Tese-Milner v. Capstone Credit, LLC (In re Level 8 Apparel, LLC)
| Decision Date | 03 February 2021 |
| Docket Number | Case No. 16-13164 (JLG),Adv. Pro. No. 20-1208 (JLG) |
| Parties | In re: LEVEL 8 APPAREL, LLC, Debtor. ANGELA TESE-MILNER, as Trustee of the Estate of Level 8 Apparel, LLC, Debtor, Plaintiff, v. CAPSTONE CREDIT, LLC and CAPSTONE CAPITAL GROUP, LLC, Defendants. |
| Court | United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York |
NOT FOR PUBLICATION
APPEARANCES:
LAW OFFICE OF WILLIAM F. MACREERY
7 Granite Springs Road
Granite Springs, New York 10527
By: William F. Macreery
-and-
The Law Firm of Tese & Milner
735 Wickham Avenue, P.O. Box 35
Mattituck, New York 11952
By: Angela Tese-Milner
Counsel for the Plaintiff-Trustee
KLESTADT WINTERS JURELLER SOUTHARD & STEVENS, LLP
200 West 41st Street, 17th Floor
New York, New York 10036
By: Tracy L. Klestadt
Counsel for Capstone Credit, LLC and Capstone Capital Group, LLC
UNITED STATES TRUSTEE, REGION 2
U.S. Federal Office Building
201 Varick Street, Room 1006
New York, New York 10014
By: Greg M. Zipes
Office of the United States Trustee
INTRODUCTION
Angela Tese-Milner is the chapter 7 trustee (the "Trustee") of the estate of Level 8 Apparel LLC (the "Debtor" or "Level 8") in this converted chapter 11 case. In this adversary proceeding she is seeking to avoid and recover certain alleged illegal, unauthorized, and fraudulent post-petition transfers and misappropriations of property of the Debtor's estate. The Trustee's complaint (the "Complaint") names defendants Capstone Capital Group LLC ("Capstone Capital") and Capstone Credit, LLC ("Capstone Credit," and together with Capstone Capital, the "Defendants"). See Complaint ¶¶ 1-3 [ECF No. 1].1
The Complaint contains five claims for relief (the "Counts")2 alleged against one or both of the Defendants. Without limitation, and in broad strokes, the Counts include claims to avoid the filing of a post-petition financing statement and to avoid and recover assignments of certain accounts receivable under state law, as well as claims against both Defendants for aiding and abetting the same. The matter before the Court is the Defendants' motion to dismiss those Counts alternatively, under the Prior Pending Action Doctrine, or pursuant to Rule 12(b)(6) ("Rule 12(b)(6)") of the Federal Rules of Civil Procedure (the "Motion").3 The Trustee opposes the Motion (the "Opposition"),4 and the Defendants have filed a reply to the Opposition(the "Reply").5 The United States Trustee (the "UST") filed a limited response to the Reply (the "UST Response"), and the Defendants filed an affidavit regarding the UST Response (the "Klestadt Declaration").6 On January 11, 2021, the Trustee filed a letter regarding certain matters addressed in the Motion and the Reply [ECF No. 24] (the "Surreply"). For the reasons set forth, the Motion is granted in part and denied in part.
The Court has jurisdiction over these matters pursuant to 28 U.S.C §§ 1334(a) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2012 (Preska, C.J.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(E), (K), and (O).
Level 8 was formed in 2009 by Bon Seung Kim ("Sam Kim") and others to engage in the business of designing, producing samples for buyers, sourcing, arranging manufacturing, importing and selling men's and women's apparel and outwear under licensed trademarks and private labels for large retailers. See Complaint ¶ 9. Sam Kim and other members of his familyalso controlled two other companies—On Five Corporation ("On Five") and Liaison Apparel Corporation ("Liaison Apparel")—which the Trustee contends were formed before (On Five) and after (Liaison Apparel) the Debtor commenced its bankruptcy case to conduct the same business as the Debtor for the purpose of misappropriating and siphoning the Debtor's assets to avoid paying the Debtor's creditors. See id. As of the Petition Date (defined below), Level 8 and Sam Kim were defendants in two lawsuits: (1) an action entitled Stuart's LLC ("Stuart's") and Wayne Galvin ("Galvin") vs. Level 8, Sam Kim, et al., Index No. 012560/2009, in Supreme Court Nassau County (the "Stuart's-Galvin Action"); and (2) an action entitled Weihai Textile Group Import & Export Co., Ltd. ("Weihai") vs. Level 8, Sam Kim, et al., Index No. 11 civ. 4405 (the "Weihai Action") in the United States District Court for the Southern District of New York. See id. ¶ 10. The Stuart's-Galvin Action resulted in judgment against the Debtor, Sam Kim, and others totaling $2,596,558.77, for, among other things, tortious interference with contracts, unfair competition and breach of fiduciary duty (the "Stuart's-Galvin Judgment"). Id. The Weihai Action resulted in judgment against Level 8 in the amount of $1,951,777.00. Id.
