Kartzman v. Latoc, Inc. (In re The Mall at Galaxy, Inc.)
| Decision Date | 29 April 2022 |
| Docket Number | Adv. Pro. 12-1769 (VFP),10-12435 (VFP) |
| Parties | In Re: THE MALL AT THE GALAXY, INC., Debtor. v. LATOC, INC., Defendant. STEVEN P. KARTZMAN, as Chapter 7 Trustee, Plaintiff, |
| Court | U.S. Bankruptcy Court — District of New Jersey |
Chapter 7
MELLINGER, SANDERS & KARTZMAN, LLC Steven P. Kartzman Esq. Steven A. Jayson, Esq. Attorneys for Steven P. Kartzman Chapter 7 Trustee/Plaintiff
PETER A. OUDA, ESQ. Attorney for Defendant, Latoc, Inc.
OPINION AFTER TRIAL ON ISSUE OF REASONABLY EQUIVALENT VALUE
This is the Court's Opinion on remand after trial. The trial followed the April 9, 2020 Opinion and Order of the United States District Court for the District of New Jersey (the "District Court"), which reversed in part the Bankruptcy Court's April 4, 2019 Opinion issued after a three-day trial (as well as a January 19, 2017 Order for partial summary judgment) in the avoidance action filed by Chapter 7 Trustee Steven P. Kartzman, Esq. (the "Trustee") against defendant Latoc, Inc. ("Latoc" or the "Defendant"). The District Court remanded the adversary proceeding to the Bankruptcy Court for further findings solely on the issue of reasonably equivalent value. The Bankruptcy Court conducted a trial on the remanded issue on August 25 and August 26, 2021 and issues this Opinion in compliance with the District Court's Order.
The Trustee's adversary proceeding seeks:
The Trustee argues that Debtor acted as a mere conduit or pass-through for the loan because the Debtor immediately transferred the $2 million in loan proceeds to certain non-debtor entities (defined below as the PermaLife Entities) in which the principals of the Debtor and Latoc both had interests -- but only after a direct loan from Latoc to the PermaLife Entities had been rejected. As a result, the Trustee asserts that the Debtor did not receive reasonably equivalent value for the $2 million loan from Latoc or the $592, 875.03 that the Debtor repaid to Latoc on that loan (the "Pre-Petition Transfers") and that the Pre-Petition Transfers should be avoided as constructively fraudulent transfers under applicable state and bankruptcy law. See 11 U.S.C. § 548(a)(1) and 11 U.S.C. § 544(b)(1), which allows the Trustee to pursue such claims under applicable state law, here N.J.S.A. §§ 25:2-25a(2) and 25:2-27a. Latoc disputes the Trustee's claim that the Debtor acted as a mere conduit or pass-through for the loan, arguing that it placed no restrictions on the Debtor's use of the loan proceeds and that the Debtor reasonably and legitimately used those proceeds to invest in its alleged subsidiaries.
After trial, the Trustee and Latoc each submitted: (i) Proposed Findings of Fact and Conclusions of Law; and (ii) responses thereto.[1] Other proceedings germane to this remand occurred in Bankruptcy Court between the District Court's issuing its April 9, 2020 Opinion and the Bankruptcy Court's trial of August 25-26, 2021. These proceedings are described below.
The Court has jurisdiction over this matter under 28 U.S.C. § 1334(b) and the Standing Orders of Reference entered by the United States District Court on July 10, 1984 and amended on September 18, 2012. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (B) [claims allowance], (H) [recovery of fraudulent transfer] and (O). Venue is proper in this Court under 28 U.S.C. § 1408. The Court issues the following findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052. To the extent that any of the findings of fact might constitute conclusions of law, they are adopted as such. Conversely, to the extent that any conclusions of law constitute findings of fact, they are adopted as such.
The Trustee's initial post-trial submission, Post-trial Proposed Findings of Fact as to Issue on Remand ("Trustee Proposed Findings"), relies in significant part on a Joint Stipulation of Undisputed Facts (the "Stipulated Facts") agreed to by the parties. The Stipulated Facts were filed at Docket No. 180. Many of those Stipulated Facts are relied upon by the Court in issuing this decision. Where non-Stipulated Facts are found or referred to, other appropriate citations will be made.
