Mendelsohn v. Paragon Mortgage Bankers Corp. et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re: 	Case No. 05-89953-DTE
PERMELL PARKER,
Chapter 7
Debtor.
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ALLAN B. MENDELSOHN, as Chapter 7 Trustee of the
Estate of PERMELL PARKER,
Plaintiff,
-against- 	Adv. Pro. No. 07-8267-DTE
PARAGON MORTGAGE BANKERS CORP.,
ANTHONY N. FOCARILE, ANAMARIA HURTADO,
and TRACEY GROOMES
Defendants.
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MEMORANDUM DECISION
Appearances:
David A. Blansky
Counsel for the Plaintiff
LaMonica Herbst & Maniscalco LLP
3305 Jerusalem Avenue
Wantagh, N.Y. 11793
Howard R. Birnbach
Counsel for Defendants Paragon Mortgage Bankers Corp.,
Anthony N. Focarile, and Anamaria Hurtado
111 Great Neck Road
Great Neck, N.Y. 11201
Jerry M. Mimms
Counsel for Defendant Tracey Groomes
6 East 4th Street, Suite 5
Patchogue, New York 11772
Hon. Dorothy Eisenberg, United States Bankruptcy Judge
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On October 16, 2005 (the “Filing Date”), Permell Parker (the “Debtor”) filed a voluntary
Chapter 7 petition for relief under the Bankruptcy Code (“Code”). 	Allan B. Mendelsohn, Esq.
was appointed as the Chapter 7 Trustee (“Trustee”), and he commenced the instant adversary
proceeding against the Defendants on October 11, 2007. 	The Complaint seeks to recover the
transfer of the Debtor’s interest in surplus money proceeds realized from a foreclosure sale of the
Debtor’s real property.
The Court has jurisdiction over this action under 28 U.S.C. §§ 157 and 1334, and
Bankruptcy Rule 6009 and 7001. 	This action is a core proceeding under 28 U.S.C. § 157
(b)(2)(A), (E), (H), and (O). 	Under 28 U.S.C. § 1409(a) the Court is the proper venue for this
proceeding.
BACKGROUND
Prior to June 11, 2004 the Debtor was the fee simple owner of the real property located
at 71 Midwood Road, West Babylon, NY 11704 (the “Real Property”). 	The Debtor resided at
the Real Property with Defendant Tracey Groomes (“Groomes”), who is the Debtor’s wife, and
their two children. At some time prior to 2000, the Debtor became injured and fell behind in his
monthly mortgage payments. Thereafter in 2000 the mortgagee commenced a foreclosure action
on the Real Property in Suffolk County, New York. 	On February 13, 2002 a judgment of
foreclosure was entered against the Debtor for $139,498.85 plus interests and costs. 	The State
Court then appointed a referee to commence a foreclosure sale. The sale took place on April 1,
2004, and the successful bid was for $315,000.00.1
After the auction the Debtor approached the successful bidders and spoke with them
about his desire to retain his home. The bidders offered to sell Debtor back his home if Debtor
was able to get a mortgage on the Real Property. 	The Debtor then approached two of his
1 Pursuant to the terms of sale, the winning bidders made a deposit of $32,000.00 to the referee.
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acquaintances: the president of Defendant Paragon Mortgage Bankers Corp., (“Paragon”) and
Defendant Anthony N. Focarile (“Focarile”). Paragon is a full service lending institution in New
York, and Defendant Focarile is an attorney who handled closings for Paragon’s mortgage
division.2 After speaking with the Debtor regarding his dilemma, Paragon’s president and
Focarile agreed to assist the Debtor.
It was at this point that Defendant Hurtado, the wife of the president of Paragon, entered
the picture. 	Hurtado’s husband asked her to assist him in helping the Debtor retain his home,
and she agreed. At the trial Hurtado testified that her role was to purchase the Real Property in
order to sell it back to the Debtor.
On 	June 	11, 	2004 	Defendant 	Focarile, 	acting 	as 	Paragon’s 	legal 	representative,
effectuated the assignment of the bid from the successful bidders to Paragon, which then
transferred the bid to Hurtado. By deed dated June 11, 2004 the Referee granted and conveyed
to Hurtado all the right, title and interest in and to the Real Property for $315,000.00. Defendant
Focarile had a hand in this as well as he notarized the Referee’s signature on the deed to
Hurtado. 	The financing for Hurtado’s purchase of the Real Property came from a $327,750.00
mortgage issued by Paragon and secured by the Real Property.3
After the payment of all liens and claims against the Real Property, the purchase of the
Real Property by Hurtado resulted in surplus monies for the Debtor in the amount of $87,013.67
(the “Surplus Monies”). 	The Surplus Monies were deposited by the Referee into the Suffolk
County Treasury. Thereafter Defendant Focarile appeared in the State Court Foreclosure Action,
this time on behalf of the Debtor, and he requested, with the Debtor’s consent, that the State
2 Prior to this time Focarile had been employed by Paragon, but was no longer working as an employee for the
company when approached by the Debtor.
