In re M. Fabrikant & Sons, Inc.

• Decision Date: 10 October 2008
• Docket Number: Bankruptcy No. 06-12737 (SMB).,Bankruptcy No. 06-12739(SMB).,Adversary No. 07-02780.
• Citation: 394 B.R. 721
• Parties: In re M. FABRIKANT & SONS, INC., et al., Reorganized Debtors. The Official Committee of Unsecured, Creditors of M. Fabrikant & Sons, Inc.; and Fabrikant-Leer, International, Ltd., Plaintiff, v. JP Morgan Chase Bank, N.A.; ABN Amro Bank N.V.; Bank of America, N.A.; HSBC Bank USA, National Association; Bank Leumi USA; Israel Discount Bank of New York; Antwerpse Diamantbank, N.V.; Sovereign Precious Metals, Llc; and Sovereign Bank, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

Page 721

394 B.R. 721

In re M. FABRIKANT & SONS, INC., et al., Reorganized Debtors The Official Committee of Unsecured, Creditors of M. Fabrikant & Sons, Inc.; and Fabrikant-Leer, International, Ltd., Plaintiff, v. JP Morgan Chase Bank, N.A.; ABN Amro Bank N.V.; Bank of America, N.A.; HSBC Bank USA, National Association; Bank Leumi USA; Israel Discount Bank of New York; Antwerpse Diamantbank, N.V.; Sovereign Precious Metals, Llc; and Sovereign Bank, Defendants.

Bankruptcy No. 06-12737 (SMB).

Bankruptcy No. 06-12739(SMB).

Adversary No. 07-02780.

United States Bankruptcy Court, S.D. New York.

October 10, 2008.

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Susman Godfrey LLP, Stephen D. Susman, Esq., Jacob W. Buchdahl, Esq., Jonathan J. Ross, Esq., of Counsel, New York, NY, Attorneys for the Official Committee of Unsecured Creditors.

Hahn & Hessen LLP, Steven J. Mandelsberg, Esq., Joshua I. Divack, Esq., Charles Loesner, Esq., of counsel, New York, NY, Attorneys for JPMorgan Chase Bank, N.A.

Cadwalader, Wickersham & Taft LLP, Evan R. Fleck, Esq., Gregory M. Petrick, Esq., Ingrid Bagby, Esq., Peter M. Friedman, Esq., of counsel, New York, NY, Attorneys for ABN Amro Bank N.V.

Reimer & Braunstein LLP, Paul S. Samson, Esq., Meegan B. Casey, Esq., Jeffrey D. Ganz, Esq., of counsel, Boston, MA, Attorneys for Bank of America, N.A.

Phillips Lytle LLP, William J. Brown, Esq., Paul K. Stecker, Esq., Allan L. Hill, Esq., of counsel, New York, NY, Attorneys for HSBC Bank USA.

Herrick, Feinstein LLP, Andrew C. Gold, Esq., Frederick E. Schmidt, Esq., of counsel, New York, NY, Attorneys for Bank Leumi USA.

Heller Ehrman LLP, Timothy Mehok, Esq., Erin McMurray-Killelea, Esq., Andrew Levine, Esq., of counsel, New York, NY, Attorneys for Israel Discount Bank of New York.

Cullen And Dykman LLP, Matthew G. Roseman, Esq., Matthew D. Brown, Esq., of counsel, Garden City, NY, Attorneys for Antwerpse Diamantbank, N.V.

Milbank, Tweed, Hadley & McCloy LLP, Douglaw W. Henkin, Esq., Wilbur F. Foster, Jr., Esq., Robert R. Miller, Esq., Alan J. Stone, Esq., of counsel, New York, NY, Attorneys for Sovereign Precious Metals, LLC and Sovereign Bank.

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART MOTIONS TO DISMISS COMPLAINT

STUART M. BERNSTEIN, Chief Judge:

This lawsuit arose out of the bankruptcy of M. Fabrikant & Sons, Inc. ("MFS") and Fabrikant-Leer International, Ltd. ("FLI," and collectively with MFS, the debtors or "Fabrikant"). In the main, the Amended Complaint, dated March 27, 2008 (ECF Doc. # 54), seeks to avoid the pre-petition obligations owed by the debtors to the defendant banks (other than Sovereign Bank), and to avoid and recover the value of the liens granted to secure those obligations. The Official Committee of Unsecured Creditors of MFS and FLI (the plaintiff or the "Committee") also seeks to recover the value of gold that MFS purchased from Sovereign Precious Metals, LLC ("SPM") and transferred to another company operated by its principals. Lastly, the Amended Complaint asserts claims against four of the defendant banks as subsequent transferees of fraudulent transfers.

Each defendant moved to dismiss the Complaint.¹ For the reasons that follow, Counts I through IV are dismissed. In addition, those portions of Counts V through VII that allege actual fraudulent transfers are dismissed. Finally, the plaintiff is granted leave to replead.

BACKGROUND

The background information is derived from the allegations of the Amended Complaint. MFS is a New York corporation, (¶ 5),² that had engaged in the diamond and jewelry business since 1895, and for many years, was one of the largest and most prominent diamond and jewelry wholesalers in the world. (¶ 17.) In 2005, MFS established FLI, also a New York corporation, (¶ 6), to act as a distributor and wholesaler of "low end" finished jewelry. MFS owns 82% of the FLI stock. (¶ 18.)

Charles Fortgang and his son, Matthew Fortgang, own approximately 32% of the stock of MFS. (¶ 18.) The remainder of stock is owned, through a trust, by Marjorie Fortgang and Susan Fortgang and by employees or former employees of MFS. (¶ 18.) At all relevant times, Charles, as chairman, and Matthew, as President, controlled MFS and FLI. (¶ 18.)

