Citibank, N.A. v. Bombshell Taxi LLC (In re Hypnotic Taxi LLC)
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Full Opinion
DECISION AFTER TRIAL
In this proceeding, which was removed by the debtors to this Court from Supreme Court, New York County, Citibank, N.A. (âCitibankâ or Plaintiffâ), the principal creditor of the debtors, seeks to collect amounts owed to it from Evgeny Freidman (âFreidmanâ or âDefendantâ), guarantor of the debtorsâ obligations. This motion presents two questions: (1) whether Citibank is entitled to an order of attachment against Freidmanâs property, and (2) whether an order of attachment to secure a judgment against Freidman can attach property which Freidman transferred to four trusts in June, 2015.
The answer to both of these questions depends upon the purpose and intent of Freidmanâs transfer, in JunĂ©, 2015, of his interests in various limited liability companies (âLLCsâ) and corporations owning real estate estimated to be worth more than $60 million, to four-offshore trusts for the benefit of himself and members of his family, without consideration. Freidmari maintains that these transfers were for estate planning purposĂ©s, while Citibank contends that the circumstances show that the transfers were made to defraud crĂ©ditors or to frustrate the enforcement of a judgment that might be entered in Citibankâs favor. The timing of the transfers, the chronology of events surrounding them, the testimony heard at the trial held on November 30, 2015, and the documentary evidence in the record, demonstrate that these transfers were made with intent to defraud, Freidmanâs creditors, or to frustrate a judgment that might be entered in Citibankâs favor. For this reason, and because the requirements of CPLR 6212(a) are met, the first question is answered in the affirmative, and the stay, entered on November 19, 2015 (ECF 34), of the order pf attachment entered on.November 17, 2015 (ECF 28), is lifted
Jurisdiction
This Court has' jurisdiction of this proceeding pursuantâto 28 U.S.C. § 1334(b), and the Eastern district of New York
This non-core proceeding is related to these bankruptcy cases. See In re Cuyahoga Equip. Corp., 980 F.2d 110, 114 (2d Cir.1992). Although bankruptcy courts may not enter final orders in non-core proceedings absent consent of the parties, the order of attachment at issue in this motion is not a final order, but is interlocutory. See Lopez v. Casal, 998 F.2d 28, 31 (1st Cir.1993); Merrimac Corp. v. Sved, 128 B.R. 874, 875 (S.D.N.Y.1991). It is well established that bankruptcy courts may enter interlocutory orders in non-core proceedings. In re Trinsum Grp., Inc., 467 B.R. 734, 739-40 (Bankr.S.D.N.Y.2012).
Background
The facts set forth below are established by the record of this case arid the evidence received at trial.
A. The Loan Defaults and Lawsuits
On March 5, 2015, Citibank began this action by filing a summons and complaint in Supreme Court, New York County (Index No. 650691/15) (the âState Court Actionâ), asserting twelve causes â of action against Freidman and the other defendants. (Declaration of Robert Guttmann (âGuttmann Deelâ), Ex. 1, ECF 56-1.) Plaintiff seeks (among other things)' a judgment against Freidman as guarantor of loans totaling $31.5 million extended by Citibank to entities closely held by'Freidman. Three loans are- at issue: a $10 million1 loan to eight LLCs owned by Freidman (the â$10 Million Loan Borrowersâ), . evidenced by notes dated February 1, 2013; a $21 million loan to fourteen corporations and LLCs owned by Freidman (the â$21 Million Loan Borrowersâ), evidenced by notes dated December 20, 2012; and a $1.5 million loan evidenced by a note dated July 1, 2013 to Taxi Club Manageinent Inc., a corporation owned by Freidman (respectively, the â$10 Million Loan,â the â$21 Million Loanâ and the â$1.5 Million Loan,â and collectively the âLoansâ). (Affidavit of Charles Nigro, attached to the December 3, 2015 Declaration of Brett Berman, ECF 62 (the âNigro Aff.â.â), ¶¶ 7-31, ECF 62-1; Nigro Aff., Ex. C, ECF 62-4-ECF 62-5; Nigro Aff., Ex. I, ECF 62-17-ECF 62-18; Nigro Aff., Ex. M, N, ECF 62-25-62-26.)
The $10 Million Loan is secured by taxi medallions owned by the $10 Million Loan Borrowers, and the $21 Million Loan is secured by taxi medallions owned by the $21 Million Loan Borrowers (collectively, the âMedallion Collateralâ). (Nigro Aff., ¶¶ 12, 20, ECF 62-1; Nigro Aff., Ex. J, ECF 62-19-ECF 62-21; Nigro Aff., Ex.D, ECF 62-6-ECF 62-10.)
