Puka Capital Funding LLC et al v. L&N Twins Place, LLC

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
L&N TWINS PLACE LLC.
NOT FOR PUBLICATION
Chapter 11
Case No. 17-22758 (rdd)
Debtor.
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PUKA CAPITAL FUNDING LLC,
Plaintiff, v. Adversary No. 17-08332 (shl)
L&N TWINS PLACE LLC.
Defendant.
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POST-TRIAL DECISION
A P P E A R A N C E S
Jeffrey A. Reich
Nicholas A. Pasalides
Reich Reich & Reich, P.C.
Counsel for the Debtor
235 Main Street, Suite 450
White Plains, NY 10601
Jonathan B. Nelson
Jessica K. Kastner
Solomon A. Frager
Dorf & Nelson LLP
Counsel for Puka Capital Funding LLC
555 Theodore Fremd Avenue
Rye, NY 10580
Joseph B Failla
Voute, Lohrfink, Magro & McAndrew, LLP
Counsel for Maria Balaj
700 Post Road
Suite 237
Scarsdale, NY 10583
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SEAN H. LANE
UNITED STATES BANKRUPTCY JUDGE
Before the Court are the merits of the above captioned adversary proceeding, which
consists of multiple proceedings removed from state court involving the Debtor L&N Twins Place
LLC. 	Plaintiff Puka Capital Funding LLC (“Puka Capital”) seeks to enforce the terms of a
promissory note between it and the Debtor. 	One of the Debtor’s two members, Maria Balaj,
contests the validity of the promissory note and Puka Capital’s right to interest of any kind. She
also has asserted a claim for breach of fiduciary duty against the Debtor and David Balaj (Debtor’s
other member and Maria Balaj’s ex-husband), who is also the son of Puka Capital’s principals, Zef
Balaj and Lina Balaj. 	Maria Balaj also has brought a direct cause of action against Zef Balaj,
David Balaj, and Puka Capital for fraud. The Debtor has objected to Maria Balaj’s claim filed in
this bankruptcy case.
Trial in all these matters took place on February 22, 2019 and March 1, 2019. 	See
Transcript of Hearings, dated Feb. 22, 2019 and March 1, 2019 [ECF Nos. 45-46]. At trial, the
Court received the written direct testimony from three witnesses: Lina Balaj, David Balaj and
Maria Balaj. See, e.g., Hr’g Tr. 14:5-15:19 (discussing declaration of Lina Balaj). Each of these
witnesses also provided additional live testimony at trial. See, e.g., id. 15:20-42:14 (Lina Balaj
testimony on cross examination and redirect). 	In addition, the parties submitted documentary
exhibits and agreed upon deposition testimony. 	See Hr’g Tr. of Feb. 22, 2019 at 6:21-15:6
(discussing parties’ agreed upon exhibits 1 through 47); id. at 71:23-106:13 (reflecting additional
exhibits 48 through 54).
After trial and for the reasons set forth below, the Court finds that Puka Capital is entitled
to recover under the promissory note, the Debtor’s objection to Maria Balaj’s claim is sustained,
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and Maria Balaj’s fraud causes of action fail. This decision constitutes the Court’s findings of fact
and conclusions of law based on all of the evidence.
BACKGROUND
A. The Debtor and Purchase of the Property
The Debtor was formed on February 20, 2002 as a New York limited liability company.
Exh. 36 (The Debtors’ Operating Agreement); see also L&N Twins Place LLC Post-Trial Brief
Regarding the Allegations of Breach of Fiduciary Duty ¶ 4 [ECF No. 52] (the “Debtor Brief”).
At all relevant times, the Debtor had two fifty-percent members: Maria and David Balaj, who
were married to each other when Debtor was formed. Decl. of David Balaj ¶ 3; Decl. of Maria
Balaj ¶¶ 4, 20. David Balaj was also the Debtor’s managing member. See Decl. of David Balaj
¶¶ 13, 15. The Debtor was formed to facilitate the purchase of real property at 2-4 Virginia
Place, Pleasantville, NY. Decl. of David Balaj ¶¶ 12, 16. Comprised of six apartments and one
duplex, the Virginia Place property eventually served both as the marital home of Maria and
David Balaj and as a source of rental income for the Debtor. Hr'g Tr. of Feb. 22, 2019 at 144:10-
14; Decl. of David Balaj ¶ 10.
Pursuant to the terms of Debtor’s Operating Agreement, David Balaj was required to do
what was necessary to acquire the Virginia Place property, including incurring debt if necessary.
Exh 36. David Balaj believed that the only way to purchase the property would be to obtain a
loan, but he was unsure whether the Debtor would get loan approval from a bank in time to
purchase the property. See Decl. of David Balaj ¶ 11. So instead of relying on a loan from a
bank, David Balaj’s parents—Zef and Lina Balaj—offered to loan the Debtor the necessary
funds through their company, Puka Capital. Decl. of Lina Balaj ¶¶ 4-5. On February 2, 2002, a
portion of the purchase price, $86,000.00, was paid directly by Puka Capital as a down payment
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on the Virginia Place property. Exh. 3 (Check issued by Puka Capital for the “contract deposit”).
