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This weeks case update:

Foster v. IOU Central, Inc, (In re Shoot the Moon, LLC), (Myers), Waiver, Venue, Civil Rule 12(b)(6)

Case no. 15-60979, Adversary no. 17-00060

Before the Court is a Civil Rule 12(b) motion filed by IOU Central, Inc., seeking to dismiss this adversary proceeding brought by chapter 11 trustee. Trustee contends the Motion must be denied because IOU waived Civil Rule 12(b) defenses by not asserting those defenses in response to the Initial Complaint. Rule 7012(b) adopts Civil Rule 12(b). Civil Rule 12(b) provides: “Every defense to a claim for relief in any pleading must be asserted in the responsive pleading if one is required. But a party may assert the following defenses by motion: (1) lack of subject-matter jurisdiction; . . . (3) improper venue; . . . (6) failure to state a claim upon which relief can be granted[.]”(emphasis added) Civil Rule 12 continues on: “A party waives any defense listed in Rule 12(b)(2)– (5) . . . by . . . failing to . . . include it in a responsive pleading or in an amendment allowed by Rule 15(a)(1) as a matter of course.” Here, Defendant’s Motion, filed after its original answer and before any responsive pleading to the FAC, invokes defenses under Civil Rule 12(b)(1), (3), and (6). Contrary to Trustee’s assertions, Defendant raised the defenses of lack of subject matter jurisdiction and improper venue—Civil Rules 12(b)(1), (3)—in its answer to the Initial Complaint. Thus, Defendant did not waive its defenses under Civil Rules 12(b)(1), (3), or (6).

Defendant argues Trustee does not have standing to bring his claims, and this Court is, thus, without subject matter jurisdiction over this adversary proceeding.  Section 547(b) gives the trustee the authority to avoid preferential transfers. Section 550 grants the trustee authority to “recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.” Section 550(a). A well-respected treatise on bankruptcy addresses the standing of an appointed or elected trustee: “Ordinarily, a trustee assumes the authority to bring preference actions immediately upon being appointed or, if elected, upon being elected.”

Defendant argues that any purported merger was made in violation of antiassignment provisions in two of the four promissory notes between Debtor’s predecessors and Defendant—the note between Defendant and Shoot the Moon 22, LLC, and the note between Defendant and Shoot the Moon III, LLC. Here, any distinction between Montana and Georgia law is immaterial because the anti-assignment provisions in the promissory notes at issue are not generally worded prohibitions on assignment. Rather, the provisions narrowly exclude only the assignment of the obligations of Shoot the Moon 22, LLC, and Shoot the Moon III, LLC. Nowhere in these promissory notes is Shoot the Moon 22, LLC, or Shoot the Moon III, LLC, prohibited from assigning their rights under the contracts. Therefore, the anti-assignment provisions in the promissory notes executed by Defendant, Shoot the Moon 22, LLC, and Shoot the Moon III, LLC, did not prohibit transfer of the rights of Shoot the Moon 22, LLC, and Shoot the Moon III, LLC, to Debtor via the merger; and, thus, Trustee’s standing is not defeated by these antiassignment provisions.

Defendant also contends Trustee is without standing because the alleged preferential transfers were made by Debtor’s predecessors for debts on which Debtor only became liable upon completion of the merger.  However, the merger statutes under which the applicable entities were merged into Debtor11 support the conclusion that Debtor, as the surviving entity, would be able to assert the rights of the merged entities.  The surviving entity steps into the shoes of the merging entities, and is vested with all the “rights, privileges, immunities, powers and purposes” of the merged entities. Thus, if the merged entities maintained the right to avoid a transfer as preferential, the surviving entity would be vested with that same right upon merger under either of these statutes. In addition, if the merged entities could pursue a claim of usury under Montana law, so too would the surviving entity. Upon merger, all the rights of the merged entities vested in Debtor, and it could pursue such rights.

Here, the U.S. Bankruptcy Court for the District of Montana is the proper venue as Debtor is an LLC registered in Montana and this proceeding arises out of Debtor’s bankruptcy. Enforcement of the forum selection clauses recited in Defendant’s motion would cut against the “strong public policy favoring consolidating these core proceedings in the bankruptcy court.”  Taking the factual allegations recited above as true, Trustee alleges sufficient facts to “state a claim to relief that is plausible on its face.” There are enough facts for Trustee to make an argument that Montana and Idaho law should apply despite the choice of law provisions. Here, the Court need not finally determine whether Georgia, Montana, and/or Idaho law applies but merely whether sufficient facts have been pled to make the claim plausible on its face. Thus, Defendant’s motion as to Count I of the FAC will be denied.

In sum, Defendant’s Motion is properly before the Court as Defendant did not waive the 12(b) defenses raised in its motion. The Court concludes under Civil Rule 12(b)(1) and (3) Trustee has standing, the Court has subject matter jurisdiction over this action, and venue is proper. Further, the Court finds Defendant’s Motion under Civil Rule 12(b)(6) is not well taken. Therefore, Defendant’s Motion will be denied.

Foster v. IOU Central, INC., May 21, 2020, David B. Cotner, Kyle Ryan for Foster, Timothy E. Dailey, Paul Wesant for IOU Central

2020 Mont. B.R. 177 (May 21, 2020)


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