Messer v. Wei Chu (In re Xiang Yong Gao)

560 B.R. 50

In re: Xiang Yong Gao, Debtor.

Gregory Messer, Chapter 7 Trustee the Estate of Xiang Yong Gao Plaintiff,

v.Wei Chu, Defendant.

Case No. 14–42722–nhl

Adv. Pro. No. 14–01149–nhl

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

Signed September 30, 2016

Gary Herbst, Esq., & Nicholas Rigano, Esq., LaMonica Herbst & Maniscalco, LLP, 3305 Jerusalem Ave. Ste. 201, Wantagh, NY 11793, Attorneys for Plaintiff

Yimin Chen, Esq. & Michael Talassazan, Esq., Law Offices of Chen & Associates, 39-15 Main Street, Suite 502, Flushing, NY 11354, Attorneys for Defendant

DECISION ON SUMMARY JUDGMENT

NANCY HERSHEY LORD, UNITED STATES BANKRUPTCY JUDGE

Plaintiff Gregory Messer (“Trustee”), Chapter 7 trustee of the estate of Xiang Yong Gao (“Gao” or “Debtor”), brought this adversary proceeding against Wei Chu (“Chu” or “Defendant”) to recover two transfers purportedly made by the Debtor to Chu, for no consideration, at a time when the Debtor was a defendant in a state court action in Texas.

On or around May 31, 2012, the Debtor sold a 5% interest he held (“5% Interest”) in 136-33 37th Avenue Realty LLC (“37th Avenue Realty LLC”) to AE & LY Holdings LLC (“AE & LY”) for $870,000 (“Equity Transfer”). The first transfer complained of by the Trustee occurred when $180,000 of the consideration for the Equity Transfer was paid by the purchaser directly to Chu, instead of to the Debtor (“$180,000 Transfer”).

The second transfer complained of by the Trustee occurred on September 11, 2012, when the Debtor transferred his interest as a joint tenant with a right of survivorship in a house located at 145-41 Willets Point Boulevard, in Whitestone, New York (“House”), to Chu, making her the sole owner (“Real Estate Transfer”) (Collectively, with the $180,000 Transfer, “Transfers”).

Before the Court is the Trustee's motion for summary judgment on the following four claims for relief in the second amended complaint.

First, by the fifth claim for relief, the Trustee seeks to recover the Transfers, pursuant to N.Y. Debt. & Cred. Law (“DCL”) § 273-a, on the basis that they were made for no consideration while the Debtor was a defendant in an action which resulted in an unpaid judgment.

Next, by the ninth claim for relief, the Trustee seeks to recover the Transfers, pursuant to DCL § 276, on the basis that the Transfers were undertaken with actual fraudulent intent, as opposed to intent presumed in law.

Third, by the tenth claim for relief, on the presumption that the Trustee prevails on his DCL § 276 claim, the Trustee seeks to recover legal fees for bringing this action, pursuant to DCL § 276-a, on the basis that there was the requisite fraudulent intent on the part of the Debtor and the Defendant.

Last, by the nineteenth claim for relief, on the presumption that the Trustee is able to recover the Real Estate Transfer pursuant to DCL § 273-a or § 276, the Trustee seeks the authority, pursuant to Code § 363(h), to sell the House free and clear of the Defendant's remaining one-half interest.¹

In addition to seeking the above relief on the merits, the Trustee, citing the failure of the Defendant to answer the second amended complaint, seeks to have the same relief granted by default judgment. Mot. for Summ. J. Attach. 1, Mem. of Law (“Mem. of Law”), at 1 n.1, ECF No. 24-1.

For reasons fully explained in this opinion, the relief that the Trustee seeks is granted on the merits, with the exception of the award of legal fees sought pursuant to DCL § 276-a, which is denied.

Jurisdiction

This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(1), and the Eastern District of New York Standing Order of Reference 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). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Rule 7052 of the Federal Rules of Bankruptcy Procedure.

Background

The $180,000 Transfer

In December 2010, the Debtor was named as one of several defendants in an action in the Texas Judicial Court for Harris County (“Texas State Court Action”), which subsequently resulted in a judgment against the Debtor in the amount of $1,917,766.76.² Pl.'s R. 7056-1 Stat. of Mat. Fact (“Trustee's R. 7056-1 Stat.”) Ex. N, at 11, ECF No. 25-14.³

The Equity Transfer occurred on or around May 31, 2012, pursuant to an agreement providing for consideration of $870,000 in exchange for the 5% Interest. Compl. Ex. E., at 2–3, ECF No. 1, Case No. 15–01059–NHL.⁴

The Trustee asserts that prior to the Equity Transfer the Debtor was both the legal and equitable owner of the 5% Interest. Tr. of January 13, 2016 (“1/13 Tr.”) 11:6–17, ECF No. 40. This assertion is consistent with the following documentary evidence:

(1) The recitals in the agreement governing the Equity Transfer. Adv. Compl. Ex. E, Membership Interest Transfer Agreement (“Transfer Agreement”), at §§ 1.1, 1.3, 3.3, 3.4, ECF No. 71-5, Case No. 14–42722–NHL.

(2) A 37th Avenue Realty LLC membership certificate which lists the Debtor as the owner of the 5% Interest just prior to the Equity Transfer, and a document signed by the Debtor granting Alan Yao the authority to transfer the 5% Interest. Rep. in Supp. of Pl.'s Mot. Ex. V, 37th Ave. Realty LLC Mem. Cert., ECF No. 35-1; R. 7056-1 Stat. Ex. D to Ex. 5, at 20, ECF No. 9-5, Case No. 15–01059–NHL.

