Knopf et al v. Meister Seelig & Fein, LLP et al.
OPINION AND ORDER....MSFs November 20, 2015 motion to dismiss is granted insofar as the Knopfs claim for actual fraudulent conveyance is dismissed. The Knopfs claims for constructive fraudulent conveyance may proceed. (Signed by Judge Denise L. Cote on 3/22/2016) (gr)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
NORMA KNOPF and MICHAEL KNOPF,
MEISTER, SEELIG & FEIN, LLP and
PURSUIT HOLDINGS, LLC.,
OPINION AND ORDER
For the plaintiffs:
Eric W. Berry
Eric W. Berry, PC
5 Columbus Circle, 8th Floor
New York, NY 10019
For the defendant Pursuit Holdings, LLC:
Nathaniel H. Akerman
Dorsey & Whitney LLP
51 West 52nd Street
New York, NY 10019
For the defendant Meister, Seelig & Fein, LLP:
Stephen B. Meister
Randi Lane Maidman
Howard S. Koh
Meister Seelig & Fein LLP
125 Park Avenue, 7th Floor
New York, NY 10017
DENISE COTE, District Judge:
This diversity action arises from a contract dispute
between South Carolina residents Michael Knopf and Norma Knopf
(collectively, “the Knopfs”), on the one hand, and Pursuit
Holdings, LLC 1 (“Pursuit”), on the other.
The contract dispute
is currently being litigated in the New York Supreme Court, New
York County (the “State Court Action”).
The Knopfs filed the
instant action alleging a January 2015 fraudulent conveyance
between Pursuit and its attorneys at Meister, Seelig & Fein, LLP
(“MSF”), and seeking a permanent injunction enjoining transfer
of Pursuit’s property.
Currently before the Court are MSF’s
motion to dismiss the fraudulent conveyance claims, Pursuit’s
motion to dismiss the claim for a permanent injunction, and
Pursuit’s request for attorney’s fees.
follow, the motions are granted in part.
For the reasons that
fraudulent conveyance is dismissed.
The claim for actual
The claims for constructive
fraudulent conveyance may proceed.
The following facts are taken from the amended complaint
and documents integral to the plaintiffs’ claims.
In the late
1990’s, the Knopfs befriended Michael Sanford (“Sanford”), the
owner of Pursuit.
The Knopfs invested approximately $11.6
million in Sanford’s hedge fund, Ulysses Opportunity Fund, L.P.,
later known as Sanford Partners, L.P.
Out of these funds, the Knopfs extended two loans to
Pursuit’s sole member is Michael Sanford, a resident of New
Pursuit, the first for $1,690,860 to finance the purchase of a
residence located at 44 East 67th Street, Unit PHC (“PHC”), and
the second for $3,250,000 to finance the purchase of three
condominium units located at 10 Bedford Street (the “Townhouse,”
collectively with PHC, the “Properties”).
Both loan agreements
included a provision in which Sanford, on behalf of Pursuit,
agreed not to sell, mortgage, hypothecate, or otherwise encumber
the acquired real estate.
Pursuit failed to repay any portion of the two loans to the
The Knopfs subsequently commenced the State Court
Action against Sanford and Pursuit, among others.
In the State
Court Action, the Knopfs alleged that Sanford and Pursuit had
breached the loan agreement with the Knopfs by failing to grant
them a mortgage on the Properties, and sought money damages as
well as imposition of a constructive trust on the real estate.
In connection with their claims in the State Court Action,
the Knopfs filed notices of pendency against the Properties on
September 18, 2009 (the “Initial Notices”).
Tingling refused to extend the Initial Notices, but the
Appellate Division, First Department, extended them on an
interim basis on September 12, 2012.
The Appellate Division on
October 15, 2013, extended the Initial Notices for a period of
three years, to end on September 17, 2015.
Knopf v. Sanford,
972 N.Y.S.2d 893, 894 (1st Dep’t 2013).
Pursuit retained MSF to represent it in defending against
the Knopfs’ suit.
