Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 1 of 20

Desc Main

Danny C. Kelly (USB 1788) Mark E. Hindley (USB 7222) Bria LaSalle Mertens (USB 14236) STOEL RIVES LLP 201 South Main Street, Suite 1100 Salt Lake City, UT 84111 Telephone: (801) 578-6979 Facsimile: (801) 578-6999 Counsel for Church of Scientology International and Church of Scientology of Utah IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF UTAH, CENTRAL DIVISION In re: Barry Don Hunter; and Kimberly Champlin Hunter, Debtors. Brian Bagley and L. Carol Bee, Plaintiffs, vs. Barry D. Hunter; Kimberly Champlin Hunter; Portfolio Manager International L.L.C.; Oneiros Technologies L.C.; Michael J. Wright; Gregory B. Madsen; Lucidity Management, LLC; Volition Trading Company, LLC; Church of Scientology of Utah; Cynthia L. Wright; Church of Scientology Mission of Salt Lake City; Church of Scientology International; Tom Burton; James DArezzo; Alan S. Farr; George Hites; Greg Kingdon; David Petersen; Robby J. Stowe; Sandor Szaniszlo. Defendants. Hon. William T. Thurman
CHURCH OF SCIENTOLOGY INTERNATIONAL AND CHURCH OF SCIENTOLOGY OF UTAHS MEMORANDUM IN SUPPORT OF THEIR MOTION TO DISMISS

Bankruptcy Case No. 12-26860WTT Chapter 7

Adversary Proceeding No. 12-02544

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 2 of 20

Desc Main

Table of Contents PAGE I. II. III. INTRODUCTION ............................................................................................................. 1 BACKGROUND ............................................................................................................... 3 ARGUMENT..................................................................................................................... 3 A. B. C. IV. This Court Lacks Jurisdiction Over the Claims Asserted Against the Churches ................................................................................................................ 3 All Claims Against the Churches Should Be Dismissed for Failure to State a Claim ................................................................................................................... 9 The Churches Are Entitled to Their Attorneys Fees and Costs.......................... 14

CONCLUSION................................................................................................................ 16

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 3 of 20

Desc Main

Table of Authorities PAGE

Cases Allstate Ins. Co. v. Countrywide Fin. Corp., 842 F.Supp.2d 1216 (C.D. Cal. 2012) .....................................................................................14 Ashcroft v. Iqbal, 129 S. Ct. 1937 (2009)...................................................................................................9, 10, 14 Bd. of Governors of Fed. Reserve Sys. v. MCorp Fin., Inc., 502 U.S. 32, 112 S.Ct. 459, 116 L.Ed.2d 358 (1991)................................................................8 Bell Atl. Corp. v. Twombly, 550 U.S. 544, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007).............................................9, 10, 14 Bly-Magee v. California, 236 F.3d 1014 (9th Cir. 2001) .................................................................................................11 In re Colorado Energy Supply, Inc., 728 F.2d 1283 (10th Cir. 1984) .................................................................................................5 In re Gardner, 913 F.2d 1515 (10th Cir. 1990) .............................................................................................6, 7 In re Midgard Corporation, 204 B.R. 764 (10th Cir. BAP 1997)...........................................................................................7 In re Mordini, No. 11-15491 ABC, 2013 WL 1855751 (Bankr. D. Colo. May 1, 2013) .............................4, 7 In re Silicon Graphics, Inc. Sec. Litig., 970 F.Supp. 746 (N.D. Cal. 1997) ...........................................................................................11 In re W.R. Grace & Co., et al., 591 F.3d 164 (3rd Cir. 2009) .................................................................................................7, 8 Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984)...........................................................................................5, 6, 7, 8 Statutes 11 U.S.C. 523.................................................................................................................................4 11 U.S.C. 727................................................................................................................................3 18 U.S.C. 1962(a), (b), and (c) ...................................................................................................12 ii

