Miller v. Dutil et al

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re 	: 	Chapter 11
TOTAL CONTAINMENT, INC. 	:
Debtor 	: 	Bankruptcy No. 04-13144
____________________________________
GEORGE L. MILLER, Chapter 11 trustee 	:
Plaintiff 	:
v. 	:
MARCEL DUTIL 	:
THE CANAM MANAC GROUP, INC.
CANAM STEEL CORPORATION 	:
FINLOC, INC.
FINLOC CAPITAL, INC. 	:
FINLOC US, INC.
WINSTON TOWERS 1988, INC. 	:
POLYFLOW, INC.
JAY R. WRIGHT, JR. 	:
BERNARD GOUIN, and
PIERRE DESJARDINS 	:
Defendants 	: 	Adversary No. 05-0145
____________________________________
..............................................................
MEMORANDUM
..............................................................
The chapter 11 trustee, George L. Miller, has commenced an adversary
proceeding asserting seven counts against 11 defendants, and seeking in excess of $23
million in damages along with declaratory relief. All 11 defendants previously sought
dismissal of all counts based upon the trustee’s purported failure to state a cause of action
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against them, pursuant to Fed. R. Bankr. P. 7012 (incorporating, inter alia, Fed. R. Civ. P.
12(b)(6)).
By memorandum and order dated October 18, 2005, I granted the
defendants’ motions in part and denied them in part. Count I was dismissed, but only as
to both Canam defendants; count II was dismissed as to defendants Dutil, Wright, Gouin,
DesJardins, Canam Steel Corporation, Canam Manac Group, Inc., and Finloc US, Inc.;
count VI was dismissed as to defendants Canam Steel Corporation, Canam Manac Group,
Inc., Finloc Capital, Inc., and Winston Towers 1988, Inc.; and count VII was dismissed as
to all defendants. The trustee was granted leave to amend these four counts, if
appropriate. See generally Jacobs v. Beard, 172 Fed. Appx. 452, 456 (3d Cir. 2006)
(“[W]hen a district court determines that a complaint is vulnerable to 12(b)(6) dismissal,
the court must permit a curative amendment, regardless of whether the plaintiff seeks
leave to amend, unless an amendment would be inequitable or futile.”). Defendants’
motions to dismiss counts III, IV and V were denied.
The trustee thereafter filed an amended complaint and certain defendants
responded by filing new motions to dismiss amended counts I, II, VI and VII.
Specifically, Canam Steel seeks dismissal of amended counts I, II, VI, and VII; Canam
Manac Group seeks dismissal of amended counts I, II, and VI; Finloc US seeks dismissal
of amended count II; and Finloc Capital and Winston Towers seek dismissal of amended
count VI. Once again, all of these defendants contend that the trustee has failed to state a
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Based upon my interpretation of Pennsylvania law, with which the trustee1
“respectfully disagrees and preserves that issue for appeal,” the trustee concedes in paragraph 74
n.2 of the amended complaint that he does not state a claim as to the individual defendants
insofar as count II is concerned. Therefore, that amended count shall remain dismissed as to
those defendants.
3
cause of action as to them. The trustee denies this assertion. 	He maintains that the facts1
alleged, if proven, would justify relief as to these defendants on those four amended
counts.
A.
As did the original complaint, these four amended claims arise from the
July 2, 2002 transfer of pipe production assets from the debtor TCI to defendant
PolyFlow. The trustee contends that the July 2nd transaction caused the following: TCI
transferred all of its pipe production assets to defendant PolyFlow and reduced its debt to
defendant Finloc, Inc. by about $2.6 million in cash and assigned debt, and reduced its
debt to defendants Winston Towers and Finloc Capital by about $3.75 million. Winston
Towers exchanged a receivable due from TCI in the amount of $1.785 million either for a
capital contribution or a debt due in virtually the same amount from Finloc US. And
defendant Finloc Capital exchanged its $1.965 million receivable due from TCI, again
either for a capital contribution or a debt in that amount due from Finloc US.
Attached as Exhibit A to the amended complaint is a modified flow chart.
According to this exhibit, the July 2nd transfer consisted of these events: Finloc Capital
transferred $1,965,000 to Finloc US, and Winston Towers transferred to Finloc US
$1,785,000, for a total transfer of $3,750,000. Finloc US then purchased 100 shares of
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The parties do not dispute that Pennsylvania law applies to all counts except2
count VII. I shall not repeat my lengthy analysis of state law.
