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Official Committee of Unsecured Creditors of Exeter Holding, Ltd. v. Haltman

United States District Court, E.D. New York

March 30, 2018

LINDA HALTMAN, et al., Defendants.


          JOANNA SEYBERT, U.S.D.J.

         The Official Committee of Unsecured Creditors of Exeter Holding, Ltd. (“Plaintiff” or “the Committee”) commenced this adversary proceeding against officers, directors, and insiders of Exeter Holdings, Ltd. (“Exeter” or the “Company”) following the commencement of bankruptcy proceedings by Exeter. (Compl., Docket Entry 3-9, ¶¶ 1-2.) On September 18, 2013, the reference to the Bankruptcy Court was withdrawn, and proceedings began in this Court. (Order Withdrawing Ref., Docket Entry 2.) The Defendants include Arnold Frank and Sondra Frank; their three children Linda Haltman, Bruce Frank, and Larry Frank; and their grandchildren, trusts and other entities (collectively “Defendants”). (Compl. ¶¶ 16-70.) Plaintiff alleges that Defendants defrauded Exeter's creditors by transferring funds to themselves, trusts, and other entities they control and seeks to recover approximately $29 million. (Compl. ¶¶ 3-7.)

         Currently pending before the Court is a motion to dismiss pursuant to Federal Rules of Civil Procedure 8(a), 9(b), and 12(b)(6)[1] filed by a group of Defendants referred to herein as the “Moving Defendants.”[2] (Mot. to Dismiss, Docket Entry 240.) The Moving Defendants consist of the following:

(1) the C.H. Trust, [3] the Ryann Haltman Trust, the Samantha Haltman Trust, the B.F. Trust, the E.F. Trust, the J.F. Trust, the K.F. Trust, the Barbara Cohen - Linda Haltman Trust, the Murray Cohen - Linda Haltman Trust, the Barbara Cohen - Bruce Frank Trust, the Murray Cohen - Bruce Frank Trust, the Barbara Cohen - Larry Frank Trust, and the Murray Cohen - Larry Frank Trust (collectively “the Moving Trusts”);
(2) Linda Haltman and Michael Haltman as trustees for the C.H. Trust, the Ryann Haltman Trust, and the Samantha Haltman Trust; Bruce Frank and Kathleen Frank as trustees for the B.F. Trust, E.F. Trust, the J.F. Trust, and the K.F. Trust; and Sondra Frank as trustee for the Barbara Cohen - Linda Haltman Trust, the Murray Cohen -Linda Haltman Trust, the Barbara Cohen - Bruce Frank Trust, the Murray Cohen - Bruce Frank Trust, the Barbara Cohen - Larry Frank Trust, and the Murray Cohen - Larry Frank Trust (collectively “the Moving Trustees”);
(3) C.H., B.F., E.F., J.F., and K.F.[4] (collectively “the Minor Grandchildren”);
(4) Linda and Michael Haltman as guardians of C.H., and Bruce and Kathleen Frank as guardians of B.F., E.F., J.F., and K.F. (collectively, “the Guardians of the Minor Grandchildren”); and
(5) Ryann Haltman and Samantha Haltman, (together “the Non-Minor Grandchildren”). (Defs.' Br. at 2-3.)

         For the reasons that follow, the motion to dismiss is GRANTED PART and DENIED IN PART.


         I. Factual Background[5]

         On November 9, 2011, Exeter filed for bankruptcy in this District under Chapter 11 of the Bankruptcy Code. (Compl. ¶¶ 2, 11.) Plaintiff was subsequently appointed and authorized to commence this action against Defendants. (Compl. ¶¶ 13-14.)

         A. The Parties

         The Committee consists of three unsecured creditors of Exeter:

         (1) the Larry Lawrence Family Trust, Larry Lawrence IRA;

         (2) Howard Berlin or Berlin Enterprises Employee Pension Fund; and

         (3) Leslie Whitney, an individual. (Compl. ¶ 15.)

         Exeter is a closely held, family-run S corporation founded in 1986 by Arnold Frank, the CEO. (Compl. ¶¶ 75-76.) At the time Plaintiff filed the Complaint, Exeter leased office space at 131 Jericho Turnpike, Suite 250, Jericho, New York. (Compl. ¶ 77.)

