Innovative Custom Brands, Inc. v. Minor et al
Filing
19
ORDER granting 6 Motion to Dismiss. For the foregoing reasons, Defendants' motion to dismiss is GRANTED and Plaintiff's claims are dismissed with prejudice. The Clerk of Court is directed to close the case. This resolves Dkt. No 6. (As further set forth in this Order.) (Signed by Judge Alison J. Nathan on 1/25/2016) (cf)
USDCSDNY
DOCUMENT
ELECTRONICALLY FILED
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
··DOC#:
.
9
DATE F-IL_E_D_:
JTTAT'T'N"'"'2.,...5-2"'"2.....
l
Innovative Custom Brands, Inc.,
Plaintiff,
15-CV-2955 (AJN)
-vMEMORANDUM AND
ORDER
Henry Minor, et al.,
Defendants.
ALISON J. NATHAN, District Judge:
In this action, Plaintiff brings fraudulent conveyance, unjust enrichment, and breach of
fiduciary duty claims against Defendants, who have moved to dismiss the complaint pursuant to
Federal Rule of Civil Procedure 12(b)(6). See Dkt. Nos. 1, 6. For the reasons articulated below,
Defendants' motion to dismiss is GRANTED.
I.
BACKGROUND 1
Plaintiff Innovative Custom Brands, Inc. is a footwear-manufacturing company. Comp.
iii! 1-2. Defendants Henry H. Minor, Sr., Henry H. Minor, Jr., and Cathy Minor are shareholders
and officers of non-party PW Minor & Son, Inc. ("the Company"), a footwear-distributing
company. Id. iii! 3-8. The instant dispute arises from a debt of $239,617 allegedly owed to
Plaintiff by the Company in connection with an order for 14,500 pairs of shoes. Id.
if 18.
Until recently, the Company's assets were encumbered by liens held by M&T Bank. Id.
if 11. In August 2013, Plaintiff was notified by Defendants that "the Company was in serious
financial distress." Id.
if 12. Specifically, Plaintiff was informed that M&T Bank had reduced
1
The following facts are taken from the Complaint and assumed true for the purpose of the motion to dismiss. See
Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 23 7 (2d Cir. 2007).
1
the Company's credit line and that Defendants intended to sell the Company. Id. In March
2014, Defendants again advised Plaintiff that the Company would either be sold or its assets
liquidated. Id.
if 15. In August 2014, M&T Bank foreclosed on the Company's assets and sold
those assets to a third-party buyer. Id.
if 20. This buyer has continued the Company's business
as "PW Minor & Sons" despite disclaiming liability for the Company's prior debts, including the
debt owed to Plaintiff. Id.
ifif 20-21.
During the Company's period of financial distress from approximately mid-2013 to mid2014, Plaintiff alleges that Defendants "improperly secreted and/or removed substantial amounts
of funds from the Company for their own pecuniary benefit, including materially raising their
own compensation." Id.
if 23. Plaintiff further alleges that prior to the Company's foreclosure,
the Company had sufficient funds to pay its creditors, including Plaintiff. Id.
if 19. In light of
these allegations, Plaintiff sued Defendants in federal court in January 2015 for fraudulent
conveyance, unjust enrichment, and breach of fiduciary duty. See 15-CV-456 (AJN), Dkt. No. 1
(S.D.N.Y. Jan. 21, 2015). In March 2015, Plaintiff voluntarily dismissed that action without
prejudice and instead filed a complaint in New York Supreme Court. See 15-CV-2955 (AJN),
Dkt. No. 1 Ex. A at 20 (S.D.N.Y. April 16, 2015). In April 2015, Defendants removed the case
back to federal court pursuant to 28 U.S.C. § 1441(a) and filed the instant motion to dismiss
pursuant to Rule 12(b)(6). 2 Id.; Dkt. No. 6.
II.
LEGALSTANDARD
When evaluating a Rule 12(b)(6) motion, a court must "accept as true all facts alleged in
the complaint" and "draw all reasonable inferences in favor of the plaintiff." See Kassner v. 2nd
2
Plaintiff argues that Defendants' "procedural gamesmanship" requires the Court to deny the motion to dismiss.
Opp. Br. at 7, 9. Because Defendants were entitled to remove Plaintiffs lawsuit under 28 U.S.C. § 1441(a) and to
move to dismiss pursuant to Rule 12(b)(6), the Court finds this argument without merit.
