Silverman v. K.E.R.U. Realty Corp. et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
---------------------------------------------------------------------------x
In re:
Case No. 03-82321-ess
ALLOU DISTRIBUTORS, INC., et al., 	(substantively consolidated)
Chapter 7
Debtors.
---------------------------------------------------------------------------x
KENNETH P. SILVERMAN, as Chapter 7 Trustee
of ALLOU DISTRIBUTORS, INC., et al.,
Plaintiff, 	Adv. Pro. No. 05-8538-ess
- against -
K.E.R.U. REALTY CORP., 2165-K-R REALTY CORP.,
KENT-RUSH REALTY CORP., K-R RESIDENCE
CORP., D.J.R. CONSTRUCTION LLC, R&D
DEVELOPMENT, LLC, CHAIM DUSHINSKY, ISAAC
RABINOWITZ, AARON JACOBS a/k/a ARI JACOBOWITZ,
BEDFORD WALL REALTY CORP., 724 BEDFORD LLC,
TEREZA LLC, “JOHN DOES 1-50,” “MARY DOES 1-50,”
“ABC PARTNERSHIPS 1-50" AND/OR “XYZ
CORPORATIONS 1-50,”
Defendants.
---------------------------------------------------------------------------x
MEMORANDUM DECISION GRANTING IN PART AND DENYING IN PART
THE MOTION OF CERTAIN DEFENDANTS TO DISMISS THE AMENDED COMPLAINT
Appearances:
Nathan Schwed, Esq. 	Ronald J. Friedman, Esq.
Zeichner Ellman & Krause LLP 	David J. Mahoney, Esq.
575 Lexington Avenue 	Silverman Perlstein & Acampora LLP
New York, NY 10022 	100 Jericho Quadrangle, Suite 300
Jericho, NY 11753
Franklyn H. Snitow, Esq. 	Attorneys for Plaintiff Kenneth P. Silverman,
Snitow Kanfer Holtzer & Millus LLP 	Esq., as Chapter 7 Trustee
575 Lexington Avenue
New York, NY 10022
Co-Counsel for Defendants Kent-Rush Realty
Corp., K-R Residence Corp., D.J.R. Construction
LLC, R&D Development LLC, Chaim Dushinsky and
Isaac Rabinowitz

HONORABLE ELIZABETH S. STONG
UNITED STATES BANKRUPTCY JUDGE
Before the Court is the motion of certain of the above-captioned Defendants, Kent-Rush
Realty Corp. (“Kent-Rush Realty”), K-R Residence Corp. (“K-R Residence”), D.J.R.
Construction LLC (“DJR Construction”), and R&D Development, LLC (“R&D Development”)
(together, the “K-R Defendants”), and Chaim Dushinsky and Isaac Rabinowitz (the “Individual
Defendants” and together with the K-R Defendants, the “Movants”), to dismiss the Amended
Complaint, dated June 19, 2006 (the “Motion to Dismiss the Amended Complaint”). The
Movants bring their Motion to Dismiss the Amended Complaint pursuant to Rules 8(a), 9(b), and
12(b)(6) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by
Rules 7008, 7009, and 7012 of the Federal Rules of Bankruptcy Procedure. The Movants argue
that the Plaintiff, Kenneth P. Silverman, as Chapter 7 trustee (the “Trustee”) of the bankruptcy
estates of Allou Distributors, Inc., and other entities (the “Debtor”), does not satisfy the pleading
threshold of Rule 8(a), does not plead fraud with the particularity required by Rule 9(b), and
does not state a claim upon which relief can be granted as required by Rule 12(b)(6).
Background
Procedural History
On April 8, 2005, the Trustee filed a complaint (the “Original Complaint”) against the
Defendants in which he seeks to avoid as fraudulent transfers certain transfers of assets that the
Trustee alleges to have originated as assets of the Debtor, and to recover the transferred property
from the Defendants. Adv. Pro. Docket No. 1. On August 4, 2005, the Movants filed a Motion
to Dismiss the Complaint (the “Motion to Dismiss the Original Complaint”). Adv. Pro. Docket
No. 8.
On March 23, 2006, the Court, by then-Chief Judge Melanie L. Cyganowski, granted the

2
Movants’ Motion to Dismiss the Original Complaint in part. Adv. Pro. Docket No. 14
(Transcript of hearing held March 23, 2006). The Court denied the Movants’ challenge to the
Trustee’s unjust enrichment claim, and denied the Movants’ statute of limitations challenge to
the Trustee’s conversion claim. Id. The Trustee was granted leave to replead the dismissed
claims. Id.
On June 19, 2006, the Trustee filed an Amended Complaint (the “Amended Complaint”).
Adv. Pro. Docket No. 19. See Affidavit of Franklin Snitow, Esq., dated August 25, 2006, Exh. D
(Original Complaint and Amended Complaint marked to show differences). On August 25,
2006, the Movants filed the Motion to Dismiss the Amended Complaint. A hearing was held
before this Court on July 16, 2007, at which counsel for the Movants and counsel for the
Plaintiff appeared and were heard. After consideration of the submissions and the arguments of
counsel, and for the reasons set forth below, the Motion to Dismiss the Amended Complaint is
granted in part and denied in part.
The Amended Complaint
The Trustee asserts that this adversary proceeding arises out of the alleged fraudulent
diversion of the Debtor’s assets by Victor Jacobs and his sons Herman Jacobs, Jacob Jacobs, and
Defendant Aaron Jacobs a/k/a/ Ari Jacobowitz (the “Jacobs”), as the former principals of the
Debtor, and their relatives and accomplices (collectively, the “Jacobs Family”). Amended
Complaint ¶ 1. The Trustee asserts that the Jacobs Family orchestrated a fraudulent scheme
through which they diverted at least $15,265,000, of the Debtor’s assets to entities that they
owned, controlled, or had an interest in, and that those entities purchased a parcel of real
property and constructed a condominium project using the diverted assets. Amended Complaint

1 See Amended Complaint, Tenth Claim for Relief, Twenty-Second Claim for Relief,
Twenty-Ninth Claim for Relief, Thirtieth Claim for Relief, Thirty-Sixth Claim for Relief, Thirty-
Seventh Claim for Relief.
2 See Amended Complaint, First through Fourth Claims for Relief, Sixth through Ninth
Claims for Relief, Thirteenth through Sixteenth Claims for Relief, Eighteenth through Twenty-
First Claims for Relief, Twenty-Fifth through Twenty-Eighth Claims for Relief, Thirty-Second
through Thirty-Fifth Claims for Relief, Thirty-Ninth through Forty-Second, and Forty-Fourth
Claim for Relief.
3 See Amended Complaint, First through Fourth Claims for Relief, Sixth through
Eleventh Claims for Relief, Thirteenth through Sixteenth Claims for Relief, Eighteenth through
Twenty-Third Claims for Relief, Twenty-Fifth through Thirtieth Claims for Relief, Thirty-
Second through Thirty-Seventh Claims for Relief, Thirty-Ninth through Forty-Third Claims for
Relief.
4 See Amended Complaint, Fifth Claim for Relief, Twelfth Claim for Relief, Seventeenth
Claim for Relief, Twenty-Fourth Claim for Relief, Thirty-First Claim for Relief, Thirty-Eighth
Claim for Relief, Forty-Fourth Claim for Relief.
3
¶¶ 1-6.
The Trustee asserts forty-nine claims for relief in the Amended Complaint. These claims
include fraudulent transfer claims under Section 548(a)(1)(A) of the Bankruptcy Code for actual
fraud and Section 548(a)(1)(B) of the Bankruptcy Code for constructive fraud.1 Pursuant to
Section 544(b)(1) of the Bankruptcy Code, the Trustee also asserts fraudulent transfer claims
under Sections 273, 274, 275, 276, and 276(a) of the New York Debtor and Creditor Law (the
“DCL”).2 The Trustee seeks recovery from the Defendants as initial transferees of the avoided
transfers pursuant to Section 550(a)(1) of the Bankruptcy Code under a “collapsing” theory3 or,
in the alternative, as immediate or mediate transferees of an initial transferee under Section
550(a)(2).4 The Trustee also asserts common law claims for fraud, conversion, conspiracy to
commit fraudulent conveyances, and unjust enrichment, and seeks the imposition of a

5 See Amended Complaint, Forty-Fifth through Forty-Ninth Claims for Relief.
4
constructive trust.5
Facts Alleged in the Amended Complaint
The Trustee alleges that the fraudulent transfers were accomplished by a series of
transfers from the Debtor to entities owned or controlled by Herman Jacobs or his family
members, including SE-Roebuck Ltd. (“SE-Roebuck”), Arrow Distributing Corp. (“Arrow”),
Buy & Save Trading Corp. (“Buy & Save”), Ever Ready First Aid Medical Supply Corp. d/b/a
A&M Enterprises (“A&M”), T.J. Associates, LLC (“T.J. Associates”), Capital Sales Corp.
(“Capital Sales”), Impax Trading Corp. (“Impax”), and Kimberley Trading & Holding, Ltd.
(“Kimberley”) (the “Controlled Entities”), and Eurofactors International Inc. (“Eurofactors”).
Amended Complaint ¶¶ 48, 54.
The Trustee alleges that the Controlled Entities and Eurofactors then transferred a portion
of the funds they received from the Debtor to or for the benefit of the Movants in connection
with the purchase of a block of real property bordered by Kent Avenue, Rush Street, Wythe
Avenue, and Morton Street, Brooklyn, New York (the “Kent Avenue Property”), and the
construction of condominiums at the Kent Avenue Property (the “Kent Avenue
Condominiums”). Amended Complaint ¶¶ 1, 53, 56. The Kent Avenue Condominiums consist
of three separate condominiums known as the 525-535 Park Plaza Condominium, the 570-576
Park Plaza Condominium, and the 564-580 Park Plaza Condominium. Amended Complaint ¶
97.
The Kent-Rush Transfers
The Trustee alleges that on December 16, 1998, the Debtor transferred $5,570,000, to an

5
account in a Swiss bank held by Kimberley, and that between December 16, 1998, and
December 29, 1998, Kimberley transferred $4,999,965, to a Swiss bank account held by
Eurofactors. Amended Complaint ¶¶ 67, 68. The Trustee alleges that on December 21 and 28,
1998, the Debtor transferred $1,450,000, to Impax, and on December 28, 1998, the Debtor
transferred $1,500,000, to Arrow. Amended Complaint ¶¶ 70, 71. The Trustee alleges that
Kimberley, Eurofactors, Impax, and Arrow are owned or controlled by the Jacobs Family.
Amended Complaint ¶ 48.
The Trustee also alleges that on December 29, 1998, the day after these transfers by the
Debtor were completed, some $7.5 million – $4,999,965, from Eurofactors; $1.5 million from
Arrow and $1 million from Impax – was transferred to an attorney’s trust account held by Leon
Traube, Esq., an attorney who represented the Debtor and the Jacobs in various transactions (the
“Kent-Rush Transfers”). Amended Complaint ¶¶ 73, 74. The Trustee alleges that on December
29, 1998, Kent-Rush Realty used substantially all of the Kent-Rush Transfers to purchase the
Kent Avenue Property. Amended Complaint ¶ 76. The Trustee alleges that Herman Jacobs is
President of Kent-Rush Realty. Amended Complaint ¶ 23, 24, 45.
The Trustee further alleges that at the December 29, 1998, closing, Kent-Rush Realty
granted a $5 million mortgage to K.E.R.U. Realty Corp. (the “K.E.R.U. Mortgage”), and a $2
million mortgage to 2165 K-R Realty Corp. (the “K-R Mortgage”), and that these and other
transfers were made for no consideration. Amended Complaint ¶¶ 72, 75-78.
The Trustee finally alleges that on April 5, 2001, A&M, one of the Controlled Entities,
transferred $650,000, to Kent-Rush Realty to pay development expenses for the Kent Avenue
Condominiums. Amended Complaint ¶ 93.