Each of the Loans had a payment due on December 1, 2014, which was not made, and on December 4, 2014 Citibank declared a default and accelerated the Loans. (Nigro Aff., ¶¶ 42-43, ¶¶ 50-52, ECF 62-1.) On December 31, 2014, the $1.5 Million Loan matured. (Nigro Aff., ¶¶ 44-45, ECF 62-1; Nigro Aff., Ex. M, N, ECF 62-25-62-26.) Failure to pay the $1.5 Million Loan triggered a further default with respect to the $10 Million Loan and the $21 Million Loan, and Citibank gave notice of this default to all of the Borrowers, as well as to Freidman in his capacity as guarantor. (Nigro Aff., ¶¶ 54-55, ECF 62-1; Nigro Aff., Ex. Z, ECF 62-45.) The $10 Million Loan matured on January 31, 2015, and the failure to pay at that time constituted an additional default with respect to the $10 Million Loan. (Nigro Aff., ¶¶ 57-58, ECF 62-1; Nigro Aff. Ex. I, ECF 62-17-62-18.)
On April 24, 2015, in relation to a separate indebtedness, Capital One Taxi Medallion Finance, a trade name for A1 Points Capital Corp., N/K/A Capital One Equipment Finance Corp. (âCapital Oneâ), filed an affidavit of judgment by confession, signed August 14, 2014 by Freidman, which resulted in a judgment by confession entered on July 10, 2015, in favor of Capital One against Freidman in the amount of $8,484,949.30. (Citibank Stmt. Re. Trial Exs., Ex. 12, ECF 48-12.)
In' the State Court Action, on May 19, 2015, Justice Jeffrey K. Oing (âJustice Oingâ) granted Citibankâs motion for an order of seizure (âSeizure Orderâ), allowing Citibank to .seize the Medallion Collateral. (Guttmann Deck, Ex. 4, ECF 56-4.) The SeizureOrder was entered on June 12, 2015. The same day, a separate order was entered -in the State Court Action denying' Defendantsâ application for a stay of the SeizurĂ© Order. (December 2; 2015 Declaration of Brett Berman (âBerman Deckâ), Ex. Q, ECF-54-18.)
On June 15, 2015, the Appellate Division, First Department entered an order granting ĂĄ temporary stay of the'Seizure Order pending a hearing by a full panel. (Berman Deck, Ex. U, ECF 54-32.) On July 14,2015, the Appellate Division grĂĄntĂ©d' a stay of the Seizure Order on condition that Defendants post a $50 million bond. (Berman Deck, Ex. W, ECF 54-36.) No bond was posted, and on July 22, 20Ă5, the twenty-two â Medallion Loan Borrowers filed these chapter 11 bankruptcy cases in the Eastern District of New York. These cases have been consolidated for procedural purposes and are'jointly administered as In re Hypnotic Taxi, Case No. 15-43300. (ECF 26, Case No. 15-43300.) The commencement of these bankruptcy cases automatically stayed enforcement of the Seizure Order. 11 U.S.C. § 362(a).
On July 29, 2015, the Debtors removed the State Court Action to the United States District Court for the Southern District of New York, and after transfer to the United States District Court for the Eastern District of New York, the action was referred to this Court by order dated October 28, 2015. (Notice of Removal, ECF 1;- Eastern District of New York Docket, p.17, ECF 1-1.)
B. The Transfers
- In April 2015, after Citibank commenced the State Court Action, and in the same month that Capital One entered the affidavit for judgment by confession, Freidman sought the advice of a trust and estates lawyer, Michael Zimmerman, to whom he had been referred by his long time lawyer
Into the Trusts, governed by. substantially similar trust documents, Freidman placed his interests.in LLCs and corporations owning all of his personal residences and investment real estate holdings in the United States (âReal Estate Entitiesâ). (November 30 Tr., ECF 66, p.64, In. 5-9, p. 121, In. 18-25, p.124, In. 2-25, p.125, In. 1-25, p. 126, ln.1-25, p. 127, In. 1-25, p. 128, hi. 1-15; Evelyn Trust, p.GF000172; Declaration of Nathan Schwed (âSchwed Deckâ), ECF 4-1, ¶ 12; Schwed Dec!., Ex. H, ECF 4-10-ECF 4-11; Citibank Stmt. Re. Trial Exs., Ex. 14, ECF 4814, Ex. 20, ECF 48-20.)
