The State Bank and Trust Company v. Spaeth

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	M OTORWERKS , I NC.,
Debtor
Case No. 	05-32116
Adv. No. 	06-3334
THE STATE BANK AND T RUST COMPANY ,
Plaintiff
v.
PAUL H. SPAETH, TRUSTEE OF THE ESTATE
OF M OTORWERKS , I NC.,
Defendant
Judge L. S. Walter
Chapter 7
DECISION OF THE COURT GRANTING, IN PART, AND DENYING, IN PART, THE
PLAINTIFF’S MOTION TO DISMISS DEFENDANT’S COUNTERCLAIMS OR, IN
THE ALTERNATIVE, FOR A MORE DEFINITE STATEMENT
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: July 13, 2007
____________________________________________________________
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The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and
the standing General Order of Reference in this District. This matter is before the court on
Plaintiff’s Motion to Dismiss Defendant’s Counterclaims or, in the Alternative, For More
Definite Statement [Adv. Doc. 11]; the Objection of Defendant Paul H. Spaeth, Trustee of the
Estate of Motorwerks, Inc. to Plaintiff’s Motion [Adv. Doc. 16] and the Plaintiff’s Reply
Memorandum in Support of its Motion [Adv. Doc. 18].
PROCEDURAL BACKGROUND
On October 10, 2006, Plaintiff State Bank and Trust Company (“State Bank”) filed a
complaint seeking declaratory judgment against Defendant Paul H. Spaeth, the Chapter 7 Trustee
(“Trustee”) for the bankruptcy estate of the Debtor, Motorwerks, Inc. (“Debtor”) [Adv. Doc. 1].
In its complaint, State Bank requests declaratory judgment that it is the owner / assignee of
certain pre-petition vehicle lease agreements involving State Bank and the Debtor, that the leases
are not property of the Debtor’s estate, and that State Bank has the first and best perfected lien on
the leased vehicles that secure the obligations of the lessees under the leases.
The Trustee filed an answer acknowledging the prepetition relationship and lease
agreements between State Bank and the Debtor, but denying the validity of many of the leases,
assignments and/or security interests State Bank asserts in the vehicles [Adv. Doc. 9].
Furthermore, the Trustee’s answer includes counterclaims against State Bank. The
counterclaims assert actions for fraudulent transfers avoidable under the Bankruptcy Code and/or
state law, preferential transfers avoidable under 11 U.S.C. § 547, aiding and abetting fraud,
aiding and abetting breach of fiduciary duty, equitable subordination, and an objection to proofs
of claim filed by, or to be filed by, State Bank.
After the Trustee filed his answer, State Bank filed a motion to dismiss the Trustee’s
counterclaims or, in the alternative, a motion for a more definite statement [Adv. Doc. 11]. State
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Bank asserts that all of the Trustee’s counterclaims fail as a matter of law and, thus, dismissal is
appropriate pursuant to Fed R. Bankr. P. 7012 incorporating Fed. R. Civ. P. 12(b)(6). In the
alternative, State Bank asserts that the counterclaims fail to disclose the facts underlying the
Trustee’s causes of action, especially with respect to the Trustee’s allegations of fraud.
Consequently, State Bank requests a more definite statement as to the facts forming the basis for
the counterclaims. The Trustee has responded to State Bank’s motion and the matter is now
fully briefed and ready for disposition.
FACTUAL BACKGROUND
For purposes of State Bank’s motion to dismiss, the factual allegations in the Trustee’s
counterclaims are deemed true.1 On March 11, 2005, an involuntary Chapter 7 bankruptcy
petition was filed against the Debtor, Motorwerks, Inc., an alleged vehicle leasing business.
[Adv. Doc. 9, ¶¶ 35-36.] 	Mark Van Nest was the sole owner and principal officer and director
of the Debtor. [Id., ¶ 37.]
Between 1998 and 2003, Debtor had a business relationship with State Bank that
included a lending arrangement referred to as a “floor plan.” [Id., ¶ 38.] 	Under the floor plan,
Debtor would borrow funds by drawing upon a revolving line of credit provided by State Bank
purportedly for the purpose of purchasing and leasing vehicles. [Id.] State Bank made advances
to the Debtor by depositing funds into a floor plan bank account in the name of the Debtor to
enable the Debtor to purchase the vehicles. [Id.] 	The Debtor, in turn, was to lease the vehicles
to its customers. [Id.] 	The leases were typically financed by various lending and financial
institutions including State Bank in many instances. [Id.] 	The advances authorized by State
Bank with the revolving line of credit were up to $1,000,000.00. [Id.]
1 The facts as stated in this decision are taken from the Trustee’s answer and counterclaim [Adv. Doc. 9] and do not
constitute the findings of the court. For purposes of determining a motion to dismiss, the court is obligated to accept
as true the facts set forth by the non-moving party which, in this case, is the Defendant-Trustee.
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A typical leasing arrangement was structured as follows. Debtor would act through Mark
Van Nest or employees to locate a vehicle which a customer wished to lease. [Id., ¶ 39.] The
Debtor would purchase the vehicle using the funds advanced by State Bank under the floor plan
and then execute a lease with the customer. [Id.] Many times the leases were then purportedly
assigned by the Debtor to State Bank as the funding source. [Id.] The funding source would then
pay a commission to the Debtor. [Id.]
When the leases were assigned, the stream of payments was paid by the Debtor’s
customer, the lessee, to the lending institution that advanced the funds and took assignment of
the lease. [Id., ¶ 40.] In many of these lease transactions, the vehicles were titled in the name of
the Debtor, with liens purportedly to attach to the vehicles in favor of the lending institution
advancing the funds. [Id.]
