In Re: The Mall at the Galaxy Inc. v.

• Court: Court of Appeals for the Third Circuit
• Decided: August 7, 2024
• Docket: 23-1906
• Status: Unpublished

Opinion

NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _____________

No. 23-1906 _____________

In re: THE MALL AT THE GALAXY, INC. _____________

STEVEN P. KARTZMAN, as Chapter 7 Trustee,

v.

LATOC, INC., Appellant _____________

On Appeal from the United States District Court for the District of New Jersey (No. 2:22-cv-02859) District Judge: Hon. John M. Vazquez _____________

Submitted Pursuant to Third Circuit L.A.R. 34.1(a) on April 11, 2024

Before: CHAGARES, Chief Judge, PORTER and SCIRICA, Circuit Judges.

Opinion filed: August 7, 2024 _________

OPINION* _________

* This disposition is not an opinion of the full Court and, pursuant to I.O.P. 5.7, does not constitute binding precedent. PORTER, Circuit Judge.

This case arises from the bankruptcy of the Mall at the Galaxy, Inc. (“the Mall”), a

mall in Guttenberg, New Jersey. From 2007 to 2009, the Mall, though insolvent, incurred

additional liabilities from being used as a conduit for a $2 million loan from a real estate

company (Latoc) to a group of rubber recycling companies (the “PermaLife” entities).

The loan funds were transferred to the Mall, which forwarded them to PermaLife. The

Mall subsequently repaid Latoc $592,875.03 before entering bankruptcy. The Trustee

filed a complaint seeking to avoid this payment as a fraudulent or preferential transfer

detrimental to the Mall’s creditors under 11 U.S.C. §§ 548(a)(1)(B) and 544(b)(1). The

Bankruptcy Court and the District Court both held that the Mall did not receive

reasonably equivalent value in exchange for the $2 million loan from Latoc, and that the

transactions between Latoc, the Mall, and PermaLife should be collapsed and construed

as a single, integrated transaction. We will affirm.

I.

This case involves essentially three entities (Latoc, the Mall, and PermaLife)

linked across the relationship between Martin Sergi, and his friends Dibo and Raffaele

Attar. Since 1986, Sergi had been the President and treasurer of the Mall, and since 1997

had owned 90% of its equity. Sergi and the Attars together held major equity stakes in the

PermaLife rubber recycling entities. At the time of the events in question, Raffaele served

as the President of Latoc and as a director of one of the PermaLife entities.

In 2007, a fire damaged the PermaLife business operation, and it deteriorated

financially. PermaLife received a secured loan from Gemini Investors IV, L.P.

2 (“Gemini”), which included a condition forbidding PermaLife from receiving a loan from

an Attar-affiliated entity. Thus, a loan from Latoc to Permalife was barred by the

conditions of the Gemini loan to PermaLife and because the PermaLife board would not

give approval.

In September 2007, Sergi and Dibo agreed to a $2 million loan agreement,

ostensibly between Latoc and the Mall. The parties memorialized the loan in a

promissory note requiring the Mall to repay the loan with interest. The Mall was

insolvent during the entire relevant period, i.e., 2007–09. The funds from Latoc were

deposited into the Mall’s bank account, and then transferred from the Mall into the

PermaLife entities.

Sergi stated that the loan was designed to “manage the conflict that precluded a

direct loan [from Latoc] to Permalife.” App. 18. He also maintained that in exchange for

the $2 million transferred to PermaLife, the Mall received equity in two PermaLife

subsidiaries—a 100% interest in Piedmont Rubber Recycling, LLC (“Piedmont”) and a

20% interest in PermaLife Internet, LLC (“PLI”). However, both subsidiaries were in

dire straits financially and “soon headed into bankruptcy proceedings.” App. 62–63.

There is no written agreement corroborating the Mall’s receipt of these equity interests.

None of the profits accrued by Piedmont and PLI were paid to the Mall.

The Mall also owed interest to Latoc for the $2 million loan. Accordingly,

between February 2008 and September 2009, the Mall transferred $592,875.03 to Latoc.

