Dery v. Karafa (In re Dearborn Bancorp, Inc.)

583 B.R. 395

IN RE: DEARBORN BANCORP, INC., Debtor.

Fred J. Dery, Trustee, Plaintiff,

v.Jeffrey Karafa, Defendant.

Fred J. Dery, Trustee, Plaintiff,

v.Michael J. Ross, Defendant.

Case No. 13–44665

Adv. Pro. No. 13–5094

Adv. Pro. No. 13–5095

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed April 20, 2018

Paul R. Hage, Louis P. Rochkind, Jaffe Raitt Heuer & Weiss, P.C., Southfield, MI, for Plaintiff.

Howard S. Sher, Debra Beth Pevos, Jacob & Weingarten, P.C., Troy, MI, for Defendants.

TRIAL OPINION

Thomas J. Tucker, United States Bankruptcy Judge

I. Introduction

Each of the above-captioned adversary proceedings is a preference action arising out of the Chapter 7 bankruptcy case of Dearborn Bancorp, Inc. The Plaintiff Chapter 7 Trustee seeks to avoid pre-petition transfers the Debtor made to Defendant Jeffrey Karafa totaling $130,422.00 (Adv. No. 13–5094) and pre-petition transfers the Debtor made to Defendant Michael Ross totaling $228,344.00 (Adv. No. 13–5095). The Trustee seeks judgments for these amounts against the Defendants, plus interest. The Trustee also seeks disallowance, under 11 U.S.C. § 502(d), of each Defendant's claim filed in the Debtor's bankruptcy case.

The Court granted partial summary judgment for the Plaintiff Trustee in each of these cases, and then held a joint bench trial. The parties then filed post-trial briefs.

The trial focused on two of the statutory defenses to the avoidance of preferential transfers—namely, the "contemporaneous exchange for new value" defense under 11 U.S.C. § 547(c)(1), and the "subsequent new value" defense under 11 U.S.C. § 547(c)(4).

The Court has considered all of the arguments of the parties; all of the exhibits admitted into evidence at trial, namely Plaintiff's Exhibits 1–4 and 8–27, and Defendants' Exhibits C, D, F–1, F–2, G–1–D, G–4–A, G–4–B, I–1, I–2, J–3, K–2, L–2, L–3, O, and P, and each of the following Defendants' Exhibits for a limited purpose as stated during trial: J–1, M–1, M–2–A, M–3, M–4–B.¹ And the Court has considered all of the testimony that was admitted into evidence at trial, of the following witnesses: William Demmer, Defendant Michael Ross, and Defendant Jeffrey Karafa.

This opinion constitutes a statement of the Court's findings of fact and conclusions of law in these two adversary proceedings. For the reasons stated in this opinion, the Court will enter judgment in favor of the Plaintiff Trustee against each of the Defendants.

II. Background and facts

A. Background

The following quotation from Defendants' trial brief accurately states some basic background facts that are not disputed:

Prior to the filing of its bankruptcy petition, Dearborn Bancorp, Inc. ("Debtor") was a publicly traded company with approximately 5,000 shareholders and was listed on the NASDAQ Stock Exchange. Debtor owned 100% of the stock of Community Bank of Dearborn, which later became known as Fidelity Bank ("Bank").

Debtor employed Michael Ross ("Ross") as its President and Bank employed Ross as its President and Chief Executive Officer. Debtor employed Jeffery Karafa ("Karafa") as its Treasurer and Chief Operating Officer and Bank employed Karafa as its Senior Vice President, Chief Financial Officer, Secretary, and Treasurer. Ross and Karafa oversaw the day-to-day operations of Bank and Debtor.

On or about March 30, 2012: (a) Bank was closed by the Michigan Office Of Financial And Insurance Regulation; (b) the Federal Deposit Insurance Corporation ("FDIC") was appointed to be Bank's receiver; (c) substantially all of the assets of Bank were sold to Huntington National Bank; and (d) all of the employees of Bank were terminated.

On or about March 21, 2012, Debtor entered into Consulting Agreements with Ross and Karafa.... [Under] the Consulting Agreements, Debtor retained Ross and Karafa to perform services in connection with the winding up of Debtor's business and affairs.... The Consulting Agreement with Ross was effective as of March 31, 2012 and the Consulting Agreement with Karafa was effective as of March 30, 2012. [Under] the Consulting Agreement with Ross, Debtor was obligated to provide the following to Ross in exchange for his performance of duties under the Consulting Agreement: (I) compensation of $6,867 [per week] paid weekly in advance; (ii) an allowance for health care benefits of $1,000 [per month] paid monthly on the first of each month; and (iii) reimbursement of expenses of $75 [per month] paid monthly on the first of each month. [Under] the Consulting Agreement with Karafa, Debtor was obligated to provide the following to Karafa in exchange for his performance of duties under the Consulting Agreement: (I) compensation of $3,846 [per week] paid weekly in advance; (ii) an allowance for health care benefits of $1,000 [per month] paid monthly on the first of each month; and (iii) reimbursement of expenses of $50 [per month] paid monthly on the first of each month.

