United States District Court, N.D. New York
MARC S. EHRLICH, Trustee for Hoffmans Trade Group LLC, Appellant,
COMMERCIAL FACTORS OF ATLANTA, Appellee.
MEMORANDUM-DECISION AND ORDER
Lawrence E. Kahn, U.S. District Judge
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.
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.
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. 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.
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.
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.
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.
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.
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.
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,
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.
Compliance with Bankruptcy Rule 8014
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).
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.