2
Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007). As a general rule, "[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 At!. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). To meet this standard, a
plaintiff must "plead[] factual content that allows the court to draw the reasonable inference that
the defendant is liable for the misconduct alleged." Id.
Unlike other claims, allegations of fraud or mistake are subject to a heightened
"particularity" pleading standard. See Fed. R. Civ. P. 9(b) ("[A] party must state with
particularity the circumstances constituting fraud or mistake."). To meet this threshold, a
plaintiff must ordinarily specify the "particulars" of the alleged fraud, including "the time, place,
particular individuals involved, and specific conduct at issue." United Feature Syndicate, Inc. v.
Miller Features Syndicate, Inc., 216 F. Supp. 2d 198, 221 (S.D.N.Y. 2002) (citing Luce v.
Edelstein, 802 F.2d 49, 54 (2d Cir. 1986)).
III.
DISCUSSION
Plaintiff alleges that Defendants are liable for actual fraudulent conveyance, constructive
fraudulent conveyance, unjust enrichment, and breach of fiduciary duty. The Court will address
each of these claims in tum.
A.
Actual Fraudulent Conveyance
New York law prohibits actual fraudulent conveyances, which are defined as any
"conveyance made ... with actual intent ... to hinder, delay, or defraud either present or future
creditors." N.Y. Debt. & Cred. Law ("DCL") § 276 (McKinney 2009). As with any allegation
of fraud, a plaintiff bringing a claim under§ 276 must satisfy Rule 9(b). See In re Sharp Int'!
3
Corp., 403 F.3d 43, 56 (2d Cir. 2005). The entirety of Plaintiffs factual allegation regarding the
actual fraudulent conveyance claim is as follows:
Upon information and belief, 3 both prior to and following the Asset Sale, the
Defendants transferred to themselves, and/or to their family members or affiliates,
and/or to a family trust ... substantial funds and assets belonging to the
Company, all at a time when the Company was insolvent, without fair
consideration for those transfers, and with the actual intent to hinder, delay or
defraud the Company's creditors .... Specifically, Plaintiff has been advised that
between the latter half of 2013, and the first half of2014, [Defendants] unlawfully
and improperly secreted and/or removed substantial amounts of funds from the
Company for their own pecuniary benefit, including materially raising their own
compensation, to the detriment of the Company's creditors.
Comp. iii! 22-23.
In this recitation, Plaintiff fails to plead with specificity when, how often, or in what
amounts the allegedly fraudulent conveyances took place. Instead, Plaintiff alleges generally
that the transfers occurred sometime during the approximately twelve months "between the latter
half of 2013[] and the first half of 2014" and that the amount of "funds and assets" transferred
was "substantial." Id. Plaintiffs failure to plead "the time, place, ... and specific conduct at
issue" with more particularity fails to satisfy Rule 9(b) and requires dismissal of the§ 276 claim.
See United Feature Syndicate, Inc., 216 F. Supp. 2d at 221 (citing Luce, 802 F.2d at 54)
(dismissing fraudulent conveyance claim because plaintiffs failed to allege "the property that was
allegedly conveyed [or] the timing and frequency of those allegedly fraudulent conveyances");
see also Watson v. Riptide Worldwide, Inc., No. 11-CV-0874 (PAC), 2012 WL 383946, at *9
(S.D.N.Y. Feb. 7, 2012) (dismissing claims under DCL § 276 for failure to "specify when the
defendants executed the Transfers [or] the amounts of the Transfers").
3
"Despite the generally rigid requirement that fraud be pleaded with particularity, allegations may be based on
information and belief when facts are peculiarly within the opposing party's knowledge." Wexner v. First
Manhattan Co., 902 F.2d 169, 172 (2d Cir. 1990). However, this does not constitute "license to base claims of fraud
on speculation and conclusory allegations" and a plaintiff must nevertheless "adduce specific facts supporting a
strong inference of fraud." Id.
4
B.
Constructive Fraudulent Conveyance
In addition to actual fraudulent conveyances, New York law prohibits constructive
fraudulent conveyances, defined as conveyances "made without 'fair consideration"' if (1) "the
transferor is insolvent or will be rendered insolvent by the transfer in question"; (2) "the
transferor is engaged in or is about to engage in a business transaction for which its remaining
property constitutes unreasonably small capital"; or (3) "the transferor believes that it will incur
debt beyond its ability to pay." In re Sharp Int 'l Corp., 403 F.3d at 53 (citing DCL §§ 273-275).
