Opinion
Index No. 652969/2014
05-01-2020
SANDS BROTHERS VENTURE CAPITAL II, LLC, Sands Brothers Venture Capital III, LLC, Sands Brothers Venture Capital IV, LLC, Genesis Merchant Partners, LP, Plaintiff, v. PARK AVENUE BANK, Matthew Morris, Charles Antonucci, General Employment Enterprises Inc., Oppenheimer & Co., Inc., Providence Property and Casualty Insurance Company, WTS Corp., WTS Acquisition Corp., DMCC Staffing, LLC, RFFG, LLC, RFFG of Cleveland, LLC, Thomas Bean, Big Red Investments Partnership, Ltd., On-Site Services, Inc., Ameritemps, Inc., Allen Reichman, Wilbur Huff, O2HR, LLC, Oxygen Unlimited, LLC, River Falls Investments, LLC, River Falls Financial Services, LLC, River Falls Holdings, LLC, W.A. Huff, LLC, SDH Realty, LLC, Defendant.
For Plaintiffs, Law Office of Wallace Neel, P.C., 43 West 43rd Street, Suite 65 New York, NY 10036, 646-524-6502 For Defendants, Smith, Gambrell & Russell, LLP, 1301 Avenue of the Americas, 21st Floor, New York, New York 10019, 212-907-9700
For Plaintiffs, Law Office of Wallace Neel, P.C., 43 West 43rd Street, Suite 65 New York, NY 10036, 646-524-6502
For Defendants, Smith, Gambrell & Russell, LLP, 1301 Avenue of the Americas, 21st Floor, New York, New York 10019, 212-907-9700
Andrew Borrok, J.
The following e-filed documents, listed by NYSCEF document number (Motion 016) 454, 455, 456, 457, 458, 459, 460, 461, 462, 463, 464, 465, 466, 467, 468, 469, 470, 471, 472, 473, 474, 475, 476, 477, 478, 479, 480, 481, 507, 508, 509, 510, 511, 512, 513, 514, 515, 516, 517, 518, 519, 520, 521, 522, 523, 524, 525, 526, 527, 528, 529, 530, 531, 532, 533, 534, 535, 536, 537, 538, 539, 540, 541 were read on this motion to/for SUMMARY JUDGMENT (AFTER JOINDER)
Upon the foregoing documents, GEE Group, Inc., f/k/a General Employment Enterprises, Inc.'s (GEE ) motion for summary judgment pursuant to CPLR § 3212 is granted solely to the extent that Sands Brothers Venture Capital II, LLC (Sands II ) and Genesis Merchant Partners LP's (Genesis ) (i) fraudulent conveyance (first) cause of action and aiding and abetting fraudulent conveyance (second) cause of action solely with respect to the On-Site Transaction (hereinafter defined) and the $2,300,000 Conveyance (hereinafter defined), (ii) aiding and abetting breach of fiduciary duty (fourth) cause of action, and (ii) conspiracy to breach fiduciary duty (fifth) cause of action are dismissed.
I. The Relevant Facts and Circumstances
This lawsuit arises from a $58 million fraud masterminded by Wilbur Anthony Huff in which he allegedly directed other co-conspirators to divert money from O2HR, LLC (O2HR ), a company that provided outsourced management of payroll, tax, and insurance obligations for client companies (NYSCEF Doc. No. 51, ¶¶ 1-4, 29). Mr. Huff was indicted by the United States Attorney for the Southern District of New York, pled guilty in December 2014, and sentenced to 12 years in prison (id. ¶ 2).
The gravamen of the Amended Complaint (hereinafter defined) is that O2HR was rendered insolvent as a result of Mr. Huff and the defendants' fraud and, as a result, O2HR has now defaulted on certain promissory notes (id. , ¶¶ 17-38). To wit, the Complaint alleges that in 2008 and 2009, O2HR issued five promissory notes (collectively, the Notes ) in favor of Sands Brothers Venture Capital II, LLC, Sands Brothers Venture Capital III, LLC, Sands Brothers Venture Capital IV, LLC, and Genesis Merchant Partners LP (collectively, the Plaintiffs ) (id. ). And, the value in O2HR was allegedly fraudulently transferred to entities controlled by Mr. Huff, including River Falls Investments, LLC, River Falls Financial Services, LLC, River Falls Holdings, LLC (River Falls Investments, LLC, River Falls Financial Services, LLC, and River Falls Holdings, LLC, collectively, the River Falls Entities ), SDH Realty LLC, among others (the River Falls Entities and SDH Realty LLC, collectively, the Huff-Controlled Entities ) (id. , ¶ 9).
More specifically, the Plaintiffs allege that Mr. Huff directed and controlled O2HR through its CEO, Thomas Bean, to fraudulently convey O2HR assets so as to divert money from its creditors (id. , ¶¶ 31-38).
