Centrix Financial Liquidating Trust v. Sutton

          ORDER

          R. Brooke Jackson United States District Judge.

         This order first addresses the Court's subject-matter jurisdiction to hear the present dispute. The parties submitted supplemental briefs, and I have now heard two oral arguments on the issue. For the reasons below, the Court determines that jurisdiction is proper under 28 U.S.C. § 1334(b). Having found that it has jurisdiction, the Court addresses and denies, except as to defendant Michael Connolly, the pending motions to dismiss for failure to state a claim upon which relief could be granted.

         I. BACKGROUND

         A. Factual Background.

         Plaintiffs Centrix Financial Liquidating Trust (“Trust”) and Jeffery Weinman, trustee of the Trust (“Trustee”), filed this lawsuit against Robert Sutton, his family members, and numerous entities purportedly related to and controlled by the Sutton family. This dispute dates to September 2006, when Mr. Sutton, serving as chief executive officer of Centrix Financial, LLC (“Centrix”), filed for chapter 11 bankruptcy. Second Amended Complaint, ECF No. 149 at 2. The Centrix bankruptcy matter remains open and is ongoing. Id. at ¶129; Bankruptcy Case No. 06-16403-EEB.

         On May 16, 2008 the bankruptcy court confirmed the Second Amended Liquidating Chapter 11 Plan (“Plan”). Bankruptcy Case No. 06-16403-EEB, ECF No. 2203. The Plan called for substantive consolidation, meaning that the liabilities and properties of the various debtors' estates were consolidated and transferred to the Trust, thus extinguished the separate legal existence of each debtor. Id., ECF No. 1831 at Art. 2, ¶¶A-B. The Plan authorized the Trustee to take any and all actions necessary to pay off creditors. Id. at Art. 7, ¶G. To accomplish the required payments, the Plan authorizes the Trustee to commence adversary proceedings to enforce any claim or interest belonging to the debtors. Id. at Art. 10, ¶A. Specifically, the Plan provides that any claims against Mr. Sutton and other nondebtor insiders and entities, including claims for fraudulent transfers out of the Centrix estate, are critical assets of the debtors' estates. Id. The Plan notes that these claims are “likely the key source of any meaningful recovery to unsecured creditors.” Id.

         Three months after confirmation, exercising its authority under the Plan, the Trust asserted an adversary proceeding against Mr. Sutton and his family, alleging that they used Centrix as a vehicle to perpetuate a large-scale fraud scheme on the subprime auto-loan industry. ECF No. 149 at 2. Plaintiffs refer to this scheme as the “Centrix scheme.” Id. Little is alleged about the Centrix scheme except that “Robert and his associates used the family of entities to shield the fact that Robert was siphoning off tens of millions of dollars for the direct benefit of his family and friends, ” and as a result, caused Centrix to file for bankruptcy. Id. at ¶¶33-34. This adversary proceeding settled for a “proportionally de minimus amount” because Mr. Sutton, his spouse Julie, and their family trust, the Julie L. Sutton Revocable Trust (“JLSRT”), represented through sworn disclosures that they had practically no assets and were thus judgment-proof. Id.

         The present dispute concerns the disclosures made during the first adversary proceeding. According to plaintiffs, the above disclosures which led to the settlement were fraudulent. Id. Plaintiffs assert that the Suttons transferred the assets held by JLSRT to numerous other entities, none of which were disclosed to plaintiffs. Id. at ¶¶67, 70. During settlement discussions, plaintiffs were aware of no Sutton-related trusts or entities other than JLSRT. Id. at ¶67. Plaintiffs assert that the Suttons created (with the assistance of their lawyer, defendant Michael Connolly) a network of entities to shield their assets under the umbrella of the Hampden Irrevocable Trust. Id. at 2. Plaintiffs refer to this scheme involving the alleged fraudulent transfers and false disclosures as the “Hampden scheme.” Id.

         The remainder of the complaint outlines a series of alleged fraudulent transactions that occurred after plaintiffs settled the first adversary proceeding.

         B. Procedural Background.

         To remedy the alleged fraud stemming from the Hampden scheme, plaintiffs filed a complaint in this Court on October 29, 2018. Complaint, ECF No. 1. Plaintiffs seek a $15 million entry of judgment against the Suttons for breaching the express terms of the settlement agreement. Id. at ¶61. To explain, the settlement agreement included a safety provision in which plaintiffs were to receive a $15 million non-dischargeable judgment if any of the financial disclosures submitted by the Suttons was materially false. Id. Plaintiffs' original complaint asserted six state-law claims for relief: (1) breach of contract; (2) fraudulent misrepresentation; (3) fraudulent conveyance pursuant to Colo. Rev. Stat. § 38-8-105; (4) conspiracy to defraud creditors and the Trust; (5) aiding and abetting fraud; and (6) fraudulent concealment. Id. at ¶¶72-103. Plaintiffs withdrew their breach of contract claim when they filed their first amended complaint in December 2018, but they continued to assert the remaining five state-law claims. ECF No. 67 at ¶¶71-97.

