Jalbert v. Gryaznova

UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re 	: 	Chapter 11
:
BICOM NY, LLC, et al., 	: 	Case No. 17-11906 (MEW)
:
Debtors. 	: 	(Confirmed Cases)
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CRAIG R. JALBERT, in his capacity as the 	:
Liquidation Trustee, 	:
:
Plaintiff, 	:
:
v. 	: 	Adv. Pro. No. 19-1311
:
IRINA GRYAZNOVA, 	:
:
Defendant. 	:
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DECISION GRANTING SUMMARY JUDGMENT IN
FAVOR OF DEFENDANT IRINA GRYAZNOVA
AND DISSOLVING TEMPORARY RESTRAINING ORDER
On August 18, 2020, at the conclusion of a hearing (the “Hearing”), the Court ruled on
several motions and issues before it. The Court denied the motion filed by Craig R. Jalbert, the
Liquidating Trustee, for summary judgment against defendant Irina Gryaznova, and denied Ms.
Gryaznova’s motion to dismiss based on an alleged lack of personal jurisdiction. However, the
Court deferred ruling on Ms. Gryaznova’s motion seeking summary judgment in her favor
pending further briefing by the parties on the issue of whether Ms. Gryaznova was an “initial
transferee” under section 550 of the Bankruptcy Code. The Court also allowed a restraining
order to remain in effect as to Ms. Gryaznova pending a decision on the “initial transferee” issue.
An order reflecting the Court’s rulings was entered on August 24, 2020 (ECF No. 49).
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Most of the material facts concerning the transfers of the funds at issue are not in dispute,
though there are some disputes (as noted below) about the background to the transactions and
disputes as to how to characterize the facts. More specifically:
1. 	Ms. Gryaznova and Alexander Boyko are citizens of the Russian Federation who
visited a friend, Veniamin Nilva, in Florida in 2008. Ms. Gryaznova and Mr. Boyko decided that
they wished to purchase a condominium in the same complex where Mr. Nilva lived, and that
they would like to obtain permanent residency in the United States.
2. 	Ms. Gryaznova sought to avail herself of the EB-5 program under which
individuals could qualify for permanent residence by investing in a U.S. company as a way to
create jobs for U.S. citizens. The process required her to maintain a U.S. bank account with a
minimum balance of $10,000.
3. 	Ms. Gryaznova contends that a social security number was needed to open a bank
account. She contends that Mr. Nilva offered to open a bank account jointly with her (the Nilva-
Gryaznova Account), that only Ms. Gryaznova’s money was to be kept in the account, and that
Mr. Nilva was only a “nominal” account holder.
 	The Trustee disputes the contention that a social security number was needed to open
a bank account and disputes the legal characterization of Mr. Nilva as a “nominal”
account holder. However, the Trustee has not contested the assertion that only Ms.
Gryaznova’s money was to be kept in the account. See “The Trustee’s Response to
Defendant Irina Gryaznova’s Statement of Undisputed Material Facts,” August 12,
2020, ¶ 5 (ECF No. 47).
4. 	The Nilva-Gryaznova Account was set up using Mr. Nilva’s Florida address to
receive and hold the monthly bank statements. There is no dispute that Ms. Gryaznova was
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aware of the existence of the joint account and that she had signatory authority with respect to
the account.
5. 	Mr. Nilva was a managing member of several automobile dealerships and
holdings companies including BICOM NY, LLC (“BICOM”), one of the debtors in these cases,
and a non-debtor named Kings Automotive Holding LLC (“Kings Automotive”).
6. 	BICOM and Kings Automotive each had bank accounts with JPMorgan Chase
(“Chase”). BICOM also maintained a “floorplan financing” plan with Chase, which required
BICOM to report all transfers made to ensure they were ordinary course of business transactions.
7. 	BICOM breached its agreement with Chase by opening a separate bank account at
Wells Fargo. The Wells Fargo account permitted the owners of BICOM to make transfers of
BICOM funds without the knowledge of Chase even if such transfers were not being made in the
ordinary course of business.
8. 	In 2016 the owners of BICOM wished to transfer $1 million from BICOM to
Kings Automotive. However, they knew that Chase would not permit such a transfer.
