Pryor v. Tiffen (In re TC Liquidations LLC)

• Decision Date: 06 December 2011
• Docket Number: Bankruptcy Nos. 03–81231–dte,05–8684–dte,05–8685–dte.,03–82765–dte,03–84721–dte,05–8683–dte,03–84723–dte,03–84722–dte.Adversary Nos. 05–8682–dte
• Citation: 463 B.R. 257
• Parties: In re TC LIQUIDATIONS LLC, et al., Debtors.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff, v. Steve Tiffen, Defendant.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff, v. Ira Tiffen, Defendant.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff, v. Barbara Mendelson, Defendant.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff, v. Jeffrey Cohen and Sandra Cohen, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

463 B.R. 257

In re TC LIQUIDATIONS LLC, et al., Debtors.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff,

v.Steve Tiffen, Defendant.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff,

v.Ira Tiffen, Defendant.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff,

v.Barbara Mendelson, Defendant.Robert L. Pryor, Chapter 7 Trustee of the bankruptcy estate of TC Liquidations, LLC, et al., Plaintiff,

v.Jeffrey Cohen and Sandra Cohen, Defendants.

Bankruptcy Nos. 03–81231–dte

03–82765–dte

03–84721–dte

03–84723–dte

03–84722–dte.Adversary Nos. 05–8682–dte

05–8683–dte

05–8684–dte

05–8685–dte.

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

Dec. 6, 2011.

Pryor & Mandelup, L.L.P., By: A. Scott Mandelup, Esq., Westbury, NY, LaMonica Herbst & Maniscalco LLP, By: David A. Blansky, Esq., Wantagh, NY, for Plaintiff.

Chadbourne & Parke LLP, Scott S. Balber, Esq., New York, NY, Ruskin Moscou Faltischek, P.C., By: Michael Amato, Esq., Uniondale, NY, for Defendants.

MEMORANDUM DECISION

DOROTHY EISENBERG, Bankruptcy Judge.

The Trustee of the Debtors' estates commenced the instant adversary proceedings against four insiders of the Debtors, and the Trustee seeks to recover certain transfers that the Debtors made to the Defendants between January 2001 and February 2003. These transfers during this time period included (a) two different sets of dividends that the Debtors issued to the Defendants, and (b) increases in certain of the Defendants' salaries while they were employed by the Debtors. The Trustee's relief is sought pursuant to 11 U.S.C. §§ 105(a), 544, 547(b), 548, 550, and 551; New York Debtor and Creditor Law (“DCL”) §§ 273, 274, and 275; and a theory of unjust enrichment under New York common law.

The Debtors' estate is comprised of the following substantively consolidated corporate entities: (a) Tiffen Manufacturing Corp.; (b) The Tiffen Company, LLC; (c) Saunders Photo–Graphic, Inc.; (d) HTN Photo, Inc.; and (e) S.P. Acquisitions Corporation.

This Court has jurisdiction over these adversary proceedings pursuant to 28 U.S.C. §§ 157 and 1334. Venue is proper in this Court pursuant to 28 U.S.C. § 1409. These are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A), (F), (H), and (O), and the following constitutes the Court's finding of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.

Background:

1. Ownership of Tiffen Manufacturing Corporation

Tiffen Manufacturing Corp. (“TMC”), the original company of the Debtors, manufactured, distributed and sold photographic supplies and equipment. The owners were Nathan and Helen Tiffen, the parents of Defendants Steven Tiffen, Ira Tiffen, Barbara Mendelson, and Sandra Cohen. In 1984 Nathan and Helen gifted 48% of their stock in TMC to their children.¹ They later retired and on April 24, 1991 they sold their remaining stock in TMC to their children Steven Tiffen, Ira Tiffen and Sandra Cohen for $1,832,000.00 plus interest (the “TMC Sale”). The children agreed to pay the purchase price in 180 monthly installments of $20,535.76. The sale increased Steven Tiffen's stock interest in TMC to 51%, and Ira Tiffen's and Sandra Cohen's interest each increased to 24.5%.² Under the TMC Sale agreement Steven Tiffen paid his parents $13,032.04 per month, and both Ira Tiffen and Sandra Cohen each paid their parents $3,751.86 per month. After the TMC Sale, TMC started issuing monthly dividends to Steven, Ira and Sandra in sums that were approximately equal to their monthly obligations to their parents under the TMC Sale agreement, and they used these additional dividends to pay their parents (the Trustee is not seeking to recover these dividends provided to the Defendants that were used to pay their parents). These dividend payments to the Defendants ceased in 1999. After the TMC Sale, Steven became the President of TMC and Ira was an employee and an officer in the company. Sandra was not employed by TMC, but her husband, Defendant Jeffrey Cohen, was employed as the Vice President of Consumer Product Sales.

