In re Candor Diamond Corp.
| Decision Date | 11 August 1987 |
| Docket Number | Adv. No. 82-5603A.,Bankruptcy No. 81 B 11594 (TLB) |
| Citation | 76 BR 342 |
| Parties | In re CANDOR DIAMOND CORP., Debtor. Daniel McCOLLEY, Trustee of Candor Diamond Corp., Plaintiff, v. Chanoch Henoch ROSENBERG, Romex Diamonds Corp., RY Diamond Co., Inc., and Achim Diamond Corp., Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of New York |
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Stroock & Stroock & Lavan by Lawrence M. Handelsman, Robin E. Keller, Sherry J. Millman, New York City, for trustee.
Finkel, Goldstein & Berzow by Harold S. Berzow, Kevin J. Nash, New York City, for Chanoch Rosenberg, Romex Diamonds Corp. & Ry Diamond Co.
DECISION ON TRUSTEE'S MOTION FOR PARTIAL SUMMARY JUDGMENT AGAINST CHANOCH HENOCH ROSENBERG, ROMEX DIAMONDS CORP. AND RY DIAMOND CO., INC.
The fraud that has pervaded the Candor Diamond Corp. ("Candor") bankruptcy again surfaces, this time in an adversary proceeding in which the trustee is seeking partial summary judgment to recover fraudulent transfers from three of the four defendants (the three are collectively called "defendants"). The defendants do not materially dispute the existence of or their participation in the fraudulent schemes alleged by the trustee. Instead the defendants offer several inapplicable or unpersuasive legal defenses. Accordingly, we grant the trustee's motion for partial summary judgment.
Prior to its bankruptcy, Candor bought and sold loose gems and manufactured and sold jewelry. On August 10, 1981, an involuntary petition in bankruptcy was filed against Candor. On November 9, 1981, an order for relief was entered following which Daniel McColley was appointed chapter 7 trustee ("Trustee").
Irwin Margolies ("Margolies"), the principal of Candor, diverted massive sums of money from Candor and its creditors to his personal use. He was indicted and pleaded guilty in 1982 to various charges of bankruptcy fraud.
Chanoch Rosenberg ("Rosenberg") and his wholly-owned companies, Romex Diamond Corp. ("Romex")1 and Ry Diamond Co., Inc. ("Ry") (the corporations, collectively, being called the "Rosenberg Entities") participated in at least one of Margolies' frauds. Margolies had been funneling money out of Candor and into the Rosenberg Entities by making payments for diamond purchases which did not occur. The scheme was fairly simple: Rosenberg would issue fictitious invoices for goods not delivered, receive payment from Candor, utilize Candor's funds in his own businesses and eventually return the funds to Margolies and/or his family. In January 1985 an information was issued charging Rosenberg with bankruptcy fraud ("Information"). Specifically, the Information charged that Rosenberg, together with Margolies and others, "unlawfully, wilfully, knowingly and fraudulently transferred and concealed the property of a corporation with intent to defeat the provisions of Title 11 by converting approximately $450,000 of Candor Diamond Corp. checks into cash." These actions constituted a violation of 18 U.S.C. § 152; Rosenberg pleaded guilty.
In this proceeding, the Trustee seeks recovery of the Candor funds described in the Information. After reviewing Candor's cancelled checks and bank statements, the Trustee had commenced a garden variety preference action against Romex on April 28, 1982. Unfortunately, because Candor's books and records had vanished, the Trustee's efforts to untangle its affairs were severely hampered and he was required to rely on the fruits of discovery and examinations pursuant to Rule 205 of the former Federal Rules of Bankruptcy Procedure to an extent perhaps greater than in most bankruptcy cases.
Discovery ensued in the preference action. In answering interrogatories directed to Romex, Rosenberg swore that Romex and Ry sold over a million dollars worth of goods to Candor from March through July 1981 and were paid in full. Thereafter, the Trustee's attorneys conducted a deposition of Romex and an examination of Ry,2 Rosenberg appearing on behalf of both companies. The sum and substance of Rosenberg's testimony was that all of the payments to the Rosenberg Entities were made in the ordinary course of business in exchange for diamonds delivered substantially contemporaneously with those payments. Rosenberg even submitted Romex and Ry invoices purporting to evidence these sales.