9. 	In order to make a transfer from BICOM to Kings Automotive, while disguising
the source of the funds, Mr. Nilva caused a check to be drawn on BICOM’s Wells Fargo account
in the amount of $1 million. The check was made payable to Ms. Gryaznova. Without Ms.
Gryaznova’s knowledge or consent, Mr. Nilva endorsed the check using his own signature and
deposited it in the joint Nilva-Gryaznova account. “Simultaneously,” Mr. Nilva also wrote a
check against the joint account for the same amount ($1 million), which he made payable to
Kings Automotive and which he deposited in a Kings Automotive bank account. The two
checks were dated the same day (June 26, 2016). Id. ¶ 12.
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During the Hearing the Trustee’s counsel confirmed that the Trustee does not dispute the
contentions that (a) Ms. Gryaznova did not actually use any of the transferred funds, (b) Ms.
Gryaznova did not know about the transfers until after this litigation was filed, (c) Mr. Nilva’s
intent was to make a transfer to Kings Automotive, and (d) the joint account was used by Mr.
Nilva solely as a device to deceive Chase as to the origin of the funds that were being transferred
by BICOM to Kings Automotive.
The parties have argued that the decision by the Second Circuit Court of Appeals in In re
Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, 130 F.3d 52 (2d Cir.
1997), is controlling under the foregoing facts, though they reach opposite conclusions as to what
result the Finley Kumble decision mandates. The Trustee argues that Ms. Gryaznova had legal
“dominion or control” over the funds because she was a joint account owner and that Finley
Kumble requires that Ms. Gryaznova be held strictly liable as an “initial transferee.” 130 F.3d at
57. Ms. Gryaznova argues that a “recipient” of funds is not necessarily a “transferee,” id., and
that under Finley Kumble her account was merely a conduit for the transfer of funds from
BICOM to Kings Automotive.
The Trustee has cited authorities that speak generally of the legal rights of joint account
owners. See, e.g., In re Strauss, 2015 WL 1221380, at *8 (Bankr. D. Colo. Mar. 16, 2015)). The
Trustee has also cited decisions in which courts have rejected (on factual grounds) contentions
by defendants that they lacked actual “control” over funds in joint accounts. See, e.g., In re Big
Apple Volkswagen, LLC, 2016 WL 1069303, at *12 (Bankr. S.D.N.Y. Mar. 17, 2016), and In re
Polichuk, 506 B.R. 405, 451 (Bankr. E.D. Pa. 2014)). At the Hearing, however, the Court
brought three additional decisions to the attention of the parties, none of which had been
addressed in the parties’ prior submissions:
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 	In In re Chase & Sanborn Corp., 813 F.2d 1177 (11th Cir. 1987), a defunct
corporation was reopened just to launder funds. The corporation’s sole owner opened
a bank account in the company’s name, deposited funds, then transferred the money
to a third party and closed the account. The Court held that a trustee of the
corporation could not recover the funds that had been transferred from the bank
account because the debtor corporation did not have sufficient control over the funds
to warrant a finding that the funds were the corporation’s property. That was true
even though the funds had been deposited in an account of which the corporation was
the legal owner. The court found the evidence of the sole owner’s control of the
transfer “overwhelming” and the debtor’s connection to the funds “tangential.”
 	In Walsh v. Townsquare Assocs. (In re Montross), 209 B.R. 943 (9th Cir. 1997),
Montross laundered funds through Townsquare bank accounts over which Montross
had the sole signature authority. He concealed the scheme from others, and
Townsquare never used the money or knew of the funds. The Court held that under
the circumstances of that case Townsquare was not a “transferee,” holding that
Townsquare never had dominion and control and only had bare legal possession of
the funds.
 	In In re Reeves, 65 F.3d 670 (8th Cir. 1995), the debtor fraudulently put $65,000 into
the account of Reeves Farms, Inc. and then transferred that money to another account
of another entity. The bankruptcy court held that Reeves Farms, Inc. was liable as an
initial transferee, but the Court of Appeals reversed. The Court of Appeals noted that
there was no indication that Reeves Farms, Inc. had received any benefit, and held
that the debtor’s use of the Reeves Farms account did not make Reeves Farms an
initial transferee. Instead, Reeves Farms was a conduit under the circumstances.
