Bavelis v. Doukas (In re Bavelis)

• Decision Date: 22 February 2017
• Docket Number: Case No. 10–58583,Adv. Pro. No. 10–2508
• Citation: 571 B.R. 278
• Parties: IN RE: George A. BAVELIS, Debtor. George A. Bavelis, et al., Plaintiffs, v. Ted Doukas, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Ohio

571 B.R. 278

IN RE: George A. BAVELIS, Debtor.

George A. Bavelis, et al., Plaintiffs,

v.Ted Doukas, et al., Defendants.

Case No. 10–58583

Adv. Pro. No. 10–2508

United States Bankruptcy Court, S.D. Ohio, Eastern Division, at Columbus.

Filed February 22, 2017

Marion H. Little, Jr., Zeiger, Tigges & Little LLP, W. Mark Jump, Columbus, OH, for Plaintiffs.

Franklin Connor Davis, Columbus, OH, Philomena S. Ashdown, Cincinnati, OH, for Defendants.

John M. Stravato, Melville, NY, pro se.

John Doe Defendants 1–25, pro se.

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW ON REMAINING COUNTS OF SECOND AMENDED COMPLAINT

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

When debtors commence Chapter 11 bankruptcy cases, they become debtors in possession obligated to perform most of the duties of a trustee, including the duty to object to improper claims filed against the bankruptcy estate in order to increase the recovery realized by their legitimate creditors. George Bavelis, whose confirmed Chapter 11 plan provides for a 100% repayment of his legitimate creditors' claims, dutifully fulfilled that obligation when he objected to the $14 million secured proof of claim filed by Quick Capital of Long Island Corp. ("Quick Capital"), a company wholly owned by his former "friend," Ted Doukas. See Bavelis v. Doukas (In re Bavelis) , 490 B.R. 258 (Bankr. S.D. Ohio 2013) (" Bavelis I "), aff'd , No. 13–8015, 2013 WL 6672988 (6th Cir. BAP Dec. 19, 2013), aff'd , 773 F.3d 148 (6th Cir. 2014). In Bavelis I , a copy of which is attached as Appendix A, the Court disallowed Quick Capital's claim and held that neither Doukas nor any of his other companies had any claim against Bavelis's bankruptcy estate. If Doukas had been as faithful to Bavelis as Bavelis was to his creditors, Doukas would not have filed the Quick Capital claim in the first place. But as explained in Bavelis I , Doukas repeatedly betrayed the confidence Bavelis placed in him before bankruptcy.

Tales of intrigue and confidence games are generally not the stuff of claim litigation in bankruptcy court. To the contrary, claim disputes usually center on more standard fare: Is the debtor in default of its loan agreement with the claimant? If so, has the claimant properly calculated its contractual damages? Or has the creditor instead included in its claim sums—late charges, attorney fees, unmatured interest and the like—it is not entitled to recover under the parties' agreement or applicable law? These and similar questions are frequently litigated in bankruptcy. But not so in this case, because Quick Capital lent Bavelis no funds. Instead, Doukas fraudulently induced Bavelis to execute the note on which the Quick Capital claim was based (the "QC Note") as part of a larger scheme designed to fleece Bavelis out of substantially all of his assets. Doukas did so after gaining Bavelis's trust at a time when he was emotionally vulnerable and financially in dire straits. And as also explained in Bavelis I , Doukas succeeded not only in fraudulently inducing Bavelis to execute the QC Note, but also in taking from Bavelis his direct and indirect membership interests in limited liability companies he had formed with his business partner, Mahammad Qureshi (the "Bavelis–Qureshi LLCs"). In short, having promised Bavelis that he would negotiate with Qureshi to resolve disputes regarding the management of the Bavelis–Qureshi LLCs, Doukas instead defrauded Bavelis into assigning his interests in the Bavelis–Qureshi LLCs to three of Doukas's wholly owned companies—defendants Blair International, Inc. ("Blair"); R.P.M. Recoveries, Inc. ("R.P.M."); and the aptly named Nemesis of LI Corp. ("Nemesis"). It is the assignments of the membership interests in three of the Bavelis–Qureshi LLCs (the "Assignments") that Bavelis here seeks to unwind as having been fraudulently induced by Doukas.¹

Given Doukas's argument that part of the consideration for the QC Note was his promise to resolve the disputes over the Bavelis–Qureshi LLCs in a manner beneficial to Bavelis, the Court was required to make findings in Bavelis I regarding the fraud in which Doukas engaged in connection with the Assignments. Although they are extensive, the Court's findings distilled down to a central conclusion: Doukas is an unrepentant fraudster who made false promises to Bavelis in an attempt to misappropriate as many of Bavelis's assets as he could.² It is those findings, which have been upheld through two layers of appeal, that form much of the basis for the Court's proposed findings of fact and conclusions of law here. In short, the Court determines that the Assignments were fraudulently induced and that as a result of his fraudulent conduct Doukas should pay both compensatory damages and substantial punitive damages to Bavelis.

