Geo-Group Communications, Inc. v. Goldberg et al
Filing
102
OPINION AND ORDER re: 71 MOTION to Dismiss. filed by Mahendra Shah, 68 MOTION to Dismiss filed by Vipin Shah, 50 MOTION to Dismiss the Second Amended Complaint filed by Joseph P. Goldberg, Hodgson Russ LLP, 59 FIRS T MOTION to Dismiss filed by Ravi Chopra, NYC Telecommunications Corp., 56 MOTION to Dismiss Defendants 728 Melville Petro LLC, Kedis Enterprises LLC, and JMVD Hillside LLC filed by 728 Melville Petro LLC, Kedis Ent erprises LLC, JMVD Hillside LLC: For the reasons stated in this Opinion, the motions to dismiss all claims against Goldberg and Hodgson Russ, as well as Counts II, III, IV, and V of the SAC as alleged against all remaining Defendants, are D ENIED AS MOOT. Defendants' respective motions to dismiss Count I against Mahendra Shah, Vipin Shah, Shalu Suri, Kedis, Melville, JMVD, and NYCT are GRANTED. Chopra's motion to dismiss Count I, as alleged against him, is DENIED. GCI may file a Third Amended Complaint no later than February 22, 2016. Defendants' deadline to answer or otherwise respond to the Third Amended Complaint will be March 14, 2016. An Initial Pretrial Conference in this matter will be scheduled for Mar ch 16, 2016 at 3:00 p.m. in Courtroom 618 of the Thurgood Marshall Courthouse, 40 Foley Square, New York, New York. The Clerk of Court is directed to terminate the motions at docket entries number 50, 56, 59, 68, and 71. (Signed by Judge Katherine Polk Failla on 2/1/2016) Copies Mailed By Chambers. (tn)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
GEO-GROUP COMMUNICATIONS, INC.,
:
:
:
Plaintiff,
:
:
v.
:
RAVI CHOPRA, et al.,
:
:
Defendants. :
:
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: February 1, 2016
______________
15 Civ. 1756 (KPF)
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge:
In its Second Amended Complaint (or “SAC”), Plaintiff Geo-Group
Communications, Inc. (“GCI”) alleged, in painstaking detail, how an attorney
and his law firm conspired to frustrate, if not prevent, GCI’s ability to collect on
an arbitration award against a former customer. Thereafter, GCI elected not to
proceed against the attorney and his firm, and voluntarily dismissed the case
as to each. In the same SAC — in considerably less detail — GCI alleged that
Defendants Ravi Chopra, Mahendra Shah, Vipin Shah, and Shalu Suri
(together, the “Individual Defendants”), as well as Defendants 728 Melville
Petro LLC (“Melville”), Kedis Enterprises LLC (“Kedis”), JMVD Hillside LLC
(“JMVD”), and NYC Telecommunications Corp. (“NYCT”) (together, the “Entity
Defendants,” and with the Individual Defendants, “Defendants”) harmed GCI
by participating in fraudulent conveyances under New York State law.
Defendants have filed a total of five motions to dismiss GCI’s allegations, each
under Federal Rule of Civil Procedure 12(b)(6). Their respective motions raise
largely the same arguments to address largely identical allegations;
consequently, the Court considers them together. For the reasons set forth in
the remainder of this Opinion, the motion to dismiss Count I of the SAC
against Defendant Chopra is denied. The respective motions to dismiss
Count I of the SAC against the remaining Defendants are granted, albeit with
leave to replead.
BACKGROUND 1
A.
Factual Background 2
This case arises out of an ongoing attempt by GCI, a telecommunications
company, to collect on a debt owed to it by another telecommunications
company, Jaina Systems Network, Inc. (“Jaina”). An arbitration award (the
“Award”) handed down on July 10, 2014, found Jaina liable to GCI in the
amount of $1,249,654, pursuant to a sales contract governing Jaina’s
purchase of telephone minutes from GCI. (SAC ¶¶ 1, 4, 5, 8). The Award was
confirmed by the New York State Supreme Court in or around December 2014.
1
As is necessary on a motion to dismiss, the facts set forth in the operative Complaint —
here, the SAC — are accepted as true. Citations to the SAC’s exhibits are made in the
form “SAC Ex.” Five separate opening briefs have been filed by Defendants, and are
referred to in the following manner: (i) joint brief of Ravi Chopra and NYCT (“Chopra
Br.”), (ii) brief of Vipin Shah (“V. Shah Br.”), (iii) brief of Mahendra Shah (“M. Shah Br.”),
(iv) brief of Shalu Suri (“Suri Br.”), and (v) joint brief of Melville, Kedis, and JMVD (“LLC
Br.”). GCI’s opposition is referred to as “Pl. Opp.,” and the defendants’ respective
replies are referred to using the same designation as given for their opening briefs, in
the format “[Designation] Reply.”
2
The SAC contains a substantial amount of information that, for reasons discussed
below, is not relevant to the instant motions. The Court here sets forth only the facts
pertaining to the pending motions to dismiss.
2
(SAC ¶ 9, Ex. 6 ¶ 25). To date, however, GCI has not collected on the Award.
(See id. at ¶¶ 43, 49, 51).