4
PolyFlow stock for $3,750,000 and paid $161,954 to Canam Steel. PolyFlow thereafter
paid TCI $3,599,913, and assumed $2,550,000 in debt owed to Finloc, Inc., for TCI’s
pipe production assets. After receiving these funds from PolyFlow, TCI paid
$1,753,137.50 to Finloc Capital, $1,783,579.86 to Winston Towers and $53,923 to
Finloc, Inc., totaling $3,590,640.36 in distributions. Id., ¶ 38, Ex. A.
Based upon numerous allegations, the trustee maintains, inter alia, that all
defendants: breached their fiduciary duties to TCI and its creditors (count I); were
participants in a fraudulent conveyance of TCI’s assets (count II); were responsible for
TCI’s “deepening insolvency” (count VI); and should have their proofs of claim against
TCI disallowed or subordinated (count VII).
B.
Applying Pennsylvania law, I concluded in the earlier challenge to the2
original complaint that TCI’s corporate officers and directors held a fiduciary duty to the
corporation and, upon corporate insolvency, to its creditors. Controlling corporate
shareholders can also have a similar fiduciary duty. These fiduciary duties may be
breached by actions taken directly or indirectly to benefit or unjustly enrich a fiduciary.
Non-fiduciaries who knowingly and substantially aid and abet fiduciaries in breaching
their duties can also be held liable. Pierce v. Rossetta Corp. 1992 WL 165817, at *8
(E.D. Pa. June 12, 1992); Koken v. Steinberg, 825 A.2d 723, 732 (Pa. Cmwlth. 2003). As
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In their motion to dismiss, the Canam defendants contend that Canam Steel3
ceased being a preferred shareholder in June 2001, more than one year prior to the challenged
transfer transactions, and had no connection to the July 2nd conveyance. The amended
complaint does allege that the preferred stock was transferred to Finloc US, but does not mention
the date of the transfer; instead it avers that this transfer occurred “either on July 2 or on another
day but in preparation for or in connection therewith. . . .” Amended Complaint, ¶ 38. In
determining a motion to dismiss, however, I cannot accept the defendants’ version of events. See
Foster v. Ford, 2005 WL 1645953, at *2 n.3 (N.D. Ohio 2005); Lester v. Brown, 1994 WL
702721, at *5 (N.D. Ill. 1994) (“[I]n resolving a motion to dismiss we must accept plaintiff's
version of events as true.”).
5
to the two Canam defendants, who held no fiduciary duties, I concluded on October 18th
that the trustee failed to plead facts demonstrating such accomplice liability.
In amended count I, the trustee attempts to correct this omission by pleading
broadly:
If and to the extent that any Defendant is found not to have
had a fiduciary duty to TCI at the time of the transactions
complained of herein, each such Defendant is nevertheless
liable for having aided and abetted the breach of fiduciary
duty by one or more of the other Defendants possessing such
duties at the relevant times. Each non fiduciary Defendant
substantially and knowingly participated in, benefitted from
and aided and abetted the breach of fiduciary duty engaged in
by the officers, directors and controlling shareholders of TCI.
Amended Complaint, ¶ 66; see also id., ¶ 49.
More specifically, the trustee alleges: Canam Steel “owned and controlled
all of the preferred shares of TCI stock and was in turn owned and controlled by Canam
Manac” (id., ¶¶ 4, 7) ; Canam Steel operated Finloc US, with the latter corporation being3
the majority shareholder of TCI (id., ¶ 11); Canam Manac “directly or indirectly
controlled and/or operated . . . TCI” (id., ¶¶ 6, 18-19); and that the Canam defendants, due
in part to concerns about loan guarantees they issued on behalf of TCI, caused other
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defendants to participate in the July 2, 2002 allegedly improper transfer of assets. (Id., ¶¶
34, 38).
The Canam defendants argue that these new allegations, even if true, are
insufficient to prove accomplice liability for breach of fiduciary duty. Respectfully, I
disagree. If these corporate defendants are proven to have orchestrated and directed
conduct that caused fiduciaries to breach their duties, they may indeed be liable. See
Cohen v. Joint Health Ventures, 107 Fed. Appx. 714, 717-18 (9th Cir. 2004); Stone Street
Services, Inc. v. Daniels, 2000 WL 1909373, at *3 (E.D. Pa. 2000); see generally Monsen
v. Consolidated Dressed Beef Co., Inc., 579 F.2d 793, 799 (3d Cir. 1978). Accordingly,
amended count I does state a claim against them.
C.