The residences owned by the Real Estate Entities are 136 E 65th Street, New York, NY; 200 E 66th Street, New York, NY, unit A1101; and 108 Halsey Lane, Bridgehampton, N.Y. (âResidencesâ).: (Citibank Stmt. Re. Trial Exs., Ex. 20, ECF 48-20.) In addition, Freidman transferred to the Trusts his interest in twenty-eight entities, holding investment properties in New York, Queens, Chicago, and Philadelphia (collectively, the âInvestment Propertiesâ). (Citibank Stmt. Re. Trial Exs., Ex. 20, ECF 48-20.) , The total value of Freid^ manâs interests in the Real Estate Entities exceeds $60 million. (November 30 Tr., ECF 66, p. 121, In. 18-25, p.124, In. 2-25, p.125, In. 1-25, p. 126, ln.1-25, p. 127, In. 1-25, p. 128, In. 1-15; Evelyn Trust, p.GF000172.)
The purpose of these transfers goes to the heart of Citibankâs application for an order of attachment.
C. The Proceedings in This Court
On November 5, pursuant to CPLR 6210, Citibank moved by order to show cause for a temporary restraining order and order of attachment, seeking to restrain any transfer of assets in which Freidman has an interest and to restrain any further transfer of assets transferred by Freidman to the Trusts. (Mot. for Order of Attach, and Temporary Restraining Order, ECF 4.) On November 5, a temporary restraining order (âTROâ) was issued pursuant to CPLR 6210, restraining any transfers of Freidmanâs property or property of the Trusts not in the ordinary course of business. (Order to Show Cause and TRO, ECF 6.) On November 12, 2015 a Fearing was held on Citibankâs.. .motion for an order of attachment, at which it was
Legal Standard
âPrejudgment attachment is a provisional remedy to secure a debt by preliminary levy upon the property of the debtor in order to conserve that property for eventual execution.â DLJ Mortgage Capital, Inc. v. Kontogiannis, 594 F.Supp.2d 308, 318 (E.D.N.Y.2009) (citing Monteleone v. Leverage Group, No. 08-CIV-1986, 2008 WL 4541124, at *6 (E.D.N.Y. Oct. 7, 2008); Michaels Elec. Supply Corp. v. Trott Elec. Inc., 231 A.D.2d 695, 647 N.Y.S.2d 839 (2d Depât 1996)). Fed.R.Civ.P. 64, made applicable in adversary proceedings, by Bankruptcy Rule 7064, permits a federal court to issue-an order of attachment in the manner provided by the law of the state in which the federal court sits. DLJ Mortgage Capital, Inc. v. Kontogiannis, 594 F.Supp.2d 308, 318 (E.D.N.Y.2009).
Under CPLR 6212(a), for an order of attachment to be granted or confirmed, a plaintiff is required to show, by affidavit and other written evidence, (1) that there is a cause of action and that it is probable that the plaintiff will succeed on the merits; (2) that one of the grounds for attachment provided in CPLR 6201 exist; and (3) that the amount demanded from the defendant exceeds all counterclaims known to the plairitiff.
CPLR 6201, as relevant here, provides: An order of attachment may be granted in any action, except a matrimonial action, where the plaintiff has demanded and would be entitled, in whole or in part, or in the alternative, to a money judgment against one or more defen-' dants, when: ...
3. the defendant, with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiffs favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts; ...
CPLR 6201(3).
CPLR 6201 provides that an order of attachment âmayâ be granted, and for this reason, courts have held that fulfillment of the requirements of CPRL 6201 is a necessary but not' a sufficient condition for granting an order of attachment. Capital Ventures Intâl v. Republic of Argentina, 443 F.3d 214, 221 (2d Cir.2006). In addition, it is necessary to show there is a need for the order of attachment. Id. at 221-23 (âIn sum, then, a motion court presented with -an application for an order of attachment must determine whether a statutory ground for attachment exists, whether the applicant has established a likelihood of success on the merits, and whether the remedy is needed to secure payment or obtain jurisdiction.â). .
A. Is Citibank Entitled to an Order of Attachment?
To' determine whether an order of attachment is appropriate in this proceeding, each prong of CPLR 62Ă2(a) will be. analyzed separately.
' 1. That there is a cause of action, and that it is probable that the plaintiff will succeed on the merits.
