Opinion
Index No. 654563/2020 MOTION SEQ. Nos. 003 004 008
01-10-2023
LOLA UNLIMITED LLC, Plaintiff, v. KME HOLDINGS LLC, AK CAPITAL, LLC, THE ESTATE OF ANDREW KOWALCZYK, ELIZABETH KOWALCZYK, PETER MELO, WILLIAM BILLY LYNCH, ROBERT EPSTEIN, MICHAEL HIRSCHBERG, DAVID ROSENBLUM, COLIN SMITH, KURT RECHNER, EDWARD KOWALCZYK, and JOHN DOES 1-12 Defendants.
Unpublished Opinion
DECISION + ORDER ON MOTION
HON. ANDREA MASLEY, Judge.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 43, 44, 47, 53, 66, 136 were read on this motion to/for DISMISS
The following e-filed documents, listed by NYSCEF document number (Motion 004) 55, 56, 67, 82, 85, 86,87,88, 109, 120 were read on this motion to/for DISMISS
The following e-filed documents, listed by NYSCEF document number (Motion 008) 140, 141, 146, 147, 151,153,154,155,160,161 were read on this motion to/for DISMISS Upon the foregoing documents, it is
In motion sequence number 003, defendants Elizabeth Kowalczyk (Elizabeth) and The Estate of Andrew Kowalczyk (the Estate) (together, the Kowalczyk Defendants) move, pursuant to CPLR 3211 (a)(1) and (7), to dismiss plaintiff LOLA Unlimited LLC's (LOLAs) first amended complaint (FAC) as against them. (NYSCEF Doc. No. (NYSCEF) 131, FAC.) In motion sequence number 004, defendants KME Holdings, LLC (KME), AK Capital, LLC (AK), Peter Melo, and William "Billy" Lynch (together, the KME/AK Defendants) move, pursuant to CPLR 3211(a)(7), to dismiss defendant Edward Kowalczyk's (Edward's) cross claims as asserted against them. In motion sequence number 008, the KME/AK Defendants move, pursuant to CPLR 3211(a)(1) and (7), to dismiss the FAC as to all causes of action asserted against them.
The Kowalczyk Defendants submitted a motion to dismiss plaintiff's complaint filed on September 29, 2020 (NYSCEF 12, FAC) and subsequently elected to apply the motion to the first amended complaint. (See NYSCEF 136, Letter to Court.)
The FAC must be properly filed and labeled in NYSCEF, not as an exhibit to a motion to seal.
The KME/AK Defendants moved to dismiss the cross claims asserted by Edward in his answer to the complaint (NYSCEF 29, Verified Answer with Cross Claims) and later elected to apply the same motion to Edward's answer to the FAC. (NYSCEF 143, Letter to Court.)
During oral argument on motion sequence number 008, counsel for the KME/AK Defendants clarified that they are not moving to dismiss the seventh cause of action in the FAC with respect to allegations concerning a transfer of $4 million to the Class C Members (as defined below) (NYSCEF 161, tr. at 5:7-16) or the eighth claim in the FAC for breach of contract as against KME. (Id. at 6:7-16.)
In the FAC, plaintiffs allege eight causes of action: (1) breach of contract against KME and AK on a 2020 note; (2) actual and constructive fraud against KME; (3) actual and constructive fraud against AK; (4) actual and constructive fraud against the Kowalczyk Defendants, Melo, and Lynch; (5) negligent misrepresentation against the Kowalczyk Defendants and the KME/AK Defendants; (6) aiding and abetting fraud against the Kowalczyk Defendants, Melo, and Lynch; (7) fraudulent and/or voidable conveyances against all defendants pursuant to New York Debtor and Creditor Law §§ 273, 274, 276, 277, and 278; and (8) breach of contract against KME and AK on a 2018 note, in the alternative to the first cause of action. (NYSCEF 131.)
In his Verified Answer to the First Amended Complaint, Edward asserts four cross claims: (1) for breach of contract against KME; (2) for breach of contract against AK; (3) an unspecified claim concerning fraudulent transfers against all defendants; and (4) for attorneys' fees pursuant to Debtor and Creditor Law § 276-a against all defendants. (NYSCEF 137.)
Background
The court summarizes the facts from the 61-page complaint here. Unless otherwise indicated, the following facts are taken from FAC, and for the purposes of these motions to dismiss, are accepted as true.
KME is the parent company of AK, an investment firm founded by Andrew Kowalczyk (Andy) in 1998. (NYSCEF 131, FAC ¶¶ 25-26.) Plaintiff alleges that Melo and Lynch have "at all relevant times been equity members of [KME] and/or [AK]," and "assumed control over [KME and AK] as managing members . . ." (Id. ¶ 26.) Plaintiff further alleges that KME received equity investments from five individuals, Epstein, Hirschberg, Rosenblum, Smith, and Rechner (Class C Members). (Id.)
Saro Cutri, who worked as a securities trader (id. ¶ 30) formed plaintiff LOLA on January 19, 2018. (Id. ¶ 34.) Cutri met Andy while working at Paine Webber in 1999. (Id. ¶ 30.) In 2009 and 2010, Cutri formed Sirona Advisors, a trading firm, as a subsidiary of KME. (Id. ¶ 31.) After Cutri earned a "significant payout" from Sirona Advisors, Andy "persuaded [Cutri] to permit [KME] to retain $400,000 of that payout as a loan." (Id. ¶ 32.) KME paid that loan and beginning on June 16, 2011, Cutri made a series of loans to KME. (Id. ¶¶
-33.) Thereafter, Cutri agreed to restructure each of his loans to KME as they matured, and on January 19, 2018, formed plaintiff for this purpose. (Id. ¶¶ 33-34.)
KME executed a $3,500,000 "senior" promissory note in favor of plaintiff on April 1,2018 (the 2018 Note). (Id. ¶ 35; NYSCEF 13, 2018 Note at 2.) The 2018 Note included an interest rate of 14.25% and a maturity date of March 31, 2020. (NYSCEF 131, FAC ¶ 35; NYSCEF 13, 2018 Note.) The note provides that "[t]he Principal Amount shall be due and payable on the earlier to occur of (i) the Maturity Date; or (ii) upon five (5) business days written notice by Lender." (NYSCEF 131, FAC ¶ 36; NYSCEF 13, 2018 Note at 2.) The note also requires KME to provide a "1) current balance sheet of Borrower on an annual basis, 2) monthly FOCUS reports filed for [AK], 3) monthly unaudited profit and loss estimations for [AK]." (NYSCEF 131, FAC ¶ 36; NYSCEF 13, 2018 Note at 3.) Each of the interest payments on the 2018 Note was made on time, either by KME or AK. (NYSCEF 131, FAC ¶ 37.)
Exhibits to the FAC shall be filed separately. In the absence of properly filed exhibits to the FAC, the court relies on the exhibits filed with the initial complaint.
Page numbers refer to NYSCEF-assigned page numbers.
On December 20, 2019, Cutri requested financial reports required under the 2018 Note from Melo by email. (Id. ¶ 38.) Melo did not reply to Cutri's email or send the reports. (Id.) On December 23, 2019, Andy requested that plaintiff extend the maturity date on the 2018 Note to March 31, 2021, lower the interest rate, and extend the "liquidity period". (Id. ¶ 39.) Plaintiff responded that the principal amount of the note would have to be reduced. (Id. ¶ 40.) Plaintiff alleges that, in response, Andy represented that "2019 was the best year that [AK] had had since 2009" in which AK had generated revenue of approximately $25,000,000. (Id. ¶ 41.) Plaintiff further alleges Andy represented that "[AK's] 2019 revenues exceeded $14,000,000," "that it was 'very well capitalized'" and "that [KME and AK] had $7,000,000 in capital available to service its debt to [plaintiff]." (Id.) According to plaintiff, Cutri understood Andy's representation of capital to mean that there was cash available to service plaintiff's debt at a 2.0 coverage ratio. (Id.)
