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Mskp Oak Grove, LLC v. Carol Venuto

June 20, 2012

MSKP OAK GROVE, LLC, PLAINTIFF,
v.
CAROL VENUTO, INDIVIDUALLY AND AS EXECUTRIX OF THE ESTATE OF RALPH A. VENUTO, SR., ET AL. DEFENDANTS.



The opinion of the court was delivered by: Simandle, Chief Judge:

OPINION

I. INTRODUCTION

This action, in which Plaintiff alleges various violations of the New Jersey Uniform Fraudulent Transfer Act, N.J. Stat. Ann. § 25:2-20 et seq., and other causes of action arising under New Jersey law, is before the Court on Defendants' motion to dismiss the Amended Complaint for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). [Docket Item 20.] This is the second time the Court has considered such a motion in this action; Defendants previously moved to dismiss Plaintiff's original Complaint, which the Court granted without prejudice on August 8, 2011. [Docket Items 11 & 12.] The instant motion seeks to dismiss Plaintiff's Amended Complaint. [Docket Item 24.] In brief, this case involves the sale of substantially all of the assets of Defendant Hollywood Tanning Systems, Inc. ("HTS") to nonparty Tan Holdings, LLC in 2007 for approximately $40 million and a 25% ownership interest in Tan Holdings. Subsequent to this asset sale, HTS paid all creditors whose claims were due and owing, and then distributed approximately $16 million to its shareholders, Defendants Carol and Ralph A. Venuto, Sr.*fn1 , Ralph A. Venuto, Jr., Carol Rebbecchi, and Richard P. Venuto ("the shareholders"). Approximately a year after the asset sale to Tan Holdings and apparently at some point after the distribution to shareholders, Plaintiff, a commercial landlord in Florida, notified HTS that it was in default on a lease; payment of which Plaintiff has not been able to secure from any party. Consequently, Plaintiff seeks to have a portion of the 2007 distribution to the shareholders set aside as a fraudulent conveyance, improper distribution, or unjust enrichment.

The principal questions at issue in Defendants' motion are

(1) whether Plaintiff has alleged an intentionally fraudulent transfer with the requisite specificity and plausibility, (2) whether, at the time of the shareholder distribution, HTS's assets appeared sufficient to cover its liabilities, and (3) whether Plaintiff is collaterally estopped from pursuing its fraudulent transfer claims. As discussed below, the Court concludes that Plaintiff has sufficiently alleged the elements of an intentionally fraudulent transfer as well as a constructive fraudulent conveyance, but has failed to allege that HTS was insolvent at the time of the shareholder distribution. The Court will grant in part and deny in part Defendants' motion.

II. BACKGROUND

The facts described below are taken from those facts alleged in Plaintiff's Amended Complaint and from undisputedly authentic documents upon which Plaintiff relies in its Amended Complaint. See Pension Ben. Guar. Corp. v. White Consol. Indus., Inc., 998 F.2d 1192, 1195, n.1 (3d Cir. 1993).

Prior to the events alleged in this action, Defendant HTS was a New Jersey corporation that operated tanning salons and sold franchises and tanning equipment to independent tanning salons. Am. Compl. ¶¶ 7-8. In 2003, HTS leased a commercial retail space in a shopping center in Florida from a predecessor in interest to Plaintiff MSKP Oak Grove, LLC ("MSKP" or "Plaintiff"). Id. ¶ 19. In 2004, Plaintiff's predecessor consented to HTS's request to sublease the space to a franchisee of HTS (a non-party entity known as Altamonte Chick Shades, Inc.), though HTS remained liable on the lease in the event of Alamonte's default. Id. ¶¶ 20-21. Plaintiff acquired the landlord's rights under the lease agreement in January of 2007.

On April 18, 2007, HTS and Tan Holdings entered into an asset purchase agreement in which Tan Holdings acquired almost all of HTS's assets in exchange for payment to HTS of approximately $40 million, approximately 25% of the issued and outstanding preferred units of Tan Holdings, and certain contingent "earn out" payments that would be made to HTS only if Tan Holdings' earnings met certain thresholds within the first two years following the asset purchase. Id. ¶¶ 9-10, 12. HTS apparently remained liable on its lease with Plaintiff despite the asset sale to Tan Holdings. Id. ¶ 21 ("Hollywood Tanning remained liable on the lease" after subletting to its franchisee).

