Debra Kramer Khan v. Mahia (In re Khan)

In re: SHAHARA KHAN, Debtor,

DEBRA KRAMER AS TRUSTEE OF THE ESTATE OF SHAHARA KHAN, Plaintiff, v. TOZAMMEL H. MAHIA, Defendant.

14-MC-1674 (PKC)

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF NEW YORK

September 30, 2015

MEMORANDUM & ORDER

PAMELA K. CHEN, United States District Judge:

Before the Court is a memorandum decision and proposed findings of fact and conclusions of law ("proposed findings and conclusions") issued by United States Bankruptcy Judge Elizabeth S. Stong regarding a motion for summary judgment filed by Plaintiff Debra Kramer ("Trustee"), in her role as Trustee of the estate of Shahara Khan ("Khan"), against defendant Tozammel H. Mahia ("Mahia"), in an adversary proceeding arising from Khan's voluntary bankruptcy petition. In re Khan, 10-46901-ESS, 2014 WL 4956676 (Bankr. E.D.N.Y. Sept. 30, 2014).¹ For the reasons set forth below, the Court affirms and adopts Judge Stong's proposed findings and conclusions in all respects, and affirms her decision granting partial summary judgment. The Trustee's motion for summary judgment is therefore granted in part and denied in part.

BACKGROUND

Having reviewed the facts and descriptions of proceedings in the Bankruptcy Court contained in the "Procedural History" and "Background" sections of Judge Stong's memorandum decision and proposed findings and conclusions, the Court adopts those sections in full and otherwise presumes the parties' familiarity with the lengthy procedural history of this case in the Bankruptcy Court, this Court, and the Court of Appeals for the Second Circuit.

In brief, Khan filed a Chapter 7 bankruptcy petition on July 22, 2010. In re Khan, 2014 WL 4956676, at *1. By this adversary proceeding, the Trustee seeks to recover two allegedly fraudulent conveyances of funds made by Khan in 2007 to her son, Mahia. Id. at *1, *3. Khan, Mahia, and their relative Shamsum N. Rimi ("Rimi") held title to real property located at 87-27 110th Street, Richmond Hill, NY 11418 (the "Richmond Hill Property"), as tenants in common by a deed recorded on November 1, 2002. Id. at *3. Beginning on September 23, 2002, Khan held a 25% interest, Mahia held a 50% interest, and Rimi held a 25% interest in the Richmond Hill Property, which Khan and Mahia used as their principal residence. Id.

The first transfer at issue occurred in connection with a home equity loan in the amount of $150,000 secured by a mortgage on the Richmond Hill Property in favor of Countrywide Bank, N.A., and signed by Khan, dated January 5, 2007. Id. The Trustee alleges that Khan conveyed her share of the mortgage proceeds, or $37,500, for no consideration to Mahia. Mahia used $100,000 of the mortgage proceeds towards the purchase of a new home located at 101-14 102nd Street, Ozone Park, NY 11416 (the "Ozone Park Property"), and deposited the remaining $50,000 in a Citibank checking account, held solely in his name, for renovations to the Richmond Hill and Ozone Park Properties. Id.

The second transfer at issue occurred in connection with the sale of the Richmond Hill Property to Jany Sikder on April 5, 2007, which yielded net proceeds of $106,761. Id. The deed for that sale indicated that Khan was a titled owner of the property, but disbursement checks from the closing did not indicate that Khan received any of the sale proceeds. Id. at *1, *3. The Trustee alleges that Khan again transferred her share of those proceeds, or $26,690.25, for no consideration to Mahia. Id. at *3. After making payments to certain parties in connection with the closing, Mahia received the balance, or $38,000, of the sale proceeds. Mahia deposited those funds in his Citibank account and used them to pay for improvements to the Ozone Park Property, purchase furniture, and purchase a vehicle. Khan did not receive her share of the Sale Proceeds at the closing or thereafter. Id.

The Trustee commenced this action on December 3, 2011 to recover Khan's shares of the mortgage proceeds ($37,500) and the sale proceeds ($26,690.25) pursuant to New York's Debtor and Creditor Law ("NY DCL") governing constructive and actual fraudulent conveyances, the Bankruptcy Code, and a common law theory of unjust enrichment. Id. at *1, *3.² On February 7, 2012, Mahia answered the complaint and asserted counterclaims for "constitutional torts" and abuse of process. On March 24, 2012, the Trustee filed a sanctions motion against Mahia's counsel, contending that the counterclaims were baseless and made in bad faith. Id. at *1-2; see Kramer v. Mahia, 12-MC-794 DLI, 2013 WL 1629254, at *1 (E.D.N.Y. Apr. 15, 2013).

