45 John Lofts, LLC v. Meridian Capital Grp. LLC (In re 45 John Lofts, LLC), Case No. 16-12043 (SHL) (Jointly Administered)

• Decision Date: 24 April 2019
• Docket Number: Case No. 16-12043 (SHL) (Jointly Administered),Adv. No. 17-01179 (SHL)
• Parties: IN RE: 45 JOHN LOFTS, LLC, Debtor. 45 John Lofts, LLC, Plaintiff v. Meridian Capital Group LLC, Crown Mansion LLC, Bo Jin Zhu, Mega International Commercial Bank, Congregation Kahal Minchas Chinuch, Chaim Schiya Babad, Reliable Abstract Co., LLC, Abraham Mandel, Toby Mandel, Silver Gold Group LLC, Joseph Brunner, Joseph Segel, David Janklowicz, Morris Lowy, Mitchell Kirschner, Jerry Lowy, Isaac Greenfeld, and Renatus Portfolio Company, LLC, Defendants.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

599 B.R. 730

IN RE: 45 JOHN LOFTS, LLC, Debtor.45 John Lofts, LLC, Plaintiff

v.Meridian Capital Group LLC, Crown Mansion LLC, Bo Jin Zhu, Mega International Commercial Bank, Congregation Kahal Minchas Chinuch, Chaim Schiya Babad, Reliable Abstract Co., LLC, Abraham Mandel, Toby Mandel, Silver Gold Group LLC, Joseph Brunner, Joseph Segel, David Janklowicz, Morris Lowy, Mitchell Kirschner, Jerry Lowy, Isaac Greenfeld, and Renatus Portfolio Company, LLC, Defendants.

Case No. 16-12043 (SHL) (Jointly Administered)

Adv. No. 17-01179 (SHL)

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

Filed April 24, 2019

WILK AUSLANDER LLP, Counsel for Plaintiff/Debtor, 1515 Broadway, 43^rd Floor, New York, New York 10036, By: Eric J. Snyder, Esq., Eloy A. Peral, Esq.

SILVERMAN SHIN & BYRNE PLLC, Special Counsel for Plaintiff, Wall Street Plaza, 88 Pine Street, 22nd Floor, New York, New York 10005, By: Peter R. Silverman, Esq., Donald F. Schneider, Esq.

BECKER, GLYNN, MUFFLY, CHASSIN & HOSINSKI LLP, Counsel for Defendants Bo Jin Zhu and Crown Mansion LLC, 299 Park Avenue, 16th Floor, New York, New York 10171, By: Jordan E. Stern, Esq., Alec P. Ostrow, Esq.

MORRISON COHEN LLP, Counsel for Defendant Meridian Capital Group LLC, 909 Third Avenue, New York, New York 10022, By: Y. David Scharf, Esq., Robert K. Dakis, Esq., Jason Gottlieb, Esq., Brett Dockwell, Esq.

CARTER LEDYARD & MILBURN LLP, Counsel for Defendant Reliable Abstract Co., LLC, Two Wall Street, New York, New York 10005, By: Jacob H. Nemon, Esq., Leonardo Trivigno, Esq.

