SE Property Holdings LLC v. Saint Family Limited Partnership

          ORDER

          WILLIAM H. STEELE UNITED STATES DISTRICT JUDGE.

         This matter comes before the Court on defendants' “Motion to Dismiss or in the Alternative for More Definite Statement and Motion for Court to Abstain or in the Alternative Stay” (doc. 10). The Motion has been the subject of extensive briefing and is now ripe.^[1] Also pending is Defendants' Motion to Correct (doc. 28), which is granted. The revised text from the Motion to Correct is hereby substituted for the fourth paragraph of Section II.A. of Defendants' Reply (doc. 24), beginning on page 11 and extending to the top of page 12.

         I. Relevant Background.

         This case is one of a number of fraudulent transfer actions that SE Property Holdings, LLC (“SEPH”), is pursuing in this District Court against guarantors of multimillion dollar loans made by SEPH's predecessor for the development and financing of certain real estate projects in Orange Beach, Alabama known as Bama Bayou and Marine Park. When the projects failed and the loans went into default, the guarantors declined to pay, thereby embroiling SEPH and the guarantors in many years of litigation spanning numerous cases and courts, including this District Court and the Mobile County Circuit Court, as well as probate and bankruptcy courts.

         In this particular action, SEPH filed a Complaint (doc. 1) against defendants, Saint Family Limited Partnership (“SFLP”); Frances J. Saint, in her individual capacity; Frances J. Saint, in her capacity as Personal Representative of the Estate of John B. Saint, deceased (the “Estate” or the “Saint Estate”); and Kasubra, LLC.^[2] The well-pleaded factual allegations of the Complaint, which are accepted as true for purposes of the Motion to Dismiss analysis, include the following: During the period of 2005 to 2007, John Saint (“Saint”) executed certain guaranties in favor of SEPH's predecessor, Vision Bank, pursuant to which Saint guaranteed a total of $7, 875, 000 in principal on Vision Bank loans for the Bama Bayou and Marine Park developments. (Doc. 1, ¶ 8.) Saint was not only the largest individual owner of the Bama Bayou and Marine Park projects, but he was also the single largest individual guarantor of the subject loans. (Id.) Vision Bank “relied greatly on John Saint's guaranties and his reported net worth and assets in its decision to make the Loans and extend credit to Bama Bayou and Marine Park.” (Id.)^[3]

         According to the Complaint, John Saint was aware by no later than early 2007 that Bama Bayou's financial condition was rapidly deteriorating (i.e., that it was “running out of cash”). Vision Bank relied on Saint's guaranties and reported assets / net worth to loan an additional $5 million to Bama Bayou in September 2007 on a short-term basis to help service the debt. (Id., ¶ 9.) Even so, Bama Bayou and Marine Park ultimately defaulted on the loans and notes in December 2008. (Id.) Vision Bank demanded payment from Saint in accordance with his guaranties; however, he refused to pay, and “[t]he entire debt remains unpaid” today. (Id.) The total amount of Saint's indebtedness to SEPH as of the filing of the Complaint in November 2016 is alleged to be in excess of $20, 905, 000 in principal and accrued interest (exclusive of attorney's fees, expenses and costs of collection). (Id., ¶ 25.)

         The Complaint also chronicles what it describes as a series of asset transfers undertaken by John Saint mostly between December 2006 and October 2007, which had the effect of “transferr[ing] away the bulk of his wealth and assets (over $35, 000, 000 in value) to entities he owned or controlled, to family members and to other insiders.” (Id., ¶ 21.) Those asset transfers are enumerated in the Complaint as follows: (i) on December 12, 2016, Saint transferred 500 shares in JDC Acquisition Corporation (valued at $31 million, according to the Complaint) to defendant SFLP; (ii) on December 14, 2016, Saint and defendant Frances Saint transferred their 70% interest in defendant Kasubra (valued at $3.4 million) to SFLP; (iii) on June 29, 2007, Saint transferred his ownership interest in a house and lot in Dauphin Island, Alabama (valued at $275, 000) to Frances Saint; (iv) in July or August 2007, Saint transferred certain Wachovia Securities (valued at $10, 000), 8, 307 shares of Wachovia Corporation (valued at $450, 000), 6, 294 shares of Colonial Bancgroup (valued at $200, 000), and 100 shares of Colonial Properties (valued at $14, 000) to SFLP; (v) also in 2007, Saint transferred his stock in Detroit Edison (valued at $20, 000) to SFLP; (vi) on October 29, 2007, Saint transferred his ownership interest in his residence on Chimney Top Drive South in Mobile, Alabama (valued at $275, 000) to Frances Saint; (vii) on October 29, 2007, Saint transferred his 98% ownership interest in SFLP as a limited partner to Frances Saint, with Saint and Frances Saint each retaining a 1% ownership interest in SFLP as general partners; and (viii) in 2007 or 2008, Saint transferred the contents of his Morgan Keegan account (valued at $31, 000) to SFLP. (Id., ¶¶ 10-20.)^[4] The Complaint alleges that, as a direct result of these transfers, Saint's holdings plummeted from $45, 725, 000 in valuation to just a shade over $2 million. (Id., ¶ 20.)

