In Re: Mosdos Chofetz Chaim Inc.

Background

Mosdos Chofetz Chaim, Inc. filed for Chapter 11 bankruptcy in 2012. The Bankruptcy Court approved the Debtor’s reorganization plan in 2019. The plan provided for the possible sale of the Debtor’s property and distributions to several classes of creditors.

Rabbi Mayer Zaks filed an adversary complaint under 11 U.S.C. § 1144 seeking to revoke the confirmation order based on alleged fraud by Rabbi Aryeh Zaks during the plan-confirmation process. The complaint alleged, among other things, that Rabbi Aryeh had arranged for the signature of creditor Munish Weintraub to be forged on a ballot supporting the plan.

Rabbi Mayer later sought permission to file an amended complaint. The proposed amendment added allegations involving ballots submitted by TBG Radin, Yeshiva Chofetz Chaim, Inc., 645 Springdale Holdings, LLC, Mikhail Leibov, and Ezra Beyman. The proposed pleading alleged that these ballots were unauthorized, involved undisclosed insiders, or resulted from other fraudulent conduct.

The Bankruptcy Court granted the Appellees’ motion to dismiss and denied Rabbi Mayer’s motion to amend. Rabbi Mayer appealed those orders to the District Court, which consolidated the appeals.

Dismissal of the Complaint

The District Court affirmed the dismissal on two grounds.

First, it affirmed the Bankruptcy Court’s conclusion that Rabbi Mayer lacked prudential standing. Prudential standing includes limits on asserting another person’s rights. The District Court reasoned that Rabbi Mayer was attempting to assert the Debtor’s rights even though the Debtor was controlled by its board of trustees, not by Rabbi Mayer and Rabbi Aryeh as co-managers. The complaint did not allege that Rabbi Mayer was acting with the consent of Rabbi Aryeh or the board of trustees. The District Court also concluded that Rabbi Mayer had not shown that he was a bankruptcy “party in interest” with authority to assert the Debtor’s rights.

Second, the District Court affirmed the dismissal for failure to state a claim. Fraud allegations must satisfy Federal Rule of Civil Procedure 9(b), which requires the circumstances of the alleged fraud to be described with particularity. The court agreed that only the allegation concerning the Weintraub ballot met that standard. It also agreed that, even accepting that allegation as true and disregarding Weintraub’s vote, the remaining Class 4 creditors would still have approved the plan. The complaint therefore did not state a claim under § 1144 because the alleged fraud would not have changed confirmation of the plan.

Denial of Amendment

The District Court also affirmed the denial of leave to amend. Under Federal Rule of Civil Procedure 15, an amendment may relate back to the original complaint when it arises from the same conduct, transaction, or occurrence. The court held that the proposed amendment added different alleged fraudulent transactions, new parties, and, for some allegations, theories unrelated to the alleged forgery of Weintraub’s ballot. Those allegations therefore did not relate back to the original complaint.

The District Court also noted that the Bankruptcy Court had identified potential prejudice to parties protected by the confirmation order. In addition, the Bankruptcy Court properly considered whether amendment would be futile—that is, whether the proposed claims could survive dismissal. The District Court affirmed the denial of the motion to amend.

Disposition

The District Court affirmed the Bankruptcy Court’s orders dismissing Rabbi Mayer’s complaint and denying his motion to amend. The Clerk was directed to terminate the pending appeal and close the case.