District Court Affirms Bankruptcy Court Conversion of Subchapter V Case to Chapter 7

Background

In 2017, former restaurant worker Pavle Zivkovic, on behalf of himself and his fellow employees (the class action creditors), sued his former employer, Laura Christy Midtown LLC (Laura Christy) and its owner, David Ghatanfard (Ghatanfard). On June 22, 2022, Zivkovic was awarded $650,000 in punitive and compensatory damages for his individual claims and the class action creditors were awarded $4.5 million in damages.
However, just as trial was commencing, Laura Christy ceased operating, and a new restaurant opened. This new restaurant had similar corporate ownership and staff, and opened just blocks away from Laura Christy’s former location. The class action creditors commenced another action (i.e., an alter-ego action) against this new restaurant, Valbella at the Park LLC, and, in this new lawsuit, the class action creditors alleged that Valbella at the Park LLC was the successor in interest to Laura Christy and that the closing and reopening of the restaurants was just an attempt to avoid paying the $5 million class action judgment.
In their post-judgment collection efforts, the class action creditors discovered that Ghatanfard had rendered himself insolvent as a result of various transactions and transfers to his “life partner,” Rosey Kalayjian, with whom he lived and shared a bank account, and who has worked in several restaurants owned by him. In particular, the class action creditors discovered that Ghatanfard transferred to Kalayjian the sum of: $1.2 million from the sale of a home he owned; $675,000 he had received from Laura Christy; $600,000 from the sale of another restaurant; and $1.4 million from the refinancing of another one of his houses located in Southampton, New York. In addition, Ghatanfard also recorded a deed transferring title to the Southampton home from his individual ownership to a joint ownership with Kalayjian. Furthermore, right before the class action judgment was entered, Ghatanfard transferred to Kalayjian 90% of his ownership in a limited liability company called Oak Grove Road LLC that owned a 50% stake in Valbella at the Park LLC.
On Nov. 13, 2023, Ghatanfard filed a Subchapter V bankruptcy case in the bankruptcy court. On his schedules, Ghatanfard estimated his assets at less than $50,000, and his liabilities as almost $6 million. On Nov. 14, 2023, Laura Christy also filed a Subchapter V bankruptcy case in the bankruptcy court.
On Feb. 12, 2024, Ghatanfard filed his Subchapter V plan of reorganization, in which he proposed to fund the plan by paying $1,700 monthly payments along with a lump sum payment of $500,000 to be obtained from Kalayjian in settlement of any and all claims against her, including, without limitation, the fraudulent transfer claims.
On March 5, 2024, the class action creditors filed a motion to convert Ghatanfard’s case to a Chapter 7 case. In their motion, the class action creditors alleged that Ghatanfard misrepresented his assets and liabilities, that he had a significant conflict of interest with Kalayjian and that the proposed settlement embodied in his Subchapter V plan was not reasonable as he proposed to settle $6.7 million in fraudulent transfer claims for the $500,000 payment from Kalayjian.
On April 11, 2024, after oral argument on the motion to convert, the bankruptcy court entered an order converting the case, stating that it had found cause for dismissal or conversion, including the Ghatanfard’s conflicts of interest in pursuing potential fraudulent transfer claims and other claims of the estate to his “life partner” Kalayjian. Given the class action creditors’ opposition to expanding the powers of the Subchapter V trustee, a decision in which the bankruptcy court expressed disappointment in since with their consent, the Subchapter V trustee would have had the power to pursue avoidance actions, the bankruptcy court concluded that conversion to Chapter 7 was the only appropriate remedy. Ghatanfard filed a notice of appeal on April 12, 2024.