643 B.R. 309
Bankr. S.D.N.Y.2022Background
- Debtor Joseph Klaynberg filed a Chapter 11 petition on February 11, 2022; he remains debtor-in-possession and Nahla (Series 2020A of Nahla Capital LLC) holds a $13,196,612.65 judgment against him as a guarantor of mezzanine financing.
- In late 2020, shortly after Nahla’s demand and a UCC sale of collateral, Klaynberg executed a rapid separation agreement and obtained an uncontested divorce that shifted roughly $8.5 million in liquid cash/securities to his wife, Emily.
- The divorce was completed quickly, Emily was largely unrepresented, the settlement allocated disproportionately large liquid assets to her, and the parties continued conduct consistent with being married — factors the court found indicia of a possible sham transfer.
- Klaynberg made additional transfers to family and related entities (sons, family trust, affiliated companies), continued joint use of brokerage accounts, and moved funds post-judgment and post-petition in ways that reduced estate liquidity.
- The Debtor filed a liquidating Chapter 11 plan under which he would control asset sales and claims reconciliation — processes that the creditor Nahla says pose conflicts benefiting insiders.
- Nahla moved for appointment of a Chapter 11 trustee under 11 U.S.C. § 1104; the court granted the motion, finding cause under § 1104(a)(1) (fraud/conflicts/mismanagement) and that appointment is in creditors’ interests under § 1104(a)(2).
Issues
| Issue | Plaintiff's Argument (Nahla) | Defendant's Argument (Klaynberg) | Held |
|---|---|---|---|
| Whether the separation/divorce was a sham used to fraudulently transfer liquid assets to shield them from creditors | The timing, rapid negotiation, lack of counsel for Emily, lopsided allocation to Emily, and post-agreement conduct show a sham designed to divert assets | The divorce was motivated by longstanding marital breakdown; negotiations occurred and Emily (via son) had input; allocations had legitimate reasons (mortgage, living costs) | Court held facts show indicia of a sham divorce and fraudulent or suspicious transfers — supports appointment of a trustee for cause under §1104(a)(1) |
| Whether transfers to family/affiliates were improper or showed mismanagement | Multiple substantial transfers to sons, a trust, and a significant other around the time of defaults and the petition indicate intent to place assets beyond creditors’ reach | Debtor contends disclosures were made and transfers were ordinary or for estate-planning/business reasons | Court found transfers unexplained and suspicious, showing misuse of assets or gross mismanagement — supports trustee appointment |
| Whether Debtor’s continued control over liquidation and claims reconciliation poses disqualifying conflicts | Debtor’s proposed plan leaves him controlling sale and claim reconciliation, which could favor insiders (his sons, co-investors) and reduce creditor recoveries | Debtor argues potential conflicts alone don’t justify a trustee and a trustee would duplicate plan administrator functions at extra cost | Court found existing transfers plus plan structure create real conflicts and risk of insider-favoring decisions; weight favors trustee appointment |
| Whether appointment of a trustee is in creditors’ interests under §1104(a)(2) | An independent trustee would better protect creditors, investigate avoidance claims, and maximize recoveries; Nahla is the largest non-contingent creditor and no creditors oppose | Debtor argues added trustee cost and that disclosure/plan protections suffice; only he opposes | Court concluded appointment is in creditors’ interests given trustworthiness concerns, risk to recoveries, and likely benefits outweigh costs |
Key Cases Cited
- In re Sillerman, 605 B.R. 631 (Bankr. S.D.N.Y. 2019) (discusses appointment of trustee for cause where conflicts, fraud, or mismanagement exist)
- Chorches v. Chen (In re Xiao), 608 B.R. 126 (Bankr. D. Conn. 2019) (identifies factors indicating a sham divorce used to shield assets)
- In re The 1031 Tax Grp., LLC, 374 B.R. 78 (Bankr. S.D.N.Y. 2007) (sets factors for §1104(a)(2) trustee appointment—trustworthiness, performance, creditor confidence, and cost/benefit)
- In re McCorhill Publ’g, Inc., 73 B.R. 1013 (Bankr. S.D.N.Y. 1987) (trustee warranted where questionable inter-company transfers and conflicting principals exist)
- In re Bellevue Place Assocs., 171 B.R. 615 (Bankr. N.D. Ill. 1994) (individual debtor-in-possession faces heightened self-dealing concerns)
- In re Skytec, Inc., 610 B.R. 14 (Bankr. D.P.R. 2019) (appointment declined where transfers were ordinary-course and thoroughly investigated)
- In re Royster, 145 B.R. 88 (Bankr. M.D. Fla. 1992) (potential conflicts alone do not automatically require trustee appointment)