The trustee’s second claim, also asserted against all of the defendants,
alleges that the July 2, 2002 transfers were fraudulent conveyances under state law. He
avers that all of the defendants “orchestrated, participated in and/or aided and abetted the
July 2 Transfers with the actual intent to hinder, delay and/or defraud TCI’s creditors.”
Amended Complaint, ¶ 68. In addition, the trustee contends that TCI did not receive
reasonably equivalent value in exchange for the transfer of its pipe production assets
when it was insolvent, “engaged in business for which its remaining property constituted
unreasonably small capital for its needs, and/or when the Defendants knew or should have
known that TCI would incur additional debts that would be beyond TCI’s ability to pay as
such debts matured.” Id., at ¶ 70.
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Count II is based upon the Pennsylvania Uniform Fraudulent Transfer Act
(PUFTA), 12 Pa. C.S.A. §§ 5101, et seq. Previously, I concluded that the trustee had
alleged facts that, if proven at trial, may demonstrate that the July 2nd transfers from TCI
to PolyFlow, Finloc Capital, Winston Towers and Finloc, Inc. were either intentional or
constructively fraudulent. These were the putative transferees of TCI assets. I also held
though that Pennsylvania would not adopt the concept of accomplice liability for claims
under PUFTA. See, e.g., Chepstow Ltd. v. Hunt, 381 F.3d 1077 (11th Cir. 2004); In re
Parmalat Securities Litigation, 377 F. Supp. 2d 390, 416-17 (S.D.N.Y. 2005); Baker
O'Neal Holdings, Inc. v. Ernst & Young LLP, 2004 WL 771230, at *14 (S.D. Ind. 2004).
Thus, aiding and abetting a fraudulent transfer does not, by itself, establish liability under
state law.
In the original complaint, the trustee failed to allege that any of the
individual defendants, the Canam defendants, or Finloc US received any of TCI’s
property stemming from the July 2002 transfers, or directly benefitted therefrom. In the
amended complaint, the trustee contends that in connection with the July 2nd transfer,
“Finloc US transferred $161,954 to Canam Steel.” Amended Complaint, ¶ 38(o). In
addition, he asserts that Canam Manac Group was a beneficiary of the July 2nd transfers
“in its capacity as owner of the preferred stock of Finloc and recipient of the profits of
Finloc and in its capacity as 100% owner and recipient of the profits of Canam Steel.”
Id., ¶ 73(a). Similarly, the trustee alleges that Finloc US was a beneficiary “in its capacity
as 100% owner of and recipient of the profits of PolyFlow and as the recipient of more
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If the trustee were alleging that Finloc US was a subsequent transferee of4
property fraudulently conveyed by TCI, it would state a cause of action. Although ¶ 73(e) could
be so read, its reference to Exhibit A makes clear that Finloc US is not asserted to be a
subsequent transferee.
As all of the funds that Finloc US received from Winston Towers and Finloc5
Capital were paid to PolyFlow, Finloc US’s transfer of money to Canam Steel must have been
made from cash on hand completely independent of the July 2nd transfers to and from TCI.
8
than $3.5 Million funneled from TCI through Winston Towers and Finloc Capital, See
Exhibit A.” Id., at ¶ 73(e). 4
As mentioned earlier, Exhibit A to the amended complaint is a flow chart
purporting to show the transfers that occurred on July 2, 2002. This diagram asserts that
all of the pipe production assets of TCI were transferred to PolyFlow, and TCI’s cash was
paid to Winston Towers, Finloc Inc. and Finloc Capital only. The alleged transfer of
$161,954 to Canam Steel is derived solely from the separate assets of Finloc US. 	Thus,5
even in the amended allegations, defendant Canam Steel is not a transferee of any of the
assets formerly owned by TCI. (Nor is it alleged to be a subsequent transferee.)
Therefore, the amended complaint still fails to assert a claim against this defendant as a
transferee of a fraudulent conveyance.
Insofar as Canam Manac, Canam Steel and Finloc US are concerned, the
trustee observes that PUFTA establishes liability of transfer beneficiaries as well as
transferees of fraudulent conveyances. Specifically, 12 Pa. C.S.A. § 5108 states:
b) Judgment for certain voidable transfers.–Except as
otherwise provided in this section, to the extent a transfer is
voidable in an action by a creditor under section 5107(a)(1)
(relating to remedies of creditors), the creditor may recover
judgment for the value of the asset transferred, as adjusted
under subsection (c), or the amount necessary to satisfy the
creditor's claim, whichever is less. The judgment may be
entered against:
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(1) the first transferee of the asset or the person
for whose benefit the transfer was made; or
(2) any subsequent transferee other than a good
faith transferee who took for value or from any
subsequent transferee.
