In re Dreier LLP

• Decision Date: 04 January 2016
• Docket Number: Case No. 08–15051 (SMB)
• Citation: 544 B.R. 760
• Parties: In re: Dreier LLP, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

544 B.R. 760

In re: Dreier LLP, Debtor.

Case No. 08–15051 (SMB)

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

Signed January 4, 2016

HOWARD M. FILE, ESQ., P.C., Counsel for Claimants, 260 Christopher Lane, Suite 102, Staten Island, New York 10314, Howard M. File, Esq. Of Counsel

KLESTADT WINTERS JURELLER SOUTHARD & STEVENS LLP, Counsel to Sheila M. Gowan, as Plan Administrator for Dreier LLP, 570 Seventh Avenue, 17th Floor, New York, N.Y. 10018, Sean C. Southard, Esq., Brendan M. Scott, Esq., Lauren C. Kiss, Esq. Of Counsel

MEMORANDUM DECISION GRANTING PLAN ADMINISTRATOR'S OBJECTION AND RECLASSIFYING PROOFS OF CLAIM NOS. 171, 172, AND 173

STUART M. BERNSTEIN, United States Bankruptcy Judge:

Sheila M. Gowan, the former chapter 11 trustee and current Plan Administrator for the estate of Dreier LLP has objected to the overlapping proofs of claim filed by Robin Bartosh, Toby Bartosh, and the Cosmetics Plus Group Ltd. ("Cosmetics Plus," and together with Robin Bartosh and Toby Bartosh, the "Claimants"). The Claimants assert that they have a security interest in certain funds that Gowan holds, or alternatively, that Gowan holds those funds in trust for their benefit.¹

The Court conducted a trial on July 22, 2015, and now concludes that the Claimants are, at most, unsecured creditors. Any superior claims to the funds acquired by the Claimants based on the transactions described below are subject to disallowance under 11 U.S.C. § 502(d), and the claims must be reclassified as general unsecured claims.

BACKGROUND²

A. The Cosmetics Plus Bankruptcy

On August 10, 2001, Cosmetics Plus and various affiliate companies filed for chapter 11 protection in the United States Bankruptcy Court for the Southern District of New York. Cosmetics Plus retained Traub, Bonacquist & Fox LLP (the "Traub Firm") as bankruptcy counsel. Cosmetics Plus subsequently employed the law firm Dreier LLP after Paul Traub and Steven Fox became partners at Dreier LLP. (JPTO ¶¶ 3–4.)

In 2003, Cosmetics Plus filed an adversary proceeding against its insurer, American International Group, Inc. ("AIG"), to recover under a business interruption policy for losses sustained as a result of the September 11, 2001 terrorist attacks. (DX B at ¶ 21.) By order dated February 26, 2008, (DX D at 1), Bankruptcy Judge Prudence Beatty, who was presiding over the Cosmetics Plus chapter 11 case, approved a settlement agreement between AIG and Cosmetics Plus (the "Settlement Agreement") pursuant to which AIG agreed to pay $350,000 to Cosmetics Plus, "care of its general bankruptcy counsel, Dreier LLP." (DX C at 3–4.) AIG, through New Hampshire Insurance Company, issued a check for $350,000 to "Dreier LLP, as attorneys for Cosmetics Plus Group, Ltd. and Cosmetics Plus South, Ltd." on March 5, 2008. (DX H.) The funds were deposited into the Dreier LLP attorney trust account ending in the digits 5966 (the "5966 Account") and designated "Attorney Trust Account Client No. 600109.001 Cosmetics Plus" on March 14, 2008. (DX H; JPTO ¶ 6; PX 15.)

At the time of the deposit on March 14, 2008, the 5966 Account contained Dreier LLP client funds and Dreier LLP operating funds. It also contained the proceeds of Marc Dreier's note fraud scheme which has been described in previous decisions of this Court.³ (JPTO ¶ 7.) The daily ending balance of the 5966 Account on March 14, 2008 was $3,090,191.44. (JPTO ¶ 8.) By mid-August 2008, however, the 5966 Account was completely exhausted and carried a negative balance for several days. (JPTO ¶¶ 10–15.)

Judge Beatty ordered the dismissal of Cosmetics Plus's chapter 11 cases by order dated October 30, 2008 (the "Dismissal Order"). (DX F.) The Dismissal Order directed the Cosmetics Plus estate to distribute its cash on hand to pay administrative expenses and United States Trustee fees, and then distribute "all remaining Cash ... to the Secured Creditor [i.e., the Bartoshes] in partial satisfaction of its Secured Claim." (DX F at ¶ 7.) As of that date, the 5966 Account had nearly $48 million on deposit.⁴ (See PX 9 at 7.)

Despite the Dismissal Order, no funds were transferred by Dreier LLP to or for the benefit of the Claimants until early December 2008. The circumstances of that transfer are important to the resolution of this dispute. Marc Dreier was arrested in Canada on December 2, 2008.

That same day, Fox sent an email to John Provenzano, Dreier LLP's comptroller, (Tr. 71:11–15), and Roseann Letizia⁵ of Dreier LLP explaining that Dreier LLP was holding $350,000 in its client trust account on behalf of its client, Cosmetics Plus. He asked Provenzano and Letizia to draw a check payable to "Robin and Toby Bartosh" and forward it to Fox for delivery to Cosmetics Plus. (DX R.) His request did not meet with success, (Tr. 64:11–18), and the next day, Traub spoke with Provenzano to discuss the release of client trust funds by Dreier LLP. (Tr. 74:5–8, 75:6–9; see also Tr. 64:19–25.)

