Opinion
No. 29681–12.
05-01-2014
Thomas J. SPOTA, District Attorney of Suffolk County, Claiming Authority, Plaintiff, v. Paul WHITE, Criminal, Defendant, and Donna White, John Cline Reservoir, LLC., Paul White, Inc., Professional Real Estate Advisors, Professional Investment Advisors and 1031 Safe Qualified Intermediary Corp., Non–Criminal Defendant Nominees.
Thomas J. Spota, District Attorney of Suffolk County, Hauppauge, pro se. Raymond Negron, Esq. Reservoir, LLC, Mount Sinai, for Defendant, John Cline. Paul White, Huntington, Defendant Pro Se.
Thomas J. Spota, District Attorney of Suffolk County, Hauppauge, pro se.
Raymond Negron, Esq. Reservoir, LLC, Mount Sinai, for Defendant, John Cline.
Paul White, Huntington, Defendant Pro Se.
DECISION AND ORDER AFTER HEARING
ELIZABETH H. EMERSON, J.
Thomas J. Spota, the District Attorney of Suffolk County (the “claiming authority”) commenced this civil forfeiture action pursuant to CPLR article 13–A against Paul White, a criminal defendant, and various other non-criminal defendants to recover $2.4 million as the proceeds, substituted proceeds, and instrumentalities of a crime or to recover a money judgment in that amount. On September 25, 2012, this court granted the claiming authority's ex-parte application for an order of attachment and authorized the levy of bank accounts in the names of the defendants Paul White; his wife, Donna White; Paul White Inc.; Professional Real Estate Advisors; 1031 Safe Qualified Intermediary Corp.; John Cline Reservoir, LLC; and Professional Investment Advisors, as well as real property located in Huntington, New York. The accounts in the name of Donna White and the real property were subsequently released by the claiming authority. Paul White was indicted on eight counts of grand larceny in the second degree pursuant to Penal Law § 155.40(1) and one count of scheme to defraud in the first degree pursuant to Penal Law § 190.65(1)(b), both of which are felonies.The claiming authority moved to confirm the ex-parte order of attachment, and the defendant Paul White cross moved to vacate, discharge, or modify the same; to dismiss this action in the interest of justice; and for attorney's fees and expenses. By an order of this court dated March 20, 2013, the motion and cross motion were referred to a hearing. The hearing was held on June 21, 2013; March 18, 2014; and April 8, 2014. The claiming authority's case consisted of the papers in support of the motion and in opposition to the cross motion and exhibits 1 through 4, which were admitted into evidence at the hearing. The claiming authority did not call any witnesses to testify. The opposition and Paul White's case consisted of the papers in opposition to the motion and in support of the cross motion; exhibits A through G, which were admitted into evidence at the hearing; and the testimony of Preston Treiber. At the conclusion of the hearing, the court reserved decision.
In order to invoke the provisional remedy of attachment under the asset-forfeiture statute, the claiming authority is required to demonstrate, inter alia, that it will prevail on the issue of forfeiture (CPLR 1312[3][a] ; Morgenthau v. Young, 204 A.D.2d 118). To prevail on the issue of forfeiture, the claiming authority must establish with an evidentiary showing that there is a substantial probability of a felony conviction for the forfeiture crimes (Kuriansky v. Bed–Stuy Health Care Corp., 135 A.D.2d 160, 175,affd 73 N.Y.2d 875;Spota v. Conti, 9 Misc.3d 349, 351). While Paul White has been indicted, the record presented fails to establish that there is a substantial probability that he will be convicted of either grand larceny in the second degree or scheme to defraud in the first degree.
A person is guilty of grand larceny in the second degree when he steals property the value of which exceeds $50,000 (Penal Law § 155.40[1] ). A person is guilty of scheme to defraud in the first degree when he engages in a scheme constituting a systematic, ongoing course of conduct with intent to defraud more than one person or to obtain property from more than one person by false or fraudulent pretenses, representations, or promises and so obtains property with a value in excess of $1,000 from one or more such persons (Penal Law § 190.65[1][b] ). The claiming authority's theory of the case is that the defendant Paul White, while acting as a financial advisor, unlawfully took approximately $2.4 million from eight investors by fraudulently misrepresenting to them that he was going to invest their money in an income-producing, low-risk investment. Instead, he used their money to purchase a 400–acre parcel of vacant land in North Carolina, which the claiming authority characterizes as drought-stricken farmland, and paid himself unauthorized real-estate brokerage commissions in the amount of $290,000.