Since 1986, Debtor's line of business was leasing commercial units at real property it owned in Guttenberg, New Jersey.[2] Martin Sergi ("Mr. Sergi") was president, treasurer and board member of Debtor since 1986 and 90% equity owner of Debtor since 1997.[3] Mr. Sergi also held equity interests in and served as an officer, director and/or board member of numerous other entities, including (i) PermaLife Products, LLC ("PermaLife"); (ii) Bristow Rubber Recycling ("Bristow"); (iii) New York Rubber Recycling ("NYR"); (iv) Arizona Rubber Recycling LLC ("Arizona"); (v) Piedmont Rubber Recycling, LLC ("Piedmont"); and (vi) PermaLife Internet, LLC ("PLI") (collectively, the "PermaLife Entities").[4] None of the PermaLife Entities engaged in the same line of business as the Debtor.[5]
Mr. Sergi had repeated business dealings with Dibo Attar ("D. Attar") and his son, Raffaele Attar ("R. Attar") (collectively, the "Attars"), and with entities in which the Attars held interests and/or controlled.[6] The Attars directly or indirectly also held equity interests in PermaLife (including through Better Half Bloodstock, Inc., an entity in which the Attars owned interests).[7] R. Attar served as a director of PermaLife until shortly before it filed for bankruptcy protection with various other PermaLife Entities in 2009.[8] R. Attar also served as president of Latoc and of Better Half Bloodstock during the relevant period.[9]
In 2007, PermaLife needed funding and sought financing from the Attars.[10] PermaLife's need for financing stemmed in substantial part from a fire that occurred in September 2007 at its Arizona facility, causing significant damage.[11] Because of R. Attar's conflicting roles with the prospective borrower (PermaLife) and lender (Latoc), the PermaLife Board would not approve borrowing from an Attar-affiliated entity such as Latoc.[12] Additionally, Gemini Investors IV, L.P. ("Gemini"), an existing, secured creditor of PermaLife, had imposed restrictions in its loan terms (the "Gemini Loan") that prevented PermaLife from further borrowing from third parties.[13] These restrictions also prevented a direct loan to PermaLife by Latoc.
The parties dispute (at the fringes) how Latoc's $2 million loan to the Debtor came about. Based on D. Attar's deposition testimony, as confirmed by R. Attar and Mr. Sergi, the parties agree that the Latoc Loan was discussed while Mr. Sergi and D. Attar were on vacation in Italy later that same month (September 2007).[14] At that time, when the parties also discussed the fire at the Arizona PermaLife facility, Mr. Sergi approached D. Attar for a loan.[15] When asked at deposition if that was for a loan to PermaLife, D. Attar said: "no for a loan," and he ultimately testified that the request was for a loan to the Debtor.[16]
Shortly thereafter, Mr. Sergi and D. Attar caused the Debtor and Latoc to enter into a $2 million loan agreement (the "Loan" or the "Latoc Loan") that was evidenced by a November 15, 2007 promissory note (the "Latoc Note").[17] The Latoc Note required the Debtor to repay the loan with interest and as it sold condominium units, among other terms.[18] It is undisputed and indeed stipulated that the $2 million in loan proceeds (the "Loan Proceeds") were deposited into Debtor's account at JP Morgan Chase Bank, N.A. through advances made from October 2007 (before the Latoc Note was signed in November) through May 2008.[19] It is similarly stipulated that, after being deposited in those accounts, all or virtually all the Loan Proceeds were immediately transferred to various PermaLife Entities, which were "all entities that [Mr.] Sergi and the Attars controlled and/or in which he [Sergi] and the Attars held an ownership interest."[20] The Debtor and the PermaLife Entities did not enter into any written agreement regarding the transfer of the Latoc Loan proceeds or how they would be repaid to the Debtor.[21] During the period from February 2008 to September 2009, the Debtor made the Pre-Petition Transfers in the amount of $592, 875.03 to Latoc in repayment of that Loan.[22]
As part of its defense, Latoc asserts that it was not aware of the purpose of the Latoc Loan and that it did not restrict or limit how its proceeds would be used.[23] The Court finds this contention to be not credible for several reasons. First, the timing of the Loan, which was made shortly after the fire at the PermaLife facility in Arizona and after a direct loan from the Attars or their entities had been rejected by the PermaLife Board, strongly indicates that both the Debtor and Latoc knew what the purpose of the Loan was. Second, the acknowledged discussions between Mr. Sergi and the Attars as to PermaLife's need for funding after the fire further confirm this knowledge. Third, the immediate and full disbursement of the Loan Proceeds by the Debtor to PermaLife and its affiliates as advances were made by Latoc is completely consistent with that intended purpose. Fourth, the close business and personal relationships between Mr....
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