Latoc, Inc. v. Kartzman (In re The Mall at the Galaxy)

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IN RE: THE MALL AT THE GALAXY, Debtor.

LATOC, INC., Appellant, v. STEVEN P. KARTZMAN, Appellee.

Civil Action No. 22-2859

United States District Court, D. New Jersey

April 14, 2023

Not for Publication

OPINION

John Michael Vazquez, U.S.D.J.

This matter comes before the Court on Latoc, Inc's. appeal of the April 29, 2022 final judgment of the United States Bankruptcy Court entered by the Honorable Vincent F. Papalia U.S.B.J. D.E. 1. Appellant (“Latoc”) filed a brief in support of its appeal (D.E. 6), and Appellee Steven P. Kartzman (the “Trustee”) filed a brief in opposition (D.E. 7). The Court reviewed the parties' submissions,^[1] and decided the motion without oral argument pursuant to Fed.R.Civ.P. 78(b) and L. Civ. R 78.1(b). For the reasons set forth below, the bankruptcy court's judgment is AFFIRMED.

I. BACKGROUND^[2]

This matter stems from the bankruptcy proceeding of The Mall at the Galaxy, Inc. (the “Debtor” or the “Mall”). Since 1986, the Debtor's line of business was leasing commercial units at real property it owned in Guttenberg, New Jersey. A2869. The Mall was operated by Martin Sergi, who served as its President, Treasurer, and board member. A2869. Sergi had been a 90% owner of the Mall since 1997. A2869. He also held equity interests in and served as an officer, director, and/or board member of other entities engaged in the rubber recycling business, including (i) PermaLife Products, LLC (“PermaLife”); (ii) Bristow Rubber Recycling (“Bristow”); (iii) New York Rubber Recycling (“NYR”); (iv) Arizona Rubber Recycling LLC (“Arizona”); (v) Piedmont Rubber Recycling, LLC (“Piedmont”); and (vi) PermaLife Internet, LLC (“PLI”) (collectively, the “PermaLife Entities”). A2869. Also involved with the PermaLife Entities were Dibo Attar (“D. Attar”), and his son, Raffaele Attar (“R. Attar”) (collectively, the “Attars”). R. Attar served as a director of PermaLife until shortly before it filed for bankruptcy protection with other PermaLife Entities in 2009. A2869-70. He also served as the President of Latoc and of Better Half Bloodstock (which held an equity interest in PermaLife) during the relevant period. A2870.

In September 2007, PermaLife was in need of funding, in large part due to a fire that occurred at its Arizona facility, which resulted in significant damage. A2870. PermaLife turned to the Attars for financing, but because of R. Attar's conflicting roles with the prospective borrower (PermaLife) and the lender (Latoc), the PermaLife Board would not approve borrowing from an Attar-affiliated entity, such as Latoc. A2870. A loan from Latoc to PermaLife was also restricted by the terms of a loan that PermaLife had with Gemini Investors IV, L.P. (“Gemini Loan”). A2870.

Thus, to facilitate the loan and manage the conflict that precluded a direct loan to PermaLife, Latoc entered into a $2 million loan agreement with the Debtor (the “Loan” or the “Latoc Loan”). A2870-72. This loan was evidenced by a promissory note, dated November 15, 2007 (the “Note”). A2870-71. D. Attar and Sergi had discussed the Loan in September 2007 (the same month that the fire had occurred) while they were on vacation together in Italy. A2870. The proceeds of the $2 million loan (the “Loan Proceeds”) were deposited into Debtor's bank account through multiple disbursements, made from October 2007 (about one month prior to the Note being signed) through May 2008. A2871. Upon receipt of each disbursement, all or virtually all of the Loan Proceeds were immediately transferred from the Debtor to various PermaLife Entities, all of which were entities that Sergi and the Attars controlled and/or held an ownership interest. A2871. The Mall and the PermaLife Entities did not enter into any written agreement regarding the transfer of the Loan Proceeds or how they would be repaid to the Mall. From February 2008 to September 2009, the Mall sent Latoc $592,875.03 towards repayment of the Loan. A2871.

II. BANKRUPTCY PROCEEDINGS

On January 28, 2010, the Debtor filed a voluntary petition for relief under Chapter 11, which was converted to a case under Chapter 7 on June 1, 2011. A2874. Steven Kartzman was appointed to serve as the Chapter 7 Trustee (the “Trustee”). A2867. On July 30, 2012, the Trustee instituted an adversary action to avoid and recover the $592,875.03 that the Debtor made in Loan repayments to Latoc, contending that such payments were fraudulent transfers under 11 U.S.C. §§ 548(a)(1)(B), 544(b)(1), and N.J.S.A. §§ 25:2-25a(2), 25:2-27a (the “Pre-Petition Transfers”).^[3]A2874; A2888. On April 4, 2019, following a three-day trial, the bankruptcy court concluded that the Pre-Petition Transfers could be avoided and entered final judgment in favor of the Trustee. In re Mall at the Galaxy, Inc., No. 10-12435, 2019 WL 1522703 (Bankr. D.N.J. Apr. 4, 2019), aff'd in part, rev'd in part and remanded sub nom. In re Mall at the Galaxy, Inc., No. 19-10340, 2020 WL 1847667 (D.N.J. Apr. 9, 2020). The bankruptcy court reasoned that such transfers “were constructively fraudulent because the Debtor did not receive reasonably equivalent value for the transfers” (as had been determined at the summary judgment stage), and because “the Debtor was insolvent at the time of each of the transfers.”^[4] Id. at *1.

