Opinion ID: 2298807
Heading Depth: 2
Heading Rank: 1

Heading: The Default Judgment as to Liability

Text: Bertram relies on our case law establishing that before the trial court may enter a default judgment, it must satisfy itself that the complaint describes a basis for liability. See Elmore v. Stevens, 824 A.2d 44, 46 (D.C.2003) (reversing default judgment that had been entered on the basis of a woefully inadequate complaint); Hudson v. Ashley, 411 A.2d 963, 968 (D.C.1980) ([A] defendant's default does not in itself warrant the court in entering a default judgment. There must be a sufficient basis in the pleadings for the judgment entered.) (citation and internal quotation marks omitted); see also City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 n. 23 (2d Cir.2011) (Most of our sister circuits appear to have held expressly that a district court may not enter a default judgment unless the plaintiff's complaint states a valid facial claim for relief.) (collecting cases). Bertram argues that, notwithstanding the Amended Complaint's legal assertion that he is liable for fraudulent conveyance, the complaint failed to plead the required elements of a claim of fraudulent transfer under the UFTA. [4] We agree with Bertram that we may not uphold the judgment against him if the Stadium's complaint failed to state a facially valid claim for relief. However, for the reasons that follow, we are unpersuaded by his argument that the Amended Complaint was fatally deficient. [5] The Council of the District of Columbia adopted the UFTA in 1995, with an effective date of February 9, 1996. [6] In enacting it, the Council understood that it would provide for more complete creditor remedies and would bring the law in the District more in conformity with federal bankruptcy law, which provides remedies for fraudulent transfers. Judiciary Committee Report at 1, 2. [7] In pertinent part, the UFTA provides that: (a) A transfer made, or obligation incurred, by a debtor is fraudulent as to a creditor, whether the creditor's claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation: (1) With actual intent to hinder, delay, or defraud any creditor of the debtor[.] D.C.Code § 28-3104(a)(1). Bertram's primary argument as to why the Stadium's Amended Complaint was deficient is that (1) to state a claim under § 28-3104(a)(1), the Stadium was required to plead that its debtor, Distributive, made a transfer of an asset or an interest in an asset [8] with the intent to hinder, delay, or defraud the Stadium as creditor; but (2) the allegations of the Amended Complaint are about the surrender of property in which the Lenders had a perfected security interest, property that did not constitute an asset within the meaning of the UFTA. See D.C.Code § 28-3101(2)(A) (providing that the term asset does not include property to the extent it is encumbered by a valid lien). Bertram's argument is valid as far as it goes, but what it overlooks is that a creditor can also state a claim under § 28-3104(a)(1) by alleging that its debtor incurred [an] obligation ... [w]ith actual intent to hinder, delay, or defraud the creditor. The Amended Complaint's assertions about Distributive's entry into the July 2010 Settlement Agreement appear to constitute just such an allegation. The UFTA does not contain a definition of obligation, [9] but, as defined in BLACK'S LAW DICTIONARY 1104 (8th ed.2004), the term includes anything that a person is bound to do or forbear from doing, whether the duty is imposed by law [or] contract [.] (italics added). In addition, the focus of the UFTA and the parallel provisions of the Bankruptcy Code is on transactions, including contracts or other obligations, that deplete[ ] the debtor's estate, In re Montgomery, 983 F.2d 1389, 1394 (6th Cir. 1993), making it unavailable to other creditors. In re Crystal Med. Prods., Inc., 240 B.R. 290, 297 (Bankr.N.D.Ill. 1999). The allegations of the Amended Complaint are about Distributive's entry into a contract (the Agreement) that changed the situation from one in which the Lenders were suing to enforce Bertram's personal guarantee, to one in which Distributive surrendered substantially all of the loan collateral in exchange for a release of Bertram's personal guarantee, with the result of diminishing the amount of Distributive's property that might have remained available to unsecured creditors and hindering the Stadium's collection efforts. [10] Specifically, the Amended Complaint alleged that Distributive, acting through Bertram, agree[d] to transfer substantially all of the valuable assets belonging to Distributive to Lender Defendants or their assignee while knowing at the time of entering into the ... Agreement that such assets were encumbered by [the Stadium's] Judgment against Distributive; that Bertram personally benefitted from the transfer of assets