Opinion
Case No. 14-30054 Adv. No. 14-3009
12-04-2014
In re: BARRINGTON SPRING HOUSE, LLC, Debtor BARRINGTON SPRING HOUSE, LLC, Plaintiff v. RAFAEL MAWARDI, ET AL., Defendants
cc: Robert Stok STOK FOLK + KON 18851 NE 29th Avenue Suite 1005 Aventura, FL 33180 Email: service@stoklaw.com John Paul Rieser Rieser & Marx LLC, Of Counsel 7925 Graceland Street Dayton, OH 45459-3834 E-mail: attyecfdesk@riesermarx.com
Chapter 7
DECISION OF THE COURT: 1) DENYING DEFENDANTS' MOTION TO DISMISS COMPLAINT; -AND- 2) PROVISIONALLY DENYING DEFENDANTS' REQUEST TO TRANSFER VENUE [Adv. Doc. 16]
This matter is before the court on the Motion to Dismiss Complaint or Transfer Venue [Adv. Doc. 16] filed by Defendants Rafael Mawardi, Limor Mawardi and Issac Keith Mawardi (collectively "the Mawardis"). A response [Adv. Doc. 19] and supplemental response [Adv. Doc. 20] were filed by Plaintiff-Trustee John Paul Rieser ("Trustee"). No reply was filed.
The original plaintiff in this adversary proceeding was Barrington Spring House LLC acting as Debtor-in-Possession on behalf of the bankruptcy estate. However, a Chapter 11 trustee was appointed in the underlying bankruptcy case and, later, the bankruptcy case was converted to Chapter 7. Consequently, the current plaintiff is Chapter 7 Trustee Rieser acting on behalf of the bankruptcy estate.
In the motion, the Mawardis argue that the Trustee's claims to avoid their mortgage lien on the estate's real property as a fraudulent or preferential transfer must be dismissed because the debtor in this case, Barrington Spring House, LLC ("Barrington"), received consideration for the transfer and judicial estoppel bars the claims. However, the consideration alleged did not clearly benefit Barrington in a quantifiable amount comparable to what the Mawardis received: a $3,500,000.00 note and mortgage lien on Barrington's real property. The Mawardis' argument for the application of judicial estoppel also fails because they point to no contradictory position taken by a party to this adversary proceeding in a prior case or proceeding.
Alternatively, the Mawardis renew a request that the court transfer the adversary proceeding to the Bankruptcy Court for the Southern District of Florida at Fort Lauderdale because such a transfer is in the interest of justice and the convenience of the parties. Although the court ruled on a prior venue motion and decided to retain the Barrington case and its related adversary proceeding, the Mawardis assert that a change in circumstances and their continuing difficulties with travel favor a transfer to Florida. The Trustee objects to a transfer asserting that a change in venue will increase costs to the estate and hinder non-insider creditors. Based on the parties' representations, the court is disinclined to grant the Mawardis' request and, consequently, the request for transfer of venue is provisionally denied subject to the Mawardis' filing a timely motion requesting a hearing on the issue.
FACTUAL AND PROCEDURAL BACKGROUND
For purposes of determining whether the complaint should be dismissed, the facts in the complaint are deemed true. Debtor Barrington Spring House, LLC ("Barrington") filed its bankruptcy petition on January 9, 2014 [Adv. Doc. 1, ¶ 14]. One of the assets of Barrington's bankruptcy estate was real property located at 4346 Riverside Drive in Dayton, Ohio (the "Real Estate") [Id., ¶¶ 15, 17]. The Real Estate was comprised of a 685-unit apartment complex called River View Park Apartments [Id., ¶ 16]. Barrington received its interest in the Real Estate on December 28, 2011 through the execution of a Limited Warranty Deed recorded in the Office of the Recorder for Montgomery County, Ohio on December 29, 2011 [Id., ¶¶ 19, 20].
Prior to Barrington's bankruptcy filing, Barrington was a party to a Florida state court lawsuit captioned Mawardi, et al., v. Edelsten, et al., Case No. 12-025285 in the Circuit Court of the Seventeenth Judicial Circuit for Broward County, Florida (the "Florida State Court Case") [Id., ¶ 22]. In the Florida State Court Case, an undated Settlement Agreement was executed and it is through this Settlement Agreement that the Mawardis obtained their mortgage interest in the Real Estate [Id., ¶ 23]. A copy of the Settlement Agreement is attached to the complaint as Exhibit B [Id.]. Barrington, while a party to the Florida State Court Case, was not a listed or signature party to the Settlement Agreement [Id.].