         The Complaint further alleges that John Saint concealed these transfers from Vision Bank by, among other things, delivering to Vision a false, inaccurate and fraudulent personal financial statement in May 2007. (Id., ¶¶ 20-21.) According to the Complaint, Saint listed in that financial statement many assets he had already transferred away (including most notably the $31 million in JDC Acquisition stock and the $3.4 million interest in Kusabra, which combined to total 77% of Saint's net worth as reported in the financial statement) some five months earlier, in December 2006. (Id., ¶ 21.) Because of this and other acts of concealment by Saint and Frances Saint, plaintiff alleges, SEPH/Vision was unaware of these transfers until September/October 2016. (Id.) Plaintiff avers that, had Saint's 2007 financial statement accurately reflected these transfers, it would not have continued to fund the Marine Park loan, would not have made additional loans for the Bama Bayou project, and would not have extended the loans' maturity dates on multiple occasions to allow Bama Bayou and Marine Park time to seek out other financing. (Id., ¶ 22.)

         On the strength of these factual allegations, the Complaint asserts five causes of action against defendants. Counts One and Two are statutory claims of fraudulent transfer under the Alabama Uniform Fraudulent Transfer Act, Ala. Code §§ 8-9A-1 et seq. (“AUFTA”). In particular, Count One alleges that the above-described transfers are constructive fraudulent transfers pursuant to Ala. Code §§ 8-9A-5 and/or 8-9A-4(c); meanwhile, Count Two alleges that those transfers are actual fraudulent transfers pursuant to Ala. Code § 8-9A-4(a). The remedies sought by SEPH for these alleged AUFTA violations include a monetary judgment against all defendants (as well as subsequent transferees) for compensatory and punitive damages, as well as declaratory relief “that the Court set aside said fraudulent transfers and declare such transfers (and any subsequent transfers of the property and assets) null and void.” (Id., at 11-12.)

         Count Three is a claim for conspiracy to defraud, alleging that Saint, defendants “and other subsequent transferees conspired to commit said fraud on SEPH in an effort to deprive SEPH of assets that could be used to pay the debts owed to SEPH by John Saint and the Saint Estate.” (Id., ¶ 33.) Counts Four and Five are common-law fraud causes of action against the Estate relating to John Saint's May 2007 personal financial statement. As pleaded, the claims are that Saint “intentionally misrepresented his assets and net worth to Vision” in that statement (fraudulent representation), and that Saint breached his “duty to disclose to and inform Vision” of such asset transfers before, contemporaneously with, and after submitting that financial statement to Vision Bank (fraudulent concealment). (Id., ¶¶ 36, 39.)

         Defendants now move for dismissal of all such claims and causes of action. Alternatively, defendants move for a more definite statement as to Count Three and abstention or a stay of this matter in its entirety pending the outcome of proceedings involving the John Saint Estate that are pending in Mobile County Probate Court.

         II. Analysis.

         A. Counts One and Two and the “Real Party in Interest” Objection.

         With respect to SEPH's claims under the AUFTA, defendants maintain that dismissal is appropriate because SEPH is not the real party in interest for those fraudulent transfer claims.^[5]Defendants' position is that the “real party in interest” for the fraudulent transfer claims is not SEPH, but is instead defendant Frances Saint, in her capacity as Personal Representative of the Estate of John Saint.

