Lyon v. Rappaport (In re ClassicStar, LLC)
- Summarized by Dean Langdon , DelCotto Law Group PLLC
- 15 years 5 days ago
- Citation:
- 6th Cir. BAP 11b0002n.06
- Tag(s):
-
- Ruling:
- The Sixth Circuit Bankruptcy Appellate Panel affirmed in part and reversed in part a ruling of the Bankruptcy Court for the Eastern District of Kentucky dismissing the Chapter 7 Trustee's amended fraudulent transfer complaint. The BAP affirmed the dismissal to the extent the Trustee attempted to plead actual fraud, but reversed and remanded dismissal of the constructive fraud count, finding the lower court failed to follow the Sixth Circuit's test for evaluating a request to dismiss for failure to join an indispensable party under Rule 19. The opinion's precedential effect is limited to the case and parties pursuant to 6th Circuit BAP LBR 8013-1(b). The BAP found the amended complaint did not meet the pleading standards of Iqbal and Twombly, and that the bankruptcy court did not abuse its discretion in denying the Trustee a second opportunity to amend. The BAP found that the court below did not comply with the Sixth Circuit's three party test for evaluating whether a party was indispensable: i) whether the party is indispensable and should be joined if possible; ii) if so, whether the party is subject to personal jurisdiction and if joinder would destroy subject matter jurisdiction; and iii) whether equity and good conscience allow the action to proceed or if dismissal is merited.
- Procedural context:
- Chapter 7 Trustee appealed bankruptcy court dismissal of amended fraudulent transfer complaint for failure to adequately plead actual fraud, and for failure to join an indispensable party. The bankruptcy court also also overruled Trustee's motion to alter or amend.
- Facts:
- James Lyon was appointed as Trustee for ClassicStar, LLC after its case was converted to Chapter 7 in April, 2008. On September 10, 2009 the Trustee filed a complaint against "Taylor & Rappaport" to avoid and recover transfers of approximately four million dollars made by the Debtor in November, 2005. In November, 2009 Sandy Rappaport filed a motion to dismiss for failure to plead fraud with particularity. In February, 2010 the bankruptcy court overruled the motion to dismiss, but because it found the Trustee had not plead actual fraud with particularity, it allowed the Trustee 30 days to file an an amended complaint. The Trustee did so, but the amended complaint also failed to include any allegations of actual fraud. Rappaport renewed his motion to dismiss for failure to plead fraud with particularity, and also for failure to join an indispensable party - Taylor & Rappaport. Shortly thereafter, the Trustee filed exhibits to the amended complaint which included discovery responses where Rappaport admitted the Debtor made payments in excess of two million dollars to Key Bank on his behalf, stated he was not in a business relationship with Taylor, and claimed that the Debtor obtained a "dollar for dollar" benefit from the payments. After a hearing, the Court dismissed the amended complaint. The Trustee sought reconsideration on the basis of Rappaport's admission of the transfer on his behalf and relying on the Sixth Circuit's three part test for determining if a party is indispensable. The bankruptcy court overruled the Trustee's motion on August 6, 2010 and the Trustee appealed from both the order of dismissal and order overruling the motion to reconsider on August 17, 2010.
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