Ft. Lauderdale bankruptcy court rules on personal jurisdiction, statute of limitations, and triggering creditor requirement for fraudulent conveyance action

In a case touching on a number of legal issues, Judge Grossman granted in part a motion to dismiss a fraudulent conveyance action, but with leave to amend, in In re Bal Harbour Quarzo, LLC, 2021 Bankr. LEXIS 3298, Case No 18-11793-SMG, Adv No 20-01079-SMG (Bankr. S.D. Fla. 3 Dec 2021).   The plaintiff in the adversary proceeding was the liquidating trustee of a trust.  He filed an 18 count complaint against a number of defendants related to a failed real estate development project.

the court first examined whether it had personal jurisdiction against the defendants.  Two defendants challenged such jurisdiction.  The Court initially looked to Rule 7004(f) of the Federal Rules of Bankruptcy Procedure, which provides:

If the exercise of jurisdiction is consistent with the Constitution and laws of the United States, serving a summons or filing a waiver of service in accordance with this rule or the subdivisions of Rule 4 F. R. Civ. P. made applicable by these rules is effective to establish personal jurisdiction over the person of any defendant with respect to a case under the Code or a civil proceeding arising under the Code, or arising in or related to a case under the Code.

Neither defendant had challenged service of process under Rule 7004.  The Court indicated it must determine whether the exercise of jurisdiction is consistent with the laws and Constitution of the United States.  This requires a finding that the defendants have sufficient minimum contacts with the US such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.¹  General jurisdiction exists as to a foreign defendant when their affiliates with the form are so continuous and systematic as to render theme essentially at home in the forum, and there must be an affiliation between the forum and the underlying controversy.

As neither defendant submitted any evidence that the court lacks jurisdiction, the court found that Plaintiff had made a prima facie showing that personal jurisdiction existed.  This including showing as to one defendant that he was a US Citizen with a Florida drivers license and a social security number, and is registered to vote in Florida.  As to the other defendant Plaintiff alleged she had a social security number, holds title to real property in the US, continues to maintain financial and other business relationships in the US,  and was a defacto manager of the debtor.  Such allegations were sufficient to make a prima facie case for personal jurisdiction.

The defendant’s also moved to dismiss for failure to state a claim.  This includes a claim to avoid a transfer from an alleged alter ego of the debtor.  In order to recover transfers allegedly made by an alter ego, the alter ego must be named as a defendant by the trustee, served with process, and provided a full opportunity to respond to the alter ego allegations.

Substantively, in order to pierce the corporate veil, the court must find by a preponderance of the evidence that 1) a shareholder dominated and controlled the corporation to such an extent that the corporation’s existence was in fact nonexistent and the shareholders were in fact alter egos of the corporation; 2) the corporate form must have been used fraudulently or for an improper purpose; and 3) the fraudulent or improper use of the corporate form caused injury to the claimant.²  As the plaintiff cited to the wrong case involving a default order determining that one entity: Synergy Entities was deemed to be the debtor’s alter ego, but that does not establish that another entity: Synergy Capital, was an alter ego.  Thus the motions to dismiss were granted on this basis, with leave to amend.

The next issue was the four year statute of limitations under Florida’s Uniform Fraudulent Transfer Act, Fla. Stat. §726.110(1).  While this transfer occurred more than four years prior to the suit, plaintiff points to an exception allowing a claim if brought within one year after the transfer or obligation could reasonably have been discovered by the claimant.   Plaintiff asserts he satisfies this exception as he was appointed state court receiver for debtor within one year of the bankruptcy filing date.  However, to state a claim under the Bankruptcy Code for fraudulent transfers, 11 U.S.C. §544(b)(1) Plaintiff must identify an unsecured (triggering) creditor that would have had actual standing to seek to avoid an recover the applicable transfers as of the petition date.³  As no such triggering creditor was alleged, the motion to dismiss must be granted, again with leave to file an amended complaint identifying such creditor.

1 Johnson v. Lovato (In re Jimenez), 627 B.R. 536, 544-45 (Bankr. S.D. Fla. 2021).^↩

2 In re Xenerga, Inc., 449 B.R. 594, 598-99 (Bankr. M.D. Fla. 2011).^↩

3 Furr v. T.D. Bank,N.A. (In re Rollaguard Sec., LLC), 570 B.R. 859, 881 (Bankr. S.D. Fla. 2017). ^↩