Rubinov v. Harrison (In re A.N. Frieda Diamonds, Inc.)

633 B.R. 190

IN RE A.N. FRIEDA DIAMONDS, INC.

Roni Rubinov and New Liberty Pawn Shop, Inc., Appellants,

v.Matthew C. Harrison, Jr., Appellee.

1:20-cv-04008-MKV

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

Signed September 30, 2021

Akiva Shapiro, Akiva Shapiro Law, PLLC, Old Bethpage, NY, for Appellants.

Stephen Vlock, Vlock & Associates, P.C., Leo Fox, New York, NY, for Appellee.

OPINION AND ORDER AFFIRMING JUDGMENT OF BANKRUPTCY COURT

MARY KAY VYSKOCIL, United States District Judge:

This appeal arises from an adversary proceeding concerning alleged post-petition transfers of property of the debtor in a bankruptcy case. In re A.N. Frieda Diamonds, Inc. , 616 B.R. 295 (Bankr. S.D.N.Y. 2020). In the adversary proceeding, Trustee-Plaintiff Matthew Harrison ("Trustee") asserted claims against Defendants Roni Rubinov ("R. Rubinov"), New Liberty Pawn Shop Inc. ("New Liberty"), New York Estate Buyers, and Avner Rubinov ("A. Rubinov") (collectively, "Defendants") to avoid certain transfers and to recover millions of dollars for the allegedly improper post-petition transfer of merchandise owned by the Debtor, AN Frieda Diamonds, Inc. ("AN Frieda"). Harrison v. Konfino, et al. , Adv. Proc. No 17-01103 (MEW) (Bankr. S.D.N.Y. 2020). Defendant-Intervenor Valley National Bank New York, LLC ("VNB"), a secured creditor of AN Frieda, asserted crossclaims against Defendants for conversion and aiding and abetting conversion, which were later assigned to the Trustee.

After a bench trial, the bankruptcy court (Wiles, J. ) issued a thorough decision and entered final judgment on VNB's conversion claim in favor of the Trustee, and against R. Rubinov and New Liberty, in the amount of $1,242,722.07. In re A.N. Frieda Diamonds, Inc. , 616 B.R. at 322–23. R. Rubinov and New Liberty ("Appellants") appeal from that decision. For the reasons discussed below, the judgment of the bankruptcy court is AFFIRMED in its entirety.

BACKGROUND

A. Factual Background¹

R. Rubinov is the owner of New Liberty, a pawnbroker that offers loans secured by delivery of merchandise as collateral. (JPTO, Stip. Facts ¶ 8.) Ronen Konfino, principal of Debtor AN Frieda, was a client of New Liberty since 2013. (Id. ) A. Rubinov, R. Rubinov's father, is the owner of N.Y. Estate Buyers, an entity that frequently purchased the merchandise collateral from New Liberty upon a debtor's default on a loan. (Id. ¶¶ 9–10.)

Between December 2013 and March 2015, Konfino delivered diamonds and other items to R. Rubinov and New Liberty in connection with 135 separate loan transactions. (Id. ¶ 11.) In May 2015, forty-four of those loans, worth a total value of over $1 million, either had fallen into default or were on the verge of falling into default within the next two months. (Id. ¶ 13.) New Liberty initiated foreclosure proceedings on July 9–10, 2015. (Id. ) Because the defaults on outstanding loans to AN Frieda had not been cured, New Liberty sold the collateral to N.Y. Estate Buyers in five separate transactions beginning on August 10, 2015, though A. Rubinov denies that N.Y. Estate Buyers purchased the collateral. (Id. )

In the interim, on July 16, 2015, creditors of AN Frieda had commenced an involuntary bankruptcy case against AN Frieda by filing a petition under Chapter 7 of the Bankruptcy Code. 11 U.S.C. § 303 ; (Id. ¶ 1.) The bankruptcy court issued several orders barring parties from transferring property that belonged to AN Frieda. Specifically, on August 5, 2015, the bankruptcy court ordered that all persons possessing property of the estate turn over such property to the Interim Trustee. (Id. ¶ 2.) On August 14, 2015, the bankruptcy court ordered AN Frieda to file a list of assets possessed by others and directed that those persons turn over such property. (Id. ¶ 3.) On August 18, 2015, David Dinoso, the Interim Trustee's attorney, contacted Daniel Gotlin, counsel for R. Rubinov and New Liberty, and requested that the Interim Trustee be permitted access to take an inventory of the merchandise in New Liberty's vault. (Id. ¶ 4.) Gotlin advised Dinoso that New Liberty was reviewing its records and instructed the Interim Trustee not to appear to take an inventory. (Id. )

On September 9, 2015, the bankruptcy court entered an order for relief under Chapter 7 of the Bankruptcy Code. (Id. ¶ 1.) On September 16, 2015, the bankruptcy court ordered R. Rubinov and New Liberty to turn over, within one day, any property of AN Frieda in their possession and provide an accounting to the Interim Trustee. (Id. ¶ 5.) The Interim Trustee filed an affidavit affirming that the bankruptcy court's order dated September 16, 2015, was served on R. Rubinov and New Liberty. (Id. ) On December 2, 2015, the Trustee wrote to R. Rubinov and New Liberty regarding the bankruptcy court's orders. (Id. ¶ 6.) R. Rubinov maintains that he learned of the bankruptcy in December 2015. (Id. )

