105 F.3d 822 (2nd Cir. 1997), 628, In re Mediators

Docket Nº:628, Docket 96-5063.
Citation:105 F.3d 822
Party Name:In re The MEDIATORS, INC., Debtor. The MEDIATORS, INC., Plaintiff-Appellant, v. Richard MANNEY, Gloria Manney, Patricia Manney, John and/or Jane Doe # 1 to # 10, Doe Corporation # 2 to # 10, Doe Partnership # 1 to # 10, Doe Foundation # 1 to # 10, the names of the foregoing thirty-nine defendants being unknown, it being intended to designate partie
Case Date:January 30, 1997
Court:United States Courts of Appeals, Court of Appeals for the Second Circuit
 
FREE EXCERPT

Page 822

105 F.3d 822 (2nd Cir. 1997)

In re The MEDIATORS, INC., Debtor.

The MEDIATORS, INC., Plaintiff-Appellant,

v.

Richard MANNEY, Gloria Manney, Patricia Manney, John and/or

Jane Doe # 1 to # 10, Doe Corporation # 2 to # 10, Doe

Partnership # 1 to # 10, Doe Foundation # 1 to # 10, the

names of the foregoing thirty-nine defendants being unknown,

it being intended to designate parties who have received

transfers, directly or indirectly, from plaintiff or Richard

or Gloria Manney or who were directors of plaintiff, Defendants,

Citibank, N.A., Astor, Weiss, Kaplan & Rosenblum, formerly

known as Astor, Weiss & Newmann and Arthur H.

Kaplan, Defendants-Appellees.

No. 628, Docket 96-5063.

United States Court of Appeals, Second Circuit

January 30, 1997

Argued Dec. 3, 1996.

Page 823

David W. Dykhouse, Patterson, Belknap, Webb & Tyler, New York City (Stephen P. Younger, Barbara A. McCormick and Christopher J. McDonald, of counsel), for Plaintiff-Appellant.

George A Zimmerman, Skadden, Arps, Slate, Meagher & Flom, New York City (Troy E. Elder and Jacob E. Hollinger (law student), of counsel), for Defendant-Appellee Citibank, N.A.

Steven Verveniotis, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City (Gerald A. Stein, of counsel), for Defendants-

Page 824

Appellees Astor, Weiss, Kaplan & Rosenblum and Arthur H. Kaplan.

Before: NEWMAN, Chief Judge, OAKES and WINTER, Circuit Judges.

WINTER, Circuit Judge:

This is an appeal from the dismissal of an adversary action arising in a bankruptcy proceeding. The committee of unsecured creditors ("Committee") of the debtor, The Media tors, Inc. ("Mediators"), suing on a claim said to belong to the debtor, appeals from Judge Haight's order dismissing its action against Citibank, N.A. ("Citibank"), Astor, Weiss, Kaplan & Rosenblum, and Arthur H. Kaplan (the "Astor defendants"), for lack of standing pursuant to Rule 12(b)(6), Fed.R.Civ.P. The Committee challenges the dismissal, arguing that appellants aided and abetted the Mediators' president and sole shareholder, Richard Manney, in his scheme to purchase the Mediators' art collection at an undervalued price in order to shield the collection from the corporation's creditors. The Committee claims that this scheme breached the Mediators' fiduciary duty to preserve its assets for creditors while insolvent. The district court held that the Committee, standing in the shoes of the debtor, could not recover from third parties for their participation in a scheme that the debtor had itself initiated and joined in. In re The Mediators, Inc., 190 B.R. 515, 527-28 (S.D.N.Y.1995). We agree. We also reject the Committee's request that we overturn our holding in In re Century Brass Products, Inc., 22 F.3d 37 (2d Cir.1994).

BACKGROUND

We recount the facts as alleged in the complaint and view them in the light most favorable to the Committee. A more extensive recital of the facts can be found in the district court's opinion. In re The Mediators, Inc., 190 B.R. at 518-21.

The Mediators is a New York corporation primarily engaged in the business of acquiring radio and television advertising time for its clients in exchange for the clients' products and services rather than for cash. At all pertinent times, Richard Manney was the corporation's sole shareholder, chief executive officer, and chairman. His wife, Gloria Manney, was treasurer, secretary, and director of the corporation but played only a limited role in managing the company.