AMENDED MEMORANDUM OF DECISION

SEAN H. LANE, UNITED STATES BANKRUPTCY JUDGE

Before the Court are motions by various Defendants seeking dismissal of the complaint in the above-captioned adversary proceeding (the "Complaint") [ECF. No. 1 ] filed by 45 John Lofts LLC (the "Debtor" or "Plaintiff"). See Memorandum of Law in Support of Motion of Bo Jin Zhu and Crown Mansion LLC For Dismissal of the Adversary Proceeding (the "Zhu Motion") [ECF No. 17 ]; Meridian Capital Group LLC's Motion to Dismiss Plaintiff's Complaint (the "Meridian Motion") [ECF No. 14 ]; Defendant Reliable Abstract Co. LLC's Motion for Judgment on the Pleadings (the "Reliable Motion," and together with the Zhu Motion and the Meridian Motion, the "Dismissal Motions") [ECF No. 32 ]. In addition, Defendants Congregation Kahal Minchas Chinuch ("Congregation") and Chaim Schiya Babad seek to join in the Dismissal Motions even though Congregation and Babad have already filed their answer to the Complaint, while the other Defendants also filed a letter joining the Dismissal Motions. See Letter to Judge Sean Lane re: Joining Motions to Dismiss, dated December 7, 2017 (notifying the Court of joinder in both the Zhu Motion and the Meridian Motion under Fed. R. Civ. P. 12(g)(1) ) [ECF No. 27 ]; Letter to the Honorable Sean H. Lane: re Joining Motions to Dismiss, dated December 18, 2017 [ECF. No. 38 ] (stating that Defendants Abraham Mandel, Toby Mandel, Silver Gold Group LLC, Joseph Brunner, Joseph Segel, David Janklowicz, Morris Lowy, Mitchell Kirschner, Jerry Lowy, Issac Greenfeld, and Renatus Portfolio Company, LLC join the Dismissal Motions); see also Answer to Complaint of Congregation Kahal Minchas Chinuch and Chaim Schiya Babad [ECF No. 15 ].

For the reasons set forth below, the Court denies the Dismissal Motions other than to grant the dismissal of certain counts seeking the disallowance of claims.

BACKGROUND

As is the case for motions to dismiss, the Court takes the allegations of the Complaint as true. Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Broadly speaking, the Complaint seeks the return of a deposit of $ 14,330,000.00 received by Debtor as part of the sale of Debtor's property, where the money was subsequently transferred to other parties as part of a series of complicated transactions involving one of Debtor's members. These subsequent transactions—unrelated to the sale of Debtor's property—form the foundation of Plaintiff's avoidance claims, fraudulent transfer claims, and claims seeking disallowance of creditor proofs of claim.

I. The Debtor

Prior to Debtor filing for bankruptcy, Chaim Miller was one of Debtor's members. Complaint ¶ 1. The only other member of Debtor was Chun Peter Dong, who was Debtor's managing member. Id. ¶ 36. However, Miller sometimes acted on behalf of Debtor with Samuel Sprei, his business partner. Id. ¶¶ 34, 41-42, 48.

Debtor's sole asset was a vacant eighty-four unit condominium located at 45-49 John Street, New York, New York (the "Property"). Id. ¶ 30. Debtor had purchased the Property in 2014 for the sum of $ 60,000,000.00. Id. ¶ 31. Debtor financed its purchase of the Property with three mortgage loans in the aggregate principal amount of $ 49,500,000.00 (the "Madison Mortgage Loans") from affiliates of Madison Realty Capital ("Madison"), a lender with which Miller had financed several other real estate transactions. Id. ¶ 32.

II. The Zhu Buy-Out and the Agreement to Sell the Property

At the same time, Miller and Sprei also were involved in other real estate dealings unrelated to Debtor. In 2014, Miller and Sprei contracted to complete a $ 31,000,000.00 buy-out of the membership interests of Miller's other partner, Defendant Bo Jin Zhu, in four limited liability companies unrelated to Debtor, each of which owned a separate commercial property. Id. ¶ 34. In May 12, 2014, Miller and Sprei entered into a contract (the "Zhu Buy-Out Contract") with Zhu's assignee, Defendant Renatus Portfolio Company, LLC ("Renatus"), to buy-out Zhu's interests in limited liability companies that owned the following four real properties: 97 Grand Avenue, 203-205 North 8th Street, 32-34 Fifth Avenue, and 29 Ryerson Street (collectively, the "Buy-Out Properties"). Id. ¶ 35.

Under the Zhu Buy-Out Contract, Miller and Sprei paid an initial deposit of $ 7,000,000.00 against a total buy-out price of $ 31,000,000.00; the balance was to be paid at a closing scheduled for August 11, 2014. Id. ¶ 37. As this August closing date neared, counsel for Miller and Sprei negotiated an extension of the closing date with Renatus to September 15, 2014 in consideration of an additional deposit of $ 1,500,000.00 (the "Extension Payment"). Id. ¶ 38.

