Allan B. Mendelsohn of the Estate v. Kovalchuk (In re Apco Merch. Servs., Inc.)

• Decision Date: 26 March 2018
• Docket Number: Case No. 8–14–73607–las,Adv. Pro. No. 8–15–8248–las
• Citation: 585 B.R. 306
• Parties: IN RE: APCO MERCHANT SERVICES, INC., Debtor. Allan B. Mendelsohn as Trustee of the Estate of APCO Merchant Services, Inc., Plaintiff, v. Olga Kovalchuk, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

585 B.R. 306

IN RE: APCO MERCHANT SERVICES, INC., Debtor.

Allan B. Mendelsohn as Trustee of the Estate of APCO Merchant Services, Inc., Plaintiff,

v.Olga Kovalchuk, Defendant.

Case No. 8–14–73607–las

Adv. Pro. No. 8–15–8248–las

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

Signed March 26, 2018

Fred S. Kantrow, Avrum J. Rosen, Rosen Kantrow & Dillon, PLLC, Huntington, NY, for Plaintiff.

Raymond W. Verdi, Jr., Patchogue, NY, for Defendant.

MEMORANDUM DECISION AFTER TRIAL

Louis A. Scarcella, United States Bankruptcy Judge

Plaintiff Allan B. Mendelsohn, Esq., as chapter 7 trustee of the bankruptcy estate of APCO Merchant Services, Inc. ("debtor"), commenced this adversary proceeding against defendant Olga Kovalchuk seeking to avoid and recover seventeen prepetition transfers made by debtor to defendant in the aggregate amount of $56,658.85.¹ Specifically, plaintiff asserts actual and constructive fraudulent transfer causes of action under 11 U.S.C. §§ 544 and 550 and New York Debtor and Creditor Law §§ 273, 274, 275, 276, and 278.² Plaintiff also seeks to recover attorneys' fees from defendant pursuant to NYDCL § 276–a. In addition, plaintiff asserts an unjust enrichment claim against defendant for her receipt of the transfers.

The Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. This is a core proceeding under 28 U.S.C. § 157(b)(2)(H). The parties have consented to the entry of a final decision and judgment by the Court in their Joint Pretrial Statement [dkt. 40].See Wellness Int'l Network, Ltd. v. Sharif , ––– U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).

The Court held a trial on May 8, 2017, observing the witness carefully, and has reviewed thoroughly the evidence presented. This decision constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy Rule 7052. To the extent that a finding of fact includes a conclusion of law, it is deemed a conclusion of law and vice versa.

For the reasons set forth below, the Court concludes that plaintiff has failed to meet his burden with respect to each claim alleged in the amended complaint. Accordingly, the Court enters judgment for defendant.

I. PROCEDURAL HISTORY

Plaintiff commenced this adversary proceeding on August 25, 2015, and filed an Amended Complaint on August 31, 2015 [dkt. 3]. The Amended Complaint alleges actual and constructive fraudulent conveyance claims against defendant pursuant to § 544(b) and the NYDCL³ and a common law claim of unjust enrichment. Specifically, the Amended Complaint asserts eight causes of action: (1) constructive fraud under § 544(b) and NYDCL §§ 273, 274 and 275 (First and Third Causes of Action), (2) intentional fraud under § 544(b) and NYDCL § 276 (Fifth Cause of Action), (3) recovery of the transfers, once avoided, under § 550 and NYDCL § 278 (Second, Fourth and Sixth Causes of Action), (4) recovery of attorneys' fees under NYDCL § 276–a (Seventh Cause of Action), and (5) unjust enrichment (Eighth Cause of Action).

In anticipation of trial, the parties filed a Joint Pretrial Statement, which included the parties' agreement to reduce the amount sought to be recovered by plaintiff to $41,544.63 arising from thirteen separate transfers made by debtor to defendant during the period July 1, 2012 through December 27, 2012 (the "Transfers"). Additionally, for purposes of trial, the parties stipulated that debtor was insolvent at the time of the Transfers.

In the section of the Joint Pretrial Statement⁴ titled "Plaintiff's Requested Relief," plaintiff asks that judgment be entered in his favor and against defendant under § 550 and NYDCL §§ 275, 276 and 278, and under a common law claim of unjust enrichment. At trial plaintiff did not argue or present evidence in support of his claim for recovery under NYDCL § 275 (First Cause of Action) and § 276 (Fifth Cause of Action). Nor did plaintiff put forth evidence to support his demand for attorneys' fees under NYDCL § 276–a (Seventh Cause of Action). Similarly, although the First Cause of Action seeks to avoid the Transfers under NYDCL § 274, at trial, plaintiff did not argue or present evidence in support of that claim.⁵ Rather, at trial, plaintiff placed primary emphasis on his allegation that pursuant to § 544(b) and NYDCL § 273, the payments made by debtor to defendant, to wit, the Transfers, were constructive fraudulent conveyances because debtor did not receive fair consideration for the payments and debtor was insolvent when it made the payments. Although not articulated as such at trial, the Court infers that this argument by plaintiff applies equally to his claim of unjust enrichment.

