In re TS Employment, Inc.

• Decision Date: 13 June 2019
• Docket Number: Case No. 15-10243 (MG),Adv. Pro. Case No. 17-01013 (MG)
• Citation: 602 B.R. 840
• Parties: IN RE: TS EMPLOYMENT, INC., Debtor. James S. Feltman, not individually but solely as chapter 11 trustee for TS Employment, Inc., Plaintiff, v. Tri-State Employment Service, Inc., Tri-State Employment Services, Inc., Broadway PEO, Inc., Carusso Staffing Corp., STS Group, Inc., Tristate SC, Inc., Odyssey Associates, Inc., Tri-State North Carolina, Inc., TSE-PEO, Inc., Robert Cassera, John Messina, James Foley and Joseph Cassera, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

602 B.R. 840

IN RE: TS EMPLOYMENT, INC., Debtor.James S. Feltman, not individually but solely as chapter 11 trustee for TS Employment, Inc., Plaintiff,

v.Tri-State Employment Service, Inc., Tri-State Employment Services, Inc., Broadway PEO, Inc., Carusso Staffing Corp., STS Group, Inc., Tristate SC, Inc., Odyssey Associates, Inc., Tri-State North Carolina, Inc., TSE-PEO, Inc., Robert Cassera, John Messina, James Foley and Joseph Cassera, Defendants.

Case No. 15-10243 (MG)

Adv. Pro. Case No. 17-01013 (MG)

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

Dated: June 13, 2019 New York, New York

JENNER & BLOCK LLP, Attorneys for Plaintiff, 919 Third Avenue, New York, NY 10022, By: Vincent E. Lazar, Esq., Richard Levin, Esq., Carl N. Wedoff, Esq.

MEMORANDUM OPINION AND ORDER GRANTING PLAINTIFF'S RENEWED MOTION FOR ENTRY OF DEFAULT JUDGMENT

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

Pending before the Court is James S. Feltman's ("Trustee") renewed motion for entry of a default judgment against three corporate defendants—Tri-State Employment Service, Inc. ("Tri-State"), Tri-State Employment Services, Inc. ("Tri-State S"), and Broadway PEO, Inc. ("Broadway PEO," and together with Tri-State and Tri-State S, the "Default Judgment Defendants").¹ ("Renewed Motion," ECF Doc. # 54.) In support of the Renewed Motion, the Trustee filed a second supplemental declaration ("Second Supplemental Declaration," ECF Doc. # 54-1), general ledger reports ("General Ledger Reports," Second Supplemental Declaration at 7–233), and a supplemental memorandum of law ("Supplemental Brief," ECF Doc. # 57).

The Second Supplemental Declaration and the Supplemental Brief resolve the Court's concerns about the Trustee's evidentiary burden to establish the quantum of damages and the proper method to measure the amount of fraudulent transfers. Thus, the Court GRANTS the Renewed Motion and orders entry of a default judgment against in the following amounts: against Tri-State in the amount of $ 98,176,412; against Tri-State S in the amount of $ 137,030,343; and against Broadway PEO in the amount of $ 31,930,387.

I. BACKGROUND

On January 31, 2017, the Trustee filed this adversary proceeding including claims under sections 544, 547, 548 and 550 of the Bankruptcy Code, sections 273, 276, 278 and 279 of the New York Debtor and Creditor Law, and Bankruptcy Rules 7064 and 7065. ("Complaint," ECF Doc. # 1.) The Complaint seeks a judgment avoiding and recovering amounts improperly transferred by TS Employment, Inc. ("Debtor") to or for the benefit of Tri-State, Tri-State S, Broadway PEO, Carusso Staffing Corp., STS Group, Inc., Tri-state SC, Inc., Odyssey Associates, Inc., Tri-State North Carolina, Inc., TSE-PEO, Inc., Robert Cassera, John Messina, James Foley And Joseph Cassera (each a "Defendant," collectively, "Defendants").

On February 1, 2017, the Clerk of the Court issued a summons and notice of pretrial conference in an adversary proceeding. ("Summons," ECF Doc. # 2.) On the same day, the Summons and Complaint was served on Tri-State, Tri-State S, Broadway PEO, Carusso Staffing Corp., STS Group, Inc., Tri-State SC, Inc., Tri-State North Carolina, Inc., and TSE-PEO, Inc. (each a "Corporate Defendant," collectively, the "Corporate Defendants"). Applying Bankruptcy Rule 7004(b)(3), the Trustee mailed copies to the attention of an officer of each Corporate Defendant and to the registered service agent of each Corporate Defendant except TSE-PEO, Inc. (See "First Certificate of Service," ECF Doc. # 5.) On February 6, 2017, the Summons and Complaint was served by mailing copies to the attention of the registered service agent of TSE-PEO, Inc. (See "Second Certificate of Service," ECF Doc. # 6.) The Corporate Defendants had until March 3, 2017 to answer or otherwise respond to the Complaint, but no appearances or responses have been filed. None of the Corporate Defendants has defended this adversary proceeding. On April 19, 2017, the Clerk of this Court certified and entered defaults against the Corporate Defendants. ("Clerk's Entries of Defaults Against Corporate Defendants," ECF Doc. ## 23–30.)