(emphasis added).
Although the trustee alleges in paragraph 74 of his amended complaint that
any defendant who was not a transferee of the July 2nd conveyance is liable for aiding
and abetting, a legal contention I have already found unpersuasive, he also asserts that
defendants Finloc US and Canam Manac benefitted from the conveyance as shareholders
of PolyFlow and Finloc, Inc. respectively, which were transferees. Amended Complaint,
¶ 73. In his memorandum, he further maintains that both Canam defendants were
beneficiaries of the transfer due to their alleged guarantee of TCI’s debt to the Bank of
America:
In the case at bar, it can be reasonably inferred from the
Amended Complaint that the Canam entities, as creditors,
were among the real beneficiaries of the fraudulent
conveyance of TCI’s assets, since the transfer of the Debtor’s
Pipe Production Business, at the very least, mitigated the
impact on the Canam Guarantors of having to make good on a
$7.5 million liability to Bank of America, i.e. “a bird in their
hand (TCI’s Pipe Production Business) was definitely worth
two in the bush (bankruptcy court).”
Trustee’s Omnibus Memorandum, at 14 (emphasis in original) (footnote omitted).
While I accept the trustee’s legal premise—that one who is a beneficiary of
a fraudulent transfer, but not a transferee, may be held liable under PUFTA—I cannot
agree that the amended complaint adequately sets forth that the Canam defendants or
Finloc US were beneficiaries within the meaning of section 5108(b)(1).
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11 U.S.C. § 550(a) provides:6
(a) Except as otherwise provided in this section, to the extent that a
transfer is avoided under section 544, 545, 547, 548, 549, 553(b),
or 724(a) of this title, the trustee may recover, for the benefit of the
estate, the property transferred, or, if the court so orders, the value
of such property, from--
(1) the initial transferee of such transfer or the entity
for whose benefit such transfer was made; or
(2) any immediate or mediate transferee of such
initial transferee.
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D.
At the outset, I note that the trustee did not cite any Pennsylvania decision
supporting his argument that these three defendants were beneficiaries, based upon their
loan guarantee or stock holdings. Indeed, there appears to be no reported state court
decision discussing the meaning of beneficiary under PUFTA. However, in its 1993
Comment issued in conjunction with the enactment of PUFTA, the Pennsylvania Bar
Association Section on Corporation, Banking and Business Law acknowledged that
section 5108(b) “is derived from § 550(a) and § 550(b) of the Bankruptcy Code.”
Committee Comment(2) to Section 5108 (1993). 	Moreover, the trustee’s use of PUFTA6
in this adversary proceeding is derived from section 544 of the Bankruptcy Code, see In
re Walter, 261 B.R. 139, 141-42 (Bankr. W.D. Pa. 2001); therefore any recovery would
be based upon section 550. See In re First Independence Capital Corp., 2006 WL
1342789, at *5 (6th Cir. 2006):
But even though voidability under § 544 may be premised on
state law, recovery of transfers avoided under this section,
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like recovery of transfers avoided under § 548, hinges on §
550 of the Bankruptcy Code rather than on state law.
Accordingly, decisions construing section 550(a) and interpreting the phrase “the entity
for whose benefit the transfer was made” are germane to the instant motions to dismiss
count II.
In general, most courts have interpreted section 550(a) consistent with the
holding of Mack v. Newton, 737 F.2d 1343, 1359-60 (5th Cir. 1984). In Mack, the Fifth
Circuit concluded that fraudulent conveyance liability under section 70e of the former
Bankruptcy Act of 1898 could not lie against a non-transferee who received only “an
incidental, unquantifiable, and remote benefit bearing no necessary correspondence to the
value of the property transferred or received.” As observed by two commentators, “[t]he
Fifth Circuit’s admonition in Mack that the benefit must bear a ‘necessary
correspondence’ to the value of the property transferred that is more than incidental and
remote provides guidance in constructing a more workable rule.” Chen & Teofan, The
Indentity and Liability of the Entity for Whose Benefit a Transfer Is Made Under Section
550(A): An Alternative to the Rorschach Test, 4 J. Bankr. L. & Prac. 145, 173 (1995)
(“Chen & Teofan”). A “workable rule” becomes necessary because one can construe the
meaning of benefit so broadly that the intended purpose behind the recovery of fraudulent
conveyances becomes lost:
The concept of “benefit” subsumes an innumerable variety of
advantages. In addition to direct financial gain, benefit may
be expressed in terms of aesthetic enjoyment, use, deferred
loss, enhancement in value, indirect profits, improved
liquidity, increased control over an asset, and enhanced
marketability, among others. Under its broadest interpretation,
a trustee would have little difficulty in showing some
“benefit” to anyone remotely connected to a transfer. An
examination of the cases permitting recovery from
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beneficiaries, however, reveals a narrower interpretation of
the requisite “benefit.”