On December 30, 2013, pursuant to the terms of the Settlement Agreement, a mortgage was executed purportedly by Barrington in favor of the Mawardis as an alleged lien on the Real Estate (the "Mortgage") [Id., ¶¶ 24, 27]. The Mortgage was executed on behalf of Barrington by Geoffrey W. Edelsten acting as "Manager" [Id., ¶ 28]. The Mortgage was recorded on January 6, 2014 in the Office of the Recorder for Montgomery County, Ohio [Id., ¶ 25].
The Mortgage claimed to secure a Promissory Note dated December 30, 2013, in the amount of Three Million Five Hundred Thousand Dollars ($3,500,000.00) owed from Barrington to the Mawardis [Id., ¶ 29]. On December 30, 2013, a Promissory Note, was executed by Barrington in favor of the Mawardis in the amount of Three Million Five Hundred Thousand Dollars ($3,500,000.00) (the "Note") [Id., ¶ 30]. The Note, a copy of which is attached to the Complaint as Exhibit D, was executed by Geoffrey W. Edelsten acting as "Manager" for Barrington [Id., ¶¶ 31-32]. Although the Note was executed on December 30, 2013, the Note carries an effective date of September 10, 2013 [Id., ¶¶ 30, 33].
Despite the Note claiming to demonstrate an obligation owing from Barrington to the Mawardis for $3,500,000.00, no money was exchanged at the time of the execution of the Note [Id., ¶ 34]. The Mawardis did not loan money to Barrington in conjunction with the Note or Mortgage and Barrington had no monetary obligation to the Mawardis at any point in time from which the Note is derived [Id., ¶¶ 35-36]. According to allegations in the complaint, no consideration or value was given to Barrington for the execution of the Note or the Mortgage [Id., ¶¶ 38-39].
LEGAL ANALYSIS
A. Request for Dismissal of the Complaint
The Mawardis request dismissal of the Trustee's complaint under Fed. R. Civ. P. 12(b)(6), incorporated in bankruptcy adversary proceedings by Fed. R. Bankr. P. 7012 for failure to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) attack, the complaint "must contain sufficient factual matter, accepted [by the court] as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (further citation omitted). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. The plausibility standard is "not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id.
The factual allegations provided in the complaint need not be detailed. Id.; Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Instead, a complaint requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to give the defendant fair notice of what the claim is and the grounds upon which it rests. Fed. R. Civ. P. 8(a)(2) (incorporated in bankruptcy by Fed. R. Bankr. P. 7008); Twombly, 550 U.S. at 555. Nonetheless, the facts provided must be sufficient to raise a right to relief "above the speculative level" and the plaintiff has the obligation to provide more than just "labels and conclusions" or a "formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555. See also Iqbal, 556 U.S. 678 (noting that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice").
In assessing the complaint, the court must keep in mind that the purpose of a Rule 12(b)(6) motion to dismiss is to test the legal sufficiency of the plaintiff's claims for relief and not to weigh the evidence. Perry v. United Parcel Service, 90 Fed. Appx. 860, 2004 WL 193203, at *1 (6th Cir. Jan. 30, 2004); Armengau v. Cline, 7 Fed. Appx. 336, 2001 WL 223857, at *5 (6th Cir. March 1, 2001). "Therefore, when deciding a motion to dismiss a court may consider only matters properly a part of the complaint or pleadings." Armengau, 2001 WL 223857, at *5. See also Kostrzewa v. City of Troy, 247 F.3d 633, 643-44 (6th Cir. 2001) (noting that if matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Fed. R. Civ. P. 56 and the parties must be provided additional notice and an opportunity to supplement the record).
1. Fraudulent Transfer Claims: Reasonably Equivalent Value
Initially, the Mawardis attack the sufficiency of the Trustee's claims that the Mawardis' mortgage lien on the Real Estate constitutes an avoidable fraudulent transfer under 11 U.S.C. § 548 and/or 11 U.S.C. § 544(b) and Ohio Rev. Code § 1336.04(A)(2) also known as the Ohio Uniform Fraudulent Transfer Act ("Ohio UFTA"). More specifically, the Mawardis assert that Barrington received consideration for the $3,500,000.00 note and mortgage executed in the Mawardis' favor precluding the Trustee from succeeding on his claims.
Section 544(b) of the Bankruptcy Code allows the trustee to avoid transfers of a debtor's property which would be avoidable under applicable state law, more specifically state fraudulent conveyance acts, by a creditor holding an unsecured claim. 11 U.S.C. § 544(b); Lyon v. Eiseman (In re Forbes), 372 B.R. 321, 330 (B.A.P. 6th Cir. 2007). In this instance, the Trustee asserts a claim of avoidance under Ohio Rev. Code § 1336.04(A)(2).
