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Carn v. Heesung PMTech Corp.

United States District Court, M.D. Alabama, Southern Division

September 27, 2017

WILLIAM C. CARN, III, As Trustee of SpecAlloy Corp., et al., Plaintiffs,




         On December 22, 2017, William C. Carn, III, as the Chapter 7 Trustee (“the Trustee”) of SpecAlloy Corporation doing business as Panhandle Converter Recycling (“SpecAlloy” or “the Debtor”), LKQ Corporation (“LKQ”), Converter Brokers, LLC, (“Converter Brokers”), and Enterprise Recycling, Ltd., doing business as Wrench-A-Part and Commodity Recyclers (“Enterprise”) filed the Amended Complaint against Defendant Heesung PMTech Corporation (“Heesung” or “Defendant”).[1] The Trustee asserts claims of avoidable setoff pursuant to 11 U.S.C. §§ 553 and 550; avoidable preferences pursuant to 11 U.S.C. §§ 547 and 550; fraudulent transfers pursuant to 11 U.S.C. §§ 548 & 550; fraudulent transfers pursuant to the Uniform Fraudulent Transfer Act, Ala. Code §8-9-1, et seq., and 11 U.S.C. §§ 544 and 550; re-characterization of the advances; and equitable subordination. LKQ, Converter Brokers, and Enterprise (collectively “the Suppliers”) assert state law claims of conversion; breach of contract; quantum meruit; unjust enrichment; principal liability; and partner/joint venture liability. Doc. 24.

         A case related to this matter is currently pending in the United States Bankruptcy Court for the Middle District of Alabama. In re SpecAlloy, No. 16-10013 (DHW). On November 28, 2016, Judge Dwight H. Williams, Jr., generally continued the matters in the bankruptcy proceeding pending the outcome of litigation in this court. Id., Doc. 43-1.

         On January 5, 2017, Heesung filed the Motion to Dismiss the Amended Complaint pursuant to Fed.R.Civ.P. 12(b)(6) and 12(b)(7). Doc. 28. On January 27, 2017, Plaintiffs filed a response to the Motion. Doc. 37. Heesung filed a reply to the Plaintiff's response on February 3, 2017. Doc. 38. The parties attached evidentiary materials to the aforementioned pleadings, motion, and responses. They also submitted additional evidentiary materials prior to the status conference on March 23, 2017. Docs. 43 & 44.

         Generally, a court may not consider matters outside the complaint without converting a motion to dismiss to a motion for summary judgment. However, the court may consider a document attached to a motion to dismiss without converting the motion into one for summary judgment if the attached document is (1) central to the plaintiff's claim and (2) undisputed. In this context, “undisputed” means that the authenticity of the document is not challenged. SFM Holdings, Ltd. v. Banc of Am. Sec., LLC, 600 F.3d 1334, 1337 (11th Cir. 2010) (citing Day v. Taylor, 400 F.3d 1272, 1276 (11th Cir. 2005) and Maxcess Inc. v. Lucent Techs, Inc., 433 F.3d 1337, 1340 (11th Cir. 2005)).

         Heesung argues that its attached exhibits are “central to the claims asserted in the Amended Complaint.” Doc. 37. Specifically, Heesung asserts that the documents are central to the claims because they “expressly contradict the limited ‘factual' allegations contained in the Amended Complaint.” Id. In addition, Heesung contends that this court may take judicial notice of the documents and evidentiary materials submitted in the bankruptcy case. Thus, this court must decide whether it is appropriate at this early stage of the proceedings to consider the attached evidence or whether it will consider the Motion solely by looking within the four corners of the Amended Complaint.

