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Chorches v. The Catholic University of America

United States District Court, D. Connecticut

July 13, 2018

RONALD I. CHORCHES, TRUSTEE, Plaintiff,
v.
THE CATHOLIC UNIVERSITY OF AMERICA, Defendant.

          RULING ON MOTION TO DISMISS

          Michael P. Shea, U.S.D.J.

         Catholic University (“Catholic”) moves to dismiss claims by a Chapter 7 bankruptcy trustee seeking to avoid transfers made by the debtors for their adult daughter's college tuition. The trustee, Ronald I. Chorches, alleges that the transfers violated both 11 U.S.C. § 548(a)(1)(B) (Count One of the Amended Complaint) and Conn. Gen. Stat. §§ 52-552e(a)(2) and 52-552f(a) (Count Two of the Amended Complaint), both of which allow creditors to recover property that an insolvent debtor transfers without receiving “reasonably equivalent value” in return. Catholic argues among other things that the funds the debtors paid for their adult daughter's college tuition should be considered expenses of the family as a single economic unit and were, therefore, exchanged for reasonably equivalent value within the meaning of these statutes. For the reasons below, I DENY the motion to dismiss.

         I. Factual Allegations

         At all relevant times, Julia Franzese, James and Kristin Franzese's daughter, was more than 18 years old. (ECF No. 24 at ¶ 5.) She was a student at Catholic University from August 2011 to August 2014. (Id. at ¶ 6.) Chorches, the trustee for the Franzeses' bankruptcy estate, alleges that, for this entire period, James and Kristin were insolvent (Id. at ¶ 7.) He includes specific information regarding the Franzeses' debts, as detailed in their bankruptcy petition. (Id. at ¶ 8.) He alleges that the Franzeses were “unable to pay their debts as they became due, as evidenced by their large tax debt and the foreclosure on their home in 2011.” (Id. at ¶ 12.)

         The Franzeses paid Catholic University $64, 845.50 for Julia's tuition between September 2011 and June 2014. (Id. at 7, ¶ 19.) They paid $30, 659.50 of this amount between September 2013 and June 2014. (Id. at 5, ¶ 19.) Chorches alleges that, at the time of these payments, the debtors “were engaged in a business or transaction, or were about to engage in a business or transaction, for which any property remaining with [them would have been] an unreasonably small amount of capital” and that they “intended to incur, or believed that they would incur, debts that would be beyond their ability to pay as such debts matured.” (Id. at 6, ¶ 23, 9, ¶ 22.)

         On August 24, 2015, James and Kristin Franzese filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. (Id. at ¶ 3.) Chorches brought this lawsuit against Catholic University for the amount the debtors paid in tuition during the two years before filing for bankruptcy under 11 U.S.C. § 548(a)(1)(B), which creates a two-year look-back period for fraudulent transfers, and during the four years before filing for bankruptcy under Conn. Gen. Stat. §§ 52-552e(a)(2) and 52-552f(a), which, together with § 52-552j, creates a four-year look-back period for such transfers. (ECF No. 24 at 10); 11 U.S.C. § 548(a)(1)(B); Conn. Gen. Stat. §§ 52-552e(a)(2), 52-552f(a), 52-552j.[1] He alleged that these tuition payments were constructively fraudulent transfers and that the Franzeses' estate can avoid them. (ECF No. 24 at 10.) Catholic moved to dismiss. (ECF No. 7.) I granted that motion to dismiss, with leave to replead, finding that Chorches had failed to allege specific facts supporting the allegation that the Franzeses were insolvent at the time they made the transfers to Catholic. (ECF No. 23.) Chorches then filed an amended complaint, correcting that deficiency. (ECF No. 24.) Catholic has now moved to dismiss the amended complaint. (ECF No. 25.)

         II. Rule 12(b)(6) Standard

         Under Fed.R.Civ.P. 12(b)(6), I must determine whether Chorches has alleged “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Under Twombly, the Court accepts as true all of the complaint's factual allegations when evaluating a motion to dismiss. Twombly, 550 U.S. at 572. The Court must “draw all reasonable inferences in favor of the non-moving party.” Vietnam Ass'n for Victims of Agent Orange v. Dow Chem. Co., 517 F.3d 104, 115 (2d Cir. 2008) (internal quotations and citations omitted). For a complaint to survive a motion to dismiss, “[a]fter the court strips away conclusory allegations, there must remain sufficient well-pleaded factual allegations to nudge plaintiff's claims across the line from conceivable to plausible.” In re Fosamax Products Liab. Litig., No. 09-cv-1412 (JFK), 2010 WL 1654156, at *1 (S.D.N.Y. Apr. 9, 2010) (internal quotations and citations omitted).

         A claim of constructive fraudulent transfer (i.e., one not relying on fraudulent intent) must be pled in accordance with Rule 8(a), rather than the heightened Rule 9(b) standard for fraud claims. In re Bernard L. Madoff Inv. Sec. LLC, 454 B.R. 317, 332 (Bankr. S.D.N.Y. 2011).

         III. Analysis

         In Count One of the Amended Complaint, Chorches seeks to avoid the $30, 659.50 of payments made to Catholic University within two years of the debtors' petition under 11 U.S.C. § 548(a)(1)(B). To allege adequately his claim of constructive fraudulent transfer under 11 U.S.C. § 548(a)(1)(B), Chorches must plead facts showing that: (1) the debtors had an interest in the property; (2) a transfer of that interest occurred within two years of the filing of the bankruptcy petition; (3) the debtors received less than reasonably equivalent value in exchange for the transfer; and (4) the debtors either were insolvent at the time of the transfer or became insolvent as a result of the transfer, were engaged in a business or transaction or were about to engage in a business or transaction for which any property remaining with them represented unreasonably small capital, or intended to incur, or believed they would incur, debts beyond their ability to pay.

         In Count Two of the Amended Complaint, Chorches seeks to avoid the $64, 845.50 of payments made to Catholic University within four years of the debtors' petition under Conn. Gen. Stat. §§ 52-552e and 52-552f(a). § 52-552e(a)(2) states:

A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, if the creditor's claim arose before the transfer was made or the obligation was incurred and if the debtor made the transfer or incurred the obligation . . . without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor (A) was engaged or was about to engage in a business or a transaction for which the remaining assess of the debtor were unreasonably small in relation to the business or transaction, or (B) ...

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