Shiboleth et al v. Yerushalmi

UNITED STATES BANKRUPTCY COURT 	FOR PUBLICATION
EASTERN DISTRICT OF NEW YORK
---------------------------------------------------------x
In re:
Case No. 07-72186-478
JOSEPH YERUSHALMI
Chapter 7
Debtor.
---------------------------------------------------------x
AMNON SHIBOLETH, individually and on behalf of
YERUSHALMI, SHIBOLETH, YISRAELI,
& ROBERTS, LLP.
Plaintiffs, 	Adversary Proceeding
No. 08-8037-478
- against -
JOSEPH YERUSHALMI,
Defendant
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MEMORANDUM DECISION
Appearances:
Avrum Rosen
Attorney for Plaintiff
The Law Offices of Avrum J. Rosen, PLLC
38 New Street
Huntington, NY 11743
Gary M. Kushner and Richard G. Goldberg
Attorneys for Defendant
Forchelli, Curto, Crowe, Deegan, Schwartz, Mineo, Cohn, LLP
330 Old Country Road, Suite 301
P.O. Box 31
Mineola, NY 11507
Hon. Dorothy Eisenberg, United States Bankruptcy Judge
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Before the Court is the Defendant’s motion to dismiss the complaint. 	The complaint
alleges seven causes of action. Causes of Action I, II, and III seek a judgment declaring the debt
due from Defendant to Plaintiffs to be nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), §
523(a)(4), and § 523(a)(6). 	Causes of Action IV, V, VI, VII seek a judgment barring Debtor’s
discharge pursuant to § 727(a)(2)(A), § 727(a)(3), § 727(a)(4)(A), and § 727(a)(5) of the
Bankruptcy Code, respectively. 	Based on the facts of this case and the relevant case law,
Defendant’s motion to dismiss is granted without prejudice as to Plaintiffs’ first cause of action,
pursuant to § 523(a)(2)(A), and denied as to all other causes of action. The following constitutes
this Court’s findings and conclusions of law as mandated by Fed. R. Bankr. P. 7052. This Court
has jurisdiction of this case pursuant to 28 U.S.C. §§ 157(b) and 1334(b), and venue is proper
pursuant to 28 U.S.C. §1409(a). 	This is a core proceeding under 28 U.S.C. § 157(b)(1), (2)(I),
and (J).
PROCEDURAL HISTORY
From 1987 to March 31, 1995, Amnon Shiboleth (“Plaintiff” or “Shiboleth”) and Joseph
Yerushalmi (“Defendant” and/or “Debtor”) were partners in a law firm known as Yerushalmi,
Shiboleth, Yisraeli & Roberts (“YSYR”). 	Yerushalmi was a 51% owner and Shiboleth was a
49% owner. On March 31, 1995, Shiboleth and Yerushalmi agreed to terminate their partnership
in YSYR, to wind up YSYR’s affairs and to work separately. Plaintiffs have alleged that upon
the dissolution of YSYR, there were fees due and owing to the firm and that these fees were to
be collected and deposited in an account maintained by YSYR in order to pay YSYR’s creditors
and then, were to be applied to settle the partners’ capital accounts.
In 1998, approximately three years after the termination of the partnership, Shiboleth
states he became aware that Yerushalmi, Yerushalmi & Associates (“Y&A”), the law firm
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formed by Yerushalmi after the termination of YSYR, and others, allegedly diverted receivables
which were purportedly due to YSYR. 	These receivables included a fee generated from a
contingency case pending in Delaware on behalf of NSN (the “NSN Case”) and fees generated
for work performed for the “Phoenix Group” on an hourly basis.
On January 23, 1998, Plaintiffs commenced a state court action (the “Accounting
Action”). 	The accounting between the Defendant and Plaintiffs with respect to YSYR was
referred to a special referee on March 7, 2002 for hearing and determination. 	After years of
litigation, by decision dated November 28, 2006, the special referee found in favor of Plaintiffs.
Subsequently on March 7, 2007 a judgment for $3,540,046.91 was entered in the state court
accounting action.
