Geltzer v. Xaverian High Sch. (In re Akanmu)

• Decision Date: 01 January 2013
• Docket Number: Adv. Proc. No. 13-01105-CEC, Adv. Proc. No. 13–01107–CEC,Case No. 11–43773–CEC
• Citation: 502 B.R. 124
• Court: U.S. Bankruptcy Court — Eastern District of New York
• Parties: In re: Olaniyi L. Akanmu & Omolayo T. Suara, Debtors. Robert L. Geltzer, as Trustee of the Estate of Olaniyi L. Akanmu & Omolayo T. Suara, Plaintiff, v. Xaverian High School, Defendant. Robert L. Geltzer, as Trustee of the Estate of Olaniyi L. Akanmu & Omolayo T. Suara, Plaintiff, v. Our Lady Of Mt. Carmel–St.Benedicta School, Defendant.

502 B.R. 124

In re: Olaniyi L. Akanmu & Omolayo T. Suara, Debtors.

Robert L. Geltzer, as Trustee of the Estate of Olaniyi L. Akanmu & Omolayo T. Suara, Plaintiff,

v.Xaverian High School, Defendant.

Robert L. Geltzer, as Trustee of the Estate of Olaniyi L. Akanmu & Omolayo T. Suara, Plaintiff,

v.Our Lady Of Mt. Carmel–St.Benedicta School, Defendant.

Case No. 11–43773–CEC

Adv. Proc. No. 13-01105-CEC, Adv. Proc. No. 13–01107–CEC

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

Filed 12/04/2013

Daniel Gershburg, Esq., Joyce Campbell Priveterre, Esq., Daniel Gershburg, Esq. P.C., 55 Broad Street, Suite 18B, New York, NY 10004, Attorneys for Plaintiff.

Benjamin D. Feder, Esq., Damon Suden, Esq., Kelley Drye & Warren LLP, 101 Park Avenue, New York, NY 10178, Attorneys for Defendant, Our Lady of Mt. Carmel–St. Benedicta School.

Fred Stevens, Esq., Sean C. Southard, Esq., Thomas Szaniawski, Esq., Maeghan J. McLoughlin, Esq., Klestadt & Winters, LLP, 570 Seventh Avenue, 17th Floor, New York, NY 10018, Attorneys for Defendant, Xaverian High School.

Chapter 7

DECISION

CARLA E. CRAIG, Chief United States Bankruptcy Judge

In these adversary proceedings, the trustee in a chapter 7 case of a married couple, who filed as joint debtors, seeks to recover from two parochial schools tuition payments made by the debtors prior to the commencement of the case for the education of their two minor children, as fraudulent conveyances. The trustee's claims are based upon the theory that because the parents were not “direct beneficiaries” of the tuition payments, and because private schooling of their children was, in the trustee's judgment, “not reasonably necessary,” the debtors did not receive reasonably equivalent value or fair consideration for the tuition payments under § 548(a)(1)(B) of the Bankruptcy Code or § 273 of the New York Debtor & Creditor Law. (Pl.'s Opp'n ¶ 3, Adv. Pro. No. 13–1105–CEC, ECF No. 19; Pl.'s Opp'n ¶ 3, Adv. Pro. No. 13–1107–CEC, ECF No. 16.)

The trustee's claims are based on a fundamentally flawed legal theory that is, moreover, at odds with common sense. The education provided by the defendants to these minor children constitutes both a direct and indirect benefit to their parents, who, with their children, must be considered a single economic unit for purposes of this analysis. Accordingly, the defendants' motions to dismiss these adversary proceedings are granted.

Jurisdiction

This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (H), 28 U.S.C. § 1334, and the Eastern District of New York standing order of reference dated August 28, 1986, as amended by order dated December 5, 2012. This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.

Background

The following facts are undisputed or are alleged by the plaintiff.

On March 25, 2011, Olaniyi L. Akanmu and Omolayo T. Suara (together, the “Debtors”) filed a voluntary petition under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”). Following the commencement of the bankruptcy case, pursuant to §§ 701 and 702,¹ Robert L. Geltzer (the “Trustee”) was appointed as trustee of the Debtors' bankruptcy estate.

From 2005 through 2011, the Debtors' two minor children were students at Our Lady of Mt. Carmel–St. Benedicta School (“Mt. Carmel”) and Xaverian High School (“Xaverian,” and with Mt. Carmel, the “Defendants”) at various times. The older child was a student at Mt. Carmel during the 2005–2006 school year, and was a student at Xaverian from 2006 through 2010. (Mt. Carmel's Mem. of Law in Supp. of Mot. to Dismiss at 3, Adv. Pro. No. 13–1107–CEC, ECF No. 9–1; Xaverian's Mot. to Dismiss ¶ 1, Adv. Pro. No. 13–1105–CEC, ECF No. 10.) The Debtors' younger child attended Mt. Carmel from 2005 through 2011. (Mt. Carmel's Mem. of Law in Supp. of Mot. to Dismiss at 3, Adv. Pro. No. 13–1107–CEC, ECF No. 9–1.)

