United States District Court, E.D. New York
ANDREW M. THALER, ESQ., as Chapter 7 Trustee of Korn & Spirn, Plaintiff,
ELLEN KORN, Defendant.
OPINION AND ORDER
SANDRA J. FEUERSTEIN, District Judge.
Before the Court is defendant's motion to dismiss plaintiff's complaint pursuant to Federal Rules of Civil Procedure ("FRCP") 8(a)(2), 9(b) and 12(b)(6). For the following reasons, defendant's motion is denied as to claims one (1), two (2), three (3), four (4), six (6), seven (7) and eight (8). Claim five (5) is denied without prejudice to renew at trial.
Andrew Thaler, Esq. ("plaintiff' or "trustee"), the Chapter 7 trustee of the bankruptcy estate ("estate") of Korn & Spirn ("debtor" or "korn & Spirn"), brings this adversary proceeding against Ellen Korn ("defendant"), widow of the debtor's partner Jay Korn. Compl. p. 1; ¶ 27. Plaintiff seeks a judgment under Bankruptcy Code § 544(b), avoiding the transfers pursuant to New York Debtor and Creditor Law§§ 273, 274, 275, 276 and 276-a; and pursuant to Bankruptcy Code§§ 550(a) and 551, recovering from defendant an amount to be determined, but no less than $2, 014, 142. Korn & Spim was a law firm partnership with its principal offices located at 50 Clinton Street, Hempstead, New York. Id. at ¶ 8. Jay Korn and Arthur Spim ("partners") were partners of the debtor. Id. at ¶ 9. On November 17, 2010 ("filing date"), an involuntary Chapter 7 petition was filed by three petitioning creditors pursuant to Bankruptcy Code § 303(b) against Korn & Spim in the United States Bankruptcy Court for the Eastern District of New York. Id at ¶ 10. On December 22, 2010, an Order for Relief was entered. Id. at ¶ 10. Thaler was appointed as interim trustee in the Korn & Spim case and is now the permanent trustee. Id. at ¶ 11.
Creditors of the debtor Korn & Spim claimed that they provided funds to Korn & Spim to be held in escrow by the debtor for, inter alia, the purposes described below. Id at ¶ 13. Korn & Spim and their "finders" ("finders") solicited individuals ("investors") to invest in purported real estate and other business ventures ("investments") which were supposed to generate high returns for the investors. Id at ¶ 14.
Pursuant to the terms of the contracts between the debtor and investors, the investors could either receive payments from their investments in the form of "interest payments" or "roll-over" their investments into a future transaction or be refunded the investment principal. /d. at ¶ 19. The representations made to the investors were largely false. /d. at ¶ 20. The investors' funds were: commingled with the debtor and/or clients' funds; utilized to pay prior investors their promised rate of interest or to provide a return on their investment; utilized to pay the operating expenses of korn & Spim; and/or transferred to Jay korn and/or his family members for his/their personal enrichment to the detriment of Korn & Spirn's legitimate creditors. /d. at ¶ 21. Plaintiff's knowledge of the debtor's scheme to sell fictitious participation notes to investors and use the proceeds from the sale of the notes to later investors to pay off prior investors ("note fraud" or "Ponzi scheme") is based upon: a review of the debtor's documents seized from the debtor's offices by the Nassau County District Attorney's Office and the Consumer Frauds Bureau; depositions of the debtor's former employees; a review of the documents provided by the investors, Bank of America, TD Bank and Astoria Federal Savings; and interviews with the investors. Id. at ¶ 22.
Investors' funds were deposited into the Korn & Spirn Bank of America attorney escrow account ("escrow account") and/or the Korn & Spirn Bank of America attorney trust account ("trust account" or, collectively, "trust accounts"). Funds were also transferred from the trust accounts into Jay Korn's and defendant Ellen Korn's personal bank accounts, other personal accounts of family members or the law firm's operating account ("operating account"). Id. at ¶ 25. The Ponzi scheme fell apart when Jay Korn committed suicide on March 26, 2010 and then current financial obligations were not met. Id. at ¶ 26.
According to the complaint, defendant is a person who received payments from the debtor, either directly or indirectly or in a representative capacity; and received millions of dollars from Korn & Spirn for which Korn & Spirn received no corresponding benefit or value and to which defendant had no good faith basis to believe she was entitled. Id. at ¶ 28. In addition, defendant knew, or had reason to know, that the joint income tax returns she signed failed to include hundreds of thousands of dollars of unreported income. During the time period June 1, 2005 through March 31, 2010, approximately $1, 241, 600 was deposited into Jay Korn's and defendant's personal bank accounts from the trust accounts. Approximately $772, 524 was deposited into Jay Korn's and defendant's personal banking account from the operating account. Id. at ¶ 29.
Transfers to Defendant
The transfers to defendant's personal banking accounts were as follows: from June 1, 2005-December 31, 2005, $108, 000 was transferred from the trust accounts and $88, 843 from the operating account for a total of $196, 943; from January 1, 2006-December 31, 2006, $267, 500 was transferred from the trust accounts and $164, 347 from the operating account for a total of $431, 847; from January 1, 2007-December 31, 2007, $271, 000 from the trust accounts and $162, 378 from the operating account for a total of $433, 378; from January 1, 2008-December 31, 2008, $278, 200 from the trust accounts and $179, 518 from the operating account for a total of $457, 718; from January 9, 2009-December 31, 2009, $243, 550 from the trust accounts and $143, 706 from the operating account for a total of $387, 256; and from January 1, 2010-March 31, 2010, $73, 250 from the trust accounts and $33, 750 from the operating account for a total of $107, 000. The total received from the trust accounts was $1, 241, 600; from the operating account $772, 542, for a total sum of $2, 014, 142. Id. at ¶ 31.
Defendant's net income for the corresponding personal income tax years was: June-December 2005, $34, 507; January-December 2006, $118, 895; January-December 2007, $64, 796; January-December 2008, $116, 844; January-December 2009, $72, 902; and January-March 2010, ($17, 228). Id. at ¶ 32. korn & Spim was either insolvent when the transfers were made or rendered insolvent as a result of the transfers. Id. at ¶ 33. At the time the transfers were made, korn & Spim had unsecured creditors who remained unsecured creditors as of the filing date of the bankruptcy action. Id. at ¶ 34.
Plaintiff, the Chapter 7 trustee of the bankruptcy estate of Korn & Spim, brought this action against Jay Korn's widow, defendant Ellen Korn, to recover the transferred funds to the extent possible for the benefit of the debtor's estate. Id. at ¶ 129.
A. Legal Standard for a Motion to Dismiss
When considering a motion to dismiss a complaint for failure to state a claim, the court must assume as true all allegations contained in the complaint. Chance v. Armstrong, 143 F.3d 698, 701 (2d Cir. 1998). However, it is "well settled that conclusory allegations merely stating general legal conclusions necessary to prevail on the merits of a claim, unsupported by factual averments will not be accepted as true." ECOR Solutions, Inc. v. Malcolm Pirnie, Inc., No. 02 Civ. 1103, 2005 WL 1843253, at *3 (N.D.N.Y. July 29, 2005). The Supreme Court has held that a "plaintiff's obligation to provide the grounds' of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). On FRCP 12(b)(6) motions, the court must assess the legal feasibility of the complaint and whether a plaintiff has pled claims for which he or she is entitled to discovery. Sims v. Artuz, 230 F.3d 14, 20 (2d Cir. 2000); Chance, 143 F.3d at 701.
In Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009), the Supreme Court held that courts should entertain a motion to dismiss by ...