Opinion
Bankruptcy Case No. 07-40161-JDP, Adversary No. 09-8018.
August 14, 2009
MEMORANDUM OF DECISION
Introduction
On March 16, 2009, chapter 7 trustee, R. Sam Hopkins ("Trustee"), initiated this adversary proceeding asserting a variety of different claims, several of which appear to have no legal or factual nexus to the others, against the various defendants named above. When no answers to his complaint were filed by several of the defendants, Trustee filed motions for entry of default judgments. However, in reviewing Trustee's motions, the Court had concerns. To address those concerns, at a recent pretrial conference, Trustee was directed to either file a brief supporting why the claims against Defendants DeVry University, Inc. ("DeVry") and ING Institutional Plan Services, LLC ("ING") had been joined in this action with the claims made against the other defendants, or in the alternative, to move to sever the claims against the parties where appropriate. Docket No. 25. Trustee elected the former option, and filed a brief in which he argued that joinder of the parties was proper under Rule 7020. Docket No. 26. The Court respectfully disagrees. Trustee's motions for default judgments against DeVry and ING will be denied, and Trustee's claims against DeVry and ING will be ordered severed.
Unless otherwise indicated, all statutory references including those to chapters or sections are to the Bankruptcy Code, Title 11, U.S. Code §§ 101 — 1532. The Federal Rules of Bankruptcy Procedure, Rules 1001 — 9037, are referred to as Rules. The Federal Rules of Civil Procedure are referred to as Civil Rules.
Facts
Trustee's Complaint states five distinct claims for relief against the defendants. The first three counts request relief as against Defendants Brian Scott ("Scott") and Chris Smith ("Smith"). The last two counts seek relief as against DeVry and ING and, as near as the Court can tell from reading Trustee's Complaint, against chapter 7 Debtors Joshua and Rochelle Criddle ("Debtors").
In Count I, Trustee alleges that Debtors were listed as the owners on the certificates of title to three motorcycles, which motorcycles are alleged to be in the possession of Scott and Smith. Trustee asserts that the motorcycles are property of the bankruptcy estate and should be turned over to him pursuant to § 542 to liquidate in the chapter 7 case. In Count II, Trustee alleges that he may avoid any ownership or lien interests which Scott and Smith may assert in those motorcycles under § 544(a)(1) and (2). And in Count III, Trustee alleges that title to the motorcycles were transferred to Smith and Scott after Debtors filed their bankruptcy petition, rendering such transfers avoidable under § 549.
In Count IV, Trustee alleges that Debtors made certain preferential payments on antecedent debts to DeVry and ING, which he may avoid and recover pursuant to § 547 and § 550. In Count V, apparently as an alternative to the preference claim against ING, Trustee alleges that Debtors and ING are in possession of avoidable fraudulent transfers, which transfers Trustee can avoid under § 548.
In his brief, Trustee indicated that he may need to amend his complaint to add an additional count against Debtors for a fraudulent transfer to DeVry of the same monies identified in Count IV. See Trustee's Memorandum in Support of Permissive Joinder, Docket No. 26 at 3. At this point, the Court will not speculate about the validity of Trustee's legal theory that a debtor, as compared to the transferee, is also liable to a trustee in bankruptcy for property fraudulently transferred.
Debtors were the only party to answer the Complaint. See Debtor's Answer to Complaint, Docket No. 7. In two separate motions, Trustee seeks entry of default judgments against the other defendants. See Docket Nos. 10, 19.
Discussion
Whether a plaintiff may "join" several parties as defendants in one action is governed by Civil Rule 20, which is made applicable in bankruptcy adversary proceedings by Rule 7020. That rule identifies two distinct requirements which must be satisfied before joinder should be permitted:
Persons . . . may be joined in one action as defendants if:
(A) any right to relief is asserted against them jointly, severally, or in the alternative with respect to or arising out of the same transaction, occurrence, or series of transactions or occurrences; and
(B) any question of law or fact common to all defendants will arise in the action.
Fed.R.Civ.P. 20(a)(2). "The purpose of the rule is to promote trial convenience and expedite the final determination of disputes, thereby preventing multiple lawsuits." Mosley v. General Motors Corp., 497 F.2d 1330, 1332 (8th Cir. 1974) (citing 7 C. Wright, Federal Practice and Procedure § 1652 at 265 (1972)). However, while convenience and expediency may be desirable, permissive joinder is not applicable in all cases; both prongs of the rule must be satisfied. Id. And where joinder of parties is improper, Civil Rule 21, applicable in bankruptcy adversary proceedings via Rule 7021, provides:
Misjoinder of parties is not a ground for dismissing an action. On motion or on its own, the court may at any time, on just terms, add or drop a party. The court may also sever any claim against a party.
Trustee's Complaint and brief fail to show how both prongs of Civil Rule 20(a)(2) are satisfied in this case. Simply put, it does not appear that Trustee's claims against DeVry, ING and Debtors arose out of the same transaction as his claims against Scott and Smith, nor that there are any common questions of law or fact implicated by the various claims.
