DEBTOR CASE NO. 97-70219


VS. ADV. NO. 99-7016






This matter has come before the Court on the defendants' Motions to Dismiss and Motion to Strike (Doc. #14), filed herein on September 14, 1999. Defendants Knox Creek Coal Corporation ("Knox Creek") and The Black Diamond Company ("Black Diamond") were not named in the plaintiff's original Complaint (Doc. #1). Knox Creek was formerly known as United Coal Company; Black Diamond was formerly known as Wellmore Coal Corporation. In addition, two other defendants named in the original Complaint, McAndrews Development, Ltd. and Harbour Marine, Inc., have merged into defendant Belfry Coal Corporation ("Belfry"), and no longer exist. The plaintiff filed her Amended Complaint (Doc. #11) clarifying the identities of the defendants. The Amended Complaint seeks to have certain releases entered into by the debtor and the various defendants set aside as fraudulent conveyances and as having been obtained by fraud and duress and coercion. The Court has jurisdiction of this matter pursuant to 28 U.S.C. §1334(b); it is a core proceeding pursuant to 28 U.S.C. §157(b)(2)(H).

Review of the record in this case reveals that the debtor filed a Chapter 11 petition in this Court on March 3, 1997. The case was converted to a Chapter 7 on October 16, 1997, and the plaintiff was appointed as interim trustee on October 23, 1997. The plaintiff filed her original Complaint in this matter on June 17, 1999; she filed her Amended Complaint on September 2, 1999. The defendants have moved to dismiss Counts I and II of the Amended Complaint on the basis of the running of the statute of limitations. Counts III and IV are attacked as having failed to state a claim. The Court will address the statute of limitations question first.

Count I is brought pursuant to 11 U.S.C. §548(a)(2), now renumbered as §548(a)(1)(B), and Count II pursuant to §548(a)(1), now renumbered as §548(a)(1)(A). These provisions allow the trustee to avoid various transfers of the debtor as fraudulent. One of the limits on her avoiding powers, however, is that an action pursuant to §548 must be filed within the time limits set out in 11 U.S.C. §546. That provision states in pertinent part:

(a) An action or proceeding under section 544, 545, 547, 548, or 553 of this title may not be commenced after the earlier of--

(1) the later of--

(A) 2 years after the entry of the order for relief: or

(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202 or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or

(2) the time the case is closed or dismissed.

The last date for bringing this action was therefore March 3, 1999. As set out above, it was not filed for more than three months after that date.

The trustee apparently does not dispute the fact that this action was brought out of time for purposes of §548. She argues, however, that the Court should invoke the doctrine of equitable tolling because, she alleges, counsel for the defendants requested that no suit be filed until settlement negotiations could be concluded. This allegation is supported by an affidavit tendered by James P. Pruitt, Jr., one of the attorneys representing the plaintiff. The defendants counter that they made no such request of the plaintiff, and that in fact they made it clear early on that they were not interested in settling this matter. They support their position with affidavits of their counsel. Copies of correspondence among counsel for the parties have also been filed.

The doctrine of equitable tolling has been described in In re Hosseinpour-Esfahani, 198 B.R. 574 (9th Cir.BAP 1996), as

a creation of common law that has been read into every statute of limitations. Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S.Ct.582,585, 90 L.Ed. 743 (1945). The Ninth Circuit has held that in certain cases, the doctrine of equitable tolling may be applied to toll the two year statute of limitations contained in §546(a)(1). In re United Ins. Management, Inc., 14 F.3d 1380, 1384 (9th Cir. 1994).

Under the doctrine of equitable tolling, 'where the party injured by the fraud remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.' Id. (citing Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363, 111 S.Ct.2773, 2782, 115 L.Ed.2d 321 (1991).

At 578. The plaintiff urges the Court to apply the analysis employed by the court in In re Gurney, 192 B.R. 529 (9th Cir.BAP 1996), where the priority period in regard to a tax debt was equitably tolled to keep the debtor, a serial filer, from evading her tax liabilities. Such an analysis would not be apropos in the context of this Court's consideration of allegations of fraudulent transfers. The statutory limitations period that applies to such actions must be met, unless the plaintiff can show that the defendants concealed the fraud, or that they engaged in some affirmative conduct calculated to keep the plaintiff from filing an action until after the limitations period had run. See Leake v. University of Cincinnati, 605 F.2d 255 (6th Cir. 1978).