During the same conversation, Andy also represented that AK was "in a position to receive what he described as an 'unbelievable' collection of paintings by the artists Keith Haring and Jean-Michel Basquiat." (Id. ¶ 42.) Plaintiff further alleges Andy represented that AK "had been granted a substantial equity position in a company known as Chromatix," and this "would be a lucrative investment." (Id.) According to plaintiff, Andy represented that "Chromatix was valued at more than $100,000,000 and that he was assisting Chromatix with raising additional capital." (Id.) Cutri then agreed to continue negotiating a restructuring of the 2018 Note. (Id. ¶ 43.)
Cutri again requested the financial reports required under the 2018 Note on February 21, 2020, but Melo did not respond. (Id. 44.) Cutri advised that KME had not provided reports for approximately 2 years. (Id.) Andy replied after another email from Cutri on March 2, 2020, that Melo would send the reports when an audit then in-progress was completed, but Melo never did. (Id. ¶ 45.) Andy then sent an email on March 3, 2020, titled "2020 State of the Union for AK Capital" again representing that 2019 was the "'best year since 2009'" and that AK had achieved $13,000,000 in revenue that year, which was $1,000,000 less than what he had previously represented to Cutri in December. (Id. ¶ 46.) Andy further represented that AK had been "'afforded the opportunity to make some direct investments,' including 'an equity stake in Chromatix,' and had 'secured' a twenty-seven percent (27%) stake in a 'large modern art collection by artists Jean Michel Basquiatand Keith Haring.'" (Id.) Plaintiff alleges this email was "a substantial driver" in his decision not to demand payment of the principal amount on the 2018 Note.
On March 16, 2020, after a state of emergency was declared in New York due to the COVID-19 pandemic, plaintiff alleges that Andy represented to Cutri that "despite pervasive market volatility - the firm was positioned to take advantage of the market disruption due to the fact it did not carry a large position and could earn a larger bid/offer spread on trades." (Id. ¶¶ 47-48.) Plaintiff alleges Andy also represented that certain of KME's investors, who Cutri later learned were the Class C Members, "were actually considering increasing their investable capital, so that they could take advantage of opportunities that they believed would result from the market disruption." (Id. ¶ 48.) Plaintiff alleges that if this were true, it would raise KME and AK's profitability and increase their ability to repay plaintiff's loan. (Id.)
During their conversation, Cutri suggested reducing the principal amount of plaintiff's loan by $500,000. (Id. ¶ 49.) Andy proposed a reduction of $250,000. (Id.) Plaintiff alleges that, in response, Andy represented that KME and AK were "'positioned to crush it' in 2020" and "encouraged [Cutri] to come back to the firm to take advantage of the market volatility in a trading position as he had in the past. . ." (Id.) Andy also represented that KME and AK had $7,000,000 in capital to service plaintiff's debt, which meant a debt coverage ratio of 2.0 on plaintiff's loan. (Id.)
Plaintiff alleges that Andy failed to disclose that the capital he represented included the equity contributions of the Class C Members, and that Andy had been permitting, and would continue to permit, them to withdraw their capital on demand. (Id. II 50.) Plaintiff alleges that [according to [Epstein], in November 2019, the Class C Members had demanded the return of all of their capital 'as soon as possible'" and "[i]n December 2019, [KME and AK] had distributed $1.5 million to the Class C Members and, in January 2020, another $1.6 million" and "would soon permit the Class C Members to withdraw another $4,000,000 in capital in June 2020." (Id.) Plaintiff alleges that Cutri was never given any materials related to the Class C Members. (Id. ¶ 51.)
Cutri messaged Andy in late March of 2020 and requested a call but Andy did not respond. (Id. ¶ 52.) Plaintiff then messaged Melo on March 25, 2020, requesting a call to discuss "the markets and their impact on the [2018 Note]." (Id. ¶ 53.) Cutri also requested that Melo provide the financial reports required under the 2018 Note and expressed his concern about refunding the 2018 Note due to market volatility, KME and AK's silence, and the note's impending maturity date. (Id.) Melo advised Cutri that Andy had contracted COVID-19 and was in the hospital. (Id. ¶ 54.)
During the same conversation, Melo and Cutri discussed the 2018 Note, and Cutri relayed his conversation with Andy about reducing plaintiff's principal loan. (Id. ¶ 55.) Melo noted complications in KME's dealings with Pershing, KME's and AK's clearing agent, and requested to stagger the payments on the note. (Id.) Plaintiff alleges Melo told Cutri that KME and AK "had approximately $6,250,000 of capital," which meant a debt coverage ratio of 1.8, that KME and AK's "financial reports were 'solid,' and that [KME and AK's] capital and trading positions were 'extremely solid.'" (Id. ¶ 55.) Plaintiff alleges that based on those representations, Cutri "tentatively agreed to reduce the principal amount on the restructured note by $250,000 on March 31, 2020 and hold the interest rate at fourteen and a quarter percent (14.25%)." (Id. ¶ 56.) On March 27, 2020, Melo sent Cutri an email reiterating the terms discussed and a draft restructured promissory note. (Id. ¶ 57.)
Andy died on April 6, 2020. (Id. ¶ 58.) On April 9, 2020, Cutri and Melo had a phone conference and Cutri requested a reduction of the loan to $1,500,000 or $2,000,000 "immediately or as soon as possible, given Andy's passing and the increased risk attendant to a change in leadership." (Id. ¶ 59.) Plaintiff alleges Melo represented "in form and in substance, that the 'funding position' at [AK] was 'strong,' that the 'markets were calming down,' and that Plaintiff's 'money was safe.'" (Id.)
Plaintiff alleges that within a week or so after Cutri's conversation with Melo, he had a discussion with Elizabeth and Melo. (Id. ¶ 60.) Cutri repeated his request to reduce the loan amount. (Id.) Plaintiff alleges Elizabeth represented that she and KME and AK "were committed to paying [KME and AK's] creditors," including plaintiff and Andy's parents, that "she had authorized [ ] Melo and Lynch, at her direction, to control the affairs of [KME and AK] following Andy's passing, including as it regards the [2018 Note]," and that Melo and Lynch were "'great' and that she 'trusted them completely' as they had been 'loyal coworkers and partners of her husband' for over 20 years." (Id.) Plaintiff alleges Elizabeth also represented that KME and AK "had been a profitable endeavor for 20 years," that "she planned to keep the business going, in order to support the 10 families associated with it, including her own," that KME and AK "were an integral part of her own assets and those of her family members" and that KME and AK "would 'never walk away' from [their] debt to plaintiff or Andy's parents . . ." (Id.)
On another phone conference on April 15, 2020, plaintiff alleges Melo represented that "'everyone'" at KME and AK "was committed to furthering Andy's legacy and continuing to grow the firm," that the Class C Members "planned to keep their capital in KME," that KME and AK "had approximately $5,250,000 in capital to service plaintiff's debt," representing a coverage ratio of 1.6, that they had made approximately $600,000 in March of 2020, and April of 2020 "was trending to be a 'very strong' month." (Id. ¶ 61.) Cutri expressed his concern about the size of plaintiff's loan to KME, and his discomfort with plaintiff's risk exposure, and again requested to reduce the principal amount of the loan. (Id. ¶ 62.) Melo said that he would discuss a plan for repayment with Lynch and Elizabeth. (Id.) Melo told Cutri that immediate repayment was not ideal for KME and AK because COVID-19 had made the markets very illiquid and requested Cutri's flexibility. (Id.) Cutri agreed to consider if KME repaid the 2018 Note as soon as possible. (Id.)
In emails dated April 15-16, 2020, Cutri and Melo confirmed their discussion. (Id. II 63.) Cutri repeated his discomfort and intention "to reduce the size of the [2018 Note] down to $1.5mm or $2.0mm as soon as possible - but in a way that would not disrupt any of the business AK is doing." (Id.) Melo countered and stated "'the firm's business lines remain fully operational and we are experiencing robust trading activity due to the current volatility in the market.'" (Id.)
Plaintiff alleges that Melo further confirmed by email that he said:
'[The Class C Members] are monitoring the market/bonds/arrangement but that they have not requested return of capital nor have they implied
they might at any point. There is a heightened awareness of the relationship given Andy's passing.
