Sarachek v. Cohen (In re Agriprocessors, Inc.)

IN RE: AGRIPROCESSORS, INC., Debtor.JOSEPH E. SARACHEK, in his capacity as CHAPTER 7 TRUSTEE, Plaintiff,

v.STEVE COHEN, Defendant.

BANKRUPTCY NO. 08-02751

ADVERSARY NO. 10-09197

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF IOWA

Dated and Entered: April 3, 2013

CHAPTER 7

ORDER ON CROSS-MOTIONS FOR SUMMARY JUDGMENT

This case is before the Court on the parties' Cross-Motions for Summary Judgment on Trustee's Complaint alleging Defendant, Steve Cohen, received avoidable preferential transfers to an insider and/or fraudulent conveyances. Keith Larson represented the Trustee. Ryan Murphy and Jeff Courter represented Steve Cohen. After hearing the parties' arguments, the Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(F).

STATEMENT OF THE CASE

Trustee moved for partial summary judgment on his claim of preferential transfers to an insider. Trustee argues that there is no genuine dispute of material fact on the elements of his prima face case under § 547(b). Trustee argues that theonly facts in dispute relate to the defenses Cohen raises under § 547(c). Cohen resists the Trustee's Motion for Summary Judgment, particularly on the insider and insolvency requirements.

Cohen also made his own Cross-Motion for Summary Judgment on all of the Trustee's claims. Cohen argues Trustee's fraudulent conveyance claims under § 548(a)(1)(B) fail as a matter of law because the record is undisputed that he gave reasonably equivalent value in exchange for payments he received. Cohen also argues Trustee's preferential transfer claims fail as a matter of law. He asserts that the undisputed facts show that the transfers he made to Debtor were contemporaneous exchanges for new value, and/or that he gave subsequent new value as a matter of law. In other words, he asserts there is no genuine issue of material fact on his defenses under § 547(c).

Trustee responds to the cross-motion arguing Cohen's arguments under § 548 about reasonably equivalent value should be rejected under the equitable doctrine of unclean hands. Trustee also argues Cohen's defenses under § 547(c) rely on disputed, not undisputed facts. Trustee argues the Court should reject Cohen's arguments under § 548 about reasonably equivalent value under the equitable doctrine of unclean hands.

After a thorough review of the record, the Court grants Cohen's Motion for Summary Judgment on Trustee's fraudulent conveyance claims. The Court denies Trustee's Motion for Partial Summary Judgment because there is a genuine issue of material fact on the question of whether Cohen was an insider. The Court also denies Cohen's Motion for Summary Judgment on Trustee's preference claims because there are genuine disputes of material fact on the defenses he asserts.

FACTUAL BACKGROUND

Debtor owned and operated one of the nation's largest kosher meatpacking and food-processing facilities in Postville, Iowa. On November 4, 2008, Debtor filed a Chapter 11 petition in the Bankruptcy Court for the Eastern District of New York. Debtor's bankruptcy petition and accompanying documents recited that its financial difficulties resulted from a raid conducted by U.S. Immigration and Customs Enforcement. A total of 389 workers at the Postville facility were arrested. The raid led to numerous federal criminal charges, including a high-profile case against Debtor's President, Sholom Rubashkin.¹ Debtor's Petition also stated it had over 200 creditors and assets and liabilities in excess of $50,000,000.00.

The Bankruptcy Court for the Eastern District of New York eventually approved the appointment of Joseph E. Sarachek as the Chapter 11 trustee. The Court concluded that appointing a trustee was necessary in part "for cause, including fraud, dishonesty, incompetence, or gross mismanagement of the affairs of the debtor by current management" under § 1104(a)(1). After hearings in a later proceeding, the Court transferred the case to this Court on December 15, 2008. This Court eventually granted the Trustee's motion to convert the case to a Chapter 7 bankruptcy. The U.S. Trustee for this region retained Sarachek as the Chapter 7 trustee.

Sarachek filed over 150 adversary cases including a case against Defendant Twin City Poultry ("TCP") and this companion case against its President Tzvi "Steve" Cohen. Trustee seeks to recover payments of $265,000 made from Debtor to Cohen within two years of bankruptcy.

The facts of the TCP and Cohen cases are intertwined. TCP is a kosher food distributor in Minneapolis, Minnesota. TCP had a long relationship with Debtor. TCP eventually purchased much of its Kosher meat product from Debtor.

