Opinion
03 Civ. 1168 (DLC).
March 16, 2006
MEMORANDUM OPINION AND ORDER
This Opinion addresses the latest chapter in the history of this difficult case. The plaintiff seeks to keep the defendant from selling his law practice. To understand this application, some context is necessary.
Boiled down to its essentials, the history is as follows. In a related, prior action, attorney David A. Dorfman ("Dorfman") was found liable to Ricky Baker ("Baker") for malpractice and fraud.See Baker v. Dorfman, No. 97 Civ. 7512 (DLC), 1999 WL 191531 (S.D.N.Y. Apr. 6, 1999) (denying defendant's motion to amend judgment). Dorfman took steps to avoid paying the judgment, including trying to insulate his income from collection by forming a professional limited liability corporation (the " PLLC"), an action that proved unsuccessful when this Court held the PLLC to be a successor in interest to Dorfman. See Baker v. Dorfman, No. 99 Civ. 9385 (DLC), 2000 WL 1010285 (S.D.N.Y. Jul. 21, 2000). Dorfman subsequently filed for bankruptcy on behalf of both himself and the PLLC. After an expensive and lengthy process, Dorfman agreed within the bankruptcy proceeding to a payment plan (the "Bankruptcy Stipulation"), which the bankruptcy court endorsed on April 29, 2002.
When Dorfman failed to make payments pursuant to the Bankruptcy Stipulation, Baker filed this diversity action on February 20, 2003, seeking reinstatement of the judgment in 97 Civ. 7512, and collection. On May 1, 2003, the parties entered an agreement to settle this second action (the "May 2003 Stipulation"), under which Dorfman was required to make payments, including those he had missed, in accordance with the Bankruptcy Stipulation. The May 2003 stipulation, which the Court "so ordered" on May 13, 2006, further provided that this Court would retain jurisdiction over the matter to ensure Dofrman's compliance. When Dorfman failed to perform his obligations under the May 2003 Stipulation, the Magistrate Judge to whom this matter was referred converted Baker's summary judgment motion into a motion for enforcement pursuant to the court's contempt power. On January 20, 2005, this Court adopted the Magistrate Judge's report and recommendation.See Baker v. Dorfman, No. 03 Civ. 1168 (DLC), 2005 WL 713329 (S.D.N.Y., Mar. 29, 2005).
Over the course of the following months, pursuant to these contempt proceedings, Dorfman was required to submit monthly reports of his expenses and income, and he succeeded in making the minimum monthly payments of $1,310 to Baker. An Order of June 2, 2005 placed certain restrictions on Dorfman's expenditures and permitted him to draw a post-withholding salary of $2,600 a month from his law practice. On December 5, 2005, this Court issued an Order capping at two the number of full-time employees (or the equivalent) that Dorfman could employ without further permission from the Court.
The current dispute erupted when Baker applied both for an increase in Dorfman's monthly payments (Dorfman's law firm had begun to show a profit) and for Dorfman to be held in contempt for hiring more than two employees without court approval. An Order of January 19, 2006 required Dorfman to appear at a conference on February 10 to show cause why he should not be held in contempt of the Court's December 5 Order, and to address the issue of whether his firm's profits should be used to satisfy his obligations to plaintiff. In a letter dated January 18, Dorfman requested that this Court approve his plan to cease operating his private law practice and begin working for a firm owned and operated by one of his employees, Gregory Koerner ("Koerner").
Prior to the February 10 hearing, Dorfman retained attorney Wayne M. Greenwald. Greenwald filed a motion in bankruptcy court to reopen Dorfman's bankruptcy proceeding and to make Baker enforce the default provisions of the Bankruptcy Stipulation through N.Y.C.P.L.R. § 5202 ("Section 5202"), rather than seeking recovery through contempt proceedings. (Presumably, Dorfman believed that his monthly payments under Section 5202 would be less than the payments required of him under the May 2003 Stipulation.) Dorfman did not advise this Court of the motion, nor did he fully apprise the bankruptcy court of the proceedings before this Court. The bankruptcy court denied Dorfman's motion.