In order to obtain advances of funds under the floor plan to purchase particular vehicles,
Debtor was required by State Bank to submit certain documentation including, but not limited to,
trust receipts identifying the specific vehicles to be purchased and containing such details as the
Vehicle Identification Number (VIN), make, model and year of the vehicle. [Id., ¶ 43.]
While the above describes a typical lease arrangement, the Trustee asserts, on
information and belief, that many of the transactions involving State Bank were more unusual.
The Trustee alleges that from September, 2000 through May 1, 2003, Mark Van Nest and or
agents / employees of the Debtor submitted trust receipts to State Bank for the purchase of
various vehicles under the floor plan.2 [Id., ¶ 44.] However, many of the trust receipts submitted
for advances, while describing different vehicle models, listed identical VIN numbers. [Id.]
The Trustee asserts that trust receipts with duplicate VIN numbers were submitted by Mark Van
Nest or agents and employees of the Debtor at least 193 times between September of 2000 and
2 The Trustee asserts that the Debtor was insolvent during most of this period. [Adv. Doc. 9, ¶ 56.]
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May 1, 2003. [Id.] 	Furthermore, the Trustee asserts that the documentation submitted by the
Debtor to State Bank was often deficient in other ways. [Id., ¶ 46.]
The Trustee believes that State Bank advanced funds to the Debtor under the floor plan
even when the trust receipts included duplicative VIN numbers or the documentation was
incomplete. [Id., ¶¶ 46, 48.] Furthermore, the Trustee suggests that State Bank’s advances were
often in amounts significantly in excess of the loan limitations under the loan agreements
between the Debtor and State Bank. [Id., ¶ 50.] The Trustee contends that if State Bank had
conducted due diligence by reviewing and monitoring the documentation submitted by the
Debtor in support of the advances, it would have been clear that the information provided by the
Debtor was false with respect to many of the transactions. [Id., ¶ 48.]
The Trustee also alleges that the advances received by the Debtor from State Bank were
not always used for their intended purpose, the purchase of vehicles. [Id., ¶ 45.] Instead, Mark
Van Nest or agents and employees of the Debtor used the funds for other purposes including but
not limited to personal expenditures of Mark Van Nest and his relatives, payment of debt, and
maintenance of a check kiting scheme. [Id., ¶ 47.] The Trustee believes that the amount of
funds misappropriated to pay personal expenses of Mark Van Nest and his relatives is at least
$1,127,196.52. [Id.] 	The Trustee asserts that State Bank did not act prudently as a floor plan
financier by failing to monitor the Debtor and perform due diligence to ensure that the floor plan
advances were used for their intended purpose. [Id., ¶ 49.]
With respect to check kiting, the Trustee alleges that between March 11, 2001 and March
11, 2005, Mark Van Nest engaged in a massive and elaborate scheme with respect to numerous
bank accounts of the Debtor and with a number of financial institutions. [Id., ¶ 51.] Mark Van
Nest frequently drew checks on Debtor’s bank accounts that did not have sufficient funds to
cover the checks. [Id.] The checks were then deposited into other Debtor accounts. [Id.] The
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scheme generally went as follows. Before the check drawn on the first account was returned to
the first bank for payment, Debtor deposited a check drawn on either the second account or other
account into the first account. [Id.] Although there were insufficient funds to cover the check,
the time delay in processing the check would create an artificially inflated balance. [Id.] Mark
Van Nest was then able to take advantage of the false and artificially inflated balance, the
“float,” during the time period of processing the checks before they cleared. [Id.]
The Trustee asserts that State Bank’s advances, deposited in the floor plan account, were
used by Mark Van Nest in his check kiting scheme. [Id., ¶¶ 52-53.] Specifically, Mark Van
Nest wrote checks against the floor plan account or accounts taking advantage of the availability
of provisional credits extended by State Bank when there were insufficient funds to support the
checks. [Id., ¶ 53.] Mark Van Nest would make deposits into bank accounts to cover the checks
after expiration of the “float” period. [Id.] The Trustee asserts that the amounts of the advances
requested from State Bank and deposited in the floor account frequently were not equal to the
purchase price of various vehicles. [Id., ¶ 54.] Instead, the advances requested from State Bank
were in amounts necessary to cover checks unsupported by sufficient funds. [Id.] In other
words, Mark Van Nest submitted trust receipts to State Bank based on fictional proposed vehicle
purchases in order to obtain advances to “cover the float” in the check kiting scheme. [Id.]
The Trustee maintains that State Bank had knowledge of, or with the exercise of due
diligence and care, should have had knowledge of the longstanding pattern of check kiting by
Mark Van Nest. [Id., ¶ 55.] Instead, despite the clear signs of check kiting and fraud, the
Trustee asserts that State Bank continued to advance significant funds to the Debtor enabling
Mark Van Nest to continue his fraudulent activities and to misrepresent the true financial
condition of the Debtor to creditors. [Id.] This, in turn, led creditors to continue to extend loans
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and funding to the Debtor at a time when Debtor was unable to pay its debts as they became due.
[Id.]
STANDARD FOR DISMISSAL
Plaintiff State Bank requests dismissal of the Defendant-Trustee’s counterclaims pursuant
to Fed. R. Civ. P. 12(b)(6), incorporated in bankruptcy adversary proceedings by Fed. R. Bankr.
P. 7012. State Bank argues that the Trustee’s counterclaims fail to state any claim upon which
relief can be granted.