The Mawardis are correct that a critical requirement for avoidance of a fraudulent transfer under the Bankruptcy Code and the Ohio UFTA is proof that the debtor transferred an interest in property for less than reasonably equivalent value. Corzin v. Fordu (In re Fordu), 201 F.3d 693,707 (6th Cir. 1999) ("A fundamental element of a constructive fraudulent transfer claim is a transfer made in exchange for less than reasonably equivalent value."); Slone v. Dirks (In re Dirks), 407 B.R. 442, 2009 WL 103606, at *7 (B.A.P. 6th Cir. Jan. 16, 2009). More specifically, 11 U.S.C. § 548(a)(1)(B) provides in pertinent part:
(a)(1) The trustee may avoid any transfer (including any transfer to or for the benefit of an insider under an employment contract) of an interest of the debtor in property, or any obligation (including any obligation to or for the benefit of an insider under an employment contract) incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
....
11 U.S.C. § 548(a)(1)(B) (i). Similarly, under the Ohio UFTA, a trustee attempting recovery under a constructive fraud theory must prove that the debtor transferred an interest in property for less than reasonably equivalent value in exchange for the transfer, and either: (1) the debtor was engaged or was about to engage in a business or transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (2) the debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due. Ohio Rev. Code § 1336.04(A)(2)(a) and (b).(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation . . . .
Whether reasonably equivalent value is received is a question of fact requiring the court to first consider whether a debtor received any value in the exchange. Wilkinson v. John Wiley & Sons, Inc. (In re Wilkinson), 196 Fed. Appx. 337, 341 (6th Cir. Aug. 17, 2006). If value was received, the court then determines whether the value received by the debtor was reasonably equivalent to the value surrendered. Id. See also In re Nat'l Century Fin. Enter., Inc., 341 B.R. 198, 214 (Bankr. S.D. Ohio 2006) (noting that while a debtor need not collect a "penny-for-penny" equivalent in the exchange, courts should keep in mind the equitable purpose behind fraudulent transfer laws "recognizing that any significant disparity between the value received and the value surrendered will significantly harm innocent creditors").
In making the reasonably equivalent value determination, "'the analysis is directed at what the debtor surrendered and what the debtor received irrespective of what any third party may have gained or lost.'" Wilkinson, 196 Fed Appx. at 343 (citing In re United Energy Corp., 944 F.2d 589, 597 (9th Cir. 1991)); Nat'l Century Fin., 341 B.R. at 214-15 (noting that the court is to measure the economic benefit flowing to the debtor and not some third party). In other words, "the focus should be on the overall effect on the debtor's net worth after the transfer." Wilkinson, 196 Fed Appx. at 343; Kovacs v. Hanson (In re Hanson), 373 B.R. 522, 526 (Bankr. N.D. Ohio 2007). In this context, net worth is the sum of the debtor's assets minus the sum of the debtor's liabilities. Kovacs, 373 B.R. at 526 (noting that a transfer that alters the amount of the debtor's assets and/or liabilities while not altering net worth, is a transfer for reasonably equivalent value).
According to allegations in the complaint, Barrington received no consideration for the execution of the note and mortgage in favor the Mawardis [Adv. Doc. 1, ¶¶ 38-39, 46, 48, 62]. Instead, the note and mortgage resulted in the loss of equity in the Real Estate and the new requirement, per the note, to make monthly payments. [Id., ¶¶ 52, 56, 65, 67].
The Mawardis dispute these factual assertions urging the court to determine that Barrington received the following consideration for the transfer:
(i) Barrington being released from any claims, (ii) all litigation against or involving it would be dismissed with prejudice, (iii) it would not need to bear the Mawardis' attorney's fees and costs, (iv) the underlying litigation would be stayed until the Settlement Agreement could be implemented and enforced, (v) it would not be disparaged, (vi) its consideration and obligations would be confidential, (vii) Edelsten was ordered to pay off in excess of close to $400,000.00 in liabilities and liens on the Altels Property resulting from the State Court's receivership, and (viii) the State Court reserved jurisdiction to summarily enforce these terms.[Adv. Doc. 16, p. 14]. To these benefits, the Mawardis add the assignment of their membership interest in Altels Management, LLC (owner of Barrington) to Geoffrey Edelsten which allowed Edelsten to file the Barrington bankruptcy case [Id.]. The Mawardis cite the Settlement Agreement entered in the Florida State Court Case and attached to the complaint as Exhibit B as the source of the consideration. According to allegations in the complaint, Barrington is not a signatory to that Settlement Agreement.
