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UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK X IN RE: CHAPTER 11 LYNN CITRON and JEFFREY CITRON, CASE NO.: ast Debtors X
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UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK X IN RE: CHAPTER 11 LYNN CITRON and JEFFREY CITRON, CASE NO.: ast Debtors X LIBERTY MUTUAL INSURANCE COMPANY, as Fiduciary for the Bankruptcy Estate of Lynn Citron and Jeffrey Citron, Plaintiff, v. ADV. PROC. NO.: ast THE STATE OF NEW YORK, BING LI and THE LAW OFFICES OF BING LI, LLC, and FRANK PAONE, Defendants X APPEARANCES: William B. Pollard, III, Esq. David T. McTaggart, Esq. Kornstein Veisz Wexler & Pollard, LLP 757 Third Avenue New York, New York Attorneys for Liberty Mutual Insurance Company John W. Kolwe, Esq. Jones, Walker, Waechter, Poitevent, Carr 600 Jefferson Street Suite 1600 P. O. Drawer 3408 Lafayette, Louisiana Attorneys for Liberty Mutual Insurance Company Neal S. Mann, Esq. Assistant Attorney General 120 Broadway New York, New York Attorneys for State of New York Memorandum Opinion - p. 1 MEMORANDUM OPINION ON CROSS-MOTIONS FOR SUMMARY JUDGMENT Issues Before the Court Pending before the Court are cross-motions for summary judgment filed by the Plaintiff, Liberty Mutual Insurance Company as Fiduciary for the Bankruptcy Estate of Lynn Citron and Jeffrey Citron ( Liberty Mutual and Plaintiff ), and by Defendant, the State of New York ( NY ). Plaintiff seeks to avoid and recover a $75, criminal fine paid by Debtor Jeffrey Citron to NY as part of a plea agreement related to several felony counts of insurance fraud, and $14, of criminal fines paid by Debtor Lynn Citron as part of a plea agreement with NY related to several misdemeanor charges of insurance fraud. For the reasons herein, this Court grants in part and denies in part, each motion. Jurisdiction This Court has jurisdiction over this core proceeding pursuant to 28 U.S.C. 157(b)(2)(A), (B), (F) and (H), and 1334(b), and the Standing Order of Reference in effect in the Eastern District of New York. Procedural History On March 27, 2008, Debtors filed a voluntary petition for relief under Chapter 13 of the United States Bankruptcy Code (the Petition Date ). [dkt item 1] 1 At the time this case was filed, Debtor Jeffrey Citron was incarcerated, and Debtor Lynn Citron was serving out a three-year probation term. On June 2, 2008, Liberty Mutual Insurance Company filed a motion to dismiss the main case and a brief in support thereof. [dkt items 30, 31] Liberty Mutual asserted, inter alia, that Debtors had filed this bankruptcy in bad faith, had failed to disclose all assets, and were ineligible 1 Unless otherwise noted, all references to the docket are in the main case. Memorandum Opinion - p. 2 for chapter 13 relief under Section 109(e) of the Bankruptcy Code, 2 because their liquidated, unsecured claims approximated $10 million, and their debts to Liberty Mutual, including treble damages and prepetition interest, exceeded $26 million (the Dismissal Motion ). Liberty Mutual filed a proof of claim asserting unsecured debts in excess of $26 million. An evidentiary hearing on the Dismissal Motion was scheduled for July 28, [dkt item 44] On June 27, 2008, this Court issued an Order directing Debtors to show cause why this case should not be converted to a case under chapter 7, and scheduled an evidentiary hearing thereon, also for July 28, [dkt item 43] On July 23, 2008, following a substitution of counsel, Debtors filed a motion seeking to convert the main case from a case under chapter 13 to one under chapter 11 of the Bankruptcy Code. [dkt item 53] On August 29, 2008, this Court entered an Order converting the main case to a case under chapter 11 of the Bankruptcy Code. [dkt item 65] On December 15, 2008, Liberty Mutual filed a motion seeking authority to initiate lawsuits on behalf of the bankrupt estate (the Authorization Motion ). [dkt item 91] On December 18, 2008, the United States Trustee (the UST ) filed a motion seeking dismissal of the main case (the UST Dismissal Motion ). [dkt item 92] On February 11, 2009, following a contested hearing on the Authorization Motion, this Court entered an Order authorizing Liberty Mutual to pursue recovery actions on behalf of the bankruptcy estate (the Authorization Order ). [dkt item 114] The UST s Dismissal Motion has been adjourned on several occasions, on consent of the UST, based on progress towards a plan of reorganization in the main case. On March 24, 2009, Liberty Mutual, with the power vested in it pursuant to the Authorization Order, filed this adversary proceeding as Plaintiff. NY filed a Rule 12(b)(6) motion 2 Unless otherwise noted, all references to statutory provisions are to the Bankruptcy Code, found under Title 11 of the United States Code. Memorandum Opinion - p. 3 to dismiss this adversary proceeding on May 18, 2009, to which Plaintiff responded on June 1, [adv. dkt items 8, 9] Supplemental