In re Fischer

• Decision Date: 07 April 2004
• Docket Number: No. 95-17119-608.,95-17119-608.
• Citation: In re Fischer, 308 B.R. 631 (E.D. N.Y. 2004)
• Parties: In re David FISCHER, Debtor.
• Court: U.S. District Court — Eastern District of New York

308 B.R. 631

In re David FISCHER, Debtor.

No. 95-17119-608.

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

April 7, 2004.

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Robert J. Kaplan, Esq., New York City, for Defendants.

Rosenberg, Musso & Weiner LLP, Brooklyn, NY, for trustee.

Herzfeld & Rubin, P.C., New York City, for Plaintiffs.

DECISION AFTER TRIAL

CARLA E. CRAIG, Bankruptcy Judge.

This matter arises in seventeen adversary proceedings brought by a group of plaintiffs ("plaintiffs," "shareholders" or "investors") against debtor David Fischer ("debtor" or "Fischer") and certain of his relatives and affiliates. The complaints assert claims for conversion, breach of fiduciary duty, fraud, accounting, and the imposition of a constructive trust. An eight day trial was held on the issues of whether any or all of the claims asserted in these adversary proceedings are barred under applicable statutes of limitation, and, if so, whether the debtor engaged in conduct which prevents him from asserting that defense. This opinion constitutes the Court's findings of fact and conclusions of law after hearing the evidence adduced at that trial.

Jurisdiction

This Court has jurisdiction of each of these adversary proceedings pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(2)(I) and the Eastern District of New York Standing Order of Reference dated August 28, 1986. The adversary proceedings are core proceedings pursuant to 157(b)(2)(A),(B), and (0).

Background

These adversary proceedings grow out of a long-running dispute within the Lubavitcher Orthodox Jewish community in Crown Heights, Brooklyn (the "Community"), between David Fischer, who was until 1987 a prominent member of the Community, and a group of individuals who claim to be shareholders in corporations set up by Fischer between 1974 and 1976. The following facts, which are not in dispute, provide a partial time line of relevant events.

In the early 1970s, following an appeal by the Lubavitcher Grand Rebbe, the spiritual leader of the Community, to its members to revitalize and improve the housing conditions of the Community, Fischer embarked on a plan to purchase and manage apartment buildings in Crown Heights. (JPTO, Plaintiffs' Contentions of Fact, ¶¶ 2-5; Feb. 27 Tr. p. 174-175.)¹ Between July 1974 and March 1976, together with Zalman Deitsch and Yitzok Gorovitz (also members of the Community), Fischer approached residents of the Community and offered them the opportunity to invest. (Feb. 27 Tr. p. 181.) Each of the investors received shares of stock in a single-asset corporation which acquired an apartment building (the "Properties"). (Feb. 27 Tr. p. 175-178; Plaintiffs' Exs. Nos. 9-16.) Ten such corporations were created, and stock was issued to the plaintiffs in 1974-76. (Id.) Partnership shares in Crown Realty Partnership, also a single-asset entity, were issued to Zalman Deitsch in August, 1977. Eight of these ten corporations and Crown Realty Partnership are at issue in the instant adversary proceedings.²

Fischer, Deitsch and Gorovitz were officers of the Corporations and were responsible for the management of the Properties. (Feb. 28 Tr. p. 117-119.) As Fischer put it,

[T]his is the way the people who invested the money they rely on Mr. Deitsch and other people on rely on Mr. Gorovitz and other people relied on me. [The investors] were not real estate people. They were regular people, working people. They did not understand. They rely on us to run the property the best way it is possible.

(Feb. 28 Tr. p. 117.)

Although Gorovitz initially maintained the "books, corporate books, check books" relating to the Corporations for approximately half a year, Fischer took over this function because Gorovitz and Deitsch were unable to devote the necessary time to the task. (Feb. 26 Tr. p. 151-154.)

Fischer was more involved with the day-to-day management of the Properties than either Deitsch or Gorovitz, and eventually took responsibility for managing the buildings (March 3 Tr. p. 28.) At this time, Fischer was a well-known and well-respected figure in the Community, because of his work with real estate in the Community, and because of his position as a rabbi, as well as the fact that he served as a rabbinical judge in the Beth Din, or rabbinical court. (Feb. 28 Tr. p. 122-126; March 3 Tr. p. 48-49.) Fischer was also involved in other Community organizations, including the Crown Heights Jewish Community Council (the "Council"), a community organization dedicated to promoting the welfare of Crown Heights residents. (Feb. 28 Tr. p. 19.)