On January 28, 2010, the Mall filed for Chapter 11 bankruptcy, which then converted

into Chapter 7 proceedings. Steven Kartzman, the Chapter 7 Trustee (“Trustee”) for the

3 Mall, commenced an action to recover the $592,875.03 repayment from the Mall to

Latoc, alleging that the loan and repayments to Latoc were fraudulent transfers under 11

U.S.C. §§ 548(a)(1)(B) and 544(b)(1), and N.J. Stat. Ann. §§ 25:2-25a(2) and 25:2-27a.

After a few years of discovery between the parties, the Trustee moved for partial

summary judgment on the issue of reasonably equivalent value. The Bankruptcy Court

granted the motion, finding that the Mall received less than reasonably equivalent value

from PermaLife in exchange for forwarding the $2 million from Latoc. The Bankruptcy

Court then conducted trial proceedings in August 2017 and February 2018, and issued a

decision on April 4, 2019. App. 39–40. The Court voided the Mall’s pre-bankruptcy

transfers, holding that these were constructively fraudulent because the Mall was already

insolvent at the time of the transfers, and because of the lack of equivalent value

exchanged. App. 7.

On April 9, 2020, the District Court reversed the Bankruptcy Court’s decision on

the issue of reasonably equivalent value, finding that it “improperly focused on whether

the [Mall] received reasonably equivalent value [from] when it transferred the Loan

Proceeds to the PermaLife Entities, rather than whether the [Mall] received reasonably

equivalent value from the $2 million [l]oan . . . [from] Latoc.” App. 7–8. The District

Court remanded to the Bankruptcy Court to address the “critical question” of “whether

the $2 million was actually a loan to the [Mall] or whether the [Mall] was merely a

conduit, or pass-through, to get the $2 million to the PermaLife Entities.” App. 8. “[I]f

the [Mall] was a mere conduit, then it did not receive any value, and the Pre-Petition

Transfers would also not reflect reasonably equivalent value.” Id.

4 On remand, the Bankruptcy Court again entered judgment for the Trustee. Latoc

appealed to the District Court. The District Court agreed with the Bankruptcy Court that

the Mall did not receive reasonably equivalent value. The District Court likewise agreed

that the loan and subsequent transfers should be collapsed and construed as a single,

integrated transaction. Finally, the District Court also agreed with the Bankruptcy Court’s

grant of prejudgment interest to the Trustee. Latoc appealed.

II

The Bankruptcy Court had jurisdiction under 28 U.S.C. § 157(b). The District Court

had jurisdiction under 28 U.S.C. § 158(a). We have jurisdiction under 28 U.S.C.

§ 158(d)(1).

“When the District Court sits as an appellate court for the Bankruptcy Court, ‘our

review duplicates that of the district court and we view the bankruptcy court decision

unfettered by the district court’s determination.’ ” In re Energy Future Holdings Corp., 990

F.3d 728, 736 (3d Cir. 2021) (quoting In re Brown, 951 F.2d 564, 567 (3d Cir. 1991)). “We

review the Bankruptcy Court’s ‘legal determinations de novo, its factual findings for clear

error, and its exercises of discretion for abuse thereof.’” In re Friedman’s Inc., 738 F.3d

547, 552 (3d Cir. 2013) (quoting In re Goody’s Fam. Clothing, Inc., 610 F.3d 812, 816 (3d

Cir. 2010)). A bankruptcy court’s award of prejudgment interest is reviewed for abuse of

discretion. See In re Hechinger Inv. Co. of Del., Inc., 489 F.3d 568, 573–74 (3d Cir. 2007).

III

Our review spans three issues. First, we agree that the Bankruptcy Court did not

err in finding that the Mall did not receive any value from the loan between the Mall and

5 Latoc. We therefore agree that the loan and pre-petition transfers from the Mall to Latoc

are constructively fraudulent and therefore avoided. Second, we agree that the

Bankruptcy Court did not err in finding that the transfers between Latoc, the Mall, and

PermaLife constituted a single, integrated transaction. Third, we agree that the

Bankruptcy Court did not abuse its discretion in awarding pre-judgment interest to the

Trustee.