GCI contends that Jaina has been unable to pay the money due under
the Award because Jaina no longer has any assets. To this end, the lion’s
share of the SAC is devoted to a recitation of the history of the arbitration with
Jaina and the purportedly unethical, if not illegal, conduct undertaken by
Jaina’s counsel, Joseph P. Goldberg, and his law firm, Hodgson Russ LLP, in
connection therewith. (See, e.g., SAC ¶¶ 1-11, 23, 26-40). From time to time,
however, the SAC makes reference to Defendants. (See, e.g., id. at ¶¶ 24, 25,
28, 31, 34, 36-38). Each of the Individual Defendants is alleged to have some
purported connection to Jaina: Chopra “had extensive financial dealings with
Jaina and was about to become a shareholder prior to the confirmation of the
arbitration award”; Mahendra Shah is both Jaina’s President and a
shareholder; Vipin Shah is brother to Jaina’s President, Mahendra Shah, and
is married to a “major Jaina shareholder”; and Shalu Suri is married to Ravi
Chopra and the CEO of STI Phone Card Warehouse, a company with offices at
the same location as NYCT. (Id. at ¶¶ 14-16, 20, 21). GCI alleges that these
individuals, as well as the Entity Defendants, received fraudulent transfers of
Jaina’s assets, leaving “insufficient assets … remaining in Jaina’s possession to
satisfy [the Award].” (Id. at ¶¶ 42, 43). GCI additionally contends that the
“siphon[ing] off” of funds by Defendants has effectively “shut down Jaina’s
operations,” leaving Jaina “unable to function.” (Id. at ¶¶ 11, 23, 24).
3
B.
Procedural Background
GCI filed its initial Complaint in this matter on March 9, 2015. (Dkt. #1).
It named as Defendants (i) attorney Goldberg, (ii) Hodgson Russ LLP,
(iii) Chopra, (iv) Mahendra Shah, (v) Vipin Shah, and (vi) five John Does. The
initial Complaint included counts for attorney misconduct in violation of New
York Judiciary Law § 487; breach of contract; fraudulent transfer in violation of
the New York Debtor and Creditor Law (the “NYDCL”) §§ 273, 273-1, 274, and
276; violation of the Bulk Transfer law under Article 6 of the Uniform
Commercial Code; common law fraud; conspiracy to violate the NYDCL; alter
ego liability; and quantum meruit. It sought damages of $8,065,974.03 (a
figure representing treble damages on the confirmed Award, to which GCI
contended it was entitled under New York Judiciary Law § 487) and attorneys’
fees. (Dkt #1 ¶¶ 21-54).
GCI filed its First Amended Complaint on March 31, 2015, dropping the
allegation of attorney misconduct, but otherwise leaving its pleading
unchanged. (Dkt. #8). On April 16, 2015, GCI submitted a letter to the Court
requesting leave to file the SAC, in which it intended to name the previously
unidentified “John Doe” defendants. (Dkt. #16). The Court granted GCI’s
request (Dkt. #21), and on May 5, 2015, GCI filed its SAC naming (i) Goldberg,
(ii) Hodgson Russ, (iii) Ravi Chopra, (iv) Mahendra Shah, (v) Vipin Shah,
(vi) Shalu Suri, (vii) Melville, (viii) Kedis, (ix) JMVD, and (x) NYCT as
Defendants. (Dkt. #24).
4
Goldberg and Hodgson Russ filed a motion to dismiss the SAC on July 9,
2015. (Dkt. #50). Entity Defendants Kedis, Melville, and JMVD (together, the
“LLC Defendants”) filed their motion to dismiss shortly thereafter, on July 16,
2015. (Dkt. #56). Defendants Ravi Chopra and NYCT filed their joint motion to
dismiss on July 20, 2015 (Dkt. #59), and Shalu Suri filed her motion to
dismiss on the same day (Dkt. #64). Finally, Mahendra and Vipin Shah,
proceeding pro se, filed their respective motions to dismiss on July 21, 2015.
(Dkt. #68, 71).
On August 13, 2015, GCI’s counsel informed the Court that new counsel
would be brought in to represent GCI and requested an extension of GCI’s time
to respond to Defendants’ motions. (Dkt. #80). The Court granted GCI’s
request (Dkt. #81), as well as a second extension request made on September
9, 2015 (Dkt. #83, 85). GCI then submitted a single brief in opposition to
Defendants’ motions, pursuant to the Court’s direction, on September 18,
2015. (Dkt. #86). In its opposition brief, GCI stated its intention to drop all
counts against Goldberg and Hodgson Russ, and to drop all claims, save its
claim for fraudulent transfer under §§ 273, 273-a, 274, and 276 of the NYCDL,
against the remaining defendants. Shortly thereafter, on September 22, 2015,
GCI voluntarily dismissed with prejudice all claims against Goldberg and
Hodgson Russ. (Dkt. #87).
On October 2, 2015, separate reply briefs were filed by Chopra and
NYCT; Vipin Shah; Mahendra Shah; and the LLC Defendants. (Dkt #93, 94,
95, 96). Shalu Suri filed her reply on October 6, 2015, thereby concluding the
5
briefing on the instant motions. (Dkt. #97). On January 6, 2016, the parties
filed a stipulation dismissing with prejudice all claims against Defendants, save
GCI’s allegation of fraudulent transfer. (Dkt. #101).
DISCUSSION
A.
Applicable Law
1.