TCP and Debtor began their relationship sometime around 1985. Debtor was in the Kosher meat business and TCP was a Kosher meat product distributor.Debtor's sales department—probably through Heshy Rubashkin—would contact TCP's meat buyer, which was Hillel Roberts, who was also TCP's majority owner and President.

Cohen, TCP's current President, assumed majority control of TCP and became president after the death of Hillel Roberts in 2006. TCP had employed Cohen since 1978. When Cohen started, TCP had two employees. Now it has between 50 and 80 employees.

Cohen described the TCP-Debtor relationship as "a business relationship, but there was an affinity because [the officers of each were] both Orthodox Jews." (Cohen Depo., ECF Doc. No. 51-3, at 17.) Cohen agreed the Orthodox Jewish community was "a close-knit community." Id. He agreed that was especially true when they are dealing with the higher level of glatt Kosher. Id. Cohen noted that TCP started making loans to Debtor in the 1990s. He agreed that TCP was not a lending or banking institution and generally did not make loans to other corporations or individuals. Id. He noted that over the years TCP made more than 105 loans to Debtor.

He described the reason for the loans as:

A. If we had cash available - - they were our primary processor. It helped - - it helped get the product to us, let's put it that way.

We have favored nation status by virtue of the fact that we were helpful with them in their financial needs as well. We had product - - we had available dollars and, therefore, we loaned to them on an ongoing basis, and some back and forth.

(Cohen Depo., ECF Doc. No. 51-3, at 26.) He says TCP provided loans because Sholom Rubashkin asked. Cohen did not ever quiz Rubashkin about why he needed the funds or why he didn't just use a bank. Cohen did not think it was unusual because a processor, like Debtor, had to pay cash up front for the product—and it took a while to process and turn the product to cash. Cohen looked at it like "an advance" on what TCP would eventually owe anyway. Cohen also admitted that he provided financing to Debtor in his personal capacity. Cohen believes that he made the loans personally when he had funds available and TCP did not.

The process for the loans was simple. Debtor would request funding from Defendants, TCP or Cohen would draft a check made payable to the Debtor, and Debtor would allegedly repay the loan. There was no particular schedule for payment and each transaction was unique in its terms. The balance owing was in constant flux. The loans had no consistent maturation date and were paid off intermittently. None of the financing agreements were documented, secured by collateral, or subject to interest charges.

Cohen and Sholom Rubashkin were friends dating to a time when they both lived in Minneapolis. They got to know each other and engaged in religious studies together. There was also a friendship between their families. Cohen and Rubashkin spoke on the phone every morning at 10:00 or 11:00 for several years. They discussed business matters and often discussed the balance of the accounts and advances Defendants made to Debtor. Cohen understood the above-described arrangement as a trade credit relationship between TCP and Debtor. (Cohen Depo., ECF Doc. No. 51-3, at 29-31.)

Trustee here is attempting to recover $265,000 of payments made from Debtor to Cohen. In particular, those payments are: (1) a February 26, 2008 payment of $75,000; (2) a second February 26, 2008 payment of $75,000; (3) a March 31, 2008 payment of $65,000; and (4) a second March 31, 2008 payment of $50,000. Cohen asserts that all of these payments retired short-term loans for the identical amount of the loans made and cannot be considered fraudulent transfers under § 548(a)(2). Cohen also argues the Trustee's § 547(b) claims fail as a matter of law because the undisputed record shows a contemporaneous exchange for new value and/or subsequent new value.

Trustee resists and argues Cohen had unclean hands and cannot assert the § 548 defense. Trustee also notes there are factual issues regarding both of Debtor's § 547(c) defenses. Trustee also made a Cross-Motion for Summary Judgment. Trustee also points out he has alternatively made claims to set aside preferential transfers to an insider under § 547(b). He asserts there is no genuine issue of fact regarding whether Cohen is an insider. Trustee asserts Cohen has failed to contradict any of the § 547(b) elements and thus his prima facie claim is established as a matter of law. Cohen resists and argues there is not sufficient proof he is an insider. He also argues Trustee has failed to prove Debtor's insolvency as required under § 547(b).

CONCLUSIONS OF LAW AND DISCUSSION

A. SUMMARY JUDGMENT STANDARDS

Summary judgment is governed by Rule 7056 of the Federal Rule of Bankruptcy Procedure. Rule 7056 applies Federal Rule of Civil Procedure 56 in adversary proceedings. Rule 56 states, in relevant part, that: "The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). The granting of "[s]ummary judgment is proper if, after viewing theevidence and drawing all reasonable inferences in the light most favorable to the...