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In Re M. Fabrikant & Sons, Inc., et al v. Jp M Organ C Hase B Ank

September 30, 2012

IN RE M. FABRIKANT & SONS, INC., ET AL. , DEBTORS.
B UCHWALD C APITAL A DVISORS LLC, AS T RUSTEE OF THE MFS GUC T RUST, APPELLANT,
v.
JP M ORGAN C HASE B ANK, N.A., ET AL. , APPELLEES.



The opinion of the court was delivered by: Richard J. Sullivan, District Judge:

MEMORANDUM AND ORDER

Buchwald Capital Advisors, LLC, which (collectively, "Appellees" or the "Banks") to serves as Trustee of the MFS GUC Trust dismiss Appellant's Third Amended ("Appellant" or the "GUC Trust"), appeals Complaint in its adversary proceeding. For from the January 25, 2011 Order of the the reasons set forth below, the Court Honorable Stuart M. Bernstein, Bankruptcy affirms the Bankruptcy Court's Order in its Judge, granting in part and denying in part entirety. the motion of the defendant banks*fn1

I. BACKGROUND

(collectively, "Debtors") each filed a April 19, 2011 and filed its brief on May 31, voluntary petition for relief under Chapter 2011. The appeal was fully submitted as of 11 of the Bankruptcy Code on November August 3, 2011. 17, 2006. Both debtors are jewelry companies owned or controlled by members II. LEGAL STANDARDS of the Fortgang family. In re M. Fabrikant & Sons, Inc. ("Fabrikant III"), 447 B.R. District courts are vested with appellate 170, 176-77 (Bankr. S.D.N.Y. 2011). In jurisdiction over bankruptcy court rulings 2007, the unsecured creditors' committee, pursuant to 28 U.S.C. § 158(a)(1). succeeded by Appellant pursuant to the Plan Specifically, "Congress intended to allow of Liquidation, filed suit against the Banks, for immediate appeal in bankruptcy cases of secured creditors of the Debtors, alleging orders that finally dispose of discrete fraudulent conveyance. Specifically, disputes within the larger case." In re Appellant alleges that the Banks participated Fugazy Exp., Inc., 982 F.2d 769, 775 (2d in a scheme whereby they made secured Cir. 1992) (internal quotation marks loans to Debtors, knowing that the proceeds omitted). Where, as here, a bankruptcy of the loans would subsequently be court has dismissed a complaint for failure fraudulently transferred to several to state a claim, pursuant to Federal Rule of companies (collectively, the "Affiliates") Civil Procedure 12(b)(6), the district court that were owned or controlled by members reviews the bankruptcy court's conclusions of the Fortgang family but which, for the of law de novo. In re Bennett Funding Grp., most part, did not own and were not owned 146 F.3d 136, 138 (2d Cir. 1998). by the Debtors. Additionally, Appellant seeks recovery of funds that it alleges MFS Federal Rule of Civil Procedure 8(a) fraudulently transferred to various Affiliates provides that a complaint must contain "a and were subsequently reconveyed to certain short and plain statement of the claim Banks. Finally, Appellant seeks recovery of showing that the pleader is entitled to alleged preferential payments made to the relief." In order to survive a motion to Banks within ninety days of the petition dismiss, a complaint must "provide the date. (See generally Third Amended grounds upon which his claim rests." ATSI Complaint ("TAC")). Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir. 2007). Plaintiffs must On October 10, 2008, the Bankruptcy also allege "enough facts to state a claim to Court granted in part and denied in part the relief that is plausible on its face." Bell Atl. Banks' motion to dismiss the Amended Corp. v. Twombly, 550 U.S. 544, 570 Complaint. In re M. Fabrikant & Sons, Inc. (2007). "A claim has facial plausibility ("Fabrikant I"), 394 B.R. 721 (Bankr. when the plaintiff pleads factual content that S.D.N.Y. 2008). Thereafter, Appellant filed allows the court to draw the reasonable a Second Amended Complaint, which the inference that the defendant is liable for the Bankruptcy Court again dismissed in part. misconduct alleged." Ashcroft v. Iqbal, 556 In re M. Fabrikant & Sons, Inc. ("Fabrikant U.S. 662, 678 (2009). Conversely, a II"), No. 06-12737 (SMB), 2009 WL pleading that only offers "labels and 3806683 (Bankr. S.D.N.Y. Nov. 10, 2009). conclusions" or "a formulaic recitation of Appellants then filed their TAC. Once the elements of a cause of action will not again, the Bankruptcy Court dismissed the do." Twombly, 550 U.S. at 570. If the TAC in part. Fabrikant III, 447 B.R. 170. plaintiff "ha[s] not nudged [his] claims Appellant appealed from Fabrikant III on across the line from conceivable to

