Armouth International, Inc. v. Michael Fallas

Background

Armouth International, Inc., a New York clothing wholesaler, sued Michael Fallas under New York common law for fraud, unjust enrichment, and conversion. Armouth alleged that Fallas, who was National Stores, Inc.’s 98% owner, chairman, and vice president, represented that National was financially healthy and able to pay for clothing. Relying on those statements, Armouth sold National clothing valued at approximately $9 million and shipped an additional $3.5 million of goods. National made only small payments, announced plans to file for bankruptcy, and refused to return unpaid goods that Armouth said remained under National’s control.

National and affiliated companies filed Chapter 11 bankruptcy cases in the District of Delaware, later converted to Chapter 7 liquidation. Armouth filed proofs of claim in that proceeding for more than $15 million. The bankruptcy trustee separately sought to stop this action, arguing that Armouth’s claims against Fallas belonged to the bankruptcy estates. The Bankruptcy Court denied a permanent injunction, determined that the fraud claim was not estate property, and concluded that Armouth could pursue Fallas directly. It later directed Armouth to withdraw its unjust-enrichment and conversion claims in this case. The parties stipulated to dismissal without prejudice of those two claims.

Fallas’s Motion

Fallas moved to dismiss, transfer venue, or stay the litigation. He argued that Armouth’s claims were duplicative of its bankruptcy claims, that the case should be transferred to the District of Delaware under the first-filed rule or federal venue statutes, and that the litigation should be stayed or enjoined because of the bankruptcy proceedings.

Transfer

The court held that the first-filed rule did not apply. That rule generally gives priority to the first of two substantially similar lawsuits, but the court found that the bankruptcy claims and this action involved materially different parties, rights, and legal theories. Armouth’s bankruptcy claims sought payment for goods sold from National, while this action sought compensation from Fallas for allegedly inducing Armouth to enter the transaction through fraud. Fallas was not a party to the bankruptcy proceeding, and the court found that a decision in this action would not have preclusive effect there.

The court also denied transfer under 28 U.S.C. § 1404(a), which permits transfer for convenience and in the interest of justice. The court assumed, without deciding, that the action could have been filed in Delaware, but found that Fallas had not shown a strong case for transfer. The court stated that Armouth’s choice of forum, the location of the alleged March 2018 meeting in New York, and the location of important witnesses—including Armouth’s chief executive officer in New York and Fallas in California—weighed against transfer to Delaware.

The court further denied transfer under 28 U.S.C. § 1412. It held that the common-law fraud claim did not arise under bankruptcy law and was not a core bankruptcy proceeding because it existed independently of the bankruptcy and concerned conduct occurring before the bankruptcy cases began. The court added that, even if § 1412 applied, the same considerations would lead it to deny transfer.

Stay or Injunction

The court denied a stay. It held that the bankruptcy automatic stay did not apply because Fallas was not a bankruptcy debtor and the action concerned Armouth’s property rather than property of the bankruptcy estate. The court also declined to issue an injunction under § 105 of the Bankruptcy Code or Federal Rule of Civil Procedure 65. It noted that the Bankruptcy Court had already declined to permanently enjoin the action and that this court had already stayed the case for more than a year. The court found no sufficient showing of irreparable harm or risk of double recovery to justify another stay or injunction.

Disposition

The court denied Fallas’s motion in its entirety. To the extent the motion sought dismissal of the unjust-enrichment and conversion claims, the court denied that request as moot because Armouth had already voluntarily dismissed those claims. The court directed the parties to submit a joint status letter and revised case-management plan by March 15, 2021.

Classification

This is a procedural order because the court ruled on dismissal, venue, and stay requests without deciding whether Armouth ultimately proved its fraud claim.

Reviewer note

The supplied metadata identifies Colleen McMahon as the judge, but the opinion text is signed by Ronnie Abrams and identifies her as the United States District Judge. This summary follows the signed opinion.