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 4 of 20

Desc Main

Table of Authorities (Cont.) PAGE

18 U.S.C. 1964(c), (5)...................................................................................................................3 28 U.S.C. 157................................................................................................................................4 28 U.S.C. 157(b)(2)(A), (F), (H) (K) and (O)............................................................................4 28 U.S.C. 1334..............................................................................................................................4 28 U.S.C. 1334(b) .....................................................................................................................5, 8 28 U.S.C. 1927............................................................................................................................15 Utah Code Ann. 25-6-2(7) ..........................................................................................................12 Utah Code Ann. 78B-5-825 ........................................................................................................15 Rules Federal Rule of Bankruptcy Procedure 7012(b) ..............................................................................9 Rule 8 ...............................................................................................................................................9 Rule 9(b) ........................................................................................................................................11 Rule 11 .............................................................................................................................................9 Rule 12(b)(6)........................................................................................................................9, 10, 11 Rule 2004 ............................................................................................................................... passim

iii

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 5 of 20

Desc Main

The Church of Scientology International (the International Church) and the Church of Scientology of Utah (the Utah Church and, together with the International Church, the Churches) submit the following memorandum in support of their motion dismiss the abovecaptioned Adversary Proceeding [Docket No. 54] filed by Brian Bagley and L. Carol Bee (Plaintiffs) against debtors Barry Don Hunter and Kimberly Champlin Hunter (collectively, Debtors) and 18 non-debtor defendants (the Non-Debtor Defendants and, together with Debtors, the Defendants). In support hereof, the Churches hereby respectfully allege and represent as follows: I. INTRODUCTION

Plaintiffs First Amended Complaint [Docket No. 39] (the Complaint) tells a long and convoluted tale that can be distilled to a simple series of events: Plaintiffs made an investment with people they thought they could trust in hopes of seeing significant returns. A portion of their investment is now gone, and Plaintiffs seek to hold someone anyone accountable.1 Whether Plaintiffs are entitled to recover from someone remains to be seen; but what is clear is that they have no claims against the Churches. There are no allegations (nor could there be) that the Churches solicited Plaintiffs money, took their money, or either directed or participated in the fraud that Plaintiffs allege. Indeed, this is Plaintiffs third lawsuit relating to their investment. The first action was filed in Third Judicial District Court for the State of Utah (the State Court) on August 20, 2010 as Case No. 100915648 (the RICO Action). The second action was filed in the State

Amazingly, the people to whom Plaintiffs actually gave their money, Christopher Hales (Hales) and Eric Richardson (Richardson), are not defendants in this action. The unstated assumption on which the Complaint is based appears to be that a portion of the money Plaintiffs gave to Hales and Richardson somehow eventually ended up in the hands of one or more of the Defendants.

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 6 of 20

Desc Main

Court as Case No. 110917105 on August 25, 2011 (collectively, the State Court Actions). The Churches were not included as defendants in either of the State Court Actions and for good reason: there were no facts to support any claims against them. In fact, the Complaint in this action is the first complaint in which the word Scientology has even appeared. And there still are no facts that implicate the Churches, directly or indirectly, in the alleged fraud perpetrated upon Plaintiffs. Given this reality, Plaintiffs are left to rely solely on the argument that the cast of characters described in the Complaint in some unspecified manner acted as agents of the Churches. Specifically, Plaintiffs allege that some of the Defendants are members of, or otherwise related to, the Churches or other Scientology entities. Indeed, it appears that the principal if not the sole reason the Churches are here is reflected in Plaintiffs counsels statement to the Court that the association of some of the Defendants with the Scientology faith as the one common link among most of these people. (Transcript of 11/05/2012 Hearing at 10:1-2) [Main Case Docket. No. 69]. From this common link,

