Messer v. Magee (In re FKF 3, LLC)
| Decision Date | 30 August 2016 |
| Docket Number | Case No. 13-CV-3601 (KMK) |
| Parties | In re: FKF 3, LLC, Debtor. GREGORY MESSER, as Trustee of the FKF TRUST, Plaintiff, v. JOHN F. MAGEE, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Appearances
Jeffrey A. Reich, Esq.
Reich, Reich & Reich, P.C.
White Plains, NY
Counsel for Debtor
Frederick N. Stevens, Esq.
Klestadt & Winters, LLP
New York, NY
Counsel for Plaintiff
Michael D. Pinsky, Esq.
Hayward, Parker, O'Leary & Pinsky
Middletown, NY
Counsel for Defendant John F. Magee
Plaintiff Gregory Messer, as trustee of the FKF Trust ("Plaintiff" or "Trustee"), brings an Adversary Proceeding (the "Adversary Proceeding"), asserting several claims against Defendants John F. Magee ("Magee"), Mitchell L. Klein ("Klein"), Burton R. Dorfman ("Dorfman"), Melissa A. Magee ("Melissa"), Patrice L. Magee ("Patrice"), Jonathan Magee ("Jonathan"), Lizbeth Magee Keefe ("Lizbeth"), Lawrence J. Keefe, Jr. ("Lawrence"), Valerie Magee ("Valerie"), FKF Holding Company, LP ("FKF Holding"), FKF V Holding Co. ("FKF V Holding"), S.F. Properties, LLC ("SF Properties"), Commercial Construction, Inc. ("Commercial Construction"), Bradley Industrial Park, Inc. ("Bradley"), FKF Edgewater, LLC ("FKF Edgewater"), Aventine Edgewater LLC ("Aventine Edgewater"), FKF Retail LLC ("FKF Retail"), Aventine Retail, LLC ("Aventine Retail"), Jerry's Self Storage, LLC ("Jerry's"), Rose Glasses, LLC ("Rose Glasses"), Bashert Developers, LLC ("Bashert"), TA Group, LLC ("TA Group"), JDJ Holding Co., LLC ("JDJ Holding"), Fasman, Klein & Feldstein, LLP ("FKF Firm"), and Dorfman, Knoebel & Conway, LLP ("Dorfman Firm") (collectively, "Defendants"), in connection with the underlying bankruptcy proceeding of FKF 3, LLC ("Debtor"). Before the Court is Magee's Renewed Motion to Withdraw the Reference to the Bankruptcy Court of the Adversary Proceeding ("Motion"). (Dkt. No. 1.)1 For the following reasons, Magee's Motion is granted.
On July 19, 2010, three creditors filed an involuntary petition against the Debtor (the "Petition"), for relief under chapter 11 of Title 11 of the United States Code (the "Bankruptcy Code"). (Bankr. Ct. Dkt. No. 1.)2 On August 9, 2010, the Debtor filed an answer to the Petition and consented to the entry of an order for relief, (Bankr. Ct. Dkt. No. 6), which was entered by the Bankruptcy Court on August 9, 2010, (Bankr. Ct. Dkt. No. 8). The Bankruptcy Court entered an order on April 18, 2011 confirming the Debtor and Unsecured Creditor Committee's First Amended Joint Plan of Liquidation (the "Plan"). (Bankr. Ct. Dkt. No. 250.) Under the Plan, all of the Debtor's rights, claims, interests, and assets were transferred to the FKF Trust, and Gregory Messer was appointed as Trustee. (Id. at 16.)
Magee filed two proofs of claim against the Debtor's estate. On October 4, 2010, Magee filed Claim Number 38, seeking $609,448.46 for money loaned pursuant to an alleged promissory note ("Claim 38"). (Aff. of Michael David Pinsky in Supp. of the Renewed Mot. to Withdraw the Reference ("Pinsky Aff.") Ex. 5 ("Claim 38") (Dkt. No. 2).) On December 15, 2010, Magee filed amended Claim Number 52 seeking damages from the Debtor in excess of $30 million on account of breaches of fiduciary duty and mismanagement of the Debtor ("Claim 52"). (Pinsky Aff. Ex. 6 ("Claim 52").) In support of Claim 52, Magee stated:
John Magee, independently and/or on behalf of entities within his control, asserts a contingent claim in the amount of $30,000,000 against [the Debtor], along with acontingent, unliquidated claim against the Debtor in an amount yet to be determined by reason of the Debtor's failure, through its Managing Member, Mitchell Klein, to act in good faith on its behalf and on behalf of its Members and creditors; by reason of the Debtor's failure, through its Managing Member, Mitchell Klein, to conduct its business within the scope of authority of its Operating Agreement; by reason of the Debtor's gross negligence and willful misconduct, through its Managing Member, Mitchell Klein, in the operation of its business; by reason of the Debtor's breach, through its Managing Member, Mitchell Klein, to act with such care as a reasonably prudent person in a like position would act under similar circumstances; and for the Debtor's breach, through its Managing Member, Mitchell Klein, of the Debtor's duty of loyalty to its members and to its creditors. John Magee's claim is both a direct and a derivative claim against the Debtor. To the extent John F. Magee's claim is a derivative claim, Mr. Magee respectfully demands that the Debtor take action on his behalf and, to the extent it does not, provides notice that he may do so in its place and in stead [sic].
