Louis A. Scarcella, United States Bankruptcy Judge.
Plaintiff Allan B. Mendelsohn, Esq., as chapter 7 trustee of the bankruptcy estate of APCO Merchant Services, Inc. ("debtor"), commenced this adversary proceeding against defendant Olga Kovalchuk seeking to avoid and recover seventeen prepetition transfers made by debtor to defendant in the aggregate amount of $56,658.85.
The Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012, effective nunc pro tunc as of June 23, 2011. This is a core proceeding under 28 U.S.C. § 157(b)(2)(H). The parties have consented to the entry of a final decision and judgment by the Court in their Joint Pretrial Statement [dkt. 40]. See Wellness Int'l Network, Ltd. v. Sharif, ___ U.S. ___, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).
The Court held a trial on May 8, 2017, observing the witness carefully, and has reviewed thoroughly the evidence presented. This decision constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy Rule 7052. To the extent that a finding of fact includes a conclusion of law, it is deemed a conclusion of law and vice versa.
Plaintiff commenced this adversary proceeding on August 25, 2015, and filed an Amended Complaint on August 31, 2015 [dkt. 3]. The Amended Complaint alleges actual and constructive fraudulent conveyance claims against defendant pursuant to § 544(b) and the NYDCL
In anticipation of trial, the parties filed a Joint Pretrial Statement, which included the parties' agreement to reduce the amount sought to be recovered by plaintiff to $41,544.63 arising from thirteen separate transfers made by debtor to defendant during the period July 1, 2012 through December 27, 2012 (the "Transfers"). Additionally, for purposes of trial, the parties stipulated that debtor was insolvent at the time of the Transfers.
In the section of the Joint Pretrial Statement
The following findings of fact are based on the trial testimony provided by defendant
During the period July 1, 2012 to December 27, 2012, debtor issued thirteen checks to defendant totaling $43,544.63
The parties do not dispute that the Transfers were made. Tr. 1:13, 18-20. Defendant testified that, other than a check in the amount of $1,000 for a Christmas bonus [Ex. 15], Tr. 23:24-25, 24:2-6, the payments received by her from debtor in 2012 were for services rendered to debtor. Tr. 67:9-16.
In 2006, at the age of 17, defendant started working for debtor, a merchant processing services company, after answering a Craigslist advertisement. Tr. 3:20-24, 4:3-8, 50:12-17, 51:12-13, 56:3-5. Defendant contacted potential customers by phone, prepared proposals, answered customer inquiries and provided general customer service. Tr. 55:11-16, 51:5-7, 55:14-56:2. Defendant was compensated as an independent commission-based salesperson, not a salaried employee of debtor. Tr. 71:13-16. She received a draw against commissions of $6,000 per month. Tr. 4:9-22. Defendant did not have a written contract with debtor setting forth the terms of her engagement. Tr. 9:17-22. Rather, according to defendant, per a verbal agreement with debtor, defendant was entitled to a 50% commission on each account she successfully solicited for debtor. Tr. 8:21-9:2. Defendant testified that during 2012, she generated 1,200 merchant accounts for debtor. Tr. 8:8-9, 43:14-16. These accounts, according to defendant, generated income to debtor in excess of $600,000. Tr. 64:7-15, 65:12-13. Defendant testified that she did not receive commissions due for the accounts generated by her for debtor in 2012. Tr. 66:17-24.
In October 2010, defendant, with the help of debtor's principal and accountant, Svetlana Shneydershteyn ("Shneydershteyn"), formed Merchant Marketing Group ("MMG"). Tr. 56:6-10, 5:23-6:20. Defendant's 2012 and 2013 federal tax returns each included Schedule C — Profit or Loss
Shneydershteyn issued checks on behalf of debtor payable to defendant, individually, and MMG. Tr. 5:16-6:2. Shneydershteyn decided how and when the checks were payable and in what amounts they were made. Tr. 6:23-7:7. Shneydershteyn, on behalf of debtor, also issued 1099 forms to defendant.