The plaintiff bases her entire equitable tolling argument on the assertion that counsel for the defendants asked that she not file an action until after settlement negotiations had been concluded. They deny that such a request was made. Further, she does not contend that she and the defendants entered into an agreement on this subject, nor that they promised that they would not contest the fact that a suit was filed out of time, or otherwise use the time to prejudice her. She simply has not made a case for equitable tolling, and Counts I and II of her Amended Complaint must therefore be dismissed as having been filed out of time.

As concerns Counts III and IV, the defendants seek their dismissal as counts which fail to state a claim. Count III alleges that the subject releases should be set aside under state law as having been induced by fraud. The elements of fraud have been enunciated by the court in Cresent Grocery Co. v. Vick, 240 S.W. 388, Ky. (1922), as follows:

We have adopted the general rule that an action cannot be maintained for fraud or deceit unless it be made to appear (1) that defendant made a material representation; (2) that it was false; (3) that when he made it he knew it was false, or made it recklessly, without any knowledge of its truth and as a positive assertion; (4) that he made it with the intention of inducing plaintiff to act, or that it should be acted upon by the plaintiff; (5) that plaintiff acted in reliance upon it; and (6) that plaintiff thereby suffered injury.

At 389. The plaintiff has set these elements out in the body of her Amended Complaint.

The Amended Complaint identifies the parties to the releases as the debtor and "the United Companies." The defendants respond that the plaintiff therefore has not met the requirement of FRCP 9(b), made applicable in bankruptcy by FRBP 7009, that "the circumstances constituting fraud .... be stated with particularity." They point out that the plaintiff has not pleaded any of the elements of fraud against United, Knox Creek, United Supply or Black Diamond. They contend that at the very least she must allege a material representation by each of these defendants that was false, and that was relied upon by the debtor to its detriment.

The plaintiff responds that all the defendants were parties to one or more of the releases, and that the Amended Complaint clearly articulates that she seeks to set aside the releases in regard to all the defendants, identified in the Amended Complaint as subsidiaries or affiliates of The United Company. (The Court would also point out that in the first paragraph of the Amended Complaint, the plaintiff, after naming each individual defendant, states that they are "hereinafter referred to as the 'United Companies.'")

In a recent case with many elements similar to those found in the instant matter, including multiple defendants who argued failure to comply with FRCP 9(b), the court in In re Everfresh Beverages, Inc., 238 B.R. 558 (Bkrtcy.S.D.N.Y. 1999), stated:

In the bankruptcy context, however, courts have noted that Rule 9(b) should be interpreted liberally, particularly when the trustee, a third party outsider to the fraudulent transactions is bringing the action. ....

. . . . . .

Even if the Proposed Amended Complaint was not particular as to each defendant's role in the alleged fraudulent conveyances, there is an exception to the general rule where the defendants are affiliates and insiders of an entity accused of committing fraud. In that instance, each individual's conduct need not be specifically detailed since it is assumed that the parties are aware of the fraudulent activities of the others and responsible for them. (Cites omitted.)

At 581-582. This Court believes that this reasoning is applicable herein, and therefore is of the opinion that Count III was pled with sufficient particularity to satisfy the requirements of FRCP 9(b) and avoid a dismissal on that basis.

The defendants make similar arguments in regard to Count IV which alleges that the releases should be set aside as having been obtained under duress. They also contend that the Amended Complaint shows as a matter of law that a claim for breach of contract cannot be asserted against United, Knox Creek, United Supply and Black Diamond because the Amended Complaint only alleges that the debtor had contracts with Belfry and McAndrews. They request that this count be dismissed pursuant to FRCP 12(b). In Columbia Natural Resources v. Tatum, 58 F.3d 1101 (6th Cir. 1995), the court, in determining whether a district court had correctly dismissed a suit pursuant to FRCP 12(b)(6), stated:

The district court must construe the complaint in a light most favorable to the plaintiff, accept all of the factual allegations as true, and determine whether the plaintiff undoubtedly can prove no set of facts in support of his claims that would entitle him to relief. .... When an allegation is capable of more than one inference, it must be construed in the plaintiff's favor. .... Hence, a judge may not grant a Rule 12(b)(6) motion based on a disbelief of a complaint's factual allegations. (Cites omitted.)

At page 1109. The court in In re Barr, 188 B.R. 565 (Bkrtcy. N.D.

Ill. 1995), held similarly that

[f]or Defendants to prevail on their Motion to Dismiss, it must clearly appear from the pleadings that the Plaintiffs can prove no set of facts in support of their claims which would entitle them to relief. .... The Court must consider both pleaded facts and reasonable inferences drawn from pleaded facts in a light most favorable to Plaintiff when reviewing the Defendants' Motion to Dismiss. ....

