Kelly M. Hagan v. Pamela Baird , 591 F. App'x 434 ( 2015 )

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 15a0001n.06
Case No. 14-1060 FILED
Jan 02, 2015
UNITED STATES COURT OF APPEALS DEBORAH S. HUNT, Clerk
FOR THE SIXTH CIRCUIT
IN RE: B & P BAIRD HOLDINGS, INC., )
)
Debtor. ) ON APPEAL FROM THE UNITED
_____________________________________ ) STATES DISTRICT COURT FOR
KELLY M. HAGAN, ) THE WESTERN DISTRICT OF
) MICHIGAN
Appellant, )
)
v.
)
PAMELA BAIRD, )
)
Appellee. )
BEFORE: DAUGHTREY, McKEAGUE, and WHITE, Circuit Judges.
HELENE N. WHITE, Circuit Judge. Chapter 7 Bankruptcy Trustee Kelly M. Hagan1
appeals from the district court’s affirmance of the bankruptcy court’s denial of leave to amend
Trustee’s complaint in the adversary proceeding Trustee brought on behalf of the debtor, B & P
Baird Holdings (Debtor), against William (Bill) and Pamela (Pam) Baird (collectively the
Bairds)2 to recover funds appropriated by them from the sale of Debtor’s assets. Hagan and
King Par, LLC, Case No. 11-80397 (Bankr. W.D. Mich.). The question on appeal is whether the
bankruptcy court properly concluded that the doctrine of in pari delicto bars Trustee’s claim of
1
The initial Trustee, James W. Boyd, resigned on May 27, 2014, after he was confirmed
to serve as a bankruptcy judge for the Western District of Michigan. Hagan was appointed as his
successor Trustee. All references to Trustee before May 27, 2014, refer to Boyd.
2
The Bairds have since divorced.
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conversion against Pam, thus rendering Trustee’s proposed amendment futile.3 Because
Trustee’s proposed allegations are consistent with a scenario to which in pari delicto would not
apply, we REVERSE the denial of Trustee’s motion for leave to amend and REMAND to the
bankruptcy court for further proceedings.
BACKGROUND
A. Izzo Sues Debtor
On January 8, 2002, Izzo Golf, Inc. (Izzo), brought a patent-infringement action against
Debtor, a golfing equipment company that was then known as King Par Corporation (Old King
Par (OKP)), alleging that OKP’s golf bags infringed on Izzo’s patents. Izzo’s motion for
summary judgment was granted in part on July 5, 2007, resulting in OKP’s liability to Izzo as
well as continuing litigation. See Izzo Golf, Inc. v. King Par Golf Inc., No. 02-CV-6012 CJS,
2010 WL 86653 (W.D.N.Y. Jan. 6, 2010) (summarizing the proceedings).
B. Debtor Sells Substantially All Its Assets
On June 4, 2009, after lengthy negotiations and while Izzo’s suit was still pending, OKP,
Baird Family LLC and Bill entered into an Asset Purchase Agreement (APA) with KP
Acquisition Company, LLC (“New King Par” or “NKP”)4 for the sale of all OKP inventory and
substantial portions of OKP’s land to NKP for $3,400,000, subject to certain adjustments.5 The
APA further provided that NKP would, for a fee, collect all OKP receivables outstanding as of
March 31, 2009, as fiduciary, and use the funds to pay OKP debts accrued as of that date. Any
3
The Final Order Dismissing Adversary Proceeding as to William Baird was filed on
January 21, 2014.
4
On or about June 9, 2009, NKP changed its name from KP Acquisition Company to
King Par, LLC. Consistent with the record, we will refer to it as NKP.
5
Although the sale closed on June 4, 2009, it had an effective date of April 1, 2009.
NKP took over the operations of OKP on April 1, 2009, “in order to take advantage of the
important spring selling season.”
2
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funds remaining after OKP’s debts were paid and NKP took its fees were to be paid to OKP
regularly. OKP retained only what the APA identified as “Excluded Assets” and “Excluded
Liabilities.” Among the liabilities designated as excluded was liability related to the Izzo
litigation. Thus, under the APA, OKP retained essentially only liabilities and the potential for
receivables collected on its behalf by NKP.