Defendant testified that she is still owed unpaid commissions for work performed from 2010 through 2013. Tr. 42:12-14. On December 4, 2014, defendant filed a proof of claim in debtor's chapter 7 case for unpaid commissions totaling $2,170,000 [Proof of Claim No. 7-1, Ex. 1].
As noted above, plaintiff seeks to recover the Transfers as constructive fraudulent transfers pursuant to § 544(b) and NYDCL §§ 273-275. In the alternative, plaintiff seeks to recover the Transfers as intentional fraudulent transfers pursuant to § 544(b) and NYDCL § 276, and demands attorneys' fees under NYDCL § 276-a. Finally, plaintiff asserts a common law claim of unjust enrichment. The Court first considers the legal principles applicable to an action under § 544(b) and the NYDCL. The Court will then discuss each cause of action in turn.
Section 544(b)(1) authorizes a trustee to "avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim." 11 U.S.C. § 544(b)(1). Hence, under § 544(b), the trustee may avoid a transfer of an interest of the debtor or an obligation incurred by the debtor that is voidable under applicable nonbankruptcy law. The parties do not dispute that in this action the "applicable law" for purposes of § 544(b) is the NYDCL, and that the action was timely commenced under § 546(a).
The power given to a trustee under § 544(b) to avoid a transfer or obligation is derivative, that is, there must be an actual existing creditor holding an allowable unsecured claim who would have had that right outside of bankruptcy. "In order for a trustee to maintain an action for avoidance of a fraudulent conveyance, the trustee must show that at least one of the present unsecured creditors of the estate holds an allowable claim, against whom the transfer or obligation was invalid under applicable state or federal law." Young v. Paramount Commc'ns Inc. (In re Wingspread Corp.), 178 B.R. 938, 945 (Bankr. S.D.N.Y. 1995).
Although defendant did not raise the issue of plaintiff's standing to bring this action, "[t]he Court is obligated to raise an issue implicating standing sua sponte, even if the parties fail to raise it, because it implicates the Court's subject matter jurisdiction." Densmore v. Litton Loan Servicing, L.P. (In re Densmore), 445 B.R. 307, 312 (Bankr. D. Vt. 2011); see Thompson v. Cty. of Franklin, 15 F.3d 245, 248 (2d Cir. 1994)); see Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 117 (2d Cir. 1991) (standing "is a threshold issue in all cases since putative plaintiffs lacking standing are not entitled to have their claims litigated in federal court."). The burden is on plaintiff to show that he has standing under § 544(b) to bring this action. Young, 178 B.R. at 945; see also Silverman v. Sound Around, Inc. (In re Allou Distribs., Inc.), 392 B.R. 24, 31 (Bankr. E.D.N.Y. 2008).
Here, plaintiff did not identify the qualifying creditor in his Amended Complaint,
For the reasons that follow, even if plaintiff had established the existence of the "golden" or "triggering" creditor under § 544(b), plaintiff has not met his burden of proof on the elements of actual and constructive fraud. Additionally, as discussed below, plaintiff has failed to prove that defendant was unjustly enriched by the payments made by debtor to defendant.
Plaintiff has the burden of proof to present evidence in support of his allegations that the Transfers may be avoided as constructively fraudulent and to prove those allegations by a preponderance of the evidence. Kramer v. Chin (In re Chin), 492 B.R. 117, 126 (Bankr. E.D.N.Y. 2013); Togut v. RBC Dain Correspondent Servs. (In re S.W. Bach & Co.), 435 B.R. 866, 875 (Bankr. S.D.N.Y. 2010). "`The burden of showing something by a preponderance of the evidence ... simply requires the trier of fact to believe that the existence of a fact is more probable than its nonexistence....'" Metro. Stevedore Co. v. Rambo, 521 U.S. 121, 137, n.9, 117 S.Ct. 1953, 138 L.Ed.2d 327 (1997) (quoting Concrete Pipe and Prods. of Cal., Inc. v. Constr. Laborers Pension Trust for S. Cal., 508 U.S. 602, 622, 113 S.Ct. 2264, 124 L.Ed.2d 539 (1993). "As the finder of fact, the Court is entitled to make credibility findings of the witnesses and testimony." Merck Eprova AG v. Gnosis S.p.A., 901 F.Supp.2d 436, 448 (S.D.N.Y. 2012), aff'd, 760 F.3d 247 (2d Cir. 2014).