3 The Down Payment that had been assigned to Paragon was further assigned to Hurtado when she purchased the
Real Property.
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Court authorize an assignment of the Surplus Monies from the Debtor to Paragon. 	There were
no objections, and the State Court granted the request. 	The Surplus Monies in the amount of
$78,598.06 were then transferred to Paragon (the “Transfer”).4 Neither Defendant Focarile or
Defendant Hurtado ever came into possession or benefitted from the Surplus Monies.5
The Debtor filed for bankruptcy protection in October 2005, and about one month later,
on November 5, 2004, Hurtado entered into a Residential Contract of Sale with the Debtor’s
wife, Defendant Groomes for the Real Property. The sale price was $345,000.00. On December
16, 2004 Paragon assigned to Groomes the Surplus Monies for her to use as part of the
consideration for her purchase of the Real Property. 	By a deed dated December 16, 2004
Groomes became the fee simple owner of the Real Property, and the Debtor, Groomes, and their
children were able to remain in their home.
The Trustee commenced the instant adversary proceeding after determining that the
transfer of the Surplus Monies to Defendant Paragon and Defendant Groomes had been a
fraudulent conveyance. Prior to the trial that was held on November 17, 2008, the Trustee made
a motion for partial summary judgment against Defendant Paragon.6 After hearing oral
arguments on July 10, 2008, the Court granted the Plaintiff’s motion against Defendant Paragon,
holding that Paragon had received the Surplus Monies as a fraudulent conveyance.7
The trial against the remaining defendants was held on November 17, 2008. 	At the
conclusion of the trial, based on all of the evidence presented and the testimony of the
Defendants and the Debtor, the Court made a finding that the Debtor’s wife had received a
4 No explanation was provided in the papers or at trial why there was a discrepancy in the amount, but it is likely
that money was used to pay the Referee’s fees and costs.
5 Paragon later paid the Debtor $8,415.61 by check in apparent consideration for the Surplus Monies.
6 The Trustee brought twelve causes of action against the Defendants, and sought summary judgment on his second,
third, fourth, fifth, and sixth causes of action against Paragon.
7 The Order was entered on August 1, 2008, and a Judgment was entered in the amount of $78,598.06, the amount of
the Surplus Monies, on August 18, 2008.
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fraudulent conveyance of the Surplus Monies, and granted judgment against her because she had
not provided any consideration for her receipt of the funds.8 The only issue remaining before the
Court is the liability of Defendants Hurtado and Focarile for their roles in the fraudulent
conveyance of the Surplus Monies.
DISCUSSION
The Trustee’s Complaint seeks relief against Defendants Focarile and Hurtado in three
ways. 	The first is that the Trustee seeks damages against these Defendants for aiding and
abetting the fraudulent conveyance of the Surplus Monies to both Paragon and Groomes. 	The
second is damages for conversion of the Surplus Monies, and the third is an accounting of all
transfers of money and property to or for the benefit of the Defendants, from the Debtor, or
property of the Debtor. Based upon a review of relevant case law, the Trustee’s requested relief
is denied.
The weight of authority holds that New York law does not recognize a cause of action
against parties for aiding and abetting a fraudulent conveyance because, like Defendants Focarile
and Hurtado, the parties “were neither transferees of the assets nor beneficiaries of the
conveyance.” 	Roselink Investors, L.L.C. v. Shenkman, 386 F.Supp. 2d 209, 227 (S.D.N.Y.
2004); Geren v. Quantum Chemical Corp., 832 F. Supp. 728, 736 (S.D.N.Y. 1993), aff’d., 99
F.3d 401 (2d Cir. 1995) (holding that “the action for fraudulent conveyance does not create an
independent remedy of money damages against third parties who aided the debtor’s transfer at
all.”); Buchwald v. Renco Group, Inc. (In re Magnesium Corp. of Am.), 2009 Bankr. LEXIS 54,
*107-116 (Bankr. S.D.N.Y. Jan. 16, 2009) (holding that New York law does not provide a cause
of action for aiding and abetting a fraudulent conveyance and holding that “there is no federal
8 On December 3, 2008 the Court entered an Order awarding the Trustee a judgment against Groomes in the amount
of $78,598.06 plus interest at the statutory rate.
