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In re Yerushalmi

November 20, 2010

JOSEPH YERUSHALMI, DEBTOR.
MARC A. PERGAMENT, TRUSTEE OF THE ESTATE OF JOSEPH YERUSHALMI, PLAINTIFF-APPELLANT,
v.
MALKA YERUSHALMI, HADAR YERUSHALMI AND CHENIE YERUSHALMI, DEFENDANT-APPELLEES.



The opinion of the court was delivered by: Spatt, District Judge

Chapter 7

MEMORANDUM OF DECISION AND ORDER

Chapter 7

This is an appeal from a January 7, 2010 order by United States Bankruptcy Judge Dorothy T. Eisenberg in the Chapter 7 bankruptcy proceedings of debtor Joseph Yerushalmi. Judge Eisenberg's order granted summary judgment against Marc A. Pergament, the trustee of Yerushalmi's bankruptcy estate denying the trustee's attempt to recover certain assets from Yerushalmi's family members. The trustee now appeals from Judge Eisenberg's ruling. For the reasons set forth below, the Court denies the trustee's appeal and affirms Judge Eisenberg's decision in all respects.

I. BACKGROUND

On July 25, 2007, debtor and attorney Joseph Yerushalmi filed a voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy Code. The petition was assigned to United States Bankruptcy Judge Dorothy T. Eisenberg. On October 2, 2007, Judge Eisenberg oversaw the conversion of Yerushalmi's petition to a Chapter 7 petition, and then appointed Marc A. Pergament as trustee for Yerushalmi's estate. As trustee, Pergament was responsible for protecting the interests of Yerushalmi's creditors by marshalling and conserving the assets of Yerushalmi's estate.

Among the creditors whose interests trustee Pergament represented were Yerushalmi's former law firm, Yerushalmi, Shiboleth, Yisraeli & Roberts LLP ("YSYR"), and Yerushalmi's sole partner in that firm-in spite of the multiplicity of names in the firm's title-Amnon Shiboleth. In March of 1995, Yerushalmi and Shiboleth parted ways in the law practice, but the breakup of YSYR caused disputes over fees owed to the firm. These disputes remained unresolved three years later when, on April 10, 1998, Shiboleth sued Yerushalmi and his new law firm, Yerushalmi & Associates, L.L.P. ("Y&A") in New York Supreme Court, New York County. Shiboleth asserted claims on his own and on YSYR's behalf, seeking primarily to recover legal fees that Yerushalmi had convinced clients to pay directly to him, rather than to YSYR. The state court case moved slowly, but Shiboleth eventually received a substantial judgment. On March 7, 2007, just over four months before Yerushalmi entered bankruptcy, the state court entered a judgment in Shiboleth's favor for almost five million dollars.

Within days of the entry of judgment, Shiboleth received the sum of $1,220,112.73 from an escrow account that was established in 1998 to hold a portion of the disputed funds. The judgment also required Yerushalmi and Y&A to pay an additional $3,540,045.91-but rather than satisfy the judgment, Yerushalmi promptly took an appeal to the Appellate Division, First Department. Nearly two years later, on January 6, 2009, the Appellate Division reversed the Supreme Court in part, and remanded the case for recalculation of the money owed to the plaintiff. Shiboleth v. Yerushalmi, 58 A.D.3d 407, 408, 873 N.Y.S.2d 2 (1st Dep't 2009). Although the Appellate Division agreed that Yerushalmi had taken fees that were owed to YSYR, the court found that Yerushalmi was likely himself entitled to a greater portion of those fees than was accounted for in the judgment. Id. The court therefore remanded for further proceedings to determine the proper amount of the judgment against Yerushalmi. Id.

On July 24, 2009, approximately six months after the Appellate Division remanded Shiboleth's case against Yerushalmi-but before the Supreme Court recalculated the amount of the judgment in that case-trustee Pergament filed the present adversarial action in the bankruptcy court to marshal assets into Yerushalmi's estate. In particular, Pergament was interested in avoiding two "gifts" of real property that Yerushalmi made to family members in 2000 and 2001. Pergament believed that these "gifts" could be annulled under state law, based on the fact that Shiboleth's suit against Yerushalmi was pending when the transfers were made. Pergament also sought to recover post-petition rents earned on those properties. Due to proceedings in the bankruptcy court, Pergament discusses only one of those two "gifts" in the present appeal. On November 21, 2000, Yerushalmi purchased, in the name of his wife, Hadar Yerushalmi, and daughter, Malka Yerushalmi, a condominium located at 19--21 Warren Street, New York, New York (the "Warren Street Condominium") for approximately $795,000, which Hadar and Malka then rented to third parties.

The Bankruptcy Code provides multiple means by which a trustee may avoid transfers of property that a debtor made before filing bankruptcy. However, because the transfer that Pergament sought to avoid happened seven years before Yerushalmi filed for bankruptcy, the sole avenue available to Pergament to avoid this transfer was in 11 U.S.C. § 544(b)(1), which permits a trustee to assert state law claims on behalf of creditors. Using Section 544(b)(1), the trustee stepped into the shoes of creditors Shiboleth and YSYR, and then looked to annul the transfer of the Warren Street Condominium under New York State Debtor and Creditor Law ("NYDCL") § 273-a, which reads as follows:

Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.

In essence, Section 273-a provides that, if a defendant in an action for money damages fails to pay a final judgment, then the plaintiff in that action may avoid any conveyance that the defendant made during the suit, provided that the defendant was not paid full value for the property conveyed. This is true regardless of whether or not the defendant made the transfer intending to hide his assets from the plaintiff. The six-year statute of limitations on Section 273-a does not begin to run until a final judgment is entered, so as long as a transfer was made during the pendency of the case against the defendant, it does not matter how long before the final judgment the conveyance occurred. See Grace v. Rosenstock, 228 F.3d 40, 54 (2d Cir. 2000). Here, Shiboleth sued Yerushalmi in 1998. Yerushalmi purchased the Warren Street Condominium for Hadar and Malka in 2000, and the earliest any final judgment could be said to have been entered against Yerushalmi was 2007. Thus, even though the relevant transfer happened a decade ago, the statute of limitations applicable to Section 273-a presents no time bar to avoiding the transfer of the Warren Street Condominium.

Using this avenue of relying on 11 U.S.C. § 544(b)(1) to assert a NYDCL § 273-a claim, on July 24, 2009 trustee Pergament commenced an adversarial proceeding against Hadar and Malka to avoid the transfer of the Warren Street Condominium, and to bring the value of the condominium and related post-petition rents into Yerushalmi's estate. Pergament also sued Yerushalmi's son Chenie Yerushalmi at that time, but due to the proceedings in the bankruptcy court, that portion of the suit is not relevant to this appeal.

On November 9 and 20, 2009, Hadar and Malka respectively moved for summary judgment on Pergament's claims against them. Hadar and Malka asserted that Section 273-a could not be used to avoid the transfer of the Warren Street Condominium because (1) Shiboleth's action against Yerushalmi was not an "action for money damages" as required by Section 273-a, and (2) Yerushalmi had not failed to satisfy a "final judgment", as required by Section 273-a. Pergament opposed the motion for summary judgment, but also requested in the ...


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