Yann Geron, Chapter 7 Tr., Direct Access Partners, LLC v. Craig (In re Direct Access Partners, LLC)

• Decision Date: 30 May 2019
• Docket Number: Case No. 15-11259 (MEW),Adv. Proc. No. 16-01058 (MEW)
• Citation: 602 B.R. 495
• Parties: IN RE: DIRECT ACCESS PARTNERS, LLC, Debtor. Yann Geron, Chapter 7 Trustee, Direct Access Partners, LLC, Plaintiff, v. James Craig, Joseph E. Flores De Meneses, and Gerard M. Visci, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of New York

602 B.R. 495

IN RE: DIRECT ACCESS PARTNERS, LLC, Debtor.

Yann Geron, Chapter 7 Trustee, Direct Access Partners, LLC, Plaintiff,

v.James Craig, Joseph E. Flores De Meneses, and Gerard M. Visci, Defendants.

Case No. 15-11259 (MEW)

Adv. Proc. No. 16-01058 (MEW)

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

Signed May 30, 2019

GOTTLIEB & JANEY LLP, New York, NY, Counsel for the Chapter 7 Trustee, By: Derrelle M. Janey, Sarah A. Adam

FOX ROTHSCHILD LLP, New York, NY, Counsel for the Chapter 7 Trustee, By: Kathleen M. Aiello

MCCABE & FLYNN, LLP, New York, NY 10004, Counsel for James, Craig By: Thomas J. McCabe

Joseph E. Flores De Meneses, Pro Se

MEMORANDUM OPINION AFTER TRIAL

MICHAEL E. WILES, UNITED STATES BANKRUPTCY JUDGE

The chapter 7 trustee of Direct Access Partners, LLC ("DA Partners") seeks to recover more than five million dollars of payments received by defendants James Craig and Joseph De Meneses between 2009 and 2013. The Trustee contends that the payments were received directly or indirectly from DA Partners; that DA Partners transferred funds with an actual intent to hinder, delay or defraud its creditors; and that DA Partners transferred funds at a time when it intended to incur, or believed that it would incur, debts that it would not be able to pay as they matured. The Trustee also contends that DA Partners' transfers were constructively fraudulent in light of DA Partners' financial condition. The Trustee asserts claims under sections 273 through 276 of the New York Debtor and Creditor Law, made applicable by section 544(b) of the Bankruptcy Code, and also (with respect to a few transfers) under section 548(a) of the Bankruptcy Code. See 11 U.S.C. §§ 544(b), 548(a), 550 ; N.Y. D.C.L. §§ 273 - 276. Defendants have denied liability, and Craig has asserted a counterclaim seeking indemnification for his legal expenses.

For reasons set forth below judgment will be entered in favor of Craig and De Meneses on all of the Trustee's claims. Craig's counterclaim is denied.

Jurisdiction and Power to Issue a Final Decision

The Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 157(b)(2)(H) and 1334(b) and under 11 U.S.C. §§ 544(b), 548 and 550. The parties do not dispute that the Court has subject matter jurisdiction and personal jurisdiction and that the Court has power to render a final decision. The Trustee and Craig have also explicitly consented to a final determination of claims by this Court to the extent that such consent is needed. See 28 U.S.C. § 157 ; Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ; Wellness Int'l Network, Ltd. v. Sharif , 575 U.S. ––––, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).

Procedural History

DA Partners is a former broker-dealer. A holding company, Direct Access Group, LLC ("DA Group"), owns 99% of the limited liability company membership interests in DA Partners.

DA Group was the subject of a contested involuntary chapter 7 bankruptcy petition dated May 30, 2013, and then filed a voluntary chapter 11 petition on July 22, 2013. More than two years later (on August 18, 2015) the DA Group bankruptcy case was converted to a chapter 7 case. Meanwhile, on May 14, 2015, DA Partners filed its own voluntary petition under chapter 7 of the Bankruptcy Code. Yann Geron (the "Trustee") is the chapter 7 trustee in both cases.

On April 26, 2016, the Trustee filed this adversary proceeding on behalf of DA Partners against Craig, De Meneses and another individual named Gerald Visci. The Trustee alleged that the defendants had received the proceeds of transfers that were fraudulent under the Bankruptcy Code and under the New York Debtor and Creditor Law. No claims were filed (or could have been filed) on behalf of DA Group, because DA Group's two-year deadline for the filing of fraudulent transfer claims had expired on July 22, 2015, before DA Group's case was converted to a chapter 7 case and before the appointment of the Trustee in that case. See 11 U.S.C. § 546(a). The Trustee's claims against Visci were later dropped. Craig and De Meneses filed Answers denying liability, and Craig filed a counterclaim seeking indemnification for certain legal fees.