On a motion to dismiss, the court's inquiry is generally limited to the content of the complaint and the court is not to consider extraneous materials. Michael v. Javitch, Block & Rathbone, LLP, 825 F.Supp.2d 913, 918 (N.D. Ohio 2011). However, the court may consider matters of public record and exhibits attached to the complaint. Id. Because the Settlement Agreement is attached to the complaint, it is considered part of the pleading.
Assuming the benefits cited by the Mawardis are part of the Settlement Agreement, it is not clear which, if any, would qualify as reasonably equivalent value to Barrington. Most of the alleged consideration arising from the Settlement Agreement, including the assignment of the Mawardis' membership interest in Altels, flowed not to Barrington but to Geoffrey Edelsten who is not the debtor in this bankruptcy case. As noted before, the reasonably equivalent value analysis "is directed at what the debtor surrendered and what the debtor received irrespective of what any third party may have gained or lost.'" Wilkinson, 196 Fed Appx. at 343. See also Slone v. Lassiter (In re Grove-Merritt), 406 B.R. 778, 805 (Bankr. S.D. Ohio 2009) (whether consideration supporting a challenged transfer is reasonable must be determined from the standpoint of the debtor). In other words, the court must examine how the items of consideration cited by the Mawardis impact Barrington and its net worth rather than third parties.
Furthermore, to the extent value did flow to Barrington through the Settlement Agreement, that value has not been quantified. While it is certainly true that the court may consider both direct and indirect benefits received by a debtor when determining reasonably equivalent value, a defendant must demonstrate that any indirect benefit received by a debtor is "concrete and quantifiable." Nat'l Century Fin., 341 B.R. at 215-16. See also, Dirks, 407 B.R. 442, 2009 WL 103606, at *7 ("Before indirect benefits may be considered . . . the value of the benefit must be tangible."). None of the items of consideration listed by the Mawardis has been quantified with the exception of Edelsten's alleged payoff of approximately $400,000.00 in liabilities and liens on Altels Property, a payoff that the Trustee disputes and asserts "is unlikely to materialize" given Edelsten's personal bankruptcy filing [Adv. Doc. 19, p. 2, ¶ 4]. The court is not in a position to determine or weigh these contrary facts on a motion to dismiss and, consequently, any determination of the value of consideration Barrington received must proceed to trial. Consequently, the Mawardis' motion to dismiss the Trustee's fraudulent transfer claims is denied on these grounds.
2. Judicial Estoppel
Next, the Mawardis argue that dismissal of the complaint is mandated because the doctrine of judicial estoppel prevents the Trustee from pursuing his claims in this adversary proceeding. "The doctrine of judicial estoppel bars a party from asserting a position that is contrary to one the party has asserted under oath in a prior proceeding, where the prior court adopted the contrary position 'either as a preliminary matter or as part of a final disposition.'" Eubanks v. CBSK Fin. Group, Inc., 385 F.3d 894, 897 (6th Cir. 2004) (citing Teledyne Indus., Inc. v. NLRB, 911 F.2d 1214, 1218 (6th Cir.1990)). It is an equitable doctrine meant to preserve the integrity of the courts "by preventing a party from abusing the judicial process through cynical gamesmanship, achieving success on one position, then arguing the opposite to suit an exigency of the moment." Id. However, the doctrine is to be applied with caution to "avoid impinging on the truth-seeking function of the court, because the doctrine precludes a contradictory position without examining the truth of either statement." Id.
In the motion to dismiss, the Mawardis cite to no inconsistent or contrary position that a party to this adversary proceeding took in a prior case or proceeding. Instead, the Mawardis point to a position that "Edelsten vociferously argued" in the Florida State Court Case in an apparent effort to obtain the Mawardis' interest in Barrington [Adv. Doc. 16, p. 16]. The Mawardis are reminded that Geoffrey Edelsten is not a party to this adversary proceeding. The Mawardis provide no legal basis for why Geoffrey Edelsten's position in the Florida State Court Case should bar the Trustee from pursuing the claims in this adversary proceeding on behalf of Barrington's bankruptcy estate and the court will not hypothesize one. The Mawardis' argument for the application of judicial estoppel fails and does not form a basis for dismissal.
