BC Liquidating, LLC v. Lloyd J. Weinstein, the Weinstein Grp., P.C. (In re BC Funding, LLC), Case No. 812–71471–reg

CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York
Writing for the CourtRobert E. Grossman
Citation519 B.R. 394
PartiesIn re: BC Funding, LLC, Debtor. BC Liquidating, LLC, Plaintiff, v. Lloyd J. Weinstein, The Weinstein Group, P.C., Karen Sharf, Hunt Ashley Group, Inc., sometimes doing business as Secret Gardens, Samantha Sharf, Mitchell C. Elman, The Law Offices of Mitchell C. Elman, P.C., TIX Group, Ltd., Mercy Roman, Andrew Muhlstock, Muhlstock & Associates, CPA's PLLC, Erica Abramson, as Trustee of BC Funding Holdings Trust, BC Funding Holdings Trust, and Erica Abramson, as Trustee of the Barry Sharf 2002 Trust and The Barry Sharf 2002 Trust, Defendants.
Decision Date31 October 2014
Docket NumberAdv. Proc. No. 814–8082–reg,Case No. 812–71471–reg

519 B.R. 394

In re: BC Funding, LLC, Debtor.
BC Liquidating, LLC, Plaintiff,
v.
Lloyd J. Weinstein, The Weinstein Group, P.C., Karen Sharf, Hunt Ashley Group, Inc., sometimes doing business as Secret Gardens, Samantha Sharf, Mitchell C. Elman, The Law Offices of Mitchell C. Elman, P.C., TIX Group, Ltd., Mercy Roman, Andrew Muhlstock, Muhlstock & Associates, CPA's PLLC, Erica Abramson, as Trustee of BC Funding Holdings Trust, BC Funding Holdings Trust, and Erica Abramson, as Trustee of the Barry Sharf 2002 Trust and The Barry Sharf 2002 Trust, Defendants.

Case No. 812–71471–reg
Adv. Proc.
No. 814–8082–reg

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

Signed October 31, 2014


Motions denied.

[519 B.R. 403]

Leslie A. Berkoff, Moritt Hock & Hamroff LLP, Garden City, NY, for Plaintiff.

Alexandra S. Davidson, Pollack Solomon Duffy LLP, George F. Meierhofer, Kaufman Dolowich & Voluck LLP, David Y. Wolnerman, White & Wolnerman, New York, NY, Richard G. Gertler, Gertler

[519 B.R. 404]

Law Group, LLC, East Meadow, NY, David J. Mahoney, SilvermanAcampora LLP, Jericho, NY, for Defendants.


Chapter 11
DECISION

Robert E. Grossman, United States Bankruptcy Judge

The Plaintiff, BC Liquidating, LLC (“Plaintiff” or “BC Liquidating”), is a limited liability company established by the Lenders' Third Amended Plan of Liquidation (“Plan”) for the Debtor, BC Funding, LLC (“BCF”), confirmed by Order, dated January 22, 2013 (“Confirmation Order”). BC Liquidating's stated purpose is to liquidate and distribute assets of the bankruptcy estate, including certain causes of action, for the benefit of the estate's creditors. Pursuant to the authority given to it by the Plan and Confirmation Order, BC Liquidating commenced this adversary proceeding against multiple defendants alleging that they engaged in a massive fraud orchestrated by BCF's CEO, Barry Sharf, to loot the assets of BCF eventually leading the company into bankruptcy.

As alleged in the Complaint, dated March 13, 2014 (“Complaint”), Sharf, in concert with the Defendants, fraudulently elicited investments of over $7 million from third parties that while ostensibly for BCF were really intended to be used by Sharf and the other Defendants for their personal gain. The Plaintiff alleges that Sharf and the Defendants then diverted BCF assets through the escrow account of the company's lawyer to numerous affiliated or controlled entities where the funds were then distributed for the Defendants' personal use and to the detriment of BCF. The causes of action asserted in the Complaint include RICO violations, fraud, aiding and abetting fraud, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conversion, aiding and abetting conversion, unjust enrichment, constructive trust, accounting, preferences, fraudulent transfer, and disallowance of claims.

