In Re: A.N. Frieda Diamonds, Inc.

Background

This was an appeal from a bankruptcy-court judgment after a four-day bench trial. Trustee-Plaintiff Matthew C. Harrison pursued claims concerning alleged post-bankruptcy transfers of merchandise owned by AN Frieda. Valley National Bank New York, LLC, a secured creditor of AN Frieda, intervened and asserted claims for conversion and aiding and abetting conversion; it later assigned those claims to the Trustee.

Roni Rubinov owned New Liberty, a pawnbroker. Between December 2013 and March 2015, AN Frieda’s principal delivered diamonds and other items to Rubinov and New Liberty in 135 loan transactions. Forty-four loans later defaulted or were close to default. New Liberty began foreclosure proceedings and, according to the appellants, sold the collateral to N.Y. Estate Buyers in August and September 2015. The bankruptcy case began on July 16, 2015, and the bankruptcy court entered orders requiring property of the estate to be turned over.

After trial, the bankruptcy court found that AN Frieda owned the items in 41 of the 44 relevant transactions. It also found that Valley National Bank’s security interests were valid and perfected before the pawn transactions, that New Liberty’s dispositions violated New York law and the bankruptcy automatic stay, and that both New Liberty and Roni Rubinov were liable for conversion. On April 30, 2020, it entered judgment for the Trustee and against the appellants in the amount of $1,242,722.07.

Issues on Appeal and Review

The appellants challenged the finding that AN Frieda owned the items, the priority of Valley National Bank’s security interest, the application of Section 541(b)(8) of the Bankruptcy Code, the application of New York General Business Law Section 44(3), and Rubinov’s individual liability.

The district court reviewed legal conclusions without deference and factual findings for clear error. Although the appellants did not file every trial exhibit designated for the appeal, the court concluded that the available record was sufficient for a fully informed review and decided the appeal on the merits.

Ownership of the Pawned Items

The court held that the bankruptcy court did not clearly err in finding that AN Frieda owned 41 of the 44 items. The record included testimony from 10 witnesses, 60 admitted exhibits, and pawn tickets naming AN Frieda and its principal in 42 of the 44 transactions. The bankruptcy court also credited testimony and evidence indicating that several items belonged to AN Frieda and found portions of Roni Rubinov’s testimony not credible. The district court deferred to those credibility determinations and concluded that the ownership finding was supported by the record.

Priority of Valley National Bank’s Security Interest

The court affirmed the ruling that Valley National Bank’s perfected security interest had priority over New Liberty’s interest. Under New York’s Uniform Commercial Code, a buyer in the ordinary course may take goods free of certain security interests, but that category excludes a person who acquires goods as security for a money debt. The court held that a pawnbroker is not a buyer in the ordinary course when it receives property as collateral for a loan.

Because New Liberty was a pawnbroker and acquired the items as security for loans, it did not take the items free of Valley National Bank’s earlier perfected security interest. The court rejected the argument that the nonrecourse nature of a pawn loan meant there was no money debt.

Bankruptcy Code Section 541(b)(8)

Section 541(b)(8) excludes certain pledged personal property from the bankruptcy estate when statutory conditions involving a pawn transaction, possession, repayment obligations, and redemption rights are satisfied. The bankruptcy court had found that the provision applied to the pawned items. The district court explained that this provision did not protect New Liberty from Valley National Bank’s senior perfected security interest.

The court also held that the alleged sales could not have extinguished Valley National Bank’s rights. New York law gave AN Frieda a redemption period, and the Bankruptcy Code extended that period to 60 days after the order for relief. The alleged August and September 2015 sales therefore would have occurred before the redemption period expired and while the automatic bankruptcy stay applied. The sales would have been void if they occurred. In addition, New Liberty did not notify Valley National Bank before disposing of collateral in which the bank held a perfected security interest, as required by New York law.

New York General Business Law Section 44(3)

The court held that Section 44(3) did not protect New Liberty. That statute concerns a pawnbroker’s obligation to relinquish collateral to the legal owner when specified conditions are met. Valley National Bank, however, was a secured creditor rather than the owner of the collateral. The court therefore concluded that the statute did not apply to Valley National Bank’s conversion claim.

Roni Rubinov’s Individual Liability

The court affirmed Rubinov’s individual liability. Under New York law, a corporate officer may be personally liable for a tort the officer commits or in which the officer participates, even when acting for the corporation. The court relied on the bankruptcy court’s finding that Rubinov personally fabricated purported sales to conceal what happened to the collateral and controlled the collateral while misrepresenting its disposition.

The court distinguished liability for an officer’s own participation in a tort from piercing the corporate veil, which is a separate doctrine used to impose a corporation’s obligation on its owners. The court held that piercing the corporate veil was unnecessary because Rubinov was liable for his own participation in the conversion.

Disposition

The district court affirmed the bankruptcy court’s judgment in its entirety and directed the Clerk of Court to close the case.