Plaintiffs have erroneously extrapolated that the Churches are complicit in the alleged fraud.2 Even if this Court had jurisdiction to hear the claims against the Churches (which it does not), Plaintiffs theory of liability is, quite simply, wrong. Membership does not confer agency authority on parishioners, and Churches are not automatically liable for alleged wrongdoing of their members.3 And here, the Complaint is devoid of any facts that would give rise to independent claims against the Churches or that tie the Churches to any other Defendants alleged wrongful activities. Accordingly, Plaintiffs claims against the Churches should be dismissed.
This common link also provides the motivation for including the Churches in this third lawsuit Plaintiffs see the Churches as the deep pockets. At a November 5, 2012 hearing in the main case, the Court asked, [w]hat are we going to have? [Are] we going to have a Church of Scientology inquisition? Counsels answer was, [w]ell, were going to have the Church of Scientology potentially acting as a source of recovery for creditors if I get to do the Rule 2004 examinations I want to do . (Tr. of Hearing, 11/05/2012 10:4-9.) In this instance, the men to whom Plaintiffs actually gave their money, Hales and Richardson, are not Scientologists. The Complaint states Defendants Michael Wright and Barry Hunter attempted to convert Hales to Scientology but, as indicated in the Complaint, such efforts failed. (Complaint 7274.)
3 2

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 7 of 20

Desc Main

II.

BACKGROUND

The Complaint contains eight causes of action.4 Both of the Churches are named as defendants as to three of the claims: fraudulent transfer, civil conspiracy, and alter ego. The Utah Church is also named as a defendant in the RICO claim. Plaintiffs have attempted to tie the Churches to these causes of action through a meandering sea of purported facts and faulty legal conclusions plead as facts, including dozens of pages of irrelevant and inflammatory allegations about Scientology that border on slander. Despite their success in setting forth over 100 pages of narrative about the Defendants, Plaintiffs have alleged essentially just three things that supposedly connect the Churches to the actions described in the Complaint: certain of the Defendants are Scientologists, certain of the Defendants were at some point in time officers of or registered agents for the Churches, and Defendants Cynthia Wright and Michael Wright owned the building where the Utah Church was formerly located. Plaintiffs have extrapolated from these allegations none of which, notably, constitutes any form of wrongdoing a theory of the Churches involvement in the alleged scheme to steal Plaintiffs money that, frankly, strains the outer limits of logic. III. A. ARGUMENT

This Court Lacks Jurisdiction Over the Claims Asserted Against the Churches. Though Plaintiffs have styled the Complaint as a Complaint to Deny Discharge under 11

U.S.C. 727 and to Determine Dischargeability Pursuant to 11 U.S.C. 523 and Further Relief, Plaintiffs, however, have failed to establish jurisdiction under 28 U.S.C. 157 and 28 U.S.C. 1334 to subject the alleged claims against the Churches to the jurisdiction of the Court. Plaintiffs
(1) Non-dischargeability of Plaintiffs claims, (2) denial of Debtors discharge, (3) fraudulent transfer, (4) RICO liability under 18 U.S.C. 1964(c), (5) breach of fiduciary duty, (6) civil conspiracy, (7) civil liability for violations of Utahs Uniform Securities Act, and (8) alter ego.
4

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 8 of 20

Desc Main

have attempted to finesse this fundamental jurisdictional defect by saying that this adversary proceeding includes core proceedings as defined in 28 U.S.C. 157(b)(2)(A), (F), (H) (K) and (O). (Complaint 24.) But the primary focus of the Complaint lies in claims that have nothing to do with the Debtors estate and cannot possibly be construed as core proceedings. While the Complaint may contain core proceedings as to the Debtors, the mere fact that a complaint includes core proceedings does not mean that a bankruptcy court has jurisdiction over any cause of action that can be ushered into a complaint.5 See, e.g., In re Mordini, No. 11-15491
Plaintiffs choice to litigate in this forum seems to stem from their desire to take advantage of the broad discovery available under the Bankruptcy Code and Bankruptcy Rules. Plaintiffs had been actively pursuing the RICO Action for approximately 20 months when they found out about Debtors bankruptcy case. Rather than seeking stay relief, however, Plaintiffs decided to pursue this costly adversary proceeding. Thus, it is fair to wonder why Plaintiffs are proceeding in this Court in the first place. In the hearing before this Court held last November, Plaintiffs made it rather clear why they are taking the approach they have: THE COURT: One other question for you [is] . . . why havent you filed a motion for relief so you can just keep going on in state court. It seems to me like this is just kind of a duplicate forum . . . . MR. SCOFIELD: Your Honor, the most important, the most critical aspect of this litigation is where did the money go . . . THE COURT: Yeah, but I guess MR. SCOFIELD: The only way, Your Honor, to effectively trace the funds is to use Rule 2004 because that allows me to trace the money. THE COURT: You cant do that in state court if the stay is lifted? MR. SCOFIELD: No, Your Honor, because the limitations of ordinary discovery are far more than the limitations under Rule 2004. . . [T]heres a 1991 case out of the District of Colorado thats cited quite often around these parties called en re Blinder Robinson and the district judge in that case said Rule 2004 isnt quite a fishing expedition but sometimes its compared to it because the breadth of Rule 2004 is far greater than that of civil discovery and when youre trying to find out whether theres been wrongdoing involving a company, whether theres been transfers of assets, Rule 2004 is the preferred method of use and thats why, Your Honor, when Mr. Hunter filed the bankruptcy and I found out about it, I figured Ill go in and use Rule 2004 because its a lot better tool than what Im going to get out of the state court discovery.5 (Tr. of Hearing, 11/5/2012 7:5-9:14. (emphasis added)).
5

