Tese-Milner v. Kim (In re Level 8 Apparel, LLC)

Decision Date26 January 2021
Docket NumberAdv. Pro. No. 19-1335 (JLG),Case No. 16-13164 (JLG)
PartiesIn re: LEVEL 8 APPAREL, LLC, Debtor. ANGELA TESE-MILNER, as Trustee of the Estate of Level 8 Apparel, LLC, Debtor, Plaintiff, v. BON SEUNG KIM, a/k/a Sam Kim, a/k/a Scott Kim, KUK JA KIM, BOKYOUNG KIM, FRANK SPADARO, RICHARD ALOISI, PETER LEWIS, JUNGE CHAE, JENNIFER SENGER, CARLOS QUINTILIANI, ON FIVE CORPORATION, LIAISON APPAREL CORPORATION and CAPSTONE CAPITAL GROUP, LLC, Defendants.
CourtUnited States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

NOT FOR PUBLICATION

Chapter 7

MEMORANDUM DECISION AND ORDER ON CAPSTONE CAPITAL GROUP, LLC'S MOTION TO DISMISS ADVERSARY PROCEEDING

APPEARANCES:

LAW OFFICE OF WILLIAM F. MACREERY

7 Granite Springs Road

Granite Springs, New York 10527

By: William F. Macreery, Esq.

-and-

The Law Firm of Tese & Milner

735 Wickham Avenue, P.O. Box 35

Mattituck, New York 11952

By: Michael M. Milner, Esq.

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

By: Andrew C. Brown

Counsel for Capstone Capital Group, LLC

HONORABLE JAMES L. GARRITY, JR. UNITED STATES BANKRUPTCY JUDGE:

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 recover damages for the alleged systematic diversion, misappropriation and looting of the Debtor's business and assets both before and after the Debtor commenced its chapter 11 case. The Trustee's complaint (the "Complaint") names twelve defendants (collectively, the "Defendants"), consisting of nine individuals and three entities. See Complaint ¶¶ 1-14 [ECF No. 1].1 The individuals are: Bon Seung Kim ("Sam Kim"); Kuk Ja Kim ("Mrs. Kim" and, together with Sam Kim, the "Kims"), Sam Kim's wife; Bokyoung Kim, Sam and Mrs. Kim' daughter in law; Frank Spadaro ("Spadaro"); Richard Aloisi; Peter Lewis; Junge Chae; Jennifer Senger; and Carlo Quintiliani (the individuals collectively will be referred to as the "Individual Defendants"). The entities are: Capstone Capital Group LLC ("Capstone"); On Five Corporation ("On Five"); and Liaison Apparel Corporation ("Liaison Apparel"). Hereinafter, the Individual Defendants together with On Five and Liaison Apparel collectively will be referred to as the "Insider Defendants."

The Complaint contains twenty-four claims for relief that are alleged against some or all the Defendants. Id. ¶¶ 82-215. Without limitation, and in broad strokes, they include claims to avoid and recover alleged fraudulent transfers, preferential transfers and unauthorized post-petition transfers, and to recover damages for alleged fraud, conversion, breach of fiduciaryduty, misrepresentation and unjust enrichment, as well as aiding and abetting the primary misconduct committed by other Defendants. Capstone is named in nine counts in the Complaint. The matter before the Court is Capstone's motion to dismiss those Counts pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure ("Rule 12(b)(6)") (the "Motion").2 The Trustee opposes the Motion (the "Opposition").3 For the reasons set forth herein, the Court grants the Motion, but with leave for the Trustee to replead.

JURISDICTION

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), (F), (H), & (K).

FACTS4
Background

On February 11, 2009, Sam Kim and others formed the Debtor to engage in the business of designing, producing samples for buyers, sourcing, arranging manufacturing, importing and selling men's and women's apparel and outerwear under licensed trademarks and private labels for large retailers. See Complaint ¶ 22. The Debtor's customers and business relationshipsincluded Costco Wholesale Corporation ("Costco") and its Kirkland Signature line of apparel, as well as Burlington Merchandising Corporation, Amazon, Blue Fly, Bon Ton, Gilt, Groupon and Liverpool (collectively, the "Customers"). See id. ¶¶ 46, 47. On November 14, 2016 (the "Petition Date"), the Debtor filed a voluntary petition under chapter 11 in this Court.5 Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code it remained in possession and control of its business and assets as a debtor in possession until August 22, 2018 (the "Conversion Date"), when its case was converted to one under chapter 7 and the Trustee was appointed. See Order Dated 8/22/2018 Granting Motion to Convert Chapter 11 Case to Chapter 7 [Case No. 16-13164, ECF No. 125].

