United States District Court, E.D. Kentucky, Northern Division
For Bank of America, N.A., successor by merger to - Lasalle Bank, National Association, Plaintiff: Christopher P. Schueller, Timothy P. Palmer, PRO HAC VICE, John R. Leathers, LEAD ATTORNEYS, Buchanan Ingersoll & Rooney - Pittsburg PA, Pittsburgh, PA.
For Corporex Companies, LLC, William P. Butler, Thomas E. Banta, Defendants: Earl K. Messer, LEAD ATTORNEY, PRO HAC VICE, Taft, Stettinius & Hollister, LLP - Cincinnati OH, Cincinnati, OH; Robert L. Rocke, PRO HAC VICE, Raul Valles, Jr., LEAD ATTORNEYS, Rocke, McLean & Sbar, P.A., Tampa, FL; Robert B. Craig, Taft, Stettinius & Hollister, LLP - Covington, Covington, KY.
MEMORANDUM OPNION AND ORDER
Amul R. Thapar, United States District Judge.
Much like board game enthusiasts engaged in a round of Monopoly, the participants in this litigation had one primary goal: to make money through developing property. And just as in the classic game of chance, key players in this litigation borrowed money from a bank and applied the funds toward developing real estate ventures. But there ends the similarity between the game and the financial transactions that gave rise to this case. A friendly round of Monopoly may, at worst, involve high rents (Boardwalk, in particular), unlucky dice rolls (" Luxury Tax" ) or even unfortunate card draws (" Go directly to Jail" ). The real estate development efforts here, however, had more serious consequences. The transactions spawned multiple civil actions in several district courts across the country to unwind alleged fraudulent conveyances made in different states.
Plaintiff Bank of America, N.A. (" the Bank" or " Bank of America" ), as successor to the original lender in this litigation, no longer wants to play the banker. Instead, Bank of America wants to undo fraudulent conveyances that it alleges a guarantor made in an attempt to avoid repaying its loans. The Bank also seeks damages for other injuries stemming from the guarantor's bad behavior. To these ends, Bank of America initiated this lawsuit against Corporex Companies, LLC (" Corporex Companies" ) and two of its officers--William P. Butler and Thomas Banta (collectively, " the defendants" ). The defendants moved to dismiss the action arguing that they are not liable to repay funds that they did not borrow or guarantee. See R. 25. Their motion raises a basic question: Does Bank of America's complaint state viable claims for relief? For the reasons below, the answer is yes.
For the purposes of the motion to dismiss, the Court takes all factual allegations in the complaint as true. See Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Between 2005 and 2008, Bank of America executed multi-million dollar loans to three business entities engaged in real estate development. See R. 21 ¶ ¶ 20, 21, 22 (naming as the " borrowers" CPX Olympic Building II, LLC, CPX Madison Place Office, LLC, and CPX Tampa Gateway OPAG, LLC). As part of the loan financing terms, the Bank obtained a guaranty from Corporex Realty, a commercial real estate conglomerate with properties across the United States. See id. ¶ ¶ 15, 16 (alleging that Corporex Realty had a " national footprint" and " claimed to be one of the leading privately held, vertically-integrated owner/operators of commercial real estate in the country" ). Incidentally, Corporex Realty's officers, William P. Butler (" Butler" ) and Thomas Banta (" Banta" ), also owned and controlled the three borrowers. Id. ¶ ¶ 20, 21, 22 (noting that Butler " and/or Banta" owned and controlled borrowers CPX Olympic Building II, LLC, CPX Madison Place Office, LLC, and CPX Tampa Gateway OPAG, LLC).
The guaranty agreements provided in part that Corporex Realty--the patriarch of the Corporex family of businesses--would
repay the borrowers' loans. Id. ¶ 19. The guarantee agreements also contained assurances that Corporex Realty would not, except in limited circumstances, " sell, transfer, convey, or assign its assets." Id. ¶ 23; see also R. 21-1 ¶ 10. And in those limited circumstances, Corporex Realty would notify the Bank if it transferred assets to any Corporex family member in which Butler had a majority ownership interest. Id. ¶ 24.