As part of its business, the Debtor was a party to several contracts with Capstone Capital, including a Sales Representative Agreement dated as of October 29, 2015 (the "Sales Representative Agreement"). See id. ¶ 11. Together, the Debtor and Capstone Capital transacted business with Costco pursuant to certain written agreements, including the (i) Costco Wholesale Global Import Supplier Agreement dated as of October 14, 2015, (ii) Costco Wholesale Private Label Agreement dated as of October 14, 2015, (iii) Copyright Assignment - Private Label Products dated as of October 20, 2015, and (iv) Costco Wholesale Basic Supplier Agreement (collectively, the "Costco Agreements"). Id. ¶ 12. Each Costco Agreement identifies Capstone Capital/Level 8 as the "vendor." Id. However, according to the Trustee, Capstone Capital could not have acted as a "vendor" under those agreements because it did not have the expertise to conceive and design seasonal lines of garments, to create samples, to procure orders for garments by store buyers, to arrange and oversee manufacturing of garments by companies in China and Vietnam, and to arrange for timely production and shipment of goods to customers that were all part of the lengthy sales process. See id. ¶ 14. She contends that it could not have succeeded as a seller of goods without the assistance of Level 8, because at all material times the Debtor, not Capstone Capital, performed all of the work associated with the design, off-shore manufacturing, production, shipment, and sale of goods to its customers. Id. ¶ 15. Moreover, she maintains that because the Debtor could manage all of the necessary elements of the lengthy sale process, it could have succeeded as a seller of the goods on its own with conventional factoring. Id.
On November 14, 2016 (the "Petition Date") Level 8 commenced a voluntary case under Chapter 11 of the Bankruptcy Code (the "Chapter 11 Case"). No statutory committee or examiner was appointed in the Chapter 11 Case, and Level 8 initially operated and controlled its business and assets as debtor-in-possession pursuant to sections 1107(a) and 1108 of the Bankruptcy Code. On November 17, 2016, the Defendants filed a financing statement, Filing No. 201611176358222, with the New York Secretary of State which claimed a security interest in all assets of the Debtor (the "Post-Petition Financing Statement"). See Complaint ¶ 34, Exhibit 5. The filing of the Post-Petition Financing Statement was not done with notice to, or approval from, the Court.
At the outset of the Chapter 11 Case the Debtor made a motion to use cash collateral consisting of the revenues generated under the Sales Representative Agreement, and to grant Capstone Capital and the Internal Revenue Service replacement liens on the Debtor's assets. Complaint ¶ 16; see also Debtor in Possession's Emergency Motion for Entry of Order Authorizing (I), on an Interim Basis, Debtor to Use Cash Collateral Pursuant to 11 U.S.C. § 363, and (II) Payment of Pre-Petition Priority Wages Nunc Pro Tunc to Petition Date Pursuant to 11 U.S.C. §§ 105, 362, 363(B), and 549, and Extending the Time for the Debtor to File Schedules and Statement of Financial Affairs, Case No. 16-13164 [ECF No. 10] (the "Cash Collateral Motion").8 The Court initially granted the Cash Collateral Motion and the replacement liens to Capstone Capital by Order dated December 6, 2016. See Emergency Order (I) Authorizing Debtor to Use Cash Collateral, (II) Granting Adequate Protection, and (IV) Granting Certain Related Relief, Case No. 16-14164 [ECF No. 14]. However, the Court subsequently vacated the replacement lien granted to Capstone Capital because Capstone Capital's lien had lapsed and become unperfected. See Order Vacating, in Part, the Emergency Order (I) Authorizing Debtor to Use Cash Collateral, (II) Granting Adequate Protection, and (IV) Granting Certain Related Relief, Case No. 16-13164 [ECF No. 22].
During the Chapter 11 Case, the Debtor made 61 separate written assignments of the Debtor's accounts receivable owed by Costco totaling $45,365,535.44 to Capstone Credit (collectively, the "Post-Petition Assignments"). Complaint ¶ 18.9 In part, the documents evidencing those assignments state that "[p]ursuant to the accounts receivable financing or factoring agreement between us, and in accordance with the provisions, representations and warranties contained therein, we confirm the transfer and assignment to Capstone Credit, LLC of all our right, title and interest in and to the accounts receivable represented by invoices identifiedabove . . . ." Id., Exhibit 1. The Trustee asserts that no such agreements exist and that Capstone Capital and Capstone Credit neither sought nor obtained Court approval to conduct out of the ordinary course of business and financing arrangements with the Debtor pursuant to the Sales Representative Agreement or the Costco Agreements, as required by ...
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