The Trustee contends that prior to the Petition Date, during the Debtor's chapter 11 case, and after the Conversion Date, the Individual Defendants engaged or participated in a systematic and continuous fraudulent scheme to divest the Debtor of its assets in order to shield them from the Debtor's creditors. See id. ¶ 38. She maintains that the alleged fraudulent scheme included looting, misappropriating, converting and diverting all the Debtor's assets, business and Customers from the Debtor to its affiliated companies, On Five and Liaison Apparel. Id. She says that those entities were formed for the specific purpose of participating in the alleged scheme. See id. The Trustee contends that the Kims hatched the scheme in May 2015 when they began to loot the Debtor by causing it to make cash payments to them, for no consideration. She says that through the Petition Date, those cash transfers and payments aggregated $330,280.00. See id. ¶¶ 28, 29. The Kims took that action at the same time that Sam Kim and the Debtor were engaged in lawsuits with Stuart's LLC ("Stuart's") and Wayne Galvin ("Galvin"), and withWeihai Textile Group ("Weihai"), which lawsuits ultimately resulted in the entry of judgments aggregating more than $4,500,000 against Sam Kim and the Debtor. See id. ¶¶ 24, 25, 27. In October 2015, shortly after the conclusion of the trials in the Stuart's-Galvin and Weihai lawsuits, Sam Kim furthered the scheme by causing the Debtor to enter into a "Sales Representative Agreement" with Capstone. See id. ¶ 30. The Trustee asserts that the agreement is a one-sided agreement that heavily favors Capstone because it places all assets of the Debtor's business with Capstone and obligates the Debtor to perform valuable services for Capstone for an unspecified and uncertain commission. See id. ¶¶ 31-32. In sum, the Trustee asserts that the agreement turned the Debtor into a shell company with no identifiable assets besides the workforce, and unlimited potential liabilities. Id.

The Trustee maintains that Bokyoung Kim took the next step in the alleged fraudulent scheme in March 2016 when she formed On Five and capitalized the business with $580,000 of the Debtor's funds that the Debtor transferred to On Five during the period of March 11, 2016 through April 12, 2016. See Complaint ¶ 39. The Debtor allegedly received no consideration for those payments. See id. ¶ 106. The Trustee says that almost immediately after On Five was formed, Sam Kim, Spadaro, Richard Aloisi, Peter Lewis, Jennifer Senger, and Junge Chae began to work for On Five, and funneled all of the Debtor's business and Customers to On Five, other than the business associated with Costco's Kirkland Signature brand, which remained with the Debtor until the Conversion Date. See id. ¶¶ 43-52. She contends that those Individual Defendants misappropriated and steered the Debtor's business opportunities to On Five by (a) negotiating license agreements on behalf of On Five for sale to the Debtor's Customers, including Costco; (b) advising the Debtor's Customers that On Five was merely a new name for Level 8; (c) transferring existing orders and new purchase orders from the Debtor's Customers toOn Five; (d) causing Customers to reissue checks payable to the Debtor, to On Five; and (e) securing purchase orders with On Five for Tahari branded products that On Five had no license to sell. See id. She maintains that through those actions, those Defendants diverted revenues of more than $2,200,000 from the Debtor to On Five. Id. The Trustee complains that the Individual Defendants compounded the financial damage that they allegedly inflicted on the Debtor by remaining on the Debtor's payroll, even as they were working adversely to the best interests of the Debtor. The Trustee says that during the six month period beginning on March 2, 2016, when On Five was formed, through the Petition Date, the Debtor paid Spadero, Aloisi, Lewis, Senger, and Chae compensation totaling $418,573.76, while they were secretly performing work for On Five and diverting the Debtor's business to On Five. See id. ¶¶ 53-57. She maintains that those Individual Defendants remained on the Debtor's payroll after the Petition Date and for the nearly two years that the Debtor remained in chapter 11 and were paid salaries aggregating $902,895.35, even as they continued to work for On Five. See id. ¶¶ 63-68.

The Trustee asserts that the Individual Defendants took the last step in furtherance of the alleged scheme on August 30, 2018, after the Conversion Date, when they formed Liaison Apparel to conduct the same type of business as On Five and the Debtor. See id. ¶ 13. She says the On Five and Liaison Apparel assumed the Debtor's payroll on and after the Conversion Date (see id. ¶ 76), and the Insider Defendants continued to conduct business with Capstone, Costco, and other former customers of the Debtor, in the name of On Five and Liaison Apparel. See id. ¶ 77. She also contends that between September 28, 2018 and July 2019, Capstone made payments totaling $1,885,941.72 to On Five under conventional factoring arrangements, including $979,264.57 associated with sales to Costco Mexico...

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