Pursuant to Rule 12(b)(6), a plaintiff may challenge the legal sufficiency of a defendant’s
counterclaims in the same manner that a defendant may challenge the sufficiency of a plaintiff’s
complaint. See May v. Nat’l Bank of Commerce, 390 F.Supp.2d 674, 675 (W.D. Tenn. 2004);
Ohio Bell Telephone Co. v. CoreComm Newco, Inc., 214 F.Supp.2d 810, 812-13 (N.D. Ohio
2002). The court “must treat all of the well-pleaded allegations of the complaint (or the
counterclaim . . .) as true, . . . and must construe all of the allegations in the light most favorable
to the non-moving party.” May, 390 F.Supp.2d at 675. Furthermore, the court “‘may dismiss a
[claim] only if it is clear that no relief could be granted under any set of facts that could be
proved consistent with the allegations.’” Id. (further citations omitted).
LEGAL ANALYSIS
A. 	Trustee’s State Law Aiding and Abetting Claims – Standing
Initially, the court must determine whether the Trustee has standing to bring his fourth
and fifth counterclaims asserted against State Bank. The Trustee cites 11 U.S.C. § 544(a) as his
source of standing to pursue state law claims for aiding and abetting fraud and aiding and
abetting breach of fiduciary duty.
A trustee’s standing to pursue litigation against third parties springs from several sources.
Savage & Assocs., P.C. v. BLR Services SAS (In re Teligent, Inc.), 307 B.R. 744, 747 (Bankr.
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S.D.N.Y. 2004). First, a trustee may stand in the shoes of the debtor by bringing a cause of
action belonging to the bankruptcy estate. Id. Section 541(a)(1) creates a bankruptcy estate that
encompasses “all legal or equitable interests of the debtor in property as of the commencement
of the case” including causes of action that a debtor could assert. 11 U.S.C. § 541(a)(1);
Honigman v. Comerica Bank (In re Van Dresser Corp.), 128 F.3d 945, 947 (6 th Cir. 1997).
When a trustee pursues a cause of action under § 541(a), the trustee brings the action as
successor to the debtor’s interest in property and, as such, the trustee is subject to all defenses,
including in pari delicto, that would have been available to the defendant against the debtor.3
Lutz v. Chitwood (In re Donahue Securities, Inc.), 304 B.R. 797, 799 n.4 (Bankr. S.D. Ohio
2003).
In this case, however, the Trustee does not assert standing as the successor in interest to
the Debtor but, instead, as a creditor. The Trustee cites 11 U.S.C. § 544(a) as his source of
standing which, he argues, allows him to bring his state law aiding and abetting actions standing
in the shoes of a hypothetical creditor.
The language of § 544(a) gives a trustee the status of certain hypothetical parties
including a hypothetical lien creditor whose lien arose as of the bankruptcy petition filing date. 4
3 Another source of a trustee’s standing springs directly from the Bankruptcy Code itself. The Bankruptcy Code
grants the trustee direct powers such as the ability to avoid certain types of transfers pursuant to 11 U.S.C. §§ 547,
548 and 549. Teligent, Inc., 307 B. R. at 748. This is not the source of the Trustee’s standing to pursue the state
law aiding and abetting claims in this case.
4 The language of § 544(a) provides:
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee
or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation
incurred by the debtor that is voidable by—
(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that
obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a
simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at
such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such
time, whether or not such a creditor exists; or
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11 U.S.C. § 544(a); Hazlett v. Suburban Tractor Co. (In re Palmer), __ B.R. __, 2007 WL
949801, at *3 (Bankr. S.D. Ohio March 30, 2007). With this § 544(a) status, the trustee has the
“strong arm” power to avoid transfers and obligations of the debtor to the same extent as the
hypothetical lien creditor. 11 U.S.C. § 544(a); Simon v. Chase Manhattan Bank (In re
Zaptocky), 250 F.3d 1020, 1023 (6 th Cir. 2001); Palmer, 2007 WL 949801, at *3. Thus, the
Trustee’s argument in this case is at least partially correct. Under § 544(a), the Trustee does
indeed stand in the shoes of a hypothetical creditor. Palmer, 2007 WL 949801, at *3.
However, the powers of a trustee acting in the capacity of a hypothetical lien creditor
under § 544(a) are not as broad as the Trustee claims. The language of § 544 provides a trustee
with limited authority to use hypothetical lien creditor status to avoid transfers of the debtor’s
property under non-bankruptcy law. See Alberts v. Tuft (In re Greater Southeast Comm. Hosp.
Corp.), 333 B.R. 506, 520 (Bankr. D.C. 2005); Goldin v. Primavera Familienstiftung, TAG
Assocs., Ltd. (In re Granite Partners, L.P.), 194 B.R. 318, 324 (Bankr. S.D.N.Y. 1996).
Contrary to the Trustee’s argument, § 544 does not give a trustee the right to bring creditor
causes of action for damages such as the aiding and abetting actions asserted in this case.
Greater Southeast Comm. Hosp., 333 B.R. at 520-21; Granite Partners, 194 B.R. at 324.
The limitation of a trustee’s § 544 powers derives from the well-settled principle, dating
back to before the enactment of § 544, that “. . . a bankruptcy trustee has no standing generally to
sue third parties on behalf of the estate’s creditors, but may only assert claims held by the
bankrupt corporation itself.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d
Cir. 1991). This principle is traced to the Supreme Court decision of Caplin v. Marine Midland
Grace Trust Co. of New York, 406 U.S. 416, 92 S.Ct. 1678 (1972). In Caplin, the Supreme
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law
permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such
transfer at the time of the commencement of the case, whether or not such a purchaser exists.