Under federal 'notice' pleading requirements, pleadings need contain 'a short and plain statement of the claim showing that the pleader is entitled to relief.' Fed.R.Civ.P. 8(a) (as made applicable to this Adversary proceeding by Fed.R.Bankr.P. 7008); .... 'Notice' pleading merely requires that plaintiff give notice to defendant of the theory behind claims alleged and the basic facts supporting those allegations. .... Federal pleadings should therefore be liberally construed. .... So long as fair notice has been given and the court can glean an actionable claim from the complaint, the court must entertain the party's case. .... (Cites omitted.)

At 570. Applying this standard to the facts pleaded in the Amended Complaint, as well as the reasonable inferences to be drawn from those facts, it is clear that this Court must overrule the Motion to Dismiss Count IV.

Finally, the defendants ask the Court to strike paragraphs 25 through 28 of the Amended Complaint pursuant to FRCP 12(f). The paragraphs in question state as follows:

25. The Contract Mining Agreement for Narrows Branch No. 1 required Belfry to pay for all coal 'mined, delivered, and accepted', yet Belfry imposed an arbitrary 15% reduction for 'rejects' on approximately 1,080,000 tons of the coal delivered by Narrows Branch (and accepted by Belfry), even though 100% of this coal was sold by Belfry to its customers. The contract also required Belfry 'to pay or cause paid all severance taxes, reclamation taxes and fees, Black Lung taxes...' and required Belfry 'to pay or cause paid all coal royalties.'

26. On information and belief, the application of the arbitrary reject percentage and the deliberate under-weighing of the coal described above resulted in an underpayment of the federal Black Lung excise tax (26 USC §4121) and the federal reclamation fee (30 USC §1232), both of which are calculated on a per ton basis.

27. On information and belief, the under reporting of coal mined also resulted in underpayment of Kentucky severance taxes and royalties due the lessors of the coal.

28. Narrows Branch may be an 'operator' for the purposes of the federal statute and a 'taxpayer engaged in severing and/or processing coal' for the purposes of the Kentucky severance tax statute (KRS§143.020) and, consequently, is potentially liable for all the taxes and royalties not paid by Belfry. Narrows Branch may not only be liable for the taxes and fees, its failure to pay them may result in the posting of Narrows Branch and Darrell Williams on the federal applicant violator system and may prevent their mining in the future. It is not possible to estimate the amount of the underpayment at this time, but it could be in excess of $1,350,000.00 [1,080,000 tons x $1.10/ton (Black Lung excess tax) + 1,080,000 x $0.15/ton (reclamation tax)].

The defendants contend that these paragraphs constitute allegations which are "immaterial, impertinent and scandalous," and have no bearing on the plaintiff's actions to set aside the releases. In Pessin v. Keeneland Association, 45 F.R.D. 10 (E.D.Ky. 1968), the court stated:

Rule 12(f), Rules of Civil Procedure, 28 U.S.C., provides that a party may move the court to strike from any pleading any insufficient defense or any redundant, immaterial, impertinent, or scandalous matter. Such motions will not ordinarily be granted unless it is apparent that the allegations sought to be stricken can have no possible relation to the controversy. .... Such motions are considered as time wasters and are not favored. .... Where the allegations cannot harm the defendants, under proper judicial supervision, they should be permitted to remain in the pleading. .... The application of this rule, which is in the discretion of the trial judge, should be resorted to only where the pleading contains such allegations that are obviously false and clearly injurious to a party to the action because of the kind of language used or that the allegations are unmistakably unrelated to the subject matter. (Cites omitted.)

At 13. See also Sec. Inv. Protection v. Stratton Oakmont, Inc., 234 B.R. 293, 336 (Bkrtcy.S.D.N.Y. 1999). Based on this standard, the defendants have not made a case for striking paragraphs 25 through 28. The remainder of the defendants' arguments concerning these paragraphs appear to be based on the assumption that the plaintiff is making a claim for unpaid taxes and royalties. The Court does not read the Amended Complaint that way-the purpose of the Amended Complaint is to set aside the releases.

In consideration of all of the foregoing, it is therefore the opinion of this Court that the defendants' Motion to Dismiss Counts I and II of the Amended Complaint should be sustained, that the Motion to Dismiss Counts III and IV should be overruled, and that the Motion to Strike Paragraphs 25 through 28 should be overruled as well. An order in conformity with this opinion will be entered separately.


By the Court -

William S. Howard, Judge

Copies to:


James P. Pruitt, Jr., Esq.

D. Duane Cook, Esq.

Charles E. Shivel, Jr., Esq.