Chen & Teofan, at 163-64.
Consistent with this narrow definition of benefit, the Eleventh Circuit
recently considered whether an individual, who was the sole shareholder and officer of a
corporation, could be liable for a fraudulent conveyance as a beneficiary. In re
International Management Assoc., 399 F.3d 1288 (11th Cir. 2005). The bankruptcy
trustee in that case had argued, and the lower courts had agreed, that:
Reily was the “primary beneficiary” of the transfer to Dr.
Gichon “as he wound up with 100% of the stock of Premier,
along with the control of all of the assets of the Debtors
within his own closely held corporation,” and so was the
“entity for whose benefit the transfers were made pursuant to
11 U.S.C. § 550.”
Id., at 1291 (quoting the lower court decision). The Circuit Court acknowledged that
Reily received some benefit from the challenged transaction, but concluded that his
benefit was not concrete enough for liability under section 550(a). It gave this lengthy
explanation for its ruling:
The overarching purpose of the transaction before us was to
obtain a loan from Healthcare REIT to restructure the
financing of the assisted living facilities and to provide capital
for continued operations. A condition of that loan was that
Reily be the sole owner of the stock of the debtor
corporations. Therefore, the acquisition of the stock was in
the interest of furthering the loan and the restructuring--goals
which fulfilled Reily's purposes. Hence, Reily was
“benefitted” in a larger sense when he obtained complete
control of the debtors’ assets and therefore fulfilled a
necessary condition of obtaining the funds from Health Care
REIT. This is the “benefit” that both the trustee and the
bankruptcy court attributed to Reily in order to underpin
liability. . . . However, this sort of unquantifiable advantage
is not the sort of “benefit” contemplated by 11 U.S.C. §
550(a).
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The paradigm case of a benefit under § 550(a) is the benefit to
a guarantor by the payment of the underlying debt of the
debtor. See In re Coggin, 30 F.3d 1443, 1453 (11th Cir.
1994) (stating that the phrase “entity for whose benefit such
transfer was made” “usually has been employed when the
trustee attempts to recover from a guarantor of an underlying
debt”). . . .
The example of a debt and a guarantor affords some insight
into the intention of Congress in enacting § 550(a). The fact
that Reily attained complete control over the debtors’ assets
does not give rise to a quantifiable benefit or one bearing the
“necessary correspondence to the value of the property
transferred or received.” Mack v. Newton, 737 F.2d 1343,
1359-60 (5th Cir. 1984). The immediate facts here are that
debtor corporations paid $100,000 for stock worth less than
$100,000 (and that was probably worth nothing). There is no
direct benefit to Reily in a transaction that reduced the assets
under his control by $100,000 but increased to an
unquantifiable extent the concentration of his control or
ownership of that shrunken asset base. The only “benefit”
cited by the bankruptcy court was the winning of 100%
control over depleted assets. This is not a tangible or a
quantifiable benefit. See id. (rejecting as too broad the
trustee’s allegation that the principals in a partnership had
received an incidental benefit from auctioning off cattle and
using the proceeds to operate their dairy enterprise, deeming
this “an incidental, unquantifiable, and remote benefit bearing
no necessary correspondence to the value of the property
transferred or received.”). Even as a matter of arithmetic, the
transfer here depleted and did not augment the assets of
debtors controlled by Reily. The fact that Reily gained
exclusive control of a smaller pool of assets does not, on the
facts before us, weigh in the balance. The very fact that the
bankruptcy estate received “less than a reasonably equivalent
value in exchange” for the $100,000 (to qualify the transfer as
voidable under 11 U.S.C. § 550(a)) would deprive Reily of
any net benefit in the transfer. Thus, Reily's loss was
$100,000 from the assets subject to his control, while his only
gain was the value of the stock giving him 100% control,
which, in order for the transfer to be voidable, was worth less
than $100,000.
This case is immediately distinguishable from In re B.S.
