Court: District Court, M.D. Florida; June 25, 2014; Federal District Court
Defendant Synovus Bank's Motion to Dismiss the Complaint, filed by Plaintiff Angela Welch, Chapter 7 Trustee for Frank Michael Mongelluzzi's bankruptcy estate, was considered by the Court. Synovus filed the motion on March 4, 2014, to which the Trustee opposed on April 4, 2014. After additional filings, including a surreply from the Trustee, the Court denied Synovus's motion.
The Amended Complaint outlines that from 1986 to 2010, Frank and Anne Mongelluzzi operated multiple temporary labor staffing companies, collectively referred to as the 'Able Body Labor Businesses,' headquartered in Clearwater, Florida. These businesses had 170 locations across 25 states and generated over $200 million in annual revenues from 2004 to 2009. The Mongelluzzis also managed various personal and business interests, including restaurants and real estate, which were financially reliant on the staffing companies' revenue and illicit banking activities.
During 2007-2011, the Mongelluzzis maintained 314 bank accounts, with 77 at Synovus. They had a $35 million asset-based revolving line of credit with Synovus, guaranteed personally by the Mongelluzzis, crucial for covering daily operational costs and legitimate creditor payments. Synovus conducted thorough financial oversight of the Mongelluzzis' operations, including ongoing reviews of their performance and financial status.
The Trustee alleges that the Mongelluzzis engaged in a large-scale check kiting scheme involving these bank accounts, utilizing checks written on insufficient funds to create a façade of available balances. This scheme aimed to provide interest-free loans and delay creditor payments from 2007 to 2010. To sustain the scheme, checks from other affiliated entities were continuously written and deposited into the accounts, preventing the checks from bouncing and avoiding exposure of the fraudulent activities.
The Trustee claims that the loan documents for the Synovus Revolver limited the use of funds to the obligors' working capital needs. However, from 2007 to 2010, Synovus was aware that Frank Mongelluzzi and associates improperly transferred loan proceeds to non-obligor entities and used these funds to cover checks related to a check kiting scheme, violating loan covenants. The Trustee also alleges that payments on the Synovus Revolver were made with proceeds from the Revolver itself, other financial institutions, and cash.
Evidence of Synovus’ knowledge of Mongelluzzi's intent to obstruct creditors includes a consistent pattern of overdrawing accounts, transferring funds to non-obligor entities without justification, using loan proceeds from different sources for repayments, and significant cash flow issues alongside other financial irregularities. Despite these red flags, Synovus maintained its banking relationship with the Mongelluzzis to continue earning fees and interest.
In July 2010, Synovus communicated to the Mongelluzzis that their total debt had escalated to $45 million due to overdrafts, which were deemed illegal. Instead of halting these activities, Synovus allegedly devised a strategy to ensure repayment of debts and to maintain revenue by facilitating the sale of the Able Body Labor Businesses. The situation culminated in the summer of 2010 when several banks froze accounts and refused to process checks, leading to the collapse of the check kiting scheme.
Synovus took significant actions against the Mongelluzzis and associated businesses due to insolvency concerns, including halting future advances, disabling corporate accounts, and requiring collateral for previously extended loans. Despite these measures, Synovus reportedly continued to receive substantial funds from Frank Mongelluzzi and related entities after becoming aware of his insolvency and an alleged check kiting scheme. Synovus pressured the Mongelluzzis to sell the Able Body Labor Businesses and was involved in the negotiations with Michael D. Traína and MDT Personnel, LLC for the sale, which occurred around September 2, 2010.
The asset purchase agreement resulted in the transfer of the Able Body Labor Businesses’ assets to Traína and MDT, with the purchase price matching the businesses' outstanding senior debt. The Synovus Revolver, secured by the businesses' assets, was restructured to become the obligation of MDT, effectively maintaining the same loan and collateral but with new obligors. Synovus subsequently advanced loan proceeds to MDT, which were quickly disbursed back to Synovus to settle existing loans.