Citibank points out that prior: to the removal of the State Court Action, Justice Oing issued the Seizure Order under CPLR 7102, which requires, among other things, a finding that âit is probable that the plaintiff will succeed on the merits.â CPLR 7102(d)(1); (Guttmann Deck, Ăx. 4, ECF 56-4.) Citibank argues this finding is law of the case. (November 30 Tr., ECF 66, p.12, In. 5-15.)
Law of the case applies to matters expressly decided âas well [as] to everything decided by necessary implication.â United States v. Yonkers Bd. of Educ., 856 F.2d 7, 11 (2d Cir.1988) (citation omitted). Law of the case will generally be followed âabsent âcogentâ or âcompellingâ reasons.â Id. (citing Doe v. New York City Depât of Soc. Servs., 709 F.2d 782, 789 (2d Cir.1983), cert. denied sub nom. Catholic Home Bureau v. Doe, 464 U.S. 864, 104 S.Ct. 195, 78 L.Ed.2d 171 (1983)). âIt is not enough for the party seeking reconsideration to make a more persuasive argument.â United States v. Yonkers Bd. of Educ., 856 F.2d at 11 (citing Fogel v. Chestnutt, 668 F.2d 100, 109 (2d Cir.1981)). A court need not reconsider findings which are law of the. ease absent â âan intervening change of controlling law, the availability of new evidence, or the need- to correct a clear error or prevent manifest injustice.â â United States v. Yonkers Bd. of Educ., 856 F.2d 7, 11 (2d Cir.1988) (citing Doe v. New York City Depât of Soc. Servs, 709 F.2d at 789 (quoting 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4478, at 790 (1981) (footnote omitted))). The pendency of an appeal, absent a stay, does not affect the status of a finding as law of the case. Cty. of Suffolk v. Long Island Lighting Co., 710 F.Supp. 1428, 1442 (E.D.N.Y.1989) (law of the ease is binding âunless it is reversed on appealâ) (revâd in part on other grounds by Cty. of Suffolk v. Long Island Lighting Co., 907 F.2d 1295, 1300 (2d Cir.1990)); accord, Todd v. Russell, 1 F.Supp. 788, 790 (S.D.N.Y.1932) (â[Ujnless and until [a holding is] reversed by an appellate court, [it] is the law of the case.â).
Application of law of the case is not mandatory;- it is âa discretionary doctrine which âdoes not constitute a limitation on the courtâs power but merely expresses the general practice of refusing to reopen what has been decided.â â United States v. Yonkers Bd. of Educ., 856 F.2d 7, 11 (2d Cir.1988) (citing United States v. Birney, 686 F.2d 102, 107 (2d Cir.1982) (quoting Slotkin v. Citizens Cas. Co., 614 F.2d 301, 312 (2d Cir.1979), cert. denied, 449 U.S. 981, 101 S.Ct. 395, 66 L.Ed.2d 243 (1980))). Whether or not given effect' as law of the case, Justice Oingâs finding, implicit in the issuance of the Seizure Order, that it is probable that Citibank will succeed on the merits, is correct. It is clear that Citibank has made a showing of probability of success which meets the requirements in CPLR 6212(a).
To establish probability of success on the merits under CPLR 6212(a), a plaintiff must show that it is more likely than not that it will succeed on the merits of its claim. DLJ Mortgage Capital, Inc. v. Kontogiannis, 594 F.Supp.2d 308, 319 (E.D.N.Y.2009) (citing New York Dist. Council of Carpenters Pension Fund v.
Freidman is unconditional guarantor of payment when due of the $1.5 Million Loan, pursuant to a guaranty dated July 1, 2013. (Nigro Aff., ¶29 ECF 62-1; Nigro Aff., Ex. Q, ECF 62-29.) Freidman executed similar guarantees, dated January 31, 2012, of the $10 Million Loan, and executed guarantee's, dated December 20, 2012, of the $21 Million Loan. (Nigro Aff., ¶¶ 14, 22, ECF 62-1; Nigro Aff. Ex. F, ECF 62-12-ECF 62-14; Nigro Aff., Ex. L, ECF 62-23-ECF 62-24.)