The Court directed the parties to make further submissions to address these authorities and any
other supplemental authorities on the same points. Those submissions have been made, and the
Court has reviewed them.
The Trustee continues to argue that Ms. Gryaznova should be held strictly liable for the
transfer at issue. It is true, as the Trustee suggests, that if a person is an initial transferee then
there is strict liability for transfers. See In re Red Dot Scenic, Inc., 351 F.3d 57, 58 (2d Cir.
2003) (“If the recipient of debtor funds was the initial transferee, the bankruptcy code imposes
strict liability and the bankruptcy trustee may recover the funds.”) However, it is emphatically
not the case that every “recipient” of funds is automatically liable as an “initial transferee.” See
Finley Kumble, 130 F.3d at 56 (“The statutory term is ‘transferee’ – not ‘recipient’ – and is not
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self-defining.”) The Trustee is trying to apply strict liability standards in deciding whether
someone is a transferee in the first place, but that is precisely what the Finley Kumble decision
forbids. Id. at 56 (rejecting the contention that “the owner of the first pair of hands to touch the
property is the initial transferee,” and agreeing with a prior decision from the Seventh Circuit
holding that “a more functional” rule must be applied, citing Bonded Fin. Servs. v. European Am.
Bank, 838 F.2d 890, 894 (7th Cir.1988)).
In Finley Kumble, an insurance broker received payments and deposited them into the
broker’s own bank account. There was no question that the insurance broker had received the
funds and that the insurance broker owned the account into which the funds were deposited. See
130 F.3d at 55. However, the only reason the broker received the payments was so that it could
make payments to an insurance company, and the record showed that the broker had paid all of
the funds to the insurance company within 5 to 14 days after the broker had received them. Id.
The Court of Appeals agreed with the district court’s holding that the broker’s receipt of the
funds did not automatically make it a “transferee,” and held that the actual “transferee” is “the
one to whom the funds ultimately should go,” which in that case was the insurance company. Id.
at 57. The broker in Finley Kumble had just performed a service, and in that context the Court
held that the broker should not be regarded as a transferee. Id. at 58-59.
The Trustee argues that under Finley Kumble any person who legally has “dominion and
control” over an account into which funds are deposited is automatically to be regarded as a
transferee. In fact, the Court held in Finley Kumble that “dominion and control” were
“minimum” requirements before someone could be treated as a transferee, but it did not hold that
they were always sufficient by themselves. Id. at 57. More importantly, the Finley Kumble
decision does not support the Trustee’s contention that a party’s bare legal ownership of a bank
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account is sufficient by itself to make the party a “transferee.” The broker in Finley Kumble
owned the bank account into which the funds were deposited and exercised actual control over
the movement of the funds. However, the broker also had agreed to transfer the funds to another
party. Under the circumstances of that case the broker was functionally just a conduit for the
intended transfer from the client to an insurance company. The broker’s legal ownership and
control of the relevant bank account were not enough to make the broker liable as an initial
transferee.
The problem with the Trustee’s approach in this case is that it pushes legal fictions to
extremes that make no sense and that are inconsistent with the teachings of the Finley Kumble
decision. The whole point of having a “dominion and control” test is to ensure that treating
someone as a “transferee” has some grounding in the realities of the underlying transaction. The
Trustee asserts that Ms. Gryaznova’s ownership of the account theoretically gave her unfettered
control over the funds, but in the real world she had no such control at all. Ms. Gryaznova had
no knowledge of the deposit, and the money was long gone before Ms. Gryaznova knew about it.
Ms. Gryaznova actually had far less actual “control” over the use of the funds at issue than the
broker had in the Finley Kumble case.