The engagement letter between Pursuit and
MSF, dated July 29, 2014, indicated that MSF would represent
Pursuit with respect to (1) moving to cancel the notice of
pendency on PHC, (2) moving for partial summary judgment solely
as to the portion of the Knopfs’ constructive trust claim
relating to PHC, and (3) prosecuting a claim on behalf of
Pursuit to recover damages/expenses incurred due to the notice
of pendency filed by the Knopfs against PHC and seeking
MSF would also represent Pursuit or all defendants
in any appeals taken concerning these three matters or any
motion to stay any order canceling the notices of pendency.
also agreed to represent the defendants in defending an appeal
of Justice Tingling’s order denying summary judgment to the
On November 26, 2014, Pursuit, represented by MSF,
moved to cancel the notices of pendency.
In a decision dated December 11, 2014, the Appellate
Division granted summary judgment in favor of the Knopfs on
their breach of contract claims.
18 (1st Dep’t 2014).
Knopf v. Sanford, 1 N.Y.S.3d
The Appellate Division also held that the
Knopfs had failed to establish their entitlement to summary
judgment on their constructive trust claim because they had not
made an evidentiary showing that money damages would be
Despite the grant of summary judgment on their
contract claim, the Knopfs have not obtained a final judgment in
the State Court Action.
On December 11, 2014, Pursuit and Sanford sent a letter to
Justice Tingling again requesting that the notices of pendency
be cancelled on the basis that Sanford was “indigent.”
Tingling cancelled the notices on December 23, 2014.
On January 21, 2015, Pursuit recorded a mortgage on PHC,
dated January 6, 2015, in favor of MSF for $575,999.
purpose of the mortgage was to secure payment for past and
prospective legal representation by MSF for Pursuit.
February 17, 2015, the Appellate Division issued an order
staying the cancellation of the notices of pendency and
enjoining Pursuit and Sanford from attempting to cancel or
remove the notices of pendency.
On July 2, 2015, the Appellate
Division affirmed Justice Tingling’s order cancelling the
notices of pendency.
On July 1, 2015, the Knopfs filed the instant diversity
action against Pursuit and MSF, seeking to set aside the
mortgage to MSF as a fraudulent conveyance.
complaint alleges that the $575,000 mortgage granted to MSF was
made for less than fair consideration and constituted a
constructive fraudulent conveyance under §§ 273, 274, and 275 of
the New York Debtor Creditor Law (“DCL”). 2
complaint alleges that the mortgage was made with actual intent
to defraud the Knopfs and was therefore an actual fraudulent
conveyance under § 276 of the DCL.
Plaintiffs also seek a
permanent injunction, pursuant to § 279(a) of the DCL, enjoining
Pursuit from transferring or further encumbering the Properties.
The Knopfs filed an amended complaint on August 24, and the
defendants filed their answer in September of 2015.
In connection with this action, the Knopfs also filed new
notices of pendency on both PHC and the Townhouse (the “Second
Following a conference with the Court on October 9,
defendants moved on October 13 to cancel the Second Notices.
a Memorandum Opinion dated October 16, the Court cancelled both
notices of pendency.
With respect to the Townhouse, the notice
of pendency was improper because the complaint alleges a
fraudulent mortgage on PHC only, and thus did not “affect the
title to, or the possession, use or enjoyment of” the Townhouse,
as required by CPLR § 6501.
With respect to PHC, the notice of
The complaint cites to the New York Civil Practice Law and
Rules (“CPLR”) instead of the New York Debtor and Creditor Law.
Because the parties’ other submissions unambiguously refer to
the Debtor and Creditor Law, these claims will be construed
pendency was filed in bad faith because the fraudulent
conveyance claim was made against MSF, not Pursuit, and there
was no suggestion that MSF would be unable to pay any judgment
entered against it.
Furthermore, the filing of the Second
Notices was an attempt by plaintiffs to, in effect, reverse the
state court’s decision to cancel the Initial Notices, and to
obtain the equivalent of an attachment on the Properties pending
judgment, an improper use of lis pendens.