Puka Capital transferred the remaining balance of the purchase price to an account controlled by
the Debtor, which was used to complete the purchase of the Virginia Place property on February
28, 2002. Exh. 16 (Puka Capital’s February 2002 Bank Statement); (Exh. 5 (Check issued by the
Debtor for the remainder of the purchase price). In total, Puka Capital loaned the Debtor
$861,000.00 plus interest at the federal prime rate, and the loan was memorialized in a
promissory note signed by David Balaj. Exh. 1 (the Promissory Note); Debtor Brief ¶ 10. 	The
Promissory Note provided for yearly payments and a maturity date of February 28, 2007. Id.;
Decl. of Lina Balaj ¶ 9; Hr’g Tr. of Feb. 22, 2019 at 35:1-9. It was notarized. Exh. 1.
Approximately two months after signing the Promissory Note, the Debtor obtained a loan
for $600,000.00 from Hudson Valley Bank (the “HVB Loan”). See Decl. of David Balaj ¶ 18.
The HVB Loan was secured by a mortgage against the Virginia Place property and carried a
6.625% per annum interest rate over a five-year term. Exh. 22 (Mortgage note for the Virginia
Place property). The HVB Loan was also personally guaranteed by Maria and David Balaj. Exh
29 (Guarantee signed by David Balaj); Exh. 30 (Guarantee signed by Maria Balaj). After closing
costs were deducted, the Debtor received $579,389.08 from the HVB Loan. Exh. 21 (listing the
amount received by the Debtor under the HVB Loan). The remainder of the HVB Loan and an
additional $7,953.92 were then used by the Debtor to pay down, but not pay in full, the
outstanding Promissory Note with Puka Capital. Exh. 8 (Check issued by the Debtor to Puka
Capital in the amount of $587,043); Exh. 13 (Letter from the Debtor to Puka Capital explaining
the purpose of the check sent to Puka Capital); Decl. of Lina Balaj ¶ 16; Hr’g Tr. of Feb. 22,
2019 at 58:9-59:14. No payments on the Promissory Note were made after the pay down via the
HVB Loan on April 30, 2002. Hr’g Tr. of Mar. 1, 2019 at 19:7-18, 39:5-12.
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Despite the pay down on the Promissory Note, the Debtor had trouble meeting its
obligations. In short, the Debtor could not afford to pay the HVB Loan and the Promissory Note
at the same time. Decl. of David Balaj ¶¶ 20-21. As managing member, David Balaj prioritized
paying the HVB Loan because the interest rate on the HVB Loan was greater than the
Promissory Note and the HVB Loan was secured by the Virginia Place property. Decl. of David
Balaj ¶ 21; Hr’g Tr. of Feb. 22, 2019 at 154:4-14. Indeed, the Debtor’s Operating Agreement
required David Balaj to prioritize paying down secured debt like the HVB Loan. Exh. 36. By
the time the HVB Loan matured in April of 2007, the Debtor had insufficient liquidity to pay the
outstanding balance. Decl. of David Balaj ¶ 22. As a result, the HVB Loan was converted into a
line of credit (the “HVB Line”) in the amount of $542,643.03 plus a variable interest rate of no
less than 5.75% (together with the HVB Loan, the “HVB Obligation”). Decl. of David Balaj ¶
22. But as Debtor remained unable to timely meet its obligations under both the Promissory
Note and the HVB Obligation, David Balaj continued to prioritize the Debtor’s secured
obligation under the HVB Line. Decl. of David Balaj ¶ 23; Hr’g Tr. of Feb. 22, 2019 at 154:4-
22. The HVB Obligation was paid off in January of 2010. Hr’g Tr. of Mar. 1, 2019 at 45:15-19.
Maria and David Balaj’s relationship eventually deteriorated, and David Balaj filed for
divorce in October of 2009. Decl. of David Balaj ¶ 26. That proceeding was highly contested
between the parties. Id. On April 14, 2010, the state court issued a restraining order against
David Balaj, which granted Maria Balaj “the exclusive use and occupancy of the Property and
also tasked her with collecting the rents from the tenants and using them to pay the Properties
carrying costs.” Id.; see also Hr’g Tr. of Feb. 22, 2019 at 154:23-155:12. From the time the
restraining order was issued until the Debtor filed for bankruptcy, Maria Balaj was essentially in
control of the Debtor. See Hr’g Tr. of Feb. 22, 2019 at 155:10-12 (David Balaj testifying that the
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restraining order “hindered every . . . possibility to communicate with any of the tenants or the
area or maintain the property”). Maria and David Balaj’s divorce became final sometime in the
summer of 2013. Hr’g Tr. of Feb. 22, 2019 at 143:6-16.