6
The DJR Construction Transfers
The Trustee alleges that Kent-Rush Realty entered into a contract with DJR Construction
to serve as general contractor for the construction of the Kent Avenue Condominiums, and that
the principal of DJR Construction is Defendant Aaron Jacobs a/k/a/ Ari Jacobowitz, a Jacobs
family member. Amended Complaint ¶¶ 80-86. The Trustee alleges that on January 19, 1999,
$160,000, was transferred from Leon Traube’s attorney’s trust account to DJR Construction to
fund operating expenses. Amended Complaint ¶ 82.
The Trustee also alleges that from February 25, 1999, to September 13, 2000, the
Controlled Entities transferred to DJR Construction at least $2.93 million in thirty transfers to
fund construction costs, and that from September 25, 2000, to February 7, 2003, the Controlled
Entities transferred to DJR Construction at least an additional $3,435,000, in some two dozen
transfers (the “DJR Construction Transfers”). Amended Complaint ¶¶ 83, 90.
The Trustee further alleges that the funds transferred by the Controlled Entities to DJR
Construction originated from the Debtor. Amended Complaint ¶¶ 84, 93. The Trustee alleges
that the Individual Defendants are principals of DJR Construction and that they, along with
Aaron Jacobs a/k/a Ari Jacobowitz, “must have known that the transfers to DJR were made by
entities that were not parties to the Construction Contract which in turn, shows their knowing
participation in the fraudulent scheme.” Amended Complaint ¶ 86.
The K-R Residence Transfers – The K-R Residence Funds Transfers
The Trustee alleges that from February 13, 1999, to August 4, 2000, the Controlled
Entities transferred at least $590,000, to K-R Residence (the “K-R Residence Funds Transfers”).
Amended Complaint ¶¶ 94-96. The Trustee alleges that these funds originated from the Debtor.

7
Amended Complaint ¶ 95.
The Trustee also alleges that Defendant Aaron Jacobs a/k/a/ Ari Jacobowitz is the
President, and the Individual Defendants are principals, of K-R Residence. Amended Complaint
¶ 45. And the Trustee alleges that the Individual Defendants “must have known” that the K-R
Residence Funds Transfers were from entities that were not parties to the construction contract,
showing their knowing participation in a scheme to defraud the Debtor. Amended Complaint
¶ 96.
The Trustee further alleges that K-R Residence was designated in certain condominium
offering plans as the sponsor and selling agent for the Kent Avenue Condominiums. Amended
Complaint ¶ 99. The Trustee alleges that on July 11, 2000, Kent-Rush Realty and K-R
Residence agreed that K-R Residence would receive ten percent of the net purchase price for
each unit sold to third parties (the “K-R Residence Contract”). Amended Complaint ¶ 104. The
Trustee further alleges that K-R Residence received over $1 million in connection with the K-R
Residence Contract and paid those funds to the Individual Defendants. Amended Complaint
¶ 105.
The K-R Residence Transfers – The K-R Residence Condominium Transfers
The Trustee alleges that on December 5, 2002, Kent-Rush Realty transferred ten
condominium units to K-R Residence (the “K-R Residence Condominium Transfers” and
together with the K-R Residence Funds Transfers, the “K-R Residence Transfers”). Amended
Complaint ¶ 106. The Trustee alleges that the deed reflecting the transfer of the ten
condominium units was signed by Herman Jacobs as president of Kent-Rush Realty, dated
December 2, 2002, and recorded on April 28, 2003, less than three weeks after the involuntary

8
bankruptcy petitions were filed against the Debtor and three of its affiliates. Amended
Complaint ¶ 107. The Trustee alleges that K-R Residence paid no consideration for the K-R
Condominium Transfers and later sold one of the condominium units for $382,500. Amended
Complaint ¶¶ 108, 109. The Trustee alleges, upon information and belief, that K-R Residence
continues to own nine condominium units (the “K-R Units”). Amended Complaint ¶ 111.
The R&D Development Transfers
The Trustee alleges that on February 26, 2003, Kent-Rush Realty, as landlord, entered
into 99-year renewable leases with R&D Development for four basements and sub-basements
that were part of the K-R Units (the “R&D Development Leased Units”) for no or less than fair
consideration. Amended Complaint ¶¶ 112, 113. The Trustee alleges that the Individual
Defendants are principals of R&D Development. Amended Complaint ¶ 45.
The Trustee also alleges that on February 25, 2003, and October 30, 2003, Kent-Rush
Realty transferred five condominium units to R&D Development for no or less than fair
consideration (the “R&D Development Units” and together with the R&D Development Leased
Units, the “R&D Development Transfers”). Amended Complaint ¶¶ 114, 115. The Trustee
alleges that Kent-Rush Realty continues to own two condominium units. Amended Complaint
¶ 116.
The Transfers to the Individual Defendants
The Trustee alleges that the Individual Defendants “personally received millions of
dollars as a result of their interest in DJR [Construction], K-R Residence and R&D” (the
“Individual Transfers”). Amended Complaint ¶ 119. The Trustee alleges that “every single
dollar transferred from The Debtor inured to the personal benefit of [the Individual Defendants]

9
because they would otherwise have had to fund the costs of development themselves as DJR
[Construction] and K-R Residence had no independent and legitimate means of income.” Id.
The Trustee further alleges that the Individual Defendants received more than $1 million
from the sale of the units by K-R Residence pursuant to the K-R Residence Contract, as well as
additional amounts arising from R&D Development’s interest in the R&D Units and the R&D
Leased Units, “all of which are income generating properties that, upon information and belief,
have been leased by R&D to third parties.” Amended Complaint ¶ 119.
The Bedford Wall Transfers
The Trustee alleges that in September 2000, Bedford Wall Realty Corp. (“Bedford Wall
Realty”), Kent-Rush Realty, and 2165 K-R Realty entered into an agreement (the “Spreader
Agreement”) providing that a $2 million lien given to 2165 K-R Realty under the K-R Mortgage
at the time of the purchase of the Kent Avenue Property would be “spread” to cover real
property owned by Bedford Wall Realty located at Bedford Avenue, Brooklyn, New York (the
“Bedford Wall Property”). Amended Complaint ¶ 122. The Trustee alleges that Aaron Jacobs
a/k/a/ Ari Jacobowitz is a principal of Bedford Wall Realty. Amended Complaint ¶ 45.
The Trustee also alleges that at the same time, Kent-Rush Realty and 2165 K-R Realty
entered into an agreement to release the Kent-Rush Property from the $2 million K-R Mortgage.
Amended Complaint ¶ 122. The Trustee alleges that as a result of these transactions, the
Bedford Wall Property was substituted for the Kent-Rush Property as security for the K-R
Mortgage. Amended Complaint ¶ 123. The Trustee alleges that the K-R Mortgage was and still
is “subject to The Debtor’s interest therein as the actual source of the monies that funded the K-
R Mortgage.” Id.

10
The Trustee further alleges that in July 2003, Bedford Wall Realty transferred the
Bedford Wall Property to 724 Bedford LLC (“724 Bedford”) and “[a]t the same time, the K-R
Mortgage was transferred to Tereza [LLC] by assignment of mortgage . . . which assignment was
executed by Herbert Greenfield . . . .” Amended Complaint ¶ 124. The Trustee alleges that
Defendants 724 Bedford and Tereza LLC (“Tereza”) are owned or controlled by the Jacobs and
Aaron Jacobs a/k/a Ari Jacobowitz. Amended Complaint ¶ 127. The Trustee alleges that Aaron
Jacobs a/k/a Ari Jacobowitz executed the Spreader Agreement and the deed to 724 Bedford on
behalf of Bedford Wall Realty, and Herman Jacobs executed the Spreader Agreement on behalf
of Kent-Rush Realty. Amended Complaint ¶ 125.
The Trustee alleges that the these transfers (the “Bedford Wall Transfers”) were made
“with the intent of placing the K-R Mortgage and the Bedford Wall Property . . . beyond the
reach of Allou, and its creditors.” Amended Complaint ¶ 128.
Discussion
The Standard for Dismissal Under Rule 12(b)(6)
In reviewing a complaint for sufficiency under Rule 12(b)(6), the court’s task is “to
assess the legal feasibility of the complaint, not to assay the weight of the evidence which might
be offered in support thereof.” Ryder Energy Distrib. Corp. v. Merrill Lynch Commodities, Inc.,
748 F.2d 774, 779 (2d Cir. 1984). The court accepts as true the well-pleaded factual allegations
made by the plaintiff, and “must draw all reasonable inferences in favor of the plaintiff.”
Bernheim v. Litt, 79 F.3d 318, 321 (2d Cir. 1996). See Levy v. Southbrook Int’l Invs., Ltd., 263
F.3d 10, 14 (2d Cir. 2001), cert. denied, 535 U.S. 1054 (2002); Villager Pond, Inc. v. Town of
Darien, 56 F.3d 375, 378 (2d Cir. 1995).

11
The Second Circuit has observed that in addition to the factual allegations contained in
the complaint, the court may also consider the contents of any “documents attached to the
complaint as an exhibit or incorporated in it by reference, to matters of which judicial notice may
be taken, or to documents either in the plaintiffs’ possession or of which plaintiffs had
knowledge and relied on in bringing suit.” Brass v. Am. Film Techs., Inc., 987 F.2d 142, 150 (2d
Cir. 1993).
This standard requires a plaintiff to do more than simply speculate about circumstances
that might conceivably give rise to a claim for relief. As the Supreme Court recently explained:
While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need
detailed factual allegations, . . . a plaintiff’s obligation to provide the “grounds” of
his “entitle[ment] to relief” requires more than labels and conclusions, and a
formulaic recitation of the elements of a cause of action will not do, . . . . Factual
allegations must be enough to raise a right to relief above the speculative level,
. . . on the assumption that all the allegations in the complaint are true (even if
doubtful in fact) . . . .
Bell Atl. Corp. v. Twombly, ___ U.S. ___, 127 S. Ct. 1955, 1964-65 (2007) (citations and
quotations omitted). That is, a plaintiff must allege “enough facts to state a claim to relief that is
plausible on its face” in order to state a claim that survives scrutiny under Rule 12(b)(6). Bell
Atlantic, 127 S. Ct. at 1974. See Iqbal v. Hasty, 490 F.3d 143, 157-58 (2d Cir. 2007) (the Bell
Atlantic standard “obliges a pleader to amplify a claim with some factual allegations in those
contexts where such amplification is needed to render the claim plausible”). Thus, a claim may
be sustained only if the plaintiff has “nudged [its] claims across the line from conceivable to
plausible. . . .” Bell Atlantic, 127 S. Ct. at 1974.
The Standard for Dismissal Under Rule 9(b)
As a counterweight to the liberal pleading standard established by Rule 12(b)(6) and Rule

12
8(a), Rule 9(b) raises the bar for certain types of claims at the pleading stage. It requires that in
“all averments of fraud or mistake, the circumstances constituting fraud or mistake . . . be stated
with particularity. Malice, intent, knowledge, and other condition of mind of a person may be
averred generally.” FED . R. CIV . P. 9(b). Rule 9(b) serves several purposes, including “(1) to
provide a defendant with fair notice of the claims against him; (2) to protect a defendant from
harm to his reputation or goodwill by unfounded allegations of fraud; and (3) to reduce the
number of strike suits.” Granite Partners, L.P. v. Bear, Stearns & Co., 17 F. Supp. 2d 275, 285-
86 (S.D.N.Y. 1998). See O’Brien v. Price Waterhouse, 740 F. Supp. 276, 279 (S.D.N.Y. 1990),
aff’d, 936 F.2d 674 (2d Cir. 1991).
To satisfy Rule 9(b)’s pleading requirements “‘a complaint must allege with some
specificity the acts constituting fraud . . . conclusory allegations that defendant’s conduct was
fraudulent or deceptive are not enough.’” Silverman v. Actrade Capital, Inc. (In re Actrade Fin.
Techs. Ltd.), 337 B.R. 791, 801 (Bankr. S.D.N.Y. 2005) (quoting Odyssey Re (London) Ltd. v.
Stirling Cooke Brown Holdings, Ltd., 85 F. Supp. 2d 282, 293 (S.D.N.Y. 2000)).
Thus, “plaintiffs are required ‘to allege facts that give rise to a strong inference of
fraudulent intent.’” Westdeutsche Landesbank Girozentrale v. SNC-Lavalin Constructors, Inc.
(In re Enron Corp.), 2006 WL 2400083, at *8 (Bankr. S.D.N.Y. 2006) (quoting Kalnit v.
Eichler, 264 F.3d 131, 138 (2d Cir. 2001)). See Securities Investor Prot. Corp. v. Stratton
Oakmont, Inc., 234 B.R. 293, 310 (Bankr. S.D.N.Y. 1999). In the bankruptcy context, courts
have found that “[a] plaintiff can sufficiently allege intent (a) by alleging that a defendant had
both motive and opportunity to commit fraud or (b) by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or recklessness.” In re Enron Corp., 2006 WL

