Gao et al v. Perfect Team Corporation et al

Filing 146

MEMORANDUM AND ORDER: Plaintiffs have failed to meet their burden in demonstrating that defendants have assigned, disposed of, encumbered, or secreted property (or are about to) with the intent to defraud creditors or frustrate the enforcement of a judgment that might be rendered in their favor. Accordingly, the motion for attachment is denied at this time. Ordered by Judge Eric N. Vitaliano on 8/11/2011. (Brucella, Michelle)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK

-----------------------------------------------------------------x
LI RONG GAO, XIAO HONG ZHENG, individually:
and on behalf of all others similarly situated,
Plaintiffs,
MEMORANDUM & ORDER

-againstIO-cv-I637 (ENV) (CLP)
PERFECT TEAM CORPORATION, d/b/a Guang
Zhou Restaurant; 11 SHIANG, INC., d/b/a Guang
Zhou Restaurant; FENG LIN; CHUN KIT CHENG,
alk/a Jun Jie Zheng; 1IA LI WANG; ZHUO PING
CHEN
Defendants.

----------------------------------------------------__ -__________ x
VIT ALIANO, D.J.

On April 13, 2010, plaintiffs Li Rong Gao and Xiao Hong Zheng, individually and on
behalf of all others similarly situated, brought this action against Perfect Team Corporation, d/b/a
Guang Zhou Restaurant; Ji Shiang, Inc., d/b/a Guang Zhou Restaurant; Feng Lin; I Chun Kit
Cheng, alk/a Jun Jie Zheng; Jia Li Wang; and Zhuo Ping Chen, seeking damages and injunctive
relief for violations of New York Labor Law and the federal Fair Labor Standards Act ("FLSA")
arising out of their employment at Guang Zhou Restaurant. Plaintiffs now move, pursuant to
I On July 21, 2011, defendant Lin filed for Chapter 7 protection in the Bankruptcy Court for the
Eastern District of New York. As applied to this action, the scope of the automatic stay, see 11
U.S.c. § 362(a), remains somewhat unclear, such that at this moment it is not evident against
which defendants plaintiffs may continue to press their claims while the bankruptcy stay is in
effect. The parties apparently agree, not only that no relief is available during the pendency ofthe
automatic stay against the debtor, but also that the automatic stay does not bar consideration of the
claims against the other individual defendants. However, given the manner of litigation-the
identity of facts and issues-any adverse determination against the other individual defendants
could still have preclusive effect on parties protected by the stay. In any event, the practical effect
of the ruling on plaintiff s motion is identical to that of a stay of all proceedings, insofar as the
status quo will be undisturbed.

Federal Rule of Civil Procedure 64, for an order of attachment against several properties owned by
defendants and others, in an amount not to exceed $514,888. For the reasons below, the motion is
denied.
Background
Plaintiffs are former and current non-managerial employees of Guang Zhou Restaurant
("the restaurant"), located in Flushing, Queens? According to plaintiffs, defendant Perfect Team
operated the restaurant until approximately June 2009, after which time it was operated by
defendant Ji Shiang, Inc. Plaintiffs claim that defendant Cheng is the President of Perfect Team
Corp. and was a manager at the restaurant; that defendant Lin is the principal shareholder of Ji
Shiang; and that Cheng's wife, defendant Jia Li Wang, and defendant Chen were or are managers
at the restaurant. At some or all times relevant to this action, according to plaintiffs, all of these
individuals had the power to hire and fire restaurant employees and to control the terms and
conditions of their employment, including determining the rate and method of compensation.
The gravamen of plaintiffs' complaint is that defendants failed to pay plaintiffs and other
non-managerial employees minimum wage, overtime payments, or spread-of-hours premiums;
illegally withheld their tips; and retaliated against plaintiffs Gao and Zheng for complaining about
the restaurant's payment practices by terminating Gao and Zheng's employment. Flowing from
these allegations, plaintiffs assert collective action claims under the FLSA for the failure to pay
minimum wage and overtime payments, as well as individual claims under the New York Labor
Law for the failure to pay minimum wage, overtime payments, and spread of hours pay; the