At the closing of the sale, NKP wired $4,010,242 to one of the Bairds’ joint personal
accounts (the “Arvest account”) at Bill’s direction. On or about June 9, 2009, OKP changed its
name to B & P Baird Holdings, Inc. Bill remained the president, director, and shareholder of the
new entity. The July, August, and September 2009 excess receivables owed to Debtor were used
to pay $384,334 on the Bairds’ personal tax obligations. All subsequent monthly receivable
collections owed to Debtor were wired to the Bairds’ Arvest account.6
At the time the APA closed, OKP had liabilities in excess of one million dollars,
including a $350,000 obligation to Izzo for the claim for which Izzo was granted summary
judgment. The Bairds made payments totaling at least $263,269.67 to a number of OKP’s
creditors, not including Izzo, from their personal bank accounts while continuing to incur costs
and fees associated with the ongoing patent-infringement litigation. Izzo obtained a judgment
against Debtor for $3,286,476.65, and later successfully petitioned for post-verdict enhanced
damages.
6
After closing, OKP and NKP disputed the final sale price under the APA. OKP claimed
that NKP still owed it $500,000. NKP, on the other hand, filed a proof of claim in the
bankruptcy action alleging that it was owed money in connection with the APA.
3
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C. Bankruptcy Filing and Instant Adversary Proceeding
On September 9, 2010, Debtor filed a voluntary Chapter 7 bankruptcy petition, listing
Izzo among six unsecured creditors and stating that Debtor’s total liability was $3,676,741.95.7
On August 23, 2011, Trustee initiated this adversary proceeding against the Bairds and
NKP8 based on the Bairds’ designation of the Arvest account for receipt of funds generated by
the sale of Debtor’s assets. On January 6, 2012, Trustee requested leave to amend the complaint,
which the court granted on January 25, 2012. The first four counts of Trustee’s first amended
complaint sought the avoidance and recovery of allegedly fraudulent transfers to the Bairds;
Count V alleged that the Bairds violated the Michigan Business Corporation Act; and Counts VI
and VII alleged Michigan common-law and statutory conversion. The conversion claims alleged
that the proceeds of sale were diverted to the Bairds as part of a scheme developed and carried
out by Pam and Bill, who were in control of Debtor’s management and direction, or,
alternatively, carried out only by either Pam or Bill.
i. Trustee Requests Leave to File Second Amended Complaint
On March 13, 2012, the bankruptcy court granted Pam’s motion to dismiss the
conversion counts (Counts VI and VII) for failure to state a claim based on the court’s
determination that Trustee had not alleged that the Bairds had actually diverted the funds for
their personal use. Trustee then moved to file a second amended complaint, again asserting the
two conversion counts, but with added factual detail to support a finding that the Bairds used the
funds generated from the sale of Debtor’s assets for their own personal use and benefit. Among
Trustee’s allegations were that Bill and Pam used money from the proceeds of the sale to buy a
7
OKP’s total liabilities greatly increased after Izzo submitted its updated proof of claim
with post-verdict damages factored in, amounting to $12,000,000.
8
Debtor settled the adversary claim against NKP.
4
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house in Hawaii and made a number of transfers from the proceeds into various personal bank
accounts. The Bairds objected to the amendment and both sides briefed the issue.
At the hearing on Trustee’s request for leave, the bankruptcy court raised sua sponte the
in pari delicto issue, positing that it might vitiate Trustee’s conversion claims and render
Trustee’s proposed amendments futile. The bankruptcy court requested that the parties file post-
hearing briefs. In Trustee’s brief, Trustee argued that the Bairds were corporate insiders whose
wrongful acts should not be protected, and that the Bairds and their actions were distinct from
Debtor, and thus in pari delicto would not apply.
In its June 11, 2012 bench opinion, the bankruptcy court found that “the scales of justice
still weigh in favor of trustee being given the opportunity to plead any and all viable claims that
can be made against the Bairds with respect to the New King Par proceeds they received and
deposited in the Arvest account,” and that Trustee’s second amended complaint properly alleged
conversion. However, the bankruptcy court also found that embezzlement, to which Michigan
law applies the doctrine of in pari delicto, is a more accurate description of “the unlawful
conduct of which the Bairds stand accused,” and that the doctrine applies to Trustee’s
embezzlement/conversion claims. The bankruptcy court rejected Trustee’s arguments and
reasoned that because Debtor and the Bairds were effectively one and the same, and the doctrine
of in pari delicto provides a complete defense, the Bairds could not be liable for injuring Debtor.