All of the Medallion Loan Borrowers executed guarantees of the $1.5 Million Loan dated July 1, 2013. (Nigro Aff., ¶¶ 27,30, ECF 62-1; Nigro Aff., Ex. R, ECF 62-30; Nigro Aff., Ex. O, ECF 62-27.) Default under the $1.5 Million Loan permits acceleration of that loan. (Nigro Aff., ¶¶ 40-41, ECF 62-1.) Acceleration of the $1.5 Million Loan triggers liability on the guarantees by Freidman and the Medallion Loan Borrowers. (Nigro Aff., ¶ 54, ECF 62-1.) In turn, default on the guarantees by the Medallion Loan Borrowers places those entities in default, permitting acceleration of the $10 Million Loan and the $21 Million Loan. (Nigro Aff., ¶54, ECF 62-1.) Acceleration of' the Loans triggers Freidmanâs liability under his guarantees. (Nigro Aff., ¶ 54, ECF 62-1.)
Each of the Loans had a monthly payment due on December 1, 2014 which was not paid, and on December 4, 2014 Citibank declared defaults and â accelerated each of the Loans. (Nigro Aff., ¶¶ 42-43, ¶¶ 50-52, ECF 62-1.) The $1.5 Million Loan matured on December 31, 2014. (Nigro Aff., ¶ 44, ECF 62-1; Nigro Aff., Ex. M, N, ECF 62-25-62-26.) Upon the failure to pay the $1.5 Million Loan at maturity, Citibank declared a further default with respect to the $10 Million Loan and $21 Million Loan and gave notice of default and acceleration to all of the Medallion Loan Borrowers as well as to Freidman as guarantor. (Nigro Aff., ¶¶ 54-55, ECF 62-1; Nigro Aff., Ex. Z, ECF 62-45.) The $10 Million Loan matured on January 31, 2015 and was hot paid, constituting an additional default with respect to the $10 Million Loan. (Nigro Aff., ¶¶ 57-58, ECF 62-1; Nigro Aff. Ex. I, ECF 62-17-62-18.) '
It is clear that the showing of likelihood of success required for an order of attachment is met. Freidman does not dispute the basic fact that the Loans were advanced, and have not been repaid, and that he guaranteed the Loans. While Defendants have alleged, that the. Borrowersâ failure to make the payments due on December 1, 2014 resulted from errors by Citibank in handling accounts of the Borrowersâ affiliates, and that the acceleration based on that default was therefore improper, they have not disputed the fact that .the $1.5 Million Loan matured on December 31, 2014. (Berman Deck, Ex. I, ECF 54-9.) Given the failure-to pay the $1.5 Million Loan at maturity; âą the resulting acceleration of the $10 Million Loan and thĂ© $21 Million Loan; and Freidmanâs
2. That one of the grounds for attachment provided in section 6201 exist.
The second requirement for obtaining an order of attachment under CPLR 6212(a) is that one or more grounds for attachment provided , in CPLR 6201 exist.â CPLR 6201, as relevant here, provides:
An order of attachment may.be granted in any action, except a matrimonial action, where the plaintiff has demandedâ and would be entitled, in whole dr in part, or in the alternative, to a money judgment against one or more defendants, when: ...
3. the defendant, with intent to defraud his creditors or frustrate, the enforcement of a judgment that might be rendered in, plaintiffs favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts; ...
CPLR 6201(3).
Because â[fraudulent intent is rarely susceptible to direct proof,â courts look to âbadges of'fraudâ to establish actual- intent. In re Kaiser, 722 F.2d 1574, 1582 (2d Cir.1983). However, â[fraudulent intent is 'not lightly inferred; allegations raising a mere suspicion of fraud are insufficient to 'sustain attachment on this ground.â Algonquin Power Corp. v. Trafalgar Power Inc., No. 00-CIV-1246 (NPM/DEP), 2000 WL 33963085, at *11 (N.D.N.Y. Nov. 8, 2000) (citations omitted).
Because â[fraudulent acts are as varied as the fish in the sea,â any list of the âbadges.of fraudâ would be non-exhaustive. In re Kaiser, 722 F.2d 1574, 1583 (2d Cir.1983). However, six telling badges of fraud are:
(1) the lack or inadequacy of consideration;
(2) the family, friendship or close associate relationship between the parties;
(3) the retention of possession, benefit or use of the property in question;
(4) the financial condition of the party sought to. be charged both before and after the transaction in question;
(5) the existence or cumulative effect of a, pattern or series of transactions or course of conduct after the incurring of debt,, onset of financial difficulties, or pendency or threat of suits by creditors; and ! -
(6) the general chronology of the events and transactions under inquiry.
Kaiser, 722 F.2d at 1582-83; In re Boyer, 328 Fed.Appx. 711, 715 n. 2 (2d Cir.2009). In this case all six of these badges of fraud are present. Each will be â.examined in turn.
