Finkel v. WeVeel LLC (In re Atomica Design Grp., Inc.)

• Decision Date: 12 August 2016
• Docket Number: Adv. Proc. No. 14–00333–AMC,Case No. 12–17235–AMC
• Citation: 556 B.R. 125
• Parties: In re Atomica Design Group, Inc., Debtor Bonnie Finkel, as Chapter 7 Trustee of the Estate of Atomica Design Group, Inc., Plaintiff v. WeVeel LLC ; Junto Creative LLC; Joseph DiPalma; Tiziano Recchia; Jason Lane; Iya Technologies, LLC; and LaRose Industries, LLC, d/b/a Cra–Z–Art., Defendants
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

556 B.R. 125

In re Atomica Design Group, Inc., DebtorBonnie Finkel, as Chapter 7 Trustee of the Estate of Atomica Design Group, Inc., Plaintiff

v.WeVeel LLC ; Junto Creative LLC; Joseph DiPalma; Tiziano Recchia; Jason Lane; Iya Technologies, LLC; and LaRose Industries, LLC, d/b/a Cra–Z–Art., Defendants

Case No. 12–17235–AMC

Adv. Proc. No. 14–00333–AMC

United States Bankruptcy Court, E.D. Pennsylvania.

Signed August 12, 2016

Andrew Scott Brown, Gary Green, Larry M. Keller, Sidkoff Pincus & Green, Philadelphia, PA, for Plaintiff.

Michael J. Shavel, Hill Wallack, LLP, Yardley, PA, David B. Aaronson, McCarter & English LLP, Philadelphia, PA, Richard A. Beran, McCarter & English LLP, Lisa S. Bonsall, McCarter & English, Newark, NJ, for Defendants.

OPINION

Ashely M. Chan, United States Bankruptcy Judge

TABLE OF CONTENTS

I. Introduction...136

II. Facts and Procedural History...136

A. The Debtor...137

B. The Chesapeake Bank Factoring Agreement...137

C. So Real Brands, LLC...138

D. The Debtor's Assets...138

E. The Chesapeake and Federal Investigations...139

F. DiPalma and Recchia's Bankruptcies...140

G. WeVeel and Junto...140

H. Cra–Z–Art and IYA...142

I. The Debtor's Bankruptcy...143

J. The Trustee's Adversary Proceeding...143

III. Discussion...144

A. Pleading Standards...144

B. Count I: The Racketeering Influenced and Corrupt Organizations Act Claims Against All Defendants...148

1. Standing...149

2. Section 1962(a)...150

3. Section 1962(c)...150

4. Section 1962(d)...151

5. The Parties' Arguments...152

6. Analysis...155

C. Count II: Fraudulent Transfer Claims Against DiPalma and Recchia...158

1. The Actual Intent Standard...161

2. The Constructive Fraud Standards...165

D. Count III: Conversion Claims Against DiPalma and Recchia...167

E. Counts IV–V: Fraudulent Transfer Claims Against WeVeel and Junto...170

F. Counts VI–VII: Veil Piercing Claims Under the Single Entity Theory...173

G. Count VIII: Unjust Enrichment Claims Against All Defendants...176

1. The Joint Defendants...177

2. Cra–Z–Art...180

IV. Conclusion...181

I. INTRODUCTION

Bonnie Finkel, the Chapter 7 trustee (“Trustee”) in the underlying bankruptcy estate of Atomica Design Group, Inc. (“Debtor”), filed this adversary proceeding against the Debtor's former officers, two of the Debtor's former customers, and other third parties. In the amended complaint (“Amended Complaint”), the Trustee raised various causes of action including claims under the Racketeering Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 –68 (2016) (“RICO”), as well as state law claims for the avoidance of fraudulent transfers, conversion, piercing the corporate veil, and unjust enrichment. All of the defendants, except for one, filed motions to dismiss the counts pending against them in the Amended Complaint based upon the Trustee's alleged failure to set forth plausible claims and each raised the affirmative defense of in pari delicto in connection with some of those claims.

As discussed below, the Court will dismiss the RICO claims against these defendants because the Trustee has failed to satisfy the “standing requirement” under § 1964(c) with respect to the nexus between the alleged RICO violations and the resulting injuries sustained by the Debtor. The Court also concludes that the Trustee has failed to set forth plausible claims related to veil piercing because there was never an identity of ownership between the Debtor and the various third party defendants.

Finally, the Court holds that the Trustee has set forth plausible claims in connection with all of the state fraudulent transfer causes of action as well as conversion. With regard to the unjust enrichment claims, the Court concludes that the Trustee has set forth plausible claims against the Debtor's former officers and various third parties and that the affirmative defense of in pari delicto is not applicable at this stage of the proceedings. However, with regard to the unjust enrichment claim against one of the Debtor's former customers, the Court concludes that the Trustee has failed to set forth a plausible claim against that entity because a contract existed between them which governed their relationship, and the transfer of services and products to that customer was not unjust since the Trustee herself concedes that the customer paid fair market value for those services and products.

II. FACTS AND PROCEDURAL HISTORY

The Debtor is a Pennsylvania corporation. Am. Compl. ¶ 5, ECF No. 49. On July 31, 2012, three of the Debtor's creditors filed an involuntary chapter 7 bankruptcy petition against it and the Court entered an order for relief on September 20, 2012. Id. ¶¶ 6–7. The Trustee was appointed as the interim chapter 7 trustee of the Debtor's estate on October 15, 2012 and became the permanent trustee on November 29, 2012. Id. ¶ 8.