The sale constituted a transfer of Frank Mongelluzzi's interest in property under Chapter 726 of the Florida Statutes, benefiting Synovus, which received approximately $42 million from the transaction. Following the sale, the Able Body Labor Businesses became shell corporations unable to meet creditor claims and were administratively dissolved.
On May 24, 2013, the Trustee filed multiple voluntary bankruptcy petitions for the Able Body Labor Businesses and other Mongelluzzi entities. By October 9, 2013, numerous proofs of claim totaling over $86 million had been filed in the Able Body Labor Bankruptcy Cases and over $37 million in the Non-Staffing Businesses Bankruptcy Cases. Frank Mongelluzzi filed for personal bankruptcy on February 2, 2011, with claims totaling over $108 million as of October 1, 2013. On February 4, 2013, the Able Body Labor Businesses’ assets were sold again, this time to TrueBlue, Inc. and/or Labor Ready Holdings, Inc., for over $48 million, with no proceeds going to the Mongelluzzis or their creditors.
The Trustee's claims focus on four categories of transfers made by Frank Mongelluzzi within four years prior to his bankruptcy filing. First, the Trustee alleges that overdraft repayments to Synovus, totaling $1,981,211.73 (the 'Overdraft Loan Repayment Transfers'), constitute property transfers subject to avoidance under Chapter 726 of the Florida Statutes for the benefit of Mongelluzzi's legitimate creditors. Second, Mongelluzzi deposited $17,434,562.80 into his Synovus accounts (the 'Deposit Transfers'), which are also claimed to be subject to avoidance. Third, the Trustee claims that Synovus gained control over repayments of Mongelluzzi's loans amounting to $5,145,963.37 (the 'Other Loan Repayment Transfers'), which are likewise subject to avoidance and recovery. Lastly, the Trustee includes claims regarding transfers related to the Able Body Labor asset sale, asserting they are subject to avoidance as well.
In total, the Trustee asserts twelve counts against Synovus, each titled 'Avoidance and Recovery of Fraudulent Transfers,' alleging both actual and constructive fraud under relevant sections of the U.S. Code and Florida Statutes for each category of transfers. Currently, Synovus has filed a Motion to Dismiss the Trustee's Amended Complaint, seeking dismissal with prejudice based on procedural grounds, which the Court is reviewing along with the associated responses and replies from both parties.
A motion to dismiss under Rule 12(b)(6) requires the court to accept all factual allegations in the complaint as true and to view these facts in the light most favorable to the plaintiff. Legal conclusions presented as factual allegations are not accepted as true. The Supreme Court’s standard in Bell Atlantic Corp. v. Twombly mandates that while detailed factual allegations are not required, plaintiffs must provide sufficient grounds for relief that exceed mere labels and conclusions, raising the claim above the speculative level. Federal Rule of Civil Procedure 8(a) further necessitates that a claim must be plausible on its face, which includes factual content allowing a reasonable inference of the defendant's liability.
In cases alleging fraud, Federal Rule of Civil Procedure 9(b) imposes a heightened pleading standard, requiring specific details about the fraud circumstances, although intent and other mental states can be alleged more generally. Synovus contends that the Trustee's claims should be dismissed based on this standard, asserting that the allegations are insufficient if based on information and belief. Conversely, the Trustee argues that the claims are not based on fraud but on fraudulent transfers meant to hinder creditors, and even if Rule 9(b) applies, courts often relax its requirements for bankruptcy trustees.
The Court refrains from making a broad ruling on the applicability of Rule 9(b) to fraudulent transfer claims, concluding that the Trustee has met its requirements. The Amended Complaint is extensive, comprising 47 pages and 137 numbered paragraphs, detailing the circumstances surrounding the transfers and including supporting documents. After review, the Court determines that the allegations are adequate to withstand a Rule 12(b)(6) challenge under both Rule 8(a) and the relaxed standard of Rule 9(b) applicable to bankruptcy trustees.
