Silverman v. Meister Seelig & Fein, LLP (In re Agape World, Inc.)

• Decision Date: 21 February 2012
• Docket Number: Adversary No. 811–9170–reg.,Bankruptcy No. 809–70660–dte.
• Citation: 467 B.R. 556
• Parties: In re AGAPE WORLD, INC., et al., Debtor.Kenneth P. Silverman, as Chapter 7 Trustee of Agape World, Inc., et al., Plaintiff, v. Meister Seelig & Fein, LLP, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of New York

467 B.R. 556

In re AGAPE WORLD, INC., et al., Debtor.Kenneth P. Silverman, as Chapter 7 Trustee of Agape World, Inc., et al., Plaintiff,

v.Meister Seelig & Fein, LLP, Defendant.

Bankruptcy No. 809–70660–dte.

Adversary No. 811–9170–reg.

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

Feb. 21, 2012.

Agape World, Inc., Agape Merchant Advance LLC, Agape Community LLC, Agape Construction Management LLC, Agape World Bridges LLC and 114 Parkway Drive South LLC, Suffolk, NY, pro se.

Barbara Whiten Balliette, Reid Collins & Tsai LLP, Austin, TX, Mark S. Mulholland, Michael S. Amato, Ruskin Moscou

Faltischek PC, Uniondale, NY, Olivia Andree Palmer, William T. Reid, IV, Reid Collins & Tsai LLP, New York, NY, for Plaintiff.

Shannon Anne Scott, Jaspan Schlesinger LLP, Garden City, NY, for Defendant.

Memorandum Decision

ROBERT E. GROSSMAN, Bankruptcy Judge.

In the substantively consolidated cases of Agape World, Inc., et al. (“Agape”),¹ Kenneth P. Silverman, the Chapter 7 trustee (“Trustee”), commenced this adversary proceeding against Meister Seelig & Fein, LLP (the “Defendant”), a law firm that represented Agape during a time when Agape conducted a massive Ponzi scheme that bilked the public of more than $400 million. The Agape scheme was based on false representations that investors' funds would be used to make short-term fully collateralized loans to creditworthy borrowers on terms producing significantly higher rates of return to the investors than what was then available. The Trustee seeks to i) avoid payments made to the Defendant by Agape for legal fees incurred by Agape in connection with the Defendant's representation of Agape on a variety of matters and to ii) recover damages for the Defendant's alleged negligence or malpractice in its representation of Agape. The Trustee also seeks damages from the Defendant under the legal theory of contribution for amounts that Agape's estate is required to disburse in satisfaction of filed claims which will exceed what the Trustee argues is Agape's fair share of such payments. The Trustee argues that while Nicholas Cosmo, the principal of Agape, was the admitted mastermind of the Ponzi scheme, the Defendant's wrongful acts magnified any losses the investors incurred at the hands of Agape. The Defendant filed a motion to dismiss the adversary proceeding in its entirety (the “Motion”), pursuant to Fed.R.Civ.P. 12(b)(6), 8 and 9(b), and on the basis that the Trustee lacks standing to bring several of the causes of action. The Defendant also seeks to dismiss the Complaint based on the Trustee's alleged violation of an agreement, pursuant to which the parties stipulated that the Trustee would forbear from filing a complaint, in exchange for an agreement that the applicable statute of limitations would be tolled.

With respect to the avoidance claims, the Court finds that the Trustee has adequately pleaded claims for relief other than the claim for attorneys' fees incurred in connection with bringing the avoidance claims. For that reason, this portion of the Motion is denied. With respect to the claims based on the Defendant's alleged negligence, malpractice, or wrongful acts, the Court finds that to the extent the investors and not Agape were harmed by the Defendant's alleged wrongful acts, the Trustee lacks standing to bring such claims and therefore these claims must be dismissed. The Court also finds that to the extent Agape itself is deemed to have been injured as a result of wrongful conduct in which Agape participated, the application of the Wagoner rule bars the Trustee from asserting such claims.² To the extent that the Trustee alleges in the Complaint that Agape did not participate in or condone the Defendant's alleged failure to properly advise Agape regarding the registration requirements under the federal securities laws, and therefore the Wagoner rule does not apply, the Trustee fails to state a claim against the Defendant under the standards enunciated by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Wagoner rule does not deprive a bankruptcy trustee of standing to sue an entity whose misconduct, in which the bankrupt corporation did not participate, injured the estate. However, the misconduct as alleged must give rise to a plausible cause of action. It is not plausible to believe that Agape was injured by the legal advice the Defendant gave to Agape, because the Ponzi scheme included the failure to register the investments as securities at the outset. Without a plausible nexus between the alleged wrongdoing and injury to Agape, this claim must be dismissed as well.