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right of action for aiding and abetting fraudulent conveyances under Bankruptcy Code section
548, and that the federal statutory provision reaches only actual recipients of the property in
question”); Securities Investor Protection Corp. v. Stratton Oakmont, Inc., 234 B.R. 292, 330
(Bankr. S.D.N.Y. 1999); Cahen-Vorburger v. Vorburger, 41 A.D.3d 281, 282, 838 N.Y.S.2d 543
(1st Dep’t 2007).
The Court also notes that this analysis does not change when one of the alleged
wrongdoers is an attorney who assisted in the fraudulent conveyance. See Foufas v. Leventhal,
1995 WL 332020 (S.D.N.Y. June 5, 1999); Gallant v. Kanterman, 198 A.D.2d 76, 603, N.Y.S.2d
315 (1st Dep’t 1993) (affirming dismissal of claim against defendant-attorneys for their role in
masterminding 	allegedly 	fraudulent 	conveyances 	because 	the 	attorneys 	were 	neither 	the
transferees nor the beneficiaries of the conveyances).
Many of the state and federal court decisions cite the New York Court of Appeals
decision in F.D.I.C. v. Porco, 75 N.Y.2d 840, 842, 552 N.E.2d 158, 552 N.Y.S.2d 910, 910
(1990). There, the F.D.I.C. had brought claims against two bank officials for assisting the bank’s
director in transferring his funds to a Switzerland account in an attempt to frustrate the F.D.I.C.’s
prior judgment against the director. 	See id. 	The F.D.I.C. argued that New York Debtor and
Creditor Law § 273-a created a remedy against the bank officials for aiding and abetting the
director. 	See id. at 842. 	The Court of Appeals rejected the plaintiff’s argument, and held that
New York Debtor and Creditor Law did not “either explicitly or implicitly, create a creditor’s
remedy for money damages against parties who … were neither transferees of the assets nor
beneficiaries of the conveyance.” Id. at 842. The Court of Appeals declined to create a judicial
remedy out of New York’s fraudulent conveyance laws against alleged aiders and abettors.
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While the facts of that case are not directly on point with the facts of the instant case, the legal
analysis is.
The Court agrees with the New York Court of Appeals and the myriad of other federal
and state decisions on this issue. Liability cannot be imposed against a defendant for aiding and
abetting a fraudulent conveyance as the alleged wrongdoer has not actually benefitted from the
fraudulent conveyance. A trustee or creditor’s remedy for a fraudulent conveyance is to “rescind
the transfer [and require the] transferee to return the transferred property to the transferor.”
Geren v. Quantum Chemical Corp., 832 F. Supp. 728, 736 (S.D.N.Y. 1993), aff’d., 99 F.3d 401
(2d Cir. 1995). 	A defendant that is alleged to have aided and abetted such a conveyance never
came into possession of the property that the trustee or creditor is seeking to have turned over,
and thus cannot be the subject of a cause of action.
The stipulated facts and the testimony at trial reveal that neither Defendant Focarile nor
Defendant Hurtado ever came into possession of the Surplus Monies, and were never the
transferees or the beneficiaries of the conveyance. 	The only parties that received the Surplus
Monies were Paragon and Groomes. 	The Court has already entered judgment against both of
those Defendants. 	Thus, under the applicable case law, Hurtado and Focarile cannot be held
liable for their roles in the fraudulent conveyance of the Surplus Monies.
As for the Trustee’s conversion and accounting causes of action, they are also denied.
With respect to the Trustee’s conversion claim, “[a]ccording to New York law, ‘[c]onversion is
the unauthorized assumption and exercise of the right of ownership over goods belonging to
another to the exclusion of the owner's rights.’" 	Thyroff v. Nationwide Mut. Ins. Co., 460 F.3d
400, 403-404 (2d Cir. 2006) (internal citations omitted). 	One of the necessary elements for an
accounting action is that the complaint must show that there was “money or property entrusted to
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the defendant [which imposed] upon him the burden of accounting.” 	State St. Houses, Inc. v.
N.Y. State Urban Dev. Corp. (In re State St. Assocs., L.P.), 323 B.R. 544, 561 (Bankr. N.D.N.Y.
2005). As the record before the Court is clear that Defendants Hurtado and Focarile never came
into possession of the Surplus Monies, the Trustee’s claims for an accounting and conversion
cannot stand.
CONCLUSION
Based upon the above facts and findings of law, the Court denies the Plaintiff’s requested
relief against Defendants Hurtado and Focarile.
Dated: Central Islip, New York
January 27, 2009 	s/ Dorothy Eisenberg
Judge Dorothy Eisenberg
United States Bankruptcy Judge
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