On November 19, the Knopfs filed a separate suit against
Pursuit in the New York Supreme Court, New York County.
suit, the Knopfs alleged that (1) Pursuit had failed to pay
certain New York City property taxes on the Townhouse, (2) New
York City assigned its tax claims against Pursuit to a trust
called NYCTL 2011-A Trust (“NYCTL”), (3) NYCTL initiated three
foreclosure actions against the Townhouse and obtained tax liens
on the property, (4) the Knopfs, in order to protect their
property interest in the Townhouse, paid the outstanding tax
liability and satisfied the liens, and (5) the Knopfs became
subrogees of NYCTL’s claims against Pursuit.
requested the imposition of equitable liens on the Townhouse
equal to amounts the Knopfs paid to satisfy NYCTL’s liens.
also requested that the Townhouse be sold at auction to satisfy
On January 11, Pursuit removed the case to federal
court and this Court accepted the case as a related matter to
the pending case.
On January 28, 2016, the case was remanded to
state court for lack of subject matter jurisdiction because
Pursuit could not remove the action as an in-state defendant.
See 28 U.S.C. § 1441(b)(2).
On November 20, 2015, MSF and Pursuit filed motions to
dismiss the instant complaint pursuant to Rule 12(c), Fed. R.
The motions were fully submitted on January 7.
The standard for deciding a motion to dismiss under Rule
12(c) is identical to that brought under Rule 12(b)(6).
New York v. First Millennium, Inc., 607 F.3d 905 (2d Cir. 2010).
When deciding a motion to dismiss under Rule 12(b), Fed. R. Civ.
P., a court must “accept all allegations in the complaint as
true and draw all inferences in the non-moving party's favor.”
LaFaro v. New York Cardiothoracic Group, PLLC, 570 F.3d 471, 475
(2d Cir. 2009).
In deciding a motion to dismiss, the court
considers “any written instrument attached to the complaint as
an exhibit or any statements or documents incorporated in it by
Stratte–McClure v. Morgan Stanley, 776 F.3d 94, 100
(2d Cir. 2015) (citation omitted).
The court also considers
“documents upon which the complaint relies and which are
integral to the complaint.”
Subaru Distributors Corp. v. Subaru
of Am., Inc., 425 F.3d 119, 122 (2d Cir. 2005).
“To survive a motion to dismiss under Rule 12(b)(6), a
complaint must allege sufficient facts which, taken as true,
state a plausible claim for relief.”
Keiler v. Harlequin
Enters. Ltd., 751 F.3d 64, 68 (2d Cir. 2014); Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (“[A] complaint must contain sufficient
factual matter, accepted as true, to state a claim for relief
that is plausible on its face.”).
“A claim has facial
plausibility when the plaintiff pleads factual content that
allows the court to draw the reasonable inference that the
defendant is liable for the misconduct alleged.”
Global Hub Ltd. v. Porsche Auto. Holdings SE, 763 F.3d 198, 208
(2d Cir. 2014) (citation omitted).
Constructive Fraudulent Conveyance
Under the DCL, a conveyance by a debtor is deemed
constructively fraudulent if it is made without ‘fair
consideration,’ and (inter alia) if one of the
following conditions is met: (i) the transferor is
insolvent or will be rendered insolvent by the
transfer in question, DCL § 273; (ii) the transferor
is engaged in or is about to engage in a business
transaction for which its remaining property
constitutes unreasonably small capital, DCL § 274; or
(iii) the transferor believes that it will incur debt
beyond its ability to pay, DCL § 275.
In re Sharp Int’l Corp., 403 F.3d 43, 53 (2d Cir. 2005).
Plaintiffs have pleaded claims under all three of the
constructive fraudulent conveyance provisions.
A. Fair Consideration
As defined by the DCL, fair consideration is given for
property or an obligation:
(a) When in exchange for such property, or
obligation, as a fair equivalent therefor, and in
good faith, property is conveyed or an antecedent
debt is satisfied, or
(b) When such property, or obligation is received in
good faith to secure a present advance or antecedent
debt in amount not disproportionately small as
compared with the value of the property, or
N.Y. D.C.L. § 272.
For a conveyance to have been made for fair
consideration “(1) the recipient of the debtor's property must
either (a) convey property in exchange or (b) discharge an
antecedent debt in exchange; and (2) such exchange must be a
‘fair equivalent’ of the property received; and (3) such
exchange must be ‘in good faith.’”