On July 25, 2007 Defendant and Y&A filed separately for bankruptcy protection under
Chapter 11 of the Bankruptcy Code. 	Subsequently both were converted to Chapter 7 by Court
order on October 2, 2007. Plaintiffs filed Proof of Claim #4 in the Debtor’s bankruptcy case on
September 26, 2007 for the amount of the state court judgment. On February 29, 2008, Plaintiffs
commenced this adversary proceeding, and on April 17, 2008 the Debtor filed the instant motion
to dismiss. Oral arguments were held before the Court on June 3, 2008.
DISCUSSION
(a) Standard for Motion to Dismiss
Rule 12 (b)(6) of the Federal Rules of Civil Procedure applies in adversary proceedings
by virtue of Rule 7012 of the Federal Rules of Bankruptcy Procedure. Pursuant to Rule 12(b)(6)
a court should grant a motion to dismiss if it appears that the plaintiff can aver no set of facts that
entitle the plaintiff to relief. 	The Court must read the complaint generously and draw all
reasonable inferences in favor of the pleading party. See e.g., Bell Atl. Corp. v. Twombly, 127 S.
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Ct. 1955, 1965 (2007) (citations and quotations omitted) (“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).”).
(b) Defendant’s Statute of Limitations and Collateral Estoppel Arguments
The Defendant has raised statute of limitations and collateral estoppel arguments as
defenses to all three of Plaintiffs’ Section 523 causes of action. The Defendant’s arguments are
inappropriate. 	Plaintiffs are not basing their complaint against the Defendant on collateral
estoppel as to any decision made in the state court proceeding. They are seeking a determination
as to the discharge and dischargeability of the judgment debt entered in the state court several
months prior to the filing of this bankruptcy case pursuant to Sections 523 and 727 of the
Bankruptcy Code.
Any arguments as to the timeliness of the underlying claims prior to the state court
judgment belonged in the state court for decision. The present issues before this court are as to
the dischargeability of the judgment debt pursuant to Section 523, or of the Debtor’s right to
discharge pursuant to Section 727 of the Bankruptcy Code. The Defendant’s motion to dismiss
the complaint based on the state statute in regard to the underlying “claim” is misplaced. We no
longer have the original claim before this Court. 	We now have a judgment upon which the
Plaintiffs’ seek a determination in the Bankruptcy Court as to whether the debt due to them, the
amount of the judgment, should be discharged or not, and whether the Defendant’s entire
indebtedness should or should not be discharged.
Defendant argues that this Court is precluded from hearing Plaintiffs’ dischargeability
action against Defendant because under state law the statute of limitations for fraud has run.
Here the debt that Plaintiffs are seeking to determine the dischargeability of is a judgment that
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was already entered in Plaintiffs’ state court Accounting Action. That action was timely brought
under New York law.
New York state law provides that where a partner seeks to bring an action at law against
another partner due to a claim arising out of the partnership, the moving partner must first bring
an action for an accounting. 	See Wiesenthal v. Wiesenthal, 40 A.D.3d 1078, 1080 (N.Y. App.
Div. 2d Dep’t 2007) (“[A] partner may not maintain an action at law for any claim arising out of
the partnership until there has been a full accounting and a balance struck, or an express
agreement to pay.”); Travelers Insurance Company v. Meyer, 267 A.D.2d 124, 125 (N.Y. App.
Div. 1st Dep’t 1999) (affirming dismissal of counterclaims and cross-claims for “breach of
fiduciary duty and gross negligence without prejudice to their imposition before the Referee
within the framework of the accounting….”); Kriegsman v. Kraus, Ostreicher & Co., 126
A.D.2d 489, 490 (N.Y. App. Div. 1st Dep’t 1987).
Before the court is a valid, prepetition state court judgment1 against Defendant, and the
statute of limitations argument against this judgment is without merit. See In re Friedenberg, 12
B.R. 901, 905 (Bankr. S.D.N.Y. 1981) (“The state court action was timely filed and a judgment
was entered in accordance with New Jersey procedure. The debt was therefore reduced to
judgment, and there is no statute of limitations to apply to the issue of dischargeability now
before this court. Congress wrote no period of limitation on the age of a debt which a creditor
seeks to remain outside a discharge. Were it otherwise, a debtor could so time his petition to
extinguish debts assertable in a bankruptcy but not able to survive the bankruptcy discharge.”).