13
2400083, at *8. See Nisselson v. Drew Indus. Inc. (In re White Metal Rolling & Stamping
Corp.), 222 B.R. 417, 428 (Bankr. S.D.N.Y. 1998).
And in the bankruptcy context, courts have evaluated fraud allegations more liberally
than in other civil actions charging fraud. See, e.g., Nisselson v. Ford Motor Co. (In re Monahan
Ford Corp. of Flushing), 340 B.R. 1, 21 (Bankr. E.D.N.Y. 2006); Wieboldt Stores, Inc. v.
Schottenstein, 94 B.R. 488, 498 (N.D. Ill. 1998); Harrison v. Entm’t, Inc. (In re Rave Commc’ns,
Inc.), 138 B.R. 390, 396 (Bankr. S.D.N.Y. 1992). This is because in such cases, “it is often the
trustee, a third party, who is pleading fraud on secondhand information.” Hassett v. Zimmerman
(In re O.P.M. Leasing Servs., Inc.), 32 B.R. 199, 202 (Bankr. S.D.N.Y. 1983). As one court
found, “[s]ince a bankruptcy trustee rarely has personal knowledge of the events preceding his
appointment, he can plead scienter based upon information and belief provided he pleads the
basis of his belief.” In re White Metal Rolling & Stamping Corp., 222 B.R. at 428. See Global
Link Liquidating Trust v. Avantel, S.A. (In re Global Link Telecom Corp.), 327 B.R. 711, 717
(Bankr. D. Del. 2005).
The particularity requirements of Rule 9(b) apply only if actual, as opposed to
constructive, fraud is alleged. In re Actrade Fin. Techs. Ltd., 337 B.R. at 801-02. Thus, for
example, Rule 9(b) does not apply to constructive fraudulent transfer claims under Section
548(a)(1)(B) and applicable state law, because such claims are not based on fraud but are based
on the transferor’s financial condition and the value given in exchange by the transferee. See,
e.g., In re Global Link Telecom Corp., 327 B.R. at 717; In re White Metal Rolling & Stamping
Corp., 222 B.R. at 428; Stratton Oakmont, 234 B.R. at 319.

14
The Standard for Dismissal Under Rule 8(a)
To survive a motion to dismiss under Rule 8(a), a complaint must set forth “a short and
plain statement of the claim showing that the pleader is entitled to relief.” F ED . R. CIV . P. 8(a).
See Erickson v. Pardus, __ U.S. __, 127 S. Ct. 2197, 2200 (2007). “Specific facts are not
necessary; the statement need only ‘give the defendant fair notice of what the . . . claim is and
the grounds upon which it rests.’” Erickson, 127 S. Ct. at 2200 (quoting Bell Atlantic, 127 S. Ct.
at 1964).
As one bankruptcy court in this Circuit recently found:
The purpose of the statement is to provide ‘fair notice’ of the claim and ‘the
grounds upon which it rests.’ Enron Corp. v. J.P. Morgan Sec., Inc. (In re Enron
Corp.), 325 B.R. 671 (Bankr. S.D.N.Y. 2005) (citing Conley v. Gibson, 355 U.S.
41, 47 (1957)). In other words, ‘[Rule 8] is designed to permit the defendant to
have a fair understanding of what the plaintiff is complaining about and to know
whether there is a legal basis for recovery.’ Ricciuti v. New York City Transit
Auth., 941 F.2d 119, 123 (2d Cir. 1991).
Official Comm. of Unsecured Creditors of 360Networks (USA), Inc. v. Pirelli Commc’ns Cables
& Sys. USA LLC (In re 360Networks (USA), Inc.), 367 B.R. 428, 432 (Bankr. S.D.N.Y. 2007).
Rule 8(a) sets a lower bar than Rule 12(b)(6) or Rule 9(b), and “does not require a
plaintiff to plead the legal theory, facts, or elements underlying his claim.” Koch v. Hicks (In re
Methyl Tertiary Butyl Ether (“MTBE”) Prods. Liab. Litig.), 457 F. Supp. 2d 298, 303-04
(S.D.N.Y. 2006) (quotations and citations omitted).
The Motion to Dismiss the Amended Complaint
The First through Forty-Fourth Claims for Relief –
Avoiding and Recovering the Alleged Fraudulent Transfers
The First through Forty-Fourth Claims for Relief assert fraudulent transfer claims under
Sections 548(a)(1)(A) and 548(a)(1)(B) of the Bankruptcy Code and Sections 273, 274, 275,

15
276, and 276(a) of the DCL, and seek to impose liability upon the Defendants for the transfers
that are avoided. The Movants argue that these claims should be dismissed because they do not
adequately state claims for recovery from the Defendants as “initial transferee[s]” under Section
550(a)(1), or alternatively, as “immediate or mediate transferee[s]” under Section 550(a)(2).
Memorandum of Law in Support of Motion to Dismiss Amended Complaint (“Movants’ Mem.”)
at 6. The Movants challenge the Trustee’s Section 550(a) claims in total, and also challenge
separately the Trustee’s Sections 550(a)(1) and (a)(2) claims.
Whether the Amended Complaint May State a Claim for Recovery of the Alleged
Fraudulent Transfers Before the Initial Transfers Are Avoided
The Movants argue that all of the Trustee’s Section 550(a) claims must fail because the
Amended Complaint does not seek to avoid the initial transfers but seeks only to avoid the
subsequent transfers, and that recovery is available only after the Trustee avoids the initial
transfers of the Debtor’s property. Movants’ Mem. at 6. See Movants’ Reply Memorandum of
Law in Support of Motion to Dismiss Amended Complaint (“Movants’ Reply Mem.”) at 8-9.
The Trustee argues that even though Section 550(a) requires that a transfer be avoided
before actual recovery is made against any transferee, the Bankruptcy Code does not require that
the claims to avoid and to recover a transfer be brought in a single adversary proceeding.
Plaintiff’s Memorandum of Law in Opposition to Motion to Dismiss the Amended Complaint
(“Plaintiff’s Mem.”) at 15-16.
The Bankruptcy Code provides distinct concepts and processes for avoidance of a
fraudulent transfer and recovery of the avoided transfer from the transferee. See 11 U.S.C.
§§ 548, 550. See also Enron Corp. v. Int’l Fin. Corp. (In re Enron Corp.), 343 B.R. 75, 81
(Bankr. S.D.N.Y. 2006). Section 550(a) is a remedies section and defines the party from whom

16
a trustee may seek to recover property that is fraudulently transferred or the value or proceeds of
such property. Section 550(a)(1) provides that either an “initial transferee” or “the entity for
whose benefit such transfer was made” is liable for an avoided transfer. 11 U.S.C. § 550(a)(1).
Section 550(a)(2) provides that “any immediate or mediate transferee of such initial transferee” –
that is, a subsequent transferee – may be liable for an avoided transfer. 11 U.S.C. § 550(a)(2).
The Bankruptcy Code also provides defenses to an avoidance action that may be
available to a subsequent transferee. Under Section 550(b)(1), a trustee may not recover an
otherwise avoidable transfer from a subsequent transferee “that takes for value, including
satisfaction or securing a present or antecedent debt, in good faith, and without knowledge of the
voidability of the transfer avoided.” 11 U.S.C. § 550(b)(1). For these reasons, “[w]hether a
‘transferee’ under § 550 is an initial or subsequent transferee . . . has significant consequences
with respect to liability and available defenses.” Official Comm. of Unsecured Creditors of
360networks (USA) Inc. v. U.S. Relocation Servs., Inc. (In re 360networks (USA) Inc.), 338 B.R.
194, 201 (Bankr. S.D.N.Y. 2005).
Section 550(a) requires the Trustee to establish that the transfer was “avoided under
Section 544, 545, 547, 548, 549, 553(b), or 724(a). . . .” 11 U.S.C. § 550(a). Once the transfer is
avoided, the Trustee may pursue the actual recovery of the transfer from the initial transferee or
the entity for whose benefit such transfer was made, or an immediate or mediate transferee. 11
U.S.C. §§ 550(a)(1), (a)(2). See In re Enron, 343 B.R. at 81; Savage & Assocs. P.C. v. BLR
Servs. SAS (In re Teligent, Inc.), 307 B.R 744, 749 (Bankr. S.D.N.Y. 2004).
Neither Section 550(a) nor any other provision of the Bankruptcy Code requires a trustee
to pursue both the avoidance of the initial transfer and the recovery of the transfer in a single

17
adversary proceeding. Nor does the Bankruptcy Code explicitly address whether a trustee must
avoid a transfer in order to state a claim for recovery of the transfer from a transferee.
In In re Enron, the court considered whether recovery under Section 550(a) of a transfer
of the debtor’s property from a subsequent transferee requires that the transfer have previously
been avoided, and concluded that “although the two actions may be brought simultaneously, the
plain language of Section 550(a) requires that the transfer first be avoided, i.e., determined to be
improper, prior to actual recovery from any transferee.” In re Enron, 343 B.R. at 76. Thus,
before the Trustee may obtain an “actual recovery” from the Movants under Section 550(a), he
must first avoid the underlying initial transfers. Cf. IBT Int’l, Inc. v. Northern (In re Int’l Admin.
Servs., Inc.), 408 F.3d 689 (11th Cir. 2005) (holding that the trustee must prove only that the
transfer is avoidable in order to recover from any subsequent transferee).
The Trustee alleges that he has commenced adversary proceedings against each of the
Controlled Entities and Eurofactors to set aside the initial fraudulent transfers of The Debtor’s
funds to them. Amended Complaint ¶ 58. The Trustee alleges that in those actions, default
judgments were entered against Arrow and Kimberley. Amended Complaint ¶ 59. The Trustee
also alleges that, as of the date of the Amended Complaint, SE-Roebuck, Impax, and Buy &
Save were in default, and that adversary proceedings against T.J. Associates, Capital Sales,
A&M, and Eurofactors were pending and contested. Amended Complaint ¶¶ 60, 61. Since the
Amended Complaint was filed, a default judgment has been entered against SE-Roebuck (Adv.
Pro. No. 05-8086, Docket No. 6) and summary judgment has been entered against T.J.
Associates and Capital Sales (Adv. Pro. No. 05-8519, Docket No. 13; Adv. Pro. No. 04-8364,
Docket No. 11.) 	In addition, the adversary proceeding against Eurofactors has been settled

18
(Adv. Pro. No. 06-8329, Docket No. 5).
Here, the Trustee commenced the adversary proceedings against the Controlled Entities
and Eurofactors to avoid the initial transfers before the Amended Complaint was filed. And
judgments or settlements have been entered in several of these actions. Equally important, the
question posed at this stage in the proceedings is whether the Amended Complaint states a claim,
not whether the Trustee has established all of the elements necessary for an “actual recovery”
from the Movants. For these reasons, and based on the entire record, the Movants’ request for
dismissal of the Trustee’s Claims for Relief under Section 550(a) on grounds that the Amended
Complaint seeks only to avoid the alleged subsequent transfers and not the initial transfers is
denied.
Whether the Amended Complaint States a Claim for Recovery from the Movants as
Initial Transferees Under a “Collapsing” Theory
The Trustee seeks to recover the alleged fraudulent transfers from the Movants as “initial
transferees” under Section 550(a)(1). The Trustee alleges that the transfers at issue “were part of
a single scheme to fraudulently transfer funds from Allou, such that the transactions should be
collapsed and [the Movants] be deemed to be initial transferees of the Fraudulent Transfers, or
entities for whose benefit the Fraudulent Transfers were made, pursuant to Bankruptcy Code
§ 550(a)(1).” Amended Complaint ¶¶ 136, 140, 148, 158.
The Movants challenge the Trustee’s “collapsing” theory on several grounds. The
Movants argue that the Trustee’s attempt to collapse the transfers falls short because a series of
transactions may be collapsed only where there appears to have been fair consideration for the
initial transfer but, upon closer scrutiny, the substance of the series of transactions, taken
together, indicates that the debtor did not ultimately receive fair consideration. The Movants