The Manneys are avid art collectors. Beginning in the late 1970's they caused the Mediators to purchase millions of dollars worth of art, some of which was financed through borrowing by the corporation. In 1987, the Mediators encountered severe financial problems stemming in part from a $17 million judgment against it for breaching a contract with Wang Laboratories, Inc. Anticipating that the Mediators' precarious financial situation might result in bankruptcy, Manney hired the law firm, Astor, Weiss, Kaplan & Rosenblum, and the accounting firm, Morris J. Cohen & Co., to facilitate a transaction that would shield the art collection from liquidation in bankruptcy. (Morris J. Cohen & Co. was named a defendant in this action but settled before this appeal was heard. No further mention of its role is necessary.) The firms are alleged to have recommended that Manney buy the artwork from the Mediators at a discounted price, thereby turning the collection into Manney's personal asset protected by the corporate veil in the event of the Mediators' bankruptcy.

The transfer of the art commenced on June 29, 1988. Manney borrowed $12,000,000 from Citibank and purchased the art collection from the Mediators for $12,646,690. The Mediators guaranteed Citibank's loan to Manney for $12,125,000. In addition, the Mediators tendered a one-year deposit of $4,125,000 to Citibank, the principal and proceeds of which secured a portion of the loan. The artwork itself further secured the loan. The $12,646,690 price Manney paid was the art collection's book value, its original cost. However, it is alleged that the collection had greatly appreciated in value and was worth much more than its original purchase price. In the Committee's view, the transaction stripped the Mediators of its assets while rendering it liable to Citibank for the cost of the self-dealing purchase.

Three years after the art transfer, on June 2, 1991, an involuntary liquidation petition

Page 825

under Chapter 7 of the Bankruptcy Code was filed against the Mediators by American Broadcasting Companies, Inc., ABC Radio Network Inc., and ESPN, Inc. On September 13, 1991, the bankruptcy court converted the case to Chapter 11. On October 16, 1991, the United States Bankruptcy Trustee appointed the plaintiff as an unsecured creditors' committee pursuant to 11 U.S.C. § 1102. The bankruptcy court then authorized the Committee to bring this suit because Manney had failed to pursue the action on behalf of the corporation.

The original complaint was filed with the bankruptcy court on April 22, 1992. It alleged that the Manneys had enriched themselves at the corporation's expense by appropriating corporate assets for little or no consideration. The first amended complaint alleged, inter alia, that Citibank and the Astor defendants aided and abetted the Mediators in its breach of its fiduciary duty to its creditors; that Citibank and the Astor defendants were unjustly enriched; that Citibank participated in a fraudulent conveyance of the art collection; that the Astor defendants breached their contract in recommending that Manney engage in fraudulent transfers of the corporate artwork; and that the Mediators were entitled to avoid Citibank's security interests in the artwork.

The district court held that the Committee lacked standing as to the claims against the non-Manney defendants. It reasoned that the Committee, suing on behalf of the Mediators, could not bring claims against third parties for facilitating a fraudulent transfer of assets, where the Mediators also participated in the misconduct. In re The Mediators, 190 B.R. at 526-31. The court further held that the fraudulent conveyance claims were time-barred as to Citibank, pursuant to Section 546(a) of the Bankruptcy Code and our decision in In re Century Brass Products, Inc., 22 F.3d 37, 39 (2d Cir.1994) (applying the two-year statute of limitations of § 546(a) to debtors-in-possession, as of date of bankruptcy petition). In re The Mediators, 190 B.R. at 523-26.

DISCUSSION

  1. The Claim for Aiding and Abetting a Fiduciary's Breach of Duty

    We emphasize at the outset that the issue before us is whether a creditors' committee standing in the shoes of the debtor may bring a claim against parties alleged to have aided and abetted the debtor's breach of fiduciary duties. This particular action is by no means the only remedy for such acts available under New York law. Indeed, that is the problem. Where third parties aid and abet a fiduciary's breach of duty to creditors--as is claimed here--the creditors may bring an action in their own right against such parties. See Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120 (2d Cir.1991) ("A claim against a third party for defrauding a corporation with the cooperation of management accrues to creditors...."). 1 The appellees' papers state that a claim by creditors in their own right would be time-barred under New York law. Whether that is so is not before us, and we must address the present action in the form in which it was brought. 2

    In a bankruptcy proceeding, state law determines whether a right to sue belongs to the debtor or to the individual creditors. St. Paul Fire & Marine Ins. Co. v. PepsiCo, Inc., 884 F.2d 688, 700 (2d Cir.1989). The Bankruptcy Code places a trustee in the shoes of the bankrupt corporation and affords the trustee standing to assert

    Page 826

    any claims that the corporation could have instituted prior to filing its petition for bankruptcy. See 11 U.S.C. §§ 541, 542; Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 428-29, 92 S.Ct. 1678, 1685-86, 32 L.Ed.2d 195 (1972); Wagoner, 944 F.2d at 118. In the instant matter, the Committee, while not a trustee in bankruptcy, is in a position analogous to a trustee because it is suing on behalf of the debtor. For that reason, the district court treated the Committee...

To continue reading

FREE SIGN UP