United States District Court, D. Colorado
CENTRIX FINANCIAL LIQUIDATING TRUST and JEFFREY A. WEINMAN, in his capacity as Trustee for the Centrix Financial Liquidating Trust, Plaintiffs,
ROBERT SUTTON, JULIE L. SUTTON REVOCABLE TRUST, JULIE SUTTON, DAVID SUTTON, KATE SUTTON, HAMPDEN IRREVOCABLE TRUST, UNIVERSITY IRREVOCABLE TRUST, WILLISTON TRUST, WILLISTON TRUST GROUP, LLC., WILLISTON HOLDING GROUP, WILLISTON HOLDINGS, LTD., PREFERRED HOLDING GROUP, LLC, FOUNDATION FUND, LLC, FREEDOM FUND HOLDINGS, POLO PLACE, LLC, HERITAGE ADVISORS, LLC, THE ORCHARD, LLC, ORCHARD LANE, LLC, A FORTIORI, LLC, PRIME HEALTH, LLC, NANO FORMULAS, LLC, NANO IP, LLC, NANOSPHERE HEALTH SCIENCE, LLC, NANOSPHERE HEALTH SCIENCES, INC., DOUG SYMONS, PATRICK BAKER, and MICHAEL CONNOLLY, Defendants.
Brooke Jackson United States District Judge.
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.
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.
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.
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.
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.
remainder of the complaint outlines a series of alleged
fraudulent transactions that occurred after plaintiffs
settled the first adversary proceeding.
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.
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.
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.
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.
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
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.
STANDARD OF REVIEW
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 ...