2 On August 25, 2010, the complaint was amended to include plaintiffs Shu F. Jiang, Wei S. Tan
and Wei 1. Wu.

2

unlawful retention of gratuities; and retaliation. 3
On February 3,2011, plaintiffs filed an ex parte motion, pursuant to Federal Rule of Civil
Procedure 64, seeking pre-judgment attachment of the restaurant; Ji Shiang, Inc.; Perfect Team
Corp.; 64-56 Cloverdale Boulevard, Oakland Gardens, New York, 11364, a residence owned by
defendants Cheng and Wang; 240-58 68th Avenue, #55, Douglaston, New York, 11362, a
residence now owned by defendant Lin's ex-wife, third-party Jia Ni Wang; and the ownership
interests of defendants Cheng, Wang, and Lin in Bai Lao Hui Shabu Shabu, a restaurant located at
142-38 Roosevelt Avenue, Flushing, New York, 11354. On February 4th, the Court scheduled a
hearing for defendants to show cause why these assets should not be attached, but declined to issue
the temporary restraining order that plaintiffs requested enjoining defendants from selling,
transferring, or encumbering any of these assets pending the hearing. Following the hearing, the
Court reserved decision on the application for attachment and granted leave to submit
supplemental briefing.

Defendants' counsel represented that their clients had agreed not to

transfer any of their interests in the restaurant, or in any of the entities that operate it, pending the
Court's ruling on this motion, effectively consenting to a portion of the relief sought in the request
for a temporary restraining order.
In their supplemental memorandum of law, plaintiffs have modified their attachment
request.

They now seek attachment of the 64-56 Cloverdale Boulevard property in the full

amount of$514,888.22 and request that, if the Court does not order the attachment of this property
or if the property does not have sufficient value, the Court order the attachment of the remaining
amount against one or more of the restaurant, Perfect Team's and/or Ji Shiang's assets, the 68th

Plaintiff Jiang, like plaintiffs Gao and Zheng, brings suit individually and on behalf of all others
similarly situated. Plaintiffs Tan and Wu bring suit in their individual capacity only.
3

3

Avenue property, or defendants' ownership interests in Jili, Inc.

Plaintiffs also seek an

accounting of Perfect Team and Ji Shiang to identify any other assets that can be attached.
Discussion

Federal Rule of Civil Procedure 64 permits federal litigants to seek an order of attachment
in the manner provided by the law of the state in which the district court sits. See Fed. R. Civ. P.
64 ("[T]hroughout an action, every remedy is available that, under the law of the state where the
court is located provides for seizing a person or property to secure satisfaction of the potential
judgment," including attachment.) Under New York law, a plaintiff may obtain an order of
attachment if it demonstrates that (1) it has stated a claim for a money judgment; (2) it has a
probability of success on the merits; (3) the defendant, "with the intent to defraud his creditors or
frustrate the enforcement of a judgment that might be rendered in plaintiffs favor, has assigned,
disposed of, encumbered, or secreted property, or removed it from the state or is about to do any of
these acts," and (4) the amount demanded from the defendant is greater than the amount of all
counterclaims known to plaintiff. N.Y. C.P.L.R. §§ 6212(a), 6201(3).
Because attachment is a harsh remedy, these statutory factors are construed strictly in favor
ofthe party against which attachment is sought. See DLJ Mortgage Capital, Inc. v. Kontogiannis,
594 F. Supp. 2d 308, 319 (E.D.N.Y. 2008); see also Brastex Corp. v. Allen Int'l, Inc., 702 F.2d 326,
332 (2d Cir. 1983). By consequence, under the third element, fraud is not lightly inferred.
Rather, the moving papers must contain evidentiary facts indicating the existence of fraud, not
simply conclusory statements, and it "must appear that ... fraudulent intent really exists in the
defendant's mind." Encore Credit Corp. v. LaMattina, No. 05-CV-5442, 2006 WL 148909, at *3
(E.D.N.Y. Jan. 18,2006). Nonetheless, because "fraudulent intent is rarely susceptible to direct
proof," In re Kaiser, 722 F.2d 1574, 1582 (2d Cir. 1983), courts have looked to whether allegedly
4