The Trustee initiated this adversary proceeding on behalf of the Debtor by filing a complaint against Joseph DiPalma; Tiziano Recchia; Jason Lane; WeVeel, LLC; Junto Creative LLC; and LaRose Industries, LLC d/b/a Cra–Z–Art (collectively “Defendants”)¹ on July 29, 2014 (“Complaint”).

Ultimately, the Court dismissed the Complaint without prejudice and the Trustee filed the Amended Complaint against the Defendants and IYA Technologies, LLC on June 15, 2015.² The Amended Complaint raises eight counts, including causes of action under RICO; the Pennsylvania Uniform Fraudulent Transfer Act, 12 Pa. Stat. and Cons.Stat. Ann. §§ 5101–10 (West 2016) (“PUFTA”); and for conversion, piercing the corporate veil, and unjust enrichment. The facts, as set forth in the Amended Complaint, are summarized below.

A. The Debtor

DiPalma and Recchia first met at the Art Institute in Philadelphia where DiPalma instructed a graphic design course in which Recchia enrolled. Am. Compl. ¶ 33. Together, they formed the Debtor as a boutique graphic design firm that developed brand packaging for food, beverage, candy, publishing, and toy companies in or about April 2000. Id. 32.

DiPalma served as the Debtor's President and Chief Executive Officer and Recchia served as its Vice President. Id. 34. DiPalma and Recchia hired Bernard Stromberg (“Stromberg”) as the Debtor's Business Manager in or about October 2006 and promoted him to Chief Financial Officer (“CFO”) shortly thereafter. Id. 35. DiPalma, Recchia, and Stromberg comprised the Debtor's board of directors and owned 60%, 20%, and 20% of the shares of the Debtor, respectively. Id. ¶¶ 36–37. DiPalma's mother, Diane Scalera (“Scalera”), served as the Debtor's Business Manager throughout the events described in the Amended Complaint. Id. ¶ 42.

B. The Chesapeake Bank Factoring Agreement

In July 2007, the Debtor entered into a cash flow or factoring agreement (“Factoring Agreement” or “Agreement”) with Chesapeake Bank (“Chesapeake”). Id. ¶ 38. Chesapeake is a Virginia corporation and maintains its principal place of business in Virginia. Id. 39. Pursuant to the Factoring Agreement, Chesapeake initially extended a $500,000 line of credit to the Debtor and then increased it to $700,000 on April 25, 2008. Id. ¶¶ 38, 41. In return, the Debtor discounted, sold, and assigned to Chesapeake its right, title and interest in invoices that it billed to its customers “up to the full amount” of its line of credit. Id. ¶ 38.

As part of the Factoring Agreement, DiPalma and Recchia represented that the invoices that the Debtor sold to Chesapeake “were true and real debts owed to [the Debtor] for goods and services actually provided.” Id. DiPalma signed the Factoring Agreement “in his corporate capacity as President of [the Debtor], and separately in the capacity of Guarantor.” Id. ¶ 40. He also “worked closely” with and “instruct[ed]” Scalera with respect to her duties relative to the Factoring Agreement, for example drafting, reviewing, and sending customer invoices to Chesapeake. Id. ¶ 42. Recchia also signed the Factoring Agreement as a Guarantor. Id. ¶ 40.

In February 2009, despite their contrary assurances, DiPalma and Recchia began selling fabricated invoices to Chesapeake under the Agreement. Id. ¶ 57. Scalera and Stromberg were also involved in the fraud. Id. ¶ 59. DiPalma and Recchia continued to sell fabricated invoices to Chesapeake until November 2009, by which time they had fabricated and sold at least 160 invoices. Id. ¶ 57.

C. So Real Brands, LLC

At its inception, the only services that the Debtor performed for its customers were graphic design services. Id. ¶ 43. Then, in early 2009, DiPalma and Recchia decided to expand the Debtor's business into “the design, production and sale of children's toys and crafts.” Id. As a result, they created a toy and craft division within the Debtor. Id. ¶ 48.

Ultimately, through the Debtor, DiPalma and Recchia formed a wholly owned subsidiary, So Real Brands, LLC (“SRB”), in June 2009.Id. SRB was a front through which the Debtor conducted its toy and craft division. Id. DiPalma and Recchia told the Debtor's employees that it operated the toy and craft division through SRB because the Debtor's graphic design customers might stop employing the Debtor if they learned that it operated a competing business. Id. ¶ 47.

To further hide the toy and craft division from the Debtor's graphic design customers, SRB operated under the name of Joseph Cullen (“Cullen”), a creditor of the Debtor. Id. ¶ 50. DiPalma and Recchia represented to Cullen that he would become President and sole shareholder of SRB in a series of communications from June to December 2009. Id. ¶ 50(a). These concessions to Cullen were intended to satisfy a portion of the debt that the Debtor owed to Cullen. Id. However, despite the concessions, DiPalma and Recchia controlled and operated SRB, not Cullen. Id. ¶ 50(b).

SRB and Cullen were used to disguise the Debtor's toy and craft division from June to December 2009. Id. ¶ 50(c). Throughout this period, SRB owned no assets and had no employees—it was a shell. Id. ¶ 51. Instead, the Debtor handled all of SRB's operations and transactions. Id. The Debtor financed SRB's operations...