McCord v. Wilkin (In re Sci., Language, & Arts Int'l Sch.)

660 B.R. 21

IN RE: SCIENCE, LANGUAGE, AND ARTS INTERNATIONAL SCHOOL, Debtor.

Richard J. McCord, Esq., The Chapter 7 Trustee of Science, Language,and Arts International School a/k/a Science Language and Arts, Plaintiff, v. Jennifer Wilkin Margaret Reimann Kristie Blasé Christian Whitted Maria Guigue Brett James, Defendants.

Case No.: 22-40065-ess

Adv. Pro. No. 22-01069-ess

United States Bankruptcy Court, E.D. New York

Signed May 7, 2024

Richard J. McCord, Esq., Thomas J. McNamara, Esq., Certilman Balin Adler & Hyman, LLP, 90 Merrick Avenue, East Meadow, NY 11554, Attorneys for Plaintiff Richard J. McCord, Solely as Chapter 7 Trustee of Science, Language, and Arts International School a/k/a Science Language and Arts.

Robert Modica, Esq., John F. Watkins, Esq., Coffey Modica O'Meara LLP, 200 East Post Road (Suite 210), White Plains, NY 10601, Attorneys for Defendants Margaret Reimann, Kristie Blasé, Christian Whitted, Maria Guigue, and Brett James.

Howard Mankoff, Esq., Marshall Dennehey Warner Coleman & Goggin, 425 Eagle Rock Avenue (Suite 302), Roseland, NJ 07068, Attorneys for Defendant Jennifer Wilkin.

MEMORANDUM DECISION ON MOTION TO DISMISS OF DEFENDANTS MARGARET REIMANN, KRISTIE BLASÉ, CHRISTIAN WHITTED, MARIA GUIGUE, AND BRETT JAMES

ELIZABETH S. STONG, UNITED STATES BANKRUPTCY JUDGE

Introduction

On January 13, 2022, Science, Language, and Arts International School ("SLA") filed a petition for relief under Chapter 7 of the Bankruptcy Code. In re Science, Language, and Arts Int'l School, Case No. 22-40065, ECF No. 1. Soon thereafter, Richard J. McCord, Esq. was appointed as the Chapter 7 trustee, and in that role, Mr. McCord is authorized to investigate and pursue claims and causes of action on behalf of SLA's Chapter 7 bankruptcy estate.

SLA was founded in 2013 by defendant Jennifer Wilkin as an independent elementary school offering French and Mandarin language immersion education. See Complaint ("Compl.") ¶ 11, ECF No. 1. On September 17, 2013, SLA was issued a provisional charter to operate a pre-kindergarten through fifth grade independent elementary school, by the Board of Regents on behalf of the New York State Department of Education. See Compl. ¶ 9.

On August, 31, 2022, the Chapter 7 Trustee commenced this adversary proceeding by filing a complaint against several former board members of SLA, including Ms. Wilkin, SLA's executive director and board chair, as well as board members Margaret Reimann, Kristie Blasé, Christian Whitted, Maria Guigue, and Brett James (the "Board Defendants"), for breach of fiduciary duty, gross negligence and/or reckless conduct, breach of duty of care, breach of duty of loyalty and obedience, and corporate waste in their capacities as officers and/or directors of SLA.

On May 30, 2023, the Board Defendants moved to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable here by Bankruptcy Rule 7012(b), on grounds that the Complaint does not state a claim upon which relief may be granted. Motion to Dismiss Case, ECF No. 29 ("Board Motion to Dismiss" or "Board Mem."). Ms. Wilkin has also separately moved to dismiss the Complaint, on substantially similar grounds. Motion to Dismiss Adversary Proceeding, ECF No. 27 ("Wilkin Motion to Dismiss" or "Wilkin Mem."). From time to time, and on April 9, 2024, the Court held pre-trial conferences in this adversary proceeding and hearings on the Motions to Dismiss, at which the Chapter 7 Trustee, the Board Defendants, and Ms. Wilkin appeared and were heard. The Court also directed the parties to participate in mediation, to see if a consensual resolution could be reached. See Mediation Referral Order, ECF No. 16. The record on these Motions to Dismiss is now closed, and in this Memorandum Decision, the Court addresses the Board Motion to Dismiss.¹

Jurisdiction

This Court has jurisdiction over this matter pursuant to Judiciary Code Sections 157(b)(1) and 1334(b), and the Standing Order of Reference dated August 28, 1986, as amended by the Order dated December 5, 2012, of the United States District Court for the Eastern District of New York. This is a core proceeding pursuant to Judiciary Code Sections 157(b)(2)(A), (B), (E), (F), (H), and (O), and venue is proper before this Court pursuant to Judiciary Code Section 1409. "Core proceedings include, but are not limited to matters concerning the administration of the estate;" "allowance . . . of claims against the estate," "orders to turn over property of the estate," and "determinations of the validity, extent, or priority of liens;" among other types of claims. 28 U.S.C. § 157(b)(2)(A), (B), (E), (K). As core matters, this Court has constitutional authority to enter a final judgment, because the Chapter 7 Trustee's claims stem "from the bankruptcy itself." Stern v. Marshall, 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). See Wellness Int'l Network, Ltd. v. Sharif, 575 U.S. 665, 685, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).