At the hearing, the Court learned that Dorfman was paying Mr. Greenwald at least $5,000 from the profits of his firm, despite having been informed that one of the purposes of the hearing was to determine what portion of those profits should be allocated to plaintiff.
Dorfman was apparently proceeding under the belief that the contempt proceeding in this Court pertains to his breach of the Bankruptcy Stipulation. He was mistaken. Although the May 2003 Stipulation incorporates many of the terms — and much of the payment schedule — outlined in the Bankruptcy Stipulation, it is a separate Order in a separate proceeding. And it is because of Dorfman's repeated violation of the May 2003 Stipulation that this Court has invoked its contempt power. In any event, Dorfman's motion in bankruptcy court, while fundamentally flawed, appears to have been yet another effort to avoid paying his obligations to plaintiff.
At the February 10 hearing, Dorfman indicated that he intended to sell his firm's assets, which had been valued at $850 by an appraiser, to Koerner for $2,000 (the "proposed sale"). The proceeds of the sale were to be paid directly to Baker. Koerner stated that, after the proposed sale, he would employ Dorfman at an annual salary of $55,000. Counsel for Dorfman initially indicated that his client would be entitled to reduce his monthly payments to plaintiff from $1,310 to a total of $458.33 — 10% of his gross salary. He later stated that Dorfman would continue to provide plaintiff with $1,310 each month, but that he would have to cancel his health insurance in order to do so.
Koerner has indicated that he would make the payments directly to plaintiff, presumably deducting an equal amount from Dorfman's salary.
On February 20, plaintiff filed the instant motion, which seeks to block the proposed sale of defendant's law firm on the ground that it constitutes a fraudulent transfer under N.Y. Debt. Cred. §§ 273 and 274. Alternatively, plaintiff seeks to have Koerner's law firm declared to be the successor in interest to Dorfman's firm, and therefore liable for its debt to plaintiff. Finally, plaintiff states that he will withdraw his objections to the proposed sale if (a) Koerner pays $50,000, which would represent "fair consideration for the goodwill of [Dorfman's] law firm," or (b) plaintiff is allowed to bid on the law firm, either privately or at a sheriff's sale, with Dorfman's continued involvement guaranteed. Defendant and Koerner oppose the motion.
Fraudulent Conveyance
Under New York law, any conveyance made without "fair consideration" by a defendant against whom a judgment for money damages has been docketed, "is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment." N.Y. Debt. Cred. § 273-a ("Section 273-a"). Plaintiff contends that the proposed sale is a fraudulent conveyance because $2,000 is not adequate consideration for the goodwill that Koerner will obtain by buying the assets of Dorfman's firm and employing him as an attorney.
The plaintiff bears the burden of demonstrating the inadequacy of the consideration provided. United States v. McCombs, 30 F.3d 310, 324 (2d Cir. 1994). Given the unfavorable press that Dorfman has received as a result of this litigation, as well as the historic instability of his firm's profits and Dorfman's difficulty in managing his own affairs, Baker has not shown that the proposed sale will result in the transfer of substantial goodwill to Koerner. As the ABA publication concerning the valuation of a law practice proffered by Baker underscores, it is exceedingly difficult to value a small law firm. James D. Cotterman, Valuation of a Law Practice, General Practice Solo Small Firm Division, Jan.-Feb. 2000, available at http://www.abanet.org/genpractice/magazine/jf00cotterman.html. Baker has not shown, therefore, that the proposed sale is a fraudulent conveyance under Section 273-a.