         In so contending, defendants' reasoning begins with the proposition that, as pleaded in the Complaint, Saint's liabilities were approximately 16 times greater than his assets at the time of his death (roughly $32 million versus roughly $2 million), and creditors have filed more than $25 million in claims against the Saint Estate in Probate Court. Thus, the claims against the Saint Estate outstrip its assets by a wide margin. Next, defendants point to a section of the Alabama Probate Procedure Act that reserves for the personal representative the power to recover property as needed to pay the decedent's unsecured debts, to-wit:

“The property liable for the payment of unsecured debts of a decedent includes all property transferred by the decedent by any means which is in law void or voidable as against creditors, and subject to prior liens, the right to recover this property, so far as necessary for the payment of unsecured debts of the decedent, is exclusively in the personal representative.”

         Ala. Code § 43-2-838 (emphasis added).^[6] Because § 43-2-838 vests authority in recovering property transferred by the decedent in a void or voidable manner exclusively with the personal representative, and because these assets are needed to pay the Estate's debts which greatly exceed its assets, defendants conclude that Frances Saint (as the Estate's personal representative) is the real party in interest for Counts One and Two. Accordingly, defendants posit, she must be realigned as a plaintiff pursuant to Rule 17(a) of the Federal Rules of Civil Procedure. Of course, any such realignment would destroy federal diversity jurisdiction (because Frances Saint's citizenship is the same as that of other defendants) and require dismissal. Defendants say this result is warranted from a public policy standpoint, in order to prevent “a multitude of lawsuits filed by separate creditors of the deceased which could result in inconsistent determinations by a multitude of courts setting aside the transfers of the same assets in favor of different creditors.” (Doc. 11, at 9.)^[7]

         As noted in footnote 6, supra, the parties have not identified a single case authority construing the language of § 43-2-838 in the context of Uniform Fraudulent Transfer Act claims brought by a creditor against an estate for transfers made by the decedent to the estate's personal representative. Thus, this Court's analysis must focus on the statutory language itself.^[8] By its terms, § 43-2-838 vests the “right to recover” the decedent's “property” “exclusively in the personal representative” where (i) the decedent transferred property “by any means which is in law void or voidable as against creditors;” and (ii) recovery of the property is “necessary for the payment of unsecured debts of the decedent.” This plain language would appear to support defendants' position insofar as SEPH may be seeking in Counts One and Two the remedy of having the transfers set aside and the transferred assets restored to the Estate of John Saint for purposes of paying Saint's unsecured debts in probate proceedings.

         A fair reading of Counts One and Two, however, reflects that SEPH seeks remedies far beyond revesting title to the transferred assets in the Estate. Indeed, in both AUFTA claims, SEPH demands “compensatory and punitive damages” against the Saint Estate, Frances Saint, SFLP and Kasubra; as well as that the Court “declare such transfers (and any subsequent transfers of the property and assets) null and void.” (Doc. 1, at 11-12.) These remedies are outside the scope of the plain language of § 43-2-838, which gives the Estate's personal representative the exclusive right “to recover this property, so far as necessary for the payment of the unsecured debts of the decedent.” In seeking money damages from the transferees of the subject property, SEPH is not seeking to recover property to pay John Saint's unsecured debts, but is rather pursuing compensation from those defendants pursuant to Alabama Code § 8-9A-8(b) for the harm they allegedly caused SEPH by receiving those transfers.^[9] Moreover, a declaratory judgment that the transfers violate the AUFTA would not appear to implicate § 43-2-838. Stated differently, nothing in § 43-2-838 purports to grant a personal representative the exclusive right to pursue any and all fraudulent transfer remedies related to the decedent's estate; rather, it only affords the personal representative the exclusive right “to recover this property, so far as necessary for the payment of unsecured debts of the decedent.” The remedies sought by SEPH - other than setting aside the fraudulent transfers - are not reserved for Frances Saint (as personal representative of the Estate) by the clear language of § 43-2-838. That is to say, while § 43-2-838 gives Frances Saint the exclusive right to recover property that belongs in the Estate for administration in the Mobile County Probate Court proceedings, it does not confer upon her the exclusive right to pursue any and all remedies that are or might be available to creditors under the AUFTA.^[10]

         Because certain remedies are still available to it in Counts One and Two, notwithstanding the constraints imposed by § 43-2-838, SEPH - and not Frances Saint as personal representative - is the real party in interest for those claims, and diversity jurisdiction properly lies as to those claims without realigning Frances Saint as a plaintiff. Counts ...