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 9 of 20

Desc Main

ABC, 2013 WL 1855751 (Bankr. D. Colo. May 1, 2013). Bankruptcy jurisdiction begins with 28 U.S.C. 1334(b), which provides that federal district courts have original but not exclusive jurisdiction of all civil proceedings arising under [the Bankruptcy Code], or arising in or related to cases under [the Bankruptcy Code]. Proceedings arising under the Bankruptcy Code are those that would not exist outside of bankruptcy since they depend upon the Code for their existence (e.g., employment of estate professionals, dischargeability actions). Proceedings arising in a bankruptcy case are claims that could not exist outside of a bankruptcy case, but are not causes of action created by the Bankruptcy Code (e.g., rejection of a contract). Related-to proceedings are those that relate to a bankruptcy case but have been or could have been brought in a district court or state court. In re Colorado Energy Supply, Inc., 728 F.2d 1283, 1286 (10th Cir. 1984). As indicated by Plaintiffs own allegations, the only possible basis for jurisdiction here is related-to jurisdiction. The seminal case on related-to jurisdiction is Pacor, Inc. v. Higgins, 743 F.2d 984 (3d Cir. 1984). In Pacor, a lawsuit in state court against Pacor, a distributor of chemical supplies, sought damages from injuries allegedly resulting from work-related exposure to asbestos supplied by Pacor. Pacor then filed a third-party complaint against the Johns-Manville Corporation (Manville), the original manufacturer of the asbestos. When Manville filed its chapter 11 petition, Pacor attempted to remove the state court lawsuit to Manvilles bankruptcy court, claiming that the court had related-to jurisdiction of the action. The Third Circuit first articulated the test for determining related-to jurisdiction as: . . . whether the outcome of [the relevant] proceeding could conceivably have any effect on the estate being administered in bankruptcy.... An action is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 10 of 20

Desc Main

freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankrupt estate. Id. at 994 (emphasis added). Applying this standard, the court concluded that the state court suit would have no effect on Manvilles bankruptcy estate and that, therefore, the bankruptcy court had no related-to jurisdiction over the suit. Id. at 995. The reason that the outcome of the action would have no effect on the estate is that the suit was only a precursor to a potential third indemnification action by Pacor against Manville. As such, the outcome of the state court action would not be binding on Manville, and Pacor would be required to bring an entirely separate proceeding against Manville. Thus, the action could not result in even a contingent claim against Manville. The leading case in the Tenth Circuit on related-to jurisdiction is In re Gardner, 913 F.2d 1515 (10th Cir. 1990). In Gardner, the Tenth Circuit held that the bankruptcy court did not have subject matter jurisdiction to determine creditors claims over marital property when a state court order in a divorce action had previously divested the debtor of any interest in the property. In deference to the Pacor test, the court first asked whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy even if the proceeding in question was not against the debtor or his property. Id. at 1518. In addressing this question, however, the court put a limitation on the Pacor test by holding that bankruptcy courts lack related jurisdiction to resolve controversies between third party creditors which do not involve the debtor or his property unless the court cannot complete administrative duties without resolving the controversy. Id. (emphasis added). Under this standard, the court concluded that [t]he conflict between the government and Mrs. Gardner [debtors former spouse, acting as a creditor of estate property] is irrelevant to the bankruptcy estate since the disputes regarding their stake in [the debtors] property have been resolved . . . and neither [the 6

