Lyman Commerce Solutions, Inc. v. Lung et al

Filing 87

OPINION: re: 55 MOTION for Reconsideration re; 52 Memorandum & Opinion, filed by R.D. Simpson, Inc., Irwin Levy, The Richard Gilbert Family LLC, Richard Gilbert. For the forgoing reasons, the court denies Gilbert defendants' argument that Iowa law governs plaintiff's fraudulent conveyance claims. This opinion resolves docket item number 55. SO ORDERED. (Signed by Judge Thomas P. Griesa on 2/06/2014) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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LYMAN COMMERCE SOLUTIONS, INC.,
12-cv-4398
Plaintiff,

OPINION

-againstCONRAD LUNG, RICHARD GILBERT,
LUNG’S CONSULTANTS LLC, R.D.
SIMPSON, INC., THE RICHARD
GILBERT FAMILY TRUST, and IRWIN
LEVY AS TRUSTEE OF THE RICHARD
GILBERT FAMILY TRUST,
Defendants.
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Plaintiff, Lyman Commerce Solutions, Inc. (“LCS”), brings this action to
recover payments allegedly made by MUDD USA LLC (“MUDD”) to defendants
Richard Gilbert, R.D. Simpson, Inc., the Richard Gilbert Family Trust, and
Irwin Levy as Trustee of the Richard Gilbert Family Trust (“the Gilbert
defendants”) and the Lung defendants, Conrad Lung, former president of
MUDD, and Lung Consultants, LLC-an entity which Lung allegedly controlled.
Plaintiff alleges that these payments, which were made during a pending
court proceeding by MUDD to its officers and owners located in New York, were
fraudulent conveyances under New York Debtor and Creditor Law (“DCL”).
On September 7, 2012, the Gilbert defendants moved to dismiss the
complaint, arguing that the law of Iowa (where LCS is located) or Delaware

(where MUDD was formed) governs the dispute; that a default judgment
entered in Iowa is now a nullity because, upon MUDD's corporate dissolution
in Delaware, the Iowa court was deprived of jurisdiction over defendants; and
finally, that plaintiff has failed to plead lack of fair consideration as required
under DCL § 273–a and thus could not state a claim for relief under that
section.
On August 30, 2013, the court issued an opinion denying Gilbert
defendant’s motion to dismiss in its entirety. On September 13, 2013, the
Gilbert defendants moved for the court’s reconsideration, arguing that the
court erred in its choice of law analysis. That is, defendants contend that the
court incorrectly concluded that New York law applied to plaintiff’s constructive
fraudulent conveyance claims, and that the law of Iowa – where LCS is located
– is the correct choice of law.
For the following reasons, the motion should be denied.
BACKGROUND
THE PARTIES
Plaintiff, LCS, provides online commerce technology, marketing and
design services. MUDD USA, LLC – a now defunct company, incorporated in
Delaware – was once in the field of manufacturing, among other things,
women’s jeans. MUDD filed for dissolution in August of 2008.

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Two defendants in this action were once managers and officers of MUDD.
One, Richard Gilbert, was the CEO of MUDD and was also a manager on
MUDD’s board of managers. The other, Conrad Lung, was the President of
MUDD and a manager on its board of managers as well. The Gilbert Family
Trust, also a named defendant, was managed by defendant Trustee Irwin Levy.
THE UNDERLYING LITIGATION
LCS provided online commerce services to MUDD pursuant to an
agreement between the parties. In early 2006, MUDD defaulted on its payment
obligations under the agreement. On February 19, 2007, LCS, in response,
filed a lawsuit against MUDD in the Iowa state district court seeking money
damages for breach of contract. The lawsuit resulted in a judgment entered
against MUDD in the amount of $2,176,049.01 on March 17, 2009. LCS then
sued MUDD in New York state court, which resulted in a judgment entered on
February 24, 2010.
THE FRAUDULENT TRANSFERS
The alleged fraudulent transfers, which took place over an 18 month
period that included the Iowa litigation, were carried out by various methods in
order to avoid paying the underlying judgment. The complaint alleges that
between February 2007 and August 2008 that nearly $4 million of MUDD’s
funds were funneled from MUDD directly to accounts controlled by Gilbert and
Lung or to entities that they owned and controlled. For example, it is alleged
that between February 19, 2007 and June 30, 2007, MUDD made salary
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payments to Gilbert totaling $336,377.25 and to Lung totaling $261,390.00.
In addition, MUDD also made two $30,000 payments to R.D. Simpson – a
company owned by Gilbert – on April 2, 2007 and again on June 7, 2007.
These transfers were alleged to have been made when MUDD was engaged in
no real business operations.
Shortly after these transactions took place, Gilbert and Lung also
executed a resolution of MUDD’s board of managers, which authorized MUDD
to buy Gilbert's interest in the company. Gilbert executed the so-called buyout agreement on behalf of himself and R.D. Simpson, and Lung executed it in
New York on behalf of MUDD. Thereafter, MUDD made nearly $2 million in
transfers to the Gilbert Family Trust and $1,700.00 to Gilbert. Each of these
transfers was made from MUDD’s New York brokerage accounts to Gilbert
defendants’ New York accounts. MUDD also allegedly wired $1.2 million from
its New York brokerage account directly to Lung’s New York checking account.
And finally, it is alleged that from 2007-2008 Lung signed and deposited
various checks transferring $265,716.87 from MUDD’s New York bank account
to New York accounts held by a company that he owned called Lung
Consultants. In sum, the complaint alleges that all of these transactions were
made with an aim at depleting the funds available to satisfy plaintiff’s valid
judgment in violation of New York Debtor Creditor Law.
DISCUSSION