         Despite the parties' multitude of attached evidentiary materials, this case is currently before the court on a motion to dismiss. As demonstrated by the sheer number of documents and the parties' extensive arguments over whether the facts as set forth in the Amended Complaint are a true representation of the circumstances in this case, it is clear that the parties aim to litigate factual questions beyond the scope of 12(b)(6). Michel v. NYP Holdings, Inc., 816 F.3d 686, 701 (11th Cir. 2016). While trial courts may consider matters outside the pleadings on conversion of a motion to dismiss into a motion for summary judgment, the court has near-absolute discretion to take such a procedural detour. Jumbo v. Alabama State Univ., 229 F.Supp.3d 1266, 1270-71 (M.D. Ala. 2017) (citing 5C Charles A. Wright & Arthur R. Miller, Federal Practice & Procedure § 1366 (3d ed. 2016) (“[F]ederal courts have complete discretion to determine whether or not to accept the submission of any material beyond the pleadings that is offered in conjunction with a Rule 12(b)(6) motion and rely on it, thereby converting the motion, or to reject it or simply not consider it.”)). The claims in this case are fraught with factual allegations. Therefore, the court will not convert the motion to dismiss into a motion for summary judgment. To the extent the parties have submitted documents in an effort to contradict factual allegations made by another party, the court will not consider the material at this early stage of the proceedings.

         This court has federal question jurisdiction pursuant to 28 U.S.C. §1331, diversity jurisdiction pursuant to 28 U.S.C. §1332, bankruptcy jurisdiction pursuant to 28 U.S.C. §1334(b), and supplemental jurisdiction pursuant to 28 U.S.C. §1367. The parties have consented to a United States Magistrate Judge conducting all proceedings in this case and ordering the entry of final judgment pursuant to 28 U.S.C. § 636(c)(1) and M.D. Ala. LR 73.1.

         Now pending before the court is Defendant's Motion to Dismiss pursuant to Fed.R.Civ.P. 12(b)(6) and 12(b)(7) filed by Heesung. Doc. 28. Upon consideration of the Motion, the Response, and the Reply, the court concludes that the Motion to Dismiss is due to be DENIED.


         A Rule 12(b)(6) Motion tests the legal sufficiency of the complaint. Although it must accept well-pled facts as true, the court is not required to accept a plaintiff's legal conclusions. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009) (“[T]he tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.”). In evaluating the sufficiency of a plaintiff's pleadings, the court must indulge reasonable inferences in plaintiff's favor, but we are not required to draw a plaintiff's inference. Aldana v. Del Monte Fresh Produce, N.A., Inc., 416 F.3d 1242, 1248 (11th Cir. 2005). Similarly, “unwarranted deductions of fact” in a complaint are not admitted as true for the purpose of testing the sufficiency of plaintiff's allegations. Id.; see also Iqbal, 556 U.S. at 680, 129 S.Ct. at 1951 (stating conclusory allegations are “not entitled to be assumed true.”)

         A complaint may be dismissed if the facts as pled do not state a claim for relief that is plausible on its face. See Iqbal, 556 U.S. at 679, 129 S.Ct. at 1950 (explaining “only a complaint that states a plausible claim for relief survives a motion to dismiss”); Bell Atl. Corp. v. Twombly, 550 U.S. 544, 561-62, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (retiring the prior “unless it appears beyond doubt that the plaintiff can prove no set of facts” standard). In Twombly, the Supreme Court emphasized that a complaint requires “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. Factual allegations in a complaint need not be detailed but “must be enough to raise a right to relief above the speculative level on the assumption that all the allegations in the complaint are true (even if doubtful in fact).” Id. at 555 (internal citations and emphasis omitted).

         In Iqbal, the Supreme Court reiterated that although Fed.R.Civ.P. 8 does not require detailed factual allegations; it does demand “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 556 U.S. at 678, 129 S.Ct. at 1949. A complaint must state a plausible claim for relief, and “[a] claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The mere possibility the defendant acted unlawfully is insufficient to survive a motion to dismiss. Id. The well-pled allegations must nudge the claim “across the line from conceivable to plausible.” Twombly, 550 U.S. at 570.


         The following factual allegations as presented in the Amended Complaint will be construed in the light most favorable to the plaintiffs, as the court must do at this stage of the proceedings. See, e.g., Financial Security Assur., Inc. v. Stephens, Inc., 450 F.3d 1257, 1262 (11th Cir. 2006). SpecAlloy, doing business as Panhandle Converter Recycling, is a company based in Dothan, Alabama. SpecAlloy sources or dismantles catalaytic converters it has purchased from other companies, such as LKQ, Enterprise Recycling, and Converter Brokers. SpecAlloy sells the components of the converters to buyers. Heesung was the primary buyer of materials, including precious metals sourced from the catalytic converters.