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 11 of 20

Desc Main

debtor] nor the bankruptcy estate are affected by the dispute between Mrs. Gardner and the government. Since the dispute was not otherwise related and would not affect the distribution of assets and administration of the bankruptcy estate, the circuit court held that the bankruptcy court lacked jurisdiction to resolve the dispute. In doing so, the court reasoned that [t]o hold otherwise would lead to almost unlimited jurisdiction by the bankruptcy court. Id. at 1518-19 (internal citations omitted). See also In re Midgard Corporation, 204 B.R. 764 (10th Cir. BAP 1997). Following Gardners limited standard, at least one other Tenth Circuit court has even further limited the already-limited reach of Pacor in cases involving non-debtor plaintiffs and non-debtor defendants. In a recent decision, the Colorado bankruptcy court confronted claims asserted by a third-party creditor against two non-debtor entities in which the debtor held a majority interest. See In re Mordini, No. 11-15491 ABC, 2013 WL 1855751 (Bankr. D. Colo. May 1, 2013). Even considering the potentially negative impact on the value of the debtors estates, the court concluded it did not have jurisdiction over the creditors claims. While the court acknowledged that the nexus of the claims fell within the literal language of Pacors any conceivable effect standard, [the court observed that the Pacor] test has been more restrictively applied in practice. Id. at 2.6 The court concluded that, in view of the restrictions

The Third Circuit had the opportunity to revisit its holding in Pacor in In re W.R. Grace & Co., et al., 591 F.3d 164, (3rd Cir. 2009) and concluded that the Pacor test should not be construed literally. After reciting the Pacor test that [p]roceedings over which a bankruptcy court can legitimately exercise related-to jurisdiction include suits between third parties that conceivably may have an effect on the bankruptcy estate the court added that: [b]roadly worded as [the Pacor test] is, however, related-to jurisdiction is not without limitation. Id. at 228; see also Bd. of Governors of Fed. Reserve Sys. v. MCorp Fin., Inc., 502 U.S. 32, 40, 112 S.Ct. 459, 116 L.Ed.2d 358 (1991) (noting the limited authority Congress has vested in the bankruptcy courts through related-to jurisdiction). 591 F.3d at 171(emphasis added).

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 12 of 20

Desc Main

placed on the broadly worded tests for related-to jurisdiction, the potential negative economic effect of litigation on the value of the non-debtor company in which a debtor owned an equity interest is insufficient to create jurisdiction. This concept extends related to jurisdiction too far, potentially expanding the bankruptcy courts jurisdiction to any lawsuit involving any corporation in which the debtor owns stock. . . . It is highly unlikely that related to jurisdiction of 28 U.S.C. 1334(b) was intended to cast such a broad net. Id. at 3. Plaintiffs Complaint provides no indication of how the Churches were involved in any aspect of the Debtors estate, nor does it illustrate any meaningful connection between the Debtors acts and the Churches. The outcome of any of Plaintiffs claims against the Churches would have no conceivable effect on the administration of the Debtors bankruptcy case. Though portions of the Complaint suggest that, if recovered, some funds may go to Debtors estate, Plaintiffs fail to explain how the money that the Plaintiffs hope to recover from this litigation would have an impact on the administration of the Debtors estate. Plaintiffs have no standing to recover funds on behalf of the estate, Plaintiffs have no obligation to turn any recoveries they obtain over to the estate, and Plaintiffs have not committed to gift any recoveries to the estate. Accordingly, this Court lacks jurisdiction over Plaintiffs claims and their claims against the Churches should be dismissed. B. All Claims Against the Churches Should Be Dismissed for Failure to State a Claim. One might be tempted to look at the sheer length of Plaintiffs complaint and suppose that it contained sufficient allegations against the Church for purposes of notice pleadings. But even the most cursory review of the Complaint demonstrates that it does not. To the contrary, nowhere in the 103-page Complaint do Plaintiffs allege any facts showing that the Churches were involved at all in the alleged fraud against Plaintiffs in any way. Indeed, they make no 8

