Rosen v. Chowaiki & Co. Fine Art Ltd. (In re Chowaiki & Co. Fine Art Ltd.)

• Citation: 593 B.R. 699
• Decision Date: 16 November 2018
• Docket Number: Adv. Pro. No. 17-01242 (MKV),Case No. 17-13228 (MKV)
• Parties: IN RE: CHOWAIKI & CO. FINE ART LTD., Debtor. Shay Rosen, Plaintiff, v. Chowaiki & Co. Fine Art Ltd., Defendant.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

593 B.R. 699

IN RE: CHOWAIKI & CO. FINE ART LTD., Debtor.

Shay Rosen, Plaintiff,

v.Chowaiki & Co. Fine Art Ltd., Defendant.

Case No. 17-13228 (MKV)

Adv. Pro. No. 17-01242 (MKV)

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

Signed November 16, 2018

LAW OFFICE OF MATTHEW C. HEERDE, Attorneys for Shay Rosen, 222 Broadway, 19th Floor, New York, New York 10038, By: Matthew C. Heerde, Arthur Palmieri

TOGUT, SEGAL & SEGAL LLP, Counsel to the Chapter 7 Trustee, Albert Togut, One Penn Plaza, Suite 3335, New York, New York 10119, By: Neil Berger, Minta Nester

MEMORANDUM OPINION AND ORDER GRANTING MOTION TO DISMISS

MARY KAY VYSKOCIL, UNITED STATES BANKRUPTCY JUDGE

Shay Rosen ("Rosen" or "Plaintiff") commenced this action (the "Adversary Proceeding") seeking a declaratory judgment that Chowaiki & Co. Fine Art Ltd. (the "Gallery" or "Debtor"), acting through one of its principals, Ezra Chowaiki ("Chowaiki"), fraudulently induced Rosen to transfer $230,000 (the "Wired Funds") to the Gallery's bank account pre-petition. See First Amended Adversary Complaint For Declaratory Judgment; Imposition of Constructive Trust; And Turnover of Funds (the "Amended Complaint" or "Am. Compl.") [ECF No. 5], ¶¶ 37-43 (Count One). Rosen also seeks a declaration that the Wired Funds are not property of the Gallery's bankruptcy estate within the meaning of section 541(d) of the Bankruptcy Code, (Am. Compl. ¶¶ 44-48) (Count Two), and the imposition of a constructive trust for the benefit of Rosen and turnover of the Wired Funds. (Am. Compl. ¶¶ 49-53) (Count Three).

Albert Togut, not individually but solely in his capacity as Chapter 7 trustee (the "Trustee") of the Gallery, moved to dismiss this adversary proceeding pursuant Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure.¹ See Motion to Dismiss the First Amended Complaint for Declaratory Judgment; Imposition of Constructive Trust and Turnover of Funds (the "Motion to Dismiss") [ECF No. 6]. Rosen filed a Memorandum of Law in Opposition to the Motion to Dismiss (the "Opp. Memo") [ECF No. 14], to which the Trustee filed a Reply in response [ECF No. 15]. The Court heard oral argument on the Motion to Dismiss (the "First Hearing" or "First Hr'g") and, at the close of the Hearing, requested supplemental briefing on whether Rosen had standing to initiate this adversary proceeding. Thereafter, the Court held another hearing on the Motion to Dismiss (the "Second Hearing" or "Second Hr'g").

Having considered all arguments raised by the parties, for the reasons set forth below, the Motion to Dismiss is GRANTED under Rule 12(b)(6) on the ground that Rosen has failed to state a claim upon which relief can be granted.

JURISDICTION AND VENUE

The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334 and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(a). Venue is proper pursuant to 28 U.S.C. § 1409. Both the Trustee and Rosen have consented to the entry of a final order or judgment by this Court. See Statement of Consent to Final Orders or Judgment [ECF No. 27]; Trustee's Standing Memo at 15 n.6; First Hr'g Tr. 20:1-23 [ECF No. 21].

BACKGROUND

A. Chowaiki and Rosen's Pre-Petition Transaction

For purposes of the Motion to Dismiss, the Court accepts as true the following facts as alleged in the Amended Complaint (and the exhibits thereto)² and the Supporting Declarations. See Gregory v. Daly , 243 F.3d 687, 691 (2d Cir. 2001).

Rosen is an Israeli national and operates an art consulting business. Rosen Decl. ¶ 1. On or around October 11, 2017, Rosen was introduced to Chowaiki through a mutual colleague, Christine Barberi ("Barberi"). Am. Compl. ¶ 11. Rosen had known Barberi for around 10 years and previously had completed art transactions with her. Id. Barberi suggested to Rosen the possibility of entering into a transaction with the Gallery, through Chowaiki, with regard to a watercolor and ink painting entitled Schichtenweise by the late Russian Expressionist-Abstract painter Wassily Kandinsky (the "Kandinsky"). Id. ¶ 1, 11. In an email dated October 11, 2017, Barberi explained to Rosen that the Gallery was "looking to either sell [the Kandinsky] and make a profit or buy it from [its] current owner and share the investment with a partner and then resell [it] and make a substantial profit." Id. ¶ 11. Barberi stated that "time was of the essence" because Chowaiki was concerned that "another buyer [would] buy it before he [got] the funds together." Id. Barberi represented to Rosen that Chowaiki was trustworthy and that they were close friends, having engaged in "a lot of business together [in the past]." Id.