(3) The First Amended and Restated Operating Agreement of 37th Avenue Realty LLC, signed by the Debtor as a 5% owner. R. 7056-1 Stat. Ex. H to Ex. 5, at 47, ECF No. 9-5, Case. No 15–01059–NHL.

(4) Form K-1 from 37th Avenue Realty LLC's tax returns for the years 2006–2012, listing the Debtor as a 5% owner. R. 7056-1 Statement Ex. B to Ex. 5, Form K-1, at 10, ECF No. 9-5, Case. No 15–01059–NHL.

(5) Redacted portions of the Debtor's tax returns for the years 2010–2012, wherein the Debtor lists both interest income and non-passive losses on account of his interest in 37th Avenue Realty LLC. Repl. Mem. in Supp. of Pl.'s Mot. Summ. J. Ex. 6, Debtor's Tax Returns, ECF No. 13-2, Case No. 15–01059–NHL.

(6) The customer copy of a $180,000 check from AE & LY to Chu, which contains a hand-written note describing the $180,000 check as part payment of the $870,000 due the Debtor on account of the transfer of the 5% Interest. R. 7056-1 Stat. Ex. F to Ex. 5, at 31, ECF No. 9-5, Case. No 15–01059–NHL. (Collectively, the “Documentary Evidence.”)⁵

Notwithstanding the Documentary Evidence, the Debtor has asserted in related proceedings that he held only legal title to the 5% Interest, and that the beneficial interest belonged to the Debtor's friend, Zhengzhou Chen (“Mr. Chen”). See Aff. in Opp. Ex. A, Aff. of Xiang Yong Gao (“Debtor's Aff.”), at 1–2, ECF No. 81-1, Case No. 14–42722–NHL. The Debtor asserts that Mr. Chen asked him to hold legal title to the 5% Interest on Mr. Chen's behalf because Mr. Chen did not have “legal status.” Id. The Debtor states “upon information and belief” that Mr. Chen has gone to China and cannot be found. Id. at 2.

Chu does not dispute that she received a $180,000 check from AE & LY's managing member, Alan Yao. She also makes no mention, via affidavit or testimony, of Mr. Chen.⁶ Trustee's R. 7056-1 Stat. Ex. E., Depo. Of Wei Chu, April 17, 2015 (“Chu Depo.”), at 19:3–21:24, ECF No. 25-5; Aff. in Opp. to Pl.'s Mot. for Partial Summ. J. 4 ¶ 11, ECF No. 31. Chu's attorney (who also represents the Debtor) asserts on “information and belief” that:

Defendant asserts that the actual seller's name is Zhengzhou Chen, but that it was merely under Gao's name. Defendant Wei Chu states that she lent $ 180,000.00 K [sic] to Zhengzhou Chen prior and thus received the check at closing.⁷ Checks dated 5/10/10, 8/4/10 and 6/22/11 represent 145,000.00 of the 180,000 lent by the defendant for the 136-33 37th Ave venture.

Aff. in Opp. 4 ¶ 11, ECF No. 31. There is no affidavit or testimony from Chu in the record explaining the significance of these checks.

The Trustee believes that Mr. Chen is an invention of the Debtor. Rep. Aff. of Nicholas C. Rigano, Esq. in Supp. of Trustee's Mot. to Compel Turnover 2 ¶ 3, ECF No. 83, Case No. 14–42722–NHL.⁸

The Real Estate Transfer

On September 11, 2012, the Debtor transferred to Chu his interest in a joint tenancy with right of survivorship in the House, making her the owner in fee simple. Aff. in Opp. Ex. A, at 6–19, ECF No. 31; Chu Depo. 8:3–10, ECF No. 25-5.

The Debtor and Chu purchased the House in 1999, and lived there together from that point until at least May 28, 2014, the date the Debtor filed his chapter 7 petition (“Petition Date”). Chu Depo. 6:6–25, 7:4–24, ECF Doc. No. 25-5; Trustee's R. 7056-1 Stat. 8 ¶¶ 50–53, ECF No. 25; see Petition 1, ECF No. 1, Case No. 14–42722–NHL.⁹ The Debtor and Chu are co-obligors on a home mortgage line of credit against the House entered into with Chase in April 2007 (“Home Mortgage Line of Credit”). Trustee's R. 7056-1 Stat. Ex. G, at 4, ECF No. 25-7. In addition, the Debtor and Chu have two children together and have shared a bank account since 2010. Chu Depo. 6:11–18, ECF No. 25-5; Trustee's R. 7056-1 Stat. Ex. P, at 2–3, ECF No. 25-16.

Consideration for the Real Estate Transfer is listed as $520,000 in the Real Property Transfer Report. Aff. in Opp. Ex. A, Real Prop. Transf. Rep., at 15, ECF No. 31. The Debtor lists half this amount, $260,000, as the consideration he received for the Real Estate Transfer in his statement of financial affairs (“SOFA”). SOFA 43, ECF No. 1, Case. No. 14–42722–NHL. However, Chu concedes that this money was not actually paid. Chu Depo. 8:3–10:19, ECF No. 25-5. Instead, Chu asserts that the Real Estate Transfer was made as repayment of a $270,000 loan she made to the Debtor in February 2008. Id. As evidence of this loan, Chu points to a $270,000 check payable from her to L & L Supermarket (“L & L”), dated February 23, 2008 (“$270,000 Transfer”). Chu Depo. 10:20–14:18, ECF No. 25-5; Trustee's R. 7056-1 Stat. Ex. J, ECF 25-10.¹⁰ The Debtor held an interest...