A

Pre-bankruptcy petition transfers may be avoided if they reflect actual or

constructive fraud. 11 U.S.C. § 548(a)(1). Sounding in constructive fraud, a Trustee may

avoid a transfer when a party insolvent on the date of a transfer does not receive

reasonably equivalent value for that transfer. Id. § 548(a)(1)(B).

We apply a two-step test to determine whether a transferor received reasonably

equivalent value. In re R.M.L., 92 F.3d 139, 148–49 (3d Cir. 1996). The first step entails

“an express factual determination as to whether the debtor received any value at all.” Id.

at 149. This value need not be direct, tangible, or easily quantifiable. Id.

Second, if it is established that at least some value was received, we apply a

totality-of-the-circumstances test to determine whether that value was reasonably

equivalent to the amount transferred. Id. at 153. This inquiry may consider the fair market

value received by the debtor, the arm’s-length nature of the transaction, and the

transferee’s good faith. In re Fruehauf Trailer Corp., 444 F.3d 203, 213 (3d Cir. 2006)

(citing In re R.M.L., 92 F.3d at 148–49, 153). More broadly, “reasonably equivalent value

is not an esoteric concept: a party receives reasonably equivalent value for what it gives

6 up if it gets ‘roughly the value it gave.’” VFB LLC v. Campbell Soup Co., 482 F.3d 624,

631 (3d Cir. 2007) (quoting In re Fruehauf Trailer Corp., 444 F.3d at 213).

In a fraudulent conveyance action, the burden falls on the movant to prove by a

preponderance of the evidence that the transfer resulted in no value for the debtor, or that

the value received was not “reasonably equivalent” to the value of the relinquished

interest. In re Fruehauf, 444 F.3d at 210–11. The inquiry is conducted from the

standpoint of the creditors based on the circumstances existing at the time of the

transfers. In re R.M.L., 92 F.3d at 150. The court must look to the substance of the

transaction, rather than its form, to determine whether a fraudulent transfer occurred. Id.

Also, because determinations about reasonably equivalent value are “more often than not

. . . bound up in the bankruptcy court’s factual determinations,” we have explained that

they are “largely immune from attack on appeal . . . as it should be; the bankruptcy court,

with its unique expertise, is in far better position than either the district courts, sitting as

appellate tribunals, or the courts of appeals to make such determinations.” Id. at 154.

Here, the Trustee met the burden of proving that the loan between Latoc and the

Mall conferred less than reasonably equivalent value on the Mall. The Mall and its

creditors assumed the repayment obligations for the $2 million loan. The Mall’s only

possible benefit from the $2 million was the alleged receipt of the interests in PLI and

Piedmont. But those companies were insolvent, and, as rubber recycling companies, had

no connection to the Mall’s business. And in any case, the Bankruptcy Court found that

Latoc failed to prove that the Mall received interests in PLI and Piedmont in the first

place. There was no documentation of any such transaction, and all revenue received by

7 PLI was paid to PermaLife, and not the Mall. Latoc fails to cite evidence or present

arguments sufficient to challenge the Bankruptcy Court’s factual findings.

We affirm the Bankruptcy Court’s holding that, because the Mall received less

than reasonably equivalent value from the $2 million loan, the loan and pre-petition

transfers from the Mall to Latoc are constructively fraudulent and therefore avoided

under § 548(a).

B

“In analyzing a fraudulent transfer claim where there are multiple transactions,

courts may collapse the steps, exchanges, and transactions that are ‘part of one

integrated transaction’ to examine the substance, rather than the form, of the

transactions.” In re DSI Renal Holdings, LLC, 617 B.R. 496, 504 (Bankr. D. Del. 2020)

(quoting United States v. Tabor Ct. Realty Corp., 803 F.2d 1288, 1302 (3d Cir. 1986));

see also Voest-Alpine Trading USA Corp. v. Vantage Steele Corp., 919 F.2d 206, 211–12

(3d Cir. 1990). Relying on Tabor and Voest, bankruptcy courts within our circuit apply

the collapsed-transaction doctrine to avoidance actions. See, e.g., In re Mervyn’s

Holdings, LLC, 426 B.R. 488, 497 (Bankr. D. Del. 2010) (quoting Tabor, 803 F.2d at

1302).

Latoc accepts the applicability of collapsed-transaction doctrine rule from Tabor

but argues that the evidence presented at trial cuts against application of the doctrine.

