Brooke or BASC received the corresponding premiums, and those where they did not. While the Trustee concedes that transfers in the first category may not be fraudulent due to potential satisfaction of an antecedent debt, it intends to pursue claims only for the second category, totaling $21,935.09. The Court agrees that the Trustee should not pursue claims for the first type of payments but notes that the complaint appears to encompass all payments made by Brooke, including substantial amounts without distinction between the two types. This broad inclusion raises concerns about the plausibility of the claim, as it may include legitimate transactions that do not constitute fraudulent transfers.
Count I of the amended complaint is subject to dismissal; however, the Court would typically permit the Trustee to amend the count to clarify the fraudulent payments and the supporting theory. Before allowing this, the Court must evaluate if the second type of payments should be viewed as satisfying an antecedent debt and for REV under the law. The Defendant contends that the agency agreement and guarantee hold BASC and Brooke accountable for any premium payments for insurance, regardless of whether the customer paid them. The Trustee claims that Brooke’s overall net value is impacted by payments to the defendant since it did not receive corresponding payments from the customer. However, the Trustee fails to clarify why Brooke’s net value remains unaffected if those payments eliminated a liability to the defendant. The Trustee argues that if an insured did not remit funds to BASC, Brooke had no obligation to pay the defendant, but this assertion appears incorrect based on the agency agreement, which suggests liability exists regardless of customer payments. The Trustee has not justified why Brooke is not liable for all premiums in both scenarios presented.
Furthermore, the Trustee's statement in Count II that transfers to the defendant were for an antecedent debt contradicts the claim in Count I that such transfers were not for an antecedent debt. The Trustee also indicates that the existence of a policy related to the second scenario is uncertain without discovery; however, a claim cannot be based on potential findings from discovery. The complaint does not plausibly allege that the defendant was overpaid or received payments for non-existent policies, as it suggests the payments were connected to specific policies issued by the defendant. The Court will allow the Trustee to amend Count I to establish a credible claim for fraudulent transfer regarding the second scenario, requiring a plausible explanation of why the payments were not for REV in light of the agency agreement and guarantee. If the Trustee cannot formulate such an amended claim, Count I will remain dismissed.
In Count II of the amended complaint, the Trustee seeks to recover payments made by Brooke to the defendant within ninety days prior to the bankruptcy filing, claiming these payments are preferences under 11 U.S.C. § 547. The defendant argues for dismissal based on the affirmative defense in § 547(c)(2)(A), which protects transfers made in the ordinary course of business. The burden of proof for this defense lies with the defendant, who claims the payments were consistent before and during the preference period, as evidenced by the attached payment list. The Court notes that the defense should be narrowly construed as per Tenth Circuit guidance and emphasizes that such a fact-dependent issue cannot be resolved at this stage of the proceedings. The defendant's cited case, which allowed dismissal based on this defense, does not apply here due to differing factual contexts. Consequently, the motion to dismiss Count II is denied.
Count III, which relates to the recovery of avoidable transfers under 11 U.S.C. § 550 and K.S.A. 33-207, is dependent on Count II; thus, it survives the motion to dismiss. In Count IV, the Trustee seeks to disallow any proof of claim filed by the defendant, but since the defendant has not filed a proof of claim, this count is dismissed. The Court orders that the defendant’s motion to dismiss is partially granted, dismissing Counts I and IV, while Counts II and III remain. The Trustee is permitted to file a second amended complaint by January 27, 2012, to assert a viable claim for fraudulent transfer.
The Court has declined the defendant's request to dismiss the Kansas statutory claims due to the Trustee's failure to invoke 11 U.S.C. § 544 in Count I, as the defendant did not provide authority supporting such a requirement or demonstrate a lack of jurisdiction over the state-law claims. Both parties focused on case law related to 11 U.S.C. § 548 without separately analyzing the state-law claims, leading the Court to assume the survival of both federal and state claims on this issue. The Court clarified that in ruling on a motion to dismiss, it may consider documents referenced in the complaint if they are central to the claims and their authenticity is not disputed. The Trustee's objection to summary judgment before discovery is noted, but the Court confirmed that documents can be considered without converting the motion, negating the need for affidavits or testimony. The Trustee has not disputed the authenticity of the agency agreement, which will be considered alongside the amended complaint. The Court also addressed the defendant's argument regarding intangible benefits received by Brooke, stating that a factual issue would arise concerning their value, which is not suitable for dismissal at this stage. Finally, the Court rejected the defendant's argument for dismissal of Count I as a sanction for the Trustee's previous noncompliance with a Bankruptcy Court order, noting that the order is no longer in effect and that the Trustee has since provided the required information, resulting in no demonstrated prejudice to the defendant.