suspicious transactions exhibit "badges of fraud" that give rise to a sufficient inference of intent,
see, e.g., N. Y Dist. Council of Carpenters Pension Fund v. KW Constr., Inc., No. 07-CV -8008,
2008 WL 2115225, at *4-*5 (S.D.N.Y. May 16, 2008). When reviewing a suspect transaction,
among the badges considered are (1) gross inadequacy of consideration; (2) a close relationship
between transferor and transferee; (3) the transferor's insolvency as a result of the conveyance; (4)
a questionable transfer not in the ordinary course of business; (5) secrecy in the transfer; and (6)
retention of control of the property by the transferor after the conveyance. Id. Other indicia of
fraud may include "the existence or cumulative effect of a pattern or series of transactions or
course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of
suits by creditors" and the transfer of assets in close proximity to events in litigation. Id
Here, plaintiffs have pled a claim for damages, and no counterclaims have been interposed
against them, thereby satisfying the first and fourth elements for attachment. At issue, then, are
the second element-whether plaintiffs have a probability of success on the merits of their
claims-and the third-whether defendants have intentionally sought to defraud their creditors or
to frustrate the enforcement of a judgment in plaintiffs' favor by disposing of their assets, or are
about to do so. Because the Court finds that plaintiffs have not satisfied the third element,
however, it need not address whether they have demonstrated a probability of success on the
merits.
In order to establish that defendants have acted with fraudulent intent, plaintiffs point to
three allegedly suspicious transactions: (l) the June 2009 change in ownership of the restaurant;
(2) defendant Lin's transfer of the 68th Avenue property to his ex-wife, a process commenced in
May 2009 and completed in April 2010; and (3) the purported future transfer of the restaurant to a
third party. The Court does not find that any of these transactions suffices to meet plaintiffs'
5

burden.
June 2009 Change in Restaurant Ownership

Plaintiffs' most compelling-but still ultimately unconvincing-argument is that the
change in ownership of the restaurant in June 2009 was effected in order to stymie this lawsuit.
Plaintiffs claim that Ji Shiang's incorporation in March 2009 occurred only after defendants
learned that plaintiffs and other employees were discussing the possibility of joining a union and /
or filing a lawsuit against Perfect Team.

In June 2009, Ji Shiang assumed control of the

restaurant: the new company paid no consideration, but assumed all of Perfect Team's equipment
and fixtures and then continued operating the restaurant with the same sign, menu, management,
and staff (aside from plaintiffs Gao and Zheng, who were not rehired following the change in
ownership). According to plaintiffs, there is no evidence that defendants attempted to advertise
or sell the restaurant to any prospective buyers other than Lin; rather, plaintiffs claim, Cheng and
Wang simply shifted nominal ownership to Lin and dissolved Perfect Team, but retained a covert
ownership interest in Ji Shiang, continued to work in the restaurant and oversaw its operations.
Thus, in plaintiffs' view, the transfer of the restaurant exhibits many of the badges of fraud that
support pre-judgment attachment, including gross inadequacy of consideration, a close
relationship between transferor and transferee, the transferor's insolvency as a result of the
conveyance, a questionable transfer not in the ordinary course of business, secrecy in the transfer,
and retention of control of the property by the transferor after the conveyance.
In response, defendants challenge each and every one of plaintiffs' claims. They deny
that Perfect Team transferred the restaurant to Ji Shiang; rather, they claim, Perfect Team
surrendered the restaurant's fixtures, furniture and equipment to its landlord in order to terminate
the restaurant's lease. In defendants' view, if a transfer at all, it was for adequate consideration
6