The Trustee's argument, supported by the Court, emphasizes that courts should ease the specificity requirements of Federal Rule of Civil Procedure 9(b) in cases involving bankruptcy trustees, particularly concerning fraudulent transfer claims where the defendant transferee is not directly accused of fraud. While some courts maintain the applicability of Rule 9(b), they often relax its standards for "outsiders" like bankruptcy trustees who may have limited access to relevant information. The Court notes that Synovus has not strongly contested the sufficiency of the Amended Complaint under Rule 9(b), instead focusing on more substantive dismissal arguments.
Counts I, IV, and VII of the Amended Complaint seek recovery of assets allegedly transferred by Frank Mongelluzzi to Synovus with the intent to hinder or delay creditors, based on 11 U.S.C. § 544 and Florida Statutes § 726.105(1)(a). This statute defines a transfer as fraudulent if made with intent to defraud or if the debtor received no equivalent value while being over-leveraged or unable to pay debts as they come due. Under § 544(b), the Trustee operates as a hypothetical creditor, allowing the assertion of state fraudulent conveyance claims.
In defense, Synovus challenges the allegations of a "check kite," asserting that it lacks legal foundation and does not sufficiently demonstrate Mongelluzzi's fraudulent intent. They argue that check kiting, unlike Ponzi schemes, does not inherently imply intent to defraud creditors, and that mere actions associated with kiting do not constitute fraud without additional evidence of intent.
Courts assess a transferor's intent to defraud creditors by examining the overall circumstances and identifying "badges of fraud." The Amended Complaint claims that Frank Mongelluzzi intended to hinder or delay creditors, evidenced by factors such as his insolvency, involvement in a check kiting scheme, inability to pay debts, pre-transfer lawsuits, asset concealment, and substantial debt accumulation around the time of transfers to Synovus. The Trustee's allegations sufficiently demonstrate Mongelluzzi's intent, allowing the case to proceed past Synovus's Motion to Dismiss.
Furthermore, Synovus contends that, under the Uniform Commercial Code (UCC) and case law, repayments and deposits cannot constitute fraudulent transfers, referencing cases like Pioneer Liquidating Corp. and others. The Trustee argues that these precedents are irrelevant and lack binding authority in Florida, and that they do not provide an absolute defense against fraudulent transfer claims. The Court agrees, stating it is premature to dismiss the Trustee's claims based on these arguments. Synovus also cites Florida case law suggesting that payments to creditors cannot be fraudulent transfers, but the Court has yet to evaluate these claims fully.
The Court finds that Synovus has misapplied the precedents in its argument. The case of Jacksonville Bulls does not support LaMarca's claim that her status as a creditor negates intent to defraud. Jacksonville Bulls clarifies that if a judgment debtor sells assets for fair value, the transaction is not fraudulent unless there is evidence of intent to favor particular creditors over others. Transfers that favor some creditors but not all are termed 'preferential transfers' and are not inherently fraudulent. In the current case involving Bifani and LaMarca, the transfer was not a preferential transfer, as there was no indication that Bifani received above-market compensation to selectively pay LaMarca. Therefore, the Court cannot determine if the transfers constitute fraudulent transfers based solely on the pleadings at this stage, leading to the decision not to dismiss Counts I, IV, and VII.
Furthermore, Synovus contends that the Complaint lacks evidence of a genuine check kiting scheme despite the Trustee's claim of a "massive check kiting scheme." The examples provided by the Trustee show that checks were paid on the same day deposits were made, indicating a consistent effort to ensure deposits covered checks rather than demonstrating fraudulent kiting. Synovus argues that the Complaint does not establish any kited float used for Repayments and Deposits, as the alleged events occurred over different time frames. In response, the Trustee asserts that the nature of the funds used in the transfers is not crucial; rather, Mongelluzzi’s intent is the primary concern.