A. The 2010 GEE Acquisitions
The Plaintiffs allege that through a number of deceptively crafted steps Mr. Huff fraudulently used O2HR assets to buy a majority of common shares in GEE, a publicly-traded temporary staffing company headquartered in Illinois, and then used GEE to transfer value out of O2HR (id. , ¶¶ 29, 39-41). Mr. Bean allegedly took cash and receivables from the insolvent O2HR and exchanged them for ownership of shares and/or assets in certain O2HR client companies that owed receivables to O2HR, including On-Site Services, Inc., RFFG of Cleveland, LLC, and DCMM Staffing, LLC among others (id. , ¶¶ 43-44). While Mr. Bean allegedly forgave those receivables in partial exchange for ownership of O2HR customers' assets, he did not provide the value that he received to O2HR (id. , ¶¶ 45-46). Rather, Mr. Bean allegedly put his interest in the O2HR client companies into entities that he personally owned, including WTS Acquisition Corp. (WTS ) and RFFG, LLC (id. , ¶ 48).
Mr. Bean then, through WTS, allegedly swapped assets and/or ownership interests in the O2HR client companies for shares of GEE stock when GEE purchased the alleged O2HR client companies through its subsidiary, Triad Personnel Services (Triad ) (id. , ¶¶ 54-66).
Pursuant to an Asset Purchase Agreement (NYSCEF Doc. No. 457), dated June 1, 2010, by and between On-Site Services, Inc. (OnSite ) as seller, Mr. Bean, GEE, and Triad as buyer, Triad acquired certain assets of On-Site for the purchase price of $600,000, which included 1,476,015 shares of GEE common stock, valued at approximately $487,000 (the On-Site Transaction ). The Plaintiffs allege that Mr. Bean, through WTS, swapped assets and/or ownership interests of On-Site in the On-Site Transaction, for 1,476,015 shares of GEE stock, which shares were delivered to Big Red Investments Partnership, Ltd. (Big Red ), a company owned by Mr. Bean (NYSCEF Doc. No. 51, ¶¶ 54-57).
Pursuant to an Asset Purchase Agreement (NYSCEF Doc. No. 460), dated November 1, 2010, by and between of DMCC Staffing, LLC (DMCC ) and RFFG of Cleveland, LLC (RFFG ) as sellers, Mr. Bean, GEE, and Triad as buyer, Triad acquired certain assets of DMCC and RFFG for a purchase price of $4,800,000, which included 5,581,395 shares of GEE common stock, valued at approximately $2,400,000 (the Ameritemps Transaction ; the On-Site Transaction and the Ameritemps Transaction, together, the 2010 Transactions ) (NYSCEF Doc. No. 456, ¶¶ 7-18). The Plaintiffs allege that Mr. Bean, through WTS, traded assets of DMCC and RFFG in the Ameritemps Transaction for 5,581,395 shares of GEE stock, of which 3,500,000 GEE shares were placed into RFFG, LLC and the remainder was placed into Big Red (NYSCEF Doc. No. 51, ¶¶ 60-63).
B. The Alleged $2,300,000 Conveyance
The Plaintiffs further allege that $2,300,000 was improperly taken from GEE's account at Park Avenue Bank and a fraudulent conveyance of $2,300,000 in O2HR derived valued was returned to GEE to make it whole again in late 2009 (id. , ¶¶ 67-72).
The disappearance and reappearance of the $2,300,000 from GEE's bank accounts is more fully described in Mr. Huff's Indictment, which is summarized as follows (NYSCEF Doc. No. 51, Exh. B). Mr. Huff maintained 22 bank accounts at Park Avenue Bank, of which Mr. Antonucci was President and CEO (id. , ¶ 4). Under federal law and New York law, Park Avenue Bank was required to maintain certain levels of capital on deposit to cover potential obligations, and a bank that was rated "undercapitalized" was subject to potential enforcement actions, among other prohibitions (id. ). In October 2008, Park Avenue Bank was in danger of becoming "undercapitalized," which resulted in a scheme between Mr. Huff, Mr. Antonucci and others to make the bank appear more capitalized (id. , ¶¶ 43-44).
The scheme was accomplished by deceptive transactions whereby $6,500,000 in Park Avenue Bank funds were disguised as loans to Huff-Controlled Entities, and transferred into Park Avenue Bank accounts maintained by these entities, which funds were then transferred from the Huff-Controlled Entities to Mr. Antonucci, and then from Mr. Antonucci to Park Avenue Bank as a purported $6,500,000 "personal investment" to enable the bank to maintain sufficient capital (id. , ¶¶ 44-48, the Round-Trip Transaction ). As part of this Round-Trip Transaction, Park Avenue Bank extended a $2,300,000 loan to a Huff-Controlled Entity, U.S. Insurance Group (USIG ) (id. , ¶ 50). However, because USIG filed for bankruptcy and was under increased scrutiny, Mr. Huff and others stole funds from GEE's Park Avenue Bank account to enable USIG to repay its $2,300,000 loan to Park Avenue Bank (id. ).
