Harrison v. N.J. Cmty. Bank (In re Jesup & Lamont, Inc.)

507 B.R. 452

In re Jesup & Lamont, Inc. and Jesup & Lamont Securities Corporation, Debtors.Matthew C. Harrison, Jr., Confirmation Trustee of the Jesup Liquidating Trust, Plaintiffs,

v.New Jersey Community Bank, Robert O'Donnell, and Stephen Rabinovici, Defendants.

Case No. 10–14133 (ALG) (Jointly Administered)

Adv. Pro. No. 12–1168

United States Bankruptcy Court, S.D. New York.

Signed March 26, 2014

Wilk Auslander LLP, Counsel to Post-Confirmation Trustee, 1515 Broadway, 43rd Floor, New York, New York 10036, By: Stuart M. Riback, Esq., Eric J. Snyder, Esq., Jessica Taran, Esq.

Klestadt & Winters LLP, Counsel to New Jersey Community Bank, and Robert O'Donnell, 570 Seventh Avenue, 17th Floor, New York, New York 10018, By: Tracy L. Klestadt, Esq., Brendan M. Scott, Esq.

Lowenstein Sandler LLP, Counsel to Steven Rabinovici, 1251 Avenue of the Americas, New York, New York 10020, By: Robert C. Bonebert, Esq., David M. Banker, Esq., Richard C. Wolter, Esq.

Chapter 11

MEMORANDUM DECISION

ALLAN L. GROPPER, UNITED STATES BANKRUPTCY JUDGE

Introduction

Debtor Jesup & Lamont, Inc. (“JLI”) filed a voluntary chapter 11 bankruptcy petition on July 30, 2010. About seven weeks later, on September 24, 2010, its wholly owned broker-dealer subsidiary, Jesup & Lamont Securities Corp. (“JLSC”), also filed under chapter 11. The two cases were jointly administered and the Court approved a Chapter 11 Plan of Liquidation (the “Plan”) on October 6, 2011. By virtue of provisions in the Plan, Matthew Harrison was appointed “Confirmation Trustee” of the “Jesup Liquidating Trust” (the “Trust”), authorized to pursue claims on behalf of either or both estates.

On March 14, 2012, the Confirmation Trustee (the “Trustee”) filed, and later amended, an adversary complaint in this Court (as amended, the “Complaint”). The Complaint was filed in the name of the Trust and on behalf of both estates against New Jersey Community Bank (“NJCB”), Robert O'Donnell, chief executive officer and chairman of the board of NJCB, and Stephen Rabinovici, former chairman of the board of both Debtors. Count I alleges breach of fiduciary duty claims against Rabinovici; Count II alleges aiding and abetting breach of fiduciary duty claims against NJCB and O'Donnell; Counts III and IV allege fraudulent conveyance claims under the Bankruptcy Code and New York State law, respectively, against NJCB; and Count V alleges, in the alternative, preferential transfer claims under 11 U.S.C. § 547 against NJCB. On July 17, 2013, defendants NJCB and O'Donnell filed a motion to dismiss the preference and aiding and abetting breach of fiduciary duty claims asserted against them. That same date, defendant Rabinovici filed a motion to dismiss the count asserted against him alleging breach of fiduciary duty if the underlying causes of action, fraudulent conveyance and preference, were dismissed. On July 26, 2013, the Trustee responded with a motion for summary judgment in his behalf on the preference and fraudulent conveyance claims against NJCB.

Facts

JLI was a holding company whose principal subsidiary was JLSC, a registered broker-dealer subject to regulation, inter alia, by the Financial Industry Regulatory Authority (“FINRA”). On May 28, 2009, JLI borrowed $2.1 million from NJCB (the “JLI Loan”). Plaintiff's Statement of Undisputed Material Facts (“Pl's Stmt.”) at ¶ 10; Counter Statement of Undisputed Facts of Defendants NJCB and Robert O'Donnell (“Counter Stmt.”) at ¶ 10. JLI transferred the $2.1 million to its wholly-owned subsidiary, JLSC, and it is not disputed that the funds became the property of JLSC. However, the money remained at NJCB. Counter Stmt. at ¶ 11.¹ JLSC agreed to keep the $2.1 million in a certificate of deposit account at NJCB (the “NJCB CD Account”) and executed an “Assignment of Deposit Account” by which it pledged the funds as collateral for the JLI Loan. Id. There is no dispute that JLSC did not guarantee the JLI Loan, but it is equally without dispute that NJCB had a claim against the property of JLSC up to the amount of the collateral deposited.

On July 23, 2009, FINRA demanded that some or all of the $2.1 million be moved to another bank for reasons that are not clear on the record. JLI requested a modification of the JLI Loan terms to permit the $2.1 million in the NJCB CD Account to be moved. Pl.'s Stmt. at ¶¶ 13, 14, 17; Counter Stmt. at ¶¶ 13, 14, 17. Roma Bank agreed to accept the funds in an account in the name of JLSC at Roma Bank (the “Roma Account”). To continue to protect NJCB's loan, Roma issued a $2 million letter of credit in favor of NJCB (the “Roma L/C”), collateralized by $2 million deposited by JLSC. Pl.'s Stmt. at ¶ 19; Counter Stmt. at ¶ 19. NJCB approved the transfer of funds and accepted delivery of the Roma L/C. Pl.'s Stmt. at ¶ 18; Counter Stmt. at ¶ 19. $100,000 remained in the NJCB CD Account and continued to collateralize the loan. Pl.'s Stmt. at ¶ 21; Counter Stmt. at ¶ 21. The Assignment of Deposit Account agreement remained outstanding. It continued to provide that collateral would include “all additional deposits hereafter made to the Account.” (Dkt. No. 38, Ex. F–3).