         Arnold Frank was a fifty-percent owner of Exeter.[6](Compl. ¶ 16.) He was married to Sondra Frank, an officer of Exeter, who owns ten percent of Exeter. (Compl. ¶¶ 16-17, 75.) The remaining forty percent is owned by the Sondra Frank Grantor Remainder Annuity Trust. (Compl. ¶ 75.) Arnold and Sondra have three children: Linda Haltman, Bruce Frank, and Larry Frank (the “Children”). (Compl. ¶ 17.)

         Linda Haltman is the President of Exeter and married to Michael Haltman. (Compl. ¶¶ 12, 18.) Michael is an employee of Exeter. (Compl. ¶ 75.) Linda and Michael have three children: Ryann Haltman, Samantha Haltman, and C.H. (Compl. ¶¶ 18-19.) Bruce Frank is married to Kathleen Frank, and the couple has four children: B.F., E.F., J.F., and K.F (along with Ryann, Samantha, and C.H., “the Grandchildren”). (Compl. ¶¶ 20-21.) The Complaint alleges that Arnold and Sondra Frank, their Children and Grandchildren were insiders of Exeter as defined by the Bankruptcy Code.[7] (Compl. ¶¶ 16-22.)

         The Defendants also include fourteen corporations owned by Arnold Frank, Linda Haltman, Bruce Frank, or Larry Frank, or a combination thereof (the “Property Corporation Defendants”). (Compl. ¶¶ 36-49.) Although they are not Defendants, Plaintiff alleges that eight corporations that were dissolved before the filing of the Complaint are also relevant. (Compl. ¶ 50.) The Complaint avers that these corporations were alter egos of Exeter and their owners. (Compl. ¶ 50.) These twenty-two corporations will be referred to as the “Property Corporations.”

         The Committee also brought suit against a number of trusts created for the benefit of either one of the Children or the Grandchildren. (Compl. ¶¶ 52-69.) Plaintiff alleges that each of the beneficiaries of these trusts was an insider as defined by the Bankruptcy Code. (Compl. ¶¶ 52-68.) The trusts will be referred as the “Trust Defendants.”

         B. Exeter's Business

         Exeter was in the business of making construction loans to builders and homeowners using a combination of bank loans, funds from family members, and funds loaned to the Company by various individuals and entities (“Non-Bank Lenders”). (Compl. ¶ 80.) In exchange, the Non-Bank Lenders would receive notes in which Exeter agreed to repay the loan at a specified interest rate. (Compl. ¶¶ 81-82.) Generally, when Exeter provided a construction loan, it received collateral, often in the form of a mortgage. (Compl. ¶ 83.)

         Exeter frequently incorporated entities (previously referred to as the Property Corporations) “for the purpose of purchasing property or vacant lots” and used the address of the property as the name for the newly formed entity. (Compl. ¶ 85.) Exeter loaned money, without liens, to the Property Corporations to purchase the property, and Exeter would recover the amount of the loan, plus interest, once the property was sold. (Compl. ¶ 87.) Many of the transactions involved 124 New York Avenue Corp., which according to Linda Haltman, is “one in the same” with Exeter.[8] (Compl. ¶ 88.) After the property was purchased by the Property Corporation, Exeter would provide a construction loan to a construction or building company to improve the property. (Compl. ¶ 89.) However, after these transactions were finalized, “Exeter rarely sought to collect on the notes or to recover the property because each and every one of the Property Corporations was its alter ego as well as the alter ego of the owners of the Property Corporation.” (Compl. ¶ 91.) As of September 30, 2006, Exeter had construction loan receivables secured by first mortgages to twenty-seven Property Corporations in the amount of $13, 085, 919.00, and as of September 30, 2008, to twenty-four Property Corporations in the amount of $11, 396, 727.00. (Compl. ¶ 92.)

         Occasionally, Exeter also engaged in mortgage transactions (“Mortgage Transactions”) in which it loaned funds to individuals or companies in exchange for collateral, usually a mortgage on the property which had either first or second priority. (Compl. ¶ 93.) Because Exeter was a licensed mortgage banker, it was required to submit quarterly reports detailing certain financial information, including information for affiliated companies such as the Property Corporations. (Compl. ¶ 94.)