A conveyance by a debtor may be avoided as constructively fraudulent if made without fair consideration under NYDCL § 272 and one of the following additional elements has been established: (i) the debtor was insolvent or was rendered insolvent as a result of the transfer, NYDCL § 273; (ii) the debtor was left with unreasonably small capital, NYDCL § 274; or (iii) the debtor intended or believed it would incur debts beyond its ability to pay such debts as they matured, NYDCL § 275. See Sharp Int'l Corp. v. State Street Bank and Trust Co. (In re Sharp Int'l Corp.), 403 F.3d 43, 53-54 (2d Cir. 2005); Liberty Mutual Ins. Co. v. Horizon Bus Co., Inc., No. CV 10-0449(JS)(WDW), 2011 WL 1131098, at *5 (E.D.N.Y. Feb. 22, 2011). Under NYDCL §§ 273-275, "`a transfer made without fair consideration constitutes a fraudulent conveyance, regardless of the intent of the transferor.'" Sharp, 403 F.3d at 53 (quoting HBE Leasing Corp. v. Frank, 48 F.3d 623, 633 (2d Cir. 1995).
At trial, plaintiff did not put forth evidence to show that debtor was undercapitalized or that debtor intended or believed that it would incur debts beyond its ability to pay when the debts matured. Rather, as noted above, for purposes of trial, the parties agreed that debtor was insolvent at the time the Transfers were made. Accordingly, the Court need not and does not reach the issue of whether the Transfers may be avoided under NYDCL §§ 274 and 275, and the following discussion is limited to plaintiff's argument that he may recover the Transfers as constructively fraudulent under NYDCL § 273.
Liquidation Trust v. Daimler AG (In re Old Carco LLC), 509 Fed.Appx. 77, 78 (2d Cir. 2013) (internal citations and quotations omitted).
Where "a transferee has given equivalent value in exchange for the debtor's property, the statutory requirement of `good faith' is satisfied if the transferee acted without either actual or constructive knowledge of any fraudulent scheme." HBE Leasing Corp., 48 F.3d at 636. "`Good faith' in a constructive fraudulent conveyance claim is the good faith of the transferee." Sharp, 403 F.3d at 54, n.4.
Accordingly, the crux of this dispute is not whether debtor received consideration for the Transfers, but rather, who rendered the services for which debtor paid, and whether at the end of the day the net effect of the Transfers reduced the assets of the bankruptcy estate and lessened the funds available for distribution to unsecured creditors. For the reasons set forth below, plaintiff has failed to establish by a preponderance of the evidence that he is entitled to relief under his legal theory.
First, while plaintiff argues that MMG rendered services to debtor, and not defendant, the trial record shows that MMG is a sole proprietorship owned by defendant. Defendant's 2012 and 2013 federal tax returns each included Schedule C — Profit or Loss From Business (Sole Proprietorship) and Schedule SE — Self-Employment Tax, and her 2012 and 2013 state tax return included a copy of Schedule C that was filed with defendant's federal tax returns [Exs. 21 and 22]. Defendant testified that Schedule C reflected profits and losses for MMG. Tr. 31:12-18. The Second Circuit has recognized that "a sole proprietorship has no legal existence apart from its owner." Lattanzio v. COMTA, 481 F.3d 137, 140 (2d Cir. 2007). "As a general matter, the income and expenses of a sole proprietorship are the income and expenses of [owner of the business]." Stewart v. C.I.R., 84 T.C.M. (CCH) 175 (T.C. 2002) (citing 26 U.S.C. § 61(a)(2)). "[A] sole proprietorship, unlike [a] corporation, [is] not a separate taxable entity from [the individual]...." Id. It is "a business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity." BLACK'S LAW DICTIONARY (10th ed. 2014).