Livingston & Co., Inc., 186 B.R. 841 ([] D.N.J. 1995), in
which the defendants were benefitted when they sold the core
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of the debtor's business to a third party in exchange for
lucrative positions in the new company. Although Livingston
may present a “benefit” that is on the far edge of qualification
under 11 U.S.C. § 550(a), there is no obvious violence to the
language in stating that the benefit of a lucrative position, like
the benefit experienced by a guarantor, may be considered
direct, ascertainable and quantifiable, unlike the “benefit”
attributed to Reily.
Id., at 1292-93 (footnote, citations and reference to the record omitted).
A similar conclusion was just reached in In re Hansen, 341 B.R. 638
(Bankr. N.D. Ill. 2006). There the chapter 7 trustee sought to recover from the president
and majority shareholder an allegedly fraudulent transfer made by the individual debtor to
the defendant’s corporation. The defendant, Richard Stiefel, was also the guarantor of
certain corporate obligations; however, none of the transferred funds were used to reduce
this guarantee. Id., at 641-42. The Bankruptcy Court held that stock ownership or
officership status by themselves are insufficient to provide a direct and quantifiable
benefit when the corporation is the recipient of an allegedly fraudulent transfer, unless the
individual is found to be the alter ego of the corporation:
Nothing in section 550(a)(1) indicates that corporate form can
be thrust aside and all voidable transfers to a corporation
recovered from its shareholders on the mere assumption that
shareholders somehow automatically “benefit” from such
transfers. If corporate existence is to be observed, transfers
cannot be recovered even from a shareholder who by virtue of
his majority ownership ostensibly “controls” the corporation. .
. . Something more than mere status as a shareholder, officer,
or director must be shown. . . .
The better view--and the one consistent with corporate law--is
that shareholders, officers, and directors are not liable for
transfers to their corporation unless they actually received
distributions of the transferred property (in which case they
would be subsequent transferees under section 550(a)(2)), or a
showing can be made to pierce the corporate veil. . . . Most
cases in which shareholders or officers have been found
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The Third Circuit Court of Appeals analyzed Pennsylvania law for piercing the7
corporate veil in the following terms:
We have stated that “[f]actors considered under Pennsylvania law,
for example, with respect to the alter ego theory include, but are
not limited to, the following: ‘[T]he failure to observe corporate
formalities; non-payment of dividends; insolvency of debtor
(continued...)
15
responsible under section 550(a)(1) as beneficiaries of
corporate transfers have involved some veil-piercing aspect.
Id., at 645-46 (citations omitted). This narrow definition of benefit under section 550(a)
is consistent with that used in construing section 547(b)(1): the defendant must have
“realized some quantifiable monetary advantage from the debtor’s transfer . . . .” In re
Erin Food Services, Inc., 980 F.2d 792, 800 (1st Cir. 1992) (emphasis in original).
In the amended complaint, the only benefits that the Canam defendants and
Finloc US allegedly received were indirect and unquantifiable. There was no allegation
that any of the funds involved with the July 2nd transfer were used to reduce the Canam
defendants’ guarantee of TCI’s obligation to the Bank of America. The guarantee
obligation remained unchanged and unreduced. Rather, the trustee posits that, as a result
of the transfer, there was a possibility that the guarantors’ exposure could be reduced in
the future. This potential benefit is too remote for liability under section 550(a).
Similarly, the trustee is implicitly asserting in amended count II that parent
corporations or affiliate corporations of corporate transferees that have allegedly received
fraudulent conveyances may also be liable, based solely upon their relationship to the
transferees. This contention is equally unpersuasive, unless the parent or affiliate
corporation is the alter ego of the corporate transferee, an assertion that the trustee does
not make ; or that the fraudulently conveyed assets were themselves transferred to the7
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(...continued)7
corporation; siphoning the funds from corporation by dominant
shareholders; non-functioning of other officers and directors;
absence of corporate records; whether the corporation is a mere
facade for the operations of a common shareholder or shareholders;
and gross undercapitalization.’” Eastern Minerals & Chemicals
Co. v. Mahan, 225 F.3d 330, 333 n.7 (3d Cir. 2000) (quoting
Wheeling-Pittsburgh Steel Corp. v. Intersteel, Inc., 758 F. Supp.
1054, 1059 (W.D. Pa. 1990)).
Plastipak Packaging, Inc. v. DePasquale, 2003 WL 22120971, at *1 (3d Cir. 2003)
(unpublished); see Kaplan v. First Options of Chicago, Inc., 19 F.3d 1503, 1520-21 (3d Cir.
1994), aff’d, 514 U.S. 938 (1995).