Sharp, 403 F.3d at 53
“[W]hat constitutes fair consideration
under section 272 must be determined upon the facts and
circumstances of each particular case.”
United States v.
McCombs, 30 F.3d 310, 326 (2d Cir. 1994) (citation omitted).
When a conveyance is made in consideration of future services,
those services must be “fixed and definite” to constitute fair
HBE Leasing Corp. v. Frank, 61 F.3d 1054, 1061
(2d Cir. 1995).
The parties do not dispute that Pursuit granted a mortgage
to MSF in the amount of roughly $575,000.
According to the
complaint, the value of the legal services provided by MSF to
Pursuit in consideration of the mortgage was far less than
The Knopfs have adequately pleaded lack of fair
First, the Knopfs have alleged facts suggesting
that the total value of the legal representation provided by MSF
was less than the $575,000 given by Pursuit in the form of a
Second, the Knopfs have alleged that to the extent
the mortgage was an advance payment for future legal work, such
future work was too indefinite to constitute fair consideration.
Third, the Knopfs have alleged the absence of good faith because
they contend that (1) the mortgage value was inflated in order
to deprive the Knopfs of their interest in the Properties, (2)
MSF artificially inflated its legal bills in bad faith, and (3)
Pursuit improperly paid MSF for legal work for other parties.
Because fair equivalent value and good faith are both factspecific inquiries, McCombs, 30 F.3d at 326, the value of the
legal services performed by MSF and the good faith, or lack
thereof, of Pursuit cannot be determined in deciding this motion
to dismiss. 3
B. Insolvency (DCL § 273)
As defined by the DCL, “[a] person is insolvent when the
present fair salable value of his assets is less than the amount
that will be required to pay his probable liability on his
existing debts as they become absolute and matured.”
& Cred. Law § 271.
Solvency under the DCL is determined by
comparing the assets of the transferor to its existing debts and
probable future liability, but it does not require that a debtor
have sufficient cash flow or liquid assets to pay all its
In their amended complaint, as well as in the opposition
brief, the Knopfs adequately allege that Pursuit was insolvent
at the time it granted the mortgage to MSF. 4
They allege that
Pursuit’s assets are roughly $8.36 million, while its
liabilities are roughly $8.64 million.
The Knopfs assert that
This conclusion is not altered by the plaintiffs’ consent to
the Court’s consideration of the fee schedule contained in the
engagement letter between Pursuit and MSF. Even were the Court
to consider the fee schedule, it could not determine, in
deciding this motion to dismiss, whether those fees represent
fair equivalent value for the work actually performed by MSF.
Because some of the facts on which the plaintiffs rely to
support their more general allegations in the amended complaint
have been recited by the plaintiffs in their memorandum in
opposition to this motion, the plaintiffs will be given an
opportunity to file a second amended complaint.
Pursuit owes them approximately $7.85 million pursuant to the
two real estate loans, and has other debts of roughly $792,000.
The Knopfs allege that Pursuit’s only assets are the
Properties, and provide a basis for estimating the value of the
Properties at roughly $8.36 million.
The Knopfs allege that PHC
is worth $2.929 million because that is the amount for which
Pursuit agreed to sell PHC to an individual named Michael
The Knopfs allege that the Townhouse is worth $5,427,500.
They arrive at that number by starting with the price Pursuit
paid for the Townhouse, $3.25 million, and relying on a report
by Douglas Elliman titled Decade Survey of Townhouse Sales 2005
– 2014 (the “Elliman Report”), which allegedly shows that
townhouse prices in Lower Manhattan 5 rose by 78.8 percent between
January 1, 2005 and December 31, 2014.
The Knopfs contend that
because the period between Pursuit’s purchase of the Townhouse
and the granting of the mortgage to MSF covers 103 of the 120
months analyzed in the Elliman Report, it is reasonable to
estimate that the Townhouse appreciated in value by 67.6
The Elliman Survey defines the “downtown” area as being bounded
by West 34th Street and East 42nd to the north, Battery Park to
the south, the Hudson River to the west, and the East River to
While the Knopfs have made selective use of the
Elliman Report, 6 it does provides a plausible basis for their
estimate of the value of the Townhouse.
plaintiffs have plausibly alleged the value of Pursuit’s assets
to be approximately $8.36 million.