On or about July 21, 2009, Mr. Huff and others caused GEE's CEO to authorize a transfer of $2,300,000 from a GEE bank account to purportedly purchase a certificate of deposit at Park Avenue Bank (id. ). The $2,300,000 from GEE was not used to buy a certificate of deposit, however, but to reimburse Park Avenue Bank for the $2,300,000 loan previously issued to USIG and a counterfeit receipt for the certificate of deposit was made, which falsely stated that the sum was invested in a 90-day certificate of deposit (id. ). After the $2,300,000 withdrawal came to the attention of GEE's Audit Committee and outside auditors, Mr. Huff caused approximately $2,300,000 to be returned to GEE's bank account from other unrelated Huff-Controlled Entities (the $2,300,000 Conveyance ) (id. ). A large portion of the $2,300,000 Conveyance was allegedly comprised of money that O2HR collected from its clients for their employment tax and other obligations, which Mr. Huff diverted to other entities including Oxygen and River Falls, and, ultimately, to GEE (id. ).
Subsequently, the Plaintiffs brought this action on September 30, 2014 and assert the following claims against GEE in their Amended Complaint (NYSCEF Doc. No. 51, the Amended Complaint ): (i) fraudulent conveyance (the first cause of action), (ii) aiding and abetting fraudulent conveyance (the second cause of action), (iii) aiding and abetting breach of fiduciary duty (the fourth cause of action), and (iv) conspiracy to breach fiduciary duty (the fifth cause of action) and seeking $5 million in damages.
C. The Relevant Evidence
GEE objects to 15 of the 18 documents that the Plaintiffs attach to their counsel's affirmation in opposition to the instant motion because it argues that these documents were not adduced with proper authentication and/or foundation and are, therefore, inadmissible. GEE does not object to the admissibility of three deposition transcripts attached by the Plaintiffs (NYSCEF Doc. Nos. 512, 514, 523). The Plaintiffs do not object to any documents that GEE attaches as evidence to the instant motion.
While an attorney is generally permitted to append documents to his or her affirmation that constitute evidentiary proof in admissible form, such documents are not admissible where the attorney fails to demonstrate personal knowledge of the contents of the document ( Zuckerman v. New York , 49 NY2d 557, 563 [1980] ). Certain types of documents, however, may be admitted into evidence without foundation testimony where the records are "so patently trustworthy as to be self-authenticating" ( Elkaim v. Elkaim , 176 AD2d 116, 117 [1st Dept 1991] ).
The Plaintiffs' chart purporting to show the flow of funds between Huff-Related Entities (NYSCEF Doc. No. 509) is not admissible without further foundation because it does not appear to be a record prepared in the ordinary course of business ( Equidyne Corp. v. Vogel , 160 AD2d 389, 390 [1st Dept 1990] ) or otherwise admissible as an exception to hearsay.
The five documents released by the Securities and Exchange Commission and the Southern District of New York are admissible as trustworthy documents on their face (NYSCEF Doc. Nos. 510, 511, 513, 515, 522). The Plaintiffs' expert report, while unsworn, is also admissible because its conclusions were adopted by GEE's own expert (NYSCEF Doc. Nos. 463, 524; see People v. Campney , 94 NY2d 307, 311 [1999] [permitting an adoptive admission where party acknowledges and attests to something already uttered by another person, which effectively becomes the party's own admission] ). The remainder of the Plaintiffs' documentary evidence is presumed authentic and therefore admissible because these documents were produced by GEE, who does not rebut the presumption of authenticity by a preponderance of evidence ( CPLR § 4540-a ; NYSCEF Doc. Nos. 516-521, 525, 526).
The admissible and relevant evidence submitted in connection with the instant motion is summarized below.
1. Judson B. Wagenseller, Attorney for WTS
Judson B. Wagenseller was the attorney who represented WTS as seller in the 2010 Transactions, and was deposed in a companion action (Index No. 654168/2012) on August 3, 2017 (NYSCEF Doc. No. 478, at 36:13-19). Mr. Wagenseller testified that prior to the 2010 Transactions, he represented WTS as buyer in acquisitions pursuant to which WTS acquired certain assets of On-Site, DMCC, and RFFG. Mr. Wagenseller also testified that he was paid by Mr. Huff for his representation of WTS and that he believed Mr. Bean funded these acquisitions with loans from the River Falls Entities (id. at 100:8-11, 105:18-25, 108-21, 119:2-10).
Mr. Wagenseller testified that he represented WTS as buyer when it acquired DMCC and RFFG assets in mid-2008 for the purchase price of $3,750,000 of which $750,000 was paid (id. at 67:19-72:10, 106:4-15). Mr. Wagenseller explained that Mr. Bean funded this WTS acquisition with $750,000 borrowed from RFFS, which he described as a "a pocket book controlled by Mr. Huff," but that Mr. Bean repaid the sum, which led the U.S. Government to absolve Mr. Bean of liability relating to O2HR monies (id. at 82:25-84:7). Mr. Wagenseller could not recall whether the $750,000 loan to Mr. Bean for the Ameritemps Transaction was documented via a note or otherwise, but he recalled seeing accounting for the same (id. at 119:20-120:4).