The Trustee's allegations regarding fraudulent activities extend beyond just the kite examples from January to April 2010, asserting that Frank Mongelluzzi and others engaged in such schemes with intent from 2007 to 2010. The Court declines to resolve factual disputes at this stage, determining that the Amended Complaint contains sufficient detail to survive Synovus's Motion to Dismiss under Rule 12(b)(6). The claims in Counts I, IV, and VII are based on the actual intent to hinder or defraud creditors, as outlined in Florida Statute § 726.105(1)(a). Synovus's additional arguments—asserting that kiting primarily injures banks, limiting Trustee recovery, and the potential for fraudulent transfer claims against all of Mongelluzzi's creditors—do not warrant dismissal and may be revisited at the summary judgment stage.
Synovus further contends that it owes no duty to the Trustee as a private litigant, claiming any duty to monitor illicit activities would be owed to the government, not the Trustee. Synovus defends its actions as standard banking practice, asserting that pursuing a controlled exit strategy with a distressed debtor indicates no ill intent regarding the transactions. The Trustee's contradictory claims about Synovus's actions regarding an overdraft of $15 million are noted, highlighting inconsistency in the Trustee's position.
Synovus challenges the Trustee's claims in Counts I, IV, and VII, contending that the allegations of Frank Mongelluzzi's intent to defraud creditors through Repayments and Deposits are conclusory and lack factual support, particularly concerning the 2007-2011 period. Synovus attempts to frame issues related to its due diligence and monitoring as questions of the Trustee's standing to bring these claims. However, the Court disagrees, noting that none of Synovus's cited cases establish a lack of standing based on the bank's duty to the government rather than third parties. The Court views Synovus's actions regarding the transfers as relevant to assessing good faith, a defense that is currently not in dispute. Consequently, the Court denies Synovus's motion to dismiss Counts I, IV, and VII.
In Counts II, III, V, VI, VIII, and IX, the Trustee alleges constructive fraud under Florida statutes. Synovus briefly argues for dismissal, claiming the Trustee has not shown that reasonably equivalent value was not exchanged for the transfers. The Trustee counters that Synovus's assertions lack support and that the question of fair consideration is typically a factual issue. The Court agrees with the Trustee, finding that the allegations regarding the exchange of value are sufficient to survive dismissal at this stage, suggesting that the matter will be reevaluated at the summary judgment phase when more evidence is available.
Lastly, in Counts X, XI, and XII, which involve claims for fraudulent transfer related to the Able Body Labor Sale Transfers, Synovus argues that the Trustee lacks standing to pursue these claims. The Court will need to evaluate this assertion further.
Frank Mongelluzzi’s ownership interests in the Able Body Labor Businesses are legally separate from the businesses' assets, meaning transfers of those assets do not constitute transfers of Mongelluzzi's property and thus cannot be recovered by the Trustee. The Trustee counters that the Amended Complaint asserts the Mongelluzzis owned and operated the businesses, which generated significant revenue. It claims that the Defendant pressured the Mongelluzzis during the sale of those assets to MDT and Traína as part of a strategy to repay debts. The Trustee argues that Mongelluzzi’s financial interests in the businesses qualify as a “debtor’s property interest” under fraudulent transfer laws, granting the Trustee standing to recover such interests. Citing In re IFS Fin. Corp., the Trustee emphasizes that control over assets can demonstrate ownership, regardless of legal title. Synovus contends that the Trustee must assert substantive consolidation claims to establish standing but fails to provide authority for this requirement. The Trustee's allegations suggest Mongelluzzi had control over the business assets, which may qualify as an interest in the transferred property. The Court will not assess Mongelluzzi’s interests at this preliminary stage, as these matters are better suited for summary judgment. Regarding allegations of fraud, Synovus claims that the Amended Complaint lacks factual support for asserting fraudulent intent on Mongelluzzi's part. It argues the transfers were for fair value, citing sale prices of up to $55 million in 2010 and over $48 million in 2013.