Ă. The lack or inadequacy of consider- . . ation.
The .transfer of Freidmanâs interests in the Real Estate Entities to the Trusts was a gratuitous transfer; this badge of fraud is unquestionably present. (Freidman Aff., ECF 18, ¶ 15.)
2. The family, friendship or close associate relationship between the parties;
The beneficiaries of the Trusts are Freidman, his children, and his parents. (Kelly Trust, p.GF000346, Thud Schedule, p.65; Lindy Trust, p.GF000242, Third Schedule, p.64; Evelyn Trust, p.GF000154, Third Schedule, p.64; Birkin Trust, p.GF000072, Third Schedule, p.66.) This badge of fraud is unquestionably present as well. '
The evidence establishes the presence of this badge of fraud.
First of all, Freidman has structured the Trusts so that he reserves the right to continue to use the properties, including the Residences, owned by the Real Estate Entities he transferred to the Trusts. The trust deeds of all of the Trusts provide that:
The Trustees, with the written consent of the Protector, shall have power to permit a Discretionary Beneficiary to occupy, use or enjoy personally any movable or immovable property which may, for the time being, be comprised in the Trust Fund upon any terms and conditions which thé Trustees may think fit.
(Evelyn Trust, p.GFOOOlll, ¶17, p.23; Lindy Trust, p.GF0002000, ¶ 17, p.23; Kelly Trust, p.GF000303, ¶17, p.23; Birkin Trust, p.GF000029-000030, ¶ 17, pâ.24-25.) All of the Trusts designate Freidman as both the Protector and a Discretionary Beneficiary. (Evelyn Trust, p.GF000154; Third Schedule, p.64; Evelyn Trust, p.GF000158, Seventh Schedule, p.68; Birkin Trust, p.GF000072, Third Schedule, p. 66; Birkin Trust, p.GF000076, Seventh Schedule p.70; Kelly Trust, p.GF000346, Third Schedule :p.- 65; â Kelly Trust, P.GF000350, Seventh Schedule p. 69; Lindy ' Trust p.GF000242, Third Schedule, p,64; Lindy Trust, p.GF0Q0246, Seventh Schedule,1 p.68.) Furthermore, the Protector is empowered to remove and replace the Trustees at any time. ' (Evelyn Trust, P.GF000122, 1135(d), p.34; Lindy Trust, P.GF000211, ¶ 35(d), p. 34; Birkin Trust, p;GF000040-000041, ¶ 35(d), p.35-36; Kelly Trust, p.GF000314-GF000315, ¶ 35(d), p.34-35.)
In addition, Freidman maintains management control over and use.of the Investment Properties in the same manner as he did prior to the transfer to the Trusts. Freidman testified at trial that he never transferred to the1 Trustees signing authority over the bank accounts into which, the income from the Investment Properties is deposited. (November 30 Tr., EOF 66, p. 97, In. 16-25, p. 98 In. 1-8, p. 109,. In. 21-25. P. 110, In. 1-2.) Freidman continues to exercise .that authority. (November 30 Tr., -EOF 66, p. 98, In. 4-6.) Edward Mermelstein, an original trustee of the Kelly Trust, testified that, until his deposition was taken in this proceeding, he did pot- know that the Kelly Trust contained assets other than $20 transferred when the Kelly Trust was created; had no management* responsibility with respect to any real properties; and does not know whether the LLCs transferred to the Kelly Trust have bank accounts. (November 30 Tr., ECF 66, p.l69,' ln.l5-25, p.170, In. 1-25, p.171, In. 1-18.) Likewise, Ellen Walker, an original trustee of all four Trusts, testified at her deposition that, in her role as trustee, she has never handled ĂĄny funds of ahy of the Trusts; had no part in managing any of the properties owned by the Real Estate Entities; did not -know if any of the properties had rent paying tenants, did not know whether they are managed by real estate management companies, has not spoken to any real estate management company; has engaged no professionals to do anything related to the properties owned by the Real Estate Entities; has not negotiated or engaged anyone to deal with tax liens on the properties; does not know if any property is managed by ĂĄ super; and has not communicated with any super. (Deposition of Ellen Walker (âWalker Depâ), p,92, ln.1525, p.93, In. 1-25, p.951n.l-5.)
Confronted with the fact that he seems to have ÂĄmaintained total control over the Investment Properties, Freidman testified
Properties located at 48-02 Van Dam Street, Long Island City, N.Y. 11101 and 44-07 Vernon Boulevard, Long Island City, N.Y. 11101, used as business premises by Freidmaris affiliated taxi cab management companies, continued to be used in the same manner by those entities after the transfers, without paying rent. (November 30 Tr., ECF 66, p.113, ln.1-19.)