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In denying Gilbert defendants’ motion to dismiss on August 30, 2013,
the court found that New York Debtor Creditor Law § 273–a, the basis for
plaintiff’s constructive fraudulent conveyance claim, did not require a showing
of fraudulent intent, while both Iowa law and Delaware law required such a
showing. Therefore, it followed that a conflict of laws existed. Upon
recognizing the existing conflict, the court engaged in a choice of law analysis
and came to the conclusion that New York law governed plaintiff’s § 273–a
claims. Gilbert defendants now contend that the court erred in making that
determination. More particularly, they argue that Iowa law governs those
claims because the alleged injury occurred in Iowa, where LCS – a judgment
creditor – is located. In opposition to the motion for reconsideration, plaintiff
mainly relies on its prior submission in opposition to the motion to dismiss.
As the court stated in its decision, in any tort case, “the law of the
jurisdiction where the tort occurred will generally apply because that
jurisdiction has the greatest interest in regulating behavior within its borders.”
And “[a] tort occurs in the place where the injury was inflicted, which is
generally where the plaintiffs are located.” The Gilbert defendants now argue
that the court did not follow these principles to come to the correct conclusion
that plaintiff is located in Iowa and therefore the law of Iowa applies.
However, the court very clearly stated in its August 30, 2013 decision
that the difference between New York and both Iowa and Delaware law is that
“in New York, a plaintiff need not prove [fraudulent] intent” to establish a
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constructive fraudulent conveyance claim. Id. at 7. More particularly, the
court found that under those laws, “where the debtor was a defendant in a
lawsuit when it made the conveyance, a plaintiff must still prove actual
fraudulent intent.” Id. The court then engaged in an “interest analysis” to
conclude that New York law applied to plaintiff’s constructive fraudulent
conveyance claims. Although it is true that the court did not explicitly refer to
Iowa law in its choice of law analysis, but rather Delaware law, that omission
did not determine the result. The court’s decision would not have been
different if the court would have mentioned Iowa law, as both 6 Del. C. § 1304
(Delaware law), and I.C.A. § 684.4 (Iowa law), require a showing of “actual
intent to hinder, delay, or defraud any creditor of the debtor,” while DCL § 273–
a does not.
Moreover, contrary to defendants’ contention, the fraud alleged in this
action is “conduct regulating,” and thus where the fraud occurred, as opposed
to where LCS was located, is more germane to the court’s conclusion that New
York law applied to plaintiff’s constructive fraudulent conveyance claims.
While they cite authority in support of its position that Iowa law governs, see,
e.g., Eclaire Advisor Ltd. v. Daewoo Eng’g & Constr. Co., 375 F. Supp. 2d 257,
268 (S.D.N.Y. 2005) (applying New York fraudulent-conveyance law to a case
involving a New York creditor, a Korean defendant, and transfers in Korea),
Gilbert defendants cannot refute the Second Circuit’s controlling opinion in
Licci v. Lebanese Canadian Bank, SAL, 672 F.3d 155 (2d Cir. N.Y. 2012).
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There, the Court of Appeals recognized that for tort claims involving conductregulating laws the location of the injury and plaintiff’s domicile do not govern
the choice of law analysis. Id. 672 F.3d at 158. Contrary to Gilbert defendants’
position, “the location of the injury does not control; instead, it is the location
of the defendant's conduct that controls.” Wultz v. Bank of China Ltd., 865 F.
Supp. 2d 425, 429 (S.D.N.Y. 2012).
This proposition is well-settled in the fraudulent conveyance context. For
example, in Tyco Int'l, Ltd. v. Kozlowski, 756 F. Supp. 2d 553, 559-60 (S.D.N.Y.
2010), this court found that claims of constructive fraud were governed by New
York law and that the location of the wrongful conduct, not the place of
plaintiff’s injury, was determinative in its choice of law analysis. Similarly in
GFL Advantage Fund, Ltd. v Colkitt, 2003 WL 21459716, *3 (S.D.N.Y. 2003),
this court held that given that fraudulent conveyance laws are “conduct
regulating”, the law of the jurisdiction where the tort occurred will generally
apply because that jurisdiction has the greatest interest in regulating behavior
within its borders.
Here, the alleged tortious conduct primarily occurred in New York. For
example, it is alleged that MUDD made nearly $2 million in transfers to the
Gilbert Family Trust and $1,700.00 to Gilbert. Each of these transfers was
made from MUDD’s New York brokerage accounts to Gilbert defendants’ New
York accounts. Moreover, the so-called buy-out agreements were executed, at
least in part, in New York. The simple fact that LCS is a business organized
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under the laws of Iowa does not neutralize the State of New York's interest in
preventing this kind of wrongful, fraudulent conduct, which allegedly occurred
within its borders and resulted from at least some concerted action on
defendants' part.
CONCLUSION

For the forgoing reasons, the court denies Gilbert defendants' argument
that Iowa law governs plaintiffs fraudulent conveyance claims.
This opinion resolves docket item number 55.
SO ORDERED.
Dated: New York, New York

February 6,2014

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Thomas P. Griesa

U.S. District Judge

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