The Debtor’s financial problems continued after Maria Balaj took control of the Property
under the restraining order. As noted above, no payments were made under the Promissory Note
during this period, even though the HVB Obligation was paid in 2010. Maria Balaj also failed to
pay real estate taxes on the Virginia Place property even though she was receiving the rents
under the restraining order issued by the state court. Decl. of David Balaj ¶ 28. But Maria Balaj
contends that that the Puka Capital loan was forgiven as a “gift.” Decl. of Maria Balaj ¶¶ 27-42;
Hr’g Tr. of Feb. 22, 2019 at 55:25-56:11. This claim is contested by Puka Capital and David
Balaj. Decl. of Lina Balaj ¶¶ 17, 21; Decl. of David Balaj ¶ 25; Hr’g Tr. of Mar. 1, 2019 at
48:21-23. Maria Balaj also contends that she was unaware of the existence of the Promissory
Note. See Decl. of Maria Balaj ¶ 46.
B. Proceedings Before This and Other Courts
Well before this bankruptcy case was ever filed, the parties had been litigating various
issue in state court. Puka Capital filed a motion for summary judgment in lieu of complaint in
Supreme Court, Bronx County on August 24, 2011, based on the Debtor’s failure to make
payments under the Promissory Note. See Removal Order at Exh. B [ECF No. 1]. After various
procedural maneuvers before the Bronx County court, Maria Balaj submitted a filing deemed to
be answer in the state court on behalf of the Debtor. See Removal Order at Exh. D. In that
filing, she asserted that she had no knowledge of the Promissory Note and that certain documents
that she had discovered suggested that the Promissory Note was actually created on January 17,
2010, not February 28, 2002, as was claimed by Puka Capital. Removal Order at Exhs. D, E.
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Maria Balaj subsequently filed her own separate action in Supreme Court, Westchester County
on April 23, 2013, against Zef Balaj, David Balaj, and Puka Capital, alleging fraud by all the
defendants, to which responsive pleadings and counterclaims were filed. See Exhs. 9-12. Both
cases were consolidated and transferred to the Supreme Court in Bronx County. See Removal
Order at Exh. G.
Given all the state court litigation and its outstanding tax debts, the Debtor filed a
voluntary petition for relief under Chapter 11 of the Bankruptcy Code on May 23, 2017. See
Hr’g Tr. of Mar. 1, 2019 at 48:23-49-2. Puka Capital filed a proof of claim for money owed on
the Promissory Note. See Claim No. 4. Maria Balaj also filed a proof of claim in the bankruptcy
for breach of fiduciary duty and self-dealing based on the actions of David Balaj, including, most
notably, his failure to pay off the Promissory Note, while also arguing that the Promissory Note
was fraudulent. See Claim No. 8. The state court lawsuits were removed and transferred to this
Court as part of this bankruptcy. See Removal Order. Objections and other responsive pleading
as to both Puka Capital’s claim and Maria Balaj’s claim were filed by the parties. See ECF Nos.
73-76, 78, 84-85.
All of the above referenced proceedings, claims and disputes were tried together before
this Court on February 22, 2019 and March 1, 2019. After the close of evidence, the Court ruled
against Maria Balaj on her direct fraud causes of action in a bench ruling. 	Hr’g Tr. of Mar. 1,
2019 at 49:15-52:8. Thereafter, the parties agreed that there were four issues left for the court to
decide: (1) whether the Promissory Note is valid and, if so, whether it was forgiven; (2) whether
Puka Capital is entitled to pre-petition interest under the Promissory Note; (3) whether Puka
Capital is entitled to post-petition interest; and (4) whether David Balaj breached his fiduciary
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duties to the Debtor.1 See ECF No. 44. The parties submitted post-trial briefing on the interest
and fiduciary duty issues on May 15, 2019. See ECF Nos. 48, 50, 52.
During the pendency of the Debtor’s bankruptcy case, the Virginia Place property was
sold for $1,490,000.00, resulting in a profit of $629,000.00 on Debtor’s initial investment. See
Exh. 35; Debtor Brief ¶ 26.
DISCUSSION
I. 	The Promissory Note is Valid and Enforceable
The Court begins by addressing the central dispute in this case: whether Puka Capital can
recover under the Promissory Note. There has been no argument about whether the Promissory
Note meets all the specific substantive requirements for a valid negotiable instrument under New
York law. See N.Y. U.C.C. Law § 3-104(1)(a)-(d) (McKinney 2019). Instead, Maria Balaj
argues more broadly that the Promissory Note is a fabrication created on or about January 17,
2010, not February 28, 2002, and is therefore unenforceable. In the alternative, she argues that
the Promissory Note was forgiven by Zef Balaj, Lina Balaj, and Puka Capital.