As noted in a prior footnote, there have been two plaintiffs in this case both acting on behalf of the bankruptcy estate. The original plaintiff was Barrington acting as Debtor-in-Possession, but the case was subsequently converted and the plaintiff is now the Chapter 7 Trustee on behalf of the estate. The Mawardis point to no statement or position by either plaintiff made in prior litigation that contradicts a position they are taking in this adversary proceeding.
B. Request to Transfer Venue
Finally, the Mawardis argue that the court should reconsider its prior determination and transfer venue of this adversary proceeding pursuant to 28 U.S.C. § 1412. Under § 1412, the court may transfer a case or proceeding to a different district "in the interest of justice or for the convenience of the parties." 28 U.S.C. § 1412. As the court noted in its prior determination on venue, the decision of whether to change venue is within the court's discretion based on a case-by-case analysis of convenience and fairness. In re Barrington Spring House, LLC, 509 B.R. 587, 604 (Bankr. S.D. Ohio 2014). Factors relevant to the interest of justice include whether transferring venue would promote the efficient administration of the bankruptcy estate, judicial economy, timeliness and fairness. Id. When analyzing the convenience of the parties, the court is to consider the proximity of the parties and witnesses to the court locations, the location of the assets relevant to the proceeding and, again, the administration of the estate. Id. at 608.
The court has already considered and ruled on a prior motion to change venue filed by the Mawardis in the underlying bankruptcy case. In its prior ruling, the court determined that two related bankruptcy cases, those of Geoffrey Edelsten and N770GE, LLC, should be transferred to the Bankruptcy Court for the Southern District of Florida at Fort Lauderdale. Id. at 604. The court decided to retain the Barrington bankruptcy case and its adversary proceeding in Dayton, Ohio noting that Dayton is the location of the Real Estate, its management, a significant number of unsecured creditors, and the trustee. Id. at 604-05. Nonetheless, the court invited a renewed request to transfer venue if circumstances changed favoring a transfer to the Florida bankruptcy court. Id. at 605 n.12.
Subsequently, the Mawardis renewed their request to transfer venue of the adversary proceeding in the instant motion citing the liquidation of Barrington's Real Estate as a change of circumstance favoring a transfer by reducing the estate's assets to a "dwindling pile of cash." [Adv. Doc. 16, p. 20]. The Mawardis also note that their personal physical and financial limitations continue to make it difficult to travel to Dayton.
It is unclear from the Mawardis' motion whether they request transfer of this adversary proceeding or the entire Barrington bankruptcy case. Because the Mawardis filed the motion in the adversary proceeding, the court construes it as a motion requesting transfer of only that proceeding and not the entire bankruptcy case. A motion to transfer venue of the bankruptcy case must be filed in the underlying bankruptcy case and served on all creditors and parties in interest.
The Trustee objects to the Mawardis' request asserting that a change of venue would be detrimental to local non-insider creditors and would increase costs to the estate. The Trustee also notes that the Mawardis have been able to travel to Dayton in the past. To the extent that travel is difficult, the Trustee further agrees to accommodate the Mawardis and their witnesses with depositions in Florida. Additionally, the Trustee asserts that the issues in the instant adversary proceeding are discreet from those currently being litigated in the other two bankruptcy cases transferred to Florida and, consequently, there is no need for one judge to decide matters in all three cases.
Based solely on the parties' representations, the court is disinclined to transfer venue of this adversary proceeding. However, it is difficult to fully weigh the parties' relative positions without a hearing. Consequently, the court will provisionally deny the Mawardis' motion to transfer venue subject to the Mawardis filing a motion, within thirty (30) days of the entry of this decision and corresponding order, requesting a hearing on the issue.
CONCLUSION
With respect to the Mawardis' Motion to Dismiss Complaint or Transfer Venue [Adv. Doc. 16], that portion of the motion requesting dismissal of the complaint is DENIED. The Mawardis' request to transfer venue is PROVISIONALLY DENIED subject to the Mawardis filing a motion requesting a hearing on venue transfer. The motion shall be filed within thirty (30) days of the entry of this decision and the corresponding order. If such a motion is not timely filed, the court's denial of the Mawardis' request to transfer venue shall become final.
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Lawrence S. Walter
United States Bankruptcy Judge Dated: December 4, 2014 cc: Robert Stok
STOK FOLK + KON
18851 NE 29th Avenue
Suite 1005
Aventura, FL 33180
Email: service@stoklaw.com John Paul Rieser
Rieser & Marx LLC, Of Counsel
7925 Graceland Street
Dayton, OH 45459-3834
E-mail: attyecfdesk@riesermarx.com