Specifically, Latoc argues that the evidence established independence between the parties

during the transactions, because:

1) Latoc actually gave the Mall two million dollars;

8 2) It did not control where the money was [sent] and how it was used; 3) The Mall exercised dominion and control over the money; 4) It was not obligated to forward the money to the Permalife entities; 5) There was proof of investment that was reasonable and legitimate; 6) The Mall was not a conduit to get the money to the Permalife entities; 7) The Mall had a right to make an investment and that fact that it failed is of no moment; 8) There was no reason or basis to collapse the transaction.

Latoc's assertions do not render the Bankruptcy Court’s factual findings clearly

erroneous. The Bankruptcy Court found that the evidence overwhelmingly indicated that

the Loan was a “plan to fund the PermaLife Entities indirectly through the [Mall] after

the direct loan from Latoc to [PermaLife] was rejected.” App. 70. Sergi and the Attars

shared interests in PermaLife and negotiated the Loan amongst themselves. The Loan

from Latoc had been obtained “to manage the conflict” preventing PermaLife from

borrowing directly from Latoc. App. 72 (internal quotation marks omitted). Sergi himself

emphasized that the transactions were conceived to address the difficulty which he and

the Attars faced trying to “put[] things into PermaLife.” App. 73.

Based on that evidence, the Bankruptcy Court correctly found that the Loan and

related transactions constitute one integrated transaction designed to circumvent the

restrictions preventing a loan from Latoc to PermaLife. We therefore affirm the

Bankruptcy Court’s collapse of the transfers into a single, integrated transaction.

C

Latoc challenges the Bankruptcy Court’s award of prejudgment interest on the

Mall’s $592,875.03 loan repayment, dating from the filing of the Trustee’s Complaint on

July 30, 2012. Latoc argues against such an award because in issuing the $2 million loan

9 and receiving repayment of $592,875.03, it purportedly lost over $1.4 million. But as the

Bankruptcy Court pointed out, Latoc was able to use the $592,875.03 for over a decade.

11 U.S.C. § 550 governs prejudgment interest, and it provides:

(a) Except as otherwise provided in this section, to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from— (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.

Id. § 550(a) (emphasis added). While there is no reference to prejudgment interest in the

Bankruptcy Code, we construe the word “value” in § 550(a) as authorizing an interest

award. In re Hechinger, 489 F.3d at 579.

“[T]he award of prejudgment interest in a preference action is within the discretion

of the bankruptcy court.” Id. (alteration in original) (quoting In re USN Commc’ns, Inc.,

280 B.R. 573, 602 (Bankr. D. Del. 2002) (collecting cases)). However, “[d]iscretion must

be exercised according to law, which means that prejudgment interest should be awarded

unless there is a sound reason not to do so.” Id. (alteration in original) (quoting In re

Milwaukee Cheese Wis., Inc., 112 F.3d 845, 849 (7th Cir. 1997)).

“[M]ost courts find that awarding prejudgment interest in an avoidance action

furthers the congressional policies of the Bankruptcy Code by compensating the estate for

the time it was without use of the transferred funds.” In re USN Comm’s, 280 B.R. at 602

(collecting cases). “The award of prejudgment interest therefore serves to compensate the

debtor’s estate for . . . use of those funds that were wrongfully withheld from the debtor’s

10 estate during the pendency of the current suit.” Id. (quoting In re Cybermech, Inc., 13

F.3d 818, 822–23 (4th Cir. 1994)).

The Bankruptcy Court reasonably awarded prejudgment interest to the Mall’s

estate. Courts have noted that “gratuitous delay” by the party seeking recovery may be

grounds for limiting an award of interest. See, e.g., id. at 603. However, the litigation in

this case was not unnecessarily prolonged by the Trustee. The proceedings persisted over

a long period because of summary judgment motions and discovery disputes, some of

which resulted in discovery sanctions against Latoc. Accordingly, the Bankruptcy Court

did not abuse its discretion in awarding prejudgment interest.

***

We will affirm the District Court’s order affirming judgment in favor of the

Trustee and against Latoc, including the award of pre- and post-judgment interest.