Trustee's argument in his brief with respect to the first joinder element consists of a single paragraph, stating:
The trustee has asserted as an alternative to that preference claim against ING that the debtors are liable [sic] the transfer of the same monies transferred to ING. The transfer of the $2392.18 from the debtors to ING arise [sic] out of the same transaction and occurrence.
Trustee's Memorandum in Support of Joinder, Docket No. 26 at 2-3. Assuming Trustee is correct, while there may be some link between Trustee's claims against Debtors and ING, Trustee does not explain how the transfer Debtors made to ING has any relationship to the transactions concerning the motorcycles, or to Scott and Smith, who are the targets of Counts I, II, and III.
There is also nothing to show why Trustee's claims against DeVry and ING should be joined in the same action. The complaint alleges that these defendants received different payments from Debtors. Although both alleged preferences occurred within ninety days prior to Debtors' bankruptcy filing, Trustee's claims did not arise out of the same transaction or occurrence.
With regard to the second element of the joinder analysis, Trustee contends that similar questions of law or fact will be raised in adjudicating his claims. In particular, Trustee focuses on Debtors' alleged insolvency at and around the time they filed their bankruptcy petition as an example of a common question of fact or law. Trustee points out that Debtors and Trustee will both likely be required to testify at trial concerning claims that are largely the same. After noting that Civil Rule 20 is to be liberally construed, Trustee explains that permitting joinder in this instance would obviate the need for Debtors and Trustee to appear at three separate trials to testify about essentially the same facts and documents. See Trustee's Memorandum in Support of Permissive Joinder, Docket No. 26 at 4.
Based upon the allegations of the Complaint, it would appear that Debtors' insolvency is a potential issue only as to Trustee's claims against ING and Debtors for the alleged fraudulent conveyance under count V; Debtors' insolvency will have no bearing on Trustee's claims against the other defendants.
Trustee's bare-bones complaint offers precious little insight into the relevant facts giving rise to his claims. For the most part, the allegations are merely legal conclusions. Recently, the Supreme Court clarified the minimum pleading standard for federal complaints established in Civil Rule 8(a)(2) by noting that while "detailed factual allegations" are not required, an unadorned, "the defendant-unlawfully-harmed-me" accusation in a complaint is not adequate. Ashcroft v. Iqbal, ___ U.S. ___, 129 S. Ct. 1937, 1949 (2009) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007)). In other words, a complaint which merely sets forth "naked assertion[s]" devoid of "further factual enhancement" is insufficient. Id. None of the defaulting defendants have challenged the adequacy of the complaint. Even so, Trustee should take heed of the Supreme Court's instructions regarding the quantity and quality of factual allegations necessary for a viable complaint.
In count IV, Trustee asserts preference claims against both DeVry and ING based upon Trustee's avoiding power under § 547. But, while Trustee relies upon the same statute as the basis for his claims against these two defendants, this does not amount to a common "question of law" and no common questions of fact apparently exists as between the two preference defendants.
And, of course, Trustee's argument does not respond to the Court's concern about why Trustee's claims against Scott and Smith are joined with his claims against DeVry, ING and Debtors. To be sure, Civil Rule 20 does not require that all questions of law or fact be common between all defendants, only that a question of law of fact be common among them. But in this case, the Trustee's brief and the Complaint offer little to aid the Court in determining whether some factual or legal commonality is at least conceivable.
In short, Trustee has not shown how his right to relief with respect to all defendants arose out of the same transaction or occurrence, nor that there are any common issues of fact or law involved in his various claims. Because both requirements of the rule are not satisfied, joinder is not proper. See Citibank (South Dakota) v. Conners (In re Conners), 125 B.R. 611, 614 (Bankr. S.D. Cal. 1991) (concluding that joinder was not proper when multiple plaintiffs attempted to join their independent claims against a single debtor in one adversary proceeding).
Conclusion
In the exercise of the discretion granted by Rule 7021 and Civil Rule 21, the Court concludes that separate adversary proceedings against the defendants are required in this instance. To accomplish that end, Trustee's claim against DeVry, and Trustee's claims against ING and Debtors, will be severed from this adversary proceeding and two new adversary proceedings will be opened by the Clerk. In other words, the instant adversary proceeding will continue only against Smith and Scott. A second adversary proceeding will be opened as to Trustee's claims against DeVry. And finally, a third adversary proceeding will be opened regarding Trustee's claims against ING and Debtors.
Trustee's motions for entry of default judgments against DeVry and ING in this action will be denied without prejudice. Trustee may move for entry of default judgment against DeVry and ING in the new adversary proceedings. Trustee's motion for default judgments against Smith and Scott on his claims concerning the motorcycles in this action will be granted. The trial previously scheduled in this action concerning Trustee's claims against Debtors shall be vacated, and a new trial date established and pretrial order entered after severance of the actions.
A separate order will be entered.