plausible, [his] complaint must be A. Counts I-IV: "Collapsing" dismissed." Id. In reviewing a motion to Fraudulent Conveyance Claims dismiss, pursuant to Rule 12(b)(6), the Court must accept as true all factual allegations in Counts I-IV of the TAC allege that, the Complaint and draw all reasonable beginning in 2003, the Banks knowingly inferences in favor of the plaintiff. ATSI made numerous secured loans to Debtors, Commc'ns, 493 F.3d at 98. and Debtors subsequently reconveyed the proceeds of those loans to the Affiliates for However, all averments of fraud must be less than reasonably equivalent value. "state[d] with particularity." Fed. R. Civ. P. According to Appellant, Debtors' dealings 9(b). Thus, to comply with the heightened with the Banks and the Affiliates should be pleading standard of Rule 9(b), a plaintiff collapsed and viewed as a single transaction. must: "(1) detail the statements (or And, because Debtors did not retain the loan omissions) that the plaintiff contends are proceeds, Appellants contend that the fraudulent, (2) identify the speaker, (3) state conveyance of liens from Debtors to the where and when the statements (or Banks was a fraudulent transfer, in violation omissions) were made, and (4) explain why of 11 U.S.C. §§ 544, 548, and New York the statements (or omissions) are law.*fn2

fraudulent." Eternity Global Master Fund Ltd. v. Morgan Guar. Trust Co., 375 F.3d 1. Applicable Law 168, 187 (2d Cir. 2004) (citing Harsco Corp. v. Segui, 91 F.3d 337, 348 (2d Cir. Pursuant to 11 U.S.C. § 548, a transfer 1996)). Additionally, although Rule 9(b) made or obligation incurred within two relaxes the specificity requirement for years of the petition date may be avoided as scienter, that "must not be mistaken for intentionally or actually fraudulent if it was license to base claims of fraud on made "with actual intent to hinder, delay, or speculation and conclusory allegations." In defraud any entity to which the debtor was re Carter-Wallace, Inc., Sec. Litig., 220 F.3d or became, on or after the date that such 36, 39 (2d Cir. 2000) (internal quotations transfer was made or such obligation was and citations omitted). A complaint still incurred, indebted." 11 U.S.C. must "allege facts that give rise to a strong § 548(a)(1)(A). Alternatively, a transfer is inference of fraudulent intent." Id. constructively fraudulent if the debtor

"received less than a reasonably equivalent

III. DISCUSSION value in exchange for such transfer or

The GUC Trust appeals the Bankruptcy Court's dismissal of: (1) Counts I-IV (the

obligation; and was insolvent on the date debtor then gratuitously reconveyed what it that such transfer was made or such received to a third party, taking nothing in obligation was incurred, or became insolvent return; and (2) the party to the transaction as a result of such transfer or obligation." with the debtor that is sought to be avoided, Id. § 548(a)(1)(B).*fn3 "must have [had] actual or constructive knowledge of the entire scheme that renders Similarly, under New York Debtor and [its] exchange with the debtor fraudulent." Creditor Law section 276, a conveyance HBE Leasing Corp. v. Frank, 48 F.3d 623, made or obligation incurred "with actual 635 (2d Cir. 1995). The Court proceeds to intent, as distinguished from intent consider whether the Bankruptcy Court presumed in law, to hinder, delay, or defraud correctly concluded that Appellant failed to either present or future creditors" is plead either required element. fraudulent; under section 273, a conveyance or obligation is "fraudulent as to creditors 2. Whether the Trustee Adequately without regard to his actual intent if the Pleaded That the Loans Were Reconveyed conveyance is made or the obligation is incurred without a fair consideration."*fn4 On appeal, Appellant argues that the