The Plaintiff's standing to bring these causes of action derives from two separate sources: the Plaintiff asserts the causes of action for RICO violations, fraud, aiding and abetting fraud, breach of fiduciary duty, and aiding and abetting breach of fiduciary duty, as assignee of those claims from Harrison Trading Investments, LLC (“HTI”) and Steven Khan (“Khan”), both pre-petition investors in the Debtor's business (the “Lender Causes of Action”); the remainder of the causes of action, i.e., for conversion, aiding and abetting conversion, unjust enrichment, constructive trust, accounting, preferences, fraudulent transfer, and disallowance of claims were assigned to the Plaintiff by the Debtor pursuant to the confirmed Plan (the “Debtor Causes of Action”).

Before the Court are several related motions to dismiss the Complaint, filed by (1) Lloyd Weinstein and The Weinstein Group (the “Weinstein Defendants”), (2) Karen Sharf and Hunt Ashley Group, Inc., sometimes doing business as Secret Gardens (together Hunt Ashley Group, Inc., and Secret Gardens are referred to herein as “HASG”), (3) Samantha Sharf,1 (4) Mitchell C. Elman, the Law Offices of Mitchell C. Elman, P.C., and TIX Group, Ltd. (the “Elman Defendants”), (5) Andrew Muhlstock and Muhlstock & Associates, CPAs PLLC (the “Muhlstock Defendants”), (6) Erica Abramson, as Trustee of BC Funding Holdings Trust, and Erica Abramson, as Trustee of the Barry Sharf 2002 Trust, and (7) Mercy Roman (“Roman”).

[519 B.R. 405]

2 Although each of the motions asserts slightly different variations on the law and the facts as applied to each Defendant, the motions taken as a whole seek to dismiss the Complaint: (a) for pleading deficiencies pursuant to Fed.R.Civ.P. 12(b)(6), 8 and 9(b); (b) on the basis that the assignment of the Lender Causes of Action to the Plaintiff was not valid; and (c) that the Plaintiff lacks standing under the so-called Wagoner Rule in effect in this Circuit and/or the doctrine of in pari delicto.

For the reasons stated more fully below, the Court finds that the Lender Causes of Action were properly assigned to BC Liquidating and that BC Liquidating has the authority to bring the claims asserted in the Complaint. The Court also finds that since the Lender Causes of Action are being brought by the Plaintiff on behalf of creditors, i.e., not derivative of the Debtor's standing, those claims are not barred by either the Wagoner Rule or in pari delicto. The Court further holds that the Debtor Causes of Action do not require any complicity or bad acts by the Debtor and thus do not fall under the framework of either Wagoner or in pari delicto.

Finally, the Court denies the motions to dismiss the Complaint pursuant to Fed.R.Civ.P. 8, 9 and 12(b)(6). As explained in more detail below, the Plaintiff alleges causes of action upon which relief can be granted, and satisfies the pleading standards of Rules 8 and 9 with respect to each of those causes of action. Although all of these very serious allegations remain to be proven at trial, the Court finds the allegations to be sufficient at this preliminary pleading stage.

THE ALLEGATIONS OF THE COMPLAINT

Barry Sharf and Kenneth Alpert (“Alpert”), the sole owner of Harrison Trading Investments, LLC (“HTI”), formed BCF in December of 2007, (Compl. ¶ 44), as a limited liability company under the control and direction of its parent company, BC Funding Holdings LLC (“BC Holding”). (Limited Liability Company Agreement of BC Funding LLC (“BC Funding LLC Agreement”), December 7, 2007, § 3.1). The business of BCF was to provide short term cash advances to merchants in need of liquidity and in return receive an assignment of the merchant's credit cards and other receivables. (Compl. ¶ 3).