We discussed that [the Class C Members] are being very supportive and that right now we're working with them to review the existing inventory to evaluate the current marks from Pershing and how much higher we think the collateral should realistically trade.'(Id. ¶ 64.)
Plaintiff alleges Melo's representations were "egregiously false." (Id. ¶ 65.) Plaintiff alleges that KME had already paid about $3,100,000 to the Class C Members using AK's funds, and he was not aware of this. (Id.) The Class C Members had also demanded the return of "'all' of their capital 'as soon as possible'" by the time Melo made this representation. (Id. ¶ 66.) Plaintiff alleges that "[a]t a meeting with Andy and [Melo] in or around November 2019, Mr. Epstein demanded that [AK] return 'all' of the Class C Members' investment 'as fast as you can,' in $2 million quarterly increments concluding in late-2020." (Id.) According to plaintiff, the Class C Members believed AK had wrongly paid itself from MBS trading platform proceeds, before paying the Class C Members. (Id.)
Plaintiff alleges that Mr. Epstein sent a demand to Melo on April 20, 2020 on behalf of the Class C Members demanding the return of $3 million, with additional funds later. (Id. ¶ 67.) After negotiations, during which the Class C Members increased their demand to $5 million, a distribution of $4 million was scheduled in June of 2020, meaning the Class C Members would receive a total of $7.1 million for their $8 million investment. (Id.) Plaintiff alleges that "[b]y April 30, 2020, [Melo] was making plans for the complete removal of the Class C Members from [AK's] operations." (Id. ¶ 68.) Plaintiff alleges Melo "advised that he needed to start 'figuring out what it will look like to have the Class C Members withdraw from the holding company'" and he "assumed that he would 'need some type of separation agreement,' and expressed a goal of having 'everything worked out over the next couple of weeks.'" (Id.) This information was never disclosed to Cutri. (Id. ¶ 70.) Plaintiff alleges that it would have enforced the 2018 Note, rather than restructuring, had Cutri known about the plan to return the Class C Members' investment. (Id. ¶ 72.)
On April 21, 2020, Melo proposed a plan to repay the 2018 Note and represented that KME would try to repay the principal even faster if profitability allowed. (Id. ¶ 73.) Melo also committed to repaying the loan down to $2,000,000 by October 1, 2021. (Id.) Cutri requested higher quarterly payments and weekly calls with Melo to discuss KME and AK's financial condition. (Id. ¶ 74.) Cutri "advised that then, especially given the circumstances, 'communication is key.'" (Id.) Cutri and Melo then "preliminarily agreed" on restructuring terms. (Id. ¶ 75.) Plaintiff alleges that Elizabeth was appointed legal representative of the Estate on May 5, 2020. (Id. ¶ 76.) Melo sent the signed note to Cutri on May 8, 2020. (Id. ¶ 77.) Cutri alleges he would not have agreed to the 2020 Note, had the KME/AK Defendants or the Kowalczyk Defendants disclosed the transfer of capital to the Class C Members, that the capital represented included the Class C Members' investments, or that AK had been requested to and planned to transfer $4,000,000 to the Class C Members in May of 2020. (Id. ¶ 78.)
The note states a principal amount of $3,250,000, an interest rate of 14.25%, a maturity date of October 1, 2021, and an effective date of April 1, 2020 (the 2020 Note). (Id. ¶ 79; NYSCEF 14, 2020 Note at 2.) The 2020 Note states that "[t]he Principal Amount, or a portion thereof, shall be due and payable on the earlier to occur of (i) the Principal Repayment Schedule listed on Exhibit 'B'; (ii) the Maturity Date; or (iii) upon thirty (30) business days written notice to Lender" and "[n]othwithstanding the prior clause, the Lender agrees not to request a return of principal for a minimum of ninety (90) days from the Effective Date hereof." (NYSCEF 131, FAC ¶ 80; NYSCEF 14, 2020 Note at 2.) The 2020 Note also requires "documents related to financial condition of Borrower and its subsidiaries," and "a daily reconciliation report of the outstanding equity position of [AK], as provided by its clearing agent. . ." (the Pershing Report). (NYSCEF 131, FAC ¶ 85.) KME made interest payments to plaintiff pursuant to the 2020 Note on May 1, 2020, June 1, 2020, and July 2, 2020. (Id. ¶ 87.)
Cutri and Melo agreed to have phone conferences every Wednesday at noon to discuss the financial condition of KME and AK, and that Melo would circulate the financial reports required under the 2020 Note in advance of each call. (Id. ¶ 88.) Plaintiff alleges that Melo continued to conceal the plans to return $4 million to the Class C Members and misrepresent the capital available to service plaintiff's debt. (Id. ¶¶ 88-96.) On June 4, 2020, Cutri received the Pershing Report for AK which showed that AK had lost more than $4,000,000 in capital in a week. (Id. ¶ 97.) Plaintiff alleges, based on a letter sent by counsel for KME on July 13, 2020 (NYSCEF 17, the July 13, 2020 Letter), that this transfer would have occurred on May 31, 2020. (Id. ¶ 125.) During a call that day with Lynch, Melo, and Cutri, Lynch told Cutri that the Class C Members had demanded the return of their capital. (Id. ¶ 98-99.) Plaintiff alleges that by paying the Class C Members, KME's capital was reduced to $2,064,000 and "upon information and belief," based on the July 13, 2020 Letter, KME was insolvent at the time of the transfer or became insolvent shortly thereafter. (Id. ¶¶ 100, 127.) Plaintiff further alleges based on the July 13, 2020, Letter that the transfers to the Class C Members were prohibited by KME's Operating and Investing Agreements. (Id. ¶ 129.)
Lynch also told Cutri during the June 4, 2020, call that "Andy had made a number of 'bad investments'" and that KME, AK, the Estate, Elizabeth, Melo, and Lynch "had been aware of those bad investments all along." (Id. ¶ 102.) Lynch could not specifically identify the "bad investments" and Lynch and Melo would not comment on the status of the assets that Andy had previously told Cutri about. (Id.) Melo and Lynch told Cutri that Elizabeth had been "'apprised of everything'" and had approved the transfers to the Class C Members. (Id. ¶ 103.) Plaintiff also alleges that Melo testified during a deposition that he approved the June 2020 transfers to the Class C Members. (Id. ¶ 104.)
During a call on June 5, 2020, with Melo and Elizabeth, plaintiff alleges Elizabeth continued to assure Cutri that they would repay the debt and continue the business. (Id. ¶¶ 105-107.) Cutri and Melo continued to have status calls through June, in which Melo represented that "'all lines' were 'doing well'" and Cutri told Melo that no money could leave the firm without his knowing. (Id. ¶¶ 108-112.) On June 17, 2020, Cutri inquired about a decrease in capital of $300,000 since the prior week, and Melo represented that this was the payment of "'mid-cycle commissions' and 'bills' that he claimed had 'accrued.'" (Id. ¶ 109.) Melo also told Cutri that the Class C Members requested another $900,000. (Id. ¶ 110.)
On July 1, 2020, Melo told Cutri that KME would not pay the first principal payment due to plaintiff under the 2020 Note. (Id. ¶ 114.) Cutri later declared a default under the note and sent a notice to KME. (Id. ¶ 118-119.) Plaintiff alleges that the entire principal amount became due on August 13, 2020, that plaintiff has not been paid any amount due under the 2020 Note as of the date of the FAC, and that unpaid interest has accrued in the amount of $77,645.80 as of September 1, 2020. (Id. ¶¶ 122-123.)
Discussion
On a motion to dismiss pursuant to CPLR 3211 (a)(7), the court must "accept the facts as alleged in the complaint as true, accord plaintiffs the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory." (Leon v Martinez, 84 N.Y.2d 83, 87-88 [1994] [citation omitted].) "[B]are legal conclusions as well as factual claims which are either inherently incredible or flatly contradicted by documentary evidence" cannot survive a motion to dismiss. (Summit Solomon & Feldesman v Lacher, 212 A.D.2d 487 [1st Dept 1995] [citation omitted].)