Furthermore if a creditor bringing an adversary proceeding under § 523 already has an
enforceable state court judgment, he will not be barred from proving the nondischargeability of
the debt even if the state statute of limitations for the alleged fraud (or other allegation as the
1 The Defendant has appealed the state court decision and judgment.
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case may be) expired prior to the filing of the debtor’s petition. See Kovalsky-Carr Elec. Supply
Co. v. Young (In re Young), 313 B.R. 555, 560 (Bankr. W.D.N.Y. 2004); Burt Bldg. Material
Corp. v. Silba (In re Silba), 170 B.R. 195, 199 (Bankr. E.D.N.Y. 1994).
In Young, the plaintiff held a prepetition judgment against the debtor, and brought an
adversary proceeding seeking to have the debt declared nondischargeable on the grounds that the
debtor had breached a fiduciary duty. In re Young, 313 B.R. at 556-57. The debtor argued that
the statute of limitations under N.Y. Lien Law had expired and therefore the action should have
been dismissed. See id. at 557-58. The bankruptcy court disagreed with the debtor and held that
because the plaintiff had a valid, enforceable prepetition judgment, he was permitted to try to
show that the judgment was nondischargeable. See id. at 559–60 (noting that had there been no
prepetition judgment and the statute of limitations had run, then there would have been no debt
for the bankruptcy court to discharge). The same result would be applicable here if Plaintiffs had
not obtained a judgment prepetition. 	The Defendant cannot raise the statute of limitations
argument in this case in regard to Sections 523 or 727 of the Bankruptcy Code.
It is well established that the bankruptcy court retains the exclusive jurisdiction to
determine the ultimate question of the dischargeability of the debt under federal bankruptcy law.
See Archer v. Warner, 538 U.S. 314, 321 (2003) (internal quotations omitted) (“Congress also
intended to allow the relevant determination (whether a debt arises out of fraud) to take place in
bankruptcy court, not to force it to occur earlier in state court at a time when nondischargeability
concerns ‘are not directly in issue and neither party has a full incentive to litigate them.’”);
Grogan v. Garner, 498 U.S. 279, 284-85 (1991); Brown v. Felsen, 442 U.S. 127, 129 (1979);
Bailey v. Sonnier (In re Sonnier), 157 B.R. 976, 979-80 (E.D. La. 1993).
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Here the Accounting Action arose prior to Defendant’s bankruptcy filing and it focused
on the alleged wrongdoing of Defendant. 	No bankruptcy concerns were present, and, as
discussed above, an accounting action must be brought first by a partner prior to any other causes
of action stemming from the partnership. 	Plaintiffs should not be estopped from asserting that
Defendant’s debt was in the nature of fraud or breach of fiduciary duty while seeking the
nondischargeability of the debt. 	Accordingly, the Court rejects the Defendant’s statute of
limitations and collateral estoppel objections to Plaintiff’s § 523 Causes of Actions.
(c) 	Is Plaintiffs §523(a)(2)(A) Claim Pled with Particularity, and Does it State a Claim for
Relief?
11 U.S.C. § 523(a)(2)(A) provides as follows:
(a) A discharge under section 727 … does not discharge an individual debtor from any
debt --
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the
extent obtained by --
(A) false pretenses, a false representation, or actual fraud, other than a statement
respecting the debtor’s or an insider’s financial condition.
The elements of a nondischargeability claim under § 523(a)(2)(A) have been described by this
Court and others as follows:
(1) the debtor made the representations; (2) at the time he knew
they were false; (3) the representations were made with the
intention and purpose of deceiving the creditor; (4) the creditor
relied on such representations; and (5) the creditor sustained the
alleged 	loss 	and 	damage 	as 	the 	proximate 	result 	of 	the
representations having been made.
Grad v. Behham (In re Yacov Benham), 2005 Bankr. LEXIS 435, *15 (Bankr. E.D.N.Y. 2007);
see People of the State of New York v. Suarez (In re Suarez), 367 B.R. 332, 338 (Bankr.
