Tese-Milner v. Edidin & Assocs., Franklin Capital Holdings LLC (In re Operations NY LLC)

• Decision Date: 21 March 2013
• Docket Number: Adversary No. 12–01783 (SMB).,Bankruptcy No. 10–13446 (SMB).
• Citation: 490 B.R. 84
• Parties: In re OPERATIONS NY LLC., Debtor. Angela Tese–Milner, Chapter 7 Trustee, Plaintiff, v. Edidin and Associates, Franklin Capital Holdings LLC d/b/a Franklin Capital Network, Gary Edidin, Claudio Gottardi, Michael Leen, Hamid Johannes Mahmood and Matteo Gottardi, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

490 B.R. 84

In re OPERATIONS NY LLC., Debtor.Angela Tese–Milner, Chapter 7 Trustee, Plaintiff,

v.Edidin and Associates, Franklin Capital Holdings LLC d/b/a Franklin Capital Network, Gary Edidin, Claudio Gottardi, Michael Leen, Hamid Johannes Mahmood and Matteo Gottardi, Defendants.

Bankruptcy No. 10–13446 (SMB).

Adversary No. 12–01783 (SMB).

United States Bankruptcy Court,

S.D. New York.

March 21, 2013.

Stahl Cowen Crowley Addis, LLC, Scott Schreiber, Esq., John K. Burnett III, Esq., of Counsel, Chicago, IL, Attorneys for Defendants.

Kornfeld & Associates, P.C., Randy M. Kornfeld, Esq., of Counsel, New York, NY, Attorneys for Plaintiff.

MEMORANDUM DECISION PARTIALLY GRANTING AND PARTIALLY DENYING MOTION TO DISMISS THE COMPLAINT

STUART M. BERNSTEIN, Bankruptcy Judge.

The plaintiff, the chapter 7 trustee of the debtor Operations N.Y. LLC (the “Debtor”), brought this adversary proceeding to avoid and recover three transfers aggregating $279,839.61 (the “Transfers”). ( See Complaint, dated Aug. 12, 2012 (ECF Doc. # 1).) The Complaint asserts claims sounding in intentional and constructive fraudulent transfer, unjust enrichment, preference and conspiracy. The defendants have moved to dismiss the Complaint pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure (“Federal Civil Rules”) made applicable to this adversary proceeding by Fed. R. Bankr.P. 7012(b) for failure to state a claim upon which relief can be granted.

For the reasons that follow, the motion is granted in part and denied in part.

BACKGROUND

The Debtor was formed in 2004 by the defendants Matteo Gottardi, Michael Leen and Johannes Mahmood to import, design and sell men's and women's garments. (¶ 15.) ¹ The Debtor opened its “flagship” store at 60 Mercer Street in Manhattan in 2005 and entered into a lease with Chelsea/Village Associates LLC (“CVA”) regarding space for a second store at 50 Ninth Avenue in Manhattan in or about May 2008. (¶ 16.) The individual defendants are board members and own interests in the Debtor. (¶¶ 10–14.) The plaintiff alleges upon information and belief that the defendant Edidin and Associates (“Edidin Associates”) is an unincorporated business organization wholly owned by defendant Gary Edidin (“Gary”), the defendant Franklin Capital Holdings LLC d/b/a Franklin Capital Network (“Franklin”), is a limited liability company also owned by Gary, and both entities operate from the same location in Highland Park, Illinois. ( See ¶¶ 8–9.) Gary, Franklin and Edidin Associates are sometimes referred to below collectively as the “Edidin Defendants”.

A. The Transfers

The Transfers at issue were made over the course of a year and were wired into an account in the name of Edidin Associates at Cole Taylor Bank in Chicago on the following dates and in the following amounts:

+------------------------------------+
                ¦        ¦Date of Transfer¦Amount ($)¦
                +--------+----------------+----------¦
                ¦        ¦09/09/2008      ¦100,000.00¦
                +--------+----------------+----------¦
                ¦        ¦09/28/2009      ¦100,000.00¦
                +--------+----------------+----------¦
                ¦        ¦09/29/2009      ¦79,839.61 ¦
                +------------------------------------+
                

(¶¶ 31–34 & Ex. A.) ² Documents supplied by Franklin and discussed below indicate that identical amounts were transferred on the same dates into Franklin's account at the same bank.

The reasons for the Transfers are the subject of dispute. The plaintiff mainly contends that the Transfers were part of a scheme to transfer assets in fraud of creditors to an insider. According to the Complaint, the Debtor's bank statements covering the period January 2006 through August 2010 do not show that the Debtor received any funds from the Edidin Defendants, (¶ 47), supporting the allegation, made on information and belief, that these defendants did not provide any goods or services in exchange for the Transfers. (¶ 35.)

