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Ehrlich v. Commercial Factors of Atlanta

United States District Court, N.D. New York

February 22, 2017

MARC S. EHRLICH, Trustee for Hoffmans Trade Group LLC, Appellant,


          Lawrence E. Kahn, U.S. District Judge


         Appellant Marc S. Ehrlich, acting as trustee for Hoffmans Trade Group LLC (“HTG”), appeals a decision by U.S. Bankruptcy Judge Robert E. Littlefield, Jr., dismissing in its entirety his Adversary Complaint. Dkt. No. 1 (“Bankruptcy Order”) at 6-8; Dkt. No. 6 (“Appellant Brief”). Appellee Commercial Factors of Atlanta (“CFA”) filed a Response, and Ehrlich filed a Reply. Dkt. Nos. 7 (“Response”), 9 (“Reply”). For the reasons that follow, the Bankruptcy Order is affirmed.


         HTG is a New York limited liability company whose sole member and owner is Gael Coakley, a resident of Latham, New York. Dkt. No. 2-1 (“Adversary Complaint”) ¶ 7. CFA is a Georgia corporation. Id. ¶ 8. HTG entered bankruptcy on June 28, 2013, and Ehrlich was appointed Chapter 7 Trustee on August 2, 2013. Id. ¶¶ 4-5.

         The relationship between HTG and CFA began in March 2011, when HTG “entered into a ‘Security Agreement' with CFA ‘to obtain short-term financing by factoring, selling, and assigning to [CFA] acceptable accounts receivable at a discount below face value.'” Id. ¶ 18 (alteration in original); id. Ex. A, ¶ 1. In other words, HTG would sell goods to a customer and in return receive an invoice representing the amount the customer owed HTG for the goods. Needing cash now rather than later, HTG would sell the invoice to CFA for a discount, and CFA would receive the income stream represented by the invoice.[1] The March agreement contemplated that HTG might receive an income stream related to an invoice that had been sold to CFA. Id. Ex. A, ¶ 46. In that case, HTG would “immediately turn over to [CFA] the . . . payment received by [HTG from the third party].” Id. The agreement also stated that CFA would “have full recourse against [HTG]” for payment on the accounts receivable. Id. ¶ 36. At the same time, HTG and CFA executed a “Notification Agreement, ” “request[ing] [the third parties'] cooperation in remitting payments on all open invoices as well as those subsequently received to [CFA].” Id. Ex. B.

         In April 2011, HTG and CFA entered another agreement, this time to “confirm [HTG's] understanding and agreement regarding the loan(s) [HTG] ha[s] requested [CFA] to make to [HTG].” Id. Ex. C at 1. The agreement stated that HTG would “assign to [CFA] as absolute owner, with full recourse, all Accounts [receivable] . . . which we shall provide to you from time to time.” Id. Ex. C, ¶ 2.1. HTG's line of credit was limited to $250, 000. Id. As with the March agreement, the agreement contemplated the possibility of HTG's turning over to CFA any payments received by HTG under an invoice. Id. ¶ 8. The parties acknowledged that the agreement “embodie[d] [their] entire agreement as to the subject matter hereof and supersede[d] all prior agreement as to the subject matter hereof.” Id. ¶ 21. HTG also granted CFA a security interest in the following items:

all of our presently existing and after acquired accounts, inventory, equipment, goods, instruments including promissory notes, chattel paper, payment intangibles, investment property, documents, deposit accounts, letter-of-credit rights, general intangibles, supporting obligations, reserves, reserve accounts and to the extent not listed above as original collateral all products and proceeds of the foregoing, and all of our rights as an unpaid vendor or lienor, all of our rights of stoppage and transit, replevin, and reclamation, and all of our rights against third parties with respect to the foregoing.

Id. ¶ 5. In the event of default, CFA would be entitled to “[t]ake possession of any or all of the Collateral.” Id. ¶ 14(c). The agreement defined “security interest” as “the security interest . . . granted by [HTG] to [CFA] as collateral for the payments of any and all obligations.” Id. ¶ 1.15. The agreement further defined “obligations” as

all of our obligations to you hereunder, all obligations of ours to you under any note, contract of surety, guaranty, or accommodation, or with respect to letters of credit or acceptances, sums owing to you for goods and/or services purchased from any other firm factored or financed by you, and all other obligations of ours to you, however and whenever created, arising or evidenced, whether direct or indirect, through assignment from third parties in the ordinary course of your business, absolute, contingent or otherwise, now or hereafter existing or due to become due.

