In re Barkany

In re: Gershon Barkany, Debtor.

No. 8-14-72941-las

United States Bankruptcy Court, E.D. New York

September 20, 2021

Chapter 7

MEMORANDUM DECISION AND ORDER DENYING TRUSTEE'S MOTION TO APPROVE ASSIGNMENT OF CLAIMS AGAINST DEFENDANTS JONATHAN ZELINGER, GILA ZELINGER, ETHICAL PRODUCTS, INC., AND PETEX INTERNATIONAL LIMITED TO BARKANY ASSET RECOVERY &amp MANAGEMENT LLC ^[1]

Louis A. Scarcella, United States Bankruptcy Judge

Presently before the Court is the motion, dated February 1, 2021 (the "Assignment Motion") [Dkt. No. 680], ^[2] filed by Marc A Pergament, Esq., as chapter 7 trustee (the "Trustee") of the bankruptcy estate (the "Estate") of Gershon Barkany (the "Debtor"), seeking an order, pursuant to 11 U.S.C §§ 105 and 363, ^[3] approving the Estate's assignment to Barkany Asset Recovery & Management LLC ("BARM")^[4] of the Estate's claims against Jonathan Zelinger, Gila Zelinger, Ethical Products, Inc. ("Ethical Products"), and Petex International Limited ("Petex") (collectively, the "Zelinger Parties") for the sum of $70, 000, subject to higher and better offers. The claims against the Zelinger Parties stem from a Ponzi scheme operated by the Debtor and are central to the Trustee's pending adversary proceeding against the Zelinger Parties and the Debtor's in-laws, Joseph and Deborah Rosenberg, in which he seeks to avoid certain prepetition transfers as fraudulent under § 544(b) and the applicable provisions of the New York Debtor and Creditor Law.

The amount offered by BARM, to wit, $70, 000, exceeds by $24 568.78 the amount the Zelinger Parties offered to pay to the Estate under a proposed settlement of the Trustee's adversary proceeding against the Zelinger Parties. This, the Trustee and BARM assert, is in the best interests of the Estate and creditors and advances the goal of maximizing the value of the Estate. The Assignment Motion is opposed by the Zelinger Parties, the defendants in the action that BARM seeks to prosecute by reason of the proposed assignment.

The Court has jurisdiction to consider this matter under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2) in which final orders and judgment may be entered by the Court.

The Court has carefully considered the parties' submissions, the relevant law, and the record in this case. For the reasons set forth below, the Assignment Motion is denied. While the Trustee and BARM may have agreed upon a process for the pursuit of avoidance actions and other estate claims against the Zelinger Parties, it is not an agreement vesting BARM with derivative standing to assert and litigate claims on behalf of the Estate and for the benefit of all creditors. BARM's pursuit of claims against the Zelinger Parties (and for that matter, against Joseph and Deborah Rosenberg) and any recovery would be for its sole benefit. Other creditors of the Estate, including those investors who likewise suffered from the Debtor's Ponzi scheme, would not partake in any recovery. That result is not consistent with what should clearly be a shared goal - the prosecution of claims in a manner consistent with maximizing the value of the bankruptcy estate for all creditors, not just one or a select few. As such, the proposed assignment in its current form ignores the long-standing practice established in the Second Circuit under which a creditors' committee or an individual creditor is authorized to pursue estate causes of action in place of a trustee or debtor in possession or pursue such causes of action as co-plaintiff. The common thread found in such cases, whether pursuit of claims centers on a request for derivative standing or an outright sale of estate claims as proposed here, is that pursuit and recovery is for the benefit of all creditors. The Court declines to follow inapposite out-of-circuit case law that the Trustee and BARM rely on.

Background

The Court presumes the parties' familiarity with the underlying facts and procedural history of the Debtor's bankruptcy case. See In re Barkany, 542 B.R. 662 668-81 (Bankr. E.D.N.Y. 2015). Accordingly, the Court will provide background only to the extent necessary to decide the Assignment Motion.

On June 25, 2014, an involuntary chapter 7 bankruptcy petition pursuant to § 303(b) was filed against the Debtor by Joseph Rosenberg, Marina District Development Co., LLC, and Saul Kessler. [Dkt. No. 1]. On January 12, 2015, the Debtor filed a statement consenting to the entry of an order for relief in the chapter 7 bankruptcy case, and on January 14, 2015, the Court entered an order for relief under chapter 7. [Dkt. Nos. 113, 118].

Mr. Pergament was appointed interim trustee on January 23, 2015 [Dkt. No. 120]. On April 22, 2015, an election for a permanent chapter 7 trustee was held and, on December 29, 2015, Mark A. Frankel, Esq. ("Frankel") was appointed as the permanent chapter 7 trustee of the Debtor's bankruptcy estate. [Dkt. Nos. 288-89]. Frankel eventually resigned as chapter 7 trustee, and Mr. Pergament was appointed as successor chapter 7 trustee and has continued to serve as the permanent chapter 7 trustee of the Debtor's bankruptcy estate. [Dkt. No. 394].