Motions Under Federal Rule of Civil Procedure 12(b)(6)
When considering a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6), a court should “draw all reasonable inferences in [the
plaintiff’s] favor, assume all well-pleaded factual allegations to be true, and
determine whether they plausibly give rise to an entitlement to relief.” Faber v.
Metro. Life Ins. Co., 648 F.3d 98, 104 (2d Cir. 2011) (internal quotation marks
omitted). Thus, “[t]o survive a motion to dismiss, a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim to relief that is
plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell
Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “While Twombly does not
require heightened fact pleading of specifics, it does require enough facts to
‘nudge [a plaintiff’s] claims across the line from conceivable to plausible.’” In re
Elevator Antitrust Litig., 502 F.3d 47, 50 (2d Cir. 2007) (quoting Twombly, 550
U.S. at 570). “Where a complaint pleads facts that are ‘merely consistent with’
a defendant’s liability, it ‘stops short of the line between possibility and
plausibility of entitlement to relief.’” Iqbal, 556 U.S. at 678 (quoting Twombly,
550 U.S. at 557). Moreover, “the tenet that a court must accept a complaint’s
6
allegations as true is inapplicable to threadbare recitals of a cause of action’s
elements, supported by mere conclusory statements.” Id. at 663.
“In considering a motion to dismiss for failure to state a claim pursuant
to Rule 12(b)(6), a district court may consider the facts alleged in the
complaint, documents attached to the complaint as exhibits, and documents
incorporated by reference in the complaint.” DiFolco v. MSNBC Cable LLC, 622
F.3d 104, 111 (2d Cir. 2010). “Even where a document is not incorporated by
reference, the court may nevertheless consider it where the complaint ‘relies
heavily upon its terms and effect,’ which renders the document ‘integral’ to the
complaint.” Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002)
(quoting Int’l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F.3d 69, 72 (2d
Cir. 1995) (per curiam)).
2.
Fraudulent Conveyances Under Article 10 of the NYDCL
Article 10 of the NYDCL provides a “set of legal rather than equitable
doctrines, whose purpose is not to provide equal distribution of a debtor’s
estate among creditors, but to aid specific creditors who have been defrauded
by transfer of a debtor’s property.” HBE Leasing Corp. v. Frank, 48 F.3d 623,
634 (2d Cir. 1995). As relevant to the instant matter, §§ 273, 273-a, and 274
outline circumstances in which a conveyance constitutes constructive fraud,
while § 276 applies to instances of actual fraud.
Section 273 of the NYDCL governs transfers of assets by insolvent
debtors, and provides that “[e]very conveyance made … by a person who is or
will be thereby rendered insolvent is fraudulent as to creditors without regard
7
to his actual intent if the conveyance is made or the obligation is incurred
without a fair consideration.” Relatedly, § 273-a pertains to asset transfers
made by a defendant in an action for money damages, and states that
[e]very conveyance made without fair consideration
when the person making it is a defendant in an action
for money damages or a judgment in such an action has
been docketed against him, is fraudulent as to the
plaintiff in that action without regard to the actual
intent of the defendant if, after final judgment for the
plaintiff, the defendant fails to satisfy the judgment.
Both sections require that the transfer lack “fair consideration” in order for a
violation to occur. The NYDCL defines fair consideration as existing in relevant
part when the transferor, (i) in good faith, (ii) receives “fair equivalent” property
or a similarly equivalent antecedent debt is discharged. N.Y. Debt. & Cred. L.
§ 272(a); see also In re Sharp Int’l Corp., 403 F.3d 43, 53 (2d Cir. 2005) (“The
fair consideration test is profitably analyzed as follows: [i] the recipient of the
debtor’s property must either (a) convey property in exchange or (b) discharge
an antecedent debt in exchange; and [ii] such exchange must be a fair
equivalent of the property received; and [iii] such exchange must be in good
faith.” (citation and internal quotation marks omitted)).
A plaintiff seeking to set aside a conveyance due to a lack of good faith
must prove one of the following factors: (i) a lack of honest belief in the
propriety of the transfer in question; (ii) intent to take unconscionable
advantage of others; or (iii) intent to, or knowledge of the fact that the activities
in question will, hinder, delay, or defraud others. Staudinger+Franke GMBH v.
Casey, No. 13 Civ. 6124 (JGK), 2015 WL 3561409, at *10 (S.D.N.Y. June 8,
8
2015) (quoting Southern Indus. v. Jeremias, 411 N.Y.S.2d 945, 949 (2d Dep’t
1978)). As the Second Circuit has observed, good faith “is hard to locate … in a
statute in which ‘the issue of intent is irrelevant.’” In re Sharp, 403 F.3d at 54
(quoting United States v. McCombs, 30 F.3d 310, 326 n.1 (2d Cir. 1994)).
Furthermore, apparent bad faith will generally not negate the existence of fair
consideration when a transfer satisfies a preexisting debt. Pashaian v.
Eccelston Props., 88 F.3d 77, 85 (2d Cir. 1996).
An exception exists, however to the debt-satisfaction rule: “Under New
York law, ‘transfers from an insolvent corporation to an officer, director or
major shareholder of that corporation are per se violative of the good faith
requirement.’” Daelim Trading Co. v. Giagni Enters., LLC, No. 10 Civ. 2944
(VLB), 2014 WL 6646233, at *8 (S.D.N.Y. Nov. 12, 2014) (quoting In Re
Centennial Textiles, Inc., 220 B.R. 165, 172 (Bankr. S.D.N.Y. 1998)); see also
Atlanta Shipping Corp. v. Chem. Bank, 818 F.2d 240, 249 (2d Cir. 1987)
(“[R]epayment of an antecedent debt constitutes fair consideration unless the
transferee is an officer, director, or major shareholder of the transferor.”).
