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Cliffs NaturaL Resources Inc. v. Seneca Coal Resources, LLC

United States District Court, E.D. Pennsylvania

October 31, 2017

CLIFFS NATURAL RESOURCES INC.; CLF PINNOAK LLC, Plaintiff,
v.
SENECA COAL RESOURCES, LLC; THOMAS M. CLARKE; ANA M. CLARKE; KENNETH R. MCCOY; JASON R. MCCOY; LARA NATURAL RESOURCES, LLC; IRON MANAGEMENT II, LLC, Defendants.

          MEMORANDUM

          GERALD AUSTIN MCHUGH UNITED STATES DISTRICT JUDGE

         This case arises from a commercial transaction in which Defendant Seneca Coal Resources, LLC acquired mining assets belonging to Plaintiff Cliffs Natural Resources Inc. On December 22, 2015, Plaintiff and Seneca Coal entered a Unit Purchase Agreement ("UPA") through which Plaintiff sold outstanding equity interests of its subsidiary, Cliffs North American Coal LLC, to Seneca. The parties also executed an Override Agreement that required Seneca to make ongoing payments to Plaintiff for coal sales exceeding a designated threshold. Plaintiff alleges that after executing the agreements, Seneca breached its contractual obligations under both the UPA and the Override Agreement. Plaintiff also alleges in Count III that Seneca fraudulently conveyed assets to Defendants Lara Natural Resources, LLC and Iron Management II, LLC, and in Count IV that the individual owners of Seneca, Lara Natural Resources, and Iron Management engaged in a civil conspiracy to execute the conveyances. Defendant Seneca Coal has filed counterclaims alleging that Plaintiff also breached the UPA.

         Defendants Lara Natural Resources, LLC, Thomas M. Clarke, and Ana M. Clarke [hereinafter the "Clarke Defendants"] and Defendants Kenneth R. McCoy, Jason R. McCoy, and Iron Management II, LLC [hereinafter the "McCoy Defendants"] have moved to dismiss Plaintiffs claims in Counts III and IV. Plaintiff in turn has moved to dismiss the counterclaims. I deny Plaintiffs Motion to Dismiss in its entirety and deny the McCoy Defendants' Motion to Dismiss as to Plaintiffs' fraudulent conveyance claims.

         Most of these motions are summarily denied in the accompanying order. This memorandum addresses the two motions that are granted.

         I. Analysis

         This motion is governed by the well-established standards of Fed. R. Civ, P, 12(b)(6), as amplified by Fowler v. UPMC Shadyskk, 578 F.3d 203, 210 (3d Cir. 2009). For present purposes, the question is whether the Complaint succeeds in pleading "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). That question must be answered through the prism of Fed.R.Civ.P. 9(b), which provides that a complaint alleging fraud must state "with particularity the circumstances constituting fraud . .. ." Applying these standards, I find that Plaintiff has not alleged facts with sufficient specificity to state a claim of fraudulent conveyance against the Clarke Defendants. Nor has Plaintiff stated a claim of civil conspiracy against any party.[1]

         A. Count III: Fraudulent Conveyance

         In Count III, Plaintiff alleges that Defendant Seneca Coal has fraudulently conveyed assets to Lara Natural Resources and Iron Management. Plaintiff further alleges that Seneca has fraudulently transferred funds to affiliates rather than satisfying its financial obligations to Plaintiff, and that it executed fraudulent conveyances by selling coal to affiliates or insiders at prices well below market rate. Only the claim against Iron Management is sufficiently pled.

         The parties have expressed some disagreement about the controlling law for Plaintiff's fraudulent conveyance claims, but seemingly concede that the choice of law has little bearing on the outcome of this case. Liability for fraudulent conveyance is defined by state statute. Ohio, Delaware, and North Carolina have adopted the Uniform Fraudulent Transfer Act (UFTA), while Virginia has adopted its own fraudulent transfer legislation, albeit with only minor differences. Under Delaware choice of law rules, Virginia appears to have the most significant contact with the conduct giving rise to Plaintiffs claims in Count III.[2] Though it is incorporated in Delaware, Defendant Seneca Coal Resources, LLC maintains its principal place of business in Virginia. PL's Second Am. Compl. ("SAC") ¶ 5, ECF No. 96. Any alleged fraudulent transfer, including the sale of coal below market rates, was likely executed in Virginia. I will therefore apply Virginia's fraudulent transfer laws in evaluating claims in Count III. Parenthetically, the same result would follow under the laws of Ohio, Delaware, or North Carolina.