         According to Plaintiffs, the relationship between SpecAlloy and Heesung changed in 2013. Prior to 2013, SpecAlloy sold materials to Heesung on a “cash-immediately-prior-to-shipment” basis. Pls' Amended Comp., p. 5. Beginning in 2013, SpecAlloy had insufficient working capital to continue its operations, source converters, and remain solvent. Thus, SpecAlloy required additional working capital in advance of purchasing the converters from companies such as LKQ, Enterprise Recycling, and Converter Brokers. Heesung began transferring funds to SpecAlloy in advance of any shipments from the companies (the “advances”). The advances constituted SpecAlloy's primary source of working capital funding, other than a smaller credit account with Wells Fargo. The advances from Heesung provided SpecAlloy with more funding than was required to purchase converters, which additional funding (the “excess advances”) was used to fund SpecAlloy's working capital, general operation costs, and for other purposes.

         The advances were undocumented or very sparsely documented with no formal loan documents memorializing a revolving line of credit. Plaintiff alleges that Heesung gained control over SpecAlloy's financial and operational decisions in exchange for the funding provided through the advances. For the next two years, Heesung sent one or more of its employees or agents to represent its interests at SpecAlloy's facility on a regular basis. Heesung had access to SpecAlloy's customer invoices, purchasing plans, weekly projections, status reports, and other confidential business information. In addition, Heesung required SpecAlloy to provide it with detailed projections that included documentation related to the value of the converters and materials that SpecAlloy proposed to acquire, as well as other supporting documents, such as purchasing plans, weekly projections, and status reports related to the shipments to be sent to Heesung.

         Plaintiffs also allege that the relationship between Heesung and SpecAlloy was extremely close and that Heesung made decisions with regard to SpecAlloy's funding that determined whether or not SpecAlloy would be able to pay its creditors and remain in business. Heesung directed SpecAlloy to arrange for the acquisition of converters for its benefit. SpecAlloy took possession of converters from LKQ, Brokers, and Enterprise (“the Suppliers”) and transferred them to Heesung. Thus, Heesung's position over SpecAlloy enabled Heesung to control the transfer of converters.

         At some point in late 2015 or early 2016, SpecAlloy's financial performance was negatively impacted by falling commodity prices, poor decision-making, increased overhead, and other factors. In August 2015, consultants were hired to audit SpecAlloy's finances. The consultant's report indicated that SpecAlloy's financial position was worse than previously expected. The results of the audit were accessible to Heesung.

         Between October and December 2015, Heesung began building a balance of cash and/or materials to set off against the amounts allegedly owing from SpecAlloy based on the excess advances. Heesung took certain materials from the facility and refused to pay invoices submitted by SpecAlloy. On or about December 11, 2015, Heesung seized certain materials, specifically pooled metals (the “seized pooled metals”), from SpecAlloy. Heesung did not pay for the seized pooled metals. According to SpecAlloy's schedules and statement of affairs filed in the bankruptcy case, the value of the seized pooled metals is $2, 718, 656.26. Pl's Amended Comp., citing SpecAlloy's Statement of Financial Affairs filed in the Bankruptcy Case at ¶6 (Doc. 59 at p. 40). In bankruptcy proceedings, Heesung claimed a setoff based on the seized pooled metals. SpecAlloy also alleged in its bankruptcy statement that Heesung took the seized pooled metals within 90 days of the petition date without permission because SpecAlloy allegedly owed a debt to Heesung. Id. On or around December 15, 2015, Heesung's attorney sent a letter to Joe Donovan, SpecAlloy's Chief Executive Officer, purporting to effectuate a setoff of the excess advances against the amounts owed on the outstanding invoices (the “unpaid materials setoff”).

         As of December 15, 2015, SpecAlloy issued invoices to Heesung totaling $3, 689, 417.73. (the “outstanding invoices”). Heesung did not pay SpecAlloy for the materials on the outstanding invoices (the “unpaid materials”). Heesung took possession of the unpaid materials, including the catalytic converter components provided by the LKQ, Brokers, and Enterprise (the “supplier converters”), and shipped them to South Korea.

