STATES BANKRUPTCY COURT
DISTRICT OF KENTUCKY
DISSOLUTION CO. f/k/a
CASE NO. 02-14261
L. BERMAN, solely in his
as the Liquidating Trustee of the
Liquidating Trust; INTERNATIONAL
GROUP, INC. f/k/a Newcoal LLC; ICG
LLC; LAUREN LAND COMPANY
ADV. NO. 04-1684
OF JOSEPH D. WEDDINGTON;
C, ADAIR, d/b/a A.C.E. Development
and Klondike Mining, Inc.;
MINING, INC.; KENTUCKY LAND
EXPLORATION COMPANY; JOHN
JANE DOES 1-100
matter has come before the court on the Defendants’ Motion to Dismiss filed
on January 24, 2005, which seeks dismissal of the Plaintiffs’ Complaint
pursuant to Federal Rule of Bankruptcy Procedure 7012.
This Rule makes Federal Rule of Civil Procedure 12(b)-(h) applicable in
bankruptcy. Although the
Defendants do not so state, the court assumes that their motion is in the
nature of a Rule 12(b)(6) motion to dismiss for failure to state a claim upon
which relief can be granted. The
Defendants state in fn. 1 of their motion that to the extent it relies on
matters outside the Complaint, it should be treated as a motion for summary
judgment. The motion also denies
that this is a core proceeding. The
Defendants filed a memorandum in support of the Motion to Dismiss on February
Plaintiffs filed their Response to Motion to Dismiss on February 18, 2005.
They filed a memorandum opposing dismissal on February 28, 2005; the
Liquidating Trustee filed a separate memorandum opposing dismissal on the same
date. This matter was heard on
March 2, 2005, and taken under submission for decision.
This court has jurisdiction of this matter pursuant to 28 U.S.C.
§ 1334(b); the Plaintiffs have alleged that it is a core proceeding
pursuant to 28 U.S.C. § 157(b)(2).
set out by the Defendants, in 1996 the late Joseph D. Weddington, Sr.
initiated litigation in the Perry Circuit Court (Civil Action No. 96-CI-00489)
against certain companies and their successors who became Debtors herein
(“the Perry Circuit Court Action”). Subsequently,
Defendants Kentucky Land and Exploration Company (“KLE”), and Ezra C.
Adair, d/b/a A.C.E. Development Company and Klondike Mining, Inc.
(collectively “Adair”), intervened as plaintiffs in the Perry Circuit
Court action. One of the claims
asserted by these Defendants in that action related to the ownership of,
rights or interest in, certain real property known as the DeGroot Land Patents
( the “Title Claims”).
November 13 and 14, 2002 the former Debtors filed Chapter 11 petitions.
The cases were ordered to be administered jointly.
Eventually the Debtor entities were divided into those that would
reorganize and those that would be liquidated (together “the Debtors”).
On September 16, 2004, a Joint Plan of Reorganization and a Joint
Liquidating Plan (together, as modified, “the Plans”) were confirmed by
separate orders (“the Confirmation Orders”).
Pursuant to the Plans, the Confirmation Orders and the Liquidating
Trust Agreement executed by the Plaintiff Liquidating Trustee (“the
Trustee”) and the Debtors, the Trustee was appointed as of October 1, 2004.
May 13, 2004, prior to confirmation of the Plans, the Debtors sought an order
concerning auction procedures and the sale of various properties.
The Defendants herein filed objections to the proposed sale on the
grounds that any proposed sale of the real property which was the subject
matter of the Perry Circuit Court Action could not be sold free and clear of
the Title Claims of the Defendants. The
order approving auction procedures entered on June 16, 2004 addressed these
concerns, preserving the Defendants’ right to object to the Debtors’
ownership of the disputed property and providing that an announcement would be
made at the auction concerning the pending lawsuit.
Debtors filed their two Chapter 11 Plans on July 11, 2004.