From 2005 to 2011, Mt. Carmel received approximately $21,540 (the “Mt. Carmel Tuition Payments”) for tuition paid on behalf of the younger child and approximately $3,206 for tuition paid on behalf of the older child. (Compl. ¶¶ 10–11, Adv. Pro. No 13–1107–CEC, ECF No. 1). From 2006 through 2010, Xaverian received approximately $21,816 (the “Xaverian Tuition Payments,” and together with the Mt. Carmel Tuition Payments, the “Tuition Payments”) for tuition paid on behalf of the older child. (Compl. ¶¶ 8–9, Adv. Pro. No. 13–1105, ECF No. 1.)

On March 22, 2013, the Trustee commenced these adversary proceedings against Xaverian and Mt. Carmel seeking to recover the Tuition Payments, totaling $46,562, as constructively fraudulent transfers under §§ 544 and 548(a)(1)(B) and New York Debtor & Creditor Law (“DCL”) § 273. The Trustee alleges that because the Debtors' children, not the Debtors, received the education provided by the Defendants, the Debtors did not receive reasonably equivalent value or fair consideration in exchange for the Tuition Payments. The Trustee also contends that, at the time each tuition payment was made, the Debtors (i) were insolvent or were rendered insolvent as a result of such transfers, (ii) had unreasonably small capital for the business in which they were engaged or were about to engage, and/or (iii) intended to incur, or believed that they would incur, debts beyond their ability to pay as such debts matured. (Compl. ¶ 24, Adv. Pro. No. 13–1105–CEC, ECF No. 1; Compl. ¶ 26, Adv. Pro. No. 13–1107–CEC, ECF No. 1.)

The Defendants' motions to dismiss focuses on the element of reasonably equivalent value and fair consideration, contending that, as a matter of law, the value provided in the form of an education for the Debtors' children constitutes reasonably equivalent value and fair consideration to the Debtors. ²

Legal Standard for Dismissal of Complaints

Federal Rule of Civil Procedure 12(b)(6), made applicable to these adversary proceedings by Federal Rule of Bankruptcy Procedure 7012(b), provides that a complaint may be dismissed “for failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6); Fed. R. Bankr.P. 7012(b). The purpose of Rule 12(b)(6) “ ‘is to test, in a streamlined fashion, the formal sufficiency of the plaintiff's statement of a claim for relief without resolving a contest regarding its substantive merits.’ ” Halebian v. Berv, 644 F.3d 122, 130 (2d Cir.2011) (quoting Global Network Commc'ns, Inc. v. City of New York, 458 F.3d 150, 155 (2d Cir.2006)).

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662,678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544,570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). In making this determination, a court must liberally construe the complaint, accept the factual allegations as true, and draw all reasonable inferences in favor of the plaintiff. Goldstein v. Pataki, 516 F.3d 50, 56 (2d Cir.2008). However, courts “are not bound to accept as true a legal conclusion couched as a factual allegation.” Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986); see also Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (“Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.”). A complaint must make a “ ‘showing,’ rather than a blanket assertion, of entitlement to relief” supported by sufficient “factual allegation[s].” Twombly, 550 U.S. at 556 n.3, 127 S.Ct. 1955. “A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement.” Iqbal, 556 U.S. at 678, 129 S.Ct. 1937 (alteration in original) (citations and internal quotation marked omitted).

Discussion

A. Constructively Fraudulent Conveyance

1. Legal Standard for Avoidance Based on Constructive Fraud

Section 548(a)(1)(B) authorizes a trustee to avoid a transfer of an interest in property of the debtor under a theory of constructive fraud. That section provides:

The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—

(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and

(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;

(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital;

(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured; or

(IV) made such transfer to or for the benefit of an insider, or incurred such obligation to or for the benefit of an insider, under an employment contract and not in the ordinary course of business.

11 U.S.C § 548(a)(1)(B). The purpose of this provision is to set aside transactions that “unfairly or improperly deplete a debtor's assets” so that the assets may be made available to creditors. Togut v. RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 435 B.R. 866, 875 (Bankr.S.D.N.Y.2010) (citing 5 Collier on Bankruptcy ¶ 548.01 and In re PWS Holding Corp., 303 F.3d 308, 313 (3d Cir.2002)). See also Walker v. Treadwell (In re Treadwell), 699 F.2d 1050, 1051 (11th Cir.1983) (“The object of section 548 is to prevent the debtor from depleting the resources available to creditors through gratuitous transfers of the debtor's property.”).

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