To prevail on a CPLR 3211 (a)(1) motion to dismiss, the movant has the "burden of showing that the relied-upon documentary evidence resolves all factual issues as a matter of law, and conclusively disposes of the plaintiffs claim." (Fortis Fin. Servs. v Filmat Futures USA, 290 A.D.2d 383, 383 [1st Dept 2002] [internal quotation marks and citation omitted].) "A cause of action may be dismissed under CPLR 3211 (a)(1) only where the documentary evidence utterly refutes [the] plaintiffs factual allegations, conclusively establishing a defense as a matter of law." (Art and Fashion Group Corp. v Cyclops Prod., Inc., 120 A.D.3d 436, 438 [1st Dept 2014] [internal quotation marks and citation omitted].)
Motion Sequence Number 008-The KME/AK Defendants' Motion to Dismiss the Complaint
The court declines to address plaintiffs procedurally improper request for summary judgment on the 2020 Note. (See CPLR 3212[a] ["Any party may move for summary judgment in any action, after issue has been joined..."]; Shaibani v Soraya, 71 A.D.3d 1121, 1121 [2d Dept 2010] ["Joinder of issue requires the service of a complaint by the plaintiff and an answer or counterclaim by the defendant."])
I. First and Eighth Causes of Action for Breach of the 2020 Note and 2018 Note
KME moves to dismiss the first cause of action for breach of the 2020 Note on the basis that Elizabeth did not have authority to sign it at the time she did. LOLA alleges that the "effective date" of the 2020 Note was April 1, 2020. (NYSCEF 131, FAC ¶ 79; NYSCEF 14, 2020 Note.) On the signature line of the 2020 Note, Elizabeth "executed and delivered" the note in her capacity "as Personal Representative of The Estate of Andrew Kowalczyk, its Member" as of April 1, 2020. (NYSCEF 14, 2020 Note.) However, Andy passed away on April 6, 2020. (NYSCEFF 131, ¶ 168.) Indeed, LOLA concedes that Mrs. Kowalczyk was not granted "control over KME" until after April 6, 2020. (Id.) Therefore, KME argues that Elizabeth could not have been the personal representative of Andy's estate on April 1, 2020. However, plaintiff alleges that Elizabeth executed the 2020 Note on May 7, 2020, despite its April 1 effective date. (NYSCEF 131, FAC ¶¶ 76, 77.) Therefore, an issue of fact exists that cannot be resolved on this motion to dismiss as stated on the record on May 20, 2022. (NYSCEF 161, tr. 44:9-16.)
AK moves to dismiss the first and eighth causes of action on the basis that AK did not sign either note and is not an alter ego of KME as plaintiff alleges. For alter ego liability, plaintiff must allege: "(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury.'" (Skanska USA Bldg. Inc. vAtl. Yards B2 Owner, LLC, 146 A.D.3d 1, 12 [1st Dept 2016], aff'd, 31 N.Y.3d [2018] [citation omitted].) Plaintiff alleges Andy's domination and his use of AK for an improper purpose to do wrong against plaintiff. (NYSCEF 131, FAC ¶¶ 148-165.) Specifically, as to domination, plaintiff alleges that Andy was not a member of AK, but AK paid Andy's "travel and entertainment expenses, personal expenses, and American Express charges, and then 'reclassified them' as a 'loan to member' each year. According to Mr. Melo, 'at various points throughout the year, a portion of the Loan to Member account would be written off as a capital withdrawal.'" and "[t]here were and are no loan documents evidencing this arrangement." (Id. ¶¶ 150, 152.) Plaintiff also asserts AK's undercapitalization. (NYSCEF 131, FAC ¶ 171.) Plaintiff also asserts that these payments and the withdrawals of capital by the Class C Members constitute fraudulent and voidable conveyances. However, as discussed below, the Seventh Cause of Action is dismissed with leave to replead. Therefore, KME's motion to dismiss the first cause of action is denied, but AK's motion to dismiss the first and eighth causes of action is granted.
While the court sustained the claim for alter ego on the record, it did so before examining the fraudulent conveyance claim. (NYSCEF 161, tr. at 44:9-16; 45:13-19.)
II. Second through Sixth Causes of Action for Fraud and Negligent Misrepresentation against the KME/AK Defendants
A. Actual Fraud
The KME/AK Defendants assert that plaintiff's claims for actual fraud fail because (1) plaintiff mischaracterizes the parties' conversations, and documents submitted by the KME/AK Defendants provide otherwise; (2) the alleged misrepresentations and omissions that occurred after the 2020 LOLA Note was executed and delivered to Cutri are not actionable; (3) many of plaintiff's alleged misrepresentations are not actionable as statements of opinion or future expectation; (4) plaintiff has not adequately pled that the KME/AK Defendants' statements were false or that they knew they were false; (5) plaintiff has not pled scienter; (6) plaintiff has failed to adequately allege justifiable reliance; and (7) plaintiff fails to allege any injury caused by defendants' fraud.
The Court also addresses arguments made by the Kowalczyk Defendants in motion sequence number 003 here, as well, since the KME/AK Defendants expressly incorporate these in their own brief. (NYSCEF 141, Memorandum of Law at 15, n. 3.)
"To state a cause of action for fraud, a plaintiff must allege a representation of material fact, the falsity of the representation, knowledge by the party making the representation that it was false when made, justifiable reliance by the plaintiff and resulting injury." (Kaufman v Cohen, 307 A.D.2d 113, 119 [1st Dept 2003] [citation omitted].) "When a plaintiff brings a cause of action based upon fraud, 'the circumstances constituting the wrong shall be stated in detail.'" (Sargiss v Magarelli, 12 N.Y.3d 527, 530 [2009] [quoting CPLR 3016(b)].)
Representations Made After Plaintiff's Execution of the 2020 LOLA Note
To the extent plaintiff alleges misrepresentations or omissions that were made after plaintiff executed the 2020 Note, specifically in paragraphs 90-93, 102, 108, and 111-12 of the FAC, these cannot form the basis for any of plaintiff's fraud claims. (See RKA Film Fin., LLC v Kavanaugh, 171 A.D.3d 678, 679 [1st Dept 2019] [dismissing fraud claim against defendants where "[t]he alleged misrepresentations attributed to [them] were made after plaintiff had already invested in Relativity, precluding a conclusion that they induced plaintiff to engage in the transaction."]; High Tides, LLC v DeMichele, 88 A.D.3d 954, 958 [2d Dept 2011] [finding "allegations of fraudulent misrepresentations and omissions which occurred after" the transactions plaintiff alleged it was fraudulently induced to enter into "may not form the basis for the plaintiff's fraud claims . . . since the element of reliance is necessarily absent.")
Plaintiff argues that the alleged post-May 8th fraudulent activities were intended to persuade plaintiff not to sue or call the 2020 Note by covering up the prior lies. But plaintiff even admits that it could not have called the note until June 30, 2020 and plaintiff alleges that the KME/AK Defendants revealed the fraud on June 4, 2020. (NYSCEF 131, FAC ¶ 99.) In any event, the FAC contains no such claim of forbearance and plaintiff cannot now assert one. Plaintiff also argues that its post-May 8th allegations are meant to provide circumstantial evidence of the KME/AK Defendants' prior fraud. Plaintiffs allegations concerning the post-May 8th representations need not be stricken at this time-and the KME/AK Defendants do not argue they should be- however, they cannot support the misrepresentation or reliance elements of plaintiffs fraud and negligent misrepresentation claims.
As stated on the record, because the only alleged representation made by Lynch occurred after plaintiff executed the 2020 LOLA Note, to the extent plaintiff alleges fraudulent inducement as to Lynch, that claim is dismissed. (NYSCEF 161, tr at 44:17-45:9.) The KME/AK Defendants also argue that the only omissions alleged against Lynch occurred after the 2020 Note was executed and therefore, any fraud based on omission against Lynch should also be dismissed. As plaintiff fails to respond to this argument, plaintiffs fraud claims against Lynch are dismissed in their entirety.