         According to Plaintiffs, the value of the Supplier Converters was not less than $2, 870, 742.00.[2] SpecAlloy did not pay LKQ, Brokers, or Enterprise for the converters and advised Heesung on multiple occasions that title to the supplier converters never passed to SpecAlloy. Less than a month after Heesung seized the pooled metals and converter components and sent the setoff letter, SpecAlloy was forced to file for Chapter 11 bankruptcy protection. As of the petition date, SpecAlloy reported total liabilities of $19, 246, 158.51 and total assets of $8, 693, 807.38. On March 17, 2016, the bankruptcy case was converted to one under Chapter 7 of the Bankruptcy Code. The bankruptcy court appointed William C. Carn III as the Chapter 7 trustee of SpecAlloy's bankruptcy estate.


         A. The Trustee's Claims

         Heesung asserts that all of the Chapter 7 Trustee's claims (Counts I-VI) are due to be dismissed because the Trustee fails to present sufficient factual allegations to establish a plausible claim for relief. Specifically, Heesung argues that the documents it provided to the Trustee in the bankruptcy case and its response to the Trustee's objection to Heesung's proof of claim “detail[] the various fallacies in the Trustee's assertions.” Doc. 28, Motion to Dismiss, p. 13.

         1. Count I: Avoidable Setoff under 11 U.S.C. §§ 550 & 553

         The Trustee of SpecAlloy asserts that both the seized pooled metals setoff and the unpaid materials setoff are invalid and disallowed. Specifically, the Trustee contends that both setoffs by Heesung occurred within 90 days before the bankruptcy petition date while SpecAlloy was insolvent. In other words, the Trustee argues that Heesung's setoff rights may be affected by the bankruptcy code pursuant to 11 U.S.C. § 553(a)(3).

         The Trustee asserts that it seeks to avoid the setoffs to the extent Heesung improved its setoff position between October 7, 2015 -- the ninety (90) days prior to the bankruptcy petition date -- and the dates of the setoffs pursuant to 11 U.S.C. § 553(b). In addition, the Trustee seeks to recover the value of the avoidable setoffs from Heesung pursuant to 11 U.S.C. § 550(a). Heesung, however, argues that the Section 553 claim is due to be dismissed because the allegations in the Amended Complaint are factually inaccurate.

         An explanation of the law concerning Section 553 was recently summarized in Edward Specialties, Inc. v. Olive Props., Inc. (In re Edwards), 553 B.R. 902 (Bankr. N.D. Ala. 2016), as follows:

Setoff under 11 U.S.C. § 553 “allows entities that owe each other money to apply their mutual debts against each other, thereby avoiding the absurdity of making A pay B when B owes A.” Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 18, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995) (quoting Studley v. Boylston Nat. Bank, 229 U.S. 523, 33 S.Ct. 806, 57 L.Ed. 1313 (1913)); See also Dzikowski v. Northern Trust Bank of Florida, N.A. (In re Prudential of Florida Leasing, Inc.), 478 F.3d 1291, 1297 (11th Cir.2007) (quoting In re Patterson, 967 F.2d 505, 508-09 (11th Cir.1992)) (“Setoff [under section 553] is an established creditor's right to cancel out mutual debts against one another in full or in part ... to avoid ‘the absurdity of making A pay B when B owes A.'”). According to Black's Law Dictionary, setoff is defined as a “defendant's counterdemand against the plaintiff, arising out of a transaction independent of the plaintiff's claim.” Black's Law Dictionary (10th ed. 2014).
Although the Bankruptcy Code does not create a federal right of setoff, the right to setoff mutual debts is preserved by § 553 where it existed prepetition under applicable non-bankruptcy law. Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 20, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995); Brook v. Bank USA, N.A. (In re Acosta-Garriga), 566 Fed.Appx. 787, 789 (11th Cir.2014); In re Prudential of Florida Leasing, Inc., 478 F.3d 1291, 1297 (11th Cir.2007) (explaining that substantive law, usually state law, determines the validity of the right of setoff under the Bankruptcy Code).

         Section 553 of the Bankruptcy Code states as follows:

Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that-
(1) the claim of such creditor against the debtor is disallowed;
(2) such claim was transferred, by an entity other than the debtor, to such creditor-
(A) after the commencement of the case; or
(B) (i) after 90 days before the date of the filing of the petition;
(ii) while the debtor was insolvent ...; or
(3) the debt owed to the debtor by such creditor was incurred by such creditor-
(A) after 90 days before the date of the filing of the petition; and
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor....