Section 274 of the NYCDL applies when a transferor “is engaged or is
about to engage in a business or transaction” for which the transferor’s
remaining assets after a conveyance constitute “unreasonably small capital.”
Such a conveyance, if made without fair consideration, “is fraudulent as to
creditors and as to other persons who become creditors during the continuance
of such business or transaction without regard to [the transferor’s] actual
intent.” N.Y. Debt. & Cred. L. § 274. The same standard for fair consideration
9
applicable to §§ 273 and 273-a applies to transfers alleged to be fraudulent
under § 274. However, the allegedly fraudulent conveyance need not render
the transferor insolvent, so long as the transferor is left with “unreasonably
small capital” for its then-current or immediately pending business.
Finally, while the constructive fraud sections of Article 10 require a lack
of fair consideration but disregard intent, § 276, which applies to instances of
actual fraud, has no provision regarding consideration but requires that a
conveyance was made “with intent to defraud.” Specifically, § 276 states that
“[e]very conveyance made and every obligation incurred with actual intent, as
distinguished from intent presumed in law, to hinder, delay, or defraud either
present or future creditors, is fraudulent as to both present and future
creditors.” Due to the difficulty of proving actual intent, such intent may be
inferred from circumstantial “badges of fraud,” including
[i] a close relationship between the parties to the
transaction, [ii] a secret and hasty transfer not in the
usual course of business, [iii] inadequacy of
consideration, [iv] the transferor’s knowledge of the
creditor’s claim and his or her inability to pay it, [v] the
use of dummies or fictitious parties, and [vi] retention
of control of the property by the transferor after the
conveyance.
In re Application Pursuant to 28 U.S.C. Section 1782 of Okean B.V. & Logistic Sol.
Int’l to Take Discovery of Chadbourne & Parke LLP, 60 F. Supp. 3d 419, 431
(S.D.N.Y. 2014) (quoting Amusement Indus., Inc. v. Midland Ave. Assocs., LLC,
820 F. Supp. 2d 510, 530 (S.D.N.Y. 2011); see also In re Sharp, 403 F.3d at 56
(“Due to the difficulty of proving actual intent to hinder, delay, or defraud
creditors, the pleader is allowed to rely on ‘badges of fraud’ to support his case,
10
i.e., circumstances so commonly associated with fraudulent transfers that their
presence gives rise to an inference of intent.” (citation omitted)).
B.
Analysis
1.
The Requisite Specificity for Pleading Constructive Fraudulent
Conveyance Under the NYCDL
As a threshold matter, while the initial Complaint explicitly listed
separate counts for violations of Article 10 of the NYDCL and for common law
fraud, the SAC titles the sole claim left in this matter simply as “fraud.”
(SAC 13). It is thus understandable that Defendants’ respective moving briefs
premise their arguments for dismissal primarily on GCI’s failure to plead its
claim with the specificity required for claims sounding in fraud pursuant to
Federal Rule of Civil Procedure 9(b). (See Chopra Br. 3-6; M. Shah Br. 3; V.
Shah Br. 2; Suri Br. 3; LLC Br. 4-6). However, the weight of the case law
suggests that while the heightened pleading standard of Rule 9(b) applies to
claims of actual fraud under § 276, it does not govern claims for constructive
fraudulent transfer under §§ 273, 273-a, or 274. See, e.g., In re Bernard L.
Madoff Inv. Sec. LLC, 458 B.R. 87, 110-11 (Bankr. S.D.N.Y. 2011) (stating that
“[u]nder both the [Bankruptcy Code and the NYDCL], courts consistently hold
that ‘claims of constructive fraud do not need to meet the heightened pleading
requirements of Fed. R. Civ. P. 9(b)’” (quoting Bank of Commc’ns v. Ocean Dev.
Am., Inc., No. 07 Civ. 4628 (TPG), 2010 WL 768881, at *6 (S.D.N.Y. Mar. 8,
2010))), leave to appeal denied sub nom. Picard v. Estate of Madoff, 464 B.R.
578 (S.D.N.Y. 2011); see also Friedman v. Wahrsager, 848 F. Supp. 2d 278,
292 (E.D.N.Y. 2012) (holding that when a claim sounds in “constructive fraud,
11
as opposed to fraudulent intent, the heightened pleading standard embodied in
Rule 9(b) does not apply”); Greystone Bank v. Neuberg, No. 10 Civ. 5225 (JS),
2011 WL 3841542, at *2 (E.D.N.Y. Aug. 25, 2011) (citing cases) (finding “that
Rule 8, not Rule 9, sets the pleading standard for constructive fraudulent
transfers”); Eclaire Advisor Ltd. v. Daewoo Eng’g & Constr. Co., 375 F. Supp. 2d
257, 268 (S.D.N.Y. 2005). But see Marketxt Holdings Corp. v. Engel & Reiman,
P.C., 693 F. Supp. 2d 387, 397 n.75 (S.D.N.Y. 2010) (noting that there is some
disagreement in the Second Circuit over whether Rule 9(b) applies to claims of
constructive fraud and comparing cases); Cargo Partner AG v. Albatrans Inc.,
207 F. Supp. 2d 86, 115-16 (S.D.N.Y. 2002) (“The particularity requirements of
Rule 9(b) apply to claims asserted under Sections 273 and 276 of the Debtor
and Creditor Law.”), aff’d, 352 F.3d 41 (2d Cir. 2003). Rather, most courts
have found — and this Court agrees — that the pleading standard for claims of
constructive fraud is provided by Rule 8(a) and the plausibility requirement set
forth in Twombly and Iqbal. 3 That said, while claims for constructive
fraudulent transfer “do not require the intent to defraud as an element, [and
therefore] are not held to the heightened pleading requirements of Fed. R. Civ.