Ross and Karafa performed the obligations required under their respective Consulting Agreements. Between April 7, 2012 and November 2, 2012, Debtor paid $228,344 to Ross and $130,422 to Karafa. Such payments were made in the amounts and at the times required under their respective Consulting Agreements. Both Ross and Karafa continued to perform services for Debtor pursuant to the provisions of the Consulting Agreements after Debtor ceased paying them for services at the beginning of November 2012.

Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on March 11, 2013. Ross filed a proof of claim, Claim No. 2, in the amount of $137,340 for services rendered pursuant to his Consulting Agreement subsequent to November 9, 2012. Karafa filed a proof of claim, Claim No. 5, in the amount of $76,920 for services rendered pursuant to his Consulting Agreement subsequent to November 9, 2012.²

B. Plaintiff Trustee's complaints

The Plaintiff Trustee's complaints in these two adversary proceedings are similar, and each complaint contains six counts.³ Count I of each complaint seeks to avoid the pre-petition transfers the Debtor made under the Consulting Agreements with Defendants—totaling $130,422.00 to Karafa and $228,344.00 to Ross—as preferential transfers under 11 U.S.C. § 547(b). Counts II through IV, which are no longer part of these cases, sought to avoid the same transfers, as fraudulent transfers under several provisions in 11 U.S.C. § 548. Count V seeks recovery of the avoided transfers from each Defendant, as an initial transferee, under 11 U.S.C. § 550. And Count VI seeks disallowance of each Defendant's claim filed in the bankruptcy case under 11 U.S.C. § 502(d).

C. The Court's summary judgment rulings and the trial

Before trial, Plaintiff moved for summary judgment in each adversary proceeding. Plaintiff sought summary judgment on Count I (the preference claim), and also on Counts III and IV (fraudulent transfer claims) of his complaint in each case. Defendants opposed the summary judgment motions.

After holding a hearing, the Court issued a bench opinion⁴ and entered an order in each adversary proceeding, granting Plaintiff's motions in part and denying them in part. The Court denied Plaintiff's summary judgment motions entirely with respect to the fraudulent transfer claims (Counts III and IV). But the Court granted partial summary judgment with respect to Plaintiff's preference claims in each adversary proceeding (Count I), as follows:

IT IS ORDERED that:

1. The Motion is granted to the following extent: Plaintiff is granted partial summary judgment on Count I ..., determining that the Plaintiff has established all of the necessary elements under 11 U.S.C. § 547(b) for avoiding the transfers alleged and referred to in ... the Complaint ....

2. The Motion also is granted to the following extent: Plaintiff is granted partial summary judgment, with respect to the Defendant's affirmative defense to Count I under 11 U.S.C. § 547(c)(2).

3. To the extent the Plaintiff's Motion seeks summary judgment on the Defendant's affirmative defenses to Count I under 11 U.S.C. § 547(c)(1)and 11 U.S.C. § 547(c)(4), the Motion is denied.⁵

The Court then held a joint trial in the two adversary proceedings. Before trial, Plaintiff abandoned all of his fraudulent transfer claims, Counts II through IV in each case,⁶ and the Court now will enter judgment dismissing those claims with prejudice. Trial was held on Plaintiffs preference claims under Count I, and the related claims that depend on Plaintiff's success in avoiding the transfers as preferences—Counts V (the § 550 recovery claim), and VI (the § 502(d) claim).

III. Jurisdiction

This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). All of Plaintiff's claims in these adversary proceedings are core proceedings, under 28 U.S.C. §§ 157(b)(2)(B), 157(b)(2)(F) and 157(b)(2)(H).

In addition, each of these adversary proceedings falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans–Industries, Inc. ), 419 B.R. 21, 27 (Bankr. E.D. Mich. 2009). Each is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," see id. , namely Bankruptcy Code §§ 502(d), 547, 548, and 550. And each is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." See Allard v. Coenen , 419 B.R. at 27.

For these reasons, this Court has statutory authority, under 28 U.S.C. § 157(b)(1), to enter a final judgment on all of Plaintiff's claims. If and to the extent this Court might otherwise lack constitutional authority to enter a final judgment, under Stern v. Marshall , 564 U.S. 462...