Plaintiff's argument that the proposed sale is a fraudulent conveyance under N.Y. Debt. Cred. § 274 ("Section 274") fails for a similar reason. Section 274 deems fraudulent any conveyance made without fair consideration by a party about to engage in a business transaction "for which the property remaining in his hands after the conveyance is an unreasonably small capital." N.Y. Debt. Cred. § 274. Baker has not shown that the proposed sale fails to pay Dorfman fair consideration. Successor Liability
Given the failure of plaintiff to prevail under either of these theories, it is unnecessary to reach the additional defenses raised by Koerner and Dorfman, including that Dorfman's assets are "exempt property" under N.Y.C.P.L.R. § 5205, and that successor liability cannot be imposed by motion.
Under New York common law, a successor business entity may be held liable for the torts of its predecessor if
(1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuance of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations.Baker v. Dorfman, 2000 WL 1010285, at *4 (S.D.N.Y. Jul. 21, 2000); see also Schumacher v. Richards Shear Co., 464 N.Y.S.2d 437, 440 (1983). Plaintiff claims that, after the proposed sale, Koerner's law firm would be a mere continuation of defendant's law firm.
The Second Circuit has enumerated four factors to be considered "in a flexible manner" in determining whether the mere continuation doctrine applies: "(1) continuity of ownership; (2) cessation of ordinary business by the predecessor; (3) assumption by the successor of liabilities ordinarily necessary for continuation of the predecessor's business; and (4) continuity of management, personnel, physical location, assets, and general business operation." Nettis v. Levitt, 241 F.3d 186, 193-94 (2d Cir. 2001). Under the terms of the proposed sale, Dorfman would not be entitled to any of the profits of Koerner's firm, Koerner would not assume any of Dorfman's liabilities, and Dorfman would have no role in the management of the firm. The owner of the business would become an employee, and an employee would become the owner. With these changes, Baker has failed to show that Koerner's firm is a continuation of Dorfman's law practice.
Other Relief
Plaintiff requests that if the proposed sale is allowed to go forward, Koerner be required to pay $50,000 for Dorfman's firm, or plaintiff be allowed to submit a bid for the firm and require Dorfman to continue to work for the winning bidder. Both requests are denied. Because the plaintiff has not shown that the proposed sale constitutes a fraudulent conveyance, there is no basis for requiring Koerner to pay more than he has offered. Further, as plaintiff has conceded, the Court cannot require Dorfman to work at all, let alone for a particular business. U.S. Const. amend. XIII. Therefore, it does not have the power to order Dorfman to maintain his "involvement" in the firm regardless of who ultimately buys it. Pursuant to the parties' May 2003 Stipulation, and the additional orders entered in this action, however, the Court does have authority to review Dorfman's income and expenses to ensure that he is fulfilling his financial responsibilities to Baker to the extent he is able to do so. Conclusion
Although the Court will not grant Baker the relief he requests, it notes that plaintiff's evident frustration with Dorfman's decision to close his firm is understandable. For years, plaintiff has struggled to ensure that he received payments on the debt owed him, despite defendant's elaborate and sometimes fraudulent efforts to avoid fulfilling the judgment against him. In recent months, Dorfman's firm has finally made a consistent profit, and just when it appeared that defendant would be able to increase his payments to plaintiff, he announced his intent to cease operating the firm.
For the foregoing reasons, it is hereby
ORDERED that the motions by Baker for various forms of relief are denied.
IT IS FURTHER ORDERED that, if and when Dorfman sells his law practice and secures new employment, he will provide the Court and counsel for plaintiff with a copy of his employment contract, including a statement of Dorfman's salary and any other anticipated or potential remuneration; a statement of Dorfman's itemized monthly expenses; and a proposal for continued payments to plaintiff. At that time, the Court will revise its Order of June 2, 2005 to reflect Dorfman's changed circumstances.
IT IS FURTHER ORDERED that all Orders previously issued by the Court in this action will remain in effect until such time as the Court amends or revokes them.
IT IS FURTHER ORDERED that any and all proceeds from the sale of defendant's law practice will be paid to Baker.
SO ORDERED: