The principal was the “sole member and manager of the [d]ebtor.” The principal entered into a lease agreement for an apartment with two corporations in his individual capacity. After discovering that the principal had misappropriated client funds, the creditors sought to put the debtor into an involuntary Chapter 7 bankruptcy. Additionally, the principal had pled guilty to the misappropriation of funds. The court appointed a trustee who sued the principal and one of the corporations to recover allegedly fraudulent transfers made between the debtor and the corporations. The corporations moved to dismiss and filed a motion for judgment on the pleadings “based on defenses including holder in due course, good faith, fair consideration, and in pari delicto.”
In Togut v. Roc Le Triomphe Assocs. LLC (In re Kossoff PLLC), No. 21-10699 (DSJ), 2024 WL 1715011, 2024 Bankr. LEXIS 945 (Bankr. S.D. N.Y. April 19, 2024) (opinion not yet released for publication), the court denied the corporations’ motion to dismiss except for the trustee’s unjust enrichment claim. First, the court addressed whether the corporations were holders in due course. Under New York law, the corporations were required to demonstrate that they had received the disputed funds without notice of the wrongdoing and in good faith. N.Y.U.C.C. § 3-302. The court found that whether the corporations had actual knowledge of wrongdoing was unknown, and additional fact-finding was necessary; therefore, the holder in due course argument must be denied. Second, the court applied similar reasoning in denying the movants’ good faith defense, claiming discovery was needed to determine if the movants were unaware of wrongdoing. Third, the court addressed whether the defense of fair consideration was sufficient to dismiss some of the trustee’s claims. The court reasoned that the lack of good faith on the part of the movants served as the basis for denying their fair consideration argument. Under statutory and case law, good faith is an element required for fair consideration, and “showing an absence of one element is sufficient to survive a motion to dismiss.” Because the trustee “adequately plead[] a lack of fair equivalent value,” the court declined to dismiss the trustee’s claims under the defense of fair consideration. Finally, the court considered the trustee’s unjust enrichment claim. The corporations assert several defenses, including that the claim was time-barred, the Wagoner rule, and the in pari delicto defense. The court found that the applicable statute of limitations was only three years, which time-barred a substantial amount of the claims. In addition, the court dismissed the unjust enrichment claim, citing the Wagoner rule, which provides that “a trustee, who stands in the shoes of the debtor, lacks standing to recover for a wrong that the debtor participated in.” In re Bernard L. Madoff Inv. Sec. LLC., 721 F.3d 54, 63 (2d Cir. 2013). Therefore, the principal’s misconduct was imputed to the debtor and prevented the trustee from seeking to recover from the corporations. The court also justified the dismissal under the doctrine of in pari delicto, which bars a wrongdoer from recovering “from another party whose equal or lesser fault contributed to the loss” if the damages are a “result of its own intentional wrongdoing.” Picard v. HSBC Bank PLC, 454 B.R. 25, 29 (S.D.N.Y. 2011). Ultimately, the court held that only the unjust enrichment claim could be dismissed at this stage.
By Paul Iskra: [email protected]
Edited By Nura Elhentaty: [email protected]
Edited By Ashley Boyce: [email protected]
Edited By Hayden Mariott: [email protected]