Silverman v. A-Z RX LLC (In re Allou Distribs. Inc.)

In re ALLOU DISTRIBUTORS INC., et al., Debtors.KENNETH P. SILVERMAN, as Chapter 7 Trusteeof ALLOU DISTRIBUTORS INC., et al.,and CONGRESS FINANCIAL CORPORATION, Plaintiffs,

v. A-Z RX LLC, EVER READY FIRST AID MEDICAL SUPPLY CORP.,d/b/a A&M ENTERPRISE, DIXIE EMS SUPPLY USA LLC, SILVIA DOMB a/k/a SYLVIA DOMB,EVA SILBERSTEIN a/k/a EVA SILVERSTEIN a/k/a EVA JACOBOWITZ,SARA JACOBOWITZ, CHANIE JACOBOWITZ, ARI JACOBOWITZa/k/a AARON JACOBOWITZ, and MOM & SONS REALTY, LLC, Defendants.

Case No. 8-03-82321-ess

Adv. Pro. No. 04-08369-ess

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK

Dated: December 3, 2012

Chapter 7

MEMORANDUM DECISION ON THE TRUSTEE'S

MOTION FOR SUMMARY JUDGMENT

Appearances:

Ronald J. Friedman, Esq.

SilvermanAcampora LLP

100 Jericho Quadrangle (Suite 300)

Jericho, NY 11753

Attorneys for the Chapter 7 Trustee

Scott A. Krinsky, Esq.

Backenroth, Frankel & Krinsky, LLP

Attorneys for the Defendants

HONORABLE ELIZABETH S. STONG

UNITED STATES BANKRUPTCY JUDGE

Introduction

Before the Court is the motion of plaintiff Kenneth P. Silverman, as Chapter 7 Trustee of Allou Distributors, Inc. and other entities ("Allou"), for partial summary judgment on the claims asserted in the complaint dated June 2, 2004, filed by the Trustee and Congress Financial Corporation, now known as Wells Fargo Bank, N.A. ("Congress"), as agent for itself and other lenders, against certain individual and corporate defendants (respectively, the "Individual Defendants" and the "Corporate Defendants," and together, the "Defendants"). This motion arises in one of many adversary proceedings brought in connection with the fraud committed by Allou's principals, and the involuntary and voluntary bankruptcy filings that followed.

The Parties

The Individual Defendants are Silvia Domb a/k/a Sylvia Domb, Eva Silberstein a/k/a Eva Silverstein a/k/a Eva Jacobowitz, Sara Jacobowitz, Chanie Jacobowitz, and Ari Jacobowitz a/k/a Aaron Jacobowitz. In Claims One through Six, the Plaintiffs seek to hold the Individual Defendants liable under theories of aiding and abetting breach of fiduciary duty and aiding and abetting fraud, based on the Individual Defendants' alleged knowledge of and participation in the breach of fiduciary duty and fraud perpetrated by Allou's former management.

The Corporate Defendants are A-Z RX, LLC ("A-Z"), Ever Ready First Aid Medical Supply Corp. d/b/a A&M Enterprise ("Ever Ready"), and Dixie EMS Supply USA LLC ("Dixie"). The Plaintiffs bring Claims Thirteen, Fourteen, Fifteen, Seventeen, Twenty, Twenty-One, Twenty-Two, and Twenty-Four against the Corporate Defendants under New York's Debtor and Creditor Law ("DCL") Sections 273, 274, and 275 and Bankruptcy Code Sections548(a)(1)(B), 550(a), and 551, to recover funds transferred to the Corporate Defendants by Allou, its principals, and affiliates. The Plaintiffs bring Claims Nine and Ten, seeking the imposition of a constructive trust, against the Corporate Defendants. In Claims Eleven and Twelve, the Plaintiffs assert that the Corporate Defendants were unjustly enriched by the transfers they received from Allou, its principals, and affiliates. And in Claims Eight, Thirty-Two, and Thirty-Four, the Plaintiffs seek a permanent injunction and an order of attachment against all of the Defendants.

The Motion for Summary Judgment

The Trustee argues that summary judgment should be granted against the Individual Defendants on the aiding and abetting claims because there is no genuine dispute of material fact as to the elements of these claims. The Trustee contends that there is no dispute as to the underlying fraud and fiduciary breach at Allou, and that the evidence establishes the Individual Defendants' knowledge and participation in the fraud and fiduciary breach at Allou. The Trustee relies on the Individual Defendants' undisputed close family relationships with the Jacobs, as spouse and sibling. The Trustee also cites the Individual Defendants' membership in Mom & Sons, LLC a/k/a Mom & Sons Realty, LLC ("Mom & Sons") and stock ownership in the Corporate Defendants, entities that were involved in hundreds of transactions with Allou involving transfers of millions of dollars over a six-year period when Allou was engaged in a massive fraud, their control of the Corporate Defendants' bank accounts and, with the exception of Domb, their invocation of the Fifth Amendment privilege against self-incrimination at their Rule 2004 examinations.