The Court now turns to the contribution claims. These claims also must be dismissed. While some recent decisions argue a contrary position, the Court believes that a Chapter 7 trustee may have the right to assert a contribution claim under applicable New York law. However, the Trustee's right to assert a cause of action against the Defendant under the theory of contribution does not relieve the Trustee of the obligation to adequately plead each element of the underlying claim giving rise to the right of contribution. Although courts applying New York law recognize that contribution claims are not barred by the doctrine of in pari delicto, the Wagoner rule dictates a different result. The Wagoner rule, which largely applies to the negligence claims underlying the contribution claim, elevates in pari delicto beyond a mere defense to a claim, and acts to bar the Trustee from bringing such claims. Under the facts of this case, in which the Trustee is barred by the Wagoner rule from bringing the underlying claims, the contribution claim cannot be maintained. To the extent any portion of the negligence claim is not barred by the Wagoner rule, it is nevertheless dismissed for failure to state a claim under the standard set forth in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Court declines to determine whether the Trustee breached the tolling agreement, and denies this portion of the Motion.

Facts

Nicholas Cosmo (“Cosmo”) was the president of Agape and operated Agape as a massive Ponzi scheme from 2003 to 2009.³ Cosmo predicated the scheme on representing Agape World, Inc. (“Agape World”) as a bridge lender providing short-term commercial loans for borrowers otherwise unable to obtain financing from traditional sources. Through Agape World, Cosmo represented to prospective investors that these loans would generate above-market rates of return. Based on these promises, Agape World raised in excess of $350 million from more than 5,500 investors. However, it appears that only approximately $18 million was actually employed to fund the aforementioned loans. To evidence their investments, investors were issued client contracts, which included assurances that their investments were secured by first position asset liens equaling 100% of the investments. Agape virtually guaranteed rates of return of up to 80% over extremely short periods. Cosmo also presented Agape Merchant Advance, LLC (“Agape Merchant”) as being in the business of making loans to merchants against credit cards and other receivables. Agape Merchant raised approximately $50 million from investors, but the books and records of Agape Merchant reflect that only $5 million was invested as represented. Cosmo used the vast majority of the funds raised by Agape World and Agape Merchant to both support his own lifestyle, which included massive losses resulting from investing in futures trading and commodities trading, and to pay exorbitant commissions and bonuses to brokers, which were a necessary expense in keeping any Ponzi scheme functioning. Initial investors received returns of approximately 12% on their investments, but the “returns” were derived not from any actual loans but rather from money provided by new investors.

In part as a result of the economic turmoil of 2008, Agape found it increasingly difficult to attract a steady stream of new investors, and, as is the fate of all such schemes, it all fell apart. Cosmo was indicted on criminal charges in 2009, and on October 29, 2010, he pleaded guilty to federal charges of mail and wire fraud. As part of his allocution at sentencing, Cosmo admitted that from 2003 to some point in 2009, he operated Agape as a Ponzi scheme and that his use of Agape's funds to engage in the unauthorized trading in commodities and futures was a part of that scheme. (Complaint (“Compl.”), ¶ 36) (citing to Transcript of October 29, 2010 Plea Hearing in United States v. Nicholas Cosmo, Case No. CR–09–255, United States District Court for the Eastern District of New York).

On February 5, 2009 (the “Petition Date”), an involuntary Chapter 7 petition was filed against Agape World. On February 12, 2009, an order was entered appointing the Trustee as interim trustee. On March 4, 2009, an order for relief under Chapter 7 was entered in the Agape World case. On April 14, 2009, an order was entered substantively consolidating the Agape cases. On January 19, 2011 the Defendant and the Trustee entered into a Tolling and Forbearance Agreement (“Tolling Agreement”), stipulating and agreeing that the Trustee would forbear from filing a complaint, and in exchange, the Defendant agreed that the statute of limitations applicable to the claims which are the subject of this adversary proceeding would be tolled. The dates set forth in the Tolling Agreement were extended by agreements dated April 18, 2011 and May 17, 2011. On June 22, 2011, within the deadline set forth in the Tolling Agreement, as extended, the Trustee commenced the instant adversary proceeding against the Defendant.

The Complaint contains the following allegations:

1. The Defendant was retained in February 2007 to represent Agape. From February 2007 to January 2009, the Defendant represented Agape in at least thirty-eight separate matters, including representing Agape as...