(since the payments remaining on the lease exceeded the value of the fixtures, furniture and
equipment), it was in the ordinary course of business (insofar as a commercial tenant surrendering
assets to its landlord is not out of the ordinary), and it was not in any way secret. Nor was it in
response to plaintiffs' lawsuit, about which defendants claim they were unaware prior to transfer
incident to lease surrender. Finally, defendants deny that Cheng or Wang has any ownership
interest in Ji Shiang or that Perfect Team was rendered insolvent by the transaction.
Reviewing the maneuvers in the light of the parties' widely divergent interpretations and
the evidence adduced at the hearing, the Court finds that plaintiffs have not provided sufficient
evidence of any of the badges that may support an inference of fraudulent intent. Plaintiffs have
presented no reliable testimony nor documentary evidence to contradict defendants' account of the
progression of ownership and control of the restaurant's assets from Perfect Team to the
restaurant's landlord (a nonparty) to Ji Shiang. Nor do they present any proof one way or another
that Perfect Team's surrender of the restaurant's fixtures, furniture and equipment to the landlord
in order to terminate the restaurant's lease was anything but arm's length, much as Ji Shiang's
subsequent surrender of the lease to the landlord (which has now prompted an eviction action
brought by the landlord against Ji Shiang) appears to have been. By the same token, while Ji
Shiang's assumption of control of the restaurant (using Perfect Team's former equipment and
fixtures and the same sign, menu, management, and staff) appears suspicious, plaintiffs have not
sufficiently demonstrated that the transaction actually was out of the ordinary course of the wind
up of a business or featured gross inadequacy of consideration or a close relationship between
transferor and the actual transferee. If, in fact, Perfect Team surrendered the premises to the
landlord-as defendants allege, and as plaintiff has presented no reliable evidence to
contradict-Jiang Shi would have acquired almost all of the non-human resources from the
7

landlord, not Perfect Team. In such circumstances, for plaintiffs to prevail, there would need to
be proof of the landlord's active participation in the scheme. But plaintiffs have presented no
evidence at all that the landlord is involved in the alleged fraudulent scheme. This failure to
account for the landlord's role greatly reduces the degree of suspicion.
Similarly, plaintiffs have offered little to no reliable proof to support their allegations that
other badges of fraud-namely, the insolvency of Perfect Team as a result of the conveyance,
secrecy in the transfer; or retention of control of the property by the transferor after the
conveyance-were present. Thus, on plaintiffs' scanty showing, there simply is not enough
evidence for the Court to find that defendants acted with the intent requisite to justify attachment.
Without question, the maneuvering for ownership of the restaurant and the churning effect of all of
the dealings appears suspicious.

But the proof neither explains nor eliminates defendants'

account, including the role of the nonparty landlord, the buffer (as defendants tell it) to direct
transfer. Moreover, even if plaintiffs' are correct that the transfer was not at arms' length and was
for insufficient consideration, these facts in themselves would not necessarily indicate that
defendants intended to defraud creditors or frustrate the enforcement of a judgment that might be
rendered in plaintiffs' favor. Cf Kontogiannis, 594 F. Supp. 2d at 322 ("Whatever the role of this
transaction . . . plaintiff provides no evidence . . . to indicate that the sale is suspicious in the
context of this Court's inquiry into whether [defendant] has intentionally disposed of assets to
defraud his creditors or frustrate the enforcement of a judgment."). This would be true even if
plaintiffs also are correct that defendants were aware of the potential for this lawsuit, in which case
there would be, at very best, only a suspicion that defendants' intent was to stymie plaintiffs'
efforts.

Under New York law, all of that does not suffice as a foundation for ordering

extraordinary provisional relief.
8

Lin's transfer ofthe 68th Avenue Condominium
The next transaction plaintiffs target is defendant Lin's transfer of the residence located at
240-58 68th Avenue, Douglaston, New York to his now ex-wife, Jia Ni Wang.