briefs were filed on August 11 and 12, [adv. dkt items 11, 12] This Court denied the NY motion to dismiss on August 31, [adv. dkt item 14] On July 28, 2009, Debtors and Liberty Mutual filed a motion in the main case seeking to have the Court approve a global settlement between them. [dkt item 133] On August 26, 2009, this Court entered an Order approving the settlement between Liberty Mutual and Debtors. [dkt item 137] This settlement was represented as clearing a few of the potential roadblocks between Liberty Mutual and Debtors so that Debtors could confirm a plan of reorganization. In this adversary proceeding, Liberty Mutual and NY now have each filed motions seeking summary judgment under Rule 7056 of the Bankruptcy Code. Each has also filed a statement of material facts upon which there is no dispute, in accordance with Local Bankruptcy Rule in the Eastern District of New York. [adv. dkt items 16, 18, 20, 26] These motions are fully briefed and were taken under submission by the Court. 3 Uncontroverted Facts The following materials facts are not controverted: 1. On or about June 5, 2007, Debtors were both indicted, along with several others, for alleged involvement in an alleged fraudulent insurance scheme against Liberty Mutual and others. The indictment, styled as People of the State of New York against Jeffrey Citron, et al., was assigned indictment number 2373/2007 (the Indictment ). 2. The Indictment accused Jeffrey Citron of 85 felonies, which carried maximum fines 3 For clarification regarding the other three defendants listed in this adversary proceeding: On December 18, 2009, the Court approved a settlement agreement between Liberty Mutual and Defendant Frank Paone [dkt item 28]; on March 5, 2010, Liberty Mutual filed a status letter with the Court indicating it was in settlement discussions with the remaining defendants, Bing Li and the Law Offices of Bing Li [dkt item 31]. Memorandum Opinion - p. 4 of double the amount of any gains from the commissions of the alleged crimes The Indictment accused Lynn Citron of 7 felonies, which carried maximum fines of double the amount of any gains from the commissions of the alleged crimes Debtors both pleaded guilty to certain counts. On September 10, 2007, Debtors each allocuted as part of their respective plea agreements. Jeffrey Citron allocuted to five felony counts, and received an indeterminate sentence of one and two-thirds to five years, along with having to pay a $75, fine by the sentencing date. This plea agreement was conditioned upon Jeffrey Citron surrendering his notary license, staying out of trouble between his allocution date and his sentencing date, cooperating with the department of probation so his presentence report could be prepared, and his not engaging in any insurance business prior to his sentencing date. As part of his plea agreement, Jeffrey Citron also agreed to waive his right to trial on the charges and waived his right to appellate review. Lynn Citron allocuted to a misdemeanor charge in exchange for which she was to be sentenced to three years probation, and in lieu of forfeiture or fines in the total amount of $175,000, agreed to pay $5, by her sentencing date, and an additional $4, per month over the duration of her probation, with an agreement to provide the State of New York with a judgment, which could be secured by Debtors residence in Woodbury, New York. Lynn Citron also agreed to surrender any insurance licenses held by her or her agency, waived her right to a trial, and waived her right to appellate review. Lynn Citron also agreed not to travel, other than for work, to New York City, or to visit 4 The pleadings do not reveal what the maximum incarceration term might have been. 5 As with Jeffrey Citron s Indictment, the pleadings do not reveal what the maximum incarceration term might have been for Lynn Citron. Memorandum Opinion - p. 5 her husband in prison. 5. After several delays in their sentencing date, Debtors were finally sentenced on December 19, Also on December 19, 2007, NY and Lynn Citron entered into a Consent Order, which memorialized her forfeiture of $175,000.00, and provided for her first payment to be due on the sentencing date of December 19, 2007, with monthly payments thereafter of $4, over the term of her thirty-six months of probation. Lynn Citron further agreed to a confession of judgment, and the indexing of that confession of judgment as a lien against Debtors residence should she miss two monthly payments. 7. Lynn Citron signed an affidavit of confession of December 19, 2007, and paid her initial $5, Jeffrey Citron paid his entire $75, fine on March 25, Lynn Citron paid an additional $9, on March 25, The March 25, 2008, payments made by each of Debtors had been due earlier, but the payment date had been extended with the approval of the state criminal court until March 20, Debtors filed a Chapter 13 bankruptcy case on March 27, Lynn Citron defaulted on her monthly payment obligations, having made only the initial $5, payment on December 19, 2007, and a $9, payment on March 25, 2008, representing the payment due for January and February On May 16, 2008, the Supreme Court of Nassau County entered a Judgment by Memorandum Opinion - p. 6 Confession against Lynn Citron, in the amount of $161,015.00, plus postjudgment interest of nine percent per annum. 