Furthermore, the Trustee’s argument about Ms. Gryaznova’s alleged theoretical
discretion over the funds ignores the check that Mr. Nilva “simultaneously” wrote to Kings
Automotive. The issuance of that check created a legal obligation that had to be honored and
denied Gryaznova the right to put the money to her own purposes. If the broker’s agreement to
transfer funds to an insurance company created a legal obligation that was sufficient to negate
the broker’s alleged “dominion and control” over funds that the broker received in the Finley
Kumble case, then so too the simultaneous check written by Mr. Nilva to Kings Automotive
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created a legal obligation that had to be honored and that negated any “dominion and control”
over the deposit that Ms. Gryaznova allegedly had by virtue of her rights as a joint account
owner.
Under the admitted facts Mr. Nilva simultaneously deposited the BICOM check in the
joint account and issued a check from that account to Kings Automotive. The two checks
directly offset each other. Any benefit allegedly provided by the deposit was coupled with an
equal and simultaneous liability. On a net basis the transaction did not actually made any funds
available. No real-world transfer of funds to Ms. Gryaznova was intended, and none was
accomplished. Nilva used the joint account solely to facilitate a transfer from BICOM to Kings
Automotive. Ms. Gryaznova did not endorse, participate in or know about this use of her
account – which was supposed to be used only for her own funds – and she received no benefit
from it.
The admitted facts distinguish this case from the decisions cited by the Trustee. In In re
Big Apple Volkswagen, LLC, Adv. Proc. No. 11-2251 (JLG), 2016 WL 1069303, at *12 (Bankr.
S.D.N.Y. Mar. 17, 2016), for example, a defendant disputed her liability as an initial transferee
for transfers made by a company owned by one of her sons to an account in her name. 	She
alleged that another son controlled that bank account and that she had no knowledge of the
transfers made to the account. However, the Court held that the defendant had not proffered any
evidence in support of her allegations. Id. Further, the transfers of the funds to the bank account
were not for the benefit of a third-party, they were for account holder’s benefit. Id. at 16. Under
these circumstances, the court concluded that the unsupported statement that another son
controlled the account were insufficient to insulate the defendant from liability as an initial
transferee. Id.
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In Finkel v. Polichuk (In re Polichuk), 506 B.R. 405 (Bankr. E.D. Pa 2014), a debtor
wrote a check in the name of his sister (Larisa); Larisa then opened a joint bank account with the
debtor’s wife (Marina), and deposited the check in the joint account. Id. at 449. Larisa moved
for summary judgment, arguing that she did not have dominion and control over the funds even
though the check had been written to her. The court held that Larisa had presented “no
evidence” to support this contention, and denied summary judgment. Id. at 451.
In Anstine v. Barclays Bank Del. (In re Strauss), Adv. Proc. No. 12-01801, 2015 Bankr.
LEXIS 822 (Bankr. D. Colo. Mar. 16, 2015), a debtor deposited funds into a joint account with
his wife and the funds were used to pay credit cards belonging to both the wife and the husband.
A trustee sued the bank that received the credit card payments. The bank argued in response that
the wife (not the bank) was the ‘initial transferee” of funds that the husband had deposited in the
joint account, and that the wife’s and husband’s credit card debts constituted “reasonably
equivalent value” for the funds that the bank later received from the couple through the joint
account. The trustee argued that the wife was not a “transferee,” and that all of the funds in the
joint account should be treated as funds belonging to the husband because it was the husband
who had earned the money. Id. at *23. There was no dispute, however, that the wife had control
over the account and actual access to the funds, and that the funds had been used to pay her
credit card debts. Under those circumstances the Court of Appeals agreed with the bank’s
contention that the wife (not the bank) was an initial transferee of funds from the husband, and
held that there was “reasonably equivalent value” for the funds the bank had received from the
two owners of the joint account.
None of the foregoing decisions supports the Trustee’s arguments in this case. They all
involve situations in which, for factual reasons, courts rejected contentions that a joint account
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holder was not a transferee. They do not support the contention that a joint account holder
should be deemed liable as a transferee under the unusual circumstances present in this case.
The Trustee has also relied on decisions involving parties who knowingly act as
transferees of funds for the purpose of hiding the funds from creditors, and who then attempt to
avoid liability by contending that they lacked “control” of the funds because they merely
followed instructions they received from other people. In In re Hurtado, 342 F.3d 528 (6th Cir.