For the reasons articulated above, Plaintiffs failure to adequately plead the "particulars," such as
date, frequency, and amount, of the challenged transfers does not satisfy Rule 9(b) for the
constructive fraudulent transfer claim. See United Feature Syndicate, Inc., 216 F. Supp. 2d at
221 (citing Luce, 802 F.2d at 54). Additionally, Plaintiff fails to adequately plead the existence
of any situation in which the construc/tive fraudulent conveyance doctrine is applicable.
1. Insolvency
DCL § 271 defines insolvency as the "probable liability on ... existing debts" exceeding
"the present fair salable value of ... assets." DCL § 271(1). An adequate pleading of
insolvency "requires some sort of 'balance sheet' ... information ... that the Court can use to
infer that the corporation's liabilities exceeded their assets at the time the transfers took place."
In re Trinsum Grp., Inc., 460 B.R. 379, 392 (Bankr. S.D.N.Y. 2011) (emphasis added).
Plaintiff alleges that the transfers took place "between the latter half of 2013 [] and the
first half of 2014," but that M&T Bank did not foreclose on the Company until August 2014.
Comp. iii! 20, 23. While Plaintiff does allege that the Company was experiencing "serious
financial distress" as of August 2013, see id.
if 12, it does not provide any "balance sheet"
information to suggest "that the corporation's liabilities exceed[ed] [its] assets at the time the
5
transfers took place." In re Trinsum Grp., Inc., 460 B.R. at 392-93 (finding net income and cash
flow figures alleged in the complaint insufficient to adequately plead insolvency). In fact,
Plaintiff alleges that "prior to M&T Bank's foreclosure action [in August 2014] ... the Company
had more than sufficient funds with which to pay its creditors." Id.
if 19. As a result, Plaintiff
fails to adequately plead that the Company's liabilities exceeded its assets at the time of the
transfers, and thus fails to adequately plead insolvency.
2. Unreasonably Small Capital
Under DCL § 274, "the plaintiff must plead facts supporting the allegation that at the
time of the transfers, the [defendant] was engaged in or about to engage in a business or
transaction that would leave it with unreasonably small capital." In re Operations NY LLC., 490
B.R. 84, 98 (Bankr. S.D.N.Y. 2013). This test reaches entities that are "technically solvent but
doomed to fail." MFS/Sun Life Trust-High Yield Series v. Van Dusen Airport Servs. Co., 910 F.
Supp. 913, 944 (S.D.N.Y. 1995). As noted above, Plaintiff fails to specify the dates of the
transactions in question and alleges that the Company had sufficient assets to pay its creditors
during the relevant period. Comp. iii! 19, 22-23. For this reason, Plaintiff fails to allege that at
the time of the transfers, Defendants were engaged in a business transaction that would leave the
Company with unreasonably small capital. See In re Operations NY LLC., 490 B.R. at 98
(dismissing claims where defendant had assets and continued operations for several months after
the challenged transactions).
3. Inability to Pay
A transfer is a constructive fraudulent conveyance under DCL § 275 if "the person
making the conveyance . . . intends or believes that he will incur debts beyond his ability to pay
as they mature." Demonstrating liability under this provision "requires proof of the transferor's
6
subjective intent or belief that it will incur debt it cannot pay at maturity." See In re Operations
NY LLC., 490 B.R. at 98. Because Plaintiff "does not allege any facts relating to [Defendants']
intent to incur debt that [they] believed [they] would be unable to pay," it fails to adequately
plead a violation ofDCL § 275. Id.
As Plaintiff does not allege the "particulars" of the challenged transfers and does not
adequately plead insolvency, unreasonably small capital, or inability to pay, its constructive
fraudulent conveyance claims are dismissed.
C.
Unjust Enrichment
A claim for unjust enrichment under New York law requires three elements: "(1) that the
defendant benefitted; (2) at the plaintiffs expense; and (3) that equity and good conscience
require restitution." Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield ofNJ., Inc., 448
F.3d 573, 586 (2d Cir. 2006) (quoting Kaye v. Grossman, 202 F.3d 611, 616 (2d Cir. 2000)). If
an unjust enrichment claim is "premised on fraudulent conduct," it is subject to Rule 9(b)'s
particularity requirement. See Welch v. TD Ameritrade Holding Corp., No. 07-CV-6904 (RJS),
2009 WL 2356131, at *22 (S.D.N.Y. July 27, 2009) (quoting Sec. Inv'r Prof. Corp. v. Stratton
Oakmont, Inc., 234 B.R. 293, 311 (Bankr. S.D.N.Y.1999)); see also Rombach v. Chang, 355
F.3d 164, 172 (2d Cir. 2004) (quoting In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1405 n.2 (9th
Cir. 1996)) (Rule 9(b) applies if"the gravamen of the complaint is plainly fraud"); Hines v.