Under New York law, “a certificate of acknowledgment attached to an instrument such as
a deed raises a presumption of due execution, which presumption, in a case such as this, can be
rebutted only after being weighed against any evidence adduced to show that the subject
instrument was not duly executed.” Beshara v. Beshara, 51 A.D.3d 837, 838, 858 N.Y.S.2d 351,
352 (N.Y. App. Div. 2d Dept. 2008) (quoting Son Fong Lum v. Antonelli, 102 A.D.2d 258, 260-
61, 476 N.Y.S.2d 921, 923 (N.Y. App. Div. 2d Dept. 1984)). The testimony of interested parties
is not enough to overcome the presumption of due execution. Id. (citing Albany Cnty. Sav. Bank
1 	The parties frame the remaining issues as four distinct matters. But as two of the issues relate to Puka
Capital’s entitlement to interest, the Court will discuss those related matters together.
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v. McCarty, 149 N.Y. 71, 80 (N.Y. 1896)). Instead, a party contesting the validity of the
instrument must demonstrate facts calling into question the instrument’s validity by clear and
convincing evidence. Id. (requiring that the evidence shown against validity of an instrument be
“a moral certainty”). Evidence useful for this inquiry can include the testimony of the notary
that purported to witness the signing of the instrument. See Kitovas v. Megaris, 133 A.D.3d 720,
721-22, 20 N.Y.S.3d 393, 394 (N.Y. App. Div. 2d Dept. 2015); see also John Deere Ins. Co. v.
GBE/Alasia Corp., 57 A.D.3d 620, 621-22, 869 N.Y.S.2d 198, 200 (N.Y. App. Div. 2d Dept.
2008) (suggesting that the testimony of a handwriting expert could have established that the
signature on an instrument was forged).
The overwhelming credible evidence in this record supports the validity of the
Promissory Note. The presumption of validity applies here because the Promissory Note was
duly notarized. Exh. 1 (contains the signature of a notary named Lisa Manning). There has been
no evidence submitted to indicate that the Promissory Note was not signed by David Balaj, that
Ms. Manning was not actually present at the time the Promissory Pote was signed, or that Ms.
Manning was not a notary public at the time the Promissory Note was executed. The most Maria
Balaj offered at the trial is that the Promissory Note “did not exist in 2002.” Hr’g Tr. of Feb. 22,
2019 at 64:6-8. But the Court finds her testimony to be unreliable and self-serving; the Court
further concludes that her testimony is easily outweighed by the remainder of the evidence of the
Promissory Note’s validity. See Osborne v. Zornberg, 16 A.D.3d 643, 644-45, 792 N.Y.S.2d
183, 184-85 (N.Y. App. Div. 2d Dept. 2005).
The Court also rejects Maria Balaj’s contention that the Debtor’s obligations under the
Promissory Note were forgiven by Zef Balaj, Lina Balaj, and Puka Capital. Considering all the
evidence in the record, including the live testimony of the witnesses, the Court finds that her
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argument is not supported by credible evidence. More specifically, the Court finds that the
credibility of Maria Balaj’s position is severely undermined by the cross examination of Maria
Balaj by Puka Capital’s counsel. See Hr’g Tr. of Feb. 22, 2019 at 95:3-106:12 (comparing
purported written forgiveness with other documents between the same parties). Thus, the Court
concludes that there was no written forgiveness of the Promissory Note and further notes that
any oral forgiveness of such an obligation would be invalid under New York law. See In re
Estate of Carr, 99 A.D.2d 390, 393, 473 N.Y.S.2d 179, 181 (N.Y. App. Div. 1st Dept. 1984).
For all these reasons, the Court concludes that the Promissory Note is valid and enforceable
against the Debtor.
II. 	Puka Capital is Entitled to the Entirety of Interest it Seeks
Puka Capital seeks interest on the Promissory Note for two separate time periods. First,
Puka Capital seeks interest on the Promissory Note that accrued from the date the loan matured on
February 28, 2007 until the date this Bankruptcy was filed on. Puka Capital Brief at 3-5. Second,
Puka Capital seeks interest after the filing of the Bankruptcy to date under the Promissory Note’s
default rate of six (6) percent. 	Puka Capital Brief at 2-3. 	As the standards governing the
entitlement to interest for those two time periods are different, the Court addresses the issues
separately.
A. Puka Capital Is Entitled to Pre-Petition Interest on the Promissory Note
Maria Balaj argues that Puka Capital should be denied pre-petition interest because Puka
Capital failed to take collection action earlier. More specifically, Maria Balaj argues that Puka
Capital’s failure to immediately sue to recover under the terms of the Promissory Note is akin to
a forfeiture that would reduce the interest owed to Puka Capital. See Post-Trial Brief of Maria
Balaj at 5 [ECF No. 50] (the “Maria Brief”) (“Given Puka[] [Capital’s] deep ties to [David
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Balaj], they allowed interest to accrue unspoken from 2002 to 2011, nine years to their
advantage. At the very least, the equitable solution[] is to forego interest before filing of
summary judgment in 2011.”); Hr’g Tr. of Mar. 1, 2019 at 6:17-18:12. The Court disagrees.