2003), for example, a mother knowingly deposited funds for her son and daughter-in-law into a
joint account held by the mother and her spouse. Id. at 530. The money was in the joint account
for many months. The mother and her spouse claimed that they were not really “transferees”
because the funds were only used at the direction of and for the benefit of the children. Id.
However, the facts showed that the mother knowingly accepted the funds for the purpose of
concealing them from creditors. Id. at 531. Under these circumstances the mother and her
spouse plainly were “transferees” of fraudulently transferred property. The mere fact that they
were motivated by a desire to help their children, and chose to accept instructions from the
children, did not alter the fact that they had agreed to be the transferees of funds in transactions
that were meant to hinder, delay or defraud creditors. They were voluntary transferees in
transactions that were intentionally fraudulent, and this was true regardless of whether the
mother and her spouse chose to follow the children’s instructions or to use the funds otherwise.
Similar patterns can be found in other decisions cited by the Trustee. See, e.g.,
Richardson v. United States, IRS (In re Anton Noll, Inc.), 277 B.R. 875, 881-82 (1st Cir. 2002)
(corporate owner transferred debtor’s funds to his own account; the owner was the transferee
under those facts, and the mere fact that the owner chose to use the money to pay the owner’s
debts to the IRS did not change that conclusion); Helms v. Roti (In re Roti), 271 B.R. 281, 296
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(Bankr. N.D. Ill. 2002) (father transferred funds to daughters to keep the funds away from
creditors; the daughters were “transferees” notwithstanding their contention that they only used
the money at their father’s instructions); 718 Arch St. Assocs., Ltd. v. Blatstein (In re Blatstein),
260 B.R. 698, 718 (E.D. Pa. 2001) (husband transferred money to his wife to prevent creditors
from having access to the money; wife was a “transferee” notwithstanding her allegation that she
only actually used the money as her husband directed). Transfers plainly were made in the
foregoing cases. The mere fact that the transferees allegedly agreed or chose to follow
instructions from other people did not negate the fact that they voluntarily agreed to be the
transferees of funds and that they did so for the express purpose of defrauding creditors. No
similar facts are present here. Ms. Gryaznova did not authorize or participate in Mr. Nilva’s use
of the account, she exercised no actual authority over the funds, and she received no benefit.
The real transfer that was accomplished in Finley Kumble was a transfer from a client to
an insurance company. In this case, the “transfer” that BICOM intended to make, and did make,
was a transfer to Kings Automotive, not to Ms. Gryaznova. The joint account was just a brief
waystation for the funds, not a destination. Ms. Gryaznova may have had legal rights with
respect to the joint account in the abstract, but she had neither the practical opportunity nor (in
light of the simultaneous check to Kings Automotive) the legal right to use the relevant funds.
She was not an intended or actual “transferee” of these funds in any realistic way.
The Trustee also argues that Ms. Gryaznova “made her own bed” by agreeing to have the
joint account and that she now should bear the consequences, including strict liability as a
deemed “transferee.” But Ms. Gryaznova did nothing inherently wrong, illegal or tortious by
having a joint bank account with Mr. Nilva. She admittedly did nothing to prompt Mr. Nilva’s
actions, did not join in them and did not actually benefit from them. The account was only
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supposed to be used for Ms. Gryaznova’s funds; Mr. Nilva’s actions (for his own nefarious
purposes) were contrary to that agreement. Strict liability is appropriate as a way of redressing
wrongs, not as a way of victimizing innocent parties. The notion that Mr. Gryaznova did
something that warrants strict liability, and that she should be obligated to pay $1 million of her
own funds because Mr. Nilva used her $10,000 account in the manner described above, is
without merit.
Conclusion
For the foregoing reasons, the motion by Irina Gryaznova for summary judgment in her
favor will be granted, the adversary proceeding will be dismissed with prejudice, and the
temporary restraining order will be lifted insofar as it relates to Ms. Gryaznova. A separate
Order will be issued to this effect.
Dated: New York, New York
September 21, 2020
s/Michael E. Wiles
UNITED STATES BANKRUPTCY JUDGE
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