Misrepresentations
While several of the misrepresentations alleged in the FAC are not actionable, as set forth below, plaintiff does allege actionable misrepresentations. "Absent a present intention to deceive, a statement of future intentions, promises or expectations is not actionable on the grounds of fraud." (Non-Linear Trading Co. v Braddis Assocs., Inc., 243 A.D.2d 107, 118 [1st Dept 1998] [quotations and citation omitted].) However, "[a]n expression or prediction as to some future event, known by the author to be false or made despite the anticipation that the event will not occur, is deemed a statement of a material existing fact, sufficient to support a fraud action." (Cristallina S.A. v Christie, Manson & Woods Int'l, Inc., 117 A.D.2d 284, 294-95 [1st Dept 1986] [internal quotations and citation omitted].)
While the KME/AK Defendants address statements made by Elizabeth in their brief, the court addresses these in its decision on motion sequence number 003 below.
The KME/AK Defendants argue that certain statements concerning performance of KME's and AK's businesses are not actionable. Andy's statement that "despite pervasive market volatility - the firm was positioned to take advantage of the market disruption due to the fact it did not carry a large position and could earn a larger bid/offer spread on trades" (id. ¶ 48) is actionable, because it is a false representation of KME and AK's then present finances and abilities. (See Aris Multi-Strategy Offshore Fund, Ltd. v Devaney, 26 Misc.3d 1221 [A] *3 [Sup Ct, NY County 2009] [finding statements that "[funds] were positioned to profit from a continued downturn in the ABS and MBS markets when, in fact, they were positioned to experience significant losses" were actionable].) Moreover, Melo's representation, that "'the firm's business lines remain fully operational and we are experiencing robust trading activity due to the current volatility in the market'" (NYSCEF 131, FAC ¶ 63) is a representation of the present state of the company, not opinion or an expectation of future performance.
Additionally, Andy and Melo's misrepresentations that investors were "considering increasing their investible capital," (id. ¶ 48) and "planned to keep their capital in [KME]" (id. ¶ 61), are actionable. (See ACA Fin. Guar. Corp. v Goldman, Sachs & Co., 25 N.Y.3d 1043, 1044 [2015] [finding plaintiff stated fraud claim based on allegations that "defendant affirmatively misrepresented to plaintiff that Paulson would be the equity investor in ABACUS" and "defendant fraudulently concealed the fact that [Paulson] . . . planned to take a 'short' position in ABACUS, thereby intentionally exposing plaintiff to substantial liability."])
Plaintiff has also sufficiently alleged facts from which it can be inferred that these representations were false and that the KME/AK Defendants knew they were false when they were made. For example, plaintiff alleges that "[according to Mr. Epstein, in November 2019, the Class C Members had demanded the return of all of their capital 'as soon as possible.'" (NYSCEF 131, FAC, ¶ 50.) Thus, plaintiff alleges sufficient facts to infer that, at the time Andy and Melo represented that investors were considering increasing or keeping their capital in KME, they knew these representations were false. (Houbigant, Inc. v Deloitte & Touche LLP, 303 A.D.2d 92, 99 [1st Dept 2003] [A plaintiff "need only allege specific facts from which it is possible to infer defendant's knowledge of the falsity of its statements."].) This allegation also creates a reasonable inference that Andy knew his representations that KME was positioned to take advantage of market disruptions in 2020 were false, as the Class C Members' withdrawals would hinder its ability to do so.
While the parties have engaged in some discovery to date, some of which plaintiff incorporates in the FAC, the Court applies the standard applicable to a pre-discovery motion here. (William Doyle Galleries, Inc. v Stettner, 167 A.D.3d 501, 504 [1st Dept 2018] ["[A]ctual knowledge need only be pleaded generally . . . particularly at the prediscovery stage, [since] a plaintiff lacks access to the very discovery materials which would illuminate a defendant's state of mind."] [quotations and citations omitted].)
Moreover, plaintiff has alleged other misrepresentations which the KME/AK Defendants do not challenge, including, by way of example, representations by Andy that "2019 was the best year that [AK] had had since 2009" (NYSCEF 131, FAC ¶¶ 41, 46); by both Melo and Andy that KME was sufficiently capitalized to repay the debt (id. ¶¶ 41, 49, 55, 61), and representations by Melo about the Class C Members (id. ¶ 64).
For the same reasons, plaintiff has also, contrary to the KME/AK Defendants' arguments, adequately alleged scienter. (See Seaview Mezzanine Fund, LP v Ramson, 77 A.D.3d 567, 568 [1st Dept 2010] [finding scienter was adequately pled where "plaintiff alleged that [accountant defendants], inter alia, knowingly made false representations regarding the finances of [entity defendants] . . ."])
Certain of the alleged misrepresentations however are not actionable. For example, while representations that the companies actually did make an investment in Chromatix and acquired an art collection, (NYSCEF 131, FAC ¶¶ 42, 46) are statements of present facts, statements that the companies were "in a position" to acquire art (id. ¶ 42), are not actionable. (See ESBE Holdings, Inc. v Vanquish Acquisition Partners, LLC, 50 A.D.3d 397, 398 [1st Dept 2008] ["Claims based upon defendants' projections of returns on investment, such as the expected acquisition of the Orient Cruise Lines and the projected Southeast Cruise Holdings acquisitions, are not actionable . . ."])
Moreover, plaintiff fails to allege facts creating any inference that Andy did not actually have AK invest in Chromatix or art. Plaintiff alleges that in June of 2020, Lynch advised Cutri that "Andy had made a number of 'bad investments'" but when asked about Chromatix and the art collection, "[n]either [Lynch] nor [Melo] would or could comment on the status of those assets." (Id. ¶ 102.) Plaintiff further alleges that "[i]n or around September 2020, [KME] advised Plaintiff that it had virtually no assets of its own aside from its ownership of AK Capital." (Id. ¶ 142.) At most, these statements suggest that Andy made investments which turned out to be poor ones, not that he did not make them. It does, however, suggest that Andy's representation of the value of those investments was false. Thus, plaintiff can only rely on these representations in support of its fraud or negligent misrepresentation claims to this extent.
Finally, while specific statements about the companies' current capital and revenue are actionable (see, e.g. NYSCEF 131, FAC ¶¶ 41, 60-62), general statements that the company's financials or trading positions were "'solid,'" "'extremely solid,'" "'strong'" or that plaintiff's "'money was safe'" (NYSCEF 131, FAC ¶¶ 55, 58, 59); Andy's representation that KME and AKwere "'positioned to crush it'" in 2020 and that Cutri should come back to the firm to take advantage of the market volatility (id. ¶ 49); and Melo's statement that "that April 2020 was trending to be another 'very strong' month" (id. ¶ 61) are too general and speculative to be relied upon. (See Bader v Siegel, 238 A.D.2d 272, 272 [1st Dept 1997] [dismissing fraud claim based on representation "in the nature of opinion or puffery incapable of being proved true or false."]) Melo's representation that the "'markets were calming down'" is similarly not actionable. (NYSCEF 131, FAC ¶ 55.) Finally, Melo's representation in paragraph 60 that "'everyone' at [KME and AK] was committed to furthering Andy's legacy and continuing to grow the firm" merely "amounts to [a] vague expression[] of hope and future expectation, which [is] insufficient to support a claim of fraud." (See U.S. Bank Nat'l Ass'n v Kahn Prop. Owner, LLC, 206 A.D.3d 851, 855 [2d Dept 2022].)
Justifiable Reliance
Plaintiff's fraud claims ultimately fail because plaintiff does not adequately allege justifiable reliance. Generally, "[w]hether [a] plaintiff could justifiably rely on [a] false representation is an issue of fact." Gonzalez v 40 W. Burnside Ave. LLC, 107 A.D.3d 542, 544 [1st Dept 2013] [citation omitted]; see also Brunetti v Musallam, 11 A.D.3d 280, 281 [1st Dept 2004] ["The issues of material misrepresentation and reasonable reliance, essential elements of a fraud claim, are not subject to summary disposition."]) Nevertheless, "[a]s a matter of law, a sophisticated plaintiff cannot establish that it entered into an arm's length transaction in justifiable reliance on alleged misrepresentations if that plaintiff failed to make use of the means of verification that were available to it, such as reviewing the files of the other parties." (LIST Priv. Equity Invs. Fund, Inc. v Salomon Smith Barney, 288 A.D.2d 87, 88 [1st Dept 2001].)