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 13 of 20

Desc Main

allegations that the Churches were involved with Plaintiffs investment; that the Churches solicited Plaintiffs investment; that the Churches directed others to target Plaintiffs; or that the Churches even knew about the investment. In no way does the Complaint factually connect the Churches to the alleged bad acts of any other Defendant or, more particularly, the third parties to whom Plaintiffs gave their money who are not even targets in this action. Because Plaintiffs have no facts implicating the Churches, they resort to the vague, unsupported allegations that other parties with whom they had dealings acted as agents or alter egos of the Churches.7 But these assertions are nothing more than broad legal conclusions which themselves are completely devoid of any factual allegations. As such, they are incapable of surviving a motion to dismiss. Under Rule 12(b)(6), a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007).8 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. Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 556). The Complaint reveals Plaintiffs extensive efforts to paint the Churches into the broad landscape of wrongdoing alleged of others. However, none of the facts alleged against the Churches would allow the Court to draw the reasonable inference that the Churches are

The Complaint does its best to paint the Churches as evil, claiming that it encourages its members to engage in such accepted practices as committing murder to protect the Churches assets. (Complaint 61.) Such allegations are (besides being near slanderous) irrelevant to the asserted claims and are not well pled under Rule 8 or Rule 11. Federal Rule of Civil Procedure 12(b)(6) is made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7012(b).
8

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 14 of 20

Desc Main

responsible for any of the misconduct alleged in the Complaint. The allegations against the Churches are a strange combination of legal conclusions and broad, non-specific statements regarding other Defendants purported connections to the Churches. At no point do Plaintiffs allege any plausible facts that connect the Churches to any of the alleged wrongdoing. Indeed, the sum-total basis for Plaintiffs belief that the Churches were involved in the alleged bad acts of the other Defendants appears to be as follows: Defendants Michael Wright, Cynthia Wright and Kimberly Hunter were allegedly registered agents, officers or directors of the Utah Church or the Utah Mission Lake City at certain points in time which may even correspond to the timeframe in which Plaintiffs made their investment (2008 and 2009); and The Utah Church had an office in the same building as PMI, and that this building was owned by Defendants Cynthia Wright and Michael Wright. Even if both of those statements and the allegations are assumed to be true, they simply do not constitute a sufficient basis for concluding that the Churches are liable for the alleged harm to Plaintiffs. Accordingly, the Complaint cannot survive scrutiny under Rule 12(b)(6). Fraudulent Transfer Allegations In addition to the requirements of Rule 12(b)(6), in fraudulent transfer actions based on actual fraud, Rule 9(b) also applies. To comply with Rule 9(b), allegations of fraud must be specific enough to give defendants notice of the particular misconduct which is alleged to constitute the fraud charged so that they can defend against the charge and not just deny that they have done anything wrong. Bly-Magee v. California, 236 F.3d 1014, 1019 (9th Cir. 2001) (citations and internal quotations omitted). Moreover, where a plaintiff makes fraud allegations against more than one defendant, Rule 9(b) requires that a plaintiff plead with sufficient