E.D.N.Y. 2007).
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Plaintiffs have failed to meet the elements required for § 523(a)(2)(A). The complaint is
unclear as to what the representations were that Defendant made to Plaintiffs that were false and
intended to deceive them. 	The complaint also lacks particularity as to the fraud committed by
the Defendant. 	Accordingly, the Plaintiffs First Cause of Action shall be dismissed without
prejudice, for failure to state a cause of action, and for failure to plead with particularity.
(d) Plaintiffs’ Second Cause of Action – 11 U.S.C. § 523(a)(4)
Plaintiffs’ 	Second 	Cause 	of 	Action 	seeks 	to 	prevent 	the 	dischargeability 	of 	the
Accounting Action judgment under § 523 (a)(4). 11 U.S.C. § 523(a)(4) provides:
(a) A discharge under section 727 … does not discharge an individual debtor from
any debt --
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or
larceny.
In addition to the statute of limitations and collateral estoppel arguments discussed above,
Defendant argues that Plaintiffs Second Cause of Action under § 523(a)(4) cannot stand because
Defendant did not owe a fiduciary duty to Plaintiffs once the parties agreed to dissolve the
partnership. The duty of partners to each other and to the res of the partnership after they have
agreed to dissolve their partnership is the question that the Court now turns to.
(1) Is There a Fiduciary Relationship During the Winding Up Period of a Partnership?
“A determination of when a fiduciary relationship exists pursuant to section 523(a)(4) is
determined by looking to state law.” In re Stone, 90 B.R. 71, 79 (Bankr. S.D.N.Y. 1988). New
York Partnership Law § 61 states that “on dissolution the partnership is not terminated, but
continues until the winding up of the partnership affairs is completed.” (emphasis added). 	See
e.g., Chaim Ben-Dashan v. Plitt, 58 A.D.2d 244, 249 (N.Y. App. Div. 4th Dep’t 1977).
Although the statute does not characterize which relationship exists with respect to the assets
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during the winding up period, case law holds that such relationship is a fiduciary one. See In the
Matter of Sheldon Silverberg, 81 A.D.2d 640, 641 n.1 (2d. Dept. 1981) (internal citations
omitted) (“The partner charged with winding up the affairs of the partnership still retains a
fiduciary duty as an agent of the remaining partners with respect to the liquidation of the firm.”);
Chaim Ben-Dashan v. Plitt, 58 A.D.2d at 249 (holding that during the winding up period there is
an agency relationship between the liquidating partner and other partners); Lavin v. Ehrlich, 80
Misc. 2d 247, 249 (N.Y. Sup. Ct. 1974) (internal citations omitted) (“There may be a relaxation
of a partner's duties to his copartners in relationships that look to the future of the newly
dissolved partnership. But, in dealings effecting the winding up of the partnership and the proper
preservation of partnership assets during that time, ‘the good faith and full disclosure exacted of
partners continues.’”).
Where neither partner assumes the task of liquidating partner, the law considers both to
be charged with the responsibility of winding up the partnership. See Chaim Ben-Dashan v. Plitt,
58 A.D.2d at 249 (holding that where both parties delayed in winding up the partnership, both
were deemed to share in the expenses and responsibilities caused by the delay); Meyers v.
Kazlow, 1989 U.S. Dist. LEXIS 4510, *8 (S.D.N.Y. 1989) (internal citations omitted) (“Unless
the partnership otherwise agrees, any partner has an equal duty and an equal right to participate
in the winding up of the partnership's affairs. Such participation is contemplated to protect the
interests of the partnership's creditors, as well as one or more of its minority partners.”).
Moreover, New York Partnership Law § 43 provides:
Every partner must account to the partnership for any benefit, and
hold as trustee for it any profits derived by him without the consent
of the other partners from any transaction connected with the
formation, conduct, or liquidation of the partnership or from any
use by him of its property.
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The “liquidation of the partnership” refers to the winding up process of the partnership.