         Virginia's fraudulent conveyance statute follows the same criteria as the Uniform Fraudulent Transfer Act. Under Virginia Code § 55-80, a conveyance of assets with "intent to delay, hinder or defraud creditors, purchasers or other persons [with a legal claim against the party]" will be void with respect to that creditor. While section 55-80 requires a showing of intent, a plaintiff may make out a prima facie case by alleging facts reflecting "badges" of fraud. Fox RestAssocs., L, P, v. Little, 282 Va. 277, 284, 717 S.E.2d 126, 131 (2011). Badges of fraud include the following: "(1) retention of an interest in the transferred property by the transferor; (2) transfer between family members for allegedly antecedent debt; (3) pursuit of the transferor or threat of litigation by his creditors at the time of the transfer; (4) lack of or gross inadequacy of consideration for the conveyance; (5) retention or possession of the property by transferor; and (6) fraudulent incurrence of indebtedness after the conveyance." Id. at 285.[3]

         Virginia Code § 55-81 sets out a separate fraudulent transfer provision that requires no showing of intent. Section 55-81 provides that a transfer or conveyance of assets "which is not upon consideration deemed valuable in law" by "an insolvent transferor, or by a transferor who is thereby rendered insolvent, shall be void as to creditors whose debts shall have been contracted at the time it was made . . . ." Va. Code § 55-81.

         In evaluating Count III, it is instructive to compare Plaintiffs factual allegations against Iron Management, affiliated with the McCoy Defendants, with those against Lara Natural Resources, affiliated with the Clarke Defendants. Plaintiff alleges that Seneca "has an outstanding debt to Cliffs for reimbursement and indemnification." SAC ¶ 82. Plaintiff alleges that despite its obligations to Cliffs, Seneca "transferred or diverted monies and/or funds to Lara Natural Resources, Iron Management, and 'other affiliate companies owned by the members'-----" Id. ¶ 84. Plaintiff specifically alleges that Seneca transferred $300, 000 to Iron Management "shortly after Seneca failed to make the $437, 000 lease payment on the BB&T lease and failed to replace Cliffs' bonds as required under the UPA." Id. ¶ 87. By comparison, Plaintiff has not specifically alleged any similar transfer to Lara Natural Resources. Rather, Plaintiff states only that Seneca transferred funds to Lara Natural Resources, and alleges that Seneca transferred "at least $2.4 million to insider affiliate companies" within seven weeks of executing the UPA. Id. ¶ 49.

         The complaint therefore suffices to state a claim of fraudulent transfer against Iron Management. Plaintiff alleged a specific transfer that Seneca made to Iron Management, as well as alleged facts that Virginia courts recognize as badges of fraud. PL's Answering Br. 11-12, ECF No. 112 (citing SAC ¶¶ 44, 49, 88, 99-100).[4]

         In contrast, I find that Plaintiff has not stated a claim for fraudulent conveyance against Lara Natural Resources. Plaintiff has alleged no facts lending plausibility to the claim that Lara Natural Resources itself received any of the $2.4 million that Seneca is alleged to have fraudulently transferred. It is insufficient under Rule 9(b) for a plaintiff to allege facts that merely replicate the language of a cause of action. Here, because Cliffs offers no specific facts relating to transfers that Lara Natural Resources allegedly received, I must dismiss its claim against Lara Natural Resources under Section 55-80. For the same reason, I find that Plaintiff has also not stated a claim under Section 55-81. Although Cliffs has alleged facts indicating that Seneca had insufficient property to pay its debts at the time it transferred $2.4 million in assets to other parties, Hudson v. Hudson,24 ...


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