The defendants' motion papers, however, indicate a business rationale. The moving memorandum attached two letters dated June 6, 2012 and July 9, 2012, and the exhibits that accompanied those letters, and where appropriate, the Court will refer to the letters and their enclosures collectively as the “Letters.” The Complaint attached the June 6, 2012 letter as Exhibit C but omitted the enclosures. It did not attach the July 9, 2012 letter but quoted from the letter and certain of its enclosures, and ultimately based its claim against Franklin on the content of the Letters. In the June 6, 2012 letter and enclosures, the defendants' counsel provided evidence that Franklin had entered into a Factoring Agreement, dated May 15, 2008, with the Debtor, and enclosed the Factoring Agreement and a UCC–1 financing statement, filed three weeks before the Factoring Agreement, which related to a security interest in most or all of the Debtor's assets.³ The July 9, 2012 letter and enclosures further explained that the September 2008 transfer repaid a letter of credit provided by Franklin. The September 2009 transfers represented the proceeds of payments by Levi Strauss & Co. that were owed to Workshop, factored by Franklin and mistakenly paid to the Debtor. However, the invoices bore the name “Operations”—which could refer to the Debtor or Workshop—originated from the Debtor's “flagship” Mercer Street address, and included the Debtor's web address (operationsny.com). (July 9, 2012 letter,⁴ at Ex. B, C; Complaint ¶ 50.) Furthermore, defendant Leen had testified that Levi Strauss was a customer of the Debtor. ( Complaint ¶ 49.)

B. The Other Fraudulent Scheme

The Complaint also includes allegations of a separate scheme by the “Operations N.Y. Defendants” to defraud CVA.⁵ These allegations have no apparent connection to the Transfers, and the Complaint does not assert any claims or seek any relief based on this scheme. According to the plaintiff, the Debtor owed CVA $100,000 in rent arrears by the end of April 2009. On May 5, 2009, the owners of the Debtor formed Workshop, and “transferred all remaining assets of the Debtor, including client accounts, to Operations Workshop, LLC.” ⁶ (¶ 18.) On May 7, 2009, the Debtor “secretly vacated” the Ninth Avenue store in the middle of the night to avoid eviction, taking with it all of its remaining inventory, equipment furniture and other assets. (¶ 17.) Ten months later, when CVA was about to obtain a judgment against the Debtor, Workshop and its ownership liquidated all of the Debtor's remaining assets.⁷ (¶ 27.) Finally, after CVA sued the Debtor,the Debtor misrepresented to the state court that the Debtor and Workshop were the same entity. (¶¶ 21–25.) The misrepresentation enabled the Debtor to avoid a pre-judgment attachment. (¶ 26.)

C. The Bankruptcy

On June 29, 2010, CVA filed an involuntary petition against the Debtor. The Court ordered relief on August 19, 2010, and the United States Trustee appointed the plaintiff to serve as chapter 7 trustee of the Debtor's estate.

The plaintiff filed this adversary proceeding on August 3, 2012. The Complaint consists of nine counts. The first eight are asserted against the Edidin Defendants and Count IX is directed against the individual defendants. Counts I through VI assert claims sounding in intentional and constructive fraudulent transfer under bankruptcy and New York law. Count VII asserts a claim of unjust enrichment, (¶¶ 94–100), Count VIII alleges an insider preference with respect to the two September 2009 transfers, (¶¶ 101–09), and Count IX charges that the individual defendants conspired to defraud the Debtor's creditors through the Transfers and the other scheme directed against CVA. (¶¶ 110–18.)

The Defendants have moved to dismiss the Complaint for failure to state a claim under Federal Civil Rule 12(b)(6). In the main, they contend that the Complaint is based upon conclusory statements and formulaic recitations of statutory requirements without any supporting facts. They also argue that the Complaint improperly relies on “group pleading,” and fails to satisfy the pleading requirements for fraud in connection with the intentional fraudulent transfer claims.

DISCUSSION

A. Standards Governing the Motion

“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (citations omitted); accord Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). Iqbal outlined a two-step approach in deciding a motion to dismiss. First, the court should begin by “identifying pleadings that, because they are no more than [legal] conclusions, are not entitled to the assumption of truth.” Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. “Threadbare recitals of the elements of a cause of action supported by conclusory statements” are not factual. See id. at 678, 129 S.Ct. 1937. Second, the court should give all “well-pleaded factual allegations” an assumption of veracity and determine whether, together, they plausibly give rise to an entitlement of relief. Id. at 679, 129 S.Ct. 1937.

Courts do not decide plausibility in a vacuum. Determining whether a claim is plausible is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Id. A claim is plausible when the factual allegations permit “the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 678, 129 S.Ct. 1937. A complaint that only pleads facts that are “merely consistent with a defendant's liability” does not meet the plausibility requirement. Id. (quoting Twombly, 550 U.S. at 557, 127 S.Ct. 1955 (internal quotation marks omitted)). “The pleadings must create the possibility of a right to relief that is more than speculative.” Spool v. World Child Int'l Adoption Agency, 520 F.3d 178, 183 (2d Cir.2008) (citation omitted).

In deciding the motion, “courts must consider the...