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Court held that under the former Bankruptcy Act, a chapter X trustee lacked standing to assert
creditors’ claims of misconduct against an indenture trust on behalf of the holders of debentures
issued by the bankrupt entity. Id. at 428. 	The Supreme Court concluded that nothing in the
Bankruptcy Act provided the trustee with authority to collect money not owed to the estate. Id.
Instead, the trustee’s task is “simply to ‘collect and reduce to money the property of the estates
for which (he is trustee).’” Id. at 428-29 (further citations omitted). Although Caplin was
decided under the former Bankruptcy Act, numerous circuits, including the Sixth Circuit,
recognize its continuing vitality under the Bankruptcy Code. 	See Stevenson v. J.C. Bradford &
Co. (In re Cannon), 277 F.3d 838, 853 (6th Cir. 2002) (citing Caplin and noting that if an action
belongs solely to the estate’s creditors, the trustee has no standing to pursue the claim). See also
Official Comm. of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 349 (3d Cir.
2001); Shearson Lehman, 944 F.2d at 118; Mixon v. Anderson (In re Ozark Restaurant
Equipment Co.), 816 F.2d 1222, 1226-30 (8th Cir. 1987).
As noted by the Trustee, there are some courts that conclude that the “rights and powers”
language of § 544(a) does, in fact, broaden a trustee’s powers beyond avoidance of transfers
thereby allowing the trustee to file any claim, including tort claims, that a creditor with a judicial
lien or creditor’s bill might possess.5 See, e.g. Raleigh v. Schottenstein (In re Wieboldt Stores,
Inc.), 131 B.R. 655, 668 (N.D. Ill. 1991); Collins v. Kohlberg and Co. (In re Southwest
Supermarkets, LLC), 325 B.R. 417, 425-26 (Bankr. D. Ariz. 2005) (concluding that § 544(a)
vests a trustee with the “rights and powers” of creditors to bring certain damage actions in
addition to avoidance actions); PMSC, Inc. v. Porter (In re Porter McLeod, Inc.), 231 B.R. 786,
5 Some of these courts make a distinction between “personal” and “general” claims of creditors based on whether
individual creditors were injured or whether the injury was to the entire creditor body as a whole. As noted by the
court in Greater Southeast Comm. Hosp., this is a distinction without a difference. 333 B.R. at 519. Regardless of
the number of creditors injured, if the trustee pursues a claim that does not belong to the estate, he has no standing.
Id. On the other hand, if the trustee pursues a claim that could be pursued by either creditors or the debtor because it
arises from diminution of the debtor’s assets, the trustee pursues that action as successor to the debtor’s interest
under § 541.
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792-93 (D. Colo. 1999) (allowing a trustee to stand as a “creditor” under § 544(a) to bring the
estate’s tort claims and avoid the application of the in pari delicto defense).
However, this minority view has several flaws. First, it conflicts with the recognition by
the Sixth Circuit and other courts of the ongoing vitality of Caplin and its holding that the trustee
has no standing to pursue claims arising from injuries to others. Cannon, 277 F.3d at 853;
Greater Southeast Comm. Hosp., 333 B.R. at 519-20. Second, no provision in § 544(a)
explicitly states that the “rights and powers” extended to a trustee include the ability to bring tort
claims on behalf of injured creditors. 11 U.S.C. § 544(a); Ozark Restaurant, 816 F.2d at 1227
(while the enactment of § 544 expanded a trustee’s role with respect to creditors, it was not
changed to authorize the trustee to bring suits on behalf of the estate’s creditors against third
parties); Greater Southeast Comm. Hosp., 333 B.R. at 520 (noting that the language does not
transform a trustee into a “super creditor” with the ability to raise causes of action not possessed
by the estate). Instead, the precise language and tenor of § 544(a) only confer on the trustee the
status of a creditor with a judicial lien or creditor’s bill for the limited purpose of attaching or
seizing property transferred by the debtor to a third party prior to bankruptcy. Greater Southeast
Comm. Hosp., 333 B.R. at 520; Sigmon v. Miller-Sharpe, Inc. (In re Miller), 197 B.R. 810, 814-
15 (W.D.N.C. 1996); Granite Partners, 194 B.R. at 324.
Perhaps most significantly, the minority view fails to recognize the legislative history
behind the enactment of § 544. As originally proposed, § 544 was to contain a subsection (c)
that would have explicitly overruled Caplin and allowed a trustee to bring creditors’ claims to
benefit the estate. Ozark Restaurant, 816 F.2d at 1227-28 & nn.9-10; Greater Southeast Comm.
Hosp., 333 B.R. at 518-19; Rodolakis v. Shadduck (In re Shadduck), 208 B.R. 1, 3-4 (Bankr. D.
Mass. 1997). Section § 544(c) was deleted by Congress prior to enactment thereby raising the
reasonable inference that Congress did not intend to overrule Caplin by enacting § 544. Ozark
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Restaurant, 816 F.2d at 1227-28 (determining that Congress’s refusal to enact subsection (c)
sends a clear message that no trustee has the power under § 544 to assert general causes of action
on behalf of estate creditors); Greater Southeast Comm. Hosp., 333 B.R. at 518-19; Shadduck,