Following that conversation, Provenzano spoke with Dreier, the signatory on the 5966 Account, (Tr. 75:17–20), and received authorization to wire the funds requested by Traub. (Tr. 76:13–19.) On December 4, 2008, Dreier LLP initiated two wire transfers from the 5966 Account to the Traub Firm's account. (PX 11 at 1.) One of those transfers, in the amount of $441,145.58 (the "Traub Firm Transfer"), included the $350,000 owed to the Claimants under the Dismissal Order. It also included amounts corresponding to two other Traub Firm matters. (PX 11 at 1; DX U.)⁶ The Traub Firm Transfer was made with an understanding that the funds would be held by the Traub Firm for the benefit of particular Traub Firm clients, including Cosmetics Plus. (Tr. 64:19–65:11.) Once the transfer was received, the Traub Firm maintained the funds in an escrow account, (Tr. 44:5–7), until the funds were turned over to the Trustee in February 2009, (Tr. 45:22–46:4), pursuant to an agreement discussed below.

B. The Dreier LLP Bankruptcy

On December 8, 2008, the Securities and Exchange Commission filed a complaint alleging that Dreier had violated the federal securities law through the sale of certain notes. In re Dreier LLP, 429 B.R. 112, 119 (Bankr.S.D.N.Y.2010). On December 10, 2008, the United States District Judge Miriam G. Cedarbaum appointed a receiver, and the receiver filed a voluntary chapter 11 petition on behalf of Dreier LLP on December 16, 2008. Id. On January 9, 2009, Gowan was appointed chapter 11 trustee.

Gowan subsequently contacted Traub and requested the return of the Traub Firm Transfer which she would hold subject to further direction from the Court. (Tr. 44:7–45:1; DX X, at 1 of 3.) Accordingly, on February 27, 2009, the Traub Firm wired $441,145.58 to Gowan's account from the Traub Firm account. (Tr. 65:18–66:22; DX X, at 1 of 3.) Gowan holds the wired funds in a segregated escrow account subject to further order of the Court, (Tr. 66:12–22; DX X), and the Court assumes that whatever rights the Claimants had in the Traub Firm account continue in Gowan's account.

On March 18, 2009, Robin and Toby Bartosh and Cosmetics Plus filed proofs of claim in the Dreier LLP case. (See Plan Administrator's Objection to Proof of Claim Nos. 171, 172 and 173, filed Feb. 6, 2015 ("Claim Objection "), Exs. A, B & C (ECF Doc. # 2096).) Each proof of claim asserted a $350,000 secured claim against Dreier LLP based upon Dreier LLP's retention of the proceeds of the Settlement Agreement. (Id. ) Gowan, now Plan Administrator, filed the Claim Objection on February 6, 2015. The Claim Objection argued that the proceeds of the Settlement Agreement had been "hopelessly commingled" with other funds in the 5966 Account, (Claim Objection ¶ 18), and the Claimants' secured claims should be reclassified as general unsecured claims. (Id. ¶¶ 27–28.)

In response, the Claimants argued that the Traub Firm had failed to comply with Judge Beatty's Dismissal Order in a timely manner, and that the Settlement Agreement proceeds had been segregated and held by the Traub Firm for the benefit of the Claimants from December 4, 2008 through February 27, 2009. (Claimants' Response to Plan Administrator's Objections to Proof of Claim Nos. 171, 172, and 173, filed Mar. 17, 2015, at 7 (ECF Doc. # 2110).) Additionally, the Claimants argued that equitable principles justified imposition of a constructive trust on the funds for their benefit and that equity supported relaxation of the requirement that they be required to trace their interest in the funds. (Id. at 10–12.)

Gowan replied, inter alia, that to the extent the Traub Firm Transfer provided the Claimants with rights superior to general unsecured creditors, such a transfer was a preference subject to avoidance pursuant to 11 U.S.C. § 547(b). (Plan Administrator's Reply to Claimants' Response and in Further Support of Plan Administrator's Objection to Proof of Claim Nos. 171, 172, and 173, filed Mar. 23, 2015, at 4–5 (ECF Doc. # 2113).)

DISCUSSION

A properly filed proof of claim "constitute[s] prima facie evidence of the validity and amount of the claim. Fed. R. Bankr.P. 3001(f). An objector may negate the prima facie validity of such a proof of claim and shift the burden of proof back to a claimant by producing "evidence equal in force to the prima facie case ... which, if believed, would refute at least one of the allegations that is essential to the claim's legal sufficiency." Creamer v. Motors Liquidation Co. GUC Trust (In re Motors Liquidation Co.), No. 12 CIV. 6074(RJS), 2013 WL 5549643, at *3 (S.D.N.Y. Sept. 26, 2013) (quoting In re Allegheny Int'l, Inc., 954 F.2d 167, 173 (3d Cir.1992) ). Thereafter, a claimant must prove the validity of a claim by a preponderance of the evidence. Id.

A. The Secured Claim

The Claimants do not hold secured claims. The Code requires that the property which is the subject of a secured claim be property "in which the estate has an interest." 11 U.S.C. § 506(a)(1). The beneficial ownership of funds in an attorney escrow account does not create a secured claim against...