United States District Court, W.D. Virginia, Abingdon Division
ANGELA WELCH, AS CHAPTER 7 TRUSTEE FOR THE BANKRUPTCY ESTATE OF FRANK MICHAEL MONGELLUZZI, Plaintiff,
HIGHLANDS UNION BANK, Defendant.
Robert F. Elgidely and Michael A. Friedman, Genovese Joblove & Battista, P.A., Fort Lauderdale, Florida, and Igor M. Babichenko, McGuire Woods LLP, Richmond, Virginia, for Plaintiff.
Patrick R. Hanes and Jonathan T. Lucier, Williams Mullen, Richmond, Virginia, for Defendant.
OPINION AND ORDER
JAMES P. JONES, District Judge.
Pending before the court is the Defendant's Motion for Judgment on the Pleadings filed pursuant to Federal Rule of Civil Procedure 12(c). For the reasons stated, the motion will be denied.
Angela Welch, the Chapter 7 Trustee for the bankruptcy estate of Frank Michael Mongelluzzi (the "Trustee"), filed this action in the United States District Court for the Middle District of Florida against Highlands Union Bank ("Highlands"), a commercial bank located in this judicial district, seeking to avoid alleged fraudulent conveyances pursuant to 11 U.S.C. § 544(b). Section 544(b) "does not in general establish substantive provisions for the avoidance of transfers." 4 William L. Norton Jr. & William L. Norton III, Norton Bankruptcy Law and Practice § 63:7 (3d ed.). Rather, it allows a trustee to utilize applicable nonbankruptcy law available to creditors. Id.
The Trustee filed an Amended Complaint and the Florida court entered an order by agreement on September 18, 2014, transferring the case to this court pursuant to 28 U.S.C. § 1406(a). Thereafter, Highlands filed its Answer to the Trustee's Amended Complaint. On November 3, 2014, Highlands filed a Motion for Judgment on the Pleadings. The motion has been fully briefed and is ripe for decision.
According to the Trustee's Amended Complaint, Frank Mongelluzzi and his spouse (the "Mongelluzzis") owned and operated various temporary labor staffing companies, referred to collectively as "Able Body Labor Businesses, " between 1986 and 2010. The Able Body Labor Businesses were headquartered in Clearwater, Florida, and had 170 office locations in 25 states. The labor staffing businesses generated over $200 million in annual revenues between 2004 and 2009.
The Mongelluzzis also maintained various other personal and business assets, including "restaurants, construction companies, pawn shops, residential and commercial real estate holdings, aircraft, and yachts." (Am. Compl. ¶ 10, ECF No. 15.) According to the Amended Complaint, the non-labor staffing interests "were not financially self-sufficient but, rather, relied heavily upon the Able Body Labor Businesses' revenue, loan proceeds, and illicit banking activities." ( Id. ¶ 11.)
In total, the Mongelluzzis and their various business entities allegedly maintained 314 bank accounts at approximately 38 financial institutions, including 12 bank accounts at Highlands (the "Highlands Bank Accounts") between 2007 and 2011. According to the Amended Complaint, "[a]t the time the Highlands Bank Accounts were opened, Highlands was required to conduct due diligence with regard to the identity of the account holders, the nature of their business activities, the source of their revenue, as well as the intended purpose for, and anticipated use, of the accounts." ( Id. ¶ 13.) After the accounts were opened, the Trustee alleges that "Highlands was required to monitor the activity in the Highlands Bank Accounts through use of its automated software systems." ( Id. ¶ 14.)
The Trustee also alleges that the Mongelluzzis and their various business entities had a "substantial lending relationship with Highlands in the period 2007 through 2011." ( Id. ¶ 18.) The Trustee asserts that "[i]n connection with the administration of the Highlands Loans, Highlands obtained and scrutinized information concerning the obligors' financial condition on a periodic basis." ( Id. ¶ 19.)
The Trustee asserts that Frank Mongelluzzi and his accomplices engaged in a check kiting scheme through the use of the multiple bank accounts, including the Highlands Bank Accounts. The Amended Complaint describes the check kiting scheme in the following terms:
Basically, F[rank] Mongelluzzi and others continuously issued checks drawn on accounts which lacked sufficient available funds to cover them (the "Check Kite Accounts") so that they would have access to interest free loans of the fictitious account balances during the float period and thereby hinder and/or delay F[rank] Mongelluzzi's and the Business Entities' creditors in the period 2007 through 2010.
In order to provide cover for their massive check kiting scheme, F[rank] Mongelluzzi and others would then continuously write checks drawn on the accounts of their other affiliated entities (or transfer loan proceeds) and deposit those checks (or loan proceeds) to the Check Kite Accounts before the float period expired so that the checks would not bounce and thereby cause the revelation and cessation of the scheme.
( Id. ¶¶ 21-22.)
The Trustee contends that the check kiting scheme resulted in numerous bank account overdrafts. The Trustee characterizes the overdrafts as loans to Frank Mongelluzzi that were repaid with subsequent deposits during the float periods associated with the check kiting scheme.
The Amended Complaint provides eight detailed examples of how the check kiting scheme and overdraft repayment process worked in practice. Two of these examples involve a Highlands' bank account in which check kiting allegedly occurred on January 5-7, 2010, and January 22-25, 2010. For example, regarding the latter example, the Trustee alleges that
[b]eginning on January 22, 2010, when the available balance in the [Highlands] 2742 account was a negative $(10, 587.39), F[rank] Mongelluzzi wrote a series of checks as follows: Check No. 1256 to Professional Staffing for $300, 000 on January 22, 2010 and Check No. 1488 to Stearns Bank for $117, 484.70 on January 22, 2010. In order to provide cover for these checks, on January 25, 2010, F[rank] Mongelluzzi deposited Check No. 542 from The Risk Group for $117, 484.70 and Check No. 550 from The Risk Group for $305, 000. But for the deposits made into [Highlands] 2742 on January 25, 2010, there would not have been sufficient funds to pay the checks drawn on January 22, 2010.
( Id. ¶ 23(e).) The Risk Group is identified in the Amended Complaint as "an entity owned by F[rank] Mongelluzzi." ( Id. ¶ 23(a).)
The Trustee alleges that "Highlands' relationship with F[rank] Mongelluzzi represented a significant departure from ordinary banking practices and its normal course of dealings with customers." ( Id. ¶ 43.) The Trustee also asserts that
[a]lthough Highlands had a common law, statutory and regulatory duty to detect and terminate check kiting, money laundering, and other illicit banking activities in the Highlands Bank Accounts, it permitted a multitude of highly irregular and suspicious banking transactions to occur, many of which appeared to have no legitimate business purpose.
( Id. ¶ 16.)
The Trustee alleges that "Highlands' actual knowledge of F[rank] Mongelluzzi's intent to hinder and/or delay creditors is evidenced by significant circumstantial evidence in the period 2007 ...