Thus, the bankruptcy court denied as futile Trustee’s motion to file the second amended
complaint.
ii. Trustee’s Motion to Alter or Amend the Order
Trustee moved to alter or amend the order denying leave to amend, arguing that because
Pam alleged she had no active role in the conversion of Debtor’s assets, the in pari delicto
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doctrine did not apply to her. In an affidavit attached to her response to Trustee’s motion for
summary judgment, Pam claimed that she had not been a shareholder of Debtor at any time
relevant to the dispute. She further swore that she had not signed many of the corporate
documents bearing her signature and indicating her role in the company.
Trustee put forth two scenarios in which innocent conversion by Pam was consistent with
the allegations of the proposed second amended complaint. First, Trustee argued that paragraph
217 left open the possibility that Pam acted innocently, by alleging action by “Pam and/or Bill.”
Second, Trustee asserted that if Pam was still an OKP shareholder, she was an innocent decision
maker, thus rendering in pari delicto inapplicable. As to Trustee’s first proposed scenario, the
bankruptcy court held that
the doctrine of in pari delicto applies in this instance because the person or persons
controlling debtor were also the persons or persons who were benefiting from the
alleged conversion. Therefore, it makes no difference whether Mr. or Ms. Baird
controlled debtor as trustee alleges, or only Mr. Baird controlled the debtor, which is
what Ms. Baird contends. Either way, debtor had to be complicit in the conversion if
that is in fact what occurred, and, as such, trustee, as debtor’s successor in interest, is
barred by the doctrine of in pari delicto from alleging that a conversion had taken
place.
However, the court recognized that in pari delicto might not apply to Trustee’s second proposed
scenario, yet found the allegation too conjectural to support leave to amend.
Trustee posits a hypothetical that has not in fact been alleged. If at some point he
wishes to make this allegation, then the Court will at that time consider once again
his conversion count. Or alternatively if Ms. Baird prevails at trial concerning her
innocence, then trustee can ask at that time to amend his complaint to add the
conversion so as to have his complaint conform with the proofs. However at this
point in time, trustee is alleging that Ms. Baird was part of the decision process and
as such, this exercise is pure speculation at this time.
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iii. Pam’s and Bill’s Settlements with Trustee
Trustee reached settlements with Pam and Bill, approved by the bankruptcy court9 and
supported by Izzo, Debtor’s largest creditor, with regard to all but the conversion claim against
Pam. Pam agreed to pay $1,875,000 into the bankruptcy estate, and Bill agreed to pay
$1,900,000.10 The only remaining claim, the potential conversion claim against Pam, carries
with it the possibility of treble damages under Michigan law.
iv. Appeal to the District Court
Trustee appealed the bankruptcy court’s denials of Trustee’s motion to file a second
amended complaint and to alter or amend that denial. The district court affirmed, concluding
that the bankruptcy court’s determination that Trustee had properly pled embezzlement, not
conversion or innocent conversion, was well founded, that “[t]he innocent conversion gloss the
trustee now wants to place on the conversion claims in his proposed second amended complaint
are [sic] not consistent with the facts alleged,” and that the bankruptcy court properly applied the
doctrine of in pari delicto to bar the potential conversion/embezzlement claim.
DISCUSSION
I. Leave to Amend the Complaint
A. Standard of Review
We review de novo the district court’s decision to deny Trustee leave to amend his
complaint on the grounds of futility. Orton v. Johnny’s Lunch Franchise, LLC, 668 F.3d 843,
850 (6th Cir. 2012) (citing Inge v. Rock Fin. Corp., 281 F.3d 613, 625 (6th Cir. 2002)). “A
9
The settlement approval motions were filed and approved in the underlying bankruptcy
case, No. 10-10941-JRH, not the adversary proceeding, in order to allow OKP’s other creditors
the opportunity to object to the settlement. The Final Order Dismissing Adversary Proceeding
As to William Baird was filed on January 21, 2014.
10
The most recent Trustee’s Status Report, filed July 21, 2014, indicates that Pam and
Bill paid a combined total of $3,775,000 into the estate.