4

According to

plaintiffs, on May 14, 2009, Lin converted sole ownership of his condominium at this address to
joint ownership with Wang for no consideration. Further, on April 15,2010, two days after Lin
was served with the complaint in this lawsuit, he conveyed his remaining interest to his wife, also
for no consideration. On April 27th of that year, Wang initiated divorce proceedings against Lin,
and a divorce judgment was entered on November 9th by Judge Jeffrey Liebowitz of Supreme
Court, Queens County. A stipUlation that Wang would be awarded exclusive ownership and
possession of the condominium, to which Lin irrevocably relinquished any interest, claim, right or
title, including any marital interest he may have had under New York law, was incorporated by
reference into the divorce judgment.
Plaintiffs make much of the timing of the transfer, especially the fact that both steps in the
title transaction occurred prior to the consummation of the divorce, and of the fact that Lin may
have been spied visiting the residence late in the evening on two separate occasions following the
divorce. The Court finds neither fact at all suggestive of fraudulent intent. While plaintiffs
argue that the fact the transaction occurred prior to the divorce indicates it was undertaken in bad
faith, it seems equally or more likely that the transfer was undertaken for some good faith purpose:
perhaps for tax reasons, or (most likely) in anticipation of the couple's divorce.

That one

potential, but relatively unlikely, motivation could be fraud is not sufficient to support attachment.

Plaintiffs also seek to attach this property, on the theory that the transfer was fraudulent and
(assumedly) that Lin retains an ownership interest in the property. To the extent that this is the
case, attachment of the property is barred by the automatic stay following Lin's filing for
bankruptcy.
9

4

Nor is plaintiffs' near-risible suggestion that Lin's visiting his ex-wife's domicile after the divorce
might indicate that the divorce and / or associated transfer of assets were intended to defraud
creditors or frustrate this lawsuit. This leaves only the coincidence that the second part of the
transfer occurred two days after Lin was served with the complaint-far too slender a reed on
which to base attachment. Cf Kontogiannis, 594 F. Supp. 2d at 322 ("[T]he mere fact that the
transaction occurred in temporal proximity to the start of this case does not overcome the
conclusory nature of the allegation and does not evince fraudulent intent.").
Divorce is expensive; it has far-reaching financial, familial, legal and social consequences.
The dividing up of property is an essential part of this process. Plaintiffs come nowhere near
close to explaining the transaction here as an act of fraud. By consequence, attachment will not
be ordered on this basis.
Alleged further transfer of Restaurant

Finally, plaintiffs contend that Ji Shiang intends to transfer the restaurant once again in
order to frustrate this lawsuit.

In support of this contention, they claim that two nonparty

employees informed them in January 2011 that the restaurant had been sold and that the new
owner would take over management imminently. As further evidence of defendants' fraudulent
intent, they also point to the closing of the restaurant in February 2011, one week after defendants
were served with plaintiffs' motion for attachment, and three days before notice of this action was
to be posted in the restaurant.
Again, this evidence simply is insufficient to support attachment. Moreover, although
plaintiffs summarily discount defendants' alternative explanation of the restaurant's closing (that
it has not been sold, but rather shut down for "personal and financial reasons"), subsequent events
support defendants' explanation and discredit plaintiffs' speculations. On June 27th, counsel for
10

JAC SAL Realty, Inc., the restaurant's landlord, informed the Court that a warrant of eviction had
been issued against Ji Shiang, but that no new tenant had yet been located. On July 22nd, counsel
for Lin and Ji Shiang informed the Court that Lin had filed for bankruptcy under Chapter 7 of the
United States Bankruptcy Code.

It is evident, therefore, that the restaurant has not been

transferred to new owners.
To be clear, these subsequent events are not the bases for decision. They are offered
merely to highlight how equivocal the nature of the proof upon which plaintiffs do rely. For this
reason, whether or not barred by the automatic bankruptcy stay, the Court observes that attachment
is certainly unwarranted on the proof submitted. Indeed, equivocalness is a fair description for all
of plaintiffs' proof. That, simply, cannot support extraordinary prejudgment provisional relief.
Conclusion
In sum, plaintiffs have failed to meet their burden in demonstrating that defendants have
assigned, disposed of, encumbered, or secreted property (or are about to) with the intent to defraud
creditors or frustrate the enforcement of a judgment that might be rendered in their favor.
Accordingly, the motion for attachment is denied at this time.

SO ORDERED.

s/ENV

Dated: Brooklyn, New York
August 11,2011

ERIC N. VITALIANO
U.S.D.l

11