On June 22, 2007, the asset purchase agreement closed between Tan Holdings and HTS. Am. Compl. ¶ 15. After the deal closed, Defendant HTS used "much of" the $40 million acquisition price to settle all then-outstanding debts owed to creditors of HTS; Tan Holdings did not assume liability for such debts that were due and owing at the time of the closing. Id. ¶ 13, 16; Asset Purchase Agreement at ¶ 2.4(d). The remainder was distributed, some time thereafter not specified in the Amended Complaint, to the Defendant shareholders of HTS, in the aggregate amount of approximately $16 million. Id. ¶ 17.

After HTS had paid the company's debts that were due and owing at the time of the closing, and subsequently distributed the approximately $16 million to its shareholders, Defendant HTS's remaining assets were the approximately 25% ownership stake in Tan Holdings and the possibility of being paid specific "earn outs" should Tan Holdings meet certain earnings thresholds. Plaintiff does not allege sufficient facts from which the Court can estimate the approximate value of these assets, as no information about the aggregate valuation of Tan Holdings is alleged. However, the Court notes that one of the Defendants later said that the 25% ownership interest seemed to be of "substantial value" to the HTS shareholders at that time. Venuto June 18, 2010 Deposition at 27:5-10.*fn2

On July 3, 2008, Plaintiff notified Defendant HTS that its sublettor franchisee had defaulted on its lease. Id. ¶ 24. Plaintiff sued Defendant HTS and the franchisee Alamonte Chick Shades in state court in Florida to recover for breach of the lease. Id. ¶ 25. Plaintiff subsequently won a judgment against Defendant HTS in the Florida action for approximately $411,573, which remains unpaid. Id. ¶ 26-28. Tan Holdings, similarly, did not succeed after the acquisition; in May of 2009, it turned over its assets to its creditors. Id. ¶ 37. Defendant Ralph Venuto, Jr. described the company as having gone bankrupt. Venuto June 18, 2010, Dep. at 17:13. In addition to Plaintiff, at least 14 other landlord creditors have sought to collect on various liabilities of HTS after the shareholder distribution. Am. Compl. ¶ 39.

Plaintiff filed the original Complaint in this action on December 13, 2010, naming as defendants only the shareholder Defendants. [Docket Item 1.] Defendants moved to dismiss the Complaint for failure to state a claim, which the Court granted on August 8, 2011, dismissing the Complaint without prejudice to Plaintiff filing a motion for leave to amend to cure the defects of the original Complaint. [Docket Items 11 & 12.] Plaintiff thereafter moved to file an amended complaint, which Defendants did not oppose. Plaintiff's Amended Complaint, which added HTS as a Defendant, was subsequently docketed [Docket Item 24]; the Amended Complaint asserts six counts against Defendants: Counts One through Four involve claims under the New Jersey Uniform Fraudulent Transfer Act ("NJUFTA"), N.J. Stat. Ann. § 25:2-20 et seq. Count Five seeks to recover based on a claim that the shareholder distribution was an improper distribution under N.J. Stat. Ann. 14:6-12(1)(c); and the sixth count seek to recover under a theory of unjust enrichment. Defendants subsequently moved to dismiss again for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6).

III. DISCUSSION

A. Standard of Review

Pursuant to Rule 8(a)(2), a complaint need only contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Specific facts are not required, and "the statement need only 'give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'" Ericson v. Pardus, 551 U.S. 89, 93 (2007) (citations omitted). However, while a complaint is not required to contain detailed factual allegations, the plaintiff must provide the "grounds" of his "entitle[ment] to relief", which requires more than mere labels and conclusions. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007).

The Supreme Court has identified two working principles underlying the failure to state a claim standard: first, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Indeed, threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Id.

