Default Interest, Equitable Subordination, Avoidance and Fraudulent Transfers
NESV Ice, et al vs SHS ACK, LLC, MABK, Adv. Pro. 21-1093. In a five count complaint (the “Complaint”), the Debtors seek (i) entry of a declaratory judgment that the default rate of interest of 18% per annum provided for by the loans and notes held by the defendant, SHS ACK, LLC (“SHS” or “Defendant”), is unenforceable and/or may not be collected from March 1, 2017 (“Count I”); (ii) equitable subordination of the debt the Debtors owe to SHS (“Count II”); and (iii) avoidance and recovery of certain transfers made by NESV Land East, LLC (“Land East”) to SHS’s predecessor in interest,HarborOneBank(“HarborOne” or the “Lender”), pursuant to Mass. Gen. Laws. ch. 109A, §§ 5, 6 and 11 U.S.C. § 548 (“Counts III–V”). SHS moves to dismiss (Dkt. No. 4) (the “Motion”) all counts of the Complaint under Fed. R. Civ. P. 12(b)(6), as made applicable by Fed. R. Bankr. P. 7012(b). For the reasons below, the Court denied the Motion in part and granted the Motion in part, with leave for the Debtors to amend the Complaint.
“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The Court
presumes all well-pleaded allegations are true, resolves reasonable doubts and inferences in the pleader’s favor, and views the complaint in the light most favorable to the non-moving party. See Twombly, 550 U.S. at 555.
Count II of the Complaint asserts a claim for equitable subordination under § 510(c). The First Circuit Court of Appeals has adopted the following test to determine whether a claim should be equitably subordinated: “‘(i) “[t]he claimant must be found to have engaged in inequitable conduct[;] (ii) “[t]he misconduct must have either resulted in injury to creditors or given the claimant an unfair advantage[;]” (iii) “[e]quitable subordination of the claim must not be in conflict with the provisions of federal bankruptcy law.’” In re 604 Columbus Ave. Realty Tr., 968 F.2d 1332, 1353 (1st Cir. 1992) (quoting In re Mobile Steel Co., 563 F.2d 692, 699–700 (5th Cir.1977): see also Merrimac Paper Co. v. Harrison (In re Merrimac Paper Co.), 420 F.3d 53, 59 (1st Cir. 2005) (noting that “[t]his court has adopted Mobile Steel as the gold standard for section 510(c) cases”) (citations omitted).
As to Count III (Avoidance and Recovery of Alleged Fraudulent Transfers), the Complaint alleges that Land East “was made insolvent” or left with unreasonably small capital as a result of the mortgage granted to the Lender. Compl. ¶¶ 125–127, 135, 143–144. The Complaint contains no allegations regarding solvency other than conclusory allegations tracking the elements of the claims. The Debtors have made no allegations regarding the value of Land East’s assets, debts, or capital requirements. See generally, Compl.; see also, e.g., Foisie v. Worcester Polytechnic Inst., 967 F.3d 27, 51–52 (1st Cir. 2020) (finding insolvency plausibly alleged where approximate assets before the transfer were alleged and compared to the amounts of the allegedly fraudulent transfers and debt purportedly owed to the creditor; concluding it is at least plausible that aggregate transfers consumed substantially all of transferor’s assets and left him insolvent); Butler v. Wojtkun (In re Wojtkun), 534 B.R. 435, 454 (Bankr. D. Mass. 2015) (finding insolvency plausibly alleged where debtor’s assets and debt were both alleged). Because of the conclusory allegations supporting the solvency element of these claims, the Court dismissed Counts III, IV, and V with leave to amend.