19
assert that inasmuch as The Debtor made the initial transfers to the Controlled Entities for no
consideration, the subsequent transfers to the Movants may be recovered only under Section
550(a)(2). Movants’ Reply Mem. at 10.
Alternatively, the Movants argue that the Trustee’s “collapsing” theory is deficient
because the Trustee has not adequately alleged that the Movants were part of a scheme to
defraud. Movants’ Mem. at 3. The Movants argue that the Trustee’s allegations of a fraudulent
scheme are conclusory and speculative and do not satisfy the requirements of Rules 8(a) and
9(b). Id. They also argue that the Trustee’s fraud allegations do not relate back to the Original
Complaint and are barred by the statute of limitations. Movants’ Mem. at 3-4.
The Second Circuit has observed that “[i]t is well established that multilateral
transactions may under appropriate circumstances be ‘collapsed’ and treated as phases of a
single transaction for analysis under the [fraudulent conveyance law].” HBE Leasing Corp. v.
Frank, 48 F.3d 623, 635 (2d Cir. 1995). The court has declined to “turn a blind eye to the
reality” of the substance of a series of transactions in determining whether a fraudulent
conveyance has been shown, and has observed:
In equity, “substance will not give way to form, [and] technical considerations
will not prevent substantial justice from being done.” Pepper v. Litton, 308 U.S.
295, 305, 60 S. Ct. 238, 244, 84 L. Ed. 281 (1939); . . . Thus, an allegedly
fraudulent conveyance must be evaluated in context: “[w]here a transfer is only a
step in a general plan, the plan ‘must be viewed as a whole with all its composite
implications.’” Pereira v. Checkmate Communications Co. (In re Checkmate
Stereo & Elec., Ltd.), 9 B.R. 585, 612 (Bankr. E.D.N.Y. 1981) (quoting Buffum v.
Peter Barceloux Co., 289 U.S. 227, 232, 53 S. Ct. 539, 541, 77 L. Ed. 1140
(1933), aff’d, 21 B.R. 402 (E.D.N.Y. 1982).
Orr v. Kinderhill Corp., 991 F.2d 31, 35 (2d Cir. 1993). See Official Comm. of Unsecured
Creditors of Sunbeam Corp. v. Morgan Stanley & Co. (In re Sunbeam Corp.), 284 B.R. 355, 370

20
(Bankr. S.D.N.Y. 2002) (“Courts have ‘collapsed’ a series of transactions into one transaction
when it appears that despite the formal structure erected and the labels attached, the segments, in
reality, comprise a single integrated scheme when evaluated focusing on the knowledge and
intent of the parties involved in the transaction.”).
In HBE Leasing, the Second Circuit noted that collapsing “finds its most frequent
application to lenders who have financed leveraged buyouts of companies that subsequently
become insolvent,” but did not limit the collapsing doctrine to such circumstances. HBE
Leasing, 48 F.3d at 635. The court found that the “paradigmatic scheme” in which collapsing
applies is where:
one transferee gives fair value to the debtor in exchange for the debtor’s property,
and the debtor then gratuitously transfers the proceeds of the first exchange to a
second transferee. The first transferee thereby receives the debtor’s property, and
the second transferee receives the consideration, while the debtor retains nothing.
Id. But a paradigm is simply an example – it does not, by itself, define the exclusive elements of
a claim to recover a fraudulent transfer based on a “collapsing” theory. See In re Sunbeam
Corp., 284 B.R. at 370 (“Although the concept of ‘collapsing’ a series of transactions and
treating them as a single integrated transaction has been applied primarily . . . in the context of a
failed levered buy-out (‘LBO’), it has also been utilized in other contexts.”).
Working from this paradigm, the HBE Leasing court identified two conditions for
“collapsing” the transactions for purposes of establishing a fraudulent conveyance. The first
condition identified by the court was, “in accordance with the foregoing paradigm, the
consideration received from the first transferee must be reconveyed by the debtor for less than
fair consideration or with an actual intent to defraud creditors.” HBE Leasing, 48 F.3d at 635.
(emphasis added). More generally, the first condition for collapsing a series of transactions is

21
that the transactions, taken as a whole, diminish the value of the debtor’s estate and are marked
by either a transfer made by the debtor for less than fair consideration or a transfer made by the
debtor with actual fraudulent intent. See id.
The second condition identified by the court was “the transferee in the leg of the
transaction sought to be voided must have actual or constructive knowledge of the entire scheme
that renders her exchange with the debtor fraudulent.” Id. As the court found:
The case law has been aptly summarized in the following terms:
“In deciding whether to collapse the transaction and impose liability on particular
defendants, the courts have looked frequently to the knowledge of the defendants
of the structure of the entire transaction and to whether its components were part
of a single scheme.”
HBE Leasing, 48 F.3d at 635-36 (quoting In re Best Prods. Co., 168 B.R. 35, 56-57 (Bankr.
S.D.N.Y. 1994).
The Second Circuit described the constructive notice needed to satisfy this condition:
[T]he transferee need not have actual knowledge of the scheme that renders the
conveyance fraudulent. Constructive knowledge of fraudulent schemes will be
attributed to transferees who were aware of circumstances that should have led
them to inquire further into the circumstances of the transaction, but who failed to
make such inquiry.
HBE Leasing, 48 F.3d at 636. The court observed that “[t]here is some ambiguity as to the
precise test for constructive knowledge in this context.” Id.
Thus, a claim for a fraudulent transfer may be alleged based on “collapsing” a series of
transactions where the transactions, taken as a whole, diminish the value of the debtor’s estate
and are marked by either a transfer made by the debtor for less than fair consideration or a
transfer made by the debtor with actual fraudulent intent, and the party from whom recovery is
sought had actual or constructive knowledge of the entire scheme that renders the transfer

6 The “mere conduit” theory is based on the premise that the conduit did not have
dominion or control over the transferred property and cannot or should not be deemed a
“transferee.” See Stratton Oakmont, 234 B.R. at 313 (“an initial transferee has dominion and
control over the res of the initial transfer, whereas a conduit has but a fleeting possessory interest
therein”).
22
fraudulent.
The Movants argue that a series of transactions may be collapsed only where the series
begins, like the “paradigm” in HBE Leasing, with a transfer by a debtor that appears to be for
fair consideration, but upon closer scrutiny provides no value to the debtor. Movants’ Mem. at
7-8. The Movants argue that “when a debtor makes a transfer of funds for no consideration
(which is avoidable as a fraudulent conveyance) and the funds are thereafter ‘washed’ through
other entities in a series of subsequent transfers, ‘collapsing’ may not be used in order to convert
a ‘subsequent transferee’ into an ‘initial transferee.’” Movants’ Mem. at 8. They argue that
under this “wash” scenario, “a claim lies against the initial recipient under § 550(a)(1) as the
‘initial transferee’ and against the subsequent recipients as the ‘mediate or intermediate
transferee’ under § 550(a)(2).” Movants’ Mem. at 8-9. The Movants note that a subsequent
recipient of a transfer may be subject to a claim under Section 550(a)(1) where the initial
recipient was a “mere conduit,”6 and suggest that where the initial transfer by a debtor is for no
consideration, only the “mere conduit” theory, not a “collapsing” theory, supports a recovery
under Section 550(a)(1) from a subsequent transferee. Movants’ Mem. at 9.
But as indicated above, HBE Leasing and other authorities do not limit recovery under a
“collapsing” theory to situations where the initial transfer in the series of transactions appears to
be, but is not, for value. Rather, these authorities establish two conditions for the statement of a
claim for collapsing a series of transactions: that the transactions, taken as a whole, are marked

23
by either a transfer made by the debtor for less than fair consideration or one made by the debtor
with actual fraudulent intent; and that the transferee from whom recovery is sought had actual or
constructive knowledge of the entire scheme. See, e.g., Orr, 991 F.2d at 35; In re Sunbeam
Corp., 284 B.R. at 370; In re Best Prods. Co., 157 B.R. 222, 229 (Bankr. S.D.N.Y. 1993). See
also pp. 19-22, supra.
And the authorities relied upon by the Movants, which arise in the context of whether an
initial transferee was a “mere conduit” that was unable to exercise dominion and control over the
assets transferred by the debtor, do not preclude the “collapsing” theory advanced by the Trustee.
See Movants’ Mem. at 8-10. Rather, they confirm that courts should look to the substance, as
well as the form, of a series of transactions to determine whether a fraudulent transfer claim has
been pleaded or proved.
For example, in Bonded Financial Services, Inc. v. European American Bank, 838 F.2d
890 (7th Cir. 1988), the trustee sought to recover $200,000, from a bank as the initial transferee.
There, the bank received a check from the debtor and followed the debtor’s instructions to
deposit the funds in the account of the debtor’s principal. Bonded Fin. Servs., Inc., 838 F.2d at
891. The debtor’s principal then applied the funds to pay down the balance of his personal loan.
Id. The court held that the debtor’s principal, not the bank, was the initial transferee, and that the
bank was not a transferee at all but merely a financial intermediary or conduit. Bonded Fin.
Servs., Inc., 838 F.2d at 893. The court reasoned that “the minimum requirement of status as a
‘transferee’ is dominion over the money or other asset, the right to put the money to one’s own
purposes. When A gives a check to B as agent for C, then C is the ‘initial transferee’; the agent
may be disregarded.” Id.

24
Similarly, in Christy v. Alexander & Alexander of N.Y. Inc. (In re Finley, Kumble,
Wagner, Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52 (2d Cir. 1997), the Second
Circuit declined to hold that the first entity to receive a transfer from a debtor is necessarily the
“initial transferee.” There, the debtor prepaid the premium for a three-year extension of its
malpractice insurance before filing for bankruptcy. In re Finley, Kumble, 130 F.3d at 53. The
court found that the premium could not be recovered from the insurance broker because, despite
the broker’s participation in the selection of the insurance carrier, the broker was a “mere
conduit” of the premium payment. In re Finley, Kumble, 130 F.3d at 58.
In IBT International, Inc. v. Northern (In re International Administrative Services, Inc.),
408 F.3d 689 (11th Cir. 2005), the trustee sought to avoid and recover funds that were
transferred more than one hundred times among twenty-three entities through multiple
transactions. IBT Int’l, Inc., 408 F.3d at 696. The trustee commenced an adversary proceeding
seeking to avoid the various transfers but did not name the initial transferees – the attorney and
firm who formulated the plan – as defendants. Id. The bankruptcy court and district court ruled
in favor of the trustee and the defendants appealed, arguing that the trustee should have first
avoided the transfer to the initial transferees. IBT Int’l, Inc., 408 F.3d at 698. The Eleventh
Circuit declined to deem the initial transferees as conduits. IBT Int’l, Inc., 408 F.3d at 706. The
court held that “Section 550(a) does not mandate a plaintiff to first pursue recovery against the
initial transferee and successfully avoid all prior transfers,” but rather “once a plaintiff proves
that an avoidable transfer exists he can then skip over the initial transferee and recover from
those next in line.” IBT Int’l, Inc., 408 F.3d at 706, 708.
Finally, in Max Sugarman Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d 1248 (1st

25
Cir. 1991), the court found that transfers to initial transferees in a “sham” transaction were void
under Section 548(a)(1), and that the subsequent transferee was the “entity for whose benefit [the
initial] transfer was made” under Section 550(a)(1). Max Sugarman Funeral Home, Inc., 926
F.2d at 1256. Alternatively, the court found that the transfers could be recovered from the
subsequent transferee under Section 550(a)(2). Id. The court concluded that “[under]
Bankruptcy Code § 550(a)(1), the trustee in bankruptcy is entitled to recover from [the
subsequent transferee] for the benefit of the debtor estates” all assets transferred through the
initial transfers and the subsequent transfers. Max Sugarman Funeral Home, Inc., 926 F.2d at
1257.
Here, the Trustee is not seeking to recover from the Defendants as initial transferees by
deeming the Controlled Entities and Eurofactors “mere conduits” under the dominion and
control test. Rather, the Trustee is seeking to collapse the series of transactions ending with
transfers to the Movants and to state a claim to recover from them under Section 550(a)(1) as
initial transferees. As the Trustee notes, “the issues of whether the transfers should be collapsed
and whether a party is a ‘mere conduit’ are different issues involving different analyses.”
Plaintiff’s Mem. at 20 n.23.
Viewed in this light, it is clear that the Trustee has adequately alleged that the
transactions at issue, taken as a whole, satisfy the first condition for collapsing – that is, they
diminished the value of the Debtor’s estate and were marked by a transfer by the Debtor for less
than fair consideration or a transfer by the Debtor with actual fraudulent intent. Accordingly, the
Movants’ challenge to the Trustee’s “collapsing” theory, and the Section 550(a)(1) claim, turns
on whether the Trustee has adequately alleged that the transactions at issue, taken as a whole,

26
satisfy the second condition for collapsing – that is, whether the Movants had actual or
constructive knowledge of the entire scheme that renders them fraudulent.
Whether the Amended Complaint Adequately Alleges that the Movants Had
Actual or Constructive Knowledge of a Scheme To Defraud the Debtor
As discussed above, to satisfy Rule 9(b)’s pleading requirements “‘a complaint must
allege with some specificity the acts constituting fraud . . . conclusory allegations that
defendant’s conduct was fraudulent or deceptive are not enough.’” In re Actrade Fin. Techs.
Ltd., 337 B.R. at 801. See pp. 9-13, supra. Fraud allegations are more liberally evaluated in
bankruptcy cases because “it is often the trustee, a third party, who is pleading fraud on
secondhand information.” In re O.P.M. Leasing Servs., Inc., 32 B.R. at 202.
Rule 8(a) is satisfied if the complaint provides “‘fair notice’ of the claim and ‘the
grounds upon which it rests.’” In re 360Networks (USA), Inc., 367 B.R. at 432. See p. 14,
supra.
The Movants argue that the Trustee’s allegations that they had actual or constructive
knowledge of the Jacobs’ fraudulent scheme to divert funds from the Debtor are “at best
speculative and conclusory and, at worst, pure fabrication.” Movants’ Mem. at 11. For these
reasons, the Movants argue that the Trustee’s claims based on their alleged knowledge of the
scheme do not satisfy Rule 9(b) or Rule 8(a) and must be dismissed.
In response, the Trustee points to several allegations in the Amended Complaint and
urges that they show that the Movants, and in particular the Individual Defendants, were aware
of and participated in the “overall scheme” to fund the construction of the Kent Avenue
Condominiums with funds that were fraudulently diverted from the Debtor. Plaintiff’s Mem. at
22.