208 B.R. at 4-5.
Having analyzed the relevant case law and legislative history of § 544, the court agrees
with the Eight Circuit that “nowhere in Sections 544(a) or (b), nor in other relevant provisions of
the Code is there any suggestion that the trustee has been given the authority to collect money
not owed to the estate.” Ozark Restaurant, 816 F.2d at 1229-30. The court concludes that §
544(a) does not expand a trustee’s abilities to bring actions beyond those seeking avoidance of
transfers of a debtor’s property to third parties. Consequently, § 544(a) does not confer standing
on a trustee to bring creditors’ tort actions under state law such as the Trustee’s aiding and
abetting claims in this case. Because this is the only basis cited for the Trustee’s standing in this
case, the Trustee’s fourth and fifth counterclaims for aiding and abetting fraud and breach of
fiduciary duty are dismissed. 6
6 Although the Trustee cites § 544(a) as his sole basis for standing with respect to the aiding and abetting claims, his
allegations also refer to damage done to the Debtor corporation and not just the creditors. [Adv. Doc. 9, ¶¶ 100,
104-105.] When a corporation suffers an injury through diminution of its value, the claim belongs to the
corporation. Granite Partners, 194 B.R. at 325. While the Trustee could amend his complaint to clarify that he is
alleging a direct injury to the corporation and, as successor to the Debtor, change his grounds for standing to 11
U.S.C. §§ 323 and 541, the ultimate outcome would be the same. The claims would be subject to dismissal on
different grounds, specifically, the application of the in pari delicto defense. As this court recently noted in its
Amcast decision, in pari delicto is an equitable defense referring to the plaintiff’s participation in the same
wrongdoing as the defendant. Liquidating Trustee of the Amcast Unsecured Creditor Liquidating Trust v. Baker (In
re Amcast Industrial Corp.), __ B.R. __ , 2007 WL 777704, at *24 (Bankr. S.D. Ohio March 12, 2007). The
defense is used to prevent one wrongdoer from recovering from the other because each should bear the
consequences of his own actions without recourse against the other. Id. Significantly, the Sixth Circuit has
determined that in pari delicto is a defense that may be raised against a bankruptcy trustee to the extent that the
defense could be raised against a debtor. Id. (citing Terlecky v. Hurd (In re Dublin Securities, Inc.), 133 F.3d 377,
380-81 (6 th Cir. 1997) and Lutz v. Chitwood (In re Donahue Securities, Inc.), 304 B.R. 797, 799 n.4 (Bankr. S.D.
Ohio 2003)). In this case, the Trustee’s counterclaims include allegations that State Bank, either knowingly or
unknowingly, participated in the fraudulent activities of the Debtor acting through Mark Van Nest and possibly
other employees. [Adv. Doc. 9, ¶¶ 39-56.] Consequently, the in pari delicto defense would seemingly apply.
In arguing that in pari delicto would not apply, the Trustee cites the “adverse interest” exception. Under this
exception, bad acts of an agent of the debtor will not be imputed to the debtor-corporation (and, consequently, in
pari delicto will not apply) if the agent acts on his own behalf and adversely to the corporation. Mediators, Inc. v.
Manney (In re Mediators, Inc.), 105 F.3d 822, 827 (2d Cir. 1997); Schnelling v. Thomas (In re Agribiotech, Inc.),
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B. 	Trustee’s Avoidance Claims – Identifying the Transfers to be Avoided
Next, State Bank asserts that the Trustee’s fraudulent and preferential transfer avoidance
claims pursued under both bankruptcy and state law, should be dismissed.7 State Bank argues
that the Trustee’s claims lack the required specificity or particularity because they fail to identify
the particular transfers that are preferential or fraudulent in nature. The court agrees with State
Bank that the Trustee’s avoidance claims lack the required specificity under the federal rules of
civil procedure adopted in bankruptcy adversary proceedings. However, the court also takes into
consideration the fact that pleading rules are liberally applied to bankruptcy trustees who bring
their actions as third party outsiders based on secondhand information. For this reason, the court
will allow the Trustee to amend his counterclaims rather than dismiss the claims outright.
Pursuant to Fed. R. Civ. P. 8, adopted in bankruptcy adversary proceedings by Fed. R.
Bankr. P. 7008, a pleading setting forth a claim for relief must contain “a short and plain
statement of the claim showing that the pleader is entitled to relief.” The statement must give a
defendant sufficient notice of the pleader’s claim and the grounds upon which it rests so that the
defending party can prepare an adequate answer. See Giuliano v. U.S. Nursing Corp. (In re
Lexington Healthcare Group, Inc.), 339 B.R. 570, 575 (Bankr. D. Del. 2006); Pardo v. Gonzaba
2005 WL 4122738, at *9 (D. Nev. April 1, 2005). See also First Nat’l Bank of New Bremen v. Burns, 88 Ohio St.
434, 438, 103 N.E. 93, 94 (1913) (recognizing, under Ohio law, the adverse interest exception to the imputation of
knowledge to a corporation). The Trustee argues that the actions of Mark Van Nest and other employees were for
Mark Van Nest’s own benefit and were adverse to the Debtor whose assets were diminished. However, the adverse
interest exception is, itself, subject to an exception where the sole owner or representative of the principal
corporation participated in the fraudulent activities. Mediators, Inc., 105 F.3d at 827 (where the sole shareholder is
alleged to have stripped the corporation of assets, the adverse interest exception does not apply); Agribiotech, 2005
WL 4122738 at *9; In re Crown Vantage, Inc., 2003 WL 25257821, at *7-9 (N.D. Cal. Sept. 25, 2003) (in pari
delicto prevents a trustee from bringing an action where the sole shareholder participated in the fraud). See also
First Nat’l Bank of New Bremen, 88 Ohio St. at 445-46, 103 N.E. at 96 (recognizing, under Ohio law, the “sole
actor” exception to the “adverse interest” exception). In this case, the Trustee admits in his counterclaims that Mark
Van Nest was the sole owner and principal officer and director of the Debtor. [Adv. Doc. 9, ¶ 37.] Consequently, in
pari delicto would apply in this case to prevent the Trustee from pursuing his state law aiding and abetting
counterclaims.