Second, a complaint must state a plausible claim for relief in order to survive a motion to dismiss; where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged - but it has not "show[n]" - "that the pleader is entitled to relief." Id. at 679. To survive a motion to dismiss, therefore, civil complaints must allege "sufficient factual matter" to show that a claim is facially plausible. This "allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. at 678.

After Iqbal and Twombly, the Third Circuit now requires that a district court presented with a motion to dismiss conduct a two-part analysis set forth in Iqbal: first, the factual and legal elements of a claim should be separated. The district court must accept all the complaint's well-pleaded facts as true, but may disregard any legal conclusions. Iqbal, 556 U.S. at 678-79. Second, a district court must then determine whether the facts alleged in the complaint are sufficient to show that the plaintiff has a "plausible claim for relief." Id. at 679. This "plausibility" determination will be "a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Id.

In addition, Rule 9(b) imposes heightened pleading standards for a complaint alleging fraud; Rule 9(b) applies to claims under the NJUFTA. Ford Motor Credit Co. v. Chiorazzo, 529 F. Supp. 2d 535, 538 (D.N.J. 2008). Rule 9(b) requires a party to "state with particularity the circumstances constituting fraud or mistake." This requirement is intended "to place the defendants on notice of the precise misconduct with which they are charged, and to safeguard defendants against spurious charges of immoral and fraudulent behavior." Seville Indus. Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984). Notably, the Third Circuit has stated that "[a]though Rule 9(b) falls short of requiring every material detail of the fraud such as date, location, and time, plaintiffs must use 'alternative means of injecting precision and some measure of substantiation into their allegations of fraud.'" In re Rockefeller Center Properties, Inc. Securities Litigation, 311 F.3d 198, 216 (3d Cir. 2002) (citations omitted).

In spite of Rule 9(b)'s heightened requirements, however, courts should be conscious of the fact that application of these more stringent pleading standards may allow "sophisticated defrauders" to "successfully conceal the details of their fraud." In re Burlington Coat Factory Securities Litigation, 114 F.3d 1410, 1418 (3d Cir. 1997). In situations where the required factual material "is peculiarly within the defendant's knowledge or control, the rigid requirements of Rule 9(b) may be relaxed." Id. However, "boilerplate and conclusory allegations will not suffice" and "[p]laintiffs must accompany their legal theory with factual allegations that make their theoretically viable claim plausible." Id.

B. Analysis

As stated above, Plaintiff asserts six counts in the Amended Complaint. As Defendants seek to dismiss each count for different reasons, the Court will address them in turn.

1. Fraudulent Conveyance under § 25:2-25(a) Plaintiff's first count alleges that the $16 million shareholder distribution runs afoul of the intentionally fraudulent transfer provision contained in § 25:2-25(a). The relevant provision of the statute states that [a] transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:

a. With actual intent to hinder, delay, or defraud any creditor of the debtor . . .

N.J. Stat. Ann. § 25:2-25(a). Plaintiff alleges that Defendants undertook the shareholder distribution in 2007 with the intent to hinder, delay or defraud those creditors, like Plaintiff, whose potential contractual liabilities were not satisfied by HTS prior to the shareholder distribution. Plaintiff argues that: the distribution constituted substantially all of HTS's liquid assets; it was distributed to insiders of HTS; HTS received no consideration from the shareholders for the distribution; and as a result, the remaining assets of HTS were insufficient to satisfy claims such as Plaintiff's against HTS. Am. Compl. ¶ 34-39. Plaintiff alleges, generally, that the distribution was made with the intent to hinder, delay or defraud creditors such as Plaintiff. Id. ¶ 40.

"The purpose of the [NJUFTA] is to prevent a debtor from placing his or her property beyond a creditor's reach" thereby "deliberately cheat[ing] a creditor by removing his property from the jaws of execution." Gilchinsky v. Nat. Westminster Bank N.J., 159 N.J. 463, 475 (1999) (internal quotation and citations omitted). The New Jersey Supreme Court has articulated two elements that must be alleged and proven to prevail on such a claim.

The first is whether the debtor or person making the conveyance has put some asset beyond the reach of creditors which would have been available to them at some point in time but for the conveyance. . . The second is whether the debtor transferred ...


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