27
A review of the Amended Complaint shows that the Trustee alleges that some $7 million
was transferred, by wire transfer or check, from the Controlled Entities to DJR Construction and
K-R Residence in some 90 transfers. See Amended Complaint ¶¶ 81-85, 90, 94. The Amended
Complaint also states that the transfers came from seven different entities, none of which was
involved in the Kent Avenue Condominiums. See Amended Complaint ¶¶ 83, 90, 94. And the
Amended Complaint states that the funds were deposited into a bank account for which the
Individual Defendants were the authorized signatories. See Amended Complaint ¶ 85. The
Amended Complaint states that the Individual Defendants’ failure to question the source of these
funds provides a basis to infer that they knowingly participated in the Jacobs’ fraudulent scheme.
Amended Complaint ¶¶ 86, 96.
The Amended Complaint further alleges that the Individual Defendants incorrectly stated
in the offering plans for the Kent Avenue Condominiums that they were the sole principals of K-
R Residence and did not disclose that Aaron Jacobs a/k/a Ari Jacobowitz was the president of K-
R Residence. Amended Complaint ¶ 100. The Amended Complaint states that this information
was withheld from the public record to make it more difficult for anyone to discover the Jacobs’
involvement with the selling agent of the condominium project. Amended Complaint ¶ 101.
The Amended Complaint states that the Individual Defendants should have questioned the
transfers of the R&D Leased Units and the R&D Units by Kent-Rush Realty for less than fair
consideration. Amended Complaint ¶¶ 112-15, 118.
And the Amended Complaint states that several of the entities involved in the
transactions and transfers, including Kent-Rush Realty, DJR Construction, K-R Residence, and
2165 K-R Realty, were formed on the same day that the agreement relating to the construction of

28
the Kent Avenue Condominiums was entered into by Chaim Dushinsky and Herman Jacobs.
Amended Complaint ¶¶ 81, 130.
Here, a review of the Amended Complaint shows that the Trustee adequately alleges that
the Movants had actual or constructive knowledge of the Jacobs’ fraudulent scheme to divert
funds from the Debtor for the purpose of funding the Kent Avenue Condominiums. The
Amended Complaint states a motive and opportunity to participate in the alleged fraud – that is,
the financial motive to profit from the construction project involving companies owned or
controlled by the Individual Defendants. 	See In re White Metal Rolling & Stamping Corp., 222
B.R. at 428.
Alternatively, the Amended Complaint states facts sufficient to “constitute strong
circumstantial evidence of conscious misbehavior or recklessness.” Id. The Amended
Complaint states that the Movants received some 90 transfers, from seven different entities that
were not known to be involved in the development or construction of the Kent Avenue
Condominiums, and that the Movants were aware of, but did not question, the transfer of
valuable condominium units by Kent-Rush Realty to K-R Residence and R&D Development for
less than fair consideration.
And similarly, the Amended Complaint meets the low threshold established by Rule 8(a)
as to these claims, because it states facts sufficient to put the Movants on notice of the claims
against them and the legal theories upon which those claims are based.
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claims for Relief under Section 550(a)(1) on grounds that the Amended Complaint
does not satisfy the requirements of Rule 9(b) and Rule 8(a) is denied. And for these same

29
reasons, the Movants’ request for dismissal of the Trustee’s Claims for Relief under Section
550(a)(1) on grounds that the Amended Complaint does not adequately allege a claim under a
“collapsing” theory is denied.
Whether the Claims Arising Out of an Alleged “Scheme” Are Barred by the
Statute of Limitations
The Movants argue that the Trustee’s fraudulent conveyance claims based on a scheme to
defraud are barred by the statute of limitations. Movants’ Mem. at 15-17. They argue that these
allegations do not relate back to the Original Complaint because the Original Complaint did not
put them on notice of the Trustee’s theory that they engaged in a scheme fraudulently to transfer
funds from the Debtor, and that the Trustee has asserted that they were participants in such a
scheme for the first time in the Amended Complaint. Id.
The Trustee asserts that his claims are timely and relate back to the Original Complaint
as required by Rule 15(c). He also argues that Rule 15(c) does not require the new claims to
have been asserted in the original pleading, because a single transaction or occurrence can give
rise to many claims. Plaintiff’s Mem. at 8. Alternatively, the Trustee argues that even if these
claims do not relate back to the Original Complaint, the doctrine of equitable tolling precludes
their dismissal. Plaintiff’s Mem. at 14. He argues that the statute of limitations may be
equitably tolled when fraud has been concealed or is of such character as to conceal itself, until
the fraud is discovered by or becomes known to the party seeking relief. Id.
The amendment of a pleading is governed by Rule 15(c), which provides that “[a]n
amendment of a pleading relates back to the date of the original pleading when . . . the claim or
defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set
forth or attempted to be set forth in the original pleading.” F ED . R. CIV . P. 15(c)(2). As the

30
Second Circuit has observed:
The purpose of “Rule 15 ‘is to provide maximum opportunity for each claim to be
decided on its merits rather than on procedural technicalities.’” . . . 	“For a newly
added action to relate back, ‘the basic claim must have arisen out of the conduct
set forth in the original pleading. . . .’” Under Rule 15, “the central inquiry is
whether adequate notice of the matters raised in the amended pleading has been
given to the opposing party within the statute of limitations by the general fact
situation alleged in the original pleading.” Where the amended complaint does
not allege a new claim but renders prior allegations more definite and precise,
relation back occurs.
In contrast, even where an amended complaint tracks the legal theory of the first
complaint, claims that are based on an “entirely distinct set” of factual allegations
will not relate back.
Slayton v. American Express Co., 460 F.3d 215, 228 (2d Cir. 2006) (citations omitted). See
Contemporary Mission, Inc. v. N.Y. Times Co., 665 F. Supp. 248, 255-56 (S.D.N.Y. 1987)
(holding that a claim relates back under Rule 15(c) if the “general fact situation alleged in the
original pleading” provided adequate notice of the new allegations), aff’d, 842 F.2d 612 (2d Cir.
1988), cert. denied sub nom. O’Reilly v. N.Y. Times Co., 488 U.S. 856 (1988); In re Chaus Sec.
Litig., 801 F. Supp. 1257, 1263 (S.D.N.Y. 1992).
In addition, the Second Circuit has found that where fraud is alleged, a new claim will
relate back if there is “sufficient commonality” between the new claim and the matters alleged in
the original pleading to avoid “unfair surprise” to the defendant. Benfield v. Mocatta Metals, 26
F.3d 19, 23 (2d Cir. 1994).
Rule 15(c) does not set a high bar for relation back, so long as the claims attempted to be
asserted in the new complaint share a reasonable measure of common ground with the
allegations of the original pleading. Rule 15(c) requires only that they arise out of the same
“conduct, transaction, or occurrence . . . attempted to be set forth” in the original complaint, but

31
those original allegations do not need to have been sufficient, on their own, to state a claim.
FED . R. CIV . P. 15(c)(2). As courts have found, “adequate notice” not of the particulars but of
the “general fact situation” is all that is required. Contemporary Mission, Inc., 665 F. Supp. at
255-56. But if there is no common ground between the allegations of the original complaint and
those of the amended pleading, then “unfair surprise” would be the result, the repose offered by
statutes of limitation would be an empty promise, and relation back must be denied. Benfield, 26
F.3d at 23.
Here, the Original Complaint alleged that “[m]illions of dollars of Allou funds were
fraudulently diverted from Allou through certain Jacobs controlled entities, as detailed herein, to
DJR with the knowledge of Ari [Jacobowitz] and DJR’s other principals, Defendants Dushinsky
and Rabinowitz.” Original Complaint ¶ 2. The Original Complaint also alleged:
Upon information and belief, [the Individual Defendants] knew that millions of
dollars were being paid directly to DJR and K-R Residence from entities other
than Kent-Rush Realty, the purported owner of the Kent-Rush Property and knew,
or should have known, that the DJR Construction Transfers, the K-R Residence
Transfers and the R&D Development Transfers were fraudulent.
Original Complaint ¶ 105. These same individuals, entities, properties, and transfers are the
basis for the allegations that the Movants participated in a scheme fraudulently to transfer funds
from the Debtor, and are sufficient to provide the Movants with notice of the “general fact
situation” that gives rise to the Trustee’s scheme allegations.
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claims for Relief under Section 550(a)(1), on grounds that the allegations of a
scheme do not relate back to the Original Complaint and are therefore barred by the statute of
limitations, is denied.

32
Whether the Amended Complaint Adequately Alleges that the Movants Are
Entities for Whose Benefit the Transfers Were Made
The Movants argue that the Trustee’s Section 550(a)(1) claim based on the theory that
they are “‘entities for whose benefit the Fraudulent Transfers [by the Debtor] were made’”
should be dismissed because under Second Circuit authority, “an ultimate recipient of funds can
never be ‘the entity for whose benefit’ the initial transfer was made.” Movants’ Mem. at 10.
The Trustee responds that DJR Construction was an entity for whose benefit the transfers
were made because it was the general contractor for the Kent Avenue Condominiums and
received payments in that capacity. Plaintiff’s Mem. at 26. The Trustee similarly argues that
Kent-Rush Realty was an entity for whose benefit the transfers were made because it was
required to provide financing for the construction of the Kent Avenue Condominiums and like
DJR Construction, received funds which it used in that capacity. Plaintiff’s Mem. at 26-27. For
these reasons, the Trustee argues, these entities were each an “‘entity for whose benefit’ the
initial transfer[s] were made as referred to in 11 U.S.C. § 550(a)(1).” Plaintiff’s Mem. at 26.
See Amended Complaint ¶¶ 81, 83, 90.
Under Section 550(a)(1), a trustee may recover an avoided transfer from “the initial
transferee of such transfer or the entity for whose benefit such transfer was made.” 11 U.S.C.
§ 550(a)(1). “Section 550(a)(1) groups initial transferees with ‘entities for whose benefit such
transfer was made’ and subjects both groups to strict liability.” In re Finley Kumble, 130 F.3d at
57. The Amended Complaint states:
As a result of the fraudulent scheme, the foregoing transactions should be
collapsed and each of the Defendants should be deemed to be initial transferees of
the Fraudulent Transfers, or entities for whose benefit the Fraudulent Transfers
were made, pursuant to Bankruptcy Code § 550(a)(1).