The KME/AK Defendants, citing Centro Empresarial Cempresa S.A. v Am. Movil, S.A.B. de C.V., assert that plaintiff, as a sophisticated entity, had a "heightened degree of diligence" because it knew it had not received the financial information that it was entitled to under the note. (17 N.Y.3d 269, 279 [2011].) In Centro, the court found that a release in the parties' contract barred plaintiff's fraudulent inducement claim because "plaintiffs knew that defendants had not supplied them with the financial information necessary to properly value the TWE units, and that they were entitled to that information" but "they chose to cash out their interests and release defendants from fraud claims without demanding either access to the information or assurances as to its accuracy in the form of representations and warranties." (Id. at 279.)
Plaintiff fails to address Centro other than to say that it did take steps to protect itself and defendants misrepresented the status of the Class C Members and the available capital. Unlike Centro, the 2020 Note did not contain any release. (See id.; see also Pappas v Tzolis, 20 N.Y.3d 228, 233 [2012] [dismissing fraudulent inducement claim where "plaintiffs 'in the plainest language announced and stipulated that [they were] not relying on any representations as to the very matter as to which [they] now claim[ ] [they were] defrauded'".] [internal quotations and citations omitted].) However, plaintiff alleges that, during the negotiation of the 2020 Note, plaintiff requested additional financial reports on December 20, 2019; February 21, 2020; March 2, 2020; and March 25, 2020 that were not provided. (NYSCEF 131, FAC ¶¶ 38, 44-45, 53). As in Centro, plaintiff allegedly knew that it had not been supplied with the financial information it requested before it entered into the 2020 Note, but entered into the 2020 Note anyway.
Injury
Finally, plaintiff fails to sufficiently allege injury caused by the KME/AK Defendants' fraud. "To establish causation, [a] plaintiff must show both that defendant's misrepresentation induced plaintiff to engage in the transaction in question (transaction causation) and that the misrepresentations directly caused the loss about which plaintiff complains (loss causation)." (Laub v Faessel, 297 A.D.2d 28, 31 [2002].) Plaintiff alleges that absent the KME/AK Defendants' fraudulent misrepresentations about their available capital, plaintiff would not have restructured the 2018 Note, but rather, would have enforced that note, before defendants paid the Class C Members their remaining equity.
As determined on the record, these allegations are sufficient to state an injury separate from the breach of contract. (NYSCEF 161, tr. 16:16-21.) Neither note requires plaintiff to be paid before the Class C Members and thus paying them first would not be a breach of contract. Even though plaintiff can only ultimately collect damages on either the fraud or the breach of contract claims, plaintiff has alleged sufficient facts of a separate injury for its fraud claims. (See Shear Enter., LLC v Cohen, 189 A.D.3d 423, 424 [1st Dept 2020] [finding dismissal of fraud claim improper where plaintiffs allegations supported a non-duplicative fraud claim, even if "the damages are the same under either theory."])
Nevertheless, the KME/AK Defendants also assert that plaintiff has not alleged any loss as a result of the fraud because plaintiff had already loaned the money to KME. Similarly, the Kowalczyk Defendants argue that plaintiff has not sufficiently alleged loss causation, because it did not accelerate the debt under the 2020 Note until a month after it learned of the payment to the Class C Members and plaintiff fails to allege that it would have been paid had it enforced the 2018 Note. Plaintiff fails to address these arguments.
Therefore, the actual fraud claims are dismissed against the KME/AK defendants.
B. Constructive Fraud and Negligent Misrepresentation
The KME/AK Defendants argue that plaintiffs claims for constructive fraud and negligent misrepresentation fail because plaintiff has not alleged the existence of a fiduciary or confidential relationship. "The elements of a cause of action to recover for constructive fraud are the same as those to recover for actual fraud with the crucial exception that the element of scienter upon the part of the defendant, his knowledge of the falsity of his representation, is dropped." Brown v Lockwood, 76 A.D.2d 721, 731 [2d Dept 1980] [citation omitted].) Instead, a plaintiff must demonstrate "the existence of a fiduciary or confidential relationship warranting the trusting party to repose his confidence in the defendant and therefore to relax the care and vigilance he would ordinarily exercise in the circumstances." (Id. [citation omitted].) Similarly, a negligent misrepresentation claim requires "a special or privity-like relationship imposing a duty on the defendant to impart correct information." (See Mandarin Trading Ltd. v Wildenstein, 16 N.Y.3d 173, 180 [2011] [quotations and citations omitted].)
"A fiduciary relation exists when confidence is reposed on one side and there is resulting superiority and influence on the other." (Roni LLC v Arfa, 18 N.Y.3d 846, 848 [2011] [internal quotations and citation omitted].) "As a general matter, an arms' length lender-borrower or creditor-debtor contractual relationship may not give rise to a fiduciary obligation on the part of the lender or creditor." (Wiener v Lazard Freres & Co., 241 A.D.2d 114, 122 [1st Dept 1998] [citations omitted]; see also Greenberg, Trager & Herbst, LLP v. HSBC Bank USA, 17 N.Y.3d 565, 578 [2011] ["[T]he relationship between a bank and its depositor is one of debtor and creditor and an arm's length borrower-lender relationship ... does not support a cause of action for negligent misrepresentation. This is true even if there is a long-standing relationship between the customer and a particular bank employee or if the parties are familiar or friendly."] [internal quotations and citations omitted].)
Plaintiff does not sufficiently allege a fiduciary relationship with any of the KME/AK Defendants. There are no facts alleged which suggest that plaintiff had a fiduciary relationship with KME, AK, or Lynch. As to Melo, plaintiff alleges that Andy introduced Cutri to Melo around 2009-2010 and they "developed a close professional relationship, building on the relationship of trust and confidence that Andy had cultivated with [Cutri]." (NYSCEF 131, FAC ¶ 31.) These facts suggest, at most, a close friendship between Cutri and Melo which is not sufficient to support the existence of a fiduciary or confidential relationship. (See Benzies v Take-Two Interactive Software, Inc., 159 A.D.3d 629, 631 [1st Dept 2018] [finding "emails in the record, although showing a close friendship, are not sufficient to establish the necessary requirement of trust and confidence" for a fiduciary relationship between employee and employer].)
Moreover, even if plaintiff could assert a fiduciary relationship with the KME/AK Defendants based on Cutri's relationship with Andy, as plaintiff seems to suggest, plaintiff has only alleged, at most, a close friendship with Andy that does not amount to a fiduciary relationship. (See NYSCEF 131, FAC ¶ 31 [alleging that Cutri and Andy met in or around 1999 and in the 20 years that followed "formed a close relationship, both personally and professionally," and Andy "came to be a mentor and father figure to [Cutri] and established a relationship of trust and confidence with him."]) "Family members stand in a fiduciary relationship toward one another in a co-owned business venture." (Braddock v Braddock, 60 A.D.3d 84, 88 [1st Dept], appeal withdrawn, 12 N.Y.3d 780 [2009]). However, Andy's father-like relationship with Cutri, is not sufficient to allege a fiduciary duty. (See Benzies, 159 A.D.3d at 631; See Index 651920/16, NYSCEF 2, Complaint.)
Plaintiff cites to Penato v George for support, which found that a fiduciary "relationship might be found to exist, in appropriate circumstances, between close friends or even where confidence is based upon prior business dealings." (52 A.D.2d 939, 942 [2d Dept 1976] [friends helping friends to get patent for invention], dismissing appeal, 42 N.Y.2d 908 [1977].) However, that case did not involve a lender-borrower relationship between entities, which the First Department has held does not support a fraud claim. (Id.; See also Banque Nationale de Paris v 1567 Broadway Ownership Assocs., 214 A.D.2d 359, 360 [1st Dept 1995]). Moreover, the fact that the KME/AK Defendants may have had superior knowledge about the Class C Members does not support a fiduciary relationship. (RKA Film Fin., LLC v Kavanaugh, 171 A.D.3d 678, 680 [1st Dept 2019] [superior knowledge of the alleged wrongdoing is not unique or specialized expertise supporting a negligent misrepresentation claim].) Thus, plaintiffs claims for constructive fraud and negligent misrepresentation against KME, AK, Melo and Lynch are dismissed.