Mr. Wagenseller also stated that he represented WTS as buyer when it acquired the outstanding stock of On-Site on January 1, 2009 (id. at 97:1-12, 103:8-12). Mr. Wagenseller believes that Mr. Bean paid $125,000 for On-Site and in that accounting, he recalled seeing a reference to "monies related to On-Site" (id. at 120:13-21).
Mr. Wagenseller did not know if interest was repaid on the loans from RFFS to Mr. Bean or if these loans were documented (id. at 120:22-121:6). When Mr. Wagenseller was asked about the Plaintiffs' allegations that Mr. Bean took part in O2HR's alleged scheme to take cash and receivables from the insolvent O2HR and exchange them for ownership or shares and assets in certain O2HR client companies, Mr. Wagenseller provided the following response:
A. The only thing I could - - well, as far as the assets, that doesn't make any sense, okay. Unless everybody involved at Ameritemps lied on the reps and warranties, lied in the due diligence as far as what the — what the assets were and where they were going. As far as cash, again, the only indication I had is that the 750, the 500 down payment, the 250, came from RFFS, and RFFS was regularly getting money from — from Credit Investor Resources. I understand the, you know, the bulk of the money Huff stole was - - wasn't O2HR money, it wasn't O2HR property, it was IRS money and that's not property of the debtor susceptible being confronted with conveyance. So you know, to the extent that Bean asserts in sending me, you know, some accounting that indicates he, you know, WTS or whomever it was borrowed 750 for the down payment, and then one of $250,000 payments and that he paid it back, plus another 400 on top of that, you know, I guess my opinion would be, well, he borrowed the money from RFFS. Where RFFS got it, who knows? Someone's going to have to spend 100,000 bucks doing an accounting unless they want to believe the, you know, IRS letter to Bean saying they're not going to chase them for having stolen money from - - from O2HR, and so that wasn't, right, the subject of a fraudulent conveyance
(id. at 199:15-200:14).
2. The Plaintiffs' Expert Witness
The Plaintiffs' expert, Jeff Johnson, a Chartered Financial Analyst, issued a report dated July 1, 2019 (NYSCEF Doc. No. 524), wherein he traced the flow of funds that the Plaintiffs invested in O2HR. With respect to those funds invested by Sands Brothers Venture Capital II, LLC, Sands Brothers Venture Capital III, LLC, and Sands Brothers Venture Capital IV, LLC, Mr. Johnson found that:
a portion, if not all, of the investment by Sands Brothers Venture Capital was transferred from Oxygen Unlimited II LLC's PAB account [ending 0291] to Oxygen Unlimited LLC's PAB Account [ending 0828] [o]n October 28, 2009, all funds in Oxygen Unlimited LLC's PAB account [ending 40828], totaling $6,579,897, were withdrawn via a single check. According to the bank statement the description for the withdrawal was to Oxygen Unlimited accounts ending in No.401566 and #401613, which is related to a loan.11 While bank statements for these two accounts were not available, it was identified that these accounts made a $700,000 deposit into Oxygen Unlimited LLC PAB account [ending 0725] on February 4, 2008. It was also identified that other Huff- Controlled Entities, specifically AIR and River Falls Investments made interest payments, such that of $20,333.33 on December 1, 2008 for the same #401613 loan account.
11 Bank Statement PAB [ending 0828], Oxygen Unlimited LLC, Page 1.
(id. , at 6-7).
With respect to the investment by Genesis Merchant Partners, LP, Mr. Johnson determined that that the investment by Genesis Merchant Partners, LP was transferred from Oxygen Unlimited II LLC's account (ending in 0725) to multiple Huff-Controlled Entities or bank accounts where it was subsequently used to pay taxes, pay off credits, or transferred again to commonly-controlled bank accounts (id. at 2-3).
At his deposition on August 13, 2019, Mr. Johnson testified that he did not find any evidence that GEE saw any of the money that the Plaintiffs invested (NYSCEF Doc. No. 479, at 79:14-81:19). In particular, when asked whether he traced any of the Plaintiffs' funds to GEE stock, any person or investment vehicle that then purchased GEE stock, Mr. Bean, or Big Red, Mr. Johnson's response was, "No" (id. at 137:2-17).