Because they have plausibly
alleged that Pursuit’s assets are roughly $8.36 million and its
liabilities are roughly $8.64 million, the Knopfs have
adequately pleaded Pursuit’s insolvency for purposes of Rule
12(b), and this claim may proceed.
C. Unreasonably Small Capital (DCL § 274)
A conveyance made without fair consideration is
constructively fraudulent “when the person making it is engaged
or is about to engage in a business or transaction for which the
property remaining in his hands after the conveyance is an
unreasonably small capital.”
N.Y. Debt. & Cred. Law § 274.
amended complaint alleges that “[f]ollowing the Meister
mortgage, Pursuit possessed unreasonably small capital for its
As discussed in connection with insolvency, the
Knopfs have plausibly alleged that Pursuit’s liabilities
exceeded its assets at the time it granted the mortgage to, and
entered into the engagement letter with, MSF.
The Knopfs have
If the Knopfs had used average instead of median prices, the
valuation of the Townhouse would have been greater.
also alleged that Pursuit was delinquent in paying property
taxes on the Properties.
The allegations are sufficient to
plead that Pursuit was left with “unreasonably small capital”
when it granted the mortgage to MSF.
Accordingly, this claim
D. Intent to Incur Debts Beyond Ability to Pay (DCL § 275)
A conveyance made without fair consideration is
constructively fraudulent “when the person making the conveyance
or entering into the obligation intends or believes that he will
incur debts beyond his ability to pay as they mature.”
Debt. & Cred. Law § 275.
This claim is adequately pleaded
because the Knopfs have alleged that Pursuit’s liabilities
exceed its assets and thus it is plausible that Pursuit intended
to incur debts beyond its ability to pay when it granted to
mortgage to MSF.
Accordingly, this claim may proceed.
Actual Fraudulent Conveyance
A conveyance is an actual fraudulent conveyance if made
“with actual intent . . . to hinder, delay, or defraud either
present or future creditors.”
N.Y. Debt. & Cred. Law § 276.
“Where actual intent to defraud creditors is proven, the
conveyance will be set aside regardless of the adequacy of
In re Sharp, 403 F.3d at 56 (citation
Because a claim under § 276 sounds in fraud, it must
satisfy the heightened pleading standards of Rule 9(b), Fed. R.
Id. at 56.
To satisfy the requirements of Rule 9(b), a
plaintiff must (1) detail the events giving rise to the fraud,
such as the statement/omission that is alleged to be fraudulent,
the identity of the speaker, the location of the fraud, and the
reason the statement is fraudulent and (2) allege facts “that
give rise to a strong inference of fraudulent intent.”
Fin. (Jersey) No. 3 Ltd. v. Wells Fargo Sec., LLC, 797 F.3d 160,
171 (2d Cir. 2015).
“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, i.e.,
circumstances so commonly associated with fraudulent transfers
that their presence gives rise to an inference of intent.”
re Sharp, 403 F.3d at 56.
Badges of fraud include, inter alia:
(1) a close relationship between the parties, (2) a questionable
transfer not in the usual course of business, (3) inadequacy of
consideration, (4) retention of control of the property by the
transferor after the conveyance, and (5) secrecy, haste, or
unusualness of the transaction.
The Knopfs have failed to adequately allege that the
issuance of a mortgage by Pursuit to MSF was made with the
actual intent to defraud the Knopfs.
As a threshold matter, the
Knopfs do not attempt to satisfy Rule 9(b) by alleging that a
specific statement made by Pursuit was fraudulent, and instead
rely on badges of fraud to plead their claim under § 276.
the allegations of badges of fraud, however, do not give rise to
a strong inference of fraudulent intent, as required by Rule
The Knopfs allege two badges of fraud.
First, they argue
that the mortgage to MSF was made with haste and secrecy because
of MSF’s litigation conduct in seeking a cancellation of the
Specifically, the Knopfs allege that the
motion to cancel the notice of pendency was filed by an order to
show cause on the Wednesday before Thanksgiving, served late
that day, and required an opposition to be filed the Monday
While this timing may reflect sharp
practice, these allegations are inadequate for two reasons.