Plaintiff has not argued or presented evidence to show that MMG is a separate legal entity from defendant. As noted above, the evidence introduced at trial demonstrated that MMG is a sole proprietorship owned by defendant. This evidence conflicts with plaintiff's theory of the case that debtor paid defendant for services provided, not by defendant, but MMG. Because MMG is a sole proprietorship,
As to the value of the consideration exchanged between debtor and defendant, plaintiff does not argue nor did he introduce evidence to show that the value of the merchant accounts generated by defendant for the benefit of debtor was not a "fair equivalent" for the Transfers. Defendant testified that she received the Transfers, i.e., $41,544.63, for services she rendered to debtor. Tr. 55:11-56:2, 67:5-16. According to the unrefuted trial testimony of defendant, during 2012, she generated 1200 merchant accounts for debtor, Tr. 8:8-9, 43:14-16, which in turn generated in excess of $600,000 of income to debtor, Tr. 64:7-15, 65:12-13, and for which she did not receive any commissions, Tr. 66: 17-24. The Court carefully considered whether any basis for discrediting defendant's testimony existed but found none. Defendant testified consistently and credibly as to the Transfers and her work relationship with debtor.
Secondly, plaintiff failed to show how the challenged transaction diminished debtor's estate and adversely affected creditors. "[I]f the debtor receives property ... that is substantially equivalent in value to the property given or obligation incurred by him in exchange, then the transaction has not significantly affected his estate and his creditors have no cause to complain." Rubin v. Mfrs. Hanover Trust Co., 661 F.2d 979, 991 (2d Cir. 1981). "Whether a debtor received a reasonably equivalent value is analyzed from the point of view of the debtor's creditors, because the function of this element is to allow avoidance of only those transfers that result in a diminution of a debtor's prepetition assets." Jordan v. Kroneberger (In re Jordan), 392 B.R. 428, 441 (Bankr. D. Idaho 2008); see also Frontier Bank v. Brown (In re N. Merch., Inc.), 371 F.3d 1056, 1059 (9th Cir. 2004) ("the primary focus ... is on the net effect of the transaction on the debtor's estate and the funds available to the unsecured creditors."). "The touchstone is whether the transaction conferred realizable commercial value on the debtor reasonably equivalent to the realizable commercial value of the assets transferred." Mellon Bank, N.A. v. Metro Commc'ns, Inc., 945 F.2d 635, 647 (3d Cir. 1991).
Here, regardless of whether defendant or as plaintiff posits, MMG, provided services, debtor received "realizable commercial value" reasonably equivalent to the Transfers. As noted above, plaintiff does not dispute that new accounts for debtor were created through services provided by defendant or as plaintiff argues, MMG. At the end of the day, debtor received the value of those accounts, and, thus, a "fair equivalent" for the payments it made to defendant for services rendered. Debtor's creditors suffered no adverse impact by the Transfers — the net effect of the transaction on debtor's estate and the funds available for debtor's unsecured creditors is null.
Lastly, because defendant gave equivalent value in exchange for the Transfers, and plaintiff did not argue or present evidence that defendant acted with actual or constructive knowledge of any fraudulent scheme, the requirement under NYDCL § 272 that defendant act in good faith has
Accordingly, based on all of the credible evidence at trial, the Court finds that plaintiff has failed to establish that the Transfers were made without a fair consideration. Plaintiff's claim that the Transfers may be avoided as constructively fraudulent under NYDCL § 273 therefore fails.
Plaintiff next challenges the Transfers as actually fraudulent under NYDCL § 276. Section 276 provides that "[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors." N.Y. DEBT. & CRED. § 276.
To prevail on his claim of actual fraud, plaintiff must prove by clear and convincing evidence that the Transfers were made by debtor with actual intent to hinder, delay, or defraud. United States v. McCombs, 30 F.3d 310, 328 (2d Cir. 1994); Mendelsohn v. Jacobowitz (In re Jacobs), 394 B.R. 646, 661 (Bankr. E.D.N.Y. 2008). Proof by clear and convincing evidence means that when all of the evidence is considered, the trier of fact is convinced that it is highly probable that it is true. See Colorado v. New Mexico, 467 U.S. 310, 316, 104 S.Ct. 2433, 81 L.Ed.2d 247 (1984).