         The Mohrings, one of Exeter's oldest clients, served as builders or contractors on a number of projects. (Compl. ¶ 96.) Arnold Frank and Mr. Mohring agreed to more than ten deals “with a ‘handshake'” and without any written agreements, and on occasion, Exeter loaned money to the Mohrings on an unsecured basis. (Compl. ¶ 97.) Plaintiff alleges that “as a result of their close relationship, ” Defendants “frequently entered into transactions that were contrary to the Debtor's normal course of business.” (Compl. ¶ 99.) Additionally, Exeter's unsecured loans to the Mohrings were never repaid and the security for the loans was “entirely inadequate collateral” and sometimes “conveyed to third parties . . . without [Exeter's] knowledge or consent.” (Compl. ¶ 102.) Plaintiff details a number of transactions in which the Mohrings violated their obligations without consequence and conveyed or offered as collateral properties that were worthless due to a sale to a third party or other encumbrances, including at least one property that was subject to foreclosure. (Compl. ¶¶ 104-08.) Additionally, approximately $1, 700, 000.00 loaned to the Mohrings, which was previously held in escrow, cannot be located. (Compl. ¶ 109.)

         C. Improper Management

         In the wake of the housing crisis, Plaintiff alleges that none of the Defendants “focused on furthering Exeter's business” and did not appear regularly at Exeter's offices. (Compl. ¶ 112.) Arnold Frank and Linda Haltman did not attempt to collect on the loans to the Property Corporations and did nothing to ensure that Exeter made a profit on its business deals. (Compl. ¶ 112.) Around the end of 2010, Arnold Frank became ill; however, “despite his illness and inability to truly contribute to Exeter or its business, [he] continued to draw a salary, ” and Exeter continued to pay for his “medical insurance and expenses, credit card bills, cell phone, car, and a driver.” (Compl. ¶ 114.) Sondra Frank, the secretary of Exeter, never came to Exeter's offices, yet Exeter paid for her car. (Compl. ¶¶ 115-16.)

         Exeter's President, Linda Haltman, was “clearly derelict in [her] duties, ” and “undertook [ ] daily duties . . . which conflicted with the best interests of Exeter and its creditors” in order to “keep the stream of cash flowing to support the Frank-Haltman Clan.” (Compl. ¶ 118.) While President, she also served as Chief Financial Officer of Hallmark Abstract Service (“Hallmark”), [9] also headquartered at Exeter's offices. (Compl. ¶ 119.) During this time, Exeter paid Linda Haltman's personal expenses, including the cost of a luxury vehicle. (Compl. ¶ 120.) Since the filing of the bankruptcy petition, Linda Haltman has been permitted to continue serving as Exeter's President so long as she provides status reports to the Committee. (Compl. ¶ 121.) The Committee maintains that the information provided by Linda has been “woefully incomplete, ” that she has failed to provide information of which she should be aware, and that she has provided contradictory information in order to delay the bankruptcy proceeding and protect herself and her family. (Compl. ¶ 122.)

         D. Transfers and Conveyances

         Plaintiff alleges that Exeter had been inadequately capitalized since at least January 1, 2006, rendering it insolvent from January 1, 2006 to the date of the bankruptcy petition, November 9, 2011 (the “Petition Date”). (Compl. ¶¶ 137-138.) During that time, Defendants “transferred value out of Exeter in the form of loans, properties, and other payments funding their personal lifestyle” and “use[d] Exeter as their personal piggy bank.” (Compl. ¶ 138.)

         Using several techniques, Defendants transferred money to themselves “for their private gain and for no corporate benefit.” (Compl. ¶ 139.) For example, Exeter paid consulting fees to Larry Frank and Bruce Frank, despite Linda Haltman's testimony during the bankruptcy proceedings that her brothers' roles were limited to “‘help[ing] her with making decisions and giving advice.'”[10] (Compl. ¶ 140.) Exeter also paid: (1) medical expenses for various members of the Frank and Haltman families, (2) education expenses, including payments to universities and private schools, and (3) transportation expenses, including for vehicles used by Arnold Frank, Sondra Frank, Linda Haltman, and Michael Haltman.[11] (Compl. ¶¶ 141-43.) Plaintiff alleges that the vehicles were for personal use, and not used to carry out Exeter's business. (Compl. ¶ 144.) Further, the ...

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