10

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 15 of 20

Desc Main

particularity attribution of the alleged misrepresentations or omissions to each defendant. In re Silicon Graphics, Inc. Sec. Litig., 970 F.Supp. 746, 752 (N.D. Cal. 1997). Rather than citing facts to support their fraudulent transfer claims, Plaintiffs do nothing more than recite the statutory language pertaining to fraudulent transfers. (Complaint 166170.) With respect to the unidentified transfers involving actual fraud, Plaintiffs allege only that such transfers were made with actual intent to hinder, delay, or defraud the creditors of PMI. With respect to the constructive unidentified fraudulent transfers to unidentified persons, Plaintiffs first allege that PMI was insolvent at all times because it was operated as a Ponzi scheme and all the insiders knew it, then parrot the statutory language that PMI made such transfers: without receiving a reasonably equivalent value in exchange for the transfer or obligation and PMI: (I) was engaged or was about to engage in a business or a transaction for which the remaining assets of PMI were unreasonably small in relation to the business or transaction; or (ii) intended to incur, or believed or reasonably should have believed that it would incur, debts beyond its ability to pay as they became due. (Complaint 168 and 170.) Plaintiffs do not identify the property transferred, the value of the property, who transferred the property, when the alleged transfers took place, or any other facts necessary to support fraudulent transfer claims. Nor do Plaintiffs attribute the alleged wrongful conduct to any Defendants or third parties. Clearly, none of the allegations regarding Plaintiffs fraudulent transfer claims describe any acts attributable to the Churches. Again, the Complaint states only that [s]ome or all of the assets of PMI were transferred to one or more defendants who are insiders as that word is defined in Utah Code Ann. 25-6-2(7). (Complaint 166.) The Churches also note that the fraudulent transfer claims asserted by Plaintiffs do not involve property of the Debtors. Perhaps more than any of Plaintiffs other causes of action, their fraudulent transfer claims demonstrate that the outcome of this action would have no impact

11

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 16 of 20

Desc Main

on the Debtors estate. The Complaint does not indicate how the alleged transfers of a third partys unidentified property of unknown value or the recovery thereof would have any effect on the administration of the estate. The Debtors case is a no asset case. The chapter 7 trustee of the estate has reviewed the facts, including Plaintiffs allegations, but elected not to pursue any claims or attempt to recover any assets for the benefit of the estate.9 RICO Allegations10 The allegations regarding Plaintiffs RICO claims continue for 40 pages of the Complaint. Plaintiffs allege that certain of the Defendants, including the Utah Church, conspired to violate 18 U.S.C. 1962(a), (b), and (c) through two or more unidentified predicate acts forming a pattern of racketeering to operate the Enterprise. But despite its length, the Complaint is devoid of any facts suggesting that the Utah Church did anything that would give rise to RICO liability. To the contrary, Plaintiffs 32 pages of tables summarizing documentary evidence purporting to support the RICO claims demonstrate this fact. (Complaint pp. 59-91.) Notwithstanding the detail contained in the single-spaced 32 pages of tables, Scientology is mentioned only three times. Even then, there are no allegations that either Scientology generally or any specific Scientology entities took any actions relating to any alleged

On November 9, 2012, the trustee, Gary Jubber, met with Plaintiffs counsel. The trustee thereafter withdrew his no-asset report and, on November 16, 2012, he filed a motion to extend the time to object to the discharge of Debtors. [Main Case Docket No. 50]. On January 29, 2013, the trustee obtained an order authorizing the Rule 2004 examination of Debtor Barry Hunter and requiring the production of extensive documents. [Main Case Docket No. 63.] The trustee, however, did not file a complaint objecting to the Debtors discharge by the applicable deadline of February 22, 2013. [Main Case Docket No. 59.]
10

The International Church is not the subject of Plaintiffs RICO cause of action.

12

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 17 of 20

Desc Main

wrongdoing.11 This so-called evidence does not come close to stating a RICO claim against the Churches. Civil Conspiracy Allegations The brief recitation of Plaintiffs civil conspiracy allegations is made up of a series of legal conclusions and do not describe any facts that pertain to the Churches. Though the Complaint is somewhat unclear on this point, it appears that Plaintiffs civil conspiracy cause of action seeks to hold the Defendants liable for the act of conspiring to commit the RICO violations articulated in paragraphs 172-198 of the Complaint. Plaintiffs allege that each coconspirator Defendant: Entered into a combination of two or more persons to accomplish the object of the Conspiracy; Reached a meeting of the minds on the object of the Conspiracy and on one or more courses of action; and Committed one or more unlawful, overt acts in furtherance of the Conspiracy that were the cause-in-fact and legal cause of damage to Plaintiffs, including Plaintiffs extreme emotional distress and mental anguish. Alter Ego Allegations Central to the allegations pertaining to Plaintiffs alter ego claim is the contention that PMI was a faade for various Defendants, including the Churches, and that some of the alleged wrongdoers acted as agents for the Churches in the course of their alleged wrongful acts. Again, Plaintiffs sole support for their position is a series of unsupported legal conclusions. As with the other causes of action alleged against the Churches, the allegations pertaining to Plaintiffs alter ego claim are wholly unsupported by facts that would allow the Court to
Two of the of the references to Scientology relate to the same event (i.e., Hales was introduced to Scientology) and the other reference relates to a narrative attached to a 2006 email where a non-Defendant named Steve Nemeth outlined his Scientology auditing. (Complaint pp. 61, 78, and 91.)
11