On November 7, 2018, the Court heard the Trustee's motion for default judgment against all eight Corporate Defendants. ("Original Motion," ECF Doc. # 47.) At the hearing, the Court concluded that the Trustee's declaration in support of the Original Motion ("Original Declaration," ECF Doc. # 47-1) did not provide sufficient evidence for the Court to ascertain the proper amount of damages.

On November 29, 2018, the Trustee filed a supplemental declaration ("Supplemental Declaration," ECF Doc. # 50), providing additional details regarding the amount of damages sought in the Original Motion. Attached to the Supplemental Declaration were six exhibits: (i) the Debtor's audited financial statements for the period ending on December 31, 2013; (ii) Kossoff's declaration; (iii) certain general ledger entries; (iv) the Debtor's internal unaudited balance sheet for the period ending November 30, 2014; (v) copies of certain journal entries; and (vi) Cassera's declaration. ("Exhibits to the Supplemental Declaration," ECF Doc. ## 50-1–6.). The Supplemental Declaration asserted that the Debtor transferred $ 90,783,130 to or for the benefit of the Corporate Defendants, without receiving consideration in exchange. (Supplemental Declaration. ¶ 31.) The Trustee represented that he arrived at $ 90,783,130 after making various adjustments and disregarding improper "eve-of-bankruptcy journal entries." (Id. ¶ 30.) The Trustee, however, failed to explain how he arrived at $ 90,783,130 after disregarding various journal entries. The Court concluded that the Trustee's Supplemental Declaration did not provide a proper rule for calculating damages. (Id. ¶¶ 7, 13, 30.) In addition, the Court concluded that the Trustee did not provide sufficient evidence for the Court to determine the amount of compensable damages.

On February 27, 2019, the Court issued an order finding that the Original Declaration and the Supplemental Declaration did not provide sufficient evidence to establish the amount of compensable damages. ("Order," ECF Doc. # 52, at 5 ("While the Trustee supplied a Supplemental Declaration and exhibits to support his damages calculation, the declaration relies on unauthenticated schedules and hearsay conclusions based on what others said or did.").)

In a letter dated March 19, 2019 ("Letter," ECF Doc. # 53), the Trustee said he was able to address the authentication and hearsay issues identified in the Order by submitting the Second Supplemental Declaration and General Ledger Reports. On May 7, 2019, the Court held a hearing on the Renewed Motion.

At the May 7, 2019 hearing, the Court found that the Second Supplemental Declaration established the foundation required to admit the General Ledger Reports into evidence as Debtor's business records. The Court questioned, however, whether the Trustee had provided legal support for relying on the net cash outflows shown in the General Ledger Reports to establish damages for the fraudulent transfers. The Court directed the Trustee to submit a Supplemental Brief addressing the proper calculation of damages for fraudulent transfer claims. The Trustee submitted the Supplemental Brief on May 21, 2019. As explained below, the Court is now satisfied that the Trustee has provided appropriate legal support for the measure of damages he seeks to apply in the Renewed Motion.

II. LEGAL STANDARD

Rule 55 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Bankruptcy Rule 7055, "provides a ‘two-step process’ for the entry of a judgment against a party that fails to defend: first, the entry of a default, and second, the entry of a default judgment." City of New York v. Mickalis Pawn Shop, LLC , 645 F.3d 114, 128 (2d Cir. 2011) (quoting New York v. Green , 420 F.3d 99, 104 (2d Cir. 2005) ). "The first step, entry of a default, formalizes a judicial recognition that a defendant has, through its failure to defend the action, admitted liability to the plaintiff." Id. "The second step, entry of a default judgment, converts the defendant's admission of liability into a final judgment." Id.

A default generally is "an admission of all well-pleaded allegations against the defaulting party." D.H. Blair & Co. v. Gottdiener , 462 F.3d 95, 107 (2d Cir. 2006). However, "allegations in the complaint with respect to the amount of the damages are not deemed true." Credit Lyonnais Sec. (USA), Inc. v. Alcantara , 183 F.3d 151, 155 (2d Cir. 1999). Accordingly, the trial court "must ... conduct an inquiry in order to ascertain the amount of damages with reasonable certainty." Id. (citing Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp. , 109 F.3d 105, 111 (2d Cir. 1997) ). Ascertaining damages involves two steps: (1) "determining the proper rule for calculating damages on such a claim," and (2) "assessing plaintiff's evidence supporting the damages to be determined under this rule." Credit Lyonnais , 183 F.3d at 155.

III. DISCUSSION

A. The Trustee is Entitled to Default Judgment

The Trustee seeks to avoid and recover actual and constructive fraudulent transfers under sections 544(b)(1) and 550 of the Bankruptcy Code and sections 273, 278 and 279 of the New York Debtor and Creditor Law ("NYDCL"). (See Complaint at 27–31.) Section 544(b)(1) of the Bankruptcy Code incorporates "applicable law," and NYDCL applies in this adversary proceeding. 11 U.S.C. § 544(b)(1). Next, the Court explains how the NYDCL, especially its burden-shifting framework, operates in the context of a default judgment.

Liability for an actual fraudulent transfer under section 276 of the NYDCL is established if a transfer is made with intent to defraud on the part of the transferor. In re Sharp Int'l Corp. , 403 F.3d 43, 56 (2d Cir. 2005) ; Fed. Nat'l Mortg. Ass'n v. Olympia Mortg. Corp. , No. 04-CV-4971 NG MDG, 2014 WL 2594340, at *3 (E.D.N.Y. June 10, 2014). A default...