While the extension was for the benefit of Miller and Sprei, the Extension Payment was actually made by another individual—Defendant Joseph Brunner—using funds from two entities controlled by Brunner: Defendant Silver Gold Group LLC ("SGG") and non-party Brooklyn Realty Holdings, LLC. Id. ¶¶ 39, 77. By the end of August 2014, counsel for Miller and Sprei were unable to raise the remainder of the purchase price needed to consummate the Zhu Buy-Out Contract. Id. ¶ 40. Thereafter, Miller and Sprei attempted to obtain the necessary funds by, among other things, contracting to sell the Property and refinancing three of the Zhu Buy-Out Properties, as well as another property controlled by Miller. Id. ¶¶ 41-42.

Sprei and counsel for Debtor ultimately negotiated an Agreement of Purchase and Sale ("PSA") to sell the Property to HS 45 John LLC ("HS 45"). Id. ¶¶ 48-49. The PSA provided for a down payment totaling $ 14,330,000.00 (the "PSA Down Payment"). Id. ¶ 50. However, the PSA did not require that the PSA Down Payment be placed in escrow, a fact which was unknown to Debtor's other members. Id.

On September 19, 2014 (the "Contract Date"), Miller executed the PSA with HS 45 on behalf of Debtor. Id. ¶ 51. The total purchase price was $ 64,500,000.00, including the PSA Down Payment and an amount equal to the unpaid outstanding mortgage indebtedness not to exceed $ 47,000,000.00. Id. ¶¶ 52, 54. Miller executed the PSA without the knowledge or consent of either Dong, Debtor's managing member, or Debtor's other investors who collectively held a 41 percent membership interest in Debtor (the "41% Investors"). Id. ¶ 55. On the very same day the PSA was executed, Miller and Sprei took the PSA Down Payment and transferred all but $ 1,000,000.00 (the "Adjusted Down Payment") to Riverside Abstract Company ("Riverside") to fund the Zhu Buy-Out; the remaining $ 1,000,000.00 was previously transferred directly to Defendant Meridian Capital Group LLC ("Meridian"). Id. ¶¶ 49, 54, 60.

When Dong and the 41% Investors learned of the unauthorized PSA, Miller and Sprei provided Debtor's other members with a fabricated letter to conceal their theft of the PSA Down Payment. Id. ¶ 56. The letter (the "Quick Title Letter") was purportedly from Quick Title Search, LLC ("Quick Title"), signed by Abraham Teitelbaum, and addressed to Miller. Id. It stated that Quick Title "is still holding on behalf of Harry Miller the proceeds from a 1031 exchange in the amount of $ 12,453,980." Id. Sprei later testified that the Quick Title Letter was simply a hoax, as Quick Title never held any of the proceeds of the PSA Down Payment and never had any dealings with Miller or Sprei. Id. He also testified that the Quick Title Letter was created by a "friend" without the knowledge of any of Quick Title's employees or principals, including Mr. Teitelbaum. Id. Sprei further testified that he provided Dong and the 41% Investors with the Quick Title Letter to "soothe" the "Asian Group" (i.e., Debtor's other members) who were alarmed at the unauthorized sale of the Property and the prospect that Miller and Sprei might "run off" with the PSA Down Payment. Id.

To provide additional funds for the Zhu Buy-Out, Miller and Sprei also arranged for mezzanine financing from Madison on three of the Zhu Buy-Out Properties and a fourth property which Miller controlled (the "Collateral Properties Financing"). Id. ¶ 57. The Collateral Properties Financing netted Miller and Sprei the sum of $ 16,073,911.00 in addition to the PSA Down Payment. Id. ¶ 58.

III. Disbursement of the Adjusted Down Payment and Collateral Properties Financing to the Ultimate Beneficiaries

Central to the allegations of the Complaint is the disposition of the funds collected by Miller and...