3. GEE's Expert Witness
By affidavit, dated October 28, 2019, GEE's expert witness, Yale Scott Bogen, a Certified Public Accountant, certified in financial forensics, and Managing Director at Development Specialists, Inc., attested that he was retained to analyze the loans made by the Plaintiffs in favor of O2HR and repayments for the same (NYSCEF Doc. No. 463, ¶ 2). Mr. Bogen found that the Plaintiffs received partial payment from entities other than O2HR, including Oxygen Unlimited II, LLC, River Falls Investment, LLC, SDH Realty, Inc., and River Falls Financial Services, LLC (id. , ¶ 32). Ultimately, Mr. Bogen concluded that his analysis of the Loans was the same as that conducted by the Plaintiffs' Expert, Mr. Johnson, except for a nominal omitted payment (id. , ¶ 32).
II. Discussion
On a motion for summary judgment, the movant "must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact" ( Alvarez v. Prospect Hosp ., 68 NY2d 320, 324 [1986], citing Winegrad v. New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985] ). Once this showing is made, the burden shifts to the opposing party to produce evidence in admissible form sufficient to establish the existence of a triable issue of fact ( Zuckerman v. New York , 49 NY2d 557, 562 [1980] ).
A. Fraudulent Conveyance (the First Cause of Action)
As noted above, the Plaintiffs allege that GEE took part in two fraudulent conveyances: (1) the conveyance of Mr. Bean's O2HR derived assets to GEE via the 2010 Transactions in exchange for GEE common stock, and (2) the $2,300,000 Conveyance of O2HR derived assets.
1. The 2010 Transactions
GEE argues that the first cause of action for fraudulent conveyance should be dismissed because (i) the Plaintiffs have no standing to bring this claim because they are not creditors of the purported transferors, On-Site, DMCC or RFFG and (ii) no O2HR assets were transferred or acquired in the 2010 Transactions.
New York Debtor and Creditor Law enables a creditor to recover its debts despite efforts of a debtor to elude payment ( Hearn 45 St. Corp. v. Jano , 283 NY 139, 142 [1940] ). As a result, a plaintiff creditor may obtain recovery against the debtor or transferee who allegedly participated in the fraudulent transfer (Matter of 4042 E. Tremont Café Corp. v. Sodono , 177 AD3d 456, 458 [1st Dept 2019] ).
As the Plaintiffs loaned money to O2HR that GEE allegedly received through a chain of fraudulent conveyances, the Plaintiffs must demonstrate that O2HR funds were diverted through GEE to establish liability in the alleged chain of fraudulently conveyed assets. In support of its argument that no O2HR assets were transferred or acquired in the 2010 Transactions, GEE refers to the Plaintiffs' expert, Mr. Johnson, who stated that he was unable to trace any O2HR funds to (i) GEE stock, (ii) any person or investment vehicle that then purchased GEE stock, (iii) Mr. Bean, or (iv) Big Red (NYSCEF Doc. No. 479 at 137:2-21). GEE also relies on the relevant asset purchase agreements executed during the 2010 Transaction, whereby (i) On-Site as seller provided that the assets sold were "free and clear of all Adverse Claims" and that On-Site had good and valid title to all the purchased assets (NYSCEF Doc. No. 457, §§ 2.1, 4.4[a] ), and (ii) DMCC and RFFG provided that the assets sold were "free and clear of all Adverse Claims" and that DMCC and RFFG had good and valid title to the purchased assets (NYSCEF Doc. No. 460, §§ 2.1, 4.4[a] ).
In their opposition papers, the Plaintiffs rely on Mr. Wagenseller's testimony that WTS and Mr. Bean initially received undocumented, no-interest loans from the River Falls Entities controlled by Mr. Huff to acquire On-Site, DMCC, and RFFG. In other words, the Plaintiffs argue that it was WTS's initial purchase of On-Site, DMCC, and RFFG that was the transaction through which O2HR-derived assets were funneled, and in turn conveyed to GEE during the 2010 Transactions.
Based on the foregoing evidence, there exists a material issue of fact concerning whether WTS's initial purchase of On-Site, DMCC, and RFFG was funded or connected to O2HR. Significantly, Mr. Wagenseller testified that there may have been undocumented loans between the River Falls Entities and Mr. Bean, which the Plaintiffs' expert would not be able to trace. Accordingly, that branch of GEE's motion to dismiss the first cause of action for fraudulent conveyance related to the 2010 Transactions is denied.
2. The Alleged $2,300,000 Conveyance
GEE also argues that the alleged $2,300,000 Conveyance that GEE received satisfied an antecedent debt, such that it is not an improper conveyance under NY Debtor and Creditor Law. In their opposition papers, the Plaintiffs argue that the antecedent debt exception only applies where the transfer is made and received in good faith.
Constructive fraud may be shown when a debtor transfers assets without fair consideration and the debtor is or becomes insolvent as a result of the transfer ( NY DCL § 273 ). However, a conveyance will not be set aside as fraudulent when a debtor makes a transfer to satisfy an antecedent debt made while the debtor is insolvent, even if the effect is to prefer one creditor over another ( Ultramar Energy v. Chase Manhattan Bank, N.A. , 191 AD2d 86 [1st Dept 1993] ).