Maria Balaj fails to cite statutory authority or case law that would support the tolling of
interest under the Promissory Note. See Maria Brief at 12-13. Although Maria Balaj discussed
the tolling of interest under New York law in certain foreclosure cases, those cases are
distinguishable. Hr’g Tr. of Mar. 1, 2019 at 18:5-12. All those cases involve inequitable
conduct after the commencement of a case. See, e.g., Dayan v. York, 51 A.D.3d 964, 965-66,
859 N.Y.S.2d 673, 674-75 (N.Y. App. Div. 2d Dept. 2008) (denying secured creditor post-
petition interest on the mortgage where the secured creditor failed to seek a judgment of
foreclosure within seven years of the case being initially filed and where the property had still
not been sold for another seven years after that). The Court has not been presented with
evidence that would support a finding of misconduct after this case was filed. Indeed, Maria
Balaj’s briefing focuses on Puka Capital’s failure to bring its state court collection action sooner.
See Maria Brief at 12-13. Nor has Maria Balaj identified any authority or rationale for applying
the principles in these foreclosure cases for the present circumstances.
Even if this Court were to consider Maria Balaj’s argument as one seeking to invoke the
laches defense—as Puka Capital does (see Puka Capital Brief at 3-5)—her argument to seek
tolling of interest here would still fail. “Laches is an equitable doctrine based on fairness.”
Cont. Cas. Co. v. Emp’rs. Ins. Co. of Wausau, 60 A.D.3d 128, 137, 871 N.Y.S.2d 48, 55 (N.Y.
App. Div. 1st Dept. 2008). Where there has been lengthy neglect or omission to assert a right
with resulting prejudice to an adverse party, laches applies. See Saratoga Cnty. Chamber of
Commerce v. Pataki, 100 N.Y.2d 801, 816 (2003). Mere delay without a showing of prejudice to
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the adverse party is insufficient to sustain a laches defense. See Estate of Linker v. Martin, 23
A.D.3d 186, 189, 803 N.Y.S.2d 534, 537 (N.Y. App. Div. 1st Dept. 2005). Prejudice typically
requires an “injury, change of position, intervention of equities, loss of evidence, or other
disadvantage resulting from such delay.” Id. (citing Skrodelis v. Norbergs, 272 A.D.3d 316, 317,
707 N.Y.S.2d 197, 198-99 (N.Y. App. Div. 2d Dept. 2002)).
Both the law and the facts would require a rejection of laches as a defense here for
myriad reasons.
First, laches is an affirmative defense that must be pled and proved by the party asserting
it. See Fed. R. Civ. P. 8(c)(1) (listing laches as a defense that must be raised in an answer to a
complaint); Karlen v. N.Y. Univ., 464 F. Supp. 704, 708 (S.D.N.Y. 1979) (“The defense of laches
is an affirmative defense under [Rule] 8(c) and properly should be raised in the defendant’s
answer . . . .”); see also Dreikausen v. Zoning Bd. of Appeals, 98 N.Y.2d 165, 173, n.4 (N.Y.
2002) (“Laches must be pleaded and proved by one who urges it.”) (citation omitted). The Court
does not find an assertion of laches in any of the state court pleadings filed by Maria Balaj or in
her proof of claim filed here.
Second, Maria Balaj has failed to prove that inequitable conduct occurred. It is true that
the Promissory Note continued to accrue interest for years starting in 2002. While interest was
accruing, however, that is because the Debtor was paying off its higher cost secured debt under
the HVB Obligation rather than its less expensive unsecured debt under the Promissory Note.
This advanced rather than harmed the Debtor’s interests. There is also no evidence that the
purported delay in bringing Puka Capital’s case made the Debtor (or Maria Balaj) incapable of
defending Puka Capital’s claims under the Promissory Note. See Reif v. Nagy, 2019 WL
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2931960, at *15 (N.Y. App. Div. 1st Dept. Jul. 9, 2019); Sparkling Waters Lakefront Assn., Inc.
v. Shaw, 42 A.D.3d 801, 803, 841 N.Y.S.2d 146, 149 (N.Y. App. Div. 3d Dept. 2007).
Third, Puka Capital’s action to recover under the Promissory Note is an action at law.
See Kahn v. N.Y. Times Co., 122 A.D.2d 655, 663, 503 N.Y.S.2d 561, 567 (N.Y. App. Div. 1st
Dept. 1986). Generally, laches is inapplicable to an action at law brought within the statute of
limitations, such as for the recovery for damages under a promissory note. Id.; Cadlerock, L.L.C.
v. Renner, 72 A.D.3d 454, 898 N.Y.S.2d 127, 128 (N.Y. App. Div. 2d Dept. 2010). It is
uncontested that this case was timely brought under the statute of limitations, thus making laches
unavailable. See N.Y. C.P.L.R. 213 (McKinney) (dictating that causes of action for breach of
contract must be brought within six years).