         Defendants flooded the Court with ten motions to dismiss after plaintiffs filed their first amended complaint. Many of the motions pointed out that plaintiffs failed to allege jurisdiction in either complaint. Technically, that is true. Although the background sections of the original and first amended complaints state that “[t]he bankruptcy underlying this adversary action is twelve years old . . ., ” plaintiffs did not assert jurisdiction in the “parties, jurisdiction, and venue” sections of either complaint. ECF No. 1 at 1; ECF No. 67 at 1-2. Plaintiffs responded to defendants' Rule 12(b)(1) motions by arguing that this Court has “related to” jurisdiction under 28 U.S.C. § 1334(b). ECF No. 98 at 6.

         At the April 26, 2019 scheduling conference, I expressed my concern regarding subject-matter jurisdiction. I invited the parties to submit supplemental briefs addressing § 1334(b)'s grant of jurisdiction. At the conference, defendants also requested oral argument on the issue.

         I granted defendants' request and set the oral argument for June 11, 2019. On June 10 defendants submitted their brief addressing jurisdiction under § 1334(b). ECF No. 132. Plaintiffs elected to forgo a brief. Instead, also on June 10, plaintiffs filed a motion for leave to file a second amended complaint. ECF No. 133. I eventually granted the motion on June 12. In their second amended complaint, plaintiffs assert bankruptcy avoidance claims under 11 U.S.C. §§ 542, 544, 548, and 549. Plaintiffs argued that the crux of the original complaint concerned the fraudulent transfers of assets out of the bankruptcy estate, and that they chose to seek relief only under state statutes and not their federal counterparts. However, apparently spooked by defendants' Rule 12(b)(1) motions, plaintiffs amended their complaint to assert federal-law claims on top of their state-law claims. Plaintiffs' second amended complaint asserts 12 claims for relief. The first six claims seek to avoid pre- and post-petition fraudulent transfers under §§ 542, 544, 548, and 549. ECF No. 149 at ¶¶111-35. The remaining claims reassert the claims from the first amended complaint. Id. at ¶¶136-67. Plaintiffs now allege that this Court has jurisdiction under § 1331 as well as § 1334(b). Id. at ¶¶1-3.

         Notwithstanding plaintiffs' last-minute motion for leave to amend, the oral argument on the original jurisdictional grounds-related to jurisdiction under 28 U.S.C. § 1334(b)- proceeded as planned on June 11, 2019. At first, the parties focused on § 1334(b). However, after I indicated that I intended to grant plaintiffs' leave to amend, defendants also argued against jurisdiction under plaintiffs' new avoidance theories. Defendants argued that claims under 11 U.S.C. §§ 542, 544, 548, and 549 do not apply in the post-confirmation context, but when pressed for authority to support that position, defendants requested leave to brief the issue. When I asked plaintiffs' counsel whether defendants' position was correct, counsel answered that he didn't know, but likewise, he asked for leave to brief the issue.

         I granted the parties' request for additional briefing and held another oral argument on August 15, 2019. Plaintiffs filed their brief on June 21, 2019. Curiously, the brief focused on “Trustee's standing to pursue claims explicitly retained in the Centrix chapter 11 plan.” ECF No. 150. Defendants were quick to point out in their brief on “lack of federal jurisdiction” that Trustee's standing has never been questioned by the Court or by the defendants. ECF No. 151. Next, defendants renewed their objections to § 1334(b) jurisdiction, and then went on to argue that plaintiffs' new federal claims were frivolous, and thus, 28 U.S.C. § 1331 does not provide federal question jurisdiction.

         II. STANDARD OF REVIEW

         A. Jurisdiction.

         “Subject matter jurisdiction defines the court's authority to hear a given type of case.” City of Albuquerque v. Soto Enters., Inc., 864 F.3d 1089, 1092 (10th Cir. 2017) (quotation and citation omitted). In contrast to general jurisdiction enjoyed by state courts, a federal court's jurisdiction is limited, possessing “only that power authorized by Constitution and statute.” Kline v. Biles, 861 F.3d 1177, 1180 (10th Cir. 2017) (quoting Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994)). A federal court is to presume that a cause of action lies outside of this limited ...