It appears that no change in the use of the Residential Properties or the use or management of the Investment Properties was effectuated by the transfers to the Trusts. Therefore, this badge of fraud is present as well. âą:
4. The financial condition of the party sought to be charged both before and after the transaction in question.
It is not necessary to find that Freidman was rendered insolvent by these transfers in order to conclude that the transfers were made with intent to defraud creditors or to frustrate the enforcement of a judgment. What is telling is that, by these transfers, Freidman appears to have sought to convey all of his property against which a judgment creditor could -readily execute.
Freidman maintains that his Statement of Financial Condition dated June 30, 2015 (â2015 SFCâ) demonstrates that even after the transfers he was in robust financial shape. (November 30 Tr., ECF 66, p. 282, In. 6-9; Freidman Aff., Ex. B, ECF 18-2.) The 2015 SFC lists a net worth of almost $130 Million. (Freidman Aff., Ex.B, p. 4, ECF 18-2.) However, even a cursory analysis shows that, notwithstanding this purported net worth, Freidman retains few assets from which a potential judgment creditor might readily recover.
Of .the purported net worth of $130 million shown on the 2015 SFC, $85 million is ascribed to closely held entities owning taxi medallions. (Freidman Aff., Ex.B, p. 4,-ECF 18-2.) These medallions are all encumbered. (Freidman Aff., Ex.B, p. 5-7, ECF 18-2.) Freidmanâs equity in closely held entities owning New York City taxi medallion rights (âNYC Medallionsâ) is listed on the 2015 SFC as approximately $70 Million of the $85 million total equity attributable to taxi medallions. (Freidman Aff., Ex.B, p. 4, ECF 18-2.) It is clear, therefore, that value attributable to entities owning taxi medallions listed on the 2015 SFC is dependent on the market value of the NYC Medallions. Furthermore,- because the NYC Medallions are heavily encumbered (Freidmaris reported $70 million of equity in NYC Medallions is the result of, subtracting $185 million in encumbrances from.$255 million total value listed on the 2015 SFC); any decline in the market value of the . NYC Medallions will effect .Freidmaris equity disproportionally. (Freidman Aff.,- Ex.B, p. 6, ECF 18-2.) For example, if the value of the NYC Medallions were to decline by 10%, or $25.5 million, Freidmanâs equity would decline by over one-third. -
NYC Medallions are illiquid. (Berman Deck, Ex. L, ¶¶ 13, 21, ECF 54-13.) Very few NYC Medallions actually trade. (Ber
According to Defendants, whatever the market value of a single medallion, if a creditor were to execute on Freidmanâs interests in the Medallion Collateral and sell the medallions as a group into- the market, there is no telling where the bottom would be. (Berman Decl., Ex. L, ¶¶ 20-23, ECF 54-13.) This has been repeatedly. stressed in pleadings and affidavits submitted by Defendants . at every stage of this litigation. (Berman Deck, Ex. L, ¶¶ 20-23, ECF 54-13; Guttmann Deck, Ex 6, ¶¶ 17,19 ECF 56-9; Berman Deck, Ex.P, p.7, ECF 54-17.) Henry Debbas, Chief Executive Officer and Chief Investment Officer at Galactus Investing LLC, whose affidavit was submitted in the State Court Action in opposition to the Seizure Order, described the' likely result of allowing Citibank to seize the Medallion Collateral as follows: âthe consequence of introducing such substantial numbers of new medallions into the market would be to immediately destroy the value of medallions, including those medallions that represent Citibankâs collateral, because âit will prove impossible to find that many buyers for an already illiquid asset.â (Berman Deck, Ex. L, ¶ 21, ECF 54-13.)
In his affidavit pursuant to EDNY LBR 1007-4, submitted in connection with these bankruptcy cases, Freidman â reiterated this assessment of the likely impact on the value of New York City taxi medallions if Citibank'were permitted to sell the Medallion Collateral:
The impact of a fire sale liquidation of so many medallions would likely cause a massive devaluation of all N.Y. City medallions, resulting in more defaults by other taxi operators and perhaps cause a collapse of the entire industry.
