Fierro v. Yellen (In re Fierro)

• Decision Date: 31 March 2020
• Docket Number: Case No. 14-41439-nhl,Adv. Pro. No.: 18-01048-nhl
• Citation: 616 B.R. 596
• Parties: IN RE: Patsy FIERRO, Debtor. Patsy Fierro and Denise Zucaro, as Executor of the Estate of Luigi Zucaro a/k/a Louis Zucaro, Plaintiffs. v. Richard L. Yellen, Brendan Kombol, Richard L. Yellen & Associates LLP, Monica Kipiniak, and Gale Elston, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

616 B.R. 596

IN RE: Patsy FIERRO, Debtor.Patsy Fierro and Denise Zucaro, as Executor of the Estate of Luigi Zucaro a/k/a Louis Zucaro, Plaintiffs.

v.Richard L. Yellen, Brendan Kombol, Richard L. Yellen & Associates LLP, Monica Kipiniak, and Gale Elston, Defendants.

Case No. 14-41439-nhl

Adv. Pro. No.: 18-01048-nhl

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

Signed March 31, 2020

Douglas J. Pick, Pick & Zabicki LLP, 369 Lexington Avenue, 12th Floor, New York, NY 10017, Jay H. Berg, Cornicello Tendler & Baumel-Cornicello, Two Wall Street, 20th Floor, New York, NY 10005, Attorneys for Plaintiffs

Steven R. Schoenfeld, DelBello Donnellan Weingarten, Wise & Wiederkehr LLP, One North Lexington Ave, 11th Floor, White Plains, NY 10601, Attorneys for Defendants

DECISION AND ORDER ON MOTION TO DISMISS

HONORABLE NANCY HERSHEY LORD, UNITED STATES BANKRUPTCY JUDGE

INTRODUCTION

Plaintiffs Patsy Fierro ("Fierro"), an individual chapter 11 debtor, and Denise Zucaro, acting as the Executor of the Estate of Luigi Zucaro a/k/a Louis Zucaro ("Zucaro"), initially an individual chapter 11 debtor but now deceased, (together, the "Plaintiffs"), each commenced an adversary proceeding (Adv. Pro. Nos. 18-01048-nhl and 18-01049-nhl (together, the "Adversary Proceedings")) against Richard L. Yellen, Esq. ("Yellen"), Brendan Kombol, Esq. ("Kombol"), Richard L. Yellen & Associates LLP ("Yellen & Associates"), Monika Kipiniak, Esq. ("Kipiniak"), and Gale Elston, Esq. ("Elston") (collectively, the "Defendants"), seeking (i) sanctions for alleged violations of New York Judiciary Law § 487 (" Section 487"), (ii) sanctions pursuant to this Court's inherent power, and (iii) sanctions pursuant to 28 U.S.C. § 1927.¹ At various points, each of the Defendants represented J.C. Ryan EBCO/H&G, LLC ("J.C. Ryan") in state court proceedings or later before this Court. The Defendants filed a motion to dismiss (the "Motion to Dismiss") pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (" Rule 12(b)(6)").²

For the reasons set forth below, the Motion to Dismiss is granted with respect to the Section 487 claim as to all Defendants. Further, the Plaintiffs have failed to state a claim against Kipiniak and Elston with respect to this Court's inherent power to sanction or pursuant to 28 U.S.C. § 1927 and those causes of action are dismissed. Likewise, the Plaintiffs have failed to state a claim against Yellen, Yellen & Associates, and Kombol (the "State-Court Counsel Defendants") based on those same grounds. However, for the reasons set forth below, the Court chooses to dismiss these causes of action as to the State-Court Counsel Defendants without prejudice , to permit the Plaintiffs to amend the Complaint (i) to include an independent cause of action for fraud, and (ii) to plead facts with greater specificity, connecting the State-Court Counsel Defendants to the filing of the Proofs of Claim (as defined herein) and/or other bankruptcy-specific acts taken before this Court.

JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by Order dated December 5, 2012. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A).

The following are the Court's findings of fact and conclusions of law to the extent required by Rule 52, as made applicable by Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 7052.

BACKGROUND

The Complaint's allegations stem from the turbulent business relationship between general contractor Cyber-Struct, Inc. ("Cyber-Struct"), project owner Dean Boerum Owners, Inc. ("DBO"), and subcontractor J.C. Ryan. The Plaintiffs are seeking to sanction the Defendants in connection with a purported scheme in which J.C. Ryan allegedly obtained a fraudulent default judgment against Cyber-Struct and the Plaintiffs in New York state court, and thereafter attempted to collect said judgment through the Plaintiffs' bankruptcy cases.

I. General Background

In August of 2000, Cyber-Struct, whose principals were Fierro and Zucaro, entered into a Standard Form of Agreement with DBO, whose president was Philip Mendlow ("Mendlow"), for the purpose of constructing an apartment building in Brooklyn (the "Project"). Compl. ¶ 15. According to the Plaintiffs, the principals of Cyber-Struct and DBO were unable to get along, which resulted in the parties terminating their relationship in April of 2002 and DBO retaining Yellen as counsel. Id. ¶¶ 17–18.