The Defendants filed objections to the confirmation of these plans on
the grounds that the proposed sale of the subject property appeared to be free
and clear of the Title Claims, and on the basis of the Plans’ provisions
requiring dismissal with prejudice of all litigation, as defined therein,
against the Debtors. The
Defendants argued that confirmation of the Plans would mean the loss of their
Title Claims, and that loss would have a res judicata effect in the Perry
Circuit Court Action. The
Defendants’ objections were sustained at the confirmation hearing on August
31, 2004. The court approved the
sale of the Debtors’ assets and entered orders confirming both Plans on
September 16, 2004. A separate
order resolving the objections of the Defendants was entered on September 27,
September 27, 2004 order supplemented the Plans, the sale order and the
Confirmation Orders by providing that any real property interest conveyed
under the sale order that is the subject of the Perry Circuit Court Action is
subject to the Title Claims and allowing that litigation to proceed in situs,
but preserving the rights and powers “that the Debtors may have or other
parties may have or actions they may bring under the Bankruptcy Code or other
applicable law not inconsistent herewith.”
September 30, 2004 was established as the effective date of the
Debtors’ Plans and the sale took place, including the sale of the Debtors’
interest, if any, in the subject real property.
On November 24, 2004, the Plaintiffs filed this proceeding.
motion to dismiss made pursuant to Federal Rule of Civil Procedure 12(b)(6),
made applicable in bankruptcy by Federal Rule of Bankruptcy Procedure 7012(b),
is for failure to state a claim upon which relief can be granted.
As set out in Perniciaro v. Natale (In re Natale), 136 B.R. 344
(Bankr. E.D. N.Y. 1992), the court, in determining such a motion
must presume that the factual allegations of the complaint
are true and all reasonable inferences are to be made in favor of the
nonmoving party. Jenkins v.
McKeithen, 395 U.S. 411, 421-22, 89 S.Ct. 1843, 1848-49, 23 L.Ed.2d 404
(1969). The purpose of a motion
to dismiss is to assess the legal sufficiency of a complaint, not to judge the
weight of evidence which might be offered in its support. Geisler v. Petrocelli, 616 F.2d 636, 639 (2nd Cir.
However, on a
motion to dismiss, it is clear that the court does not have to accept every
allegation in the complaint as true in assessing its sufficiency.
5A Charles A. Wright & Arthur R. Miller, Federal Practice and
Procedure §1357, at 311-18 (2d ed. 1990).
The allegations of a complaint must be "well-pleaded" and
thus the court need not accept "sweeping and unwarranted averments of
fact." Haynesworth v.
Miller, 820 F.2d 1245, 1254 (D.C.Cir. 1987). Legal conclusions, deductions or opinions couched as factual
allegations in a complaint are not given a presumption of truthfulness.
2A James Wm. Moore et al., Moore's Federal Practice ¶12.07[2.-5],
at 12-63 to 12-64 (2d ed. 1991). A
complaint is subject to dismissal if it fails to allege a required element
which is necessary to obtain relief sought.
Moore, supra, at 12-68; (cite omitted).
A motion under Fed.R.Civ.P. 12(b)(6) should also be granted if a bar to
relief is apparent from the face of the complaint.
Moore, supra, at 12-68 to 12-69.
Id. at 348. The court's task
under Rule 12(b)(6) is then to determine the sufficiency, and not the merits,
of the Complaint. See also Am.
Express Travel Related Serv. Co. v. Henein, (E.D. N.Y. 2001), and Allard
v. Weitzman (In re DeLorean Motor Co.), 991 F.2d 1236 (6th Cir. 1993).
within Complaint seeks to avoid the Title Claims in Count I and to disallow
the Defendants’ damage claims arising from the Perry Circuit Court Action in
Count II. The Complaint alleges
at paragraph 19:
The Title Claims constitute transfers or alleged interests in
property of the Debtors that are avoidable by one or more of the Plaintiffs
under the provisions of 11 U.S.C. § 544(a)((3) in that the same would be
avoidable by a hypothetical bona fide purchaser of the real property
that is the subject of this Complaint on the Petition Dates under the
provisions of Kentucky Revised Statute 382.440.