Having obtained this discovery pertaining to the alleged preferences and the Rosenberg Entities' seemingly legitimate transactions with Candor, and at the request of the United States Attorney, the Trustee held in abeyance the prosecution of his action. When the Information was later issued, the Trustee first discovered that Rosenberg was receiving hundreds of thousands of Candor's dollars as part of a laundering scheme. These facts were wholly at odds with Romex's answers to interrogatories and the deposition testimony. Consequently, the Trustee moved for leave of this court to (i) name Rosenberg and Ry as defendants in the Romex action; (ii) consolidate this action with an ongoing adversary proceeding against Achim Diamond Corp. ("Achim"), a related company which transacted business with Candor through Rosenberg; and (iii) file an amended complaint for recovery of fraudulent conveyances. On June 24, 1985, we granted the Trustee's motion. An amended complaint was filed.
The amended complaint alleges that during the one year prior to the filing date, Candor transferred in excess of one million dollars to the defendants without receiving any goods or services in exchange for some or all of these transfers. It also alleges that Rosenberg and the other defendants were engaged in a conspiracy with Margolies to embezzle and conceal Candor's funds from its legitimate creditors. The three claims for relief are based upon fraudulent transfers grounded in actual and constructive fraud. See 11 U.S.C. § 548.
After service of the amended complaint and amended answer, the Trustee again conducted discovery. Rosenberg was deposed as a defendant in his individual capacity and as the shareholder and officer of Romex and Ry (the "third Rosenberg deposition"). Finally, he told the truth. He admitted that he had received Candor checks in excess of one million dollars payable to Ry and Romex, had deposited those checks into the accounts of the Rosenberg Entities and had used the funds in connection with those businesses. He also admitted that, on certain occasions, he had received payments and provided invoices purporting to evidence the sale of goods which were never delivered. Rosenberg testified that between June 16, 1981 and July 1, 1981, he gave Margolies $20,844 in Romex invoices without delivering goods, received a Candor check and delivered the proceeds of the check to Margolies. Similar but significantly larger transactions occurred soon after. Rosenberg admitted that in payment of Romex invoices dated July 13 and July 15, 1981 and totaling $357,328 and in payment a Ry invoice dated July 17, 1981 in the amount of $252,314, he received approximately $600,000 for goods worth only $150,000, leaving an approximate $450,000 shortfall. This shortfall is the amount recited in the Information to which he pleaded guilty.
In support of his motion for summary judgment the Trustee proffers a Candor memorandum ("Memorandum") furnished to him by the Federal Bureau of Investigation. The Memorandum is signed by Rosenberg and apparently acknowledges Rosenberg's receipt of $445,457.96 for undelivered goods. A request for admissions concerning the Memorandum was served upon Rosenberg on March 24, 1984. He filed an untimely response on June 4, 1984. Accordingly, the Trustee has asked this court to deem admitted the following statements:
In his untimely response, without admitting the authenticity of the Memorandum, Rosenberg acknowledged his receipt of $450,000 in checks from Margolies and/or Candor for goods which were invoiced but not delivered. We do not know from this record the amounts of the individual checks nor their payees. One of the figures on the Memorandum is the exact amount of the Ry invoice. Thus, if we deem the statements admitted, we can infer that Ry probably received the $252,314 in cash without delivering goods in return and that the balance of $193,143.96 probably represents the difference between the cash received by Romex and the goods which it delivered to Candor.
Relying on Margolies' plea, Rosenberg's plea, the third Rosenberg deposition, the invoices, and the admissions, the Trustee asserts that he has made out a prime facie case of actual and constructive fraudulent transfers. He seeks judgment against all defendants in the amount of $466,301.96 ($20,844.00 plus $445,457.96) and an order directing payment to the estate of that amount less $180,000 already recovered. He also seeks from all defendants recovery of costs and attorneys' fees as a result of their obstruction of his investigation and their opposition to the motion for partial summary judgment. The Trustee also bases his attorneys' fee request on Rosenberg's knowing concealment of $180,000 of Candor's funds which the Trustee spent many years recovering and on Rosenberg's failure to make restitution to the estate as he represented at his allocution he would do.
Although the defendants' amended answer denies the material allegations of the Trustee's amended complaint, their...
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