13. NY filed a secured proof of claim in the main bankruptcy case on June 27, 2008, claiming a secured debt of $161, It is unknown whether or when NY docketed the confession of judgment with the Clerk of either Nassau or Suffolk County. Summary of Arguments Liberty Mutual asserts that the Jeffrey Citron s $75, March 2008 payment and Lynn Citron s March 2008 $9, payment (collectively, the March 2008 Payments ) were both preferential payments and therefore avoidable under Bankruptcy Code Section 547(b). Liberty Mutual further argues that Lynn Citron s December 19, 2007, $5, payment, along with the Debtors March 2008 Payments (collectively, the Transfers ), all constitute fraudulent transfers and, therefore, are subject to avoidance under Bankruptcy Code Section 548(a). NY, in its cross-motion for summary judgment, asserts that the Debtors received reasonably equivalent value for the Transfers because they avoided long jail sentences, substantial fines, and the significant costs of a criminal trial, and, thus, the Transfers were not fraudulent transfers. NY concedes that the March 2008 Payments are preferences, but argues that the affirmative defense provided under Section 547(c)(1) precludes recovery by Liberty Mutual. [adv. dkt item 20] Legal Analysis The Standard for Summary Judgment Pursuant to Rule 56 of the Federal Rules of Civil Procedure, incorporated by Bankruptcy Rule 7056, summary judgment should be granted to the moving party if the Court determines that Memorandum Opinion - p. 7 the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (quoting FED. R. CIV. P. 56 ). In considering cross-motions for summary judgment, the court must evaluate the merits of each motion independently of the other. See Heublein, Inc. v. United States, 996 F.2d 1455, 1461 (2d Cir.1993); In re Rodriguez, 50 B.R. 576 (Bankr. E.D.N.Y. 1985) ( [C]ross-motions for summary judgment do not warrant the court in granting summary judgment unless one of the moving parties is entitled to judgment as a matter of law upon facts that are not genuinely disputed. ) A movant has the initial burden of establishing the absence of any genuine issue of material fact. Celotex, 477 U.S. at A fact is material if it might affect the outcome of the suit under the governing law. Anderson, 477 U.S. at 248. An issue of fact is genuine if the evidence is such that a reasonable jury could return a verdict for the nonmoving party. Id. When summary judgment is sought, the moving party bears an initial burden of demonstrating that there is no genuine dispute of material fact to be decided with respect to any essential element of the claim in issue; the failure to meet this burden warrants denial of the motion. Anderson, 477 U.S. at 250 n.4). If the movant meets his initial burden, the nonmoving party must do more than simply show that there is some metaphysical doubt as to the material facts. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). Rather, it must present significant probative evidence that a genuine issue of fact exists. Anderson, 477 U.S. at 249 (quotation omitted). There Memorandum Opinion - p. 8 is no issue for trial unless there exists sufficient evidence in the record favoring the party opposing summary judgment to support a jury verdict in that party s favor. Cadle Co. v. Newhouse, No. 01 Civ. 1777(DC), 2002 WL *4 (S.D.N.Y. Aug. 16, 2002) (citing Anderson, 477 U.S. at 249); see also Anderson, 477 U.S. at 250 (finding that summary judgment is appropriate only when there can be but one reasonable conclusion as to the verdict ). As part of the independent evaluation of cross-motions for summary judgment, the court must draw all reasonable inferences against the party whose motion is under consideration. Coach, Inc. v. Peters, 386 F.Supp.2d 495, 497 (S.D.N.Y. 2005). The parties do not dispute the material facts that each has asserted. Thus, this Court must determine whether all material facts have been presented to this Court and, if so, whether: (1) the March 2008 Payments are avoidable as fraudulent transfers under Section 548; and (2) NY has demonstrated that the March 2008 Payments are excepted from preference avoidance in accordance with Section 547(c)(1). Standards for Avoidance Under Bankruptcy Code Sections 547 and 548 Bankruptcy Code Sections 547 and 548 provide the circumstances under which a preference and a fraudulent transfer can be found to exist and be avoided. 