567 B.R. 684
N.D.N.Y.2017Background
- HTG (a NY LLC) sold invoices to Commercial Factors of Atlanta (CFA) under March and April 2011 factoring/security agreements; CFA took broad, perfected security interests by UCC statements.
- HTG’s owner, Gael Coakley, sold fabricated (phony) invoices to CFA and used proceeds from later fake sales to pay earlier obligations; CFA was ultimately a net loser of over $1M.
- Chapter 7 trustee Marc Ehrlich (trustee for HTG) sued CFA in an adversary proceeding alleging fraudulent conveyances, breach of contract, unjust enrichment, aiding/abetting fiduciary breaches, equitable subordination, and declaratory relief.
- Bankruptcy Judge Littlefield dismissed the adversary complaint in full; Ehrlich appealed to the district court.
- The district court affirmed dismissal, reasoning that (1) CFA held a valid, perfected security interest in the funds at issue so transfers could not be avoided as fraudulent conveyances; (2) many claims were barred by in pari delicto/Wagoner because HTG orchestrated the fraud; and (3) contract, equitable subordination, and unjust enrichment claims failed on the merits.
Issues
| Issue | Plaintiff's Argument (Ehrlich) | Defendant's Argument (CFA) | Held |
|---|---|---|---|
| Compliance with Bankruptcy Rule 8014 | Appellant brief incorporates bankruptcy-court arguments and omits factual/issue statements but urges merits review because bankruptcy order gave little explanation | CFA points to procedural defects under Rule 8014 | Court noted Rule 8014 violations but exercised discretion to reach merits because bankruptcy order lacked explanation; proceeded to decide on merits |
| Actual fraudulent conveyance (11 U.S.C. §548 / NY DCL §276) | HTG made transfers with actual intent to defraud (selling phony invoices to pay earlier debts); Ponzi presumption applies | CFA contends it held a perfected security interest in transferred funds so the debtor never had an owned interest to fraudulently transfer | Transfers dismissed: CFA’s perfected security interest meant the funds were not property of the debtor for avoidance; Ponzi presumption inapplicable (not a multi-investor Ponzi scheme) |
| Constructive fraudulent conveyance (§548(a)(1)(B) / DCL §§273–275) | Transfers lacked reasonably equivalent value; HTG insolvent | CFA: payments discharged antecedent debt and were fair consideration; funds secured by CFA’s perfected interest | Dismissed: same secured-interest rationale; payment of antecedent debt and fair consideration under New York law also defeat DCL constructive claims |
| In pari delicto / Wagoner standing for contract/tort claims (breach of contract, aiding/abetting, covenant of good faith) | Trustee sues CFA for participating in wrongdoing and for exceeding credit limits | CFA: HTG masterminded fraud and was principally at fault; Wagoner/in pari delicto bar trustee claims that derive from debtor’s own wrongdoing | Dismissed: Wagoner/in pari delicto bar trustee’s claims where debtor joined in fraud; trustee stands in debtor’s shoes and lacks standing for claims based on debtor’s own wrongful conduct |
| Validity/scope of CFA’s security interest; merger clause and addenda | Ehrlich challenges that the March agreement lacks sufficient collateral description and that addenda may not modify the April (superseding) agreement | CFA relies on April agreement’s broad collateral definition, perfected UCC filings, and that addenda effect line increases consistent with parties’ intent | Held: April agreement validly described collateral and was perfected; merger clause does not defeat enforcement of addenda given same parties and purpose; declaratory and breach claims fail |
| Equitable subordination and unjust enrichment | Trustee seeks subordination and restitution of funds to estate | CFA: no legal breach, tort, or bad-faith receipt; trustee’s remedies inappropriate where transferee was net victim and had security interest | Dismissed: unjust enrichment barred by existence of contract; equitable subordination not justified—extraordinary remedy not warranted given absence of culpable conduct by CFA |
Key Cases Cited
- Sharp Intern. Corp. v. State St. Bank & Trust Co., 403 F.3d 43 (2d Cir. 2005) (repayment of antecedent debt constitutes fair consideration under New York law)
- Ades-Berg Inv’rs v. Breeden (In re Bennett Funding Grp., Inc.), 439 F.3d 155 (2d Cir. 2006) (definition and attributes of a Ponzi scheme)
- Melamed v. Lake County Nat’l Bank, 727 F.2d 1399 (6th Cir. 1984) (payment to a secured creditor does not diminish debtor’s estate and is not avoidable as a fraudulent conveyance)
- Picard v. JPMorgan Chase & Co. (In re Bernard L. Madoff Inv. Sec. LLC), 721 F.3d 54 (2d Cir. 2013) (in pari delicto/Wagoner principles bar trustee recovery where debtor joined in fraud)
- Ashcroft v. Iqbal, 556 U.S. 662 (U.S. 2009) (pleading standard: plausibility requirement for surviving Rule 12(b)(6))