Mahia subsequently filed a motion to withdraw the reference to the Bankruptcy Court of the sanctions motion on November 19, 2012, and a motion to withdraw the reference of the adversary proceeding on December 5, 2012. The Honorable Dora L. Irizarry of the EasternDistrict of New York, to whom the case was assigned, denied both withdrawal motions by order dated April 15, 2013. Kramer, 2013 WL 1629254, at *1. With respect to the reference of the adversary proceeding, Judge Irizarry concluded that although the Bankruptcy Court lacked authority to render a final decision on the Trustee's fraudulent conveyance claims, the Bankruptcy Court may nevertheless hear the case and recommend proposed findings to the District Court. Judge Irizarry accordingly declined to grant permissive withdrawal of the reference of the adversary proceeding. Id. at *5. Mahia then appealed, which was dismissed by the Second Circuit for lack of jurisdiction. In re Khan, 567 F. App'x 53 (2d Cir. 2014).

On March 11, 2013, the Judge Stong issued a decision granting the sanctions motion, upon a determination that Mahia's counsel acted in bad faith by asserting counterclaims that lacked a colorable basis. In re Khan, 488 B.R. 515 (Bankr. E.D.N.Y. 2013). The sanctions order was affirmed by Judge Irizarry, Dahiya v. Kramer, 13-CV-3079 DLI, 2014 WL 1278131 (E.D.N.Y. Mar. 27, 2014), and by the Second Circuit, In re Khan, 593 F. App'x 83 (2d Cir. 2015). Of importance, the Second Circuit rejected Mahia's counsel's "sweeping argument that the very existence of bankruptcy courts violates the Appointments Clause of the United States Constitution." Id. at 85. The Circuit also found no abuse of discretion in the Bankruptcy Court's finding of bad faith, noting Mahia's counsel's "general pattern of groundless litigation in the bankruptcy courts, premised not on actual disputes with the actions of trustees but rather on frivolous, obstructive objections to the bankruptcy system." Id. at 86.

On January 31, 2014, the Trustee filed a motion for summary judgment on all 16 causes of action, which Mahia opposed. In re Khan, 2014 WL 4956676, at *3. After holding hearings, receiving additional briefing, and hearing oral argument, Judge Stong rendered her memorandum decision and proposed findings and conclusions on September 30, 2014.

Because the Bankruptcy Court lacks the authority to enter final judgment on the Trustee's State law (NY DCL) fraudulent conveyance claims and common law unjust enrichment claims, Judge Stong issued her determinations regarding summary judgment on those claims in the form of proposed findings of fact and conclusions of law, which are subject to this Court's review. Id. at *5. In her proposed findings and conclusions, Judge Stong recommends that summary judgment be granted on the Trustee's claims that the transfers of proceeds from both the mortgage and sale of the Richmond Hill Property were constructively fraudulent. This recommendation is premised on Judge Stong's proposed findings of fact that: (1) both the mortgage and sale proceeds were Khan's property; (2) these proceeds were conveyed to Mahia for less than fair consideration or reasonably equivalent value; and (3) Khan was insolvent at the time of the transfers or rendered insolvent by the transfers. Id. at *11-14, *16, *27-30, *32. Judge Stong accordingly proposed granting the Trustee's motion, under Bankruptcy Code § 544(b) and NY DCL § 273 for a declaratory judgment to set aside the transfers as fraudulent conveyances, and under Bankruptcy Code § 550(a) and NY DCL §§ 273 and 278, for a judgment against Mahia in the amount of the transfers. Id. at *54. Conversely, Judge Stong found that disputes of material fact exist with respect to the Trustee's other theories of recovery for constructive fraud, actual fraud, and unjust enrichment. Id. at *16-17, *21, *32-33, *36-37. Judge Stong thus denied summary judgment on these claims, as well as the Trustee's request for attorneys' fees under NY DCL § 276-a because the Trustee has not shown a genuine dispute of material fact that the transfers were made with actual intent to hinder, delay, or defraud Khan's creditors. Id. at *53-54.

In addition, Judge Stong determined that the Bankruptcy Court was authorized to enter judgment on the Trustee's claims under Bankruptcy Code § 542(a) for turnover and anaccounting of the transfers. Id. at *5. As a consequence of her proposed findings that the Trustee is entitled to avoid the transfers as constructively fraudulent conveyances and recover the sums under the Bankruptcy Code, Judge Stong entered a decision granting summary judgement under Bankruptcy Code § 542(a), and directing Mahia to account for and deliver the mortgage and sale proceeds to the Trustee. Id. at *24-25, *39-40, *53.

Mahia filed objections to Judge Stong's memorandum and proposed findings on November 7 and 10, 2014, and the Trustee submitted its response on November 22, 2014.

DISCUSSION

I. Legal Standards

The district court reviews de novo those portions of a bankruptcy judge's proposed findings of fact and conclusions of law to which any party has made timely and specific objection. 28 U.S.C. § 157(c)(1); Fed. R. Bankr. P. 9033(d); see also Cent. Vt. Pub. Serv. Corp. v. Herbert, 341 F.3d 186, 190 (2d Cir. 2003); In re Crysen/Montenay Energy Co., 240 B.R. 166, 169 (S.D.N.Y. 1999) aff'd, 226 F.3d 160 (2d Cir. 2000). The Court "may accept, reject, or...