In Ultramar , the First Department explained that it was not unfair for a debtor to arbitrarily select which creditor to pay, such that satisfaction of an antecedent debt could not constitute a fraudulent conveyance notwithstanding the defendant transferee's knowledge of the debtor's insolvency, or the defendant's knowledge that it would be preferred to other creditors ( id. at 91 ).
A debtor may not, however, favor one creditor over another as a means to engage in a sham transaction that furthers such preference (see Matter of CIT Group/Commercial Servs., Inc. v. 160-09 Jamaica Ave. LP , 25 AD3d 301, 303 [1st Dept 2006] [citations omitted] ["[g]ood faith is required of both the transferor and the transferee, and it is lacking when there is a failure to deal honestly, fairly, and openly"]; Sharp Intl. Corp. v. State St. Bank & Trust Co. (In re Sharp Intl. Corp.) , 403 F3d 43 [2d Cir 2005] ). In other words, a conveyance where a transferee attempts to satisfy an antecedent debt may nevertheless be set aside by a court if the transferor exhibits fraudulent intent when making the transfer (see CIT Group, supra. [transferor's sworn explanation that transfer was in partial satisfaction of antecedent debt did not negate inference of fraudulent intent when certain badges of fraud were present]; Ede v. Ede , 193 AD2d 940 [3d Dept 1993] [deed void when made with intent to defraud plaintiff, irrespective of antecedent debt, where transferor debtor attests that property was transferred to defendant to keep it from creditors who had judgment against him] ).
In its moving papers, GEE argues that under the Plaintiffs' own theory, GEE became a creditor of the missing $2,300,000 such that the $2,300,000 it later received cannot be actionable as a fraudulent conveyance because it satisfied an antecedent debt. However, GEE's argument misses the point — i.e., the Roundtrip Transaction was allegedly wholly consummated with fraudulent intent. And, equally importantly, GEE failed to tender sufficient evidence to establish that the entity which took the $2,300,000 and became GEE's purported debtor was the same or related entity that owed and later returned the $2,300,000. Put another way, GEE has simply not tendered sufficient evidence to eliminate material issues of fact as to whether the $2,300,000 Conveyance satisfied an antecedent debt that was incurred on behalf of the purported debtor — i.e. Mr. Huff or the Huff-Controlled Entities. Accordingly, the branch of GEE's motion for summary judgment to dismiss the fraudulent conveyance claim for the $2,300,000 Conveyance is also denied.
B. Statute of Limitations — Sands Brothers Venture Capital II, LLC and Genesis Merchant Partners LP
GEE also argues that the claims of Sands II and Genesis should be dismissed as time-barred. For the avoidance of doubt, GEE does not move for summary judgment based on the statue of limitations as against the other Plaintiffs — Sands Brothers Venture Capital III, LLC and Sands Brothers Venture Capital IV, LLC.
Pursuant to CPLR § 202, a non-resident that brings a lawsuit in New York based on events that give rise to a cause of action accruing outside of New York must commence the action within New York's limitation period and the limitation period of the place where the cause of action accrued. The time and place of injury determines where a tort action accrues ( Global Fin. Corp. v. Triarc Corp. , 93 NY2d 525, 529 [1999] ). When the alleged injury is purely economic, the place of injury is where the party resides and sustains the economic impact of the loss (id. ). Here, Sands II and Genesis are non-residents of New York and any alleged injury is purely economic such that their legal residence determines where the action accrues.
1. Sands Brothers Venture Capital II
In the case of a corporate plaintiff, its place of residence may be either the state of incorporation or its principal place of business ( Oxbow Calcining USA Inc. v. American Indus. Partners , 96 AD3d 646, 651 [1st Dept 2012] ). The First Department has held a limited liability company resides where its principal place of business is located (compare Kat House Prods., LLC v. Paul, Hastings, Janofsky & Walker, LLP , 71 AD3d 580, 580 [1st Dept 2010] [finding plaintiff LLC resided in its principal place of business though its state of incorporation was not mentioned]; Gordon Group Invs., LLC v. Kugler , 115 AD3d 433, 434 [1st Dept 2014] affg 2012 NY Slip Op 33358[U], *37 [Sup Ct, NY County 2012] ) [accepting plaintiff LLC's place of business was its legal residence where trial court analyzed the limitation period for both plaintiff's state of incorporation and its place of business]; Center Lane Partners, LLC v. Skadden, Arps, Slate, Meagher, & Flom LLP 154 AD3d 525, 525 [1st Dept 2017], affg 2016 NY Slip Op 32136[U], *3 [Sup Ct, NY County 2016] [finding plaintiff LLCs and LPs losses were incurred in their principal place of business], with Verizon Directories Corp. v. Continuum Health Partners, Inc. , 74 AD3d 416, 416 [1st Dept 2010] [holding that plaintiff corporation was resident in its state of incorporation] ).