33
Amended Complaint ¶ 132.
In Stratton Oakmont, the court described the typical relationship among an initial
transferee, a subsequent transferee, and an entity for whose benefit a transfer is made:
The quintessential example of the entity who benefits from the initial transfer is a
guarantor of the debtor. . . . He or she is relieved of the obligation to pay the
lender – which is the benefit – while the lender receives the money. As a general
rule, initial transferees and entities for whose benefit the initial transfer was made
are mutually exclusive. . . . The entity for whose benefit the initial transfer was
made is also distinguished from a subsequent transferee (§ 550(a)(2)) because the
former must be the intended beneficiary of the initial transfer and not someone
who either benefits from the subsequent transfer of the initially transferred money
or property, or benefits by happenstance from the initial transfer. . . .
Stratton Oakmont, 234 B.R. at 314. The court also observed:
At this juncture, all the Trustee needs to demonstrate is a possible legal theory
such that he is allowed to go forward and put on evidence. Although this benefit
theory is not explicitly stated in the Complaint, recovery under § 550(a) is not
subject to a particularized pleading standard and I am allowed to consider theories
that are not articulated, so long as there are facts alleged to support them.
Stratton Oakmont, 234 B.R. at 317-18. See Bonded Fin. Servs., Inc., 838 F.2d at 895 (“The
paradigm ‘entity for whose benefit such transfer was made’ is a guarantor or debtor – someone
who receives the benefit but not the money.”).
Other courts have found that, in the appropriate circumstance, a subsequent transferee
may be an “entity for whose benefit [the initial] transfer was made.” 11 U.S.C. § 550(a)(1). For
example, in Gallant v. Kanterman (In re Kanterman), 97 B.R. 768 (Bankr. S.D.N.Y. 1989), aff’d
on other grounds, 108 B.R. 432 (S.D.N.Y. 1989), the court found:
[I]f the first transfer would not have been made but in contemplation of another
previously agreed and nearly contemporaneous transfer, treating each stage as
merely steps in a single transfer accords with and gives meaning to Congress’ use
of the phrase “entity for whose benefit such transfer was made” in § 550(a)(1). In
such an instance, the first step is merely preliminary to the second and the first
recipient is merely a conduit for the transfer of property. The second recipient is

34
not a truly subsequent transferee.
In re Kanterman, 97 B.R. at 778.
Here, the Trustee seeks to assert a Section 550(a)(1) claim on these grounds against two
of the Movants, DJR Construction and Kent-Rush Realty. See Plaintiff’s Mem. at 26-27. The
Amended Complaint states that these Defendants received or made payments in connection with
agreements that were entered into in connection with the Kent Avenue Condominiums. While
the agreements alleged in the Amended Complaint may have little in common with a guaranty of
a debtor’s obligation, which is the “quintessential” or paradigmatic example cited by certain
courts that have considered the issue, neither Section 550(a)(1) nor the decisions interpreting it
rule out the possibility that these relationships could give rise to liability under this theory.
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claims for Relief under Section 550(a) on grounds that the Movants are not entities
for whose benefit the transfers at issue were made is denied.
Whether the Amended Complaint States a Claim for Recovery from the Movants
as Immediate or Mediate Transferees of an Initial Transferee
As an alternative theory of relief, the Trustee seeks to recover the alleged fraudulent
transfers from the Movants as immediate or mediate transferees of an initial transferee under
Section 550(a)(2) of the Bankruptcy Code. See Amended Complaint ¶¶ 1-6, 27-30, 45-46, 48,
51-57, 67-69, 80-96, 98-131. The Trustee alleges that the transfers at issue were made in a series
of transfers from the Debtor to the Controlled Entities, and then to the Movants, and argues that
the Amended Complaint sets forth these transfers and the Movants’ roles in them.
The Movants argue that the Trustee’s Claims for Relief against them as subsequent
transferees under Section 550(a)(2) should be dismissed because the Amended Complaint does

35
not adequately trace the funds allegedly received by the Movants to the initial transfers by the
Debtor. Movants’ Mem. at 18-19.
As discussed above, Section 550(a)(2) of the Bankruptcy Code provides that a transfer
avoided under Sections 544 or 548 can be recovered from the immediate or mediate transferee of
the initial transfee. 11 U.S.C. § 550(a)(2). In IBT International, Inc. v. Northern (In re
International Administrative Services, Inc.), 408 F.3d 689 (11th Cir. 2005), the court described
the plaintiff’s burden in establishing the tracing element of a Section 550(a)(2) claim:
In an action seeking recovery, the plaintiff has the burden of tracing funds it
claims to be property of the estate. . . . Although we agree with this proposition,
it is also true that proper tracing does not require dollar-for-dollar accounting. . . .
The bankruptcy court determined that the Trustee successfully proved by a
preponderance of the evidence that the $1.050 million transferred to [the
defendant] from [intermediary] accounts, originated solely with [the debtor]. We
cannot find that conclusion clearly erroneous. [The debtor’s principal and its
counsel] perpetrated a fraud that can only be described as massive. It is not fatal
to the Trustee’s case that dollar for dollar, the exact funds cannot be traced.
In re Int’l Admin. Servs., Inc., 408 F.3d at 708.
That is, in order to prove a Section 550(a)(2) claim, a plaintiff must carry its burden to
establish that the funds at issue are property of the estate – but this burden is not so onerous as to
require “dollar-for-dollar accounting” of “the exact funds” at issue. See id. And similarly, in
order to state a Section 550(a)(2) claim, a plaintiff must allege sufficient facts to show, if proved,
that the funds at issue originated with the debtor. But if dollar-for-dollar accounting is not
required at the proof stage, then surely it is not required at the pleading stage either.
Here, the Trustee alleges that funds were transferred from the Debtor to the Controlled
Entities and Eurofactors, and those funds were subsequently transferred to the Defendants to
fund the purchase of the Kent-Rush Property and the construction of the Kent-Rush

36
Condominiums. Specifically, the Amended Complaint states:
Upon information and belief, from December 1998 through February 2003, at
least tens of millions of dollars were fraudulently diverted from Allou to the
Controlled Entities. As set forth below, a portion of these fraudulently diverted
funds was transferred from the Controlled Entities to, or for the benefit of, the
Defendants and used to purchase the Kent Avenue Property and construct the
Kent Avenue Condominiums.
. . .
The funds transferred by the Controlled Entities and Eurofactors in connection
with the Kent Avenue Condominiums were preceded by fraudulent transfers of
funds from Allou in amounts sufficient to cover the transfers by the Controlled
Entities and Eurofactors.
Amended Complaint ¶¶ 53, 56.
More specifically, the Amended Complaint describes several transfers from the Debtor to
Eurofactors and the Controlled Entities and states that those funds were used to purchase the
Kent Avenue Property and construct the Kent Avenue Condominiums, all to the benefit of the
Defendants to varying degrees. See Amended Complaint ¶¶ 67-79. In addition, the Amended
Complaint describes the adversary proceedings commenced by the Trustee against the
Controlled Entities and Eurofactors to avoid and recover fraudulent transfers from the Debtor,
and states that some or all of these funds were transferred to the Defendants here. See Amended
Complaint ¶¶ 58-61, 74, 76, 82, 84, 91, 93, 95. And the Amended Complaint identifies the date
and amounts of the transfers from the Controlled Entities to several of the Defendants, including
DJR Construction and K-R Residence. See Amended Complaint ¶¶ 83 (DJR Construction); 90
(DJR Construction); 94 (K-R Residence).
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claims for Relief under Section 550(a)(2) on grounds that the Amended Complaint

37
does not adequately trace the funds that they allegedly received to the Debtor is denied.
Whether the Amended Complaint States a Claim Against the Individual
Defendants for Recovery of the Individual Transfers
The Trustee seeks to recover from the Individual Defendants “millions of dollars” in
unspecified fraudulent transfers. Amended Complaint ¶ 119. The Trustee reasons that the funds
transferred from the Debtors “inured to the personal benefit of [the Individual Defendants]
because they would otherwise have had to fund the costs of development themselves.” Id.
The Movants seek dismissal of the claims against the Individual Defendants on several
grounds. The Movants argue that “with the exception of the conclusory claim that Dushinsky
and Rabinowitz received more than $1 million from K-R Residence, none of the other
allegations of fraudulent transfers against Dushinsky and Rabinowitz ‘identify the particular
interests transferred, and they therefore do not give defendants adequate notice of the transfers
challenged.’” Movants’ Mem. at 26 (quoting Gindi v. Silvershein, 1996 WL 194304, at *2
(S.D.N.Y. 1996)). For these and other reasons, the Movants argue that the Trustee’s claims do
not satisfy the pleading requirements of Rule 8(a) and 9(b), and are barred by the statute of
limitations contained in Section 546 of the Bankruptcy Code because they do not relate back to
the Original Complaint. Movants’ Mem. at 19-26.
As discussed above, Rule 9(b) requires that “‘a complaint must allege with some
specificity the acts constituting fraud . . . conclusory allegations that defendant’s conduct was
fraudulent are not enough.’” In re Actrade Fin. Techs. Ltd., 337 B.R. at 801 (quoting Odyssey
Re (London) Ltd., 85 F. Supp. 2d at 293). This rule is applied more liberally in bankruptcy
cases, because the trustee may be required to “[plead] fraud on secondhand information.” In re
O.P.M. Leasing Servs., Inc., 32 B.R. at 202. See pp. 9-13, supra. Where allegations are based

38
on information and belief, “a complaint must adduce specific facts supporting a strong inference
of fraud or it will not satisfy even a relaxed pleading standard.” Wexner v. First Manhattan Co.,
902 F.2d 169, 172 (2d Cir. 1990) (citations omitted).
And Rule 8(a) requires a plaintiff to plead enough to “‘give the defendant fair notice of
what the . . . claim is and the grounds upon which it rests.’” Erickson, 127 S. Ct. at 2200
(quoting Bell Atlantic, 127 S. Ct. at 1964). It “does not require a plaintiff to plead the legal
theory, facts, or elements underlying his claim.” In re Methyl Tertiary Butyl Ether (“MTBE”)
Prods. Liability Litig., 457 F. Supp. 2d at 303-04 (quotations and citations omitted). See p. 14,
supra.
A review of the Amended Complaint shows that the Trustee has not identified any
specific transfer from the Debtor or a Controlled Entity to either of the Individual Defendants.
In contrast to the allegations concerning transfers to other Movants, the Amended Complaint
does not identify the source, dates, or amounts of the transfers that the Trustee claims may be
recovered, under Section 550(a)(1) or Section 550(a)(2), from the Individual Defendants.
Rather, the Amended Complaint states that the Individual Defendants personally received
“millions of dollars as a result of their interest in DJR, K-R Residence and R&D,” and that
“every single dollar transferred from Allou inured to the personal benefit of [the Individual
Defendants] because they would otherwise have had to fund the costs of development
themselves as DJR Construction and K-R Residence had no independent and legitimate means of
income.” Amended Complaint ¶ 119. The Amended Complaint also states that “[u]pon
information and belief, in excess of $1,000,000, was received by K-R Residence pursuant to the
K-R Residence Contract and ultimately paid to Dushinsky and Rabinowitz” and “[a]ll of the

7 The Movants also argue that the Trustee’s claims against the Individual Defendants are
barred by the statute of limitations. Movants’ Mem. at 19-21. The Trustee responds that the
allegations of the Original Complaint put the Individual Defendants on notice of the nature of the
claims against them, and also that the statute of limitations as to Section 550(a)(2) has not run.
Plaintiff’s Mem. at 10-14. See pp. 29-32, supra. The Court need not address whether the
Trustee’s allegations against the Individual Defendants relate back to the Original Complaint
because those allegations are not sufficient to state a claim for relief.
39
Individual Transfers represent proceeds derived from the Fraudulent Transfers.” Amended
Complaint ¶¶ 105, 120. But these allegations do not set forth the necessary vital statistics – the
who, when, and how much – of the transfers “in excess of $1,000,000” to be recovered.
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claims for Relief against the Individual Defendants on grounds that the Amended
Complaint does not adequately identify the transfers to be avoided under Section 550(a)(1) or
Section 550(a)(2) is granted. 7
Whether the Amended Complaint States a Claim for Recovery from Kent-Rush
Realty for the Bedford Wall Transfers
The Trustee seeks to avoid and recover the value of the Bedford Wall Transfers from
Kent-Rush Realty, 2165 K-R Realty Corp., Bedford Wall Realty, 724 Bedford, and Tereza under
Sections 273, 274, 275, 276, and 276(a) of the DCL, as initial transferees under Section
550(a)(1), or in the alternative, as immediate or mediate transferees of an initial transferee under
Section 550(a)(2). See Amended Complaint ¶¶ 278-99.
The Movants seek to dismiss these claims against Kent-Rush Realty on grounds that the
Amended Complaint does not adequately state a claim that Kent-Rush Realty was an initial
transferee, or an entity for whose benefit the alleged fraudulent transfers were made, or an
immediate or mediate transferee of an initial transferee, in connection with the Bedford Wall