(Id. at unnumbered 4.) Upon the Trustee's motion, which was contested by Magee, this claim was expunged by the Bankruptcy Court by order dated July 6, 2012. (Pinsky Aff. Ex. 8.)
On September 12, 2011, the Trustee commenced the Adversary Proceeding by filing the Complaint against Defendants. (Pinsky Aff. Ex. 3 ("Compl.").) The Trustee filed an Amended Complaint on January 11, 2013, which incorporated the allegations and claims in the Complaint, and added two additional claims. (Pinsky Aff. Ex. 4 ("Am. Compl.").) The following summary of facts is drawn from the Complaint and the Amended Complaint and is considered true for the purpose of resolving the instant Motion. The Debtor is owned in equal shares by its principals and members Magee, a real estate entrepreneur, Klein, an accountant, and Dorfman, an attorney (collectively, the "Principals"). (Compl. ¶ 2.) Beginning in 2004, the Principals borrowed on behalf of the Debtor in excess of $60 million from their respective clients, friends, and family members to finance various real estate development projects. (Id.) As explained to the Debtor's creditors (the "Creditors"), the Debtor's business model was to loan money at a slightly higherinterest rate than it paid to the Creditors and profit from the difference. (Id.) The Principals also represented to the Creditors that the Debtor's loans and investments were all secured by sufficient collateral to protect the Debtor's principal investment in the event of a default. (Id.) Most of the Creditors had a close professional and personal relationship with one or more of the Principals, so that the Principals were able to borrow significant amounts of money without providing any more than their representation that the Debtor was a "safe" investment. (Id. ¶ 3.) Many of the Creditors were longtime clients of Klein's accounting practice and considered Klein to be a close personal friend, and none of the Creditors were banks, institutions, or professional investors. (Id.)
The Principals operated the Debtor free of any oversight or outside review. (Id. ¶ 4.) The Principals actively solicited investments but did not register the Debtor under the Securities Act of 1933, 15 U.S.C. § 78a, et seq., never provided financial statements to the Creditors or any other party, and never sought qualified, disinterested professional advice with respect to the operation of the Debtor. (Id.) The Principals operated the Debtor in complete secrecy, intentionally establishing among the Creditors a belief that the Principals could obtain exceptional and consistent returns safely through superior knowledge of the real estate development, investment, and construction businesses. (Id.)
The Principals owed the fundamental duty of loyalty to the Debtor, which required, among other things, that the Principals not engage in self-dealing or otherwise use their position with the Debtor to further personal interests other than those of the Debtor, and that the Principals act with the highest degree of honesty and loyalty toward the Debtor and in the best interests of the Debtor. (Id. ¶ 5.) The Principals breached this duty when they took ownershipinterests in the Debtor's borrowers and used the Debtor's borrowed funds to make high-risk investments in their own projects. (Id. ¶ 6.) When they invested the Debtor's money, the Principals did not protect the Debtor's loan "with even so much as a promissory note," never personally guaranteed any insider borrowers' obligations to the Debtor, and, in all but one instance, never gave the Debtor a mortgage or security interest in their projects to protect the Debtor's claim. (Id. ¶ 7.) The Principals often gave themselves full credit for the Debtor's money by crediting their own personal capital accounts in the borrowers with the Debtor's loan and investments. (Id.)
The Principals operated the Debtor in a constant state of insolvency. (Id. ¶ 8.) More specifically, the Principals always disbursed more money to themselves than the Debtor made in profits. (Id.) In total, the Principals paid themselves over $4.2 million in four years. (Id.) The Principals were able to keep the insolvent Debtor afloat as long as they were able to make monthly interest payments to the Creditors. (Id.) In 2008, the real estate market collapsed, and most of the Principals' projects (and consequently, the Debtor's loans) were in default and required significant restructuring. (Id. ¶ 9.) Moreover, many of the Creditors had their own financial constraints and were unable to loan additional money to the Debtor. (Id.) By the summer of 2008, the Principals were aware that the Debtor's collapse was imminent, but, rather than act accordingly, the Principals continued to operate the Debtor, borrow more money from unknowing creditors, throw resources into failing projects, pull as much money out of the Debtor as they could, and in many instances, "just outright steal from the Debtor." (Id. ¶ 10.) The Complaint details this collapse. (See generally id.)
Every creditor of the Debtor that is not related to one of the Principals claims to have been defrauded by the...
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