II. FINDINGS OF FACT

The following findings of fact are based on the trial testimony provided by defendant—the only witness at trial—as well as the exhibits entered into evidence at trial.⁶

A. The Transfers at Issue

During the period July 1, 2012 to December 27, 2012, debtor issued thirteen checks to defendant totaling $43,544.63⁷ as follows: (1) Check No. 1071 dated July 1, 2012 in the amount of $6,000 [Ex. 5]; (2) Check No. 1180 dated August 2, 2012 in the amount of $1,126.81 [Ex. 6]; (3) Check No. 1185 dated July 30, 2012 in the amount of $2,046 [Ex. 6]; (4) Check No. 1233 dated August 16, 2012 in the amount of $6,371.82 [Ex. 7]; (5) Check No. 1040 dated September 1, 2012 in the amount of $3,000 [Ex. 8]; (6) Check No. 1136 dated September 29, 2012 in the amount of $3,001 [Ex. 9]; (7) Check No. 1137 dated September 29, 2012 in the amount of $2,999 [Ex. 10]; (8) Check No. 1335 dated October 22, 2012 in the amount of $1,000 [Ex. 11]; (9) Check No. 1229 November 2, 2012 in the amount of $5,000 [Ex. 12]; (10) Check No. 1380 dated November 21, 2012 in the amount of $1,000 [Ex. 13]; (11) Check No. 1417 dated November 30, 2012 in the amount of $5,000 [Ex. 14]; (12) Check No. 1433 dated December 21, 2012 in the amount of $1,000 [Ex. 15]; and (13) Check No. 1444 dated December 27, 2012 in the amount of $6,000 [Ex. 16].

The parties do not dispute that the Transfers were made. Tr. 1:13, 18–20. Defendant testified that, other than a check in the amount of $1,000 for a Christmas bonus [Ex. 15], Tr. 23:24–25, 24:2–6, the payments received by her from debtor in 2012 were for services rendered to debtor. Tr. 67:9–16.

B. Defendant's Work History and Relationship with Debtor

In 2006, at the age of 17, defendant started working for debtor, a merchant processing services company, after answering a Craigslist advertisement. Tr. 3:20–24, 4:3–8, 50:12–17, 51:12–13, 56:3–5. Defendant contacted potential customers by phone, prepared proposals, answered customer inquiries and provided general customer service. Tr. 55:11–16, 51:5–7, 55:14–56:2. Defendant was compensated as an independent commission-based salesperson, not a salaried employee of debtor. Tr. 71:13–16. She received a draw against commissions of $6,000 per month. Tr. 4:9–22. Defendant did not have a written contract with debtor setting forth the terms of her engagement. Tr. 9:17–22. Rather, according to defendant, per a verbal agreement with debtor, defendant was entitled to a 50% commission on each account she successfully solicited for debtor. Tr. 8:21–9:2. Defendant testified that during 2012, she generated 1,200 merchant accounts for debtor. Tr. 8:8–9, 43:14–16. These accounts, according to defendant, generated income to debtor in excess of $600,000. Tr. 64:7–15, 65:12–13. Defendant testified that she did not receive commissions due for the accounts generated by her for debtor in 2012. Tr. 66:17–24.

In October 2010, defendant, with the help of debtor's principal and accountant, Svetlana Shneydershteyn ("Shneydershteyn"), formed Merchant Marketing Group ("MMG"). Tr. 56:6–10, 5:23–6:20. Defendant's 2012 and 2013 federal tax returns each included Schedule C—Profit or Loss From Business (Sole Proprietorship) and Schedule SE—Self–Employment Tax, and her 2012 and 2013 state tax return included a copy of Schedule C that was filed with defendant's federal tax returns [Exs. 21 and 22]. According to defendant, in 2012, MMG had gross receipts of $18,000. Tr. 31:12–18; Schedule C—Profit or Loss From Business (Sole Proprietorship) [Ex. 21].

Shneydershteyn issued checks on behalf of debtor payable to defendant, individually, and MMG. Tr. 5:16–6:2. Shneydershteyn decided how and when the checks were payable and in what amounts they were made. Tr. 6:23–7:7. Shneydershteyn, on behalf of debtor, also issued 1099 forms to defendant.⁸ Tr. 29:13–17. In 2013, defendant noticed incorrect calculations on certain residual reports provided to her by debtor. Tr. 42:21–43:7. After she approached Shneydershteyn regarding the incorrect calculations, defendant received a letter terminating her relationship with debtor. Tr. 43:4–7.

Defendant testified that she is still owed unpaid commissions for work performed from 2010 through 2013. Tr. 42:12–14. On December 4, 2014, defendant filed a proof of claim in debtor's chapter 7 case for unpaid commissions totaling $2,170,000 [Proof of Claim No. 7–1, Ex. 1].

III. DISCUSSION

As noted above, plaintiff seeks to recover the Transfers as constructive fraudulent transfers pursuant to § 544(b) and NYDCL §§ 273 – 275. In the alternative, plaintiff seeks to recover the Transfers as intentional fraudulent transfers pursuant to § 544(b) and NYDCL § 276, and demands attorneys' fees under NYDCL § 276–a. Finally, plaintiff asserts a common law claim of unjust enrichment. The Court first considers the legal principles applicable to an action under § 544(b) and the NYDCL. The Court will then discuss each cause of action in turn.

A. 11 U.S.C. § 544(b)

Section 544(b)(1) authorizes a trustee to ...