Latoc appealed the bankruptcy court's final judgment and prior grant of partial summary judgment on the issue of reasonably equivalent value.^[5] A2877. On appeal, the Court held that the bankruptcy court erred in granting partial summary judgment on the issue of reasonably equivalent value and reversed and remanded solely on that basis. In re Mall at the Galaxy, No. 19-10340, 2020 WL 1847667, at *1 (D.N.J. Apr. 9, 2020). The Court explained that the bankruptcy court improperly focused on whether the Debtor received reasonably equivalent value when it transferred the Loan Proceeds to the PermaLife Entities, rather than whether the Debtor received reasonably equivalent value from the $2 million Loan made by the Debtor to Latoc. Id. at *5. In other words, the “critical question” for the bankruptcy court on remand was “whether the $2 million was actually a loan to the Debtor or whether the Debtor was merely a conduit, or passthrough, to get the $2 million to the PermaLife Entities.” Id. Because “[i]f the Debtor was a mere conduit, then it did not receive any value, and the Pre-Petition Transfers would also not reflect reasonably equivalent value.” Id.

On remand, the bankruptcy court conducted a two-day trial on the issue of reasonably equivalent value, during which it considered:

(i) whether the Debtor was a “pass through” or “mere conduit” for the $2 million loan proceeds; and

(ii) whether the facts adduced at trial concerning the knowledge and intent of the parties in interest allow the [c]ourt to disregard the mediate transfer to the Debtor and to collapse the loan transactions from Latoc to the PermaLife Entities.

A2884-85.^[6] Latoc asserted that it was not aware of the purpose of the Loan and that the Loan did not restrict or limit how its proceeds would be used. A2871, A2873, A2885. Latoc also argued that the Debtor sought the financing from Latoc to fund its acquisition of, and investments in, its alleged subsidiaries to provide a “continued existence” for the Debtor. A2885. The bankruptcy court did not find these assertions credible in light of the facts and circumstances surrounding the Loan, including the timing of the Loan, which came shortly after the fire at PermaLife and after a direct loan to PermaLife from the Attars (or their entities) had been rejected; the discussions between Sergi and the Attars as to PermaLife's need for funding after the fire; Sergi's explanation that the Loan was designed to “manage the conflict that precluded a direct loan” to PermaLife; the immediate and full disbursement of the Loan Proceeds by the Debtor to PermaLife and its affiliates as advances were made by Latoc; and the substantial and continuing business and personal relationships between Sergi and the Attars, including their common interests in the PermaLife Entities. A2871-74. Such evidence, the court found, “point[ed] to a knowingly and intentionally structured transaction that allowed Latoc to do indirectly what it could not do directly-make a loan to the PermaLife Entities.” A2872. And in the bankruptcy court's view, the lack of specific terms as to the use of proceeds in the Note was “more indicative of the close business and personal relationships between Mr. Sergi and D. Attar, rather than any lack of knowledge by Latoc as to how the Loan Proceeds would be used.” A2873-74.

On April 29, 2022, the bankruptcy court entered a final judgment in favor of the Trustee, finding that the Debtor did not receive reasonably equivalent value for either the $2 million loan or the $592,875.03 repayment of the loan, and that both are therefore avoided as constructively fraudulent transfers under 11 U.S.C. 11 U.S.C. §§ 548(a)(1)(B), 544(b)(1), applying N.J.S.A. §§ 25:2-25a(2), 25:2-27a. A2915-16. The bankruptcy court also determined that

it is appropriate to collapse the Latoc Loan transaction into one that was made with the knowledge and direct involvement of the lender, Latoc, and which was an intermediate step in the plan to fund the PermaLife Entities indirectly through the Debtor after the direct loan from Latoc to these entities was rejected.

A2908. Accordingly, the bankruptcy court found that the Note and Pre-Petition Transfers, plus pre-judgment and post-judgment interest, may be recovered by the Trustee against Latoc for the benefit of the estate. A2916. The instant appeal followed.

III. APPELLATE JURISDICTION

A district court has appellate jurisdiction over the final judgments, orders, and decrees of a bankruptcy court. 28 U.S.C. § 158(a)...