B. Adversary Proceeding Background

On August 2, 2017, the Trustee commenced an adversary proceeding against Defendants to recover over $1 million for improper post-petition transfer of merchandise owned by AN Frieda and to avoid certain transfers. (Compl. [Bankr. ECF No. 1]; JPTO, Nature Case ¶ 1.) VNB moved to intervene to assert crossclaims against Defendants for conversion and aiding and abetting conversion. (Mot. Intervene [Bankr. ECF No. 4]; Proposed Answer, Counterclaims, and Crossclaims [Bankr. ECF No. 4-3]; JPTO, Nature Case ¶ 2.) The bankruptcy court granted intervention to VNB. (Order Granting Intervention [Bankr. ECF No. 18].)

The bankruptcy court held a four-day bench trial in October 2019. After the trial, VNB assigned its rights and claims to the Trustee pursuant to a stipulation between the two parties. (So Ordered Stip. [Bankr. ECF No. 159].) On April 29, 2020, the bankruptcy court issued a decision making several factual findings and legal conclusions. In re A.N. Frieda Diamonds, Inc. , 616 B.R. 295 (Bankr. S.D.N.Y. 2020). First, the bankruptcy court found that the weight of the evidence showed that AN Frieda owned the items pawned in forty-one of the forty-four defaulted pawn transactions. Id. at 308. Second, VNB's prior perfected security interests in the items pawned took priority over any interests New Liberty acquired through the loan transactions. Id. Third, VNB's security interests extended to all property obtained by AN Frieda "on memorandum"—i.e. , on consignment—and New York General Business Law Section 44(3) did not protect New Liberty against claims by VNB. Id. at 310. Fourth, New Liberty disposed of AN Frieda's property in violation of New York law and the automatic stay. Id. at 312–15. Fifth, both New Liberty and R. Rubinov were liable for conversion on VNB's conversion claim. Id. at 317–18. Finally, Section 541(b)(8) of the Bankruptcy Code did not protect New Liberty from VNB's prior perfected security interest. Id. at 322. On April 30, 2020, the bankruptcy court entered judgment on VNB's conversion claim in favor of the Trustee and against Appellants in the amount of $1,242,722.07. (Judgment [Bankr. ECF No. 161].)

C. The Appeal

Appellants timely filed their Notice of Appeal in the bankruptcy court. (Notice Appeal [Bankr. ECF No. 162].) In the Designation of the Record, Appellants listed, inter alia , "Items entered into evidence at trial." (Designation Bankr. Record Appeal ¶ 2 [ECF No. 3].) Appellants explained that copies of these items are not available on the bankruptcy court docket but that current counsel had requested copies of them from outgoing trial counsel and would later file a supplement to the Designation of the Record. (Id. ) Appellants later filed a Supplemental Designation of the Record with several, but not all, trial exhibits. (Suppl. Designation Record [ECF No. 7].) After fully briefing the appeal, the parties filed a letter, pursuant to Federal Rule of Bankruptcy Procedure 8019, requesting that the Court decide the appeal on the papers and without oral argument "because the facts and legal arguments are adequately presented in the briefs and record, and the decisional process would not be significantly aided by oral argument." (Appellants' Letter Jan. 7, 2021 [ECF No. 21].)

The issues on appeal, as identified by Appellants, are as follows: (1) whether there was sufficient evidence to conclude that AN Frieda owned the items pawned in forty-one of the forty-four defaulted pawn transactions; (2) whether VNB's security interest in the pawned items takes priority over New Liberty's interest; (3) whether Section 541(b)(8) of the Bankruptcy Code protects New Liberty's interest in the pawned items against VNB's prior perfected security interest; (4) whether New York General Business Law Section 44(3) protects New Liberty against VNB's security interest; and (5) whether R. Rubinov may be held personally liable with respect to VNB's conversion claim.

JURISDICTION AND STANDARD OF REVIEW

The bankruptcy court had jurisdiction over the adversary proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334(b). See 28 U.S.C. §§ 157(a), 1334(b) ; Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York, No. M10-468, 12 Misc. 00032 (S.D.N.Y. Jan. 31, 2012) (Preska, C.J.). The adversary proceeding was a "core" proceeding that could be heard by the bankruptcy court pursuant to 28 U.S.C. § 157(b)(2)(A), (E), and (O). See id. § 157(b)(2)(A), (E), and (O) (providing that core proceedings include "matters concerning the administration of the estate," "orders to turn over property of the estate," and "other proceedings affecting the liquidation of the assets of the estate"). Even if the proceeding were not "core," the parties agreed that the bankruptcy court had jurisdiction and did not object to the exercise thereof. (Tr. Hearing Held Oct. 25, 2019 at 11 [Bankr. ECF No. 157].) See Cent. Vt. Pub. Serv. Corp. v. Herbert , 341 F.3d 186, 190 (2d Cir. 2003) (noting that "bankruptcy jurisdiction can exist only if the proceeding was...