C. Aiding and Abetting Fraud against Melo and Lynch
Defendants argue that plaintiffs claims for aiding and abetting fraud against Melo and Lynch should be dismissed because plaintiff fails to allege actual or constructive fraud against either of them. While defendants' assertion is incorrect, plaintiff does not respond to it. Rather, an underlying fraud by another party is required for an aiding and abetting claim. (See Oster v Kirschner, 77 A.D.3d 51, 55 [1st Dept 2010] ["A plaintiff alleging an aiding-and-abetting fraud claim must allege the existence of the underlying fraud, actual knowledge, and substantial assistance."]) As plaintiff has not alleged any underlying fraud by any defendant, its aiding and abetting claims must also be dismissed.
III. Seventh Cause of Action for Fraudulent/Voidable Conveyance
Plaintiff asserts a claim pursuant to New York Debtor & Creditor Law §§ 273, 274, 276, 277, and 278 for "fraudulent and/or voidable conveyances" against all defendants as "a creditor of [KME and its alter ego, AK], as the holder of [the 2020 Note]. . . which became effective on or about April 1, 2020." (NYSCEF 145, FAC ¶ 221.) Plaintiff appears to allege its claim pursuant to the sections of the former DCL, even though the Uniform Voidable Transactions Act [UVTA] repealed and replaced the DCL on April 4, 2020. The KME/AK Defendants apply the UVTA to their analysis of plaintiffs claims. The Kowalczyk Defendants appear to analyze the claims under the former DCL, noting that plaintiff has not properly alleged a claim under DCL § 277, because plaintiff does not allege any transfer of partnership assets as required under that section. Plaintiff does not respond or clarify its claim in its opposition to either motion and uses the language of both the new and former statute when describing its claims in the seventh count.
Plaintiffs seventh cause of action is dismissed without prejudice, first, because it has failed to identify which statute it is pleading under. The UVTA applies to transfers made or obligations incurred on or after April 4, 2020, but not to transfers made, obligations incurred, or rights of action that have accrued before April 4, 2020. (See Laws 2019, ch 580, § 7.) Plaintiffs seventh cause of action, as pled, appears to only apply to transfers made on or after the effective date of the 2020 Note. Plaintiff asserts that "[p]laintiffs claim pursuant to the 2020 Senior Note arose before the transfers and obligations alleged herein were made." (NYSCEF 145, FAC ¶ 221.) Thus, plaintiff hinges its cause of action on transfers made after the execution of the 2020 Note. Moreover, the transfers plaintiff references in the seventh count occurred after April 4, 2020 or have no date specified. These include a "transfer [of] $4,000,000 to the Class C Members on or about May 31, 2020" (id. ¶ 222) and several other transfers allegedly made by each of the defendants in 2020. (Id. ¶¶ 144-147, 226.)
Nevertheless, other portions of the FAC, and plaintiffs papers, suggest that plaintiffs claim is based on transfers before the alleged effective date of the 2020 Note. For example, plaintiff alleges earlier transfers to the Class C Members and to Andy, but these are not identified as part of plaintiffs seventh claim. Plaintiff also asserts such claims in a sur-reply filed in connection with motion sequence number 002 (NYSCEF 115 at 4) and its opposition to motion sequence number 008. To the extent plaintiff relies on transfers prior to April 1, 2020 in support of its fraudulent transfer claim, it can assert them either pursuant to the 2018 Note or as a "future creditor" under the 2020 Note. (JR & J Holding Co. v. Rabinowitz, 201 A.D.2d 535, 536 [2d Dept 1994] [analyzing former DCL § 276 and finding "the plain language of the statute reaches conveyances intended to defraud future creditors, including conveyances which occurred prior to the time the obligation to the plaintiff arose."]) However, plaintiff has not adequately noticed such claims in the FAC. Thus, plaintiffs seventh cause of action is dismissed without prejudice to replead.
The court further notes that the KME/AK Defendants do not move to dismiss the seventh cause of action to the extent it applies to the transfer of $4 million to the Class C Members. (See infra, fn 4.) Moreover, neither the KME/AK Defendants or the Kowalczyk Defendants move to dismiss based on plaintiffs failure to apply the correct statute. However, because plaintiffs assertion of this claim is improperly made for multiple reasons, the court dismisses it without prejudice, along with the rest of the seventh cause of action, against the KME/AK Defendants and the Kowalczyk Defendants.
Motion Sequence Number 003-Kowalczyk Defendants' Motion to Dismiss the Complaint
The Kowalczyk Defendants note that plaintiff and Cutri reside in New Jersey and cite to both New York and New Jersey law in their opening brief. (NYSCEF 44.) It does not appear that the parties have presented an issue as to what law should apply here, though, as the Kowaczyk Defendants admit that "[g]enerally, there does not appear to be a conflict between the law of fraud in New York and New Jersey" and do not cite to any New Jersey law in their reply. Thus, the court applies New York law in its decision on motion sequence number 003.
I. Actual Fraud
The Kowalczyk Defendants argue that plaintiff fails to state a claim for actual fraud against any defendant. As set forth above, plaintiff fails to sufficiently allege reasonable reliance or injury. Therefore, actual fraud against the Kowalczyk defendants is dismissed as well.
The Kowalczyk Defendants also assert that even if plaintiff has stated a fraud claim against the other defendants, plaintiff has not stated a claim for fraud against Elizabeth. Plaintiffs allegations of representations made by Elizabeth are mainly in one paragraph in the FAC. (NYSCEF 131, FAC ¶ 60.) Plaintiffs fraud claim against Elizabeth fails because, even if her promises that KME would repay its debt or her future intentions as to the companies are actionable, plaintiff has not adequately alleged facts suggesting that, at the time she made these representations, she knew they were false or intended to deceive plaintiff. "A complaint based upon a statement of future intention must allege facts to show that the defendant, at the time the promissory representation was made, never intended to honor or act on his statement." (Non-Linear Trading Co., 243 A.D.2d at 118 [1st Dept 1998] [internal quotations and citation omitted].) Plaintiff alleges that Melo and Lynch told Cutri "[Elizabeth] had been 'apprised of everything,'" referring to events with the Class C Members and Andy's investments, without stating when she was apprised, and that she "had approved the transfers to the Class C Members." (NYSCEF 131, FAC ¶ 103.) Similarly, plaintiff alleges that "[a]t the time these discussions were occurring, [Elizabeth] and [Melo] were concerned about [KME and AK's] ability to continue operating as a going concern" and "[Melo] testified that, during this period, he was frequently discussing [KME and AK's] operations with [Elizabeth] and [Lynch]." (Id. ¶ 70.) While these allegations might be specific enough to suggest that Elizabeth knew KME was not doing well and would be unable to pay plaintiff, plaintiff fails to allege timing; whether they occurred before Elizabeth made representations to plaintiff. Moreover, plaintiff's general allegations that the "Fraud Defendants" knew the facts concerning the Class C Members in April of 2020 are not sufficient. (See, e.g. NYSCEF 131, FAC ¶ 69.) Plaintiff does not allege any facts to suggest that the other statements in paragraph 60 of the FAC were false.
Plaintiff also alleges that Elizabeth made similar representations in June of 2020, after the 2020 Note was already executed. (NYSCEF 131, FAC ¶ 107.) As explained above, the representations in the FAC after May 8, 2020, cannot support plaintiff's fraud claims.