The Trustee argues that summary judgment should be granted on the constructivefraudulent conveyance claims against the Corporate Defendants because there is no genuine dispute of material fact as to the Debtors' insolvency and the Corporate Defendants' receipt of transfers without fair consideration or reasonably equivalent value. The Trustee argues that the same facts support summary judgment on the constructive trust and unjust enrichment claims. And the Trustee contends that judgment should be granted on his request for a permanent injunction and an order of attachment to prevent the Individual and Corporate Defendants from dissipating any of their assets.

The Defendants argue that there are genuine disputes of material fact that preclude summary judgment on the aiding and abetting, fraudulent transfer, constructive trust, and unjust enrichment claims, especially when all inferences are drawn in their favor as non-moving parties. The Defendants note that courts have declined to draw adverse inferences from the invocation of the Fifth Amendment on summary judgment, that no such inference can be drawn with respect to Domb, and that even if an adverse inference is made, it cannot be the sole basis for liability on a summary judgment motion.

The Defendants also contend that intent, insolvency, fair consideration, and reasonably equivalent value are ordinarily factual issues that cannot be resolved on summary judgment. And the Defendants argue that the Trustee is not entitled to summary judgment on the fraudulent transfer and common law claims against the Corporate Defendants because the evidence raises a genuine dispute of material fact as to whether the transfers were repaid.

With respect to the aiding and abetting claims, the Defendants argue that the Individual Defendants' knowledge of the transfers at issue is a factual issue that cannot be resolved on a motion for summary judgment. The Defendants also argue that the Trustee's claims are barredby the three-year statute of limitations for claims of breach of fiduciary duty and conversion.

The Defendants reject the Trustee's attempt to hold them liable for $200 million. The Defendants assert that at most, the Trustee's evidence links particular Individual Defendants with some of the transactions and the Corporate Defendants. For example, the Defendants argue with respect to Sara Jacobowitz, Chanie Jacobowitz, and Eva Jacobowitz that the Trustee "tacitly concedes that Sara, Chanie and Eva were not A-Z shareholders," and that Sara and Chanie were not shareholders of Mom & Sons or "signatories of Ever Ready." Defs' Mem. at 14. Accordingly, they argue that these defendants cannot be held liable for the A-Z and Mom & Sons transfers.

The Defendants make several arguments in opposition to the Trustee's request for injunctive relief, including that the Trustee cannot establish the element of irreparable harm because the last alleged transfer occurred in March 2003, and because the Defendants have entered into a stipulation granting preliminary injunctive relief. And the Defendants argue that there is no basis for an order of attachment as the Trustee did not allege or prove that the Defendants have improperly transferred any assets. Finally, relying on Stern v. Marshall, 131 S. Ct. 2594 (2011), the Defendants contend that this Court lacks jurisdiction to enter a final judgment in this case because the Complaint asserts state law causes of action.

* * *

Based upon the entire record, and for the reasons stated below, the Court finds that it has jurisdiction over the claims asserted in the Complaint and, to the extent that these claims are finally adjudicated on this motion, that this Court has the authority to enter a final order and judgment. In the event that the District Court concludes that this Court may not enter a finalorder and judgment consistent with Article III of the United States Constitution, this Memorandum Decision and the accompanying Order may be treated as proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c). The Court also finds that the Trustee is entitled to summary judgment on the fraudulent conveyance and unjust enrichment claims against the Corporate Defendants, and that genuine disputes of material fact preclude summary judgment as to the claims against the Individual Defendants and the requests for constructive trust, a permanent injunction, and attachment.

Jurisdiction and Authority To Enter a Final Judgment

This Court has jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334(b). To the extent that the Trustee's fraudulent transfer claims are finally adjudicated on this motion, this Court may enter an appropriate order and judgment. In the event that the District Court concludes that this Court may not enter a final order or judgment consistent with Article III of the United States Constitution on those claims, this Memorandum Decision and the accompanying Order may be treated as proposed findings of fact and conclusions of law pursuant to 28 U.S.C. § 157(c).

Procedural History

On June 3, 2004, the Trustee and Congress filed the Complaint, asserting over thirty causes of action. The Defendants filed an Answer to the Complaint on July 13, 2004, in which they deny a majority of the Trustee's allegations and assert certain affirmative defenses. And on July 20, 2004, this Court entered an order approving a stipulation between the Trustee and the Defendants, including preliminary injunctive relief in favor of the Trustee.

The preliminary injunction prevents ...