(Affidavit of Evgeny Freidman dated July 21, 2015, filed on docket of 15-43300 as ECF 2, ¶â30.) Upon obtaining a judgment against Freidman, Citibank would be able to seek to execute on all of Freidmanâs interests in the NYC Medallions, except the medallions owned by the Debtors (assuming the automatic stay is in effect .at that time). If Debbas .and Freidman are correct in their warnings concerning the effect of liquidation of the 46 medallions owned by the Debtors, presumably the wholesale liquidation of Freidmanâs interests in the remainder of the NYC Medallions (numbering 223 according to the 2015 SFC) would .have an even more significant impact on the market value of this type of asset. (Freidman Aff., Ex. B, p.5-6, ECF 18-2.) .
The second major source of value listed on the 2015 SFC is Freidmanâs interest in closely held taxi cab management companies (âManagement. Companiesâ), which are listed as worth $34,880,000. (Freidman Aff., Ex. B, p.4, ECF 18-2.) Here, again, it is highly doubtful .that these assets would actually be a significant source of recovery to a creditor seeking to execute on a judgment. Freidmanâs testimony. on this topic can only be described as self-contradictory, evasive and unconvincing. Though he initially stated that the Management Companies would be, worth more in liquidation than as a going concern (November 30 Tr., ECF 66, p. 229, In. 9-18), this â assertion collapsed under cross examination. Freidman testified - that a substantial number of the taxis managed
The other assets listed in Freidmanâs 2015 SFC are-Swiss bank accounts totaling over $2 million, and two residences in France worth â a total of $14 million. (Freidman Aff., Ex. B, p.4, ECF 18-2.) It is not clear what, if anything, the Swiss bank accounts ' currently contain; when Freidman was asked at the. hearing, âthe cash in Switzerland, is that still there now?â he replied âIâd have to check, I did not check before.â (November 30 Tr., ECF 66, p.221, In. 16-20.)- In any event, such property, like the residences in France, would -be difficult- for a creditor seeking to enforce a New York judgment to reach.
Thus, is appears that Freidman has transferred substantially all of his assets available for execution by a judgment creditor to the Trusts. Much is made by Defendants of the fact that in connection with the creation of the Trusts, Freidman signed affidavits attesting that the transfers would not render him insolvent. (November 30 Tr., p.80, ln.18-25,. p.81 In.1-8; Freidman Aff., Ex. A, ECF 18-1.) Such self-serving affidavits are entitled to little, if any, weight and do not contradict the overwhelming circumstantial and documentary evidence that show that these transfers were undertaken to remove valuable assets from the reach of potential judgment creditors.
5. The existence or cumulative effect of a pattern or series of transactions or course of conduct after the incurring of debt,' onset of financial difficulties, or pendency or threat of suits by creditors, and 6. the general chronology of the events and transactions under inquiry,'
Though fraudulent intent is rarely susceptible to direct proof, much can be inferred from the chronology of events. Citibank began this action, in March .2015, and Freidman commenced., the process of creating the Trusts in April, around the time that Capital One filed an affidavit for judgment by confession in state court. In May, pressure on Freidman intensified when Justice Oing issued the. Seizure Order, permitting Citibank to seize the Medallion Collateral from the Medallion Loan Borrowers. (Guttmann Deck, Ex. 4, ECF 56-4.) Then, in the middle of June, Freidman conveyed all his assets on which a judgment creditor would be able to execute to' the four Trusts, registered in three different offshore locations. As Trustees, Freidman appointed his business attorneys, who do not appear to have Undertak
Freidman asserts that he undertook these transfers simply for estate planning purposes, a proposition that strains credulity. From the perspective of an inquiry into the presence of the badges of fraud, it is difficult to imagine a more arresting chronology. These transfers occurred against the background of a suit by Citibank to recover in excess of $40 million dollars, and a confession of judgment Âżntered by Capital One, which resulted in a judgment of almost $8.5 million dollars. It is impossible to conclude that the timing of the transfers is merely coincidence.
Events after the TRO was issued by this Court strongly support the inference that Freidman undertook the transfers to the Trusts with the aim of frustrating judgment creditors. After this Court issued the TRO on November 5, 2015, Freidman fired the Trustees located in New York in order to appoint foreign trustees in- Moscow, in a transparent attempt to further insulate the assets he placed in the Trusts from the reach of his creditors. (Citibank Stmt. Re..Trial Exs;, Ex.7, ECF 48-7, Ex. 8, ECF 48-8.) Freidmanâs testimony to the contrary is totally lacking in credibility and is directly contradicted, by the deposition testimony of Ellen Walker, Freidmanâs lawyer and an original trustee of all four Trusts. .