The material facts apparently did not change for the next ten months. The initial loan term was due to expire on May 28, 2010. Pl.'s Stmt. at ¶ 26; Counter Stmt. at ¶ 26. In April 2010, JLI requested that the loan term be extended for another year. Pl.'s Stmt. at ¶ 27; Counter Stmt. at ¶ 27. NJCB internally approved renewal of the loan for another year in June 2010, although new loan documents were never executed. Pl.'s Stmt. at ¶¶ 28–29; Counter Stmt. at ¶¶ 28–29. At about the same time, however, FINRA apparently became concerned about the safety of the $2 million deposited by JLSC, as the Roma account was not FDIC-insured.

In June 2010, FINRA demanded that the $2 million be deposited in an FDIC-insured account. Pl.'s Stmt. at ¶ 34; Counter Stmt. at ¶ 34. On June 24, Steven Rabinovici, the chairman of the board of both Debtors, requested that Roma Bank close the Roma Account and transfer the funds to an account at Hopewell Valley Community Bank (“Hopewell Valley”), where the account would be insured. Pl.'s Stmt. at ¶ 37; Counter Stmt. at ¶ 37. Roma Bank wired the money as requested, without imposing any written conditions on the transfer. Pl.'s Stmt. at ¶¶ 38, 40; Counter Stmt. at ¶¶ 38, 40. Although it was apparently contemplated that Hopewell Valley would open a letter of credit in favor of NJCB, as Roma Bank had, Hopewell Valley was unable to do so immediately. Pl.'s Stmt. at ¶¶ 42, 44; Counter Stmt. at ¶¶ 42, 44. On June 25, as the financial situation at both Debtors was deteriorating rapidly, Rabinovici sent a letter to Hopewell Valley requesting that Hopewell Valley wire the $2 million to the NJCB CD Account. Pl.'s Stmt. at ¶ 47; Counter Stmt. at ¶ 47. Hopewell Valley wired the money to NJCB the same day, and it was deposited into the NJCB CD Account (the “NJCB Transfer”). Pl.'s Stmt. at ¶ 48; Counter Stmt. at ¶ 48. Three days later, on June 28, at Rabinovici's direction, NJCB applied the funds in the NJCB CD Account to repay the JLI Loan. Pl.'s Stmt. at ¶¶ 50–51; Counter Stmt. at ¶¶ 50–51. In deposition testimony, O'Donnell stated that Rabinovici had informed him that the loan should be paid off because Rabinovici did not want NJCB to be hurt. (Dkt. No. 38, Ex. F (O'Donnell Dep., 11/12/2010 at 70:2–6)).

There is apparently no dispute that the events of June 2010 took place on the eve of the failure of JLSC; according to Defendants' representation at oral argument, on June 18, 2010, JLSC had already been ordered to cease operations. JLI filed its bankruptcy petition on July 30, 2010, about 35 days after the June 25 Transfer. JLSC followed on September 24, 2010. On March 14, 2012, the Trustee initiated this adversary proceeding regarding the $2 million transferred from Hopewell Valley to NJCB on June 25, 2010 (the NJCB Transfer). Complaint at ¶ 1. The instant motions followed.

Discussion

I. Introduction

The principal issues in this case are raised by the motions to dismiss of certain of the Defendants and the Trustee's motion for summary judgment on the preference and fraudulent conveyance counts. In brief, the Trustee asserts that the collateralization of JLSC's debt for the benefit of its parent, shortly before the bankruptcy filing of both the parent and the subsidiary, was a fraudulent conveyance because JLSC received absolutely no consideration for taking on the obligation. If there was consideration, the Trustee further argues, then the collateralization was a preference as a payment on an antecedent obligation. Defendants argue that the collateralization falls in a gap between preference and fraudulent conveyance law. Their best argument is that the collateralization cannot be avoided because there was fair value for fraudulent conveyance purposes but no antecedent debt for preference purposes. They also contend that it falls outside the 90–day look-back period for preference liability, and that the Trustee does not have standing to sue on a claim of aiding and abetting a breach of fiduciary duty.

The Court finds that, on this record, the Trustee has established that the collateralization at issue was a preference. On the only preference issues that are open to serious dispute, the Trustee has established that the collateralization of debt that occurred on June 25, 2010 was a transfer on account of an antecedent debt owed by the debtor before such transfer was made and that it was made within the 90–day look-back period. If, however, there was no antecedent liability (as the Defendants argue), then the transfer was a fraudulent conveyance. There is no gap—on this record, it is one or the other.

Finally, the motion to dismiss the claim of aiding and abetting a breach of fiduciary duty cannot be decided on the present record, as it is impossible to determine, on the pleadings, which state law would apply to these claims.

II. The Legal...