7 State Bank does not question the Trustee’s authority and standing to bring the avoidance actions pursuant to
bankruptcy and state law.
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(In re APF Co.), 308 B.R. 183, 188 (Bankr. D. Del. 2004); Birdsell v. U.S. West Newvector
Group, Inc. (In re Cellular Express of Ariz., Inc.), 275 B.R. 357, 363 (Bankr. D. Ariz. 2002).
Applying this rule to preference and fraudulent transfer claims, the pleader must provide
more than a mere recitation of the statutory elements of the cause of action. Lexington
Healthcare, 339 B.R. at 575; Cellular Express, 275 B.R. at 363; Valley Media, Inc. v. Borders,
Inc. (In re Valley Media, Inc.), 288 B.R. 189, 192 (Bankr. D. Del. 2003). Instead, the pleader
must identify the set of facts upon which he seeks to recover. See Cellular Express, 275 B.R. at
363. At the very least, the rules of procedure require the pleader of a preferential or fraudulent
transfer claim to reasonably identify the types of transfers sought to be avoided. Id. Some courts
have held that such identification must include the amount and date of the transfers together with
the name of the transferor and transferee. See Lexington Healthcare, 339 B.R. at 575; Valley
Media, 288 B.R. at 192. In determining whether a transfer is adequately identified, a good test
“is to ask whether the defendant could respond to [the claim for relief] with an appropriate
affirmative defense.” Cellular Express, 275 B.R. at 363.
In this case, the Trustee’s preferential and fraudulent transfer claims fail to adequately
identify the transfers to be avoided. 	In his first two counterclaims, the Trustee seeks to avoid
fraudulent transfers pursuant to Ohio law under 11 U.S.C. § 544(b) and Ohio Rev. Code §
1336.01, et seq. and federal bankruptcy law under 11 U.S.C. § 548. [Adv. Doc. 9, ¶¶ 57-65 and
¶¶ 66-72.] 	In his allegations, the Trustee states that the Debtor’s sole shareholder, Mark Van
Nest, was engaged in fraudulent schemes, including check kiting, intended to defraud creditors.
[Id., ¶¶ 60 and 68-70.] The Trustee asserts that transfers made by the Debtor to State Bank
during the statutorily relevant periods were part of the Debtor’s fraudulent scheme. [Id., ¶¶ 61-
62 and 69-71.] However, the Trustee fails to identify, by date or amount, even one actual
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transfer from the Debtor to State Bank that is to be avoided. 8 Instead, the Trustee asserts that this
information is currently unknown and will be the subject of discovery. [Id., ¶¶ 65, 71.] The
remainder of the Trustee’s assertions parrot the relevant statutory language. [Id., ¶¶ 63, 72.]
The same is true of the Trustee’s third counterclaim to avoid preferential transfers
pursuant to 11 U.S.C. § 547. [Id., ¶¶ 73-93.] While this claim is somewhat more specific
because it very generally identifies the types of transfers to be avoided, i.e. vehicle lease
agreements assigned to or perfected by State Bank during the ninety (90) day period prior to
bankruptcy and payments made on leases during that same period, the claim still fails to identify
any of the avoidable leases or payments with any specificity. [Id.] Furthermore, the remainder
of the Trustee’s allegations, like those in his fraudulent transfer counterclaims, parrot the
relevant statutory language of § 547. [Id., ¶¶ 88-92.]
The problem with the Trustee’s lack of specificity is that the counterclaims fail to provide
State Bank with notice of the underlying transfers to be avoided hindering the bank’s ability to
prepare an adequate answer and affirmative defenses. The Trustee’s omission of the identity of
specific transfers to be avoided renders State Bank unable to respond to the counterclaims with
affirmative defenses such as “the bank gave contemporaneous new value for that transfer,” “that
transfer was made in the ordinary course of business,” or “the Debtor received reasonably
equivalent value for that transfer.” See Cellular Express, 275 B.R. at 363. As such, the court
concludes that the Trustee’s counterclaims fail to provide the minimum information required by
Rule 8.
8 Although the Trustee did attach exhibits to his Answer and Counterclaims including a summary of purportedly
fraudulent trust receipts given by the Debtor to State Bank describing different vehicles with identical VIN numbers
[Adv. Doc. 9, Ex. 1] and an account register with State Bank showing payments and deposits [Id., Ex. 2], these
documents are not specifically referenced in the Trustee’s preferential and fraudulent transfer counterclaims. The
exhibits do not clarify which transfers, if any, that the Trustee is pursuing as preferential or fraudulent transfers and,
thus, do not aid the Trustee in meeting the requirements of Rule 8. See Lexington Healthcare, 339 B.R. at 575
(summaries and charts included with a trustee’s complaint were insufficient because they failed to provide the
required detail as to each of the alleged transfers).
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Because the claims are deficient, State Bank requests that the court dismiss the claims or,
in the alternative, require the Trustee to amend the claims to provide a more definite statement.
In making its determination of which action to take, the court is mindful of the policy that
amendments to a complaint are to be liberally allowed. See Fed. R. Civ. P. 15(a) adopted in
bankruptcy adversary proceedings through Fed. R. Bankr. P. 7015. Consequently, the outright
dismissal of claims for lack of specificity, without providing an opportunity for amendment, is
generally inappropriate. Coffey v. Foamex L.P., 2 F.3d 157, 162 (6th Cir. 1993); Lexington
Healthcare, 339 B.R. at 575. 	A relaxed standard is particularly appropriate when specificity
rules are applied to a bankruptcy trustee who is forced to plead his case based on secondhand
information often obtainable only through discovery. In re Insilco Tech., Inc., 330 B.R. 512, 520
n.14 (Bankr. D. Del. 2005); Huntington Nat’l Bank v. Schwartzman (In re Schwartzman), 63
B.R. 348, 355 (Bankr. S.D. Ohio 1986).