7
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proposed amendment is futile if the amendment could not withstand a Rule 12(b)(6) motion to
dismiss.” Rose v. Hartford Underwriters Ins. Co., 203 F.3d 417, 420 (6th Cir. 2000). To survive
a motion to dismiss under Rule 12(b)(6), a complaint must allege facts that “state a claim to
relief that is plausible on its face,” and that, if accepted as true, are sufficient to “raise a right to
relief above the speculative level.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 570 (2007).
“A claim is plausible on its face if the ‘plaintiff pleads factual content that allows the court to
draw the reasonable inference that the defendant is liable for the misconduct alleged.’” Ctr. for
Bio-Ethical Reform, Inc. v. Napolitano, 648 F.3d 365, 369 (6th Cir. 2011) (quoting Ashcroft v.
Iqbal, 556 U.S. 662, 677 (2009)).
B. Adequacy of Conversion Allegation
Trustee argues that the bankruptcy court erred in treating the complaint as if alleging only
embezzlement although it also effectively pled conversion. We agree that Trustee adequately
pled conversion against Pam.
Under Michigan law, the tort of conversion encompasses the tort of embezzlement. The
Michigan conversion statute, Mich. Comp. Laws § 600.2919(a), provides that:
(1) A person damaged as a result of either or both of the following may recover
3 times the amount of actual damages sustained, plus costs and reasonable attorney
fees:
(a) Another person’s stealing or embezzling property or converting property to the
other person’s own use.
(b) Another person’s buying, receiving, possessing, concealing, or aiding in the
concealment of stolen, embezzled, or converted property when the person buying,
receiving, possessing, concealing, or aiding in the concealment of stolen, embezzled,
or converted property knew that the property was stolen, embezzled, or converted.
(2) The remedy provided by this section is in addition to any other right or remedy
the person may have at law or otherwise.
The Michigan Supreme Court defines conversion as “any distinct act of domain wrongfully
exerted over another’s personal property in denial of or inconsistent with the rights therein.”
8
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Dep’t of Agriculture v. Appletree Mktg., L.L.C., 779 N.W.2d 237, 244 (Mich. 2010) (footnote
and citations omitted). Moreover, “[c]onversion may occur when a party properly in possession
of property uses it in an improper way, for an improper purpose, or by delivering it without
authorization to a third party.” Id.
As the bankruptcy court recognized, Trustee properly alleged a claim of conversion. The
proposed amended complaint makes the following allegations in Count VI for common-law
conversion:
¶ 213. Defendants’ acts as set forth above constitute, under the common law of the
State of Michigan, the improper and unlawful domination and control by Defendants
over the property of Debtor and its creditors, in denial of or inconsistent with the
rights therein.
¶ 214. Because of their duties to the Debtor under the statutory and common law of
the State of Michigan, Bill and/or Pam owed a fiduciary duty to the Debtor at the
time of the distributions enumerated in Count V, above.
¶ 215. Under applicable Michigan law, “[t]he assets of a corporation are a trust fund
in the hands of the board of directors.” Barden v. A. Heller Sawdust Co., 215 N.W.
364, 367 (Mich. 1927).
¶ 216. As such, the distributions were identifiable money that Bill and/or Pam had
an obligation to deliver to the Debtor and its creditors, and in regard to which Bill
and/or Pam had a duty to refrain from the improper and unlawful domination and
control over, in denial of or inconsistent with the rights of Debtor and its creditors.
¶ 217. Pam and/or Bill are liable for conversion by aiding or abetting or assisting
another in a conversion, even if acting innocently. Prime Financial Service LLC v.
Vinton, 761 N.W.2d 694 (Mich. App. 2008). The tort of conversion may be
committed unwittingly if a defendant comes into possession of another’s property if
the defendant is unaware of the plaintiff’s property interest. Warren Tool Co. v.
Stephenson, 161 N.W.2d. 133, 147-148 (Mich. App. 1968).
¶ 218. As a result of the above, it is clear that Defendants are liable to the creditors
of Debtor for their conversion of the distributions.
¶ 219. Accordingly, Plaintiff Trustee is entitled to recover from Defendants the
value of the converted distributions. 11 U.S.C. §544; Moore v. Bay, 284 U.S. 4
(1931).
