A New York Bankruptcy Court Allows Level 8 Apparel Trustee to Use the Doctrine of Equitable Tolling and Extend the One-Year Statute of Limitation For the Claim
May 17, 2021, Southern District of New York – A Chapter 7 trustee recently brought an action against insider defendants to avoid transfers under 11 U.S.C.S. §§ 548(a)(1)(A) and 544(a) and (b) of the Bankruptcy Code and N.Y. Debt. & Cred. Law § 276. The Trustee’s complaint names 12 defendants, consisting of nine individuals and three entities. The Defendants, Capstone Credit, and Capstone Capital, (the “Capstone Defendants”) brought a motion to dismiss, in part, the Trustee’s amended complaint.
By way of background, Defendant Sam Kim and others formed the Debtor to engage in the business of designing, sourcing, importing, and selling men’s and women’s apparel and outerwear under licensed trademarks and private labels for large retailers. As part of its business, the Debtor was a party to several contracts with Capstone Capital. The Trustee asserts that the agreement is a one-sided agreement that heavily favors Capstone because it places all assets of the Debtor’s business with Capstone and obligates the Debtor to perform valuable services for Capstone for an unspecified and uncertain commission.
In the original complaint, Capstone Capital was named in nine of the 24 claims for relief. The amended complaint contains 23 claims for relief, and names the Capstone Defendants in four of these Counts. Counts 1 and 18 are relevant to the Motion. In Count 1, the trustee alleges that the Capstone Defendants were unperfected as to any relevant security interests, and therefore, the transfers are avoidable as preference transfers. Count 2 pertains to aiding and abetting the conversion of Debtor’s assets and business. The Capstone Defendants seek to dismiss Count 18 pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on the grounds that it fails to state a claim for relief against them. Separately, Capstone Credit seeks to dismiss Counts 1 and 18 pursuant to Rule 12(b)(6), but on the grounds that they are barred by statutes of limitation.
The Court denied the dismissal of Count 1 because it found that the Trustee has stated facts in support of the claim that show that she has diligently sought the information about Capstone Credit that she says was withheld from her. Accordingly, the court allowed her to use the doctrine of equitable tolling and extend the one-year statute of limitation for the claim. The Court also overruled the Motion as to Count 18 on statute of limitation grounds because it found that the Trustee has alleged facts, that if proved, demonstrate that Capstone Credit knew, or should have known, that the Original Complaint should have listed it as a party. The Court further found that Capstone’s actions arise out of the same conduct or transaction, and Capstone is “united in interest” with the original defendant.
The Court also denied the dismissal of Count 18 because it found that the Trustee has sufficiently pled the claims for aiding and abetting. While neither party provided anything but cursory allegations regarding the existence of a primary violation, the court found that the amended complaint provides specific detail regarding the type and degree of knowledge of the Capstone Defendants, which centers around the information they allegedly knew by virtue of their involvement in the SRA and the factoring of the Debtor’s accounts. Therefore, the court held that the trustee has pleaded its claims in sufficient detail and denied dismissal of Count 18 under Rule 12(b)(6).
Accordingly, the Court denied the Defendants’ Motion.
In re Level 8 Apparel, Nos. Chapter 7, 19-1335 (JLG), 2021 Bankr. LEXIS 1322 (Bankr. S.D.N.Y. May 17, 2021)