A. BARM's State Court Action

On March 3, 2014, BARM commenced a state court action (the "State Court Action") against the Zelinger Parties, as well as Joseph Rosenberg and Deborah Rosenberg (together with the Zelinger Parties, the "State Court Defendants"). For its first through ninth causes of action, BARM alleged that the State Court Defendants received transfers from the Debtor and entities that he controlled constituting fraudulent conveyances under New York's Debtor and Creditor Law. [See Dkt. No. 657-1, Ex. A, at ¶¶ 93-152]. For its tenth through twelfth causes of action, and based on the same alleged conduct, BARM asserted claims against the State Court Defendants for unjust enrichment, conversion, constructive trust, and aiding and abetting a fraud (collectively, the "Other State Law Claims"). [See id. at ¶¶ 153-78].

On September 8, 2015, the State Court entered an order granting the Trustee's motion to intervene in the State Court Action as a co-plaintiff. [See State Court Action NYSCEF 17].

B. The Rosenberg-Zelinger Adversary Proceeding

On October 5, 2016, Frankel commenced Adversary Proceeding No. 8-16-08149 (the "Rosenberg-Zelinger Adversary Proceeding") against Joseph Rosenberg, Deborah Rosenberg, and the Zelinger Parties. [Adv. Dkt. No. 1]. Joseph and Deborah Rosenberg are the parents of the Debtor's wife, Sarah Barkany, and Jonathan and Gila Zelinger are Ms. Barkany's uncle and aunt, respectively. [Adv. Dkt. No. 79 at ¶ 2]. Jonathan Zelinger is president of Ethical Products and Petex, and Joseph Rosenberg is Ethical Products' and Petex's vice president and chief information officer. In the complaint, Frankel alleged causes of action against the defendants stemming from a Ponzi scheme operated by the Debtor. Specifically, the six-count complaint asserted actual and constructive fraudulent transfer causes of action under several provisions of the New York Debtor and Creditor Law, to wit, constructive fraud under § 273 (Count I) and § 275 (Count II); intentional fraud under § 276 (Count III); and recovery of attorney's fees under § 276-a (Count IV); and asserted an objection to the allowance of Joseph Rosenberg's claims against the Estate (Count V) and an objection to the allowance of Jonathan Zelinger's claims against the Estate (Count VI). [Adv. Dkt. No. 1 at ¶¶ 82-114].

In sum, the complaint alleges that Joseph Rosenberg, Jonathan Zelinger, Ethical Products, and Petex (i) knew, or should have known, that the Debtor was engaged in a Ponzi scheme or other fraudulent scheme, (ii) willfully ignored numerous red flags evidencing the Debtor's fraudulent conduct, and (iii) were the recipients (alongside Deborah Rosenberg and Gila Zelinger) of numerous fraudulent transfers made by the Debtor. [Id. at ¶¶ 34-81]. As noted above, the claims alleged by Frankel in the Rosenberg-Zelinger Adversary Proceeding consist of intentional and constructive fraudulent transfer claims under non-bankruptcy law, specifically New York Debtor and Creditor Law §§ 273, 275, 276 and 276-a, avoidable by reason of § 544(b), and do not include allegations that the transfers in question were fraudulent under § 548(a). With respect to the Zelinger Parties, Frankel sought to recover $380, 430.98 against Jonathan and Gila Zelinger, $805, 000 against Ethical Products, and $481, 700 against Petex. The defendants appeared in the Rosenberg-Zelinger Adversary Proceeding and asked that all claims against them be dismissed with prejudice. [Adv. Dkt. Nos. 12-17].

After he was appointed as permanent chapter 7 trustee, the Trustee filed Adversary Proceeding No. 8-17-08171, alleging fraudulent transfer claims under both New York Debtor and Creditor Law and § 548(a), against fourteen defendants including Jonathan Zelinger and Joseph Rosenberg. Thereafter, the Trustee's claims against Joseph Rosenberg and Jonathan Zelinger in Adversary Proceeding No. 8-17-08171 were discontinued without prejudice by an order entered on February 13, 2018. Thus, the claims currently pending against the Zelinger Parties are those asserted in the Rosenberg-Zelinger Adversary Proceeding under New York Debtor and Creditor Law §§ 273, 275, 276 and 276-a, and the objection to the allowance of the claims filed against the Estate by the Zelinger Parties.

C. The Settlement Motion

On March 15, 2018, the Trustee filed a motion (the "Settlement Motion") pursuant to Rule 9019 of the Federal Rules of...