from Distributive to ArX as Bertram received the release of personal liability by the Lender[s]; and that these actions were intentional, willful [and] malicious, and were taken with the intent to defraud the [Stadium]. We are satisfied that these allegations sufficed to state a claim under the UFTA that the debtor Distributive incurred an obligationan agreement to surrender specified collateral in exchange for a release of the majority shareholder's personal guarantee of Distributive's debt with the intent to hinder, delay, or defraud the Stadium as creditor. [11] We find support for this conclusion in the many cases in which courts have considered claims that a debtor company, acting through its majority owner/CEO, undertook a transaction that resulted in release of the owner/CEO's personal guarantee of the company's debt, and have allowed the claims to proceed under the UFCA or the UFTA or have voided the transactions under the Bankruptcy Code. [12] Bertram contends that the Amended Complaint is deficient as a UFTA complaint because, while it makes allegations about his intent, it does not plead that the debtor, Distributive, acted with the actual intent to hinder or defraud its creditor. This argument is unavailing. [I]ntent ... may be averred generally. Super. Ct. Civ. R. 9(b). Since the complaint averred that Bertram at all relevant times was the Chief Executive Officer and majority owner of Distributive and that, acting in that capacity, he executed the Agreement with the intent to defraud the Stadium, we are satisfied that the Amended Complaint sufficiently alleged that Distributive, too, acted with fraudulent intent. We also reject Bertram's argument that the complaint's allegations about his intent to hinder, delay, or defraud are unsupported conclusions rather than well-pleaded allegations of the type necessary to support a default judgment. See Oliver v. Mustafa, 929 A.2d 873, 878 (D.C.2007) (explaining that a defendant in default is not held to admit facts that are not well-pleaded) (citations and internal quotation marks omitted). The Stadium's allegations of Bertram's intent to hinder were alleged with sufficient certainty, Thomson v. Wooster, 114 U.S. 104, 111, 5 S.Ct. 788, 29 L.Ed. 105 (1885), and thus were well-pleaded. Moreover, the Amended Complaint alleged facts that the UFTA lists as badges of fraud. [13] See D.C.Code § 28-3104(b)(1)(11) (In determining actual intent [to hinder, delay, or defraud a creditor], consideration may be given to factors such as whether there was a transfer benefitting an insider of the debtor, whether the debtor had been sued or threatened with suit before the transfer was made, and whether the transfer was of substantially all the debtor's assets); see also In re Tax Reduction Inst., 148 B.R. 63, 73 (Bankr.D.D.C.1992) (The existence of a guarantee of the debt by the debtor's president is a relevant consideration in determining whether a [transfer to the creditor holding that debt] was made in bad faith....). Bertram also argues that a claim that Distributive intended to hinder, delay, or defraud the Stadium cannot be premised on an allegation that it agreed to surrender, to the Lenders' designee, property in which the Lenders already had a perfected security interest, and upon which they were already entitled to foreclose to protect their rights. We disagree. As explained in note 11 supra, the Agreement entailed a new obligation. In addition, as we have previously recognized, even if a debtor has at least one non-fraudulent motive for a transaction, the additional motive of effecting the transaction to hinder a creditor is a sufficient ground for an unassailable conclusion [of]... fraudulent intent. Consumers United Ins. Co. v. Smith, 644 A.2d 1328, 1359 (D.C.1994). The remaining deficiency in the complaint, according to Bertram, is that while the UFTA is targeted at fraudulent conduct by a debtor, the Stadium did not sue its debtor Distributive, but instead sued Bertram, who was not the Stadium's debtor. However, the Stadium's choice of Bertram as defendant did not cause its complaint to fail to state a claim under the UFTA. The UFTA expressly permits judgments against the person for whose benefit the transfer [by the debtor] was made. D.C.Code § 28-3108(b)(1). We think it must be read also to permit judgments against the person for whose benefit an obligation [was] incurred [by the debtor] if the obligation was fraudulent as to a creditor. D.C.Code § 28-3104(a). As alleged in the Amended Complaint, Bertram is such a person, since, under his direction and by his hand, Distributive [under]took an obligation that relieved him of liability and that (although it may have been for reasonably equivalent value) was not in good faith (but instead was for the purpose of hindering Distributive's creditor). See D.C.Code § 28-3108(a); see also