Finally, to the extent that Maria Balaj asks the Court to apply some other equitable
power, including the Court’s inherent equitable powers, the Court declines to do so. While
bankruptcy courts are courts of equity, see, e.g., 11 U.S.C. 105(a), the Court finds nothing
inequitable in the actions taken before or during this case by any party, including Puka Capital.
See Law v. Siegel, 134 S. Ct. 1188 (2014) (noting limitations in equitable powers of the
bankruptcy court); see also Momentum Mfg. Corp. v. Emp. Creditors Comm. (In re Momentum
Mfg. Corp.), 25 F.3d 1132, 1136, n.4 (2d Cir. 1994).
B. Puka Capital Is Entitled to Post-Petition Interest
As a general matter, unsecured creditors are not entitled to post-petition interest as part of
their claims in bankruptcy. See 11 U.S.C. 502(b)(2) (forbidding claims for unmatured interest).
Section 502(b)(2) codifies the longstanding view that post-petition interest is disallowed because
the delay of a case is “a delay necessitated by law if the courts are to properly preserve the estate
for the benefit of all involved.” Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156,
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163 (1946). But there is an exception to this general rule where there is a return to equity in a
bankruptcy case of a solvent debtor. The thinking behind this exception is that “creditors should
receive interest [in such circumstances] as compensation for the delay in the bankruptcy
process.” In re General Growth Props., 451 B.R. 323, 326 (Bankr. S.D.N.Y. 2011); see also 4
Collier on Bankruptcy ¶ 502.03[3][c] (16th ed. 2018). The Second Circuit has long recognized
this exception. See Ruskin v. Griffiths, 269 F.2d 827, 830-31 (2d Cir. 1959).
Given the facts of this case, the Court agrees that post-petition interest on Puka Capital’s
claim is appropriate at the contract default rate of six (6) percent. Debtor’s main case and this
adversary proceeding have been ongoing since 2017, and the state court actions were first
brought in 2011. At all relevant times, Debtor has been solvent. Hr’g Tr. of Mar. 1, 2019 at
30:10-25. Permitting post-petition interest in this case is squarely in line with the policy reasons
governing the exceptions to the prohibition on receiving post-petition interest. See 4 Collier on
Bankruptcy ¶ 502.03[3][c].
Maria Balaj’s arguments to the contrary are unavailing. Maria Balaj relies upon Section
506(b) to argue that Puka Capital is not entitled to post-petition interest. See Maria Brief at 11.
But her reliance is misplaced. Section 506 applies solely to a determination of secured status and
the legal entitlements of parties that hold secured claims. See 11 U.S.C. § 506. As Puka Capital
is not a secured creditor, Section 506 does not apply.
Moreover, to the extent that Maria Balaj argues that it would be inequitable to grant Puka
Capital post-petition interest, the Court disagrees. It is undisputed that even if Puka Capital
receives interest in this case, Maria and David Balaj will still receive a distribution as equity
holders of the Debtor. See Maria Brief at 10 (“Should Puka[] [Capital’s] claim (4-1) be paid, it
would consume more than half the [remaining assets of the estate].”). Granting Puka Capital
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post-petition interest on their claim would not significantly alter that calculation, as post-petition
was calculated to be $37,555.20 as of the first day of trial in this case, so the equities firmly
weigh in favor of awarding post-petition interest. Exh. 46.
Maria Balaj has not argued for a specific rate or method of calculation for post-petition
interest. See Maria Brief at 11-12. Courts have differing views about the appropriate rate of
post-petition interest, with various courts looking to the state court judgment rate, the contract
rate, or the federal judgment rate. 4 Collier on Bankruptcy ¶ 502.03[3][c] (discussing the
contrasting rationales in applying certain interest rates). Given all the facts here including the
return to equity, the Court concludes that the contractual rate is appropriate, particularly given
that neither the Debtor nor Maria Balaj has argued for a different rate. See In re Beck, 128 B.R.
571 (Bankr. E.D. Okla. 1991) (“[I]f a contract existed between the parties pre-Petition or post-
Petition which established a rate of interest on any unpaid but payable amount, the rate
established in the contract shall be applied.”). Accordingly, the Court awards Puka Capital post-
petition interest at the rate of six (6) percent.
III. 	David Balaj Did Not Breach His Fiduciary Duties to the Debtor or its Members
The last remaining issue in this case is Maria Balaj’s claim against David Balaj for
breach of fiduciary duty. Maria Balaj argues that by executing the Promissory Note and
allowing interest to accrue on it to date, David Balaj breached his fiduciary duty as managing
member to the Debtor and her. See, e.g., Maria Brief at 7. Once again, the Court disagrees.