For these reasons, the court will deny State Bank’s request for dismissal of the fraudulent
and preferential transfer counterclaims (Counterclaims 1 through 3) and will, instead, require the
Trustee to amend his pleading. The Trustee is granted sixty (60) days from the entry of this
decision and related order to conduct any preliminary discovery required and amend his
fraudulent and preferential transfer counterclaims to identify the transfers to be avoided with
sufficient particularity or the counterclaims will be dismissed.9
C. 	Trustee’s Fraudulent Transfer Claims – Pleading Fraud with Particularity
State Bank further asserts that the more stringent requirements of Rule 9(b) apply to the
Trustee’s fraudulent transfer claims. Because the Trustee does not plead his fraudulent transfer
9 As long as the Trustee’s amended counterclaims add only factual detail regarding the transfers from the Debtor to
State Bank, the amended counterclaims will arise from the same transaction or occurrence and will relate back to the
original counterclaims pursuant to Fed. R. Civ. P. 15(c). See Slone-Stiver v. Security Nat’l Bank and Trust Co. (In
re Tower Metal Alloy Co.), 193 B.R. 266, 272 n.6 (Bankr. S.D. Ohio 1996).
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claims with particularity, State Bank argues that the claims should be dismissed. With respect to
this argument by State Bank, the court disagrees.
Fed. R. Civ. P. 9(b) incorporated into bankruptcy adversary proceedings by Fed. R.
Bankr. P. 7009 requires a party to plead fraud with sufficient particularity to give the answering
party notice of the misconduct that is being challenged.10 APF Co., 308 B.R. at 188. To meet
Rule 9(b) requirements, the Sixth Circuit generally requires the party to provide the “time, place,
and content of the alleged misrepresentation . . .the fraudulent scheme; the fraudulent intent . .
.and the injury resulting from the fraud.” Coffey, 2 F.3d at 161-62. See also Yuhasz v. Brush
Wellman, Inc., 341 F.3d 559, 563 (6th Cir. 2003). Although this rule is applied somewhat more
liberally to bankruptcy trustees, a defendant is still entitled to notice of his alleged misconduct
and, as such, trustees remain responsible for pleading actual fraud with precision. Lexington
Healthcare, 339 B.R. at 574; OHC Liquidation Trust v. Nucor Corp. (In re Oakwood Homes
Corp.), 325 B.R. 696, 698-99 (Bankr. D. Del. 2005).
Nonetheless, some courts find these fraud requirements inapplicable to fraudulent
transfer claims because the claims do not necessarily require proof that the defendant engaged in
some form of deceit, misrepresentation or fraudulent activity. Lexington Healthcare, 339 B.R. at
574-75. In fact, a fraudulent transfer claim based on constructive fraud need only allege that the
transfer was made without reasonably equivalent value while the debtor was insolvent. Id. at
575. In other words, there is no logical reason to require a trustee to plead a defendant’s fraud or
misconduct with specificity if such fraud or misconduct is not an element of the trustee’s
fraudulent transfer claim.
In this case, the Trustee appears to allege that while the Debtor and its principal, Mark
Van Nest, engaged in fraudulent schemes, State Bank was nothing more than an unwitting
10 While the circumstances constituting fraud must be pleaded with particularity, “malice, intent, knowledge and
other condition of mind of a person may be averred generally.” Fed. R. Civ. P. 9(b).
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participant through the lending process and receipt of transfers arising from the Debtor’s
schemes. [Adv. Doc. 9, ¶¶ 61-62, 68-70.] The remainder of the Trustee’s allegations relate to
elements of constructive fraud that do not require proof that State Bank engaged in any
misconduct. See Lexington Healthcare, 339 B.R. at 574-75. For these reasons, the court
concludes that the more stringent requirements of Rule 9(b) do not apply to the Trustee’s
fraudulent transfer claims except to the extent that Trustee rests his claims on allegations that
State Bank actually engaged in fraudulent activity, misrepresentation or other misconduct. If the
Trustee’s claims are based in whole or part on State Bank’s actual fraud, the Trustee must amend
his complaint within sixty (60) days from the entry of this decision and related order to describe
State Bank’s participation with sufficient particularity to meet the requirements of Rule 9(b) and
the Sixth Circuit.
D. 	Trustee’s Claims for Equitable Subordination and Disallowance
As a final matter, State Bank requests that the court dismiss the Trustee’s sixth
counterclaim for equitable subordination and seventh counterclaim for disallowance of proofs of
claim because the Trustee predicates these claims on his successful litigation of the other
counterclaims. Essentially, State Bank asserts that the Trustee’s equitable subordination and
disallowance counterclaims are derivative because they rely on court determinations in the
Trustee’s other claims such as a finding that State Bank engaged in fraud, inequitable conduct or
received fraudulent and/or preferential transfers. Consequently, if all other counterclaims of the
Trustee are dismissed, State Bank argues that the derivative equitable subordination and
disallowance claims must also be dismissed.
While State Bank’s argument is logical if all other claims are dismissed, the court has
determined that it is more appropriate to allow the Trustee to amend his complaint to clarify
certain aspects of his fraudulent and preferential transfer counterclaims rather than dismissing
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them outright. Because the court did not dismiss each and every one of the Trustee’s other
counterclaims, the Trustee’s derivative counterclaims also withstand dismissal.