Synovus asserts that the Amended Complaint fails to establish constructive fraud in the transfer of the Able Body Labor Businesses’ assets, arguing it does not demonstrate a lack of exchange of reasonably equivalent value. Instead, Synovus claims the Complaint illustrates two separate sales of similar values. The Court determines that issues of intent and the exchange of value cannot be resolved at the motion to dismiss stage. The Trustee has sufficiently pled claims, allowing further discovery. Synovus also contends it was not a transferee of the assets, claiming the transferees were MDT/Michael Traína and True Blue, Inc., arguing Florida law does not allow liability for participation in negotiations. However, the Trustee argues that recovery for a fraudulent transfer can be sought from the benefitting party, maintaining that Synovus benefited from the transfer as the sole recipient of approximately $42 million from the transaction. The Court finds the Trustee’s allegations sufficient to deny Synovus's motion regarding Counts X, XI, and XII.
Regarding Synovus's argument under Rule 12(b)(7) about failure to join necessary parties, it claims that the chapter 7 trustee Christine L. Her-endeen and MDT/Traína are essential because they dispute the characterization of the transfers. Under Rule 19, parties must be joined if their absence prevents complete relief or creates a substantial risk of inconsistent obligations. The burden lies on the movant to illustrate the interests of absent parties, and the Court must assess whether joinder is feasible based on the practical effects on the litigation.
The court must determine, under Rule 19(b), whether the action should proceed or be dismissed due to the absence of indispensable parties. Synovus contends that Trustee Herendeen has an interest in the action because the transfers in question involved property owned by the Able Body Labor Businesses, asserting that proceeding without Herendeen would expose Synovus to significant risks of inconsistent obligations regarding the alleged fraudulent transfer. Synovus further argues that MDT/Traina is a necessary party since the Trustee claims they received the fraudulently transferred assets, and their absence would impair MDT/Traina's ability to protect their interests in the Asset Purchase Agreement. The Trustee counters that Synovus’s claims do not sufficiently demonstrate that MDT or Traina are necessary parties, emphasizing that being potentially affected by the outcome does not equate to indispensability. The Trustee asserts that recovery against Synovus is appropriate as the beneficiary of the transfer, with no shared liability to determine with MDT. The court concludes that MDT, Traina, and Herendeen are not necessary parties under Rule 19(a), as their absence does not hinder the court’s capacity to provide complete relief among existing parties. The court can hold Synovus liable for the fraudulent transfer directly and establish the relevant relationships and facts without joining MDT or Traina.
The Court affirms the Trustee’s position that a fraudulent transfer action is distinct from a contract action, even when it relates to a contract. Consequently, MDT, Traína, and Trustee Herendeen are not deemed “necessary parties” under Rule 19(a), negating the need for further analysis under Rule 19(b). Synovus, while challenging the Trustee’s failure to join these parties, does not claim that such failure warrants dismissal of Counts X, XI, and XII but rather insists that their presence is essential for resolving the claims. Under Rule 12(b)(7), the burden is on Synovus to show why the absent parties cannot be joined; however, Synovus has not provided reasons for their non-joinder, leading the Court to deny the Motion to Dismiss. As a result, Synovus is ordered to respond to the Amended Complaint by July 11, 2014. The Trustee's Amended Complaint alleges that Traina and MDT breached a side agreement with the Mongelluzzis regarding profit sharing after selling assets. The Court previously directed the parties to explain why the case should not be referred to Bankruptcy Court, but both parties opposed this referral. Additionally, each count of the Amended Complaint cites 11 U.S.C. 544 and Fla. Stat. 726.108, which allows creditors to seek avoidance of fraudulent transfers. Synovus argues that it acted merely as a conduit for deposited funds, but the Court agrees with the Trustee that this is a factual issue inappropriate for resolution at the motion to dismiss stage. Synovus has conceded that defenses of mere conduit and good faith are not currently relevant. Lastly, Fla. Stat. 726.106(1) outlines the conditions under which a transfer is considered fraudulent to a creditor.