Further, pages 11 to 15 of the proposed amended complaint include a detailed accounting of the
transfers from the Arvest account into Pam and Bill’s various personal accounts. Trustee thus
alleges that the Bairds impermissibly appropriated OKP funds for personal use.
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Moreover, a cause of action for conversion under Michigan law need not necessarily
include the intent element required for embezzlement and for the application of in pari delicto.11
“[I]n general, [conversion] is viewed as an intentional tort in the sense that the converter’s
actions are wilful, although the tort can be committed unwittingly. . .” Foremost Ins. Co. v.
Allstate Ins. Co., 486 N.W.2d 600, 606 (Mich. 1992). The Michigan Court of Appeals has
described conversion as a “strict liability tort,” explaining:
The foundation for the action of conversion rests neither in the knowledge nor the
intent of the defendant. It rests upon the unwarranted interference by defendant with
the dominion over the property of the plaintiff from which injury to the latter results.
Therefore neither good nor bad faith, neither care nor negligence, neither knowledge
nor ignorance, are of the gist of the action.
In re Pixley, 456 B.R. 770 at 788 (quoting J. Franklin Interests, L.L.C. v. Mu Meng, No. 296525,
2011 WL 4501841, at *9 (Mich. Ct. App. Sept. 29, 2011) (per curiam)).
C. In Pari Delicto
State law determines whether and how in pari delicto applies. Michigan law’s wrongful-
conduct rule incorporates the common-law in pari delicto maxim that “as between parties in pari
delicto, that is equally in the wrong, the law will not lend itself to afford relief to one as against
the other, but will leave them as it finds them.” Orzel v. Scott Drug Co., 537 N.W.2d 208, 212-
13 (Mich. 1995) (internal citations omitted); see also Pantely v. Garris, Garris & Garris, P.C.,
447 N.W.2d 864, 867 (Mich. Ct. App. 1989) (“in pari delicto, as a common-law doctrine,
expresses the principle that wrongdoers ought each to bear the untoward consequences of their
wrongdoing without legal recompense or recourse”). “To implicate the wrongful-conduct rule,
the plaintiff’s conduct must be prohibited or almost entirely prohibited under a penal or criminal
11
“Before [a claim of embezzlement] can be made out, it must distinctly appear that
respondent has acted with felonious intent, and made an intentionally wrong disposal, indicating
a design to cheat and deceive the owner.” People v. Hurst, 28 N.W. 838, 839 (Mich. 1886).
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statute.” Orzel, 537 N.W.2d at 214. Further, “a sufficient causal nexus must exist between the
plaintiff’s illegal conduct and the plaintiff’s asserted damages. . . . To establish causation, a
defendant must show that the plaintiff’s illegal conduct was a proximate cause of the plaintiff’s
injuries.” In re MuniVest Servs., LLC, 500 B.R. 487, 495 (Bankr. E.D. Mich. 2013) (citing
Orzel, 537 N.W.2d at 215).
An agent’s conduct is generally imputed to his principal, except where the agent acts in his
own interest, adversely to his principal. This exception does not apply, however, where the
agent and principal are effectively one and the same, and in such a case, the agent’s fraudulent
conduct will be attributed to the principal. “The general rule which imputes an agent’s
knowledge to his principal is subject to an exception where the agent acts in his own interest,
adversely to his principal . . . . But this exception is qualified where the agent is the sole
representative or ‘sole actor’ for the principal in the transaction.” Nat'l Turners Bldg. & Loan
Ass'n v. Schreitmueller, 285 N.W. 497, 499 (Mich. 1939).
The sole actor rule comes into play where the wrongdoer is, in essence, the
corporation (the “sole actor”). Indeed, it has its roots in cases where the agent and
the principal are literally the same person (literally a “sole actor”) and thus
information obtained by a person in his role as an agent is treated as also being
obtained in his role as principal, even if his activities as agent are contrary to his
interests as a principal.