16
parent or affiliate. Compare In re FBN Food Services, Inc., 175 B.R. 671, 686-88 (Bankr.
N.D. Ill. 1994) (parent company exercises control over the transferred assets for its own
purposes). Again, the trustee does not so contend in his amended complaint. See Exhibit
A.
Accordingly, as to amended count II, the motions to dismiss filed by the
Canam defendants and Finloc US are sustained. See Crowthers McCall Pattern, Inc. v.
Lewis, 129 B.R. 992, 996 (S.D.N.Y. 1991).
D.
The trustee alleged as his amended sixth cause of action that all named
defendants are liable to him for deepening the insolvency of TCI by an amount in excess
of $17 million. Amended Complaint, ¶¶ 47, 92. This claim, he maintains, is premised
upon the sham continued operation of TCI, which operation purportedly directly or
indirectly caused the incurrence of debt to the detriment of the corporation and its
creditors.
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Specifically, the trustee asserts that after the July 2nd asset sale, TCI’s
business was limited to the distribution of pipe, the income from which was insufficient
to pay creditors. Amended Complaint, ¶¶ 33, 46. TCI was kept operational nonetheless
in order “to conceal the fraudulent transfers of the Pipe Production Business until
expiration of the applicable statutes of limitations” and to mislead creditors into believing
that TCI . . . was continuing as a going concern and conducting business as usual.” Id., at
¶¶ 33, 40.
The Third Circuit Court of Appeals has predicted that Pennsylvania will
recognize the tort of deepening insolvency. Official Committee of Unsecured Creditors
v. R.F. Lafferty & Co., 267 F.3d 340, 349 (3d Cir. 2001); see also In re CitX Corp., Inc.,
448 F.3d 672, 680 (3d Cir. 2006). This tort involves the “[t]he fraudulent and concealed
incurrence of debt” that damages the value of a corporation. Official Committee of
Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d at 349; see also In re Global
Service Group, LLC, 316 B.R. 451, 456 (Bankr. S.D.N.Y. 2004) (deepening insolvency is
defined as the “‘fraudulent prolongation of a corporation’s life beyond insolvency,’
resulting in damage to the corporation caused by increased debt.”) (quoting Schacht v.
Brown, 711 F.2d 1343, 1350 (7th Cir. 1983)).
Insofar as the original complaint was concerned, I dismissed count VI as to
Finloc Capital, Winston Towers, Finloc, Inc., PolyFlow and the Canam defendants, as the
facts alleged did not support a possible finding that these defendants were involved with
the continued operations of TCI, let alone that they acted tortiously in the accretion of
future debt by the debtor. In an attempt to state a cause of action against the Canam
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defendants, Winston Towers and Finloc Capital, the trustee’s amended complaint alleges
the following:
88. Dutil acted on his own behalf, and as agent for and on
behalf of Canam Manac and Canam Steel in connection with
causing TCI to continue and remain in business after the July
2 Transfers, knowing full well that TCI could not continue as
a going concern, was deceiving past and future creditors as to
its financial condition and was continuing to incur substantial
new debt that it could not possibly repay. Since Dutil acted as
an agent for and within the scope of his authority on behalf of
Canam Manac and Canam Steel, Defendants Canam Manac
and Canam Steel are responsible for having caused TCI to
continue and remain in business after the July 2 Transfers,
and are charged with the knowledge and intent that TCI was
being continued for the illegal purposes alleged herein.
***
90. Defendants Finloc Capital and Winston Towers (through
their ownership and control of PolyFlow and otherwise)
caused TCI to continue and remain in business after the July 2
Transfers, knowing full well that TCI could not continue as a
going concern, was deceiving past and future creditors as to
its financial condition and was continuing to incur substantial
new debt that it could not possibly repay.
Amended Complaint, ¶¶ 88, 90.
As concerns defendants Finloc Capital and Winston Towers, the amended
complaint—which does not assert any alter ego status or agency relationship—does not
allege that they participated in the continued operations of TCI and its accrual of
additional debt. Instead, these defendants allegedly controlled PolyFlow, and PolyFlow,
which is a separate defendant, purportedly was responsible for TCI’s deepening
insolvency. Such a tenuous connection does not state a cause of action for this tort. See
In re VarTec Telecom, Inc., 335 B.R. 631, 645-46 (Bankr. N.D. Tex. 2005).
