447 B.R. 170
Bankr. S.D.N.Y.2011Background
- Debtors MFS and FLI engaged in diamond/jewelry business and financed operations with multiple lenders during 2003–2006 while insolvent.
- Fortgang family and related Fortgang Affiliates controlled substantial related entities; debt structure intertwined with these affiliates.
- Loans totaling $129,384,000 were advanced by JPMC, ABN, BOA, HSBC, BL, IDB, and ADB before petition; in Oct 2004, liens were granted to secure these debts.
- Debtors allegedly transferred loan proceeds to Fortgang Affiliates through various schemes: circular loans, loans, investments, due-from accounts, and pay-down transfers.
- Consignment arrangement with SPM, Sovereign, and related entities involved transferring consigned gold to Gold Transferee Affiliates, with Sovereign financing part of the deal in July 2006.
- Plaintiff seeks to avoid/ recover fraudulent transfers and liens under Bankruptcy Code sections, asserting a collapsing “scheme” across multiple interdependent transfers.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Counts VIII–X plead actual fraudulent transfers. | Fabrikant asserts all transfers to Fortgang Affiliates were part of a single collapsing scheme. | Defendants contend the TAC fails to link each transfer to a specific lender with knowledge of the scheme. | Counts VIII–X dismissed as to actual fraudulent transfers; constructive claims survive. |
| Whether Counts V–VII (consignment) are valid fraudulent transfer claims. | TAC alleged Sovereign/SPM knew gold was delivered to Fortgang Affiliates and debtor received inadequate value. | The consignment structure and pre-existing obligations negate the alleged fraud; liens/obligations not appropriately avoided. | Counts V–VI dismissed as to SPM; Count VII dismissed as to SPM and Sovereign, with leave to replead; further pleading required. |
| Whether Counts I–IV (Scheme Claims) survive collapsing theory. | Lenders knew/should have known proceeds would be reconveyed to Fortgang Affiliates; all loans are part of one scheme. | Allegations fail to identify specific loans or transfers; no plausible collapsing transaction shown. | Counts I–IV dismissed with prejudice (except 61–62 phrasing); no cognizable collapsing claims. |
| Whether Count XI (preferences) has standing or is time-barred. | SAT abandoned claims; TAC reasserts; reliance on plan documents. | Standing not shown; claims failed to abandon via proper quorum; time-barred. | Count XI dismissed for lack of standing and time-barred; alternative ground supports dismissal. |
| Whether Count XII (502(d)) survives with respect to the remaining defendants. | Claims against certain defendants should be disallowed under 502(d). | 502(d) requires voidable transfers; some transfers not properly pleaded. | Count XII dismissed as to JPMC, BOA, HSBC, BL, ADB; remaining repleading allowed; sovereign/SPM leave to replead. |
Key Cases Cited
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (plausibility standard for pleading; two-step analysis)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (U.S. 2007) (pleading requires plausibility, not mere possibility)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (collapsing transactions require interdependent steps and knowledge of the entire scheme)
- In re Sunbeam Corp., 284 B.R. 355 (Bankr.S.D.N.Y. 2002) (danger of using genuine business transactions to cloak fraudulent transfers (context))
- Voest-Alpine Trading USA Corp. v. Vantage Steel Corp., 919 F.2d 206 (3d Cir. 1990) (collapse transactions when components form a single scheme with knowledge of all steps)