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Home / Case News / A Pennsylvania Court Denies the Defendant’s Motion to Dismiss Because a Trustee Sufficiently Pleaded the Elements of a Constructive Fraudulent Conveyance Under § 548(a)(1)(B)

A Pennsylvania Court Denies the Defendant’s Motion to Dismiss Because a Trustee Sufficiently Pleaded the Elements of a Constructive Fraudulent Conveyance Under § 548(a)(1)(B)

January 7, 2019, PennsylvaniaDebtor Mechanicsburg Fitness, Inc. was formed, among other things, to operate as a fitness center in Pennsylvania (the “Fitness Center”). To facilitate its stated purpose, the Debtor entered into a lease with Capital Plaza Associates (“Landlord”) for the use of the real property located in Pennsylvania (the “Facility Lease”). The Debtor also entered into two independent contractor Personal Trainer Agreements with Kevin Keefer (“Keefer”) and Susan Hildebrand (“Hildebrand”) and equipment lease agreement with Financial Pacific Leasing, LLC (“Financial Pacific”) for the lease of cardiovascular equipment.

About ten years later, in September 2014, the Debtor entered into an Asset Purchase Agreement (“APA”) with Linglestown Family Fitness (“Linglestown”), pursuant to which the Debtor agreed to sell its business, equipment, and all other assets to Linglestown. The Debtor closed the sale contemporaneously with the execution of the APA and assigned the Facility Lease to Linglestown, though the personal trainer agreements were not assigned. Also at closing, and as a partial payment, Linglestown executed a judgment note dated September 4, 2014, payable to the Debtor in the amount of $250,000.00 plus interest at New York Prime plus 1.00% per annum (the “Judgment Note”).

Approximately four months later on December 29, 2014, the Debtor transferred the Judgment Note to Defendant Joyce S. Whiteley (the “Transfer”) as reimbursement for her September 8, 2014 personal payment of $204,996.17 to the Landlord and her September 8, 2014 personal payment of $48,201.33 to Financial Pacific (collectively, the “Creditor Payments”).

Two days after the Transfer, Keefer and Hildebrand filed a civil complaint against the Debtor in the Cumberland County Court of Common Pleas (the “State Court”). In the State Court complaint, Keefer and Hildebrand asserted that the Debtor breached the Personal Trainer Agreements by failing to assign them to Linglestown at closing and that the breach caused them damages for which they are entitled to recovery. The Debtor filed preliminary objections to the State Court Complaint, which were overruled without opinion on April 29, 2015. Thereafter, the Debtor filed an answer with new matter to the State Court complaint, to which Keefer and Hildebrand responded.

Subsequently, the Debtor filed bankruptcy on April 29, 2016, before the State Court matter could move further. On April 25, 2018, the Trustee initiated the adversary proceeding against the Defendant by filing the underlying complaint. In response, Whitley filed the motion to dismiss the Trustee’s complaint.

The Trustee alleged that the Defendant had not made any loans to the Debtor, had not signed any loan documents with the Debtor, had no contract or written agreement with the Debtor, was not a surety for the Debtor, had no surety claim or other legally enforceable claim against the Debtor, and was not a creditor of the Debtor. Hence, the Debtor made the alleged transfer to the Defendant “for no consideration, money, payment, product, services, a release of claim, payment of an obligation, or other value of any kind whatsoever or received consideration which was less than the reasonably equivalent value of the transferred Judgment Note”. The Trustee accordingly sought to avoid the transfer of the Judgment Note to Whiteley under 11 U.S.C. § 548(a)(1)(B). Whitley sought dismissal of the Trustee’s complaint, arguing that the complaint failed to state a claim upon which relief may be granted pursuant to Federal Rule of Civil Procedure 12(b)(6).

The Court found that the Trustee met his burden with respect to the first two elements of an avoidance action under 11 U.S.C.S. § 548(a)(1)(B) by plausibly alleging that the Debtor had an interest in a judgment note at the time of transfer to the Defendant and that the transfer occurred within the two-year period preceding the petition date. The Court next held that the Trustee also plausibly pleaded that the Debtor received less than reasonably equivalent value by alleging, inter alia, that the Debtor transferred the Judgment Note to the Defendant for no consideration, the release of a claim, or other value of any kind. The Court further found that the Trustee sufficiently pleaded facts alleging the Debtor’s insolvency by alleging that the Debtor was insolvent at or around the time of the transfer. Accordingly, the Court dismissed the Defendant’s motion

Slobodian v. Whiteley (In re Mechanicsburg Fitness, Inc.), Nos. 1:16-bk-01897-HWV, 7, 1:18-ap-00043, 2019 Bankr. LEXIS 32 (Bankr. M.D. Pa. Jan. 7, 2019)