In re Harvard Knitwear, Inc.

• Decision Date: 27 April 1993
• Docket Number: Adv. No. 192-1269-353.,Bankruptcy No. 189-93895-353,189-93696-353
• Citation: 153 BR 617
• Parties: In re HARVARD KNITWEAR, INC., Debtor. In re STEPHEN DOUGLAS, LTD., Debtor. John S. PEREIRA, as Trustee of Harvard Knitwear, Inc., and Stephen Douglas, Ltd., Debtors, Plaintiff, v. Michael BINET, Morris Gluck, Bruce Masters, James Katz, Arnold Binet, Richard Binet, Frank R. Cohen, Cohen & Cohen, Schwartz & Company, Jacob H. Schwartz, Samuel Pfeiffer, Murray Hill Investments, Inc., Schlomo Berger, Yeshiva Jesode Hatorah V'es Chaim, Congregation Adas Yereim, Camp Adas Yereim and Naftoli Schlesinger, a/k/a Nat Schlesinger, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

153 B.R. 617 (1993)

In re HARVARD KNITWEAR, INC., Debtor In re STEPHEN DOUGLAS, LTD., Debtor John S. PEREIRA, as Trustee of Harvard Knitwear, Inc., and Stephen Douglas, Ltd., Debtors, Plaintiff, v. Michael BINET, Morris Gluck, Bruce Masters, James Katz, Arnold Binet, Richard Binet, Frank R. Cohen, Cohen & Cohen, Schwartz & Company, Jacob H. Schwartz, Samuel Pfeiffer, Murray Hill Investments, Inc., Schlomo Berger, Yeshiva Jesode Hatorah V'es Chaim, Congregation Adas Yereim, Camp Adas Yereim and Naftoli Schlesinger, a/k/a Nat Schlesinger, Defendants.

Bankruptcy Nos. 189-93895-353, 189-93696-353, Adv. No. 192-1269-353.

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

April 27, 1993.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Donovan Leisure Newton & Irvine by A. Peter Lubitz, John H. Wilkinson, Patrick J. Sullivan, New York City, for trustee.

Anderson Kill Olick & Oshinsky, P.C. by Roy Babitt, Avraham C. Moskowitz, New York City, for Naftoli Schlesinger.

DECISION ON MOTION TO DISMISS COMPLAINT FOR FAILURE TO STATE A CAUSE OF ACTION

JEROME FELLER, Bankruptcy Judge.

Defendant Naftoli Schlesinger, a/k/a Nat Schlesinger ("Schlesinger") moves to dismiss, as to him, the complaint ("Complaint") in the above-captioned adversary proceeding filed by John S. Pereira, the Chapter 7 Trustee ("Trustee") of Harvard Knitwear, Inc. ("Harvard") and Stephen Douglas, Ltd. ("Stephen Douglas") (Harvard and Stephen Douglas are hereinafter collectively referred to as the "Company" or "Debtors"). The Complaint alleges that Schlesinger together with other defendants, in effect, looted the Debtors' assets on a wide scale. Schlesinger, however, asserts that the claims of the Trustee against him should be dismissed, pursuant to Fed. R.Civ.P. 12(b)(6) and Fed.R.Bankr.P. 7012(b), for failure to state a claim upon which relief may be granted.

For the reasons that follow, Schlesinger's motion to dismiss is denied in part and granted in part. To the extent Schlesinger seeks dismissal of charges that he misappropriated assets, the motion is denied. On the other hand, to the extent Schlesinger seeks dismissal of charges that he conspired with other defendants in the alleged misappropriation of the Debtors' assets, the motion is granted. Insofar as the motion is granted and impacted portions of the Complaint dismissed, the Trustee is accorded leave to replead.

I.

Involuntary petitions under Chapter 7 of the Bankruptcy Code were filed against Harvard and Stephen Douglas on December 4, 1989, and November 16, 1989, respectively. In response to these involuntary petitions, Harvard and Stephen Douglas both filed voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code on December 18, 1989. The Company's reorganization effort was short lived. On March 7, 1990, this Court ordered the conversion of the Harvard and Stephen Douglas Chapter 11 cases to liquidation cases under Chapter 7. Plaintiff John S. Pereira was appointed on March 7, 1990, as interim Chapter 7 Trustee of Harvard and Stephen Douglas. He has since qualified and is acting as their permanent Chapter 7 Trustee.

Prior to conversion of these cases to Chapter 7 liquidations, the Company, operating out of the Williamsburg section of Brooklyn, New York, was a domestic distributor of women's and children's knitted apparel and women's sportswear under various brands and labels. The Company's products were sold principally to multi-unit department stores and specialty chains at "popular" and "moderate-to-better" retail prices. Complaint ¶ 7.

II.