Here the behavior of the Defendant in regards to the partnership’s receivables from a
“transaction connected with the … conduct … of the partnership,” is clearly in the nature of a
fiduciary relationship with the Plaintiffs. 	The alleged actions of Defendant to divert legal fees
and disbursements owed to YSYR for the benefit of himself and Y&A occurred during the
winding up period of the partnership, and he had a duty to account for the receivables that he
collected. The failure to do so may be a breach of his fiduciary duty. Accordingly, Defendant’s
motion is denied as to Plaintiffs’ § 523(a)(4) cause of action.2
(e) 11 U.S.C. § 727
Defendant argues that Plaintiffs’ fourth through seventh Causes of Action must be
dismissed because Plaintiffs have failed to plead them with particularity in accordance with
Bankruptcy Rule 7009(b) and Rule 9(b) of the Federal Rules of Civil Procedure. 	Rule 9(b)
provides that “[i]n all averments of fraud...the circumstances constituting fraud...shall be stated
with particularity.” A plaintiff must set forth the particulars of the acts or omissions alleged so
the defendant has adequate notice of the purported wrong and can frame a defense. See Luce v.
Edelstein, 802 F.2d 49, 54 (2d Cir. 1986); Denney v. Barber, 576 F.2d 465, 469 (2d Cir. 1978).
The “circumstances constituting fraud” are the facts telling when and where the alleged fraud
took place, who was involved, the nature of the fraudulent action and how it was accomplished.
Parnes v. Gateway 2000, Inc., 122 F.3d 539, 549-50 (8th Cir. 1997). 	With this framework in
mind, the Court will address Defendant’s motion to dismiss Plaintiffs’ § 727 causes of action.
(1) Plaintiffs’ Fourth Cause of Action – 11 U.S.C. § 727(a)(2)(A)
2 As the Defendant has not expressly attacked Plaintiff’s Third Cause of Action on the grounds that it was not pled
with particularity or that it failed to state a claim, the Court will not address it in detail. However, the Court notes
that § 523(a)(6) requires a showing of “willful and malicious injury by the debtor to another entity or to the property
of another entity.” As alleged the Defendant has acted in such a manner due to his diversion of distributions and
fees from Plaintiffs to Y&A, and that such action was done with the intent of depriving Plaintiffs of monies owed.
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Section 727(a)(2)(A) states that a court shall grant the debtor a discharge unless:
(2) the debtor, with intent to hinder, delay or defraud a creditor or an officer of the
estate charged with custody of property under this title has transferred, removed,
destroyed, mutilated, or concealed, or has permitted to be transferred, removed,
destroyed, mutilated, or concealed --
(A) property of the debtor, within one year before the date of the filing of the
petition.
To prevail on a claim under §727(a)(2)(A), a creditor must prove the following four
elements by a preponderance of the evidence: (1) the debtor or his duly authorized agent
transferred, removed, destroyed, mutilated, or concealed property; (2) said property belonged to
the debtor; (3) the transfer occurred with actual intent to hinder, delay or defraud a creditor or an
officer of the estate charted with custody of property under the Bankruptcy Code; and (4) the
transfer occurred within one year prior to filing for bankruptcy. 	See Najjar v. Kablaoui (In re
Kablaoui), 196 B.R. 705, 708 (Bankr. S.D.N.Y 1996).
Upon review of the record before it, the Court determines that Plaintiffs have pled the
Fourth Cause of Action with particularity by alleging that within a year of Defendant’s
bankruptcy filing, Defendant diverted funds owed to YSYR through his actions and the actions
of third parties, and he has attempted to hide his finances in an attempt to prevent collection by
his creditors, in this case the Plaintiffs. 	Therefore, Defendant’s motion to dismiss Plaintiffs’
Fourth Cause of Action is denied.
(2) Plaintiffs’ Fifth Cause of Action – 11 U.S.C. § 727(a)(3)
Section 727(a)(3) of the Bankruptcy Code provides that a debtor’s discharge will be
denied if he has “concealed, destroyed, mutilated, falsified, or failed to keep or preserve any
recorded information, including books, documents, records, and papers, from which the debtor’s
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financial condition or business transactions might be ascertained, unless such act or failure to act
was justified under all of the circumstances of the case.”