Insofar as the Canam defendants are concerned, the amended complaint
now claims that they, acting through their agent Mr. Dutil who was a director of TCI,
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wrongfully deepened TCI’s insolvency. To the extent that Pennsylvania would recognize
the tort of deepening insolvency, it would hold a principal liable for the actions of its
agent. See also Marion v. TDI, Inc., 2004 WL 1175740, at *1 (E.D. Pa. 2004) (denying a
motion to dismiss a claim of aiding and abetting deepening insolvency).
In the context of these motions, I must assume that the trustee can prove
Mr. Dutil’s agency status at trial. Accordingly, the motion of the Canam defendants to
dismiss count VI is denied. The motion of Finloc Capital and Winston Towers to dismiss
count VI is granted.
E.
In count VII of his amended complaint, the trustee requests that any
secured, indemnification or unsecured claims asserted by any of the defendants either be
disallowed or be subordinated to the claims of unsecured creditors. He asserts that all of
the defendants except Canam Manac Group have filed proofs of claims in this chapter 11
case, and these claims total $13 million. Amended Complaint, ¶ 94. Disallowance of the
defendants’ claims is based upon their alleged breaches of fiduciary duties.
Subordination relief is sought under 11 U.S.C. § 510(c). See generally In re McCook
Metals, L.L.C., 319 B.R. 570 (Bankr. N.D. Ill. 2005); In re Ticketplanet.com, 313 B.R.
46, 65-66 (Bankr. S.D.N.Y. 2004).
In dismissing this count in the original complaint, I then observed that the
trustee had failed to allege that any defendant, except Winston Tower and Finloc Capital,
had asserted any claim against TCI. He was given the opportunity to correct this
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oversight, and he has now done so. Indeed, Exhibit B to the amended complaint lists the
claims filed of the various defendants in this case.
Recognizing that Canam Manac Group has filed no claim in this chapter 11
case, the trustee seeks no relief against this defendant in count VII. Presently, only
Canam Steel seeks dismissal of amended count VII, based upon its assertion that the
trustee has failed to assert any valid claims against it in counts I, II, or VI. Having just
concluded that the trustee’s amended allegations would, if proven, provide relief against
Canam Steel for breach of fiduciary duty and deepening insolvency, I will deny Canam
Steel’s request to dismiss count VII.
An appropriate order shall be entered.
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re 	: 	Chapter 11
TOTAL CONTAINMENT, INC. 	:
Debtor 	: 	Bankruptcy No. 04-13144
____________________________________
GEORGE L. MILLER, Chapter 11 trustee 	:
Plaintiff 	:
v. 	:
MARCEL DUTIL 	:
THE CANAM MANAC GROUP, INC.
CANAM STEEL CORPORATION 	:
FINLOC, INC.
FINLOC CAPITAL, INC. 	:
FINLOC US, INC.
WINSTON TOWERS 1988, INC. 	:
POLYFLOW, INC.
JAY R. WRIGHT, JR. 	:
BERNARD GOUIN, and
PIERRE DESJARDINS 	:
Defendants 	: 	Adversary No. 05-0145
____________________________________
..............................................................
ORDER
..............................................................
AND NOW, this 17th day of August 2006, for the reasons stated in the
accompanying memorandum, it is hereby ordered that defendants’ motions to dismiss
amended counts I, II, VI and VII are granted in part and denied in part, as follows:
1. The motions to dismiss amended count I as to Canam Steel Corporation
and Canam Manac Group, Inc. are denied;
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2. The motions to dismiss amended count II as to the Canam defendants and
Finloc US, Inc. are granted. Furthermore, amended count II remains dismissed as to the
individual defendants;
3. The motions to dismiss amended count VI as to the Canam defendants
are denied. The motions to dismiss amended count VI as to Finloc Capital, Inc. and
Winston Towers 1988, Inc. are granted; and
4. The motions to dismiss amended count VII are denied.
BRUCE FOX
United States Bankruptcy Judge
copies to:
Steven M. Coren, Esq.
Kaufman, Coren & Ress, P.C.
1525 Locust St., 17th Floor
Philadelphia, PA 19102
Jeffrey D. Herschman, Esq.
DLA Piper Rudnic Gray Cary US, LLP
6225 Smith Ave
Baltimore, MD 21209
Phillip E. Wilson, Jr., Esq.
DLA Piper Rudnick Gray Cary US, LLP
One Liberty Place
1650 Market Street, Suite 4900
Philadelphia, PA 19103
Christopher W. Wasson, Esq.
Pepper Hamilton LLP
3000 Two Logan Square
18th & Arch Sts.
Philadelphia, PA 19103
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