P. 9(b)[,] [they] still cannot survive a motion to dismiss on conclusory
3
The heightened pleading standard under Rule 9(b) serves three purposes: “[i] enabling a
defendant to identify the allegedly fraudulent behavior in order to mount a defense with
regard to those actions; [ii] protecting defendant by prohibiting a complainant from
making character-damaging allegations that have no basis in provable fact; and
[iii] reducing the number of strike suits.” Sullivan v. Kodsi, 373 F. Supp. 2d 302, 306
(S.D.N.Y. 2005) (citing DiVittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242,
1247 (2d Cir. 1987)). However, because claims for fraudulent conveyance under §§ 273,
273-a, and 274 require neither intent to defraud nor “any of the traditional elements of
fraud,” the motivating concerns of Rule 9(b) apply with less force, making Rule 8(a) the
appropriate pleading rule for such causes of action. See id. at 307.
12
allegations alone.” Paradigm BioDevices., Inc. v. Viscogliosi Bros., LLC, 842 F.
Supp. 2d 661, 667 (S.D.N.Y. 2012).
2.
GCI Fails to State a Claim Against Shalu Suri or the Entity
Defendants
Even under the less onerous standard of Rule 8(a), GCI fails to plead
constructive fraud — let alone actual fraud — against Shalu Suri or the Entity
Defendants for the simple reason that the SAC offers nothing but conclusory
assertions of NYDCL violations with no factual support. The SAC identifies
Suri as “an individual ... who is CEO of STI Phone Card Warehouse, with
offices at 43-15 Main Street, Flushing, New York 11355 and who is the wife of
defendant Ravi Chopra.” (SAC ¶ 21). The only other fact presented regarding
Suri is an allegation that Chopra, through Suri, attempted to delay the
confirmation of the Award against Jaina by forming a corporation using GCI’s
name, which conduct is not a conveyance at all, actual or constructive,
fraudulent or otherwise. (Id. at ¶ 25). As for the Entity Defendants, the SAC
identifies each as a corporate entity, and then makes no further mention of
them until their inclusion, with Suri, in the laundry list of defendants to whom
Jaina allegedly “transferred all or substantially all of its assets.” (Id. at ¶¶ 1720, 42).
Put simply, the SAC is devoid of any facts that would make GCI’s
allegations against Suri or the Entity Defendants plausible; a claim for
fraudulent conveyance cannot possibly stand against defendants to whom no
specific conveyance is stated as having been made. The SAC’s broad assertions
that “Defendants” have “withdraw[n] ... funds” (id. at ¶ 23), with no mention of
13
timing, amount, or even which particular defendants are being referenced, falls
far short of the plausibility standard under Iqbal and Twombly. Because the
SAC contains no more than a bare recitation of the elements of fraudulent
transfer against Suri and the Entity Defendants, the claims against these
defendants must be dismissed.
3.
GCI Fails to State a Claim Against Vipin Shah and
Mahendra Shah
Defendants Vipin and Mahendra Shah argue that no claim can stand
against them, as the only transfers alleged in the SAC involving them occurred
in 2008 and 2009 — well before the arbitration award was handed down, and
years before Jaina is alleged to have become insolvent. (See V. Shah Reply
¶¶ 6-7, 20; M. Shah Reply ¶¶ 14, 19). Indeed, Defendants Vipin and Mahendra
Shah are correct insofar as the SAC on its face fails to state “a date, amount or
to who and how [any allegedly fraudulent] transfer was made” to either Shah.
(V. Shah Reply ¶ 6). Exhibit 6 to the SAC, however, provides a further morsel
of information. Specifically, it states that
between the date of the award and November 2014 ...
more than $3,000,000 was unlawfully withdrawn by
[Chopra, Vipin Shah, and Mahendra Shah] and others
connected to Jaina. Those withdrawals included funds
taken by both Vipin Shah and Mahendra Shah, as well
as $850,000 directed to “shareholders’ friends.”
Capping them off, moreover, was $1,260,000 which Mr.
Chopra directed Jaina to send to his lawyers[.]
(SAC Ex. 6 ¶ 24). In other words, the Shahs are alleged to have withdrawn not
insubstantial sums from Jaina at some time between July and November 2014.