13

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 18 of 20

Desc Main

plausibly infer that the Churches are liable to Plaintiffs for any alleged wrongdoing. Although a court must accept as true all factual allegations contained in a complaint, a court need not accept plaintiffs legal conclusions as true. Iqbal, 556 U.S. at 678. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. Id. (quoting Twombly, 550 U.S. at 555). Legal conclusions may not [be] substitute[d] for well-pleaded facts allowing the Court to reasonably infer that those conclusions are true. Allstate Ins. Co. v. Countrywide Fin. Corp., 842 F.Supp.2d 1216, 1226 (C.D. Cal. 2012). All of Plaintiffs allegations against the Churches are facially implausible and simply do not rise to the requisite level of support required for the Complaint to further proceed against the Churches. C. The Churches Are Entitled to Their Attorneys Fees and Costs. As stated above, the claims against the Churches should be dismissed as a matter of law and are not within this Courts jurisdiction. The Complaint constitutes an unreasonable and meritless series of baseless accusations against the Churches which lack any evidentiary support. Plaintiffs have brought the Churches into this case not because they have legitimate claims against them, but instead to assert leverage over them as a potential deep pocket. That practice should be roundly rejected, and the award of attorneys fees and costs would be appropriate redress for profoundly inappropriate litigation tactics. According to 28 U.S.C. 1927, [a]ny attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys fees reasonably incurred because of such conduct. State law also provides attorneys fees to parties if the court determines that the action or defense to the action was without merit and not brought or asserted in good faith . . . . Utah 14

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 19 of 20

Desc Main

Code Ann. 78B-5-825. Plaintiffs meritless contentions against the Churches cannot possibly be viewed to have been made in good faith. For these reasons, the Churches are entitled to attorneys fees and costs for their involvement in this case. There is no justification for naming the Churches as defendants in this Action. It appears that Plaintiffs have turned over every stone they have found and yet there is nothing to support their claims. Plaintiffs have nothing but their common link theory and incidental, irrelevant facts relating to the connections of only some of the Defendants to the Churches. It is preposterous to suggest that, for example, being a registered agent or one of many directors or officers of a Scientology entity at some unidentified point of time in the past or occupying the same office building in which alleged wrongdoers did business makes one an agent or alter ego of, or a conspirator with, the Churches. It is unacceptable to sue first and ask questions later. And it is no less acceptable to attempt to invoke the jurisdiction of this Court to determine what are, at best, marginal claims against 18 Non-Debtors in an action just because the action includes core proceedings relating to the two Debtors so that Plaintiffs can go on a fishing expedition under Rule 2004 to find out where their money went and seek recoveries that would benefit only them. Such actions should not only be discouraged, they should be affirmatively rejected in a way that will discourage others from taking such actions and engaging in such tactics. IV. CONCLUSION

WEREFORE, based on the foregoing, the Churches respectfully request that the Court enter an Order: 1. 2. Granting the Motion. Dismissing the Complaint and Plaintiffs claims against the Churches with 15

Case 12-02544

Doc 55

Filed 06/21/13 Entered 06/21/13 18:45:48 Document Page 20 of 20

Desc Main

prejudice. 3. 4. Awarding the Churches their attorneys fees and costs. Providing the Churches such other relief as may be just or proper.

DATED: June 21, 2013. STOEL RIVES LLP

Danny C. Kelly Attorneys for Church of Scientology International and Church of Scientology of Utah

16