Also in April of 2002, Cyber-Struct, DBO, and Bay Ridge Mechanical Corp—another party working on the Project—allegedly held a meeting where Cyber-Struct provided Mendlow with a spreadsheet (the "Spreadsheet") reflecting that Cyber-Struct owed approximately $353,566.93 to nineteen subcontractors, suppliers, and/or vendors in connection with the Project, including $68,700.00 owed to subcontractor J.C. Ryan (the "Project Claims"). Id. ¶¶ 19–21, 26. The Plaintiffs assert that the Spreadsheet did not reflect any misappropriation of trust fund monies by Fierro or Zucaro. Id. ¶¶ 27–28.

Thereafter, Yellen, as counsel to DBO, allegedly devised a strategy to acquire the Project Claims reflected on the Spreadsheet "for the specific purpose of commencing a class action lawsuit under Article 3-A of the New York Lien Law against Patsy Fierro and Louis Zucaro personally, to get money to DBO." Id. ¶ 30. In furtherance of this scheme, DBO allegedly began purchasing the Project Claims from the subcontractors, vendors and/or suppliers, executing eight assignments in favor of DBO between May 2, 2002 and June 21, 2002 (the "2002 Assignments"). Id. ¶¶ 32–35. With respect to J.C. Ryan's Project Claim, on May 2, 2002, Mendlow allegedly sent a facsimile to J.C. Ryan with a proposed agreement whereby DBO would purchase J.C. Ryan's claim for an initial amount of $20,000.00, and such additional amounts as authorized by Mendlow (the "J.C. Ryan Assignment"). Id. ¶ 40. The J.C. Ryan Assignment was allegedly signed and returned to DBO the same day, and over the course of approximately three weeks, J.C. Ryan charged $29,000.00 to Mendlow's credit card, all of which was applied to reduce the debt owed by Cyber-Struct to J.C. Ryan. Id. ¶¶ 40–45.

After consummation of the J.C. Ryan Assignment, J.C. Ryan and DBO allegedly had a disagreement about amounts owed thereunder. Id. ¶¶ 48–58. Specifically, the Plaintiffs allege that J.C. Ryan claimed it was owed an additional $42,598.00 from Cyber-Struct, and demanded this money from DBO in accordance with the J.C. Ryan Assignment. Id. ¶¶ 48–49. J.C. Ryan then purportedly hired a collection specialist and filed a mechanic's lien on DBO's property. Id. ¶¶ 48–51. Yellen, who was still counsel to DBO at this time, attempted to ameliorate the situation by delivering a $10,000.00 check, which payment had been deposited into Yellen's attorney escrow account by DBO, to J.C. Ryan's collection specialist, representing "DBO's settlement of the mechanic's lien" along with a letter that purportedly included a blueprint for a class-action lawsuit against Cyber-Struct (the "Letter Agreement"). Id. ¶¶ 57–58.

Specifically, the Letter Agreement, as summarized by the Plaintiffs in the Complaint, stated that "(a) in exchange for the $10,000 payment [from DBO] ... J.C. Ryan would act as a class representative on behalf of itself and other subcontractors similarly situated against Cyber-Struct, Mr. Zucaro, and Mr. Fierro; (b) DBO would incur all costs and expenses of the class action litigation; and (c) the first $10,000 recovered from the class action litigation would be paid to DBO as reimbursement of the $10,000 paid by DBO to J.C. Ryan." Id. ¶¶ 58, 60. The Letter Agreement also provided that J.C. Ryan would retain Yellen as its attorney to prepare and file the complaint. Id. ¶ 60.

The Plaintiffs contend that the language in the Letter Agreement evidences J.C. Ryan's release of its Project Claims against Cyber-Struct, Fierro, and Zucaro because the agreement instructed the collection specialist to "sign and return [the Letter Agreement] with the original of the release of the mechanic's lien and general release ." Id. ¶ 60. In accordance with the Letter Agreement, on March 13, 2003, J.C. Ryan allegedly executed a general release in favor of DBO, which the Plaintiffs contend "waived and/or released any claim [J.C. Ryan] had against Cyber-Struct, Louis Zucaro and/or Patsy Fierro." Id. ¶¶ 64–65.

Thus, the Plaintiffs allege that although J.C. Ryan and various other subcontractors and suppliers no longer held Project Claims against Cyber-Struct as a result of the 2002 Assignments and the general release, these parties were to become faux class members in a lawsuit to collect money on the Project Claims. Id. ¶¶ 58–64. The Plaintiffs assert that this fraudulent scheme was intended and constructed to create the appearance that J.C. Ryan could present a bona fide class action to the New York state court that, in reality, was designed to solely benefit DBO and its counsel, Yellen & Associates. See id. ¶ 14.

II. Prepetition State Court Action ³

On May 19, 2003, J.C. Ryan, through its counsel Yellen, filed a class-action complaint (the "State Court Action") with the Supreme Court of the State of New York, County of Kings (the "State Court") against Cyber-Struct, Fierro, Zucaro, and Damon Coromilas (the "State Court Defendants"). See Declaration of Steven Schoenfeld, Case No. 14-41439-nhl, ECF No. 330 and Case No. 14-41440-nhl, ECF No. 277 (hereinafter "Schoenfeld Decl."), Ex. 1; Compl. ¶ 82. The class-action complaint was brought under New York's Lien Law, alleging that the State Court Defendants wrongfully diverted funds from the Project, and failed to pay various suppliers and subcontractors in full. See Schoenfeld Decl. Ex. 1. The Plaintiffs assert that the so-called class members were not notified of the State Court Action, and that Yellen & Associates did not disclose in the complaint, or...