Rosen spoke with Chowaiki by telephone on October 12, 2017, whereupon they discussed the Kandinsky offer and Chowaiki proposed that Rosen could participate in a joint purchase of the Schichtenweise painting with Barberi and the Gallery. Id. ¶ 12. After the phone call, Chowaiki sent Rosen a follow up email discussing the terms of the offer. Id. ¶ 13; see id. Exh. A (Chowaiki email to Rosen). In the email, Chowaiki estimated that he could obtain the painting for about one million dollars and stated that he was willing to sell a half share in the piece. Exh. A. Chowaiki further represented in the email that he believed the painting could be resold "for anywhere between $1.5-2m." and that "[o]f course, Christine [Barberi needs] to be added on top."³ Id.

Chowaiki sent Rosen another email on October 20, 2017, stating that he "[had] a client already interested in the picture. It looks like he will be willing to pay $1.2m to own it outright and he will let me resell it one day when he feels like selling it." Id. ¶ 14. Chowaiki clarified that the Gallery would be required to pay $950,000 to buy the painting before re-selling it for $1.2 million and that if Rosen was interested in participating they could make the return proportional. Id. After engaging in negotiations, Rosen and Chowaiki agreed that for a 24% interest in the Kandinsky, Rosen would pay $230,000. Id.

On October 23, 2017, Rosen caused $230,000 (the "Wired Funds") to be transferred from his wife's bank account (the "Bank Account" or "Account") to the Gallery's bank account in New York. Id. ¶ 16; see also id. at Exh. B (Wire Transfer Confirmation). Rosen did not hear from Chowaiki again after transmitting the Wired Funds. Id. ¶ 17.

By November, the Gallery was facing multiple lawsuits from numerous creditors. Id. ¶¶ 28-31. On or around November 9, 2017, Barberi contacted Rosen to tell him that the Gallery had been closed and was filing for bankruptcy. Id. ¶ 19. In addition, she reported that Chowaiki and the Gallery's majority owner, David Dangoor, were being accused of fraud in which they had allegedly lured investors and collectors into paying money for artworks by renowned artists that neither the Gallery nor its principles owned or had any right to sell. Id. ; see also id. at 6 n.1. By November 4, 2017, any opportunity the Gallery had of acquiring the Kandinsky had evaporated when, because of Chowaiki's non-response to his emails, the seller of the Kandinsky took the painting elsewhere. Id. Exh. D (Email from Carosso to Chowaiki).

On December 12, 2017, the United States Attorney for the Southern District of New York commenced a criminal case against Chowaiki: USA v. Chowaiki , Case No. 1:18-cr-00323-JSR (the "Criminal Case"). On May 3, 2018. Chowaiki pled guilty for having "devised a scheme and artifice to defraud and for obtaining money and property by means of false and fraudulent pretenses ..." involving at least twenty-five pieces of art. Criminal Case, Dkt No. 15.

B. Bankruptcy

On November 13, 2017 (the "Petition Date"), the Gallery filed a voluntary petition for relief pursuant to chapter 7 of Bankruptcy Code and, on the following day, Albert Togut was appointed chapter 7 trustee. Soon thereafter, on November 27, 2017, the Gallery filed its schedules of assets and liabilities, listing assets of $276,681.59 and liabilities of $11,877,011.03. See Summary of Assets and Liabilities for Non-Individuals [Case No. 17-13228, ECF No. 7].

C. Adversary Proceeding

Shortly after the Petition Date, Rosen initiated this adversary proceeding⁴ seeking: (i) a declaratory judgment finding that the Gallery had fraudulently induced Rosen to transfer the Wired Funds to the Gallery's bank account in New York ("Count I"); (ii) a declaratory judgment that under both section 541(d) of the Bankruptcy Code and New York state law, the Gallery has no equitable interest in the Wired Funds and thus they are not part of the Gallery's bankruptcy estate ("Count II"); and (iii) the imposition of a constructive trust and the immediate turnover of the Wired Funds to Rosen ("Count III"). Am. Compl. at 12. In lieu of an answer, the Trustee moved to dismiss under Rules 9(b) and 12(b)(6).

At the hearing on the Motion to Dismiss, the Trustee raised the issue of Rosen's standing to bring this adversary proceeding. See First Hearing Tr. 21-22:20-7. The Trustee argued that it was unclear who was the real party in interest in this case, since the Wired Funds had been transferred from a bank account belonging to Rosen's wife, rather than Rosen himself. See id. 23:7-13. While Rosen conceded that the Wired Funds were transferred from his wife's account, he maintained that he had standing because the Wired Funds in fact belonged to him, notwithstanding the name on the account. See id. 41:6-13. Rosen also argued that as husband and wife, he and the account owner should be considered one economic unit. See id. 42-43:24-1.

Because the standing issue was first introduced at the First Hearing, the Court ordered supplemental briefing regarding the standing issue.⁵ See id. 68-69:23-10; So-Ordered Stipulation Scheduling Supplemental Briefing [ECF No. 19]. After further...