The creditor must prove that (1) the debtor failed to keep or preserve books and records
and (2) that this failure makes it impossible to ascertain the debtor true financial condition or
business transactions. See Doubet, LLC v. Palermo (In re Palermo), 370 B.R. 599, 612 (Bankr.
S.D.N.Y. 2007). 	If these two elements are satisfied by the creditor, the burden shifts to the
debtor to demonstrate that his failure to produce the records was justified. 	See D.A.N. Joint
Venture v. Cacioli (In re Cacioli), 463 F.3d 229, 235 (2d Cir. 2006). Here Plaintiffs allege that
Defendant has failed to provide Plaintiffs with business or personal records relating to the
various trusts Defendant is connected to, such as the assets being held by them, the source of said
assets, and how they are being used. 	He also has not provided an accounting of the trusts.
Accordingly, Plaintiffs have properly pled this cause of action and there is no basis upon which
this complaint should be dismissed.
(3) Plaintiffs’ Sixth Cause of Action – 11 U.S.C. § 727(a)(4)(A)
Section 727(a)(4)(A) states that a court should deny a debtor’s discharge if the debtor
made a false oath or account “knowingly and fraudulently, in or in connection with the case.”
When a debtor files for bankruptcy he or she does so under a duty to list all assets and answer all
questions on the bankruptcy petition. 	If a debtor makes a material omission from his or her
documentation, then it will be grounds for the court to deny a discharge. 	See Congress Talcott
Corp. v. Sicari (In re Sicari), 187 B.R. 861, 880 (Bankr. S.D.N.Y. 1994); see also Pergament v.
Smorto (In re Smorto), 2008 U.S. Dist. LEXIS 19235, at *12 (E.D.N.Y. Mar. 12, 2008).
The “false oath or account” Plaintiffs complain of are Defendant’s schedules, the signing
of which affirms that they are true. 	The information provided on Defendant’s schedules is
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questionable in their veracity as there has been conflicting information given at depositions and
testimony regarding Defendant’s interest in real property, his relationship and prepetition
payments to certain alleged insiders, and the identities of Defendant’s personal trade creditors
and the trade creditors of Y&A. Thus, Plaintiffs have pled their Sixth Cause of Action with the
requisite particularity, and Defendant’s motion to dismiss is denied.
(4) Plaintiffs’ Seventh Cause of Action – 11 U.S.C. § 727(a)(5)
Section 727(a)(5) provides that a discharge will be denied if “the debtor has failed to
explain satisfactorily, before determination of denial of discharge under this paragraph, any loss
of assets or deficiency of assets to meet the debtor’s liabilities.” 	This statutory provision is
designed to deny a discharge to a debtor if the plaintiff can establish that there has been a loss or
deficiency of an asset, and if so, that the debtor has failed to plausibly explain the reason for that
loss. See Krohn v. Cromer, (In re Cromer), 214 B.R. 86, 95 (Bankr. E.D.N.Y. 1997). Plaintiffs’
Complaint sets forth that Defendant has failed to provide sufficient information relating to his
prepetition assets and liabilities which have resulted in a decrease in the value of this bankruptcy
estate. There is sufficient pleading to put Defendant on notice of Plaintiffs’ basis for relief under
§ 727(a)(5). 	Therefore, Defendant’s motion to dismiss Plaintiffs’ Seventh Cause of Action is
denied.
Whether Plaintiffs can provide proof as to any or all of these allegations remains to be
determined at trial.
CONCLUSION
Based upon the foregoing, the Court holds the following:
(1) Plaintiffs’ First Cause of Action is dismissed without prejudice for failure to state a cause
of action and for failure to plead with particularity.
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(2) Plaintiffs’ Second and Third Causes of Action are not barred on the grounds of statute of
limitations or collateral estoppel, and they state a claim upon which relief can be granted.
Defendant’s Motion to Dismiss with respect to these claims is denied.
(3) Plaintiffs’ Fourth, Fifth, Sixth, and Seventh Cause of Action are allowed as they have
been pled with particularity, and Defendant’s Motion to Dismiss with respect to these
claims is denied.
Dated: Central Islip, New York
September 4, 2008
s/ Dorothy Eisenberg
Dorothy Eisenberg
United States Bankruptcy Judge
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