Plaintiff has also failed to allege a claim for aiding and abetting fraud against Elizabeth. The Kowalczyk Defendants argue that plaintiff's aiding and abetting claim fails for the same reason the fraud claim against her does, that plaintiff fails to allege knowledge on her part, and because plaintiff has failed to allege any substantial assistance by Elizabeth with the underlying fraud. While the allegations above are sufficient to support an inference that at some point prior to plaintiff's execution of the 2020 Note, Elizabeth knew about the facts concerning the Class C Members, plaintiff has not alleged any facts suggesting that she assisted with the fraud in any way. (Oster, 77 A.D.3d at 55) Specifically, plaintiff points towards the allegation that Elizabeth approved the transfers to the Class C Members, (NYSCEF 131, FAC ¶ 103), but the only transfer after Elizabeth allegedly had any authority as to KME or AK occurred after plaintiff alleges he was fraudulently induced into entering into the 2020 Note.
III. Constructive Fraud or Negligent Misrepresentation
Because plaintiff has not alleged a fiduciary duty to Andy, as discussed above, plaintiff has not alleged a fiduciary relationship with the Estate. Plaintiff also has not alleged any facts to suggest any fiduciary or other relationship with Elizabeth that would support a constructive fraud or negligent misrepresentation claim against her. Therefore, those claims are dismissed as against Elizabeth.
IV. Fraudulent Transfer
As explained above, plaintiff has failed to properly plead its fraudulent transfer claim. Thus, this claim is dismissed as to the Kowalczyk Defendants without prejudice as well.
Motion Sequence Number 004-The KME/AK Defendants' Motion to Dismiss the Cross Claims in Edward's Verified Answer
Edward's cross claims in his Amended Verified Answer relate to a promissory note in the amount of $400,000, executed by KME and dated May 1, 2017 (the 2017 Kowalczyk Note.) (NYSCEF 137, Amended Verified Answer ¶¶ 269-270; NYSCEF 138, 2017 Kowalczyk Note.) The maturity date of the 2017 Kowalczyk Note is April 30, 2019. (NYSCEF 137, Amended Verified Answer ¶ 272; NYSCEF 138, 2017 Kowalczyk Note.) Edward alleges that KME has made no payments of principal or interest under the note. (NYSCEF 137, Amended Verified Answer ¶ 274.)
I. Breach of Contract Against KME
The KME/AK Defendants argue that Edward's claim for breach of the 2017 Note should be dismissed as against KME, because that note was actually replaced and superseded by a new promissory note dated May 1, 2019 (the 2019 Kowalczyk Note). Notably, the KME/AK Defendants have not provided a copy of the 2019 Kowalczyk Note with their motion, and Edward denies knowledge of the 2019 Kowalczyk Note in an affidavit attached to his opposition. (NYSCEF 88, Kowalczyk aff. ¶ 9.) As evidence of the 2019 Kowalczyk Note, the KME/AK Defendants merely point to Exhibit A to the 2020 Note, which references a note with an effective date of May 1, 2019 held by Edward. (NYSCEF 4.) This reference in a separate document to a note which Edward denies the existence of, at most, creates an issue of fact as to whether it existed, and certainly is not sufficient to utterly refute Edward's allegations. Therefore, KME's motion to dismiss Edward's first cross-claim against it is denied.
Edward labels this claim the "First Amended Cross-Claim Against KME." (NYSCEF 137, Amended Verified Answer at 48.) The next cross claim is labeled the "First Amended Cross-Claim Against AK Capital." (Id. at 50.) The next cross claim is labeled: "A Second Amended Cross-Claim as Against KME and AK Capital, and as and for a First Amended Cross-Claim Against Co-Defendants the Estate, Mrs. Kowalczyk, Mr. Melo, Mr. Lynch, Mr. Epstein, Mr. Hirschberg, Mr. Rosenblum, Mr. Smith, Mr. Rechner and John Does 1-12." (Id. at 52.) The purpose of numbering claims is to make the pleading clear. Parties are directed to number claims serially by claim not by party.
The KME/AK Defendants seem to point to Exhibit A to the 2020 Note as documentary evidence utterly refuting Edward's claims, but only move under CPLR 3211(a)(7) not (1). (NYSCEF 55, Notice of Motion.) The court nevertheless analyzes the effect of the document.
II. Breach of Contract Against AK
Similar to plaintiff, Edward alleges a breach of the 2017 Kowalcyzk Note against AK as an alter ego of KME. Edward's crossclaim expressly incorporates the allegations as to alter ego in the FAC, including paragraphs 148 through 172. (NYSCEF 279, Verified Answer ¶ 279.) As set forth above, plaintiff has not sufficiently alleged its alter ego claims, and therefore, since Edward's crossclaim is entirely based on plaintiff's claim, it must also be dismissed.
Additionally, the KME/AK Defendants argue that this claim should be dismissed because AK was not a signatory to the 2019 Kowalczyk Note, and Edward's alter ego claims fail because he denied knowledge and information sufficient to form a belief as to the allegations from the FAC that it expressly incorporates in its cross-claim. While the KME/AK Defendants fail to provide any caselaw or other source in support of this argument, the Court agrees.
CPLR 3018(a) provides:
A party shall deny those statements known or believed by him to be untrue. He shall specify those statements as to the truth of which he lacks knowledge or information sufficient to form a belief and this shall have the effect of a denial.
Edward cannot effectively deny allegations in the FAC as to alter ego claims concerning AK, and yet purport to incorporate those same allegations into his own cross claim. Nearly every other allegation in his cross claim not referring to the FAC is alleged on information and belief, except for a few that are conclusory. (NYSCEF 137, Verified Answer ¶ 280-285; see Yu v BuyerGenomics Techs. LLC, 67 Misc.3d 1237[A], *3 [Sup Ct, NY County 2020] [finding "plaintiff has not adequately alleged an alter-ego claim" where its "alter-ego allegations are largely conclusory, made solely on information and belief, or both."]) Thus, the cross claim for breach of the 2019 Note is dismissed as against AK.
III. Fraudulent Conveyance Against the KME/AK Defendants
Edward's cross claim for fraudulent conveyance also fails because it does not specify what statute it is brought under, and relies entirely on plaintiffs seventh cause of action, which is dismissed as set forth above. Edward has thus failed to allege any claim for the same reasons that plaintiff has, and must replead. However, the court notes that, to the extent Edward intends to rely on allegations in the FAC, which he has effectively denied in his Verified Answer, as he does in his current cross claim, those claims will be denied.
IV. Attorneys' Fees Under the Debtor and Creditor Law
As Edward's cross claim for fraudulent conveyance fails, the court also dismisses his claim for attorneys' fees under that statute.
The court has considered all other arguments by all parties and finds they do not change the outcome.
Accordingly, it is hereby, ORDERED that motion sequence number 008 is granted in part and denied in part; and it is further
ORDERED that motion sequence number 003 is granted; and it is further
ORDERED that plaintiffs second, third, fourth, fifth, and sixth causes of action are dismissed in their entirety; and it is further
ORDERED that plaintiffs seventh cause of action is dismissed as against KME Holdings, LLC, AK Capital, LLC, Peter Melo, William "Billy" Lynch, Elizabeth Kowalczyk, and the Estate of Andrew Kowalczyk without prejudice; and it is further
ORDERED that plaintiffs first and eighth causes of action are dismissed as against AK Capital, LLC; and it is further
ORDERED that motion sequence number 004 is granted in part and denied in part; and it is further
ORDERED that Edward Kowalczyk's first amended cross claim as against AK Capital, LLC is dismissed; and it is further
ORDERED that Edward Kowalczyk's second amended cross claim as against KME Holdings, LLC and AK Capital, LLC is dismissed without prejudice; and it is further
ORDERED that Edward Kowalczyk's first amended cross claim as against Peter Melo and William "Billy" Lynch is dismissed without prejudice; and it is further
ORDERED that Edward Kowalczyk's third cross claim as against KME Holdings, LLC and AK Capital, LLC is dismissed without prejudice; and it is further
ORDERED that Edward Kowalczyk's second cross claim as against Peter Melo and William "Billy" Lynch is dismissed without prejudice; and it is further
ORDERED that plaintiff shall file a copy of the FAC in NYSCEF labeled as an amended complaint, and any exhibits appended thereto, within 10 days of the date of this decision and order; and it is further
ORDERED that the remaining parties are directed to ADR. The Part Clerk will send the ADR initiation form to the parties.