Under NYDCL § 276, it is the intent of the transferor, and not of the transferee, that is dispositive. HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1059 n.5 (2d Cir. 1995). "`Where actual intent to defraud is proven, the conveyance will be set aside regardless of the adequacy of the consideration given.'" Sharp, 403 F.3d at 56 (quoting United States v. McCombs, 30 F.3d 310, 328 (2d Cir. 1994)).
Because actual intent is rarely shown by direct evidence, courts use "badges of fraud" to support an inference of an intent. Sharp, 403 F.3d at 56; HBE Leasing Corp. v. Frank, 48 F.3d 623, 639 (2d Cir. 1995). These badges of fraud include:
Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582-83 (2d Cir. 1983). A showing of multiple badges of fraud can establish clear and convincing evidence of actual intent. Kramer v. Sooklall (In re Singh), 434 B.R. 298, 311-12 (Bankr. E.D.N.Y. 2010) (citation omitted).
While plaintiff asked in the Joint Pretrial Statement that judgment be entered in his favor under NYDCL § 276, at trial, he did not argue or present evidence of debtor's actual intent to hinder, delay, or defraud. Rather, as noted above, plaintiff placed primary emphasis on his constructive
Plaintiff has made a demand for attorneys' fees under NYDCL § 276-a. That section provides for recovery of attorneys' fees if a "conveyance is found to have been made by the debtor and received by the transferee with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud present or future creditors." N.Y. DEBT. & CRED. § 276-a. Under NYDCL § 276-a, plaintiff must establish actual intent by both the transferor and the transferee. Gowan v. Patriot Group, LLC (In re Dreier LLP), 452 B.R. 391, 433 (Bankr. S.D.N.Y. 2011).
Because plaintiff did not put forth any evidence to show that defendant received the Transfers with actual intent, plaintiff is not entitled to recover attorneys' fees under NYDCL § 276-a.
Plaintiff has the burden of proof to present evidence in support of his allegation that defendant was unjustly enriched and to prove that allegation by a preponderance of the evidence. Marini v. Adamo, 12 F.Supp.3d 549, 552 (E.D.N.Y. 2014).
"To prevail on a claim for unjust enrichment in New York, a plaintiff must establish: (1) that the defendant benefitted; (2) at the plaintiff's expense; and (3) that equity and good conscience require restitution." Beth Isr. Med. Ctr. v. Horizon Blue Cross & Blue Shield of N.J., Inc., 448 F.3d 573, 586 (2d Cir. 2006) (quoting Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000)); Adamo, 12 F.Supp.3d at 552. "An indispensable ingredient of [an unjust enrichment] claim is that as between the two parties involved there must be an injustice." Songbird Jet Ltd., Inc. v. Amax Inc., 581 F.Supp. 912, 926 (S.D.N.Y. 1984) (citing Indyk v. Habib Bank Ltd., 694 F.2d 54, 57 (2d Cir. 1982)). "The `essence' of such a claim `is that one party has received money or a benefit at the expense of another[,]'" Kaye, 202 F.3d at 616 (quotations and citation omitted), and "[t]he essential inquiry in any action for unjust enrichment ... is whether it is against equity and good conscience to permit the defendant to retain what is sought to be recovered[.]" Paramount Film Distrib. Corp. v. State, 30 N.Y.2d 415, 421, 334 N.Y.S.2d 388, 285 N.E.2d 695 (N.Y. 1972). "As long as the transferor received a benefit... the transferee is not liable on an unjust enrichment claim." Geltzer, 502 B.R. at 138.
Plaintiff has failed to meet his burden in proving his claim for unjust enrichment. For the same reasons that plaintiff's constructive fraud claim fails, the unjust enrichment claim fails. Because the payments to defendant were made for fair consideration, those payments were not made at the expense of debtor or its creditors.
Based on this evidence, the Court finds that defendant was not unjustly enriched at the debtor's expense. Accordingly, the Court finds for defendant with respect to plaintiff's claim for unjust enrichment.
For the reasons stated above, the Court concludes that plaintiff has failed to meet
SO ORDERED.