Overstock.corn, Inc., No. 09-CV-991 (SJ), 2013 WL 4495667, at *11 (E.D.N.Y. Aug. 19, 2013)
(collecting cases applying Rule 9(b) to unjust enrichment claims).
Here, the factual basis for Plaintiffs unjust enrichment claim is the same as the factual
basis for the fraudulent conveyance claim. See Comp. if 55 ("By reason of their Fraudulent
Transfers of the Company's funds and other assets, ... Defendants have been unjustly
7
enriched."). As a result, "the gravamen of [Plaintiff's] complaint is plainly fraud" and Rule 9(b)
applies to the unjust enrichment claim. See Rombach, 355 F .3d at 172 (quoting In re Stac Elecs.
Sec. Litig., 89 F.3d at 1405 n.2); see also Welch, 2009 WL 2356131, at *22.
Plaintiff alleges that at some point between mid-2013 and mid-2014, Defendants
"improperly secreted and/or removed substantial amounts of funds from the Company for their
own pecuniary benefit, including materially raising their own compensation." Comp.
i! 23.
As
discussed above, Plaintiff does not allege with any specificity the "particulars" of the challenged
transactions, namely the amount of funds that the Defendants received or the dates of the
transfers. Id.
i!il 22-23.
As a result, Plaintiff fails to meet the Rule 9(b) requirements for an
unjust enrichment claim premised on fraud and that claim must be dismissed. See Ross v.
Thomas, No. 09-CV-5631 (SAS), 2010 WL 3952903, at *7 (S.D.N.Y. Oct. 7, 2010) (dismissing
unjust enrichment claim for failure to allege "how much money was transferred" or "when the
funds were used"); Sgaliordich v. Lloyd's Asset Mgmt., No. 10-CV-03669 (ERK), 2012 WL
4327283, at *13 (E.D.N.Y. Sept. 20, 2012) (dismissing unjust enrichment claim for failure to
plead "specifics as to the dates" and amounts at issue).
D.
Breach of Fiduciary Duty
Unlike Plaintiff's other claims, the breach of fiduciary duty claim does not involve any
allegation of"fraud or mistake" and is thus not governed by Rule 9(b). See Fed. R. Civ. P. 9(b).
Instead, Plaintiff's allegations of breach of fiduciary duty need only "contain sufficient factual
matter, accepted as true, to 'state a claim to relief that is plausible on its face."' Iqbal, 556 U.S. at
678 (quoting Twombly, 550 U.S. at 570). To meet this standard, a plaintiff must "plead[] factual
content that allows the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged." Id.
8
Breach of fiduciary duty under New York law has three elements: "breach by a fiduciary
of a duty owed to plaintiff; defendant's knowing participation in the breach; and damages." SCS
Commc'ns, Inc. v. Herrick Co., 360 F.3d 329, 342 (2d Cir. 2004). "Under New York law,
creditors are owed a fiduciary duty by officers and directors of a corporation only when the
corporation is insolvent." Cohain v. Klimley, No. 08-CV-5047 (PGG), 2010 WL 3701362, at
*21 (S.D.N.Y. Sept. 20, 2010) (quoting RSL Commc'ns PLC v. Bildirici, 649 F.Supp.2d 184, 202
(S.D.N.Y. 2009)). As discussed above, Plaintiff has not adequately alleged that the Company
was insolvent at the time of the challenged transfers. As a result, Plaintiff fails to "state a claim
to relief that is plausible on its face" with regard to breach of fiduciary duty and that claim is
dismissed. Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570).
IV.
CONCLUSION
For the foregoing reasons, Defendants' motion to dismiss is GRANTED and Plaintiffs
claims are dismissed with prejudice. The Clerk of Court is directed to close the case. This
resolves Dkt. No. 6.
SO ORDERED.
Dated: January'}{, 2016
New York, New York
9
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?