GEE argues that the Sands II claims must be analyzed under Connecticut's limitation period because although Sands II was formed in New York on March 28, 2000, as of January 31, 2018, Sands II had operated in Manhattan for less than a year (NYSCEF Doc. No. 475, at 28:7-29:4). Prior to that time, Sands II operated in Greenwich, Connecticut (id. ).
In their opposition papers, and relying on Interventure 77 Hudson LLC v. Falcon Real Estate Inv. Co., LP , the Plaintiffs argue that Sands II resides in New York because Sands II was incorporated in New York. Their reliance on Intervene 77 is misplaced. In Interventure 77, the First Department affirmed the court's (Sherwood, J.) designation of the plaintiff's residence as Delaware, its state of incorporation, where "there [was] no evidence that they have a principal place of business in any one state." ( 172 AD3d 481, 481 [1st Dept 2019], affg 2018 NY Slip Op 30948[U] [Sup Ct, NY County 2018] ). In other words, Interventure 77 does not stand for the general proposition that a limited liability company's principal place of business is its state of incorporation. Rather, Interventure 77 merely stands for the proposition that where an entity does not have a principal place of business in another state, its principal place of business is its state of formation. Therefore, Sands II's principal place of business was Connecticut and under the borrowing statute, the claims must be analyzed under Connecticut law.
Pursuant to Connecticut law, the statute of limitations to set aside a conveyance is four years after the transfer was made or, within one year after the transfer could have been reasonably discovered ( Conn Gen Stat § 52-552j ). A claim for breach of fiduciary duty is subject to a three-year statute of limitations in Connecticut ( Conn Gen Stat § 52-577 ).
The record indicates that the On-Site Transaction took place on June 1, 2010 and GEE received the $2,300,000 Conveyance in 2009. However, the Plaintiffs' summons with notice was not filed until September 1, 2014 (NYSCEF Doc. No. 1), which necessarily means that the claims related to fraudulent conveyance for the On-Site Transaction, which took place on June 1, 2010, and the $2,300,000 Conveyance, which took place in 2009, are time-barred because they were not filed within four years of the purported transfers to GEE. The discovery-accrual rule does not save the claims of Sands II with respect to the On-Site Transaction and the $2,300,000 Conveyance because, even accepting the Plaintiffs' argument that it could not have reasonably discovered the GEE related transactions until the unsealing of Mr. Huff's indictment on October 1, 2012 (see NYSCEF Doc. No. 522), Sands II did not timely commence its action for fraudulent conveyance within one year of that date. That is, the discovery accrual rule only extends the limitation period an additional year from the time that a purported fraud was discovered. It does not reset the clock of the four-year statute of limitations period.
A claim for breach of fiduciary duty is subject to a three-year statute of limitations in Connecticut ( Conn Gen Stat § 52-577 ). Sands II's claims related to breach of fiduciary duty are also time barred because Mr. Bean's purported breach of his fiduciary duties to O2HR occurred during the 2010 Transactions and more than three years elapsed before this action was commenced in 2014.
Although New York's statute of limitations for claims of fraudulent conveyance and breach of fiduciary duty may differ from the limitation period under Connecticut law, a court which is presented with a cause of action that accrues outside New York "should apply the limitation period of the foreign jurisdiction if it bars the claim" ( Insurance Co. of N. Am. v. ABB Power Generation , 91 NY2d 180, 187 [1997] ). As a result, the claims of Sands II are barred.
Accordingly, that branch of GEE's motion for summary judgment on Sands II's first cause of action for fraudulent conveyance and second cause of action for aiding and abetting fraudulent conveyance for the On-Site Transaction and the $2,300,000 Conveyance, fourth cause of action for aiding and abetting breach of fiduciary duty, and fifth cause of action for conspiracy to breach fiduciary duty is also granted and these claims are dismissed as time barred.
2. Genesis Merchant Partners LP
With respect to Genesis's claims against GEE, GEE argues that these claims are also untimely because Genesis has its principal place of business in Connecticut and thus, Genesis's claims are time-barred under Connecticut law. In their opposition papers, the Plaintiffs argue that the legal residence of a limited partnership is where the partners reside and because GEE has adduced no evidence of where Genesis partners reside, Genesis's claims cannot be dismissed. The Plaintiffs' argument is unavailing.
Although the Plaintiffs rely on Gordon & Co. v. Ross , 63 F Supp 2d 405, 406 [SD NY 1999] to argue that a limited partnership's claims accrue where its partners reside, this standard has not been adopted by the First Department, which has determined that a partnership's legal residence is where its principal place of business is maintained ( Proforma Partners v. Skadden Arps Slate Meagher & Flom , 280 AD2d 303, 303 [1st Dept 2001], citing Ackerman v. Price Waterhouse , 252 AD2d 179, 192, n 5 [1st Dept 1998] ).