MCA Fin. Corp. v. Grant Thornton, L.L.P., 687 N.W.2d 850, 860 (Mich. App. 2004). We
applied the imputation rule in In re Dublin Sec., Inc., 133 F.3d 377 (6th Cir. 1997), holding that
in pari delicto properly barred a Chapter 7 trustee’s malpractice claims against law firms and
attorneys who prepared the legal documents and represented Debtor in connection with Debtor’s
fraudulent public stock offerings: “[Trustee] admits in his complaint that the debtors’ own
actions were instrumental in perpetrating the fraud on the individuals choosing to invest in the
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Dublin Securities schemes. That pleading concedes, for example, that the debtors intentionally
defrauded their investors.” In re Dublin Sec., Inc., 133 F.3d at 380.
But Michigan law is clear that the imputation rule has an exception as well: “A corporate
officer’s fraud will not be imputed to the corporation, thus allowing the bankruptcy trustee to
proceed with his claim, where there exists at least one innocent decision maker who, if he had
been alerted to the fraud, could have stopped it.” MCA Fin. Corp., 687 N.W.2d at 860. Thus, if
the proposed second amended complaint properly pled that Pam was an innocent decision maker,
the amendment should not have been rejected as futile.
As the bankruptcy and district courts noted, Trustee’s complaint contains allegations that
Bill and Pam, as sole shareholders of Debtor, coordinated the fraudulent transfer of Debtor’s
funds. However, the proposed second amended complaint also contains allegations that Pam
acted innocently. And, Trustee correctly observes that although the complaint can be read to
contain contradictory allegations—both that Pam did and did not intend to convert the funds—
these allegations constitute proper alternative theories pursuant to Federal Rule of Civil
Procedure Rule 8.
A party may set forth two or more statements of a claim . . . alternatively or
hypothetically, either in one count . . . or in separate counts . . . . When two or more
statements are made in the alternative and one of them if made independently would
be sufficient, the pleading is not made insufficient by the insufficiency of one or
more of the alternative statements. A party may also state as many separate
claims . . . as the party has regardless of consistency . . . .
Fed. R. Civ. P. 8(e)(2). We agree with Trustee that a pleading does not become insufficient
because it contains alternative, or even contradictory, claims. Rowe v. Cleveland Pneumatic Co.,
690 F.2d 88, 92 (6th Cir. 1982).
Portions of the amended complaint allege that Bill alone coordinated the conversion:
“Bill, as president, director and shareholder of OKP was in a position to control disposition of its
12
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property,” and “the transfers he orchestrated assured that he would have the benefit of
substantially all of OKP’s assets . . . .” Second Amended Complaint, ¶ 146; “At the time he
orchestrated such transfers, Bill took no action in the nature of diligence to ascertain the value of
the Excluded Assets . . . .” Id. at ¶ 147. Paragraph 148 can be read as alleging that Pam could
have inadvertently converted the OKP funds: “After the first week of June 2009, Bill and Pam
simply continued to receive transfers to OKP that they, in turn, applied to their personal
benefit. . . .” Id. at ¶ 148. Further, Paragraph 217 of the proposed amended complaint reads:
Pam and/or Bill are liable for conversion by aiding or abetting or assisting another in
a conversion, even if acting innocently. Prime Financial Service LLC v. Vinton, 761
N.W.2d 694 (Mich. App. 2008). The tort of conversion may be committed
unwittingly if a defendant comes into possession of another’s property if the
defendant is unaware of plaintiff’s property interest. Warren Tool Co. v. Stephenson,
161 N.W.2d 133, 147-148 (Mich. App. 1968).
Trustee persuasively asserts that this paragraph “clearly was intended to cover the eventuality
that Pam might have no involvement in the transactions and even invoked the Michigan law that
would support such liability even if, as she said in her affidavit, she had merely been passive
recipient of the funds wired to Arvest Bank.” Thus, although the proposed amended complaint
contains conflicting allegations, fairly read, it includes the alternative allegation that Pam acted
innocently with regard to the conversion of Debtor funds.12
Because Pam’s role in the conversion of Debtor’s assets has not been resolved, it cannot
be determined at this stage whether the in pari delicto doctrine bars Trustee’s conversion claim
against her and, if permitted, the claim would not be subject to dismissal under Rule 12(b)(6).
The proposed amendment therefore was not futile and the motion to amend should have been
granted.
12
This conclusion does not depend on Pam’s affidavit, which was prepared after the
second amended complaint.
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CONCLUSION
We REVERSE the denial of Trustee’s motion for leave to amend and REMAND to the
bankruptcy court for further proceedings.
14