Although the claiming authority alleges that Paul White stole $2,975,011.52, from eight investors it seeks to recover only $2,400,000.
The investment was known as the John Cline Reservoir. There were a total of nine investors, each of whom formed a separate limited liability company (“LLC”). Each LLC entered into a separate purchase agreement with the defendant John Cline Reservoir, LLC (the “seller”). John Cline Reservoir, LLC, is wholly owned by the defendant Paul White. It purchased the 400–acre parcel in North Carolina, and the investors purchased their interests in the property from the John Cline Reservoir, LLC. The investors held the property as tenants in common, and each investor executed a tenants-in-common agreement in addition to the purchase agreement. White planned to develop the property with a man-made reservoir, a marina, single-family homes, and retail shops, among other things.
Although there were nine investors, only eight have pursued criminal charges against Paul White. Preston Treiber, who testified at the hearing for the defendants, is only investor who is not a complainant in the criminal action against White.
The purchase agreement gave the seller, John Cline Reservoir, LLC, an option to repurchase the property for which the seller agreed to pay each investor 7% per annum and a 5% premium if it exercised the option. Both the purchase agreement and the tenants-in-common agreement allowed the investors to sell their interests in the property to each other or to third parties after first offering such interests to the other investors. Nothing in those agreements, however, required the seller, John Cline Reservoir, LLC, to buy back an investor's interest in the property. In 2011, one of the investors, the Little Shelter Animal Adoption Center, Inc. (“Little Shelter”), demanded the return of its investment from Paul White. When he refused, Little Shelter and seven other investors pursued criminal charges against White, and this action ensued.
According to the affidavit of Christine M. Lusak, Senior Investigative Auditor at the Suffolk County District Attorney's office, dated September 24, 2012, the John Cline Reservoir, LLC, received $2,625,011.52 from seven investors plus $350,00 from Little Shelter. John Cline Reservoir, LLC, used approximately $1.7 million to purchase the real property in North Carolina. Approximately $290,000 was used to pay real-estate brokerage commissions to the defendants Paul White, Inc., and Professional Real Estate Advisors, which were controlled by Paul and Donna White. Approximately $900,000 was deposited into accounts at TD Bank in the name of John Cline Reservoir, LLC, which were controlled by Paul White. Approximately $500,000 of the $900,000 was paid back to the investors for the option to repurchase their interests in the property as set forth in the purchase agreement. It is the funds currently on deposit in those accounts, a little less than $200,000, that are the subject of this action.The claiming authority has advanced several arguments in support of its motion to confirm the order of attachment that are inconsistent with the documentary evidence. For example, the claiming authority contends that Paul White misrepresented to the investors that they were purchasing a safe, liquid investment. However, the purchase agreements and tenant-in-common agreements that the investors signed clearly indicated that they were purchasing an interest in real property, and each investor formed an LLC, which is the hallmark of an investment in real estate and is used to limit personal liability. There would be no need to limit personal liability if the investment did not have any risk associated with it. Furthermore, the investors represented and warranted in the purchase agreements, inter alia, that they were purchasing the property for investment purposes and had no present intention of reselling it; that they understood real estate is not readily marketable; that they were sophisticated investors with ample experience in owning real estate; that they were willing to accept the economic risk of losing their entire investment; that they were basing their decisions to invest on their own inspections of the property and analyses; and that they were not relying on any representations or other information furnished by the seller. A party who signs a document without a valid excuse for having failed to read it is presumed to have knowledge of its contents and is conclusively bound by its terms (see, Avanta Bus. Servs. Corp. v. Colon, 4 Misc.3d 117, 119 ; see also, Daniel Gale Assocs. v. Hillcrest Estates, 283 A.D.2d 386, 387;Sofio v. Hughes, 162 A.D.2d 518, 519). The claiming authority contends that Paul White paid himself unauthorized brokerage commissions in the amount of $290,000, which represents approximately 10% of the purchase price paid by the eight investors who are the complaining witness in the criminal action. The purchase agreement provides, in pertinent part, as follows regarding commissions:
It appears that Ms. Lusak's affidavit does not take into account the $500,000 that was received from Preston Treiber.
In a subsequent affidavit dated November 15, 2012, Ms. Lusak estimated this amount to be $590,000.