First, the notice to show cause was signed by Justice Tingling,
and thus the deadlines for responding were adopted by the court.
But, more importantly, even if the notice of pendency had been
in place, it would not have barred the parties from consummating
Second, the Knopfs allege that Pursuit promised not to
encumber the Properties.
But, to plead a badge of fraud, the
Knopfs would have to allege misrepresentations or furtive
conduct in connection with the mortgage to MSF, not the previous
transactions between Pursuit and the Knopfs.
Because they have
not done so, this badge of fraud is not adequately alleged.
The Knopfs have alleged two badges of fraud, neither of
which is adequately pleaded.
Accordingly, the Knopfs have
failed to allege facts giving rise to a strong inference of
fraudulent intent as required by Rule 9(b), and have not stated
a claim under DCL § 276.
III. Permanent Injunction
The amended complaint contains a request for an injunction.
DCL § 279(a) provides that
[w]here a conveyance made or obligation incurred is
fraudulent as to a creditor whose claim has not
matured he may proceed in a court of competent
jurisdiction against any person against whom he could
have proceeded had his claim matured, and the court
may . . . [r]estrain the defendant from disposing of
or “[s]et aside the conveyance.”
N.Y. Debt. & Cred. Law §
Relying on the Rooker-Feldman doctrine, Pursuit seeks
to dismiss the claim for an injunction because of the ongoing
State Court Action. 7
In February 2016, Pursuit sold PHC to Michael Phillips for
$3,000,000. According to MSF, $650,000 of the sale proceeds
have been placed in escrow relative to MSF’s mortgage. MSF
believes the funds are being held in escrow pending the outcome
of this action.
The Rooker-Feldman doctrine “bars the federal courts from
exercising jurisdiction over claims brought by state-court
losers complaining of injuries caused by state-court judgments
rendered before the district court proceedings commenced and
inviting district court review and rejection of those
Sykes v. Mel S. Harris & Associates LLC, 780 F.3d
70, 94 (2d Cir. 2015) (citation omitted).
To satisfy the
requirements of Rooker-Feldman, a defendant must show (1) the
federal-court plaintiff must have lost in state court; (2) the
plaintiff must complain of injuries caused by a state-court
judgment; (3) the plaintiff must invite district court review
and rejection of that judgment; and (4) the state-court judgment
must have been rendered before the district court proceedings
Here, the Knopfs prevailed in state court and are not
complaining of injuries caused by a judgment in the State Court
They have alleged a fraudulent conveyance, a claim that
is distinct from the breach of contract claim in the State Court
Moreover, any injunction the Knopfs may receive will
only set aside a fraudulent conveyance or enjoin any future
As of now, there is no request for an
injunction that invites a district court review of any judgment
in the State Court Action.
Accordingly, abstention under the
Rooker-Feldman doctrine is not warranted.
The parties will be
given a further opportunity to address these issues in the event
the Knopfs show that they may be entitled to an injunction.
Pursuit argues that it should be awarded attorney’s fees
under 28 U.S.C. § 1927 due to the Knopfs’ improper litigation
strategy in this action.
“Any attorney . . . who so multiplies
the proceedings in any case unreasonably and vexatiously may be
required by the court to satisfy personally the excess costs,
expenses, and attorneys' fees reasonably incurred because of
28 U.S.C. § 1927.
An award of attorney’s fees
under § 1927 is appropriate “when there is a finding of conduct
constituting or akin to bad faith.”
Zurich Am. Ins. Co. v. Team
Tankers A.S., 811 F.3d 584, 591 (2d Cir. 2016) (citation
To constitute bad faith, “[t]he attorney's actions
must be so completely without merit as to require the conclusion
that they must have been undertaken for some improper purpose
such as delay.”
Id. (citation omitted).
The defendants may renew this motion at the conclusion of
the federal proceedings.
Until that time, this application is
MSF’s November 20, 2015 motion to dismiss is granted
insofar as the Knopfs’ claim for actual fraudulent conveyance is
The Knopfs’ claims for constructive fraudulent
conveyance may proceed.
New York, New York
March 22, 2016
United States District Judge
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