But the guaranties and assurances proved to be illusory. Corporex Realty defaulted on each of the three loans it promised to repay. Id. ¶ 26. In response, Bank of America resorted to litigation. In 2011, the Bank first filed suit against Corporex Realty for defaulting on its guarantee obligation for the CPX Madison Place Office, LLC loan. Id. ¶ 27. Later that year, the Bank also filed foreclosure actions against each of the borrowers. Id. ¶ 28. Of these four proceedings, the Bank remains active only in the two involving the CPX Madison Place Office, LLC loan. Id. ¶ 29 (stating that the Bank sold to a third party the rights to maintain foreclosure actions against CPX Olympic Building II, LLC and CPX Tampa Gateway OPAG, LLC).
After the Bank filed its complaints, Corporex Realty began transferring assets to its relatives in the Corporex family--including defendant Corporex Companies--without fair consideration and without informing the Bank. Id. ¶ 31. The individuals who allegedly orchestrated the transfers were none other than Butler and Banta, who served as officers, directors, and owners of both Corporex Realty and Corporex Companies. Id. ¶ ¶ 10, 11, 31. The Bank alleges that Corporex Realty quietly disposed of its real property, equity in other companies, cash, and " other assets" in multiple states, including Kentucky. Id. ¶ ¶ 32-33. But the Bank did not specify in its complaint the type of property or parties involved in each transfer. Nor did the Bank identify the exact location of the property or the dates of the transactions. See id. Bank of America gave one example of a fraudulent conveyance: Corporex Realty changed the ownership of equity and real estate from one of its affiliates--Corporex Select Service Hotels--to Corporex Companies. Id. ¶ 34.
Corporex Realty suffered economically after disposing of its assets without fair consideration and without informing its lender, Bank of America. See id. ¶ 4 (noting that Corporex Realty's net worth fell and that its cash reserves shrank). Before long, Corporex Realty found itself teetering on the edge of insolvency. Bank of America claims that Corporex Realty is undercapitalized and unable to repay its multi-million dollar debt to the Bank. Id. ¶ 5. As Corporex Realty withered, Corporex Companies emerged from the shadows. Flush with property and other assets transferred from the dying Corporex Realty, Corporex Companies assumed the role of the head of the Corporex family. Id. ¶ 17 (claiming that after the transfers, Corporex Companies " usurped the business role of Corporex Realty and is now the primary operating . . . entity in the Corporex real estate empire" ). Corporex Companies rose from the ashes of Corporex Realty, and shares its ownership, management, and physical location. Id. ¶ 18. In this lawsuit, Bank of America wishes to undo this recent metamorphosis of Corporex Realty into Corporex Companies.
The defendants contend that Bank of America failed to state any claims for relief in its complaint. Accordingly, they move to dismiss all nine counts falling into five categories of claims: fraudulent conveyance, successor liability, fraud by omission, breach of fiduciary duty, and aiding
and abetting the commission of torts. See R. 25-1 at 9 (moving to dismiss the counts under Federal Rule of Civil Procedure 12(b)(6)). For the reasons below, the defendants succeed in dismissing only some of the counts.
I. Bank of America's fraudulent conveyance claims do not survive the motion to dismiss.
The parties first dispute which state's law governs Bank of America's fraudulent conveyance claims, then disagree whether the Bank states a claim for relief under that law. Because Bank of America invokes diversity jurisdiction in its complaint, the choice-of-law rules of Kentucky apply to this dispute. Nat'l Union Fire Ins. Co. v. Watts, 963 F.2d 148, 150 (6th Cir. 1992) (holding that federal courts exercising diversity jurisdiction must follow the choice of law principles articulated by the highest court in the state in which they sit).
Bank of America argues that even under Kentucky choice-of-law rules, the question of which law governs a fraudulent conveyance claim is complex. The Bank claims that the answer depends on the common-law origins of the cause of action or the type of property that was fraudulently transferred. Because discovery will reveal important details about the fraudulent conveyances needed to answer the choice-of-law question, the Bank maintains that the choice-of-law dispute is premature. See R. 26 at 16. But, as explained below, Kentucky law applies after ...