II. Jurisdiction

For the reasons explained below, the Court has jurisdiction to hear these matters under 28 U.S.C. §§ 157 and 1334 and the general order of reference entered by the District Court.

Section 1334(b) of the Judicial Code sets forth three categories of civil proceedings over which the district courts (and the bankruptcy courts by reference) have original, but not exclusive, jurisdiction: (1) those "arising under title 11," (2) those "arising in" bankruptcy cases and (3) those "related to" such cases. 28 U.S.C. § 1334(b). See Stern v. Marshall , 564 U.S. 462, 473, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ; Bavelis v. Doukas (In re Bavelis) , 453 B.R. 832, 851–52 (Bankr. S.D. Ohio 2011).³ Although the Doukas Defendants concede that the Court has "arising under" jurisdiction to rule on the avoidance of the transfers of the membership interests in the Bavelis–Qureshi LLCs as fraudulent transfers under §§ 548 and 544(b) of the Bankruptcy Code,⁴ the Doukas Defendants argue that the Court lacks jurisdiction to hear the state law claims on which proposed findings of fact and conclusions of law are being submitted (the "State Law Claims"). Adv. Doc. 616 at 13–19; Adv. Doc. 677 at 14–19.⁵ Because the State Law Claims neither "aris[e] under title 11" nor "aris[e] in ... a case under title 11," 28 U.S.C. § 1334(b), the Court may exercise jurisdiction over them only if they are "related to a case under title 11." Id.

"The usual articulation of the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy." Mich. Emp't Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.) , 930 F.2d 1132, 1142 (6th Cir. 1991) (quoting Pacor, Inc. v. Higgins , 743 F.2d 984, 994 (3d Cir. 1984) ).

The Court previously made a determination that it has related-to jurisdiction over the State Law Claims. See Bavelis , 453 B.R. at 851 ("In short, the Court has jurisdiction over the claims for relief set forth in each count of the Complaint because each of these claims either arises under the Bankruptcy Code or is related to [Bavelis's] bankruptcy case."). Indeed, the Court has found that the "outcome of the [State Law Claims] ... conceivably could have an effect on the estate," because Bavelis was "acting in his capacity as the debtor in possession, and any recovery obtained by [Bavelis] would be for the benefit of his bankruptcy estate." Id. at 853. The manner in which the recovery from this adversary proceeding could conceivably benefit creditors of the bankruptcy estate was made clear in Bavelis's confirmed Chapter 11 plan, which provides for 100% repayment of creditors' claims. See Doc. 712 at 9–10 (defining "Retained Actions Net Proceeds" as including "consideration received ... as a result of a settlement ... or from the enforcement of any judgment obtained with respect to any of the Retained Actions"); Id . Ex. 2 (providing that "Retained Actions" includes all claims and causes of action in Adv. Pro. No. 10–2508); Id . at 22 (providing that "[Bavelis] may utilize any portion of Retained Actions Net Proceeds to fund any [of his] obligation[s] under this Plan ... and the repayment of any other obligation for funds borrowed on or after the Effective Date to fund [Bavelis's] obligations under this Plan").⁶

Doukas, however, maintains that the confirmation of Bavelis's Chapter 11 plan and the proposed full payment of his creditors has deprived the Court of jurisdiction over the State Law Claims under the close-nexus test for bankruptcy jurisdiction. Adv. Doc. 677 at 15–19. Under the close-nexus test, jurisdiction following confirmation is limited to "[m]atters that affect the interpretation, implementation, consummation, execution, or administration of the confirmed plan." Binder v. Price Waterhouse & Co. (In re Resorts Int'l, Inc.) , 372 F.3d 154, 167 (3d Cir. 2004) ; In re Thickstun Bros. Equip. Co. , 344 B.R. 515, 521 (6th Cir. BAP 2006). But Bavelis commenced this adversary proceeding on October 20, 2010, long before his Chapter 11 plan was confirmed on December 12, 2014. And as the circuit court of appeals that developed the close-nexus test (the Third Circuit) itself has clarified, that test applies only to actions filed post-confirmation , while the conceivability standard of Pacor applies to actions filed pre-confirmation . See Geruschat v. Ernst Young LLP (In re Seven Fields Dev. Corp.) , 505 F.3d 237, 265 (3d Cir. 2007) ("[W]ith respect to 'related to' jurisdiction, the Pacor test applies in all disputes raised pre-confirmation and the 'close nexus' test applies in all disputes raised post-confirmation, regardless of when the conduct alleged in the complaint occurred."); ConocoPhillips Co. v. SemGroup, L.P. (In re SemCrude, L.P.) , 428 B.R. 82, 96–98 (Bankr. D. Del. 2010) ; Liquidating Tr. v. Granite Fin. Sols., Inc. (In re MPC Computs., LLC) , 465 B.R. 384, 392 (Bankr. D. Del. 2012).⁷

This is because "[i]t has long been the case that the 'jurisdiction of the court depends upon the state of things at the time of the action brought.' " SemCrude , 428 B.R. at 96...