At formation, HTI agreed to provide a $1,500,000.00 secured loan to BCF in exchange for 40% equity ownership of BCF's parent entity, BC Holding, with the remaining 60% ownership of BC Holding being held by BC Funding Trust.3 (Compl. ¶¶ 40–41, 46). The HTI loan agreement, executed on June 16, 2008, provided for installment payments by HTI to BCF from December 12, 2007 to May 27, 2008. (Compl. ¶ 50). As part of that transaction Sharf was required to loan $300,000.00 to BCF, which could only be recouped after HTI's loan was fully repaid. (Compl. ¶¶ 42–43).

Barry Sharf served as Chief Executive Officer and Manager of BCF from 2007 until 2012. (Compl. ¶¶ 12, 16). From 2008 to 2011, BCF raised over $7,000,000.00 from investors, including Steven Khan and HTI. (Compl. ¶¶ 4, 145–200). According to the Plaintiff, Sharf withdrew his original $300,000 loan from the company, allegedly

[519 B.R. 406]

without consent from HTI, (Compl. ¶ 63), and, aided by the Defendants, embezzled and misappropriated hundreds of thousands of dollars to fund a lavish lifestyle for himself and his family, ending only when BCF filed bankruptcy in 2012. (Compl. ¶ 12). Sharf and the Defendants allegedly looted the company of at least $2,300,000.00 (Compl. ¶¶ 68, 69, 82, 93, 95–102, 104, 127).4

Defendant, Lloyd Weinstein (“Weinstein”), was a manager of BC Holding along with Barry Sharf. (Limited Liability Company Agreement of BC Funding Holdings, LC (“BC Holding LLC Agreement”) June 16, 2008 § 4.6). In Weinstein's capacity as Manager of BC Holding he signed, along with Alpert from HTI, Sharf's employment agreement installing Sharf as CEO. (Compl. ¶¶ 57–59; Employment and Non–Compete Agreement (“Employment Agreement”), June 16, 2008 at 9). Sharf's employment agreement included a provision that he was not to receive any annual compensation until certain funding benchmarks were reached. (Compl. ¶ 59; Employment Agreement § 3). The Plaintiff alleges that Weinstein also served as general counsel for BCF and provided legal services to BCF through his law firm, The Weinstein Group (“TWG”). (Compl. ¶¶ 17, 61). Weinstein is the sole shareholder and President of TWG. (Compl. ¶ 18).

Shortly after the formation of BCF, Sharf caused the company to engage Andrew Muhlstock (“Muhlstock”) and Muhlstock & Associates, CPA's, PLLC (“Muhlstock & Associates”) as accountants for the company. (Compl. ¶ 60). Sharf also retained Mitchell Elman (“Elman”) as a special counsel and Vice President of BCF. (Compl. ¶¶ 22, 167). In addition Sharf, on behalf of BCF, executed consulting contracts with TIX Group (“TIX”), which Elman controlled as the sole shareholder and president. (Compl. ¶ 24). Elman is also the sole shareholder and president of the Law Offices of Mitchell Elman, P.C. (“LOME”) (Compl. ¶ 23).

On March 13, 2012, BCF filed for chapter 11 bankruptcy and during the case the assets of BCF were sold to Strategic Funding Sources. (Compl. ¶¶ 13, 201). On April 12, 2013, Sharf personally filed for chapter 7 bankruptcy.5 (Compl. ¶ 202). As part of the confirmed chapter 11 Plan, the Court approved the formation of the Plaintiff, BC Liquidating. (Confirmation Order ¶ 17). BC Liquidating has all the powers of a debtor in possession, and was assigned any and all causes of action held by BCF. (Limited Liability Company Agreement of BC Liquidating (“LLC Agreement”), Jan. 17, 2013 §§ 2.4, 4.1). On March 12, 2014,...

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