TAC contains sufficient factual allegations In this case, because the amount of the to collapse the transactions and that the loans that Debtors received is roughly Bankruptcy Court improperly drew equivalent to the value of the liens that they inferences in favor of the Banks, rather than gave the Banks in return, there is no GUC Trust, when it held otherwise. allegation that these transactions were, (Appellant's Br. 20-21 & n.14.) standing alone, fraudulent conveyances. Specifically, the Trustee takes issue with the (Appellant Br. 15.) However, Appellant Bankruptcy Court's focus on the TAC's argues that when the transactions between failure to allege specific pairings of the Banks and Debtors and the transactions transactions between the Banks and Debtors between Debtors and the Affiliates are on the one hand, and Debtors and the collapsed, the liens given to the Banks are Affiliates on the other. (Id. at 19.) fraudulent conveyances. (Id.) In order to collapse two transactions and treat them as a In order to bring a collapsing fraudulent single transaction under fraudulent conveyance claim, a plaintiff must identify a conveyance law, a plaintiff must establish set of transfers that can be said to constitute that: (1) a party gave the debtor fair value in a unified scheme to defraud creditors of the exchange for the debtor's property, but the debtor. HBE Leasing, 48 F.3d at 635; see

Orr v. Kinderhill Corp., 991 F.2d 31, 35-36

recover the "unpaid balance of all loans" 59.) Clearly, more is required to state a that had been extended by the Banks rather collapsing fraudulent conveyance claim. As than an amount based on an aggregation of the Bankruptcy Court recognized, the the specific transfers it alleged were Trustee's "net transfer theory only makes fraudulent. Fabrikant III, 447 B.R. at 184. sense when all of the transfers are According to the Bankruptcy Court, "[i]t presumptively fraudulent, as in the case of a was implausible to contend that every Ponzi scheme." Fabrikant II, 2009 WL transfer from the debtors to the . . . Affiliates 3806683, at *13 n.19 (citation omitted). was fraudulent" because, among other However, the Trustee "does not state or reasons, it appeared from the pleadings that imply that Fabrikant was run as a Ponzi Debtors actually owed the Affiliates money scheme." Id. and, therefore, engaged in various clearly legitimate transactions. Id. Thus, in In essence, Appellant alleges that the Fabrikant II, the Bankruptcy Court granted TAC states a claim because the Debtors the Trustee leave to amend and directed the reconveyed some portion of the loan Trustee to identify specific transfers that proceeds that they received from the Banks might be properly "collapsed" upon to the Affiliates without receiving anything repleading. Id. at 185. in return. (Appellant Br. 19; e.g., TAC ¶¶ 6,

75.) While Appellant need not show a Nevertheless, Appellant failed to comply perfectly matched flow of consideration with this directive and, in Fabrikant III, from the Banks to the Affiliates via Debtors Judge Bernstein again found that the TAC -- i.e, a five-million-dollar loan from the failed to "allege that a particular Lending Banks to Debtors and a five-million-dollar Bank made a specific advance that was transfer from Debtors to the Affiliates, subsequently reconveyed fraudulently with without receiving value in return -- that Lending Bank's knowledge or consent." Appellant nonetheless must identify specific Id. at 191. The Bankruptcy Court concluded transactions in which some portion of loan that, by not pleading pairs of loans made by proceeds that Debtors received were the Banks to Debtors with conveyances from gratuitously reconveyed to Affiliates as part Debtors to the Affiliates, the TAC did not of a single transaction. See HBE Leasing, allege any transfers that were part of a single 48 F.3d at 635. For largely the reasons scheme.*fn5 Id. at 191. The Court agrees. explained in Fabricant III, Appellants have failed to do so. See Fabricant III, 447 B.R. Rather than identify pairs of transactions at 189-93. that actually amounted to integrated, fraudulent transfers -- as case law requires Nevertheless, Appellant asserts that the and the Bankruptcy Court clearly directed -- claims ...


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