Level 8 Apparel Trustee’s Complaint Against Insider Defendants Dismissed for Lack of Specificity in Allegations

January 27, 2021, Southern District of New York – The Chapter 7 trustee 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 brought a motion to dismiss the Trustee’s complaint under Rule 12(b)(6) and section 105(a) of the Bankruptcy Code.

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. According to the Trustee, the insiders hatched the scheme in May 2015 when they began to loot the Debtor by causing it to make cash payments to them, for no consideration and then continued it for years in numerous ways. 

However, the Court dismissed the Trustee’s complaint as the Trustee failed to adequately allege with particularity the specific property transferred to the Defendant, or obligations incurred, by a sales representative agreement. The Court also found that the Trustee did not allege with particularity facts showing that Defendant contracted with an actual intent to defraud. Further, the Trustee failed to state a claim against Defendant for aiding and abetting fraud, as she failed to plead an underlying fraud on behalf of the alleged primary wrongdoers. 

Accordingly, the court granted Defendant’s motion to dismiss the Trustee’s complaint, but with leave to replead. 

Tese-Milner v. Bon Seung Kim (In re Level 8 Apparel, LLC), Nos. 16-13164 (JLG), 19-1335 (JLG), 2021 Bankr. LEXIS 183 (Bankr. S.D.N.Y. Jan. 26, 2021)

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