11 U.S.C. § 553(a).

The plain and unambiguous language of § 553(a) preserves any right of setoff a creditor “‘may have under applicable nonbankruptcy law, ' and ‘imposes additional restrictions on a creditor seeking setoff' that must be met to impose a setoff against a debtor in bankruptcy.'” In re Semcrude, L.P., 399 B.R. 388, 393 (Bankr.D.Del. 2009). Thus, a creditor must have both an independent right of setoff under applicable non-bankruptcy law, and further satisfy the additional requirements imposed under § 553(a). In re McKay, 420 B.R. 871, 877 (Bankr.M.D.Fla.2009).
In Woodrum v. Ford Motor Credit Co. (In re Dillard Ford, Inc.), 940 F.2d 1507, 1512 (11th Cir.1991), the Eleventh Circuit stated that § 553(a) imposes three requirements for setoff: (i) the debtor and creditor must owe each other mutual debts; (ii) the mutual debts must have arisen before the commencement of the case; and (iii) the setoff cannot fall within one of the three exceptions listed in § 553(a)(1)-(3).

553 B.R. at 909-910.

         In this case, the Trustee alleges that Heesung incurred a debt to SpecAlloy within 90 days before the Petition Date while SpecAlloy was insolvent for the purpose of obtaining a right of set off against SpecAlloy. Specifically, the Trustee alleges that Heesung “[w]ithin 90 days before the Petition Date, Heesung created a debt from Heesung to SpecAlloy by (1) taking possession of the Unpaid Materials and refusing to pay the Outstanding Invoices, and (2) taking the Seized Pooled Metals without paying for them. Doc. 24, p. 13. According to the Trustee, “SpecAlloy was insolvent at the times that Heesung took possession of the Unpaid Materials, refused to pay the Outstanding Invoices, and took the Seized Pooled Metals without paying for them.” Id. The Trustee further alleges that the value of SpecAlloy's assets and liabilities as of the bankruptcy petition date indicate its insolvency and therefore the seized pooled metals setoff and the unpaid materials setoff are invalid. In addition, the Trustee alleges that Heesung improved its purported setoff position between October 7, 2015, and the dates on which it purported to exercise the setoffs. Id.

         Consequently, it is clear from the facts as alleged by Plaintiffs in the Amended Complaint that the Trustee has set forth an avoidable preference claim for relief which “nudge[s] it across the line from conceivable to plausible.” Twombly, 550 U.S. at 570. This court therefore concludes that the Motion to Dismiss the Avoidable Setoff claims pursuant to Fed.R.Civ.P. 12(b)(6) is due to be denied.

         2. Count II: Preference Claims pursuant to 11 U.S.C. §§ 547 & 550

         The Trustee asserts avoidable preferences pursuant to 11 U.S.C. §§ 547 & 550. “Preference law under the Bankruptcy Code is aimed at insuring that all creditors receive an equal distribution from the available assets of the debtor.” In re Martin, 184 B.R. 985, 990 (M.D. Ala. 1995) (citing H.R.Rep.No. 595, 95th Cong., 1st Sess. 177-78, reprinted in 1978 U.S. Code Cong. & Admin. News 5787, 5963, 6138; 4 Collier on Bankruptcy ¶ 547.05 (1995)). Section 547(b) of the Bankruptcy Code, which applies to avoidable preferences, provides as follows:

Except as provided in subsections (c) and (i) of this section, the trustee may avoid any transfer of an interest of the debtor in property-
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made-
(A) on or within 90 days before the date of filing the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if-
(A) the case were a case under Chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.

         Section 547(g) provides that a trustee has the burden of proving the avoidability of a transfer under 11 U.S.C. § 547(b) and that the creditor or party in interest against whom recovery or avoidance is sought has the burden of proving the non-avoidability of transfer pursuant to 11 U.S.C. § 547(c).

         To avoid payments under § 547, the Trustee must establish that the Debtor was insolvent at the time the payments were made. 11 U.S.C. § 547(b)(3). Heesung argues that the Trustee cannot maintain an action for avoidance of a preference because he does not include well-pled allegations of ...

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