Id. ¶ 1.7. Uniform Commercial Code (“UCC”) financing statements were executed to perfect CFA's security interest, id. Exs. G-J, and a “Notification Agreement” that is identical to the one executed in March was put into effect, id. Ex. D.

         On September 22, 2011, HTG and CFA entered an addendum to the March agreement. Id. Ex. E. It remains unclear why the parties decided to supplement the March agreement when the parties had entered a new agreement in April that was meant to completely supersede the earlier one. In any event, in the addendum CFA agreed to increase HTG's maximum account to $700, 000. Id. Then, on December 10, 2012, the parties entered another addendum, this time to increase the maximum account to $1, 400, 000. Id. Ex. F.

         From March 2011 to February 2012, CFA received payments on the invoices directly from HTG's customers. Adversary Compl. ¶¶ 48, 52. In Fall 2012, HTG began paying CFA directly, and Coakley's scheme to defraud CFA began in earnest. Id. ¶ 49. For reasons that remain murky, HTG started selling phony invoices to CFA. Id. ¶ 63. HTG eventually had to make good on these sales, but how to do so when the invoices were fabricated? Ever resourceful, Coakley came up with a plan. When CFA needed to be paid on an invoice, HTG “would submit another phony invoice and . . . utilize the payment on the newest phony invoice to [pay off the earlier invoices].” Id. ¶ 65. This continued until March 2013, when the payments to CFA stopped. Id. 52. HTG's counsel conceded that CFA was a “net loser” in these transactions. Dkt. No. 7-1 (“Hearing Transcript”) at 26:23.

         On July 1, 2014, CFA filed a proof of claim “asserting a secured claim against [HTG] in the amount of $1, 306, 020.00, plus interest.” Adversary Compl. ¶ 17. On July 30, 2015, Ehrlich, acting as trustee of HTG, filed this Adversary Complaint against CFA. Id. Ehrlich wants $1, 106, 360.29 plus interest from CFA, an amount that represents the transfers made directly from HTG to CFA. Id. at 31. As the Court just recounted, these transfers were made entirely with cash that HTG fraudulently obtained from CFA. The Adversary Complaint contains sixteen counts, which boil down to fraudulent conveyance, breach of contract, unjust enrichment, declaratory judgment, breach of the covenant of good faith and fair dealing, breach of fiduciary duty (and aiding and abetting thereof), and equitable subordination. Id. ¶¶ 78-194. On January 6, 2016, Judge Littlefield held a hearing on CFA's motion to dismiss the Adversary Complaint. Hearing Tr. At the hearing, Judge Littlefield announced that he would dismiss the Adversary Complaint in its entirety. Id. at 65:3-24. He relied solely on Sharp International Corp. v. State Street Bank & Trust Co. (In re Sharp International Corp.), 403 F.3d 43 (2d Cir. 2005), in reaching this decision. Hearing Tr. at 65:3-15. On January 13, 2016, Judge Littlefield issued an order dismissing the Adversary Complaint in its entirety. Bankruptcy Order. The Bankruptcy Order, which is three pages long, does not explain Judge Littlefield's reasoning. Id.

         On January 19, 2016, Ehrlich filed a notice of appeal of Judge Littlefield's ruling. Dkt. No. 1 at 9-10. Ehrlich's opening brief largely incorporates by reference arguments he made to Judge Littlefield. Appellant Br. Ehrlich does this in part because the Bankruptcy Order “contains no analysis, rationale or application of the law to any of the sixteen (16) counts.” Id. at 5. The Appellant Brief also fails to recount the factual background of the case-indeed, the facts section of the opening brief reads in its entirety: “For purposes of this appeal (and the Motion) the factual allegations alleged in the Complaint are assumed to be true.” Id. at 2. CFA responds by suggesting that Judge Littlefield was correct to dismiss the Adversary Complaint. Appellee Br. at 3.