In this lawsuit, the Trustee charges the defendants with the pillaging and ravaging of the Company's assets, causing its collapse and consequent bankruptcy. The Complaint, alleging some twenty-seven (27) claims for relief, was filed by the Trustee against eighteen (18) defendants, including Schlesinger, pursuant to, inter alia, 11 U.S.C. §§ 544, 547, 548 and 550 and applicable state law to recover voidable preferential and/or fraudulent transfers made by the Debtors, and to recover money or property of the Debtors. Complaint ¶ 1. The Trustee seeks redress for so-called "massive wrongs" perpetrated against the Company by way of alleged misappropriation of assets by the defendants. Complaint ¶ 16. In addition, recovery is sought for alleged specific voidable transfers made to or on behalf of some defendants. Further, the Trustee charges that certain defendants, including Schlesinger, and unnamed other persons conspired to use the Debtors, inter alia, as a vehicle for the transfer of "enormous sums of money" having no relationship to any business conducted by the Company, and to divert Harvard's and Stephen Douglas' funds, all for the personal gain and profit of defendants, and for the financial benefit of a "Community" centered in Brooklyn, New York. Complaint ¶¶ 16 and 17. Apart from specific recoveries sought for alleged misappropriation of property and alleged voidable transfers, the Trustee requests entry of a judgment against the defendants, including Schlesinger, awarding the Debtors' estates compensatory and punitive damages, each in the sum of "at least" $20 million. Complaint at page 55.

As set forth in the Complaint, the defendants include officers, directors and shareholders of the Company, many of whom are related by blood or marriage, former attorneys and accountants for the Company, certain seemingly interconnected New York not-for-profit religious corporations allegedly used as conduits for asset transfers, and persons affiliated with those not-for-profit religious corporations. The Complaint is mute as to Schlesinger's relationship or nexus to the Company and/or any of the other defendants. The description of Schlesinger in the Complaint is limited to statements that he is a resident of the State of New York and that he is an alter ego of Bali Jewelry, Ltd. ("Bali") and Private Brands, Inc. ("Private Brands"). Bali and Private Brands are referred to in the Complaint as "Schlesinger's Companies." See, e.g., Complaint ¶¶ 43, 47, 68.

Structurally, the Trustee's two hundred thirty-three (233) paragraph Complaint consists of seventy-three paragraphs of jurisdictional statements, background, and allegations of factual predicate for the relief sought. The remaining one-hundred sixty (160) paragraphs delineate the twenty-seven claims for relief against the various defendants. Schlesinger is specifically mentioned in ten of the first seventy-three (73) paragraphs (¶¶ 14, 15, 17, 21, 43, 44, 47-48, 64, 68) and appears to be impliedly referred to in others (¶¶ 16, 18, 20, 26-40, 42, 45, 46, 65-67).

The Trustee charges that Company assets were diverted by the defendants and included in such diversions were the mysterious transfers of Company funds in undocumented fashion in favor of various defendants. Complaint ¶¶ 46 and 47. In this connection and specifically as to Schlesinger, Bali and Private Brands are alleged to have received $407,000 and $131,500, respectively, by endorsing or double endorsing checks issued by the Company, which checks were originally issued to numerous other persons or entities for no apparent consideration. Complaint ¶ 47. In addition, Bali and Private Brands are alleged to have received $832,564.10 from Harvard and $440,000 from Stephen Douglas by transfers made directly to them. Complaint ¶ 47.

Defendant Camp Adas Yereim ("CAY") is a summer camp for boys between the ages of 6 and 14 and a division of defendant Yeshiva Jesode Hatorah and/or Congregation Adas Yereim, religious corporations organized and existing under the law of the State of New York. Complaint ¶ 13. The Complaint alleges that "special" accounts were established in the name of CAY from which monies were loaned to Harvard. Complaint ¶ 68. Harvard, in turn, repaid monies in excess of $3 million, which amount exceeded the loans and, in at least some instances, represented repayment of loans never received by Harvard. Complaint ¶ 68. The Trustee alleges that Bali and Private Brands received amounts ranging from $500,000 to $1,000,000 from the CAY accounts into which Harvard had placed substantial monies. Complaint ¶ 68.

The Trustee charges that the Company engaged in extensive and unexplained transactions involving millions of dollars which were recorded primarily in loan and exchange accounts ("L/E Accounts"). Complaint ¶ 42. In the period January 1988 through August 1989 alone, some 1,500 transactions, involving tens of millions of dollars in cash or cash equivalents, were recorded in the L/E Accounts. Complaint ¶ 45. There are in almost all instances no loan documents, such as promissory notes, regarding these transactions and no records documenting any business purpose for these transactions. Complaint ¶ 42. On their face, these transfers had nothing to do with the manufacture and sale of apparel or the regular business operations of the Company. Complaint ¶ 45. Bali and Private Brands are alleged to have been beneficiaries of transactions transferring substantial sums of money through the L/E Accounts. Complaint ¶ 43.

In addition to the funds identified as having been received by Bali and Private Brands and by inference, via the alter ego theory, Schlesinger himself, the Trustee also alleges that Schlesinger and the other defendants entered into a common scheme or conspiracy to divert the Debtors' assets by means of, inter alia, the L/E Accounts, undocumented, mysterious and unexplained asset transfers to third parties. Complaint ¶¶ 44, 48, 64, 68. Accordingly, on the basis of the asserted conspiracy, the Trustee seeks redress from Schlesinger for asset diversions, even if they did not specifically inure to his benefit or the benefit of his alleged alter egos, Bali and Private Brands.

Unlike other defendants in this lawsuit, Schlesinger is not specifically named in any of the twenty-seven (27) claims for relief contained in the Complaint. The relief sought against Schlesinger is set forth in one (1) claim...