In addition, Charles and Matthew Fortgang, and trusts of which Charles, Matthew, and Susan Fortgang were beneficiaries, owned a group of 47 companies (the "Fortgang Affiliates") engaged in the diamond and jewelry business. (¶ 20; see Amended Complaint at Ex. A.) With few exceptions, neither of the debtors had an ownership interest in any of the Fortgang Affiliates. (¶ 20.)

MFS became insolvent no later than January 2003, (¶ 21), and FLI became insolvent no later than January 13, 2006. (¶ 22.) They filed their voluntary chapter 11 petitions in this Court on November 17, 2006 (the "Petition Date").

A. The "Scheme" Transactions (Counts I through IV)

1. The Debtors and the Pre-Petition Banks

The thrust of Counts I through IV involves a scheme engineered by Charles and Matthew Fortgang through which MFS and FLI borrowed money from the defendant banks (other than Sovereign Bank) and then reconveyed the loan proceeds to the Fortgang Affiliates for inadequate or no consideration. For many years prior to the Petition Date, the debtors engaged in independent lending relationships with a number of financial institutions. They included the defendants, J.P. Morgan Chase Bank, N.A. ("JPMC"), ABN AMRO Bank N.V. ("ABN"), Bank of America ("BOA"), HSBC Bank USA, N.A. ("HSBC"), Bank Leumi USA ("BL"), Israel Discount Bank of New York ("IDB"), Antwerpse Diamantbank, N.V. ("ADB," and collectively, the "Pre-Petition Banks"). According to the Amended Complaint, the Pre-Petition Banks made the following aggregate loans to Fabrikant between January 2003 and the Petition Date:

                Amount of
                Pre-Petition Bank Obligation Incurred
                   JPMC                 $ 35,838,000
                   ABN                  $ 44,290,000
                   BOA                  $ 10,475,000
                   HSBC                 $ 12,075,000
                   BL                   $ 11,592,000
                   IDB                  $  9,660,000
                   ADB                  $  5,454,000
                                        $129,384,000.00
                

(¶¶ 32-33, 54, 61.)

The loans were initially made on an unsecured basis. In October 2004, the Pre-Petition Banks took security interests in all of the debtors' assets to protect themselves, and shift the detrimental effects of the fraudulent transfers to the unsecured creditors. (¶ 47.) On January 13, 2006, MFS guaranteed the $8.5 million debt FLI owed to defendants ABN and BL. (¶ 34.) On that same day, FLI guaranteed $92 million of then existing obligations owed by MFS to the Pre-Petition Banks. This amount comprised all of MFS' pre-existing obligations to the Pre-Petition Banks during the two-year period preceding the Petition Date. (Id. at ¶ 35.)

During this same period—January 2003 to the Petition Date—MFS advanced the net amount of $175.3 million to the Fortgang Affiliates (the "Affiliate Transfers"). (¶¶ 27, 40.) Fabrikant funded the transfers to the Fortgang Affiliates, at least in part, with the money borrowed from the Pre-Petition Banks. (¶ 32.) MFS made many of the transfers prior to the date the Fortgang Affiliates repaid the Pre-Petition Banks on account of their own loan obligations. (¶ 23.) Similarly, the Fortgang Affiliates transferred significant sums back to MFS in advance of MFS' loan pay-down obligations to the Pre-Petition Banks.³ (¶ 24.) However, MFS never came close to fully repaying its debts owed to the Pre-Petition Banks after January 2003. (¶ 31.)

2. The Debtors and SPM

In a separate transaction on July 7, 2006, MFS and FLI became jointly and severally obligated to SPM in the amount of $32 million on account of MFS' purchase of gold from SPM.⁴ (¶¶ 32, 37.) At least $22 million had already been delivered to Fortgang Affiliates, and the purchase was made for their benefit. (¶ 38.) The Amended Complaint also indicates that as of the Petition Date, the SPM claim was secured. (See ¶ 51.)

3. The Fraudulent Nature of the Scheme

The plaintiff alleges that the Affiliate Transfers were made with actual fraudulent intent. (¶ 41.) In the alternative, the Affiliate Transfers were made with constructive fraudulent intent because the debtors did not receive fair consideration or reasonably equivalent value in exchange for the obligations they incurred to the Pre-Petition Banks and SPM. (See ¶ 57.)

The plaintiff further alleges that the Pre-Petition Banks and SPM made the loans or extended the credit that funded the improper transfers to the Fortgang Affiliates in disregard of their actual or constructive knowledge of the facts that rendered those transfers fraudulent transfers. (¶ 45.) From at least January 2003, the Pre-Petition Banks and SPM knew that MFS did not own the Fortgang Affiliates, that a substantial portion, if not virtually all, of the funding provided by the Pre-Petition Banks would be transferred to the Fortgang Affiliates, (¶ 42), and that the receivables generated by the Affiliate Transfers were virtually worthless. (¶ 43.) The Pre-Petition Banks and SPM nevertheless made the transfers to maintain their reputations "as the premier lenders to the international jewelry and diamond industry," and to placate Charles and Matthew Fortgang, who "would not allow MFS to do business with them if they attempted to restrict transfers to Fortgang Affiliates." (¶ 45.) The Pre-Petition Banks and SPM also believed that they could protect themselves by obtaining the personal guaranties of Matthew and Charles Fortgang, and thereafter, liens on all of the debtors' assets. (¶ 45.)

B. The Subsequent Transfers (Counts V through VII)

As noted earlier, the Fortgang Affiliates also borrowed directly from five of the seven Pre-Petition Banks. (¶ 29.) From January 2006 until the Petition Date, Fabrikant made actual or constructive fraudulent transfers in the aggregate amount of $38,890,000...