         On appeal, a district court reviews a bankruptcy court's factual findings for clear error and its legal conclusions de novo. County of Clinton v. Warehouse at Van Buren St., Inc., No. 12-CV-1636, 2013 WL 2145656, at *1 (N.D.N.Y. May 15, 2013) (citing R2 Invs., LDC v. Charter Commc'ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012)). Thus, a district court reviews a bankruptcy court's dismissal of a complaint de novo. In re Maxwell Commc'n Corp., 186 B.R. 807, 815 (S.D.N.Y. 1995). To survive a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, 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, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A court must accept as true the factual allegations contained in a complaint and draw all inferences in favor of the plaintiff. Allaire Corp. v. Okumus, 433 F.3d 248, 249-50 (2d Cir. 2006). Plausibility, however, requires “enough fact[s] to raise a reasonable expectation that discovery will reveal evidence of [the alleged misconduct].” Twombly, 550 U.S. at 556. The plausibility standard “asks for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556). “[T]he pleading standard Rule 8 announces does not require ‘detailed factual allegations, ' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. (quoting Twombly, 550 U.S. at 555). Where a court is unable to infer more than the mere possibility of the alleged misconduct based on the pleaded facts, the pleader has not demonstrated that she is entitled to relief and the action is subject to dismissal. Id. at 678-79.


         A. Compliance with Bankruptcy Rule 8014

         Under Federal Rule of Bankruptcy Procedure 8014(a), a bankruptcy appellant's opening brief must include, among other things, “a statement of the issues presented, ” “a concise statement of the case setting out the facts relevant to the issues submitted for review, ” and “the argument, which must contain the appellant's contentions and the reasons for them, with citations to the authorities and parts of the record on which the appellant relies.” Fed.R.Bankr.P. 8014(a)(5), (6), (8). Failure to comply with Rule 8014(a) is grounds for dismissing a bankruptcy appeal. Gazes v. Stephenson (In re Stephenson), No. 96-CV-558, 1996 WL 403087, at *1 (S.D.N.Y. July 18, 1996) (collecting cases). Further, “Rule 8014(a) is derived from Federal Rule of Appellate Procedure 28.” Reed v. Rescap Borrower Claims Tr. (In re Residential Capital, LLC), 552 B.R. 50, 62 (S.D.N.Y. 2015). Accordingly, a bankruptcy appellant cannot raise an issue for appellate review “merely [by] incorporating by reference an argument presented to the [bankruptcy court].” Norton v. Sam's Club, 145 F.3d 114, 117 (2d Cir. 1998).

         Ehrlich's opening brief violates Rule 8014(a) in several respects. First, it does not contain a statement of the issues presented. Appellant Br. Second, it fails to describe the facts relevant to the appeal. Id. at 2. Third, out of a desire not to “burden th[e] submission” by describing its contentions, the brief mostly incorporates by reference arguments made to Judge Littlefield. Id. at 5. As the Court just mentioned, incorporation by reference is not the proper means of raising an argument for appellate review. Sam's Club, 145 F.3d at 117. The Court could dismiss the appeal because of these failures to comply with Rule 8014(a). See Shah v. Motors Liquidation Co. GUC Tr., No. 12-CV-8783, 2013 WL 12085091, at *6 (S.D.N.Y. June 3, 2013) (finding that a failure to comply with former Rule 8010 (now Rule 8014) is “in and of itself . . . a sufficient basis to dismiss Plaintiff's appeal”). After all, Rule 8014 “is not only a technical or aesthetic provision, but also has a substantive function-that of providing the other parties and the court with some indication of which flaws in the appealed order or decision motivate the appeal.” In re Gulph Woods Corp., 189 B.R. 320, 323 (E.D. Pa. 1995). Yet strict application of Rule 8014 would be inappropriate in this case in light of Judge Littlefield's decision to provide a less-than-complete explanation of the basis for dismissal. See Miranda v. Bennett, 322 F.3d 171, 176 (2d Cir. 2003) (“[S]pecification by the [trial] court of its findings of fact and conclusions of law informs the losing litigant of the reason for that court's ruling and of the principal questions that he must address if he appeals.”). Instead, the Court will address the merits of the parties' arguments.[2]

         B. Actual ...

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