14
While the claims against the Shahs come closer to meeting the
plausibility threshold, the information provided in the SAC and the attendant
exhibits still fails to provide these Defendants with the fair notice required
under Rule 8(a). See, e.g., In re Bernard L. Madoff Inv. Sec., LLC, 440 B.R. 243,
264 (Bankr. S.D.N.Y. 2010) (stating that courts evaluating a claim for
constructive fraudulent transfer must consider “whether, consistent with the
requirements of Rule 8(a), the complaint gives the defendant sufficient notice to
prepare an answer, frame discovery and defend against the charges” (internal
citation omitted)). While GCI points to the $3,000,000 figure as providing some
measure of factual support (see Pl. Opp. 9-10), the pleadings still fail to provide
any particular information about the amount allegedly transferred to each
defendant, or the manner of the transfer. Consequently GCI’s claims for
fraudulent transfer against Vipin and Mahendra Shah must be dismissed. See
Holmes v. Allstate Corp., No. 11 Civ. 1543 (LTS) (DCF), 2012 WL 627238, at *25
(S.D.N.Y. Jan. 27, 2012) (finding Plaintiff’s allegations of fraudulent transfer
against Defendants as a group, without specifying what conduct was
attributable to each, failed to satisfy the pleading standard under Rule 8(a)),
report and recommendation adopted, No. 11 Civ. 1543 (LTS) (DCF), 2012 WL
626262 (S.D.N.Y. Feb. 27, 2012).
4.
GCI States a Claim for Constructive Fraudulent Conveyance
Against Ravi Chopra Under §§ 273, 273-a, and 274
Chopra is the only Defendant as to whom the SAC alleges a specific
transfer, viz., the “$1,260,000 which Mr. Chopra directed Jaina to send his
lawyers.” (SAC Ex. 6 ¶ 24). Identifying an allegedly fraudulent transfer,
15
however, is only one element of a valid claim under the NYCDL: §§ 273 and
273-a require GCI to plead Jaina’s insolvency; § 274 requires pleading of
“unreasonably small capital”; and all three provisions require pleading of a lack
of “fair consideration.”
Chopra argues that GCI has failed to plead Jaina’s insolvency at the time
of any transfer, and that the claim under § 273 must consequently fail.
(Chopra Reply 2-4). He points to In re Vivaro Corp., 524 B.R. 536 (Bankr.
S.D.N.Y. 2015), for the proposition that when evaluating “the sufficiency of a
complaint’s insolvency allegations, the court looks for some sort of ‘balance
sheet’ test or information provided that the [c]ourt can use to infer that the
corporation’s liabilities exceeded their assets at the time the transfers took
place.” (Chopra Reply 3 (quoting id. at 551). Here, GCI has provided nothing
resembling “balance sheet” information; it has, in fact, provided no information
about Jaina’s assets at all, beyond the unsupported statement that Jaina
lacked the funds to pay its debts. (See SAC ¶ 47).
A failure to provide factual support for Jaina’s insolvency does not
necessarily doom GCI’s claim under § 273, however, as courts in this District
have repeatedly found that “[w]here a plaintiff meets its burden of showing that
the transfer is made without consideration, there exists ‘a presumption of
insolvency that shifts the burden to the defendant to rebut by showing
continued solvency after the transaction.’” Amusement Indus., Inc., 820 F.
Supp. 2d at 527 (quoting RTC Mortg. Trust 1995–S/N1 v. Sopher, 171 F. Supp.
2d 192, 199 (S.D.N.Y. 2001)); see also In re Vivaro, 524 B.R. at 553 (“The
16
Court’s conclusion that [a lack of] fair consideration is sufficiently alleged
activates the rebuttable presumption that the insolvency element of the NYDCL
section 273 portion of Count I is sufficiently pled.” (citing In re Operations N.Y.
LLC, 490 B.R. 84, 98 (Bankr. S.D.N.Y. 2013))). Hence the Court must consider
whether the SAC alleges a lack of fair consideration such that GCI’s failure to
support its assertion of insolvency can be excused.
As discussed supra, fair consideration within the meaning of the NYDCL
has two required components: an exchange for fairly equivalent value and
good faith. See N.Y. Debt. & Cred. L. § 272. GCI points to the text of the
SAC — specifically, the paragraph stating “The Transfer was without
consideration” — to argue that a lack of fair consideration has been adequately
pleaded. (SAC ¶ 45; Pl. Opp. 11). Alone, this assertion clearly fails to meet the
pleading standard, as it does not even make clear what “transfer” is being
referenced. However, the SAC also states that Chopra “had extensive financial
dealings with Jaina and was about to become a shareholder prior to the
confirmation of the arbitration award” (SAC ¶ 14); that he acted with the
apparent authority to negotiate Jaina’s obligations on its behalf (id. at ¶ 25);
that he formed a New York corporation in GCI’s name to attempt to delay
confirmation of the Award (id. at ¶ 25); and that he directed that $1,260,000 be
transferred from Jaina to his attorneys after the arbitration decision, but prior
to the Award’s confirmation, in an effort to render Jaina judgment-proof (id. at
¶ 11, Ex. 6 ¶ 24). Considering these facts together and taking them as true, as
the Court must on a motion to dismiss, GCI has sufficiently alleged Chopra’s
17
lack of good faith. Therefore GCI has also established a lack of fair
consideration, and insolvency can be presumed. The adequacy of GCI’s
pleading is tenuous, to be sure, and its survival at this stage does not suggest
that it will fare equally well at summary judgment or trial. Nevertheless, GCI’s
claim against Chopra for constructive fraudulent transfer under § 273 survives
Chopra’s motion to dismiss, if not by much.