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The parties mutually warrant and covenant that, other than commissions and other funds to be held on Buyer's behalf to entitle and improve property described in the documents, to be paid by Seller in accordance with this agreement, no other fees shall be due or payable on account of this transaction (emphasis added).
The court finds the aforementioned language to be somewhat garbled as to what it is intended to mean. Contrary to the claiming authority's contention, it does not expressly prohibit the payment of commissions and could be interpreted to authorize such payments.The claiming authority contends that Paul White did nothing to develop or improve the property. There is ample documentary evidence in the record, however, demonstrating White's efforts to develop the property and to obtain governmental approvals for his plans. Preston Treiber, the only investor who did not pursue criminal charges against White and the only witness to testify at the hearing, testified that he made four trips to North Carolina to inspect the property during which he met with engineers and a state senator, among others. Treiber also testified that White's efforts to develop the property had ceased, in part, due to the prosecution of White and his subsequent incarceration. Trieber, who invested $500,000, further testified that he was completely satisfied with his investment and that he was willing to purchase any of the other investors' interests in the property, but that no one had made him an offer. Treiber testified that he understood he was making a long-term investment and that he believed the return on his investment was in the development of the property, which he thought would be enormous. The claiming authority did not call any of the eight other investors, who are the criminal complainants, to testify at the hearing. In fact, when the attorney for John Cline Reservoir, LLC, sought to subpoena them, the claiming authority vehemently objected on the ground that it was being done merely to harass them.
The claiming authority contends that White used investors' money to pay personal expenses. However, in an affidavit dated November 15, 2012, Senior Investigative Auditor Lusak acknowledged that her review of bank records for the accounts of the defendant John Cline Reservoir, LLC, revealed that the majority of the payments from those accounts were for expenses related to the property in North Carolina and that there did not appear to be any significant personal expenses paid out of those accounts.
In her previous affidavit dated September 24, 2012, Investigator Lusak stated that the defendant Paul White paid the mortgage and real-estate taxes on his residence in Huntington, New York, with investor funds. The record reveals that three checks, each in the amount of $2,383.22, payable to the holder of the Whites' mortgage and one check in the amount of $9,355.20 payable to the Receiver of Taxes were drawn on a bank account in the name of the defendant Professional Real Estate Advisors, which is one of the accounts into which White deposited his purported brokerage commissions. As previously noted, the language of the purchase agreement may be read to allow for the payment of commissions. Accordingly, the court finds that, on this record, the claiming authority has failed to establish that Paul White was not entitled to a commission as part of the overall transaction or that the funds in the Professional Real Estate Advisors account were not earned by him.
The claiming authority contends that the investors did not receive all of the payments to which they were entitled under the repurchase option. The claiming authority contends that the investors were guaranteed monthly payments for five years after the closing, but that payments to some investors stopped prior thereto. The purchase agreement provides, in pertinent part, as follows:
Seller hereby grants buyer a guarantee to pay a repurchase option of seven percent (7%) APR paid on a monthly basis based on Buyer's interest in the property. Said option agreement may be exercised by Seller anytime within five (5) years of closing date of purchase of the property.
* * *
Buyer hereby grants to Seller the option to repurchase the Property any time after one (1) year and before five (5) years after close of escrow under the following terms....Seller shall pay Buyer seven percent (7%) APR Repurchase Option paid on a monthly basis on or about the 1st of each month.
The court finds the foregoing language to be ambiguous. It is unclear when the monthly payments were to begin, immediately or one year after the closing, and whether they had to be paid for the entire option period or only as long as the seller wished to exercise the option. Moreover, the court cannot say what the parties intended by the phrase “seller hereby grants buyer a guarantee to pay.” While the investors may have the basis for a civil suit against the seller, John Cline Reservoir, LLC, for breach of contract, the court is unpersuaded that a criminal intent to deprive the investors of their property may be inferred from the failure to make all of the repurchase-option payments.