In the alternative, State Bank requests that the court order the Trustee to provide a more
definite statement explaining the facts upon which his equitable subordination and disallowance
claims are grounded. Upon review of the Trustee’s sixth counterclaim, the court finds the
Trustee’s description of the inequitable conduct supporting his equitable subordination claim, i.e.
failing to supervise and inspect the Debtor while in the position of a floor plan financier, to be
sufficiently descriptive to meet Rule 8 requirements. [Adv. Doc. 9, ¶ 107.] Consequently, a
more definite statement is unnecessary.11
The court also finds a more definite statement unnecessary with respect to the Trustee’s
seventh counterclaim requesting disallowance of any and all proofs of claim filed by State Bank
pursuant to 11 U.S.C. § 502(d). This section of the Bankruptcy Code states:
(d) Notwithstanding subsections (a) and (b) of this section, the court shall disallow any
claim of any entity from which property is recoverable under section 542, 543, 550, or
553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h),
544, 545, 547, 548, 549, or 724(a) of this title, unless such entity or transferee has paid
the amount, or turned over any such property, for which such entity or transferee is liable
under section 522(i), 542, 543, 550, or 553 of this title.
11 U.S.C. § 502(d). This Code provision provides for the disallowance of claims of creditors
who receive preferences, fraudulent transfers or other void or voidable transfers unless such
11 In its motion to dismiss, State Bank fails to take issue with the legal substance of the Trustee’s equitable
subordination counterclaim (i.e. whether the conduct cited is sufficiently egregious to support equitable
subordination). Instead, State Bank raises this substantive argument for the first time in its reply memorandum.
[Adv. Doc. 18, p. 17.] It is generally inappropriate for a court to consider novel arguments raised for the first time
in a reply. See United States v. Demjanjuk, 367 F.3d 623, 637 (6 th Cir. 2004); Oil States Int’l., Inc. v. LTV Corp.,
2006 WL 3022971, at *5 (N.D. Ohio Oct. 23, 2006). For this reason, the court will not entertain the argument.
Nonetheless, the court notes that equitable subordination is considered an extraordinary remedy and the Trustee will
face a high standard of proof at trial. See Bayer Corp. v. MascoTech, Inc. (In re Autostyle Plastics, Inc.), 269 F.3d
726, 744-45 (6 th Cir. 2001) (determining that equitable subordination is an unusual remedy to be applied in limited
circumstances and requiring proof of more egregious conduct, such as fraud, overreaching or spoliation, when the
conduct complained of is that of a non-insider to the debtor); First Nat’l Bank of Barnesville v. Rafoth (In re Baker
& Getty Financial Services, Inc.), 974 F.2d 712, 717-18 (6 th Cir. 1992); Ralph v. Stock Yards Bank and Trust Co.
(In re Kentuckiana Truck & Trailer Repair, Inc.), 291 B.R. 84, 94-95 (Bankr. W.D. Ky. 2002); In re Colfor, Inc.,
1998 WL 70718, at *3-4 (Bankr. N.D. Ohio Jan. 5, 1998).
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creditors surrender the transferred property to the trustee in the case. In re Southern Air
Transport, Inc., 294 B.R. 293, 296 (Bankr. S.D. Ohio 2003). By its very language, § 502(d)
predicates the disallowance of proofs of claim on the outcome of other causes of action such as
the Trustee’s preferential or fraudulent transfer counterclaims. There is no need for the Trustee
to be more specific as to the basis for disallowance since, pursuant to the language of the statute,
it will depend on the outcome of these other causes of action.
CONCLUSION
For the reasons stated above, the court GRANTS, in part, and DENIES, in part, the
Plaintiff’s Motion to Dismiss Defendant’s Counterclaims or, in the Alternative, For a More
Definite Statement [Adv. Doc. 11] to the following effect:
1) 	These counterclaims in the Trustee’s Answer and Counterclaims [Adv. Doc. 9]
are dismissed for failure to state a claim:
a) 	Fourth Counterclaim: Aiding and Abetting a Fraud; and
b) 	Fifth Counterclaim: Aiding and Abetting a Breach of Fiduciary Duty.
2) 	These counterclaims in the Trustee’s Answer and Counterclaims [Adv. Doc. 9]
fail to provide the required specificity and must be amended within (60) sixty
days of the entering of this decision and the related order or they will be
dismissed:
a) 	First Counterclaim: Fraudulent Transfers – 11 U.S.C. § 544(b)/O.R.C. §
1336.01, et. seq.;
b) 	Second Counterclaim: Fraudulent Transfers – 11 U.S.C. § 548; and
c) 	Third Counterclaim: Avoidance of Preferential Transfers Relating to
Lease Assignments – 11 U.S.C. § 547.
SO ORDERED.
cc:
The State Bank and Trust Company
401 Clinton Street
Defiance, OH 43512
David L Mikel
210 West Main Street
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Troy, OH 45373-3240
Email: dlmecf@dungan-lefevre.com
James D Brookshire
210 W Main Street
Troy, OH 45373
Email: jamesb@dungan-lefevre.com
Philip F Downey
Vorys Sater Seymour and Pease
52 E Gay St
P O Box 1008
Columbus, OH 43216-1008
Email: pfdowney@vssp.com
Paul Spaeth
130 West Second Street
Suite 450
Dayton, OH 45402
Email: spaethlaw@phslaw.com
Asst US Trustee (Day)
Office of the US Trustee
170 North High Street
Suite 200
Columbus, OH 43215-2417
# # #
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