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In re : Chapter 11


Debtor : Bankruptcy No. 04-13144F


GEORGE L. MILLER, Chapter 11 trustee :

Plaintiff :

v. :












Defendants : Adversary No. 05-0145 ____________________________________


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. These 11 defendants have now filed various motions to dismiss all seven counts, contending that the trustee has failed to state any cause of action, and that he has failed to plead his claim of a fraudulent conveyance with the requisite specificity. The trustee opposes dismissal of any claim against any defendant. He maintains that his complaint complies with the liberal notice-pleading requirements of the federal rules of procedure, and so he has sufficiently pled all seven causes of action.

The parties have submitted lengthy memoranda in support of their respective positions and have orally argued their contentions. As these various motions to dismiss focus upon the allegations of the complaint, I shall first summarize those averments.



The trustee alleges that the debtor, a Pennsylvania corporation located in Oaks, Pennsylvania and referred to as TCI, “was a leading manufacturer and distributor of underground systems, products and services for the transport of petroleum and alcohol based motor vehicle fuels from underground storage tanks to aboveground fuel dispensers.” Complaint, 16. At some point in 2001 and at all relevant times thereafter, TCI’s liabilities were $9 million in excess of its assets, and so the company was insolvent.

Id., 17.Nonetheless, its assets, which included patents and other tangible and intangible personal property, had a value estimated by the trustee to be in excess of $6.1 million.

Id., 19, 55.

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a Pennsylvania corporation also located in Oaks, Pennsylvania. Id., 12, 22. The alleged purpose of establishing PolyFlow was to “divert TCI’s Pipe Production Business” from the claims of TCI’s creditors. Id., 21-22. On July 2, 2002, TCI sold all of its assets involved in this pipe production business to PolyFlow, Inc. for $3,599,913 in cash, plus PolyFlow’s assumption of approximately $2.5 million of TCI’s debt to defendant Finloc, Inc. Id., 23 (see also Ex. A to the Complaint). PolyFlow obtained the funds to purchase TCI’s assets from defendant Finloc US, who in turn had received about 50% of those funds from defendant Finloc Capital and roughly 50% from defendant Winston Towers 1988. In connection with the transfer of funds from Finloc US, PolyFlow conveyed 100 shares of its stock to Finloc US, Inc. Id., 23. Upon receipt of the sale proceeds from PolyFlow, TCI allegedly transferred all but $9,000 back to defendants Finloc Capital, Finloc, Inc. and Winston Towers 1988. Id.

According to the trustee’s complaint, Finloc, Inc. is a Canadian corporation that owned and/or controlled both Finloc US, Inc. and Finloc Capital, Inc., and is also a minority shareholder of TCI. Complaint, 8. Finloc, Inc. is an affiliate of Canam Manac Group, Inc., another Canadian corporation that owned and controlled Canam Steel Corp., a Delaware Corporation. Id. Finloc Capital, Inc. is a shareholder of Finloc US, Inc., as is Winston Towers 1988, Inc. Finloc US, Inc. is the majority shareholder of TCI and the sole shareholder of PolyFlow. Id., 6-11.

Defendants Dutil, Desjardins, Gouin, and Wright were allegedly officers and/or directors of TCI, and they were knowing participants in the alleged scheme to remove the assets from TCI. Id., 5, 13-15, 21, 23. Mr. Dutil is also asserted to be the

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Winston Towers, chairperson of Finloc, Inc. and a director of Finloc US, Inc. Id., 5. It is further alleged that defendant Canam Steel Corporation “directed, aided and abetted and benefitted” from the alleged misconduct of the various defendants. Id., 7.

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illustrating the purported facts surrounding TCI’s July 2, 2002 sale of assets to PolyFlow.

According to the trustee, 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 PolyFlow stock for $3,750,000. PolyFlow thereafter paid TCI $3,599,913, and assumed $2,550,000 in debt owed to Finloc, Inc., for the former’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., 23, Ex. A. Although not expressly alleged, one can infer that TCI had outstanding obligations to Finloc, Inc., Finloc Capital and Winston Towers prior to July 2, 2002.1

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as follows: TCI transferred its pipe production assets to PolyFlow and reduced its debt to Finloc, Inc. by about $2.6 million in cash and assigned debt, and reduced its debt to 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 to a capital contribution 1 If not, then the trustee would have complained that TCI transferred funds to these three entities without consideration. Although he does raise the issue of fraudulent conveyance, the trustee does so in the context of the totality of the transfers associated with the sale of TCI’s pipe production assets, rather than focusing upon the transfer of the proceeds to non-creditors.

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$1.965 million receivable due from TCI again either for a capital contribution or a debt in that amount due from Finloc US.

The trustee alleges that these sale and payment transactions “had no legitimate purpose or benefit to TCI,” Complaint, 23, and were undertaken to keep TCI’s pipe production assets from recovery by the debtor’s creditors and under the control of the defendants. Id., 21. The trustee further asserts in his complaint that the “Defendants structured a relationship in which they kept TCI going to mislead creditors into believing that TCI... was continuing as a going concern....” Id., 25. The trustee also contends that the “Defendants diverted more than $1 Million from TCI... to PolyFlow” and that the debtor’s insolvency increased by more than $17 million as a result of the alleged transfers and continuation of TCI’s business. Id., 27(f), 32.

Finally, the trustee avers that the individual defendants wrongfully caused TCI to fail to defend against lawsuits brought by Murphy Oil USA, Inc. and PISCES OPW, Inc., causing damages in excess of $5 million. Id., 35-46.