2. TMC's Expansion

In 1998 TMC expanded and acquired two companies: Saunders Photo–Graphic, Inc. and S.P. Acquisition Corporation. Saunders Photo–Graphic, Inc. was a manufacturer and worldwide distributor of camera accessories, and S.P. Acquisition Corp. was the worldwide licensee of Kodak books (the “Saunders Acquisition”). The purchase price for the sale was $10 million, which was partially financed by a $7 million loan from European and American Bank and Manufacturers and Traders Trust Company (collectively, the “Banks”) (the “Saunders Loan”). The $3 million balance came from the cash from the acquired corporations. Although the companies became part of TMC's corporate structure, TMC was not the borrower under the $7 million loan. The borrowers were Steven Tiffen, Ira Tiffen, Barbara Mendelson and Sandra Cohen, and they were personally liable to the Banks for the monthly payments.³ The Saunders Loan was structured through the Defendants for tax considerations. TMC was an “S” corporation and Saunders Photo–Graphic, Inc. and S.P. Acquisition Corporation were both “C” corporations. If TMC was the borrower under the Saunders Loan and it acquired the companies, then the transaction would have changed TMC's corporate status into a “C” corporation. Under a “C” Corporation the taxes can be paid at both the corporate level and at the personal level. In an “S” Corporation the profits and losses of the business are reported on the owners' personal tax returns and the owners pay any tax due. In order to prevent possible double taxation that would result from TMC becoming a “C” Corporation the Saunders Loan was structured through the individual owners: Steven, Ira, Barbara and Sandra at the Defendants' requests. For tax purposes they would be viewed as having made an investment in TMC, which would preserve TMC “S” Corporation status. The loan proceeds were treated by the corporation as an investment by the Defendants into TMC. TMC used these loan proceeds to close the Saunders Acquisition.

As the borrowers under the Saunders Loan, the Defendants, not TMC, were liable for the monthly payments to the bank. TMC began issuing dividend payments to the Defendants in an amount equal to their monthly payments due under the Saunders Loan (the “Saunders Loan Dividends”), which the Defendants used to pay their monthly obligations.⁴ This was similar to the dividends that TMC issued to the Defendants that the Defendants used to pay their monthly obligations to their parents under the terms of the TMC Sale agreement. In both cases it was TMC, not the Defendants individually, who was paying the Defendants' monthly obligations.

When TMC received the monthly statements from the Banks, at the request of the individual Defendants, TMC issued the Saunders Loan Dividends into four bank accounts. Each of these accounts were jointly held in the name of TMC's then controller (Stacey Gonzalez) and one of TMC's four shareholders (Steven Tiffen, Ira Tiffen, Sandra Cohen, and Barbara Mendelson) (the “Gonzalez Accounts”). After the dividends were issued into the Gonzalez Accounts, Ms. Gonzalez would transfer the funds to the Banks to pay the monthly obligation. There was no evidence that the Defendants personally withdrew any money from these accounts.

3. The Creation of The Tiffen Company, LLC

In 1999 TMC continued to expand by entering into a Contribution Agreement with Eastman Kodak Company (“Kodak”). Kodak licensed its brand to TMC, and the companies formed a new limited liability company called The Tiffen Company, LLC (“Tiffen LLC”). In December 1999 the newly formed Tiffen LLC purchased Kalimar Inc., which manufactured and distributed cameras and accessories, had a large client base that included Walmart, Best Buy and Target, and held a license with the Barbie line of dolls.

That same month TMC combined all of its remaining assets with Tiffen LLC and it became Tiffen LLC's managing entity. Tiffen LLC also entered into various licensing and supply agreements with Kodak. To facilitate the continued expansion of the business, Tiffen LLC received a $20 million capital contribution from Centre Capital Investors II, L.P. (“Centre Partners”), an outside investment group. In exchange for its investment, Centre Partners received 2 million preferred units of stock in Tiffen LLC.⁵ Tiffen LLC's equity interests were divided as such: (a) TMC had a 66.95% interest; (b) Centre Partners had a 27.62% interest; and (c) Kodak had a 5.43% interest. Both Centre Partners and Kodak also had a “put right”, which would have permitted them to convert their stock interests in Tiffen LLC into cash if certain preconditions were met.

On December 13, 1999 the Saunders Loan was amended to reflect the creation of Tiffen LLC, and a “Second Amended and Restated Credit Agreement” was entered into between Tiffen LLC and the Banks (the “Second Amended Credit Agreement”). The Second Amended Credit Agreement defined Tiffen LLC as the “Borrower” under the Saunders Loan, and provided that Tiffen LLC guaranteed the Defendants' obligations under the loan to the Banks. The Saunders Loan Dividends continued to be issued to the Defendants.

With the formation of Tiffen LLC in December 1999, Steven's, Ira's, and Jeffrey's roles in the company changed and their responsibilities increased. Steven Tiffen became the President and Chief Operating Officer of Tiffen LLC, and Ira Tiffen became an Executive Vice President of Research and Development. Jeffrey Cohen's job in the company changed from sales to one in consumer products management and development. Around December 1999, with the formation of Tiffen LLC, the salaries of Steven, Ira, and Sandra's husband Jeffrey Cohen increased (the “Salary Increases”). The business expanded from just TMC, which focused just on manufacturing and selling of photographic...