The claiming authority contends that the monthly checks issued to the investors were paid out of the investors' own funds. The claiming authority appears to be arguing that Paul White was the perpetrator of a Ponzi scheme. A Ponzi scheme is any sort of fraudulent arrangement that uses later-acquired funds or products to pay off previous investors (see, Schneider v. Barnard, U.S. Dist Ct, EDNY, April 2, 2014, Bianco, J. at *7). The investors' funds are never invested and, instead, are used for the payment of personal expenses and for the repayment of prior investors (see, Matter of DeLuca, 35 Misc.3d 1210[A] at *1 ). Such is not the case here. The record reflects that the defendant John Cline Reservoir, LLC, purchased a 400–acre parcel of real property with the investors' money, and the claiming authority has failed to meet its burden of establishing that investors' money was used to pay White's personal expenses. Moreover, once the investors closed on their interests in the property, the money was no longer their property, but belonged to the defendant John Cline Reservoir, LLC (see, People v. Headley, 37 Misc.3d 815, 824,citing People v. Kirk, 62 Misc.2d 1078).
The claiming authority appears to have blurred the distinction between Paul White and the various corporations and LLC's owned by him. Corporations and LLC's are legal entities distinct from their managers and shareholders and have an independent legal existence (Worthy v. New York City Housing Auth., 21 AD3d 284, 287). Their separate personalities cannot be disregarded unless the shareholders use them for the transaction of their personal business, as distinct from the corporate business. This rule is equally applicable to a corporation with a single shareholder (Id. ). That Paul White was a signatory on all of the corporate accounts does not necessarily mean that he was carrying on the business in his personal capacity for purely personal, rather than corporate ends (Id. ). In fact, the record reflects that White did not pay personal expenses directly from the John Cline Reservoir, LLC, accounts, but that he paid them from a separate account into which his purported real-estate commissions were deposited. That White used a separate account and money purportedly earned by him to pay his personal expenses indicates that he was observing, rather than disregarding, the corporate form and militates against a finding of criminal liability.
Courts have struggled with the danger of applying criminal liability to conduct arising out of civil breaches of contract (People v. Headley, supra at 821). There is a very real danger that ordinary business transactions will be inhibited due to the risk of prosecuting one who is guilty of nothing more than a mere failure to pay his debts or an inability to perform contractual obligations (Id. ). The law does not criminalize every breach of contract and will only call it a larceny when a party has effectively obtained property by a fraud to the detriment of the other party (Id. ). The pivotal inquiry in determining whether a larceny has occurred in a contractual setting is whether the complainant received the bargained-for benefit (Id. ). In order for the elements of larceny to be met, there must be a taking (Id. ). There is no taking if what was received is what the alleged victim bargained for (Id. ). Larceny may only be committed if the property received is of no value or of lesser value than the terms of the contract specified (Id. at n. 3).
The documentary evidence clearly establishes that those who invested in the John Cline Reservoir were making an investment in real estate, which is confirmed by the testimony of Preston Treiber, the only investor to testify at the hearing. The claiming authority did not call any of the other investors to testify and proffered no evidence as to the value of their collective or individual interests in the John Cline Reservoir other than its conclusory assertion that the property is “drought-stricken farmland in North Carolina.” Preston Treiber testified that the return on the investment was in the development of the property, not in the annual payments of 7% for the repurchase option. Treiber also testified that development had been delayed for a variety of reasons, including the recent downturn in the economy and Paul White's incarceration, among other things. Neither the purchase agreements nor the tenant-in-common agreements contain any representations or warranties by the seller regarding when the project will be completed. Moreover, the court notes that the planned development is quite large and that it will probably require additional financing, as well as a multitude of governmental approvals. That eight out of the nine investors may have thought they would see a return on their investment sooner does not, in and of itself, establish that Paul White had a criminal intent to deprive the investors in the John Cline Reservoir of their property. Accordingly, the court finds that the claiming authority has failed to meet its burden of establishing that the investors who purchased interests in the John Cline Reservoir did not get the benefit of their bargain.In view of the foregoing, it is
ORDERED that the motion by the claiming authority to confirm the order of attachment is denied; and it is further
ORDERED that the branch of the cross motion by the defendant Paul White which is to vacate the order of attachment is granted; and it is further
ORDERED that the branches of the cross motion by the defendant Paul White which are to discharge or modify the order of attachment are denied as academic; and it is further
ORDERED that the branch of the cross motion by the defendant Paul White which is to dismiss this action in the interest of justice is denied; and it further
ORDERED that the branch of the cross motion by the defendant Paul White which is for attorney's fees and expenses is denied without prejudice; and it is further
ORDERED that this action is stayed pursuant to CPLR 1311(a) during the pendency of the criminal action against the defendant Paul White.