KRS 382.440 is the Kentucky lis pendens statute.
It basically provides that unless notice (in the form of a memorandum)
is filed in regard to any action involving real estate, any party who
qualifies as a subsequent bona fide purchaser for value and without notice is
not charged with knowledge of the action.
Bankruptcy Code section 544(a)(3) gives a trustee the rights and powers
of a bona fide purchaser as of the date of the filing of a petition.
The Confirmation Orders transferred to the Plaintiffs any avoidance
actions pursuant to section 544 that would have been available to the Debtors
(as debtors in possession). Such
transfers are sanctioned under Bankruptcy Code section 1123(b)(3)(B).
The Plaintiffs therefore have standing to bring avoidance actions in
Section 544 gives the trustee the power to avoid “any transfer of
property of the debtor or any obligation incurred by the debtor that is
voidable by . . . a bona fide purchaser of real property[.]” 11 U.S.C.
§ 544(a)(3). Armed with
this power, the trustee may avoid preferential transfers, fraudulent
transfers, and certain post-petition transfers pursuant to Bankruptcy Code
sections 547, 548 and 549 respectively. The
Plaintiffs seek to “avoid” the Title Claims as “transfers” or
“interests in property” based solely on the fact that no lis pendens
notice was filed in regard to the Perry Circuit Court Action.
The failure to file such a notice gives the Plaintiffs the status of
bona fide purchasers pursuant to KRS 382.440.
The allegation of failure to file a lis pendens notice does not
constitute an allegation of a transfer. It
is not enough for the Plaintiffs to allege that they have the status of bona
fide purchasers; they must also allege that there is a voidable action upon
which they may exert their powers. The
definition of a voidable action is found in section 544, as set out above, and
that definition is not satisfied here. The
record is devoid of evidence that the Debtors transferred any property or any
interest in property to the Defendants or incurred any obligation in regard to
the Defendants. There has been no
fixing of an interest on the part of the Defendants in regard to any property
of the Debtors; they have no lien, no mortgage, no security interest of any
kind that was granted to them by the Debtors.
In short, there is nothing in regard to the Title Claims for the
Plaintiffs to avoid.
therefore appears to the court that while the within Complaint makes a bare
allegation of a required element, i.e., a transfer, this allegation
constitutes a “sweeping and unwarranted averment of fact." Haynesworth
v. Miller, 820 F.2d at 1254, and appears to be more of a legal conclusion
couched as a factual allegation. The
court will therefore sustain the Defendants’ Motion to Dismiss as to Count I
of the Complaint.
II of the Complaint seeks disallowance of the Defendants’ claims asserted and
filed in the within bankruptcy case “based upon matters in the State Court
Action” (Complaint, p. 7). Since
this court has dismissed Count I of the Complaint, Count II must also be
dismissed to the extent that it is based on the Plaintiffs’ contention that
the Title Claims may be avoided. The
Plaintiffs argue in Count II that the Defendants’ claims are subject to
disallowance pursuant to Bankruptcy Code section 502(b)(1) as being
“unenforceable against the debtor or property of the debtor and property of
the debtor, under any agreement or applicable law. . .”
11 U.S.C. § 502(b)(1). Since
the Title Claims may not be avoided, the question of whether the Defendants’
claims are enforceable against the Debtors has yet to be determined.
The Plaintiffs further argue that pursuant to Bankruptcy Code section
502(d), the claims are subject to disallowance as claims of a transferee of an
avoidable transfer. The dismissal of Count I negates this argument.
court has therefore concluded that Count II of the Complaint must be dismissed,
and, therefore, the entirety of the Complaint.
The dismissal is without prejudice in regard to the filing of objections
to the subject claims by the appropriate party or parties within the period set
out in paragraph 7.1 of the Plans. An
order in conformity with this opinion will be entered separately.
Bunch II, Esq.
S. Goodman, Esq.