In addition, the Chapter 7 Trustee has consented to the entry of final orders and judgments, to the extent that such consent is required to meet the requirements of Article III of the United States Constitution. See Compl. ¶ 6.

Background

SLA's Chapter 7 Bankruptcy Case

This adversary proceeding arises in connection with the Chapter 7 Trustee's administration of the assets of SLA's bankruptcy estate. On January 25, 2022, the Chapter 7 Trustee filed a Notice of Discovery of Assets, and a bar date for the filing of proofs of claim was set for April 25, 2022. In re Science, Language, and Arts Int'l School, Case No. 22-40065, ECF No. 10. Some 114 proofs of claim have been filed, including Proof of Claim 30, filed by CA 522 Fulton LLC, SLA's former landlord, in the amount of $25,256,873.45, and the total amount of filed claims is at least $27,786,851.25.

Three days later, on January 28, 2022, the Chapter 7 Trustee filed Motions for Rule 2004 Examinations of board members Ms. Guigue, Ms. Blasé, Mr. James, and Ms. Reimann, and board chair Ms. Wilkin. In re Science, Language, and Arts Int'l School, Case No. 22-40065, ECF Nos. 14, 15, 16, 18, 19. And soon thereafter, on March 2, 2022, the Chapter 7 Trustee filed a Motion for 2004 Examination of board member Mr. Whitted. In re Science, Language, and Arts Int'l School, Case No. 22-40065, ECF No. 28. Those motions were granted without opposition, and on March 8, 2022, the Court entered Orders authorizing Rule 2004 examinations of Ms. Guigue, Ms. Reimann, Mr. James, Ms. Blasé, and Ms. Wilkin. In re Science, Language, and Arts Int'l School, Case No. 22-40065, ECF Nos. 31, 32, 33, 34, 35. And on April 19, 2022, the Court entered an Order authorizing a Rule 2004 examination of Mr. Whitted. In re Science, Language, and Arts Int'l School, Case No. 22-40065, ECF No. 45.

This Adversary Proceeding

On August 31, 2022, the Chapter 7 Trustee commenced this adversary proceeding by filing a complaint against Ms. Wilkin, as the former executive director, officer, and chair of the board of directors of SLA, as well as Ms. Reimann, Ms. Blasé, Mr. Whitted, Ms. Guigue, and Mr. James, as former members of the board of directors of SLA.

In the Complaint, the Chapter 7 Trustee describes a pattern of conduct by the Board Defendants and Ms. Wilkin that, he asserts, violated the duties that they each owed to SLA as board members and fiduciaries, and that gives rise to several claims for relief.

First, the Chapter 7 Trustee alleges that Ms. Wilkin breached her fiduciary duty as an officer, the executive director, and board chair of SLA by borrowing $200,000 from SLA in the form of an interest-free loan to purchase a summer camp in her name and "signed the joint written consent of SLA to the loan as both the 'Executive Director' of SLA, and as the 'Board Chair' of SLA," in violation of New York Not-for-Profit Corporation Law, as well as federal law and Internal Revenue Service ("IRS") regulations. Compl. ¶¶ 34-37. According to the Chapter 7 Trustee, Ms. Wilkin did not "fully repay that loan," and the camp "did not pay its agreed upon rent to Debtor SLA." Compl. ¶¶ 36, 38.

Next, the Chapter 7 Trustee alleges that Ms. Wilkin caused SLA to let its existing lease expire in January 2021 by not paying rent, while committing SLA to new lease obligations "far beyond" its ability to pay. Compl. ¶¶ 39, 42. As a result, the Chapter 7 Trustee states that "[o]n April 14, 2021, SLA was sued by its landlord for approximately $24.6 million plus interest" and on "December 3, 2021, the Court in the landlord/tenant matter granted the landlord partial summary judgment in the amount of $6,107,421.03 plus 10 percent interest from February 9, 2021." Compl. ¶ 43, 41.

Then, the Chapter 7 Trustee alleges that, despite SLA's landlord having already terminated the lease, Ms. Wilkin advised parents in mid-July 2021 that "rumor[s] that the school would not reopen in the Fall of that year were false," and collected almost $900,000 in tuition fees for that coming year. Compl. ¶¶ 42, 44, 46. And the Chapter 7 Trustee states that tuition deposits for the 2021-2022 school year "were not returned to parents when the school went out of business in August, 2021." Compl. ¶ 46.

Next, according to the Chapter 7 Trustee:

[The Board Defendants] failed to ensure that SLA was making payroll withholding taxes and unemployment taxes to the Internal Revenue Service on behalf of SLA employees, which it was not, resulting in a Proof of Claim filed by the Internal Revenue Service against SLA for more than $700,000 and a similar Proof of Claim filed by the New York State Department of Taxation and Finance against SLA for more than $100,000.

Compl. ¶ 65.

In addition, the Chapter 7 Trustee alleges that the Board Defendants "made financial decisions, or permitted Wilkin to make financial decisions, knowing that neither Wilkin nor the Board had accurate data, was relying on faulty financial projections, and which omitted obligations such as repayment of [a] loan, tax...