Bonded Fin. Servs. Inc. v. European Am. Bank, 838 F.2d 890, 895 (7th Cir.1988) (explaining that the paradigm `entity for whose benefit such transfer was made' is a guarantor, i.e., someone who receives the benefit but not the money when a transaction is accomplished to satisfy the loan indebtedness and the guarantor no longer is exposed to liability). Moreover, applying the UFTA, courts have held that where an individual who controlled a debtor company participated in the decision to make a fraudulent conveyance and did so with an intention to hinder the company's creditor(s), the individual may be held liable for the fraudulent conveyance. Firstar Bank, N.A. v. Faul, No. 00-C-4061, 2001 WL 1636430, at -7, 2001 U.S. Dist. LEXIS 21294, at -21 (N.D.Ill. Dec. 19, 2001) (rejecting the argument that the fraudulent conveyance count, brought against defendant who was the majority shareholder in the transferor/debtor company, must be dismissed, reasoning that Illinois law permits a cause of action for fraud against any party who participates in a fraud, ... and ... see[ing] no reason not to extend this rule to fraudulent conveyances); [14] see also Permasteelisa CS Corp., No. 2:06-CV-569, 2007 WL 4615779, 2007 U.S. Dist. LEXIS 95860 (S.D.Ohio Dec. 31, 2007) (denying summary judgment to defendant corporate president in case alleging a fraudulent conveyance of assets by the corporation in violation of the UFTA); cf. Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206, 211, 217 (3d Cir.1990) (UFCA case upholding judgment against individuals who had 100% control of the debtor corporation and in that capacity had engineered [its] fraudulent conveyance of assets, and noting that under Pennsylvania law, liability will attach to a corporate officer who participates in the wrongful acts of the corporation) (citations omitted). Similar to the common law in the jurisdictions cited above, the case law in our jurisdiction establishes that [c]orporate officers are personally liable for torts which they commit, participate in, or inspire, even though the acts are performed in the name of the corporation. Lawlor v. District of Columbia, 758 A.2d 964, 974, 977 (D.C.2000) (noting that [a]n officer's liability is not based merely on the officer's position in the corporation; it is based on the officer's behavior and whether that behavior indicates that the tortious conduct was done within the officer's area of affirmative official responsibility and with the officer's consent or approval; and that [l]iability must be premised upon a corporate officer's meaningful participation in the wrongful acts) (citations and internal quotation marks omitted). [15] For this reason, too, we reject Bertram's argument that a UFTA suit did not lie against him individually. We also note that while the remedial provisions of the UFTA are focused primarily on following and reaching assets in the hands of transferees that have participated in the fraudulent scheme, or on recovering value from persons who have benefitted from the transfer of assets to such transferees [16] (remedies that were not available on the facts pled here), [17] the statute also provides more generally for [a]ny other relief the circumstances may require. D.C.Code § 28-3107(a)(3)(C). Courts have held that this UFTA catchall provision empower[s] a court to provide monetary relief at its discretion (and does not authorize only equitable remedies such as avoidance, attachment, an injunction, or appointment of a receiver). DFS Secured Healthcare Receivables Trust v. Caregivers Great Lakes, Inc., 384 F.3d 338, 353 (7th Cir.2004) (collecting cases). We are satisfied that the catch-all provision afforded a basis for the Stadium to sue Bertram [i]n an action for relief against a[n] ... obligation under this chapter, D.C.Code § 28-3107(a), on the basis of his role in causing Distributive to agree to surrender collateral to ArX pursuant to the Agreement. In light of all the foregoing, we conclude that, taken as true, the allegations of the Amended Complaint were sufficient to state a claim under the UFTA. They did more than permit the [trial] court to infer... the mere possibility of misconduct; they plausibly g[a]ve rise to an entitlement to relief. Ashcroft v. Iqbal, 556 U.S. 662, 679, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Had Bertram answered the complaint and the matter proceeded to trial (or even to a point where summary judgment was sought), Bertram might well have been able to rebut, or the Stadium might have failed to adduce sufficient evidence to prove, the complaint's allegation of fraudulent intent; or, Bertram may have been able to establish other facts demonstrating that he should not be held liable. Those possibilities, however, do not afford us a basis for disturbing the default that the court entered upon Bertram's failure to answer.