40
Transfers. Movants’ Mem. at 27-28. More generally, the Movants argue that the Trustee does
not allege that the Bedford Wall Transfers provided “any benefit whatsoever” to Kent-Rush
Realty. Movants’ Mem. at 27. And the Movants also argue that the claims against Kent-Rush
Realty are duplicative of other claims asserted in the Amended Complaint. Movants’ Reply
Mem. at 20.
The Trustee argues:
Those claims are based on allegations that Kent Rush Realty executed a $2
million mortgage in favor of 2165 K-R (the “K-R Mortgage”) in consideration for
a purported loan from 2165 K-R to purchase the Kent Rush Property when, in
fact, Allou, not 2165 K-R, was the source of the funds that were loaned. The K-R
Mortgage, which should have been satisfied in September of 2000 and the
proceeds repaid to Allou in connection with the Construction Loan obtained by
Kent Rush Realty, was instead released and “spread” to cover a different property
(the “Bedford Wall Property”), and thereafter assigned to Tereza, a Jacobs-
affiliated entity. . . . [T]he result of these machinations was “to substitute the
Bedford Wall Property for the Kent Rush Property in the K-R Mortgage,” and
“[t]he K-R Mortgage was, and still is, subject to Allou’s interest therein as the
actual source of the monies that funded the K-R Mortgage.”
Plaintiff’s Mem. at 34 (quoting Amended Complaint ¶ 123).
The Trustee argues that when Kent-Rush Realty executed a mortgage and granted a lien
on the Kent-Rush Property, it participated in a “chain of transfers” that had the effect of
transferring property that was fraudulently acquired with the Debtor’s assets. “Thus, Kent-Rush
Realty is a transferee in the chain of the Bedford Wall Transfers . . . .” Plaintiff’s Mem. at 35.
Here, the Trustee seeks to recover the value of the lien interest that Kent-Rush Realty
placed on property that was, he alleges, acquired with funds that were fraudulently transferred
from the Debtor. It may well be that the Trustee will not be able to carry the burden of proving
all of the elements of a claim for recovery against Kent-Rush Realty under Section 550(a)(1) or
Section 550(a)(2), or that relief under these claims will be duplicative of other relief. But here

41
too, neither these Bankruptcy Code sections nor the decisions interpreting them preclude the
possibility that the Trustee may be able to succeed on this claim.
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claims for Relief against Kent-Rush Realty arising out of the Bedford Wall
Transfers is denied.
The Forty-Fifth Claim for Relief – Common Law Fraud
The Forty-Fifth Claim for Relief asserts common law fraud claims against K-R
Residence, K.E.R.U. Realty Corp., 2165 K-R Realty, Kent-Rush Realty, DJR Construction,
R&D Development, Aaron Jacobs a/k/a Ari Jacobowitz, the Individual Defendants and the
Bedford Wall Defendants. Specifically, the Trustee alleges:
Upon information and belief, the Kent Rush Defendants, DJR, R&D, Ari,
Dushinsky, Rabinowitz, and the Bedford Wall Defendants knew that the Jacobs
were fraudulently diverting funds from Allou to pay for the Kent Rush Property
and for the construction of the Kent Avenue Condominiums.
By reason of the foregoing, the Kent Rush Defendants, DJR, R&D, Ari,
Dushinsky, Rabinowitz, and the Bedford Wall Defendants are liable to the
Trustee for money damages in an amount as yet undetermined but in no event less
than $15,265,000, plus appropriate interest thereon.
Amended Complaint ¶¶ 300, 301.
The Movants argue that this claim should be dismissed because it does not plead fraud
with particularity and does not specify the type of fraud that the Trustee is alleging. Movants’
Mem. at 28. They argue that the Trustee’s conclusory allegations found in other parts of the
Amended Complaint about an alleged scheme do not comply with Rules 8(a) or 9(b), and that
the Trustee does not describe the Movants’ role in the alleged scheme. Movants’ Mem. at 28.
The Trustee argues that “[a] fraud claim need not be based upon a misrepresentation or

42
omission.” Plaintiff’s Mem. at 28. The Trustee further claims that the “allegations of Movants’
knowledge and participation sufficiently set forth a claim that Movants ‘schemed’ to
fraudulently divert Allou’s funds,” and that such allegations state “a valid claim for common law
fraud.” Id.
The Trustee also argues that under McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000),
“[a] fraud claim need not be based upon a misrepresentation or omission.” Plaintiff’s Mem. at
28. In McClellan, the Seventh Circuit analyzed the term “actual fraud” in Section 523(a)(2)(A)
of the Bankruptcy Code, which concerns the dischargeability of a debt obtained by “actual
fraud,” and held that “section 523(a)(2)(A) is not limited to fraudulent misrepresentation.”
McClellan, 217 F.3d at 893. The Seventh Circuit found that “actual fraud,” for purposes of
Section 523(a)(2)(A), encompasses “any deceit, artifice, trick, or design involving direct and
active operation of the mind, used to circumvent and cheat another.” Id.
To state a claim for fraud under New York law, a plaintiff must allege that ‘“(1) the
defendant made a material false representation, (2) the defendant intended to defraud the plaintiff
thereby, (3) the plaintiff reasonably relied upon the representation, and (4) the plaintiff suffered
damage as a result of such reliance.’” Eastman Kodak Co. v. Wachovia Bank Nat’l Ass’n, 2007
WL 2406919, at *4 (W.D.N.Y. 2007) (quoting Bridgestone/Firestone, Inc. v. Recovery Credit
Servs., 98 F.3d 13, 19 (2d Cir. 1996)).
As noted above, the Court has already determined that the Trustee has adequately alleged
“facts that give rise to a strong inference of fraudulent intent” by the Movants, by alleging both
motive and opportunity to participate in the alleged fraud and “circumstantial evidence of
conscious misbehavior or recklessness.” In re Enron, 2006 WL 2400083, at *8. See pp. 26-28,

43
supra. And for that reason, the Trustee’s Section 550(a)(1) claim based on a “collapsing” theory
has been sustained. See pp. 28-29, supra. But to state a fraud claim under New York law, the
Trustee must also allege that the Debtor reasonably relied on a misrepresentation to its detriment.
See Eastman Kodak Co., 2007 WL 2406919, at *4.
Here, the Court is not evaluating the sufficiency of pleading “actual fraud” under Section
523(a)(2)(A) of the Bankruptcy Code. Cf. Schneiderman v. Bogdanovich (In re Bogdanovich),
292 F.3d 104, 111 (2d Cir. 2002). Nor does it appear that courts have applied the standard for
establishing this element of a dischargeability claim to the question of whether all of the
elements of a common law fraud claim under New York law have been alleged, including
whether a material false representation must be made.
Similarly, the Trustee’s allegations that the Movants were aware of and participated in
the overall scheme to fund the construction of the Kent Avenue Condominiums with funds that
were fraudulently diverted from the Debtor do not serve to sustain his common law fraud claim.
While those allegations are sufficient to establish, at the pleading stage, one of the elements of
the Trustee’s “collapsing” theory of recovery under Section 550(a)(1) of the Bankruptcy Code,
they do not establish a claim for common law fraud. See pp. 26-28, supra. Rather, each of the
elements of a fraud claim under New York law must be pleaded in order for the Trustee’s
common law fraud claim to be sustained.
Here, a review of the Amended Complaint shows that it does not state that the Movants
made a material false representation to the Debtor, or that the Debtor relied to its detriment on
such a misrepresentation. That is, the Trustee has not adequately alleged at least two of the four
elements of a common law fraud claim. Therefore, the Amended Complaint does not

44
sufficiently plead facts that allege a claim for relief based upon common law fraud under New
York law.
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claim for Relief for common law fraud on grounds that the Amended Complaint
does not state the elements of the claim is granted.
The Forty-Sixth Claim for Relief – Conspiracy To Commit Fraudulent Conveyances
The Forty-Sixth Claim for Relief asserts a claim for conspiracy to commit fraudulent
conveyances against Aaron Jacobs a/k/a Ari Jacobowitz and the Individual Defendants.
Specifically, the Trustee alleges:
Beginning [in] or about late December, 1998, an agreement or understanding was
entered into between and among Herman, and Defendants, Ari, Dushinsky and
Rabinowitz pursuant to which Allou funds would be fraudulently conveyed
through the Controlled Entities and Eurofactors to entities formed by them,
namely, Kent Rush Realty, DJR and K-R Residence.
Herman and Defendants Ari, Dushinsky and Rabinowitz are co-conspirators who
knew that the funds were being fraudulently conveyed from Allou and that no
consideration was given by Kent Rush Realty, DJR and K-R Residence to Allou
for any of these funds.
By reason of the foregoing, Ari, Dushinsky and Rabinowitz are liable to the
Trustee for money damages in an amount as yet undetermined but in no event less
than $15,265,000 plus appropriate interest thereon.
Amended Complaint ¶¶ 302-04.
The Movants argue that this claim should be dismissed under Rule 9(b), among other
grounds, because it is conclusory and lacks the factual allegations necessary to plead a
conspiracy claim. Movants’ Mem. at 28-29; Movants’ Reply Mem. at 17-18. The Movants also
argue that the conspiracy claim should be dismissed because it is duplicative of the other claims
against the Individual Defendants set forth in the Amended Complaint. Movants’ Mem. at 29.

45
The Trustee argues that the conspiracy claims should be measured under the more liberal
pleading rules of Rule 8(a), and that the Amended Complaint adequately sets forth the elements
of a claim against the Individual Defendants for conspiracy to commit fraudulent conveyances.
Plaintiff’s Mem. at 29-30. The Trustee also argues that the Amended Complaint provides notice
of the basis for the Trustee’s claims, and states facts from which the Individual Defendants’
intentional participation in the conspiracy may be inferred. Plaintiff’s Mem. at 30. The Trustee
further argues that the Movants’ argument that the conspiracy claims are duplicative of other
claims against the Individual Defendants is premature because they have not yet served an
answer, and adds that pleading in the alternative is allowed under Rule 8(e). Id.
Under New York law, a claim for civil conspiracy to commit a tortious act may not be
asserted in a vacuum. Rather, “the claim is available ‘only if there is evidence of an underlying
actionable tort.’” UniCredito Italiano SpA v. JPMorgan Chase Bank, 288 F. Supp. 2d 485, 504
(S.D.N.Y. 2003) (quoting Missigman v. USI Northeast, Inc., 131 F. Supp. 2d 495, 517 (S.D.N.Y.
2001)). See Stratton Oakmont, 234 B.R. at 331 (a conspiracy claim “‘is merely the string
whereby the plaintiff seeks to tie together those who, acting in concert, may be held responsible
in damages for any overt acts’”) (quoting Powell v. Kopman, 511 F. Supp. 700, 704 (S.D.N.Y.
1981)); Alexander & Alexander of N.Y., Inc. v. Fritzen, 68 N.Y.2d 968, 969, 510 N.Y.S.2d 546,
547, 503 N.E.2d 102, 103 (1986) (conspiracy allegations “are permitted only to connect the
actions of separate defendants with an otherwise actionable tort.”).
Courts in this Circuit have recognized that “[w]here there is an underlying tort, the
elements of civil conspiracy are: ‘(1) the corrupt agreement between two or more persons, (2) an
overt act, (3) their intentional participation in the furtherance of a plan or purpose, and (4) the

46
resulting damages.’” Pope v. Rice, 2005 WL 613085, at *13 (S.D.N.Y. 2005) (quoting Kashi v.
Gratsos, 790 F.2d 1050, 1055 (2d Cir. 1986)). See Eastman Kodak Co. v. Camarata, 2006 WL
3538944, at *17 (W.D.N.Y. 2006). And courts in this Circuit have similarly recognized that a
claim for conspiracy to commit a fraudulent conveyance may be stated under New York law.
See, e.g., UFCW Local 174 Commer. Health Care Fund v. Homestead Meadows Foods Corp.,
2005 U.S. Dist. LEXIS 25922, at *6 (S.D.N.Y. 2005) (finding that the plaintiff stated a claim for
conspiracy to commit fraudulent conveyance).
To the extent the claim sounds in fraud, the heightened pleading standard of Rule 9(b)
applies. See Pereira v. Binet (In re Harvard Knitwear, Inc.), 153 B.R. 617, 628 n.3 (Bankr.
E.D.N.Y. 1993) (“The presence of fraud as part of a conspiracy charge brings the complaint
under the requirement of Fed. R. Civ. P. 9(b) that the circumstances constituting fraud be stated
with particularity.”).
Here, the Trustee alleges that the Individual Defendants entered into “an agreement or
understanding” under which “Allou funds would be fraudulently conveyed through the
Controlled Entities and Eurofactors to . . . Kent Rush Realty, DJR and K-R Residence.”
Amended Complaint ¶ 302. The Trustee also alleges that the Individual Defendants “knew that
the funds were being fraudulently conveyed from Allou.” Amended Complaint ¶ 303. These
allegations of an agreement or understanding are supported by the Trustee’s allegations that the
Movants had actual or constructive knowledge of the Jacobs’ fraudulent scheme to divert funds
from the Debtor for the purpose of funding the Kent Avenue Condominiums. See pp. 26-28,
supra. The Amended Complaint also states facts sufficient to show that the Debtor suffered
damages resulting from the alleged conspiracy.