GCI’s claim under § 273-a presents an additional issue: Chopra argues
that the § 273-a claim fails on the independent basis that that section requires
the transferor “fail[] to satisfy a judgment,” a condition not pleaded here.
(Chopra Reply 4). GCI correctly points out that an arbitration proceeding
qualifies as an “action for money damages” within the meaning of the NYDCL,
so the fact that funds were allegedly transferred prior to the confirmation of the
award does not preclude liability under § 273-a. (Pl. Opp. 20; see also First
Keystone Consultants, Inc. v. Schlesinger Elec. Contractors, Inc., 871 F. Supp.
2d 103, 118 (E.D.N.Y. 2012) (“It is well-established that an arbitration for
money damages is an ‘action for money damages’ within the meaning of NYDCL
section 273-a.” (collecting cases)). However, that Jaina was involved in “an
action for money damages” misses Chopra’s point; he argues that nowhere in
the SAC does GCI allege that Jaina “fail[ed] to satisfy the judgment” that
resulted from that action. Rather, the SAC centers on the contention that
“collection of the arbitration award is now being frivolously challenged on any
and every available ground.” (SAC ¶ 3).
18
Section 273-a requires that a transferor fail to satisfy an award upon
which final judgment has been entered. In the present instance, the New York
Supreme Court entered judgment confirming the Award in or around December
2014, thereby rendering GCI a judgment creditor of Jaina. (SAC ¶ 4, Ex. 6
¶ 25). Jaina has appealed that confirmation, and, should it succeed in its
challenge to the Award’s confirmation, GCI will no longer have a final judgment
pursuant to which it may seek relief under § 273-a. See Cohan v.
Misthopoulos, 499 N.Y.S.2d 157, 158 (2d Dep’t 1986) (finding that plaintiff had
no claim under § 273-a where the previously entered judgment in its favor had
been vacated for retrial); accord In re Yerushalmi, 440 B.R. 24, 29 (E.D.N.Y.
2010). The fact that the judgment is currently being challenged, however, does
not stay its applicability in order to permit Chopra to claim that Jaina has not
yet “fail[ed] to satisfy” its terms. In other words, so long as the judgment
stands and the Award has not been paid, GCI has a valid claim under § 273-a.
Finally, GCI has sufficiently pleaded that Jaina was left with
“unreasonably small capital” following its transfer to Chopra to state a claim
under § 274. The SAC repeatedly asserts that the transfer of funds to Chopra
and others has “shut Jaina down” (SAC ¶¶ 23, 24), and particularly alleges
that on January 8, 2015, after, inter alia, the transfer to Chopra, Jaina’s
“business was essentially frozen” (id. at Ex. 6 ¶ 25). These facts serve to
support GCI’s allegation that “the property remaining in [Jaina’s] account after
conveyance was an unreasonably small capital.” (Id. at ¶ 48). Hence, given
GCI’s pleading of Chopra’s bad faith — and therefore of a lack of consideration
19
as defined by the NYDCL — GCI has stated a claim against Chopra for
constructive fraudulent transfer under § 274.
5.
GCI Adequately States a Claim Against Chopra for Actual
Fraudulent Transfer Under § 276
Chopra contends that the SAC falls short of Rule 9(b)’s heightened
standard, as it fails to “plead[] with particularity an actual intent to defraud.”
(Chopra Br. 3-6). GCI argues, however, that it has sufficiently pleaded
numerous “badges of fraud,” which suffice to establish fraudulent intent under
§ 276. (Pl. Opp. 25). See generally In re Sharp, 403 F.3d at 56 (stating that
due to the difficulty of proving actual intent, fraudulent intent may be inferred
from circumstantial evidence in the form of various “badges of fraud”). As
noted, evidence that courts have treated as “badges of fraud” includes (i) a
close relationship between the parties to the conveyance; (ii) a lack of
consideration; (iii) proximity of the conveyance to the time debt was incurred;
(iv) the use of false entities; (v) retention of control of property by the transferor;
and (vi) that the conveyance rendered the transferor insolvent. Camofi Master
LDC v. Riptide Worldwide, Inc., No. 10 Civ. 4020 (CM), 2011 WL 1197659, at
*11 (S.D.N.Y. Mar. 25, 2011) (citing Wall St. Assocs. v. Brodsky, 684 N.Y.S.2d
244, 247-48 (1st Dep’t 1999)); see also In re Sharp, 403 F.3d at 56; Drenis v.
Haligiannis, 452 F. Supp. 2d 418, 429 (S.D.N.Y. 2006).
In the present case, GCI has alleged sufficient specific badges of fraud to
withstand Chopra’s motion to dismiss. The SAC sets forth Chopra’s alleged
close relationship to Jaina, particularly stating that he purported to engage in
settlement negotiations with GCI’s president on Jaina’s behalf during the
20
period between the handing down of the Award and the Award’s confirmation.