In 1978, without any authorization from the shareholders, Fischer transferred five of the Properties to five limited partnerships in which the shareholders had no interest. (Feb. 27 Tr. p. 204-216; JPTO ¶¶ 2, 5, 8, 10, 12.) These limited partnerships were structured as tax shelters, in which Fischer's majority partner, Silwin Associates, contributed the funds necessary to renovate the Properties and obtained the tax benefits. (Feb. 27 Tr. p. 205-210.) Fischer also mortgaged two of these Properties in 1978, and mortgaged four more of the Properties in the early 1980s. (See Appendix A.) Fischer did not seek any authorization from the shareholders before he transferred or mortgaged the Properties, nor did he tell them after the fact that he had unilaterally transferred or mortgaged the Properties (although the transfers and mortgages were a matter of public record). (Feb. 27 Tr. p. 204-223.) Fischer used the proceeds of these transactions for his own purposes. By 1986, each of the Properties had been sold, or had been mortgaged, with no accounting to the shareholders for the sale or mortgage proceeds. (Id.)

Between 1978 and 1985, Fischer issued checks from time to time to the shareholders of the Corporations. (Feb. 28 Tr. p. 76-101.) The parties agree about the dates of the checks and the amounts given to each plaintiff; however, Fischer contends that the checks constituted repayment of the amounts originally invested, while the investors contend that the payments represented profits or dividends distributed on their investments. (JPTO, Plaintiff's Exhibits (CC) to (RRR)).

In 1986, a new group took control of the Council and the prior Council board was ousted. (Feb. 28 Tr. p. 20-21.) Shortly thereafter, the Crown Heights Rabbinical Court, or Beth Din, sent Fischer a summons on behalf of the new Council board directing Fischer to produce all his books and records pertaining to the Corporations. (Feb. 28 Tr. p. 34-36.) Fischer appeared before the Beth Din and brought certain books and records, but the Beth Din requested materials which Fischer did not provide. (Id., p. 38-39.) On February 23, 1987, the Beth Din issued a "Seruv," a contempt citation and form of excommunication against Fischer for his failure to provide books and records and an accounting of the Properties and the Corporations to the Council. (JPTO, ¶ 20.) Shortly afterwards, on March 18, 1987, the Beth Din issued a "Nedui," declaring that "one may not sit within 4 cubits of [Fischer]," effectively expelling Fischer from the Community. (JPTO, ¶ 21.) As a result of this series of events, Fischer left Crown Heights on March 15, 1987 and moved to Israel. (JPTO, ¶ 22.)

On May 18, 1987, approximately two months after Fischer's departure to Israel, several residents of the Community commenced an action in the Supreme Court of the State of New York, Kings County, alleging that Fischer had misappropriated their interests in the Chanuyot Company. (JPTO, ¶¶ 24, 25; Defendant's Proposed Exhibits, Ex. (V); Feb. 27 Tr. p. 59-60; Feb. 24 Tr. p. 242.). A few days later, on May 21, 1987, the shareholders of Sadov Realty Corporation, also members of the Community, commenced a state court action on behalf of Sadov against Shipur Hashchuna Realty Corporation, an entity owned by Fischer which was the managing agent of real property held by Sadov, alleging (among other things) that Shipur had refused to distribute mortgage proceeds of the property to them and had refused to account for rent received from the property. (JPTO, ¶¶ 28-37; JPTO Defendant's Proposed Exhibits, Ex. (DDD).). Although these lawsuits did not involve any of the Properties, it is significant that the allegations made against Fischer — that he misappropriated other shareholders' interests and failed to account for mortgage and rent proceeds — are similar to the claims made herein.

More than two years later, on July 20, 1989, and November 30, 1989, actions were commenced against Fischer, his relatives and his affiliates, by various residents of the Community who had invested in the Corporations, alleging that Fischer had breached his fiduciary duty, had defrauded them, had wrongfully converted rent, sales and mortgage proceeds of the Properties and the rents, had failed to account to the plaintiffs, and requesting the imposition of a constructive trust.³ (JPTO, ¶ 38; Defendant's Documentary Supplement Containing Plaintiffs' Complaints, Exs. A and B.) On August 15, 1995, an involuntary bankruptcy petition was filed against Fischer, and on May 6, 1998, an order for relief was entered against Fischer under chapter 7 of the Bankruptcy Code, commencing the instant bankruptcy case. In 1999, plaintiffs filed complaints as intervenors in ten adversary proceedings previously commenced by the Trustee against defendants.⁴ The intervenor complaints reiterate the allegations in the July and November 1989 Actions and assert claims for conversion, fraud, imposition of a constructive trust, breach of fiduciary duty, and accounting. (Defendants' Documentary Supplement Containing Plaintiffs' Complaints, Exs. (J) through (S).) On June 3, 1993, plaintiffs commenced derivative actions in the Supreme Court of the State of New York, Kings County, on behalf of six of the Corporations, alleging claims similar to those asserted in the July and November 1989 Actions. (Defe...