Opinion
Index No.: 114874/2010
04-09-2021
KATHERINE PRIESTLEY, Plaintiff, v. PANMEDIX, INC., ELECTRONIC KNOWLEDGE PUBLISHING, INC., HEADMINDER, INC., MCDONALD COMRIE, DR. DAVID ERLANGER, PHILIP YEE, BALLON, STOLL, BADER & NADLER, PC, HALKET WEITZ, CURTIS COMRIE, ROBERTA COMRIE, MARY ERLANGER, DARIN KAPLAN, RICHARD PECK, LINDA BIERER, TARA MACLEOD, MELVIN HELLER, JOHN THEODORACOPULOS, ALEXIS THEODORACOPULOS, STEPHANIE PARK, NICOLE KAPLAN, LITTLE ROCK, LTD, TANYA KAUSHIK, MABEL TRUESDELL, RELIDE REALTY, THEODORE WEITZ, ESQ. and DWIGHT YELLEN, ESQ., Defendants.
NYSCEF DOC. NO. 411
DECISION & ORDER
Mot. Seq. 011
Mot. Seq. 012
Mot. Seq. 013
Mot. Seq. 014
Mot. Seq. 015 KELLY O'NEILL LEVY, J. :
Motion Sequences 011, 012, 013, 014, and 015 are consolidated herein for disposition.
In Motion Sequence 011, defendants Relide Realty ("Relide") and Melvin Heller (collectively, the "Relide Defendants") move, pursuant to CPLR 3212, for summary judgment dismissing all claims against them.
In Motion Sequence 012, defendants McDonald Comrie, Curtis Comrie, Roberta Comrie, Darin Kaplan, Nicole Kaplan, Tanya Kaushik, Tara Macleod, Stephanie Park, Richard Peck, Alexis Theodoracopulos, John Theodoracopulos, Mabel Truesdell and Philip Yee (collectively the "Comrie Defendants") move, pursuant to CPLR 3212, for summary judgment dismissing all claims against them.
In Motion Sequence 013, Plaintiff cross-moves, pursuant to CPLR 3212, for summary judgment (i) on the first cause of action pursuant to Section 273-a of the Debtor & Creditor Law ("DCL"), (ii) on the second cause of action pursuant to DCL § 273, (iii) on the third cause of action pursuant to DCL § 275, (iv) on the fourth cause of action pursuant to DCL § 276, (v) on the fifth cause of action pursuant to DCL § 276-a, (vi) on the sixth cause of action pursuant to DCL § 278, (vii) on the eighth cause of action for aiding and abetting fraudulent conveyances, and (viii) on the ninth cause of action for tortious interference with enforcement of a money judgment. All of Plaintiff's causes of action are timely.
Defendant argues that the claims added in 2015 - aiding and abetting and tortious interference - were not timely. However, this action was commenced in 2010, well within the statute of limitations for all causes of action and the 2015 Second Amended Complaint was specifically reviewed and allowed by the First Department. Priestley v. Panmedix Inc., 134 A.D.3d 642, 643 (1st Dept. 2015). "[A] claim asserted in an amended pleading is deemed to have been interposed at the time the claims in the original pleading were interposed...This principle, termed the 'relation-back doctrine,' permits a plaintiff to interpose a claim or cause of action which would ordinarily be time barred, where the allegations of the original complaint gave notice of the transactions or occurrences to be proven and the cause of action would have been timely interposed if asserted in the original complaint." Pendleton v. City