Under New York law, the following elements must be shown in order to recover damages
for a breach of fiduciary duty: “(1) the existence of a fiduciary relationship, (2) misconduct by
the defendant, and (3) damages directly caused by the defendant's misconduct.” Fox v. Koplik
(In re Perry H. Koplik & Sons, Inc.), 499 B.R. 276, 289 (S.D.N.Y. 2013) (quoting Rut v. Young
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Adult Inst., Inc., 74 A.D.3d 776, 777, 901 N.Y.S.2d 715, 717 (N.Y. App. Div. 2d Dept. 2010)
(citations omitted)). Although breach of fiduciary duty can at times be a nebulous concept, it is
most commonly considered to encompass the duty of care and the duty of loyalty. See Norlin
Corp. v. Rooncer, Pace, Inc., 744 F.2d 255, 264 (2d Cir. 1984).
The duty of care requires that a fiduciary act with “the care that a reasonably prudent
person in a similar position would use under similar circumstances.” Id. The duty of care does
not exist in a vacuum, however, and must be considered in conjunction with the business
judgement rule. Id. The business judgement rule “bars judicial inquiry into actions of corporate
directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate
furtherance of corporate purposes.” Id. (citing Auerbach v. Bennett, 47 N.Y.2d 619, 629 (1979)).
The business judgment rule protects fiduciaries such as members of an LLC where that member
performs their duties “in good faith and with that degree of care that an ordinarily prudent person
in a like position would use under similar circumstances.” Nathanson v. Nathanson, 20 A.D.3d
403, 404, 799 N.Y.S.2d 83, 84-85 (N.Y. App Div. 2d Dept. 2005) (citing N.Y. Ltd. Liab. Co.
Law § 409(a)).
The duty of loyalty, on the other hand, prohibits self-dealing or engaging in transactions
where one fiduciary receives a benefit that others do not. See Norlin, 774 F.2d at 264; Marx v.
Akers, 88 N.Y.2d 189, 202 (N.Y. 1996) (“[Fiduciaries] are self-interested in a challenged
transaction where they will receive a direct financial benefit from the transaction which is
different from the benefit to [others] generally.”). The duty of loyalty exists to prohibit
fiduciaries from assuming or engaging in “the promotion of personal interests which are
incompatible with the superior interests of their [business entity].” In re Perry H. Hoplik &
Sons, 499 B.R. at 289 (quoting Foley v. D'Agostino, 21 A.D.2d 60, 66, 248 N.Y.S.2d 121, 128
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(N.Y. App. Div. 1st Dept. 1964)). “Once a prima facie showing is made that [fiduciaries] have a
self-interest in a particular [] transaction, the burden shifts to them to demonstrate that the
transaction is fair and serves the best interests . . .” of the entity. Norlin, 744 F.2d at 264.
Based on the evidence in the record, the Debtor’s objection to Maria Balaj’s breach of
fiduciary duty claim must be sustained. There are two relevant time periods subject to inquiry
before this Court: (1) the time of the Debtor’s formation until the HVB Obligation was paid off
in 2010; and (2) the time after the HVB Obligation was paid off.
As to the first time period, there can be no breach of the duty of care. The Operating
Agreement provided that David Balaj, the managing member, could take “any and all actions” he
deemed necessary to acquire the Virginia Place property. Exh. 36. That authority included the
power “to execute and deliver . . . instruments” for that purpose. Id. The Operating Agreement
also provided that secured debts like the HVB Obligation must be paid before unsecured debts.
Id. Consistent with these dictates, David Balaj decided to issue the Promissory Note,
subsequently take out the HVB Loan, and prioritize payment of the HVB Obligation over the
Promissory Note. All these actions were all expressly authorized in and consistent with the
Operating Agreement, thus satisfying his duty of care and the business judgment rule. See
Zuckerbrod v. 355 Co., LLC, 113 A.D.3d 675, 676, 979 N.Y.S.2d 119, 120-21 (N.Y. App. Div.
2d Dept. 2014) (holding defendant made a prima facie showing of good faith by establishing that
revenue was withheld in order to make improvements or repairs on the businesses’ properties).
David Balaj’s actions, or lack thereof, are on more tenuous ground for the second time
period. Once the HVB Obligation was paid off in January of 2010, David Balaj’s stated
reasoning for not making any payments to Puka Capital under the Promissory Note would appear
to disappear. See Decl. of David Balaj ¶¶ 21-23. It is arguable that payments under the
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Promissory Note should have begun at that point. But the problem with Maria Balaj’s claim for
this period is evidence. In short, there is nothing in the record to indicate what was done with the
rents collected from January through April of 2010. Maria Balaj’s counsel did not seek to elicit
testimony from David Balaj on this subject nor did she present any other evidence on this issue.