47
But these allegations are not enough to establish all of the elements of the Trustee’s
conspiracy claim. In particular, a review of the Amended Complaint shows that it does not
contain allegations sufficient to state that the Individual Defendants undertook an “overt act” in
furtherance of the conspiracy. Such allegations must do more than show that the alleged
conspirator was aware of the fraudulent conveyance and undertook an overt act as a consequence
of receiving the transfer. Viewed another way, in order to state a claim for conspiracy to commit
a fraudulent conveyance, a plaintiff must allege facts showing that the conspirator committed an
overt act that furthered the conveyance itself.
And even if the Amended Complaint set forth “independent overt acts undertaken in
pursuit of [the] conspiracy,” where those overt acts form the basis for other claims for relief, the
conspiracy claim is duplicative of those claims and should be dismissed. Stratton Oakmont, 234
B.R. at 332. As Chief Judge Brozman found:
Since New York courts do not recognize an independent cause of action for civil
conspiracy, the [conspiracy claim] can lie only if it alleges, in addition to the
conspiracy, independent overt acts undertaken in pursuit of that conspiracy. Here,
the overt acts alleged by the Trustee . . . are already embodied in the Complaint’s
[other] Claims for Relief asserted against [these defendants]. Accordingly, the
[conspiracy] Cause of Action is duplicative of those claims and should be
dismissed.
Id. (citing cases). See Briarpatch Ltd. v. Geisler Roberdeau, Inc., 2007 WL 1040809, at *26
(S.D.N.Y. 2007) (“where the acts underlying a claim of conspiracy are the same as those
underlying other claims alleged in the complaint, the conspiracy claim is dismissed as
duplicative”). Consistent with this notion, it is difficult to see how recovery by the Trustee on a
well-pleaded conspiracy claim would not be entirely duplicative of relief available to the Trustee
on his other claims.

48
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claim for Relief against the Individual Defendants for conspiracy to commit
fraudulent conveyances on grounds that the Amended Complaint does not state the elements of
the claim is granted.
The Forty-Eighth Claim for Relief – Conversion
The Forty-Eighth Claim for Relief asserts a claim against the Defendants for conversion.
Specifically, the Trustee alleges that the “Defendants converted the assets of Allou that were
used to pay for the Kent-Rush Property and construction of the Kent Avenue Condominiums,”
and that the Defendants “are liable to the Trustee for money damages in an amount as yet
undetermined but in no event less than $15,265,000 plus appropriate interest thereon.” Amended
Complaint ¶¶ 308, 309. The Trustee also alleges that “[a]s a result of the fraudulent scheme
described above, the Defendants are estopped from asserting that any portion of the claim for
conversion is barred by the statute of limitations.” Amended Complaint ¶ 310.
The Movants argue that this claim should be dismissed on grounds that it is time-barred
under Section 214 of the New York Civil Practice Law and Rules. Movants’ Mem. at 29.
Section 214 provides that a conversion claim must be commenced within three years of the date
of conversion. N.Y. C.P.L.R. 214. The Movants also argue that the Trustee has not set forth
sufficient facts by affidavit to show that the doctrine of equitable tolling should apply. Movants’
Reply Mem. at 19.
The Trustee argues that $6,151,000, of the alleged converted funds were transferred
within the three-year limitations period, so that this portion of his conversion claims is not time-
barred under any circumstances. Plaintiff’s Mem. at 31. The Trustee also argues that his claim

49
to recover the remaining $9,114,000, of the alleged converted funds is not time-barred under the
doctrine of equitable tolling. Plaintiff’s Mem. at 32. The Trustee further argues that under
General Stencils, Inc. v. Chiappa, 18 N.Y.2d 125, 272 N.Y.S.2d 337, 219 N.E.2d 169 (1966),
courts may bar the assertion of a statute of limitations defense where the defendants’ affirmative
wrongdoing caused a delay between the accrual of the cause of action and the institution of the
legal proceeding. Plaintiff’s Mem. at 31-32. For these reasons, he argues that equitable tolling
should apply and the Movants should be estopped from asserting a statute of limitations defense
as to any portion of the converted funds. Id.
The application of the doctrine of equitable tolling generally turns on questions of fact
that are difficult to resolve on a motion to dismiss. As one court found, “[g]enerally, the
applicability of equitable tolling depends on matters outside the pleadings, so it is rarely
appropriate to grant a Rule 12(b)(6) motion to dismiss (where review is limited to the complaint)
if equitable tolling is at issue.” Hoffkins v. Orleans BOCES, 2007 WL 1288210, at *2
(W.D.N.Y. 2007).
Here, a review of the Amended Complaint shows that the Trustee has alleged sufficient
facts, taken as a whole, adequately to state the grounds for application of the doctrine of
equitable tolling. That is, the Amended Complaint states that “[a]s a result of the fraudulent
scheme described above, the Defendants are estopped from asserting that any portion of the
claim for conversion is barred by the statute of limitations.” Amended Complaint ¶ 310. And
for the reasons described above, the Trustee has adequately alleged that the Movants had actual
or constructive knowledge of the Jacobs’ fraudulent scheme to divert funds from the Debtor for
the purpose of funding the Kent Avenue Condominiums. See pp. 26-28, supra.

50
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claim for Relief for conversion is denied.
The Forty-Ninth Claim for Relief – Constructive Trust
The Forty-Ninth Claim for Relief seeks the imposition of a constructive trust against all
of the Defendants. Specifically, the Trustee alleges:
The acquisition of the Kent Avenue Property and the construction of the Kent
Avenue Condominiums was accomplished, in part, through the fraudulent
diversion of monies of Allou and in breach of the Jacobs’ fiduciary obligations to
Allou and its creditors as officers and directors of Allou.
As set forth above, each of the Defendants was unjustly enriched as a result of the
Transfers and may not in equity and good conscience retain the benefit of the
Transfers.
The Trustee has no adequate remedy at law.
By reason of the foregoing, the Trustee is entitled to the imposition of a
constructive trust upon the Transfers, and all of the monies, rents, income,
proceeds and profits heretofore or hereafter received by the Defendants in
connection therewith for the full amount of their respective liability to the Trustee
as set forth above.
Amended Complaint ¶¶ 311-14.
The Movants argue that the constructive trust claim in the Amended Complaint should be
dismissed because the Trustee has not alleged three of the four elements necessary to establish a
claim for the imposition of a constructive trust. Movants’ Mem. at 30. Here, the Movants argue,
only the final element of unjust enrichment has been stated. Id.
The Trustee argues that the allegations in the Amended Complaint that the Movants were
unjustly enriched through their use of the Debtor’s assets to finance the construction of the Kent
Avenue Condominiums are sufficient to support his constructive trust claim. Plaintiff’s Mem. at
32. Imposition of a constructive trust, he argues, is flexible and even “limitless,” and courts will

51
effect such relief whenever necessary to satisfy the demands of justice. Id.
The imposition of a constructive trust under New York law generally requires the
following elements to be shown: “(1) a confidential or fiduciary relationship; (2) a promise,
express or implied; (3) a transfer of the subject res made in reliance on that promise; and (4)
unjust enrichment.” Superintendent of Ins. for the State of N.Y. v. Ochs (In re First Cent. Fin.
Corp.), 377 F.3d 209, 212 (2d Cir. 2004).
A “constructive trust is an equitable remedy, not a legal relationship.” ESI, Inc. v.
Coastal Power Prod. Co., 995 F. Supp. 419, 436 (S.D.N.Y. 1998). New York law provides that
a constructive trust:
arises against an entity that, by fraud (actual or constructive), by duress or by
abuse of confidence, or by commission of a wrong or other form of
unconscionable conduct, artifice, concealment, or questionable means, either has
obtained or holds the legal right to property which in equity and in good
conscience it ought not to hold and enjoy.
Tese-Milner v. TPAC, LLC (In re TICKETPLANET.COM), 313 B.R. 46, 68 (Bankr. S.D.N.Y.
2004).
The imposition of a constructive trust is an equitable and flexible remedy. For these
reasons, courts have imposed constructive trusts even where one or more of these elements is
absent, if other circumstances signal that a constructive trust is necessary to avoid a manifestly
inequitable result. See, e.g., Koreag, Controle et Revision S.A. v. Refco F/X Assocs. (In re
Koreag, Controle et Revision S.A.), 961 F.2d 341, 353 (2d Cir. 1992) (“the absence of any one
factor will not itself defeat the imposition of a constructive trust when otherwise required by
equity”); American Motor Club, Inc. v. Neu (In re American Motor Club, Inc.), 109 B.R. 595,
599 (Bankr. E.D.N.Y. 1990) (“the application of a constructive trust is flexible and limitless and

52
courts will effect such relief, ‘whenever necessary to satisfy the demands of justice’”) (citation
omitted)).
But as noted by the New York Court of Appeals, “though as an equitable doctrine its
application to particular circumstances is susceptible of some flexibility, to establish a
constructive trust there must be provided: (1) a confidential or fiduciary relation, (2) a promise,
express or implied, (3) a transfer made in reliance on that promise, and (4) unjust enrichment.”
Bankers Sec. Life Ins. Soc’y v. Shakerdge, 49 N.Y.2d 939, 940, 428 N.Y.S.2d 623, 623, 406
N.E.2d 440, 440 (1980).
Here, it has already been determined that the Amended Complaint states a claim for
unjust enrichment, so that element of the Trustee’s claim for a constructive trust, as the Movants
acknowledge, has been alleged. But a review of the Amended Complaint shows that the Trustee
has not adequately alleged the existence of a confidential or fiduciary relationship between the
Movants and the Debtors. Nor has the Trustee adequately alleged the existence of a promise,
express or implied, by the Movants to the Debtor, or a transfer by the Debtor to the Movants
made in reliance on that promise.
For these reasons, and based on the entire record, the Movants’ request for dismissal of
the Trustee’s Claim for Relief against the Defendants for the imposition of a constructive trust
on grounds that the Amended Complaint does not state the elements of the claim is granted.
CONCLUSION
For the reasons stated herein, and based on the entire record, the Motion to Dismiss the
Amended Complaint is granted in part to the extent that (i) the claims under Section 550(a)(1)
and 550(a)(2) against the Individual Defendants Chaim Dushinsky and Isaac Rabinowitz are

53
dismissed; (ii) the common law fraud claims against the Movants Kent Rush Realty, K-R
Residence, DJR Construction, R&D Development, Chaim Dushinsky, and Isaac Rabinowitz are
dismissed; (iii) the conspiracy to commit fraudulent conveyance claims against the Individual
Defendants Chaim Dushinsky and Isaac Rabinowitz are dismissed; and (iv) the constructive trust
claims against the Movants Kent Rush Realty, K-R Residence, DJR Construction, R&D
Development, Chaim Dushinsky, and Isaac Rabinowitz are dismissed. The Trustee may seek
leave to replead those claims within sixty days of the date of this order, and if leave is sought,
the Trustee is directed to file the proposed amended complaint with his motion. In all other
respects, the Motion to Dismiss is denied.
The Trustee is directed to submit a proposed order in accordance with this Memorandum
Decision.
Dated: Brooklyn, New York
November 2, 2007 	_s/Elizabeth S. Stong_________________
ELIZABETH S. STONG
UNITED STATES BANKRUPTCY JUDGE