In 2017, the Trustee moved to dismiss Craig's indemnification counterclaim. (ECF Nos. 23, 24, 25.) The Trustee noted that indemnification was not available if Craig committed acts "in bad faith" or through "active and deliberate dishonesty," and argued that the Trustee (on behalf of DA Partners) had the right to deny indemnification on this ground without the need for a court ruling. However, the indemnification provision did not give the company (or the Trustee) the right to decide these issues, and the Court denied the motion. (ECF No. 31.)

The Trustee also made a pre-trial motion to bar De Meneses from asserting certain defenses to the Trustee's claims. (ECF No. 54.) The Trustee argued that a guilty plea that De Meneses had entered, and an associated forfeiture judgment, precluded De Meneses from asserting "value" and "good faith" defenses to the Trustee's fraudulent transfer claims. The Court denied this motion. (ECF Nos. 64 and 65.) The Court noted that the guilty plea included admissions that De Meneses had participated in a criminal bribery scheme, but that it contained no statements or admissions as to DA Partners' alleged intent to hinder, delay or defraud creditors, or as to DA Partners' financial condition at the time it made transfers, or as to De Meneses' alleged knowledge of such an intent or financial condition. The Court also noted that the record that was before the Court at that time did not include any evidence as to how the amount of the forfeiture judgment against De Meneses had been determined. The Court held that the Trustee was free to introduce evidence at trial as to how the forfeiture judgment had been calculated and how (if at all) it overlapped with the Trustee's claims, but at trial the Trustee elected not to do so. Instead, the Trustee's counsel acknowledged at closing argument that the Trustee had chosen not to pursue his prior contentions regarding the alleged collateral estoppel and res judicata effects of the forfeiture judgment.

Curiously, though, issues relating to the forfeiture judgment resurfaced in a different form at trial. De Meneses argued that the forfeiture judgment did cover the same payments that the Trustee sought to recover, and that the Trustee should be barred from seeking any recovery on behalf of DA Partners except through the forfeiture proceedings in the criminal case. Those contentions are discussed below.

As directed by the Court, the Trustee and Craig prepared a pretrial order, which included certain stipulated facts. See ECF No. 60 at pages 6-21. De Meneses, who has throughout this litigation appeared pro se , did not participate in the preparation of the pretrial order. However, during the trial he agreed to the accuracy of many of the relevant stipulated facts. As to De Meneses, the findings of fact set forth herein are not based on the stipulations except to the extent that they were confirmed by De Meneses or shown to be true by other competent evidence.

Five witnesses testified at trial. Brian Ryniker is a forensic accountant who testified about DA Partners' accounting for certain liabilities and about errors that he believed were made in the "net capital" calculations that DA Partners prepared. Bernard W. Costich is an expert witness who testified that in his opinion DA Partners was insolvent as of no later than May 31, 2009. Jonathan Ungar is a representative of Headwaters Holdings, one of DA Group's principal investors, who testified about loans and investments that Headwaters had made and about conversations he had with Craig and others about those loans and investments. De Meneses and Craig testified as well, and the Trustee also submitted excerpts from pretrial depositions of Craig.

During the trial, the Court admitted more than sixty exhibits in evidence. One proposed exhibit was excluded. At the end of trial Craig sought to introduce into evidence an expert witness report that the Trustee had filed in a New Jersey state court litigation against a former auditor of DA Partners. Craig's counsel admitted that he had obtained a copy of this report some time prior to the trial in this Court, but that he did not list it as an exhibit in the pretrial order, did not include it among the supplemental exhibits that the parties designated during the trial, and did not otherwise alert the Trustee's counsel of his plan to offer the report in evidence. The lack of notice prejudiced the Trustee by denying the Trustee the opportunity to have a witness present who could respond to contentions about what the report purportedly showed. The Court sustained the Trustee's objection and excluded the report on the ground that it had not been timely designated as an exhibit in accordance with the Court's pretrial procedures and the Joint Pretrial Order.

There were some unusual features of the exhibits, and also some unusual circumstances surrounding the conduct of the trial itself.

First, some of the exhibits were copies of complaints filed in criminal and civil proceedings that post-dated the transfers that are at issue, including a complaint filed by the Securities and Exchange Commission. The Stipulations between Craig and the Trustee also included statements about "allegations" made by the SEC and by the United States Attorneys' Office.

Craig stipulated to the truth of certain accusations that had been made in criminal cases. In other instances, however, Craig merely stipulated that allegations were made, and did not stipulate that the allegations were correct. Nevertheless, the allegations were admitted into evidence by agreement between Craig and the Trustee and without objection by De Meneses, with no limiting caveats as to how that evidence could be used or considered by the Court. As to De Meneses, the Court finds that allegations may be taken as...