11 U.S.C. 547, 548. Section 547 of the Bankruptcy Code authorizes either the debtor or the trustee to avoid a transfer which prefers one creditor over similarly situated creditors, and allows the transferee to receive more than it would have received in a Chapter 7 case had the transfer not been made. 11 U.S.C NY has conceded that the elements of a preference under Section 547(b) have been demonstrated by the summary judgment evidence submitted by Liberty Mutual regarding the March 2008 Payments. [adv. dkt item 20, p.5] Instead, NY focuses its argument on the assertion that the March 2008 Memorandum Opinion - p. 9 Payments to NY should be excepted from avoidability under Section 547(c)(1), which provides a complete defense based on a contemporaneous exchange for new value. Bankruptcy Code Section 548(a) authorizes either the debtor or trustee to avoid a transfer made for less than reasonably equivalent value within two years prior to the petition date U.S.C. 548(a). The Bankruptcy Code provides that the trustee may avoid transfers or obligations for which the debtor received less than a reasonably equivalent value if the debtor was insolvent or was rendered insolvent by the transfer, and/or intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor s ability to pay as such debts matured. Id. Section 548 Analysis: Whether a Plea Bargain Resulting in a Reduction in Jail Time, Fines, and Legal Costs Constitutes Reasonably Equivalent Value In BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), the United States Supreme Court stated that the phrase reasonably equivalent value contained within Section 548 does not necessarily connote a strictly economic or dollar for dollar analysis. One must suspect the language means that fair market value cannot or at least cannot always be the benchmark for determining reasonably equivalent value. BFP, 511 U.S. at 537 (internal citations omitted). In BFP, the Supreme Court held that the price received at a regularly conducted, noncollusive foreclosure sale, which is properly conducted under applicable state law, conclusively establishes reasonably equivalent value for purposes of Section 548(a). See BFP, 511 U.S. at 537. In In re Zerbo, 397 B.R. 642 (Bankr. E.D.N.Y. 2008), this Court addressed a Section 548 attack by a trustee against a prepetition divorce property settlement. In Zerbo, by extension of the 6 Prior to the October 17, 2005, amendments to the Bankruptcy Code provided under the Bankruptcy Abuse Prevention and Consumer Protection Act ( BAPCPA ), the applicable look-back period under 548(a) was one year. Section 548(a) was amended to provide a two -year look back. This bankruptcy case was filed after the effective date of the relevant BAPCPA amendments. Memorandum Opinion - p. 10 BFP analysis, this Court concluded that reasonably equivalent value for purposes of Section 548(a) could be conclusively established by a divorce decree which divided marital assets, if the division of assets was approved by a matrimonial court and if there is no evidence of extrinsic fraud or collusion among the divorcing parties. Zerbo, 397 B.R. at 654. Very little case law has been found on the precise question posed here: whether the settlement of criminal litigation constitutes reasonably equivalent value for Section 548 purposes. This Court believes that BFP establishes a framework for analysis of this case as it did for Zerbo. The only two cases cited by NY, both decided well before BFP, help illuminate this analysis. These cases are In re Tower Environmental, Inc., 260 B.R. 213 (M.D. Fla. 1998), which is similar to this case in many material respects, and in In re CareerCom Corp., 215 B.R. 674 (M.D. Pa. 1997). CareerCom is not quite as similar to this case as Tower. In Tower, the debtor, an environmental remediation firm, entered into a plea agreement ( Plea Agreement ) with the State of Florida (the State ), to settle a 45-count indictment against the debtor s predecessor corporation, Consolidated Credit Group, Inc. ( CCG ). In re Tower Envtl., Inc., 260 B.R. at Under the Plea Agreement, CCG agreed to enter pleas of no contest to all of the counts of grand theft in the indictment, and the State agreed to nolle prosequi the racketeering and conspiracy charges. The Plea Agreement included both monetary and nonmonetary conditions. CCG agreed to pay restitution, a sum comprising the State s cost of the investigation, and a fine, each payable in installments. Two major stockholders of debtor guaranteed the payments under the Plea Agreement. Id. at 219. In exchange, the State agreed not to pursue the criminal prosecution of CCG, debtor, three entities associated with CCG, and any officers, directors, shareholders, employees, and agents of Memorandum Opinion - p. 11 the named entities. This agreement not to prosecute extended to matters relating to the factual basis detailed in the [i]ndictment and any matters presently under investigation. The Plea Agreement included several nonmonetary provisions and provided for withdrawal from the agreement in the event of breach by either party, which included the failure to make the r
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