Thus, the Court has no way to know how the rent funds collected during their period were used;
the uses could conceivably include appropriate expenditures such as maintenance or
inappropriate uses entirely unrelated to the Property. Given the lack of evidence as to what
David Balaj did or did not do during this four month period, Maria Balaj has not satisfied her
burden to establish either misconduct by David Balaj for this time period or any damages caused
by the misconduct. See Mobarak v. Mowad, 117 A.D.3d 998, 999-1000, 986 N.Y.S.2d 539, 541
(N.Y. App. Div. 2d Dept. 2014) (“Here, the plaintiff failed to produce any evidence to
substantiate his allegations of fraud, bad faith, or breach of fiduciary duty in connection with [the
defendants’ actions].”).2
Finally, Maria Balaj’s claims for breaches of the duty of loyalty for both time periods fail
because there is nothing in the record to indicate self-dealing or other impermissible conduct by
David Balaj. There is nothing to indicate that David Balaj was on both sides of the transaction
when he issued the Promissory Note. See In re Rothko, 43 N.Y.2d 305, 319 (N.Y. 1977). Nor is
there anything in the record to suggest that David Balaj has received a benefit that Maria Balaj
did not. See Marx, 88 N.Y.2d at 202. If the facts show anything, they illustrate the wisdom of
the familiar warning about the risks of doing business with family. See Maria Brief at 5
2 Maria Balaj complains about David Balaj’s failure to pay down of the Promissory Note. The Court notes that
another adversary proceeding has been filed regarding Maria Balaj’s own alleged failure to make various payments,
including property taxes, during her tenure managing the Property. The merits of that adversary proceeding are for
another day. But after years of extensive litigation, the Court encourages all parties to seek a final resolution of all
their remaining disputes to bring much needed closure to their lives and this bankruptcy case.
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(characterizing these proceedings as “another battle in David Balaj and Maria’s marital wars”);
see also Amundson v. Slaton (In re Slaton), 469 B.R. 814, 820 (Bankr. W.D. Wis. 2012) (“As
business advisers routinely note, it is dangerous to go into business with family or friends
because the relationships rarely survive if there is a falling out.”). Accordingly, Maria Balaj’s
fiduciary duty claims fail in toto and the Debtors’ objection to claim number 8 is sustained.3
3 Two motions in limine were filed before trial that sought to exclude evidence challenging the validity of the
Promissory Note and to exclude introduction of a purported second version of the Debtor’s Operating Agreement.
See Memorandum in Support of Plaintiff’s Motion in Limine to Preclude Certain Testimony and Evidence at Trial,
dated Feb. 22, 2019 [ECF No. 33] (seeking, inter alia, to preclude Debtor and Maria Balaj from challenging the
validity of the Promissory Note and from introducing a second version of the Debtor’s Operating Agreement);
Motion in Limine of Debtor L&N Twins Place LLC, dated Feb. 23, 2019 [ECF No. 36] (seeking to preclude
introduction of second version of Operating Agreement). Both those motions were opposed by Maria Balaj. See
Affirmation in Opposition to Motion in Limine by Puka Capital Funding, LLC and L&N Twins Place, LLC, dated
Feb. 19, 2019 (submitted by Maria Balaj) [EFC No. 38].
At trial, the Court excluded the second version of the Operating Agreement for a variety of reasons, many
of which were consistent with the arguments contained in the motions in limine. See Hr’g Tr. Feb. 22, 2019 at
113:24-131:15 (excluding the alternative version of the Operating Agreement that was marked for identification as
Exhibit 55). As today’s decision upholds the validity of the Promissory Note based on all the evidence in the record,
the decision moots the remainder of the relief sought by the motions in limine.
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CONCLUSION
For all of the reasons discussed above, Puka Capital is entitled to recover under the
Promissory Note as set forth in Claim Number 4. 4 Maria Balaj’s direct fraud causes of action are
dismissed, and the Court sustains the Debtor’s objection to Claim Number 8, which is expunged.
Puka Capital is to settle an order on seven day’s notice consistent with this Decision and
the Court’s ruling at trial on the merits of Maria Balaj’s claims. The proposed order must be
submitted by filing a notice of the proposed order on the docket, with a copy of the proposed
order attached as an exhibit to the notice. Additionally, the proposed order shall include a
calculation of its damages under the Promissory Note and post-petition interest accrued up to the
date of this decision. A copy of the notice and proposed order shall be served upon counsel for
the Debtor and Maria Balaj.
Dated: October 15, 2019
New York, New York
/s/ Sean H. Lane
UNITED STATES BANKRUPTCY JUDGE
4 	The Court notes that David Balaj brought a counterclaim against Maria Balaj seeking a declaratory
judgment that the Promissory Note is valid. See Exh. 11. But given that the relief sought by David Balaj as to the
Promissory Note is essentially the same as that granted today to Puka Capital by the Court, David Balaj’s request for
a declaratory judgment is moot.
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