The record established that although Genesis was formed as a Delaware limited partnership (NYSCEF Doc. No. 475, 39:2-18), it maintained offices in Connecticut per a certified report from the Secretary of the State of Connecticut, dated March 28, 2014, indicating that Genesis was a foreign partnership with an office in Connecticut for a report due in September 2008 (NYSCEF Doc. No. 481). Inasmuch as the Plaintiffs submit no evidence to the contrary, the claims of Genesis must be analyzed under Connecticut law.
As Genesis asserts identical claims as Sands II and Genesis is also subject to the relevant Connecticut statute of limitations, the claims of Genesis must be dismissed for the reasons set forth above. For the avoidance of doubt, even if Delaware law applied to the claims brought by Genesis, they would still be time barred as Delaware's statute of limitations for claims of fraudulent conveyance and breach of fiduciary duty are the same as Connecticut (see Del CodeAnn tit 6, § 1309 (1) [a claim of fraudulent conveyance must be brought within four years after the transfer or within one year after the transfer could reasonably have been discovered]; Del Code Ann tit 10, § 8106 [limitation period for a breach of fiduciary duty claim is three years] ). Accordingly, that branch of GEE's motion for summary judgment on Genesis's first cause of action for fraudulent conveyance and second cause of action for aiding and abetting fraudulent conveyance for the On-Site Transaction and the $2,300,000 Conveyance, fourth cause of action for aiding and abetting breach of fiduciary duty, and fifth cause of action for conspiracy to breach fiduciary duty is granted and these claims are dismissed as untimely.
C. Aiding and Abetting Fraudulent Conveyance (Second Cause of Action)
GEE argues that it is entitled to summary judgment on the Plaintiffs' claim for aiding and abetting fraudulent conveyance because no such claim exists under New York law. Simply put, GEE is mistaken.
In Federal Deposit Ins. Corp. v. Porco , the Court of Appeals held that New York Debtor and Creditor Law does not create a cause of action against a defendant that merely assists a debtor in transferring assets where the defendants are neither transferees of the assets nor beneficiaries of the conveyance ( 75 NY2d 840 at 842 [1990] ; see also Estate of Shefner , 127 AD3d at 442 [1st Dept 2015] ). However, Federal Deposit does not hold that a claim for aiding and abetting a fraudulent conveyance may not be maintained where, as here, the defendant GEE was allegedly a transferee of the assets or a beneficiary. And, GEE has not adduced sufficient evidence to eliminate any issues of fact concerning this aspect of the Plaintiffs' claim. Accordingly, GEE's motion to dismiss the second cause of action for aiding and abetting fraudulent conveyance must be denied.
D. Aiding & Abetting Breach of Fiduciary Duty and Conspiracy to Breach Fiduciary Duty (Fourth and Fifth Causes of Action)
The Plaintiffs allege that GEE aided and abetted Mr. Bean in his breach of fiduciary duty as CEO of O2HR by participating in the issuance of GEE common shares to a non-O2HR entity in exchange for the receipt of O2HR assets.
GEE argues that there is no underlying breach of fiduciary duty claim to ground a conspiracy or aiding and abetting claim because (i) the Plaintiffs have no standing to bring a claim for Mr. Bean's alleged breach of fiduciary duty vis-à-vis O2HR, and that (ii) in any event, Mr. Bean did not owe the Plaintiffs a fiduciary duty.
To bring a derivative action for breach of fiduciary duty against an officer of a limited liability company, a plaintiff must be a member of the limited liability company ( Jacobs v. Westchester Indus. Complex, LLC , 156 AD3d 608, 610 [1st Dept 2017] ). However, the trust fund doctrine provides that officers and directors of an insolvent corporation are said to hold the remaining corporate assets in trust for the benefit of its general creditors ( Credit Agricole Indosuez v. Rossiyskiy Kredit Bank , 94 NY2d 541, 550 [2000] [citations omitted] ). An unsecured creditor may not invoke the trust fund doctrine to reach transferred assets before exhausting legal remedies by obtaining judgment on the debt and having the execution return unsatisfied (id. ).
Here, Mr. Bean was the CEO and officer of O2HR when O2HR allegedly conveyed assets while insolvent such that Mr. Bean would owe a fiduciary duty to the Plaintiff creditors under the trust fund doctrine. As a matter of law, the Plaintiffs are therefore permitted to assert their claims for conspiracy and aiding and abetting breach of fiduciary duty because the Plaintiffs also have a viable breach of fiduciary duty claim against Mr. Bean. Accordingly, the branch of GEE's motion to dismiss the fourth and fifth causes of action is denied.
Accordingly, it is
ORDERED that GEE's motion for summary judgment is granted solely to the extent that Sands Brothers Venture Capital II, LLC and Genesis Merchant Partners LP's first cause of action for fraudulent conveyance and second cause of action for aiding and abetting fraudulent conveyance regarding the On-Site Transaction and the $2,300,000 Conveyance, fourth cause of action for aiding and abetting breach of fiduciary duty, and fifth cause of action for conspiracy to breach fiduciary duty of are dismissed, and the motion is otherwise denied.