(SAC ¶ 25). Although the vague allegations of Chopra’s “extensive financial
dealings with Jaina” and the fact that he “was about to become a shareholder”
do not, on their own, provide the requisite specificity of Chopra’s connection to
Jaina, the additional fact of his role as negotiator suffices to establish Chopra’s
“close relationship” to Jaina. Furthermore, as a consequence of his alleged role
in settlement negotiations with GCI, Chopra is clearly asserted to have been
aware of Jaina’s debt to GCI. As discussed supra, GCI has also alleged a lack
of fair consideration. Regarding the timing of any transfer to Chopra, Exhibit 6
to the SAC states that Chopra directed $1,260,000 be directed from Jaina to
his attorneys after the arbitration proceedings, but prior to the Award’s
confirmation. (id. at Ex. 6 ¶ 24). Taken together, these facts set forth the
“badges of fraud” necessary to state a claim under § 276. Chopra’s motion to
dismiss GCI’s § 276 claim against him must therefore be denied. 4
C.
GCI is Granted Leave to Replead Count I of the SAC
GCI requests in its opposition brief that, in the event that the Court
dismisses any of its claims against the various Defendants, GCI be granted
leave to replead. (Pl. Opp. 27). Federal Rule of Civil Procedure 15, which
4
To be clear, GCI just barely passes the pleading threshold; the SAC offers numerous
vague allegations regarding Chopra’s withdrawal of funds, failing to specify the time,
mechanism, or amount of any such transfers. (See, e.g., SAC ¶ 24 (stating that “Chopra
has withdrawn what is probably the largest amount” from Jaina at some unspecified
time)). These allegations fall short of the standard under Rule 8(a), let alone Rule 9(b)’s
heightened pleading requirements. Cf. Sullivan, 373 F. Supp. 2d at 306 (“[A]llegations
of fraud cannot ordinarily be based upon information and belief. Instead, the complaint
must specify the ‘particulars’ of the alleged fraud — including, for example, the time,
place, particular individuals involved, and specific conduct at issue.” (citation omitted)).
It is only the additional particulars provided by Exhibit 6 to the SAC that serve to inch
GCI’s claims against Chopra over the line to survive Chopra’s Rule 12(b)(6) motion.
21
governs amendments prior to trial, requires a court to “freely give leave” to
make amendments — beyond those made as of right — “when justice so
requires.” Fed. R. Civ. P. 15(a)(2). As the Second Circuit has made clear, the
central inquiry for a court in determining whether leave to replead is
appropriately granted under Rule 15 is whether such “amendment would be
futile.” Loreley Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160,
191 (2d Cir. 2015); see also Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d
42, 48 (2d Cir. 1991).
In the present case, the defects in the SAC stem largely from a lack of
specificity; nearly all claims are alleged against Defendants in the aggregate
and fail to provide the information needed to allow the various separate
defendants to formulate their respective defenses. Should Plaintiff plead its
claims with greater particularity — as it has requested leave to do — such
amendment might not necessarily be futile. (See Pl. Opp. 27). 5 Accordingly,
GCI is given leave to replead Count I of the SAC. 6
5
While the Court grants GCI leave to replead, it acknowledges that this will be GCI’s
fourth attempt at setting forth a complaint. (See Dkt. #1, 8, 24). This fact alone might
tend to suggest that amendment cannot cure the SAC. However, in recognizing that
amendment may not be futile, the Court considers GCI’s change of counsel and the
resulting change in litigation strategy effected by its new counsel. In particular, the
shift in focus from Goldberg to the Entity and other Individual Defendants — parties
who play only minor roles in the allegations, but who have now been made the focus of
the case — would foreseeably need to be accompanied by a shift in the facts pleaded.
The Court notes that substantial resources could have been saved had GCI simply
requested leave to amend once it determined that Goldberg, the central player in the
SAC, would be dropped from the case. It further expects that new counsel will think
carefully before mounting claims as to any Defendant other than Chopra, and it
reminds Plaintiff and its counsel that there will be consequences if there is again
motion practice so one-sided in this matter.
6
Count I of the SAC seeks, inter alia, treble damages pursuant to New York Judiciary
Law § 487. (SAC ¶ 51). However, Plaintiff has voluntarily withdrawn its claims under
§ 487. Consequently there remains no basis upon which Plaintiff may seek treble
22
CONCLUSION
For the reasons stated in this Opinion, the motions to dismiss all claims
against Goldberg and Hodgson Russ, as well as Counts II, III, IV, and V of the
SAC as alleged against all remaining Defendants, are DENIED AS MOOT.
Defendants’ respective motions to dismiss Count I against Mahendra Shah,
Vipin Shah, Shalu Suri, Kedis, Melville, JMVD, and NYCT are GRANTED.
Chopra’s motion to dismiss Count I, as alleged against him, is DENIED. GCI
may file a Third Amended Complaint no later than February 22, 2016.
Defendants’ deadline to answer or otherwise respond to the Third Amended
Complaint will be March 14, 2016. An Initial Pretrial Conference in this
matter will be scheduled for March 16, 2016 at 3:00 p.m. in Courtroom 618
of the Thurgood Marshall Courthouse, 40 Foley Square, New York, New York.
The Clerk of Court is directed to terminate the motions at docket entries
number 50, 56, 59, 68, and 71.
SO ORDERED.
Dated:
February 1, 2016
New York, New York
__________________________________
KATHERINE POLK FAILLA
United States District Judge
damages, and to the extent Plaintiff’s request to replead Count I might be construed as
a request to reassert its claim under § 487, such request is denied.
23
A copy of this Order was mailed by Chambers to:
Mahendra Shah
39 Capital Ave.
Williston Park, NY 11596
A copy of this Order was mailed by Chambers to:
Vipin Shah
35 Smith Place
Williston Park, NY 11596
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