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The trustee’s first claim is that all defendants breached their fiduciary duties to TCI, subjecting them to damages. His second claim is that all defendants were participants in a fraudulent conveyance of TCI’s assets with the July 2, 2002 sale and transfers of proceeds, warranting liability of more than $6.1 million. The trustee’s third claim is that defendant PolyFlow be declared the successor in liability and assets as to all

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defendants are liable for negligence as well as breaches of fiduciary duty in connection with the two judgments entered against TCI in the Murphy Oil and PISCES litigations.

The trustee’s sixth claim is asserted against all defendants for “deepening [the] insolvency” of TCI. And the seventh and final claim, also against all defendants, seeks a declaration that defendants’ conduct justifies the disallowance or subordination of all claims they may assert against TCI.

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As mentioned earlier, the defendants have sought to dismiss each count of the chapter 7 trustee’s complaint for failure to state a cause of action under Fed. R. Bankr.

P. 7012. Federal Rule of Bankruptcy Procedure 7012(b) incorporates Fed. R. Civ. P.

12(b)-(h). It is well understood that in order to dismiss a claim for failure to state a cause of action under Rule 12(b)(6), the claim should not be dismissed unless it appears beyond doubt that the plaintiff can prove no set of facts in support of that claim which would entitle him to relief. E.g., Conley v. Gibson, 355 U.S. 41, 45 (1957). A trial court must accept as true all of the well-pleaded facts alleged in the complaint and any reasonable inferences therefrom. Scheuer v. Rhodes, 416 U.S. 232 (1974); Conley v. Gibson.

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In determining whether the trustee in this proceeding has stated a cause of action, I note that the procedural rules, Fed. R. Bankr. P. 7008 (incorporating Fed. R. Civ.

P. 8), require only “‘notice’ pleading, rather than detailed fact pleading.” 2 Moore’s Federal Practice, § 12.34[1][b], at 12-60 (3d ed. 1999). Accordingly, a plaintiff is not required to plead each and every element of every claim with “precision.” Rose v. Bartle, 871 F.2d 331, 356 (3d Cir. 1989); accord In re Tower Air, Inc., 416 F.3d 229, 237 (3d Cir. 2005); Bonsall Village, Inc. v. Patterson, 1990 WL 139383, at *7 (E.D. Pa. 1990);

Atlass v. Texas Air Corp., 1989 WL 51724, at *5 (E.D. Pa. 1989).

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(incorporated by Fed. R. Bankr. P. 7009), requires that a plaintiff expressly plead the facts surrounding each and every element of the cause of action “with particularity.” Fed. R.

Civ. P. 9. See Feldman v. Trust Co. Bank, 1993 WL 300136, at *3 (E.D. Pa. 1993) (“Combining the liberal requirements of notice pleading with the more demanding ones required for fraud, the court concludes plaintiff need not plead all the elements necessary to establish his causes of action, but where he makes allegations of fraud, those allegations must be pleaded with greater particularity.”).

Nonetheless, in construing Fed. R. Civ. P. 9(b), a leading commentator explained that: “While the purpose of Rule 9(b) is to provide detailed notice of the circumstances constituting fraud, each and every alleged misrepresentation need not appear in the pleadings.” 2 Moore’s Federal Practice, 9.03[1][a] at 9-17 (3d ed. 1999) (footnote omitted).

The Third Circuit Court of Appeals echoes this general requirement:

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Craftmatic Securities Litigation v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1989) (quoting, respectively, Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786, 791 (3d Cir. 1984), and Wright & Miller, 5 Federal Practice and Procedure, § 1298, at 407 (1969)).

Indeed, in Seville, the Court of Appeals noted further that “allegations of ‘date, place or time’ fulfill these [particularity] functions, but nothing in the rule requires them. Plaintiffs are free to use alternative means of injecting precision and some measure of substantiation into their allegations of fraud.” Seville Industrial Machinery Corp., 742 F.2d at 791.2 The requirement of pleading fraud with particularity is tempered not only by a flexible approach to the rules of federal civil procedure, Craftmatic Securities Litigation v. Kraftsow, 890 F.2d at 645-46 (remedy for failing to conform with Rule 9(b) is to allow amendment of the complaint to provide greater specificity, pursuant to Fed. R. Civ. P.

2 Fed. R. Civ. P. 84 refers to an “Appendix of Forms” accompanying the rules of civil procedure which are intended to demonstrate “the simplicity and brevity” which the rules of procedure “contemplate.” See also Swierkiewicz v. Sorema, 534 U.S. 506, 513 n.4 (2002) (referring favorably to the official forms as providing a permissible example of the pleading requirements imposed by Rule 8); In re Tower Air, Inc., 416 F.3d at 237 (analyzing Official Form 9). Official Form 13 provides an example of a simple, four-paragraph complaint that seeks to set aside an intentional fraudulent conveyance.

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those circumstances “[w]here it can be shown that the requisite factual information is peculiarly within the defendant's knowledge or control.” Northwestern Human Services, Inc. v. Panaccio, 2004 WL 2166293, at *8 (E.D. Pa. 2004).

Indeed, flexibility in construing the particularity requirement of Rule 9 is particularly apt when a fraud claim is brought by a bankruptcy trustee. The trustee will have no first-hand knowledge of the prepetition acts that gave rise to the alleged fraud, and may or may not receive the cooperation of the debtor in this regard. See Official Committee of Asbestos Claimants of G-I Holding, Inc. v. Heyman, 277 B.R. 20, 36-37 (S.D.N.Y. 2002); In re Sverica Acquisition Corp., Inc., 179 B.R. 457, 463 (Bankr. E.D.

Pa. 1995); In re Harry Levin, Inc., 175 B.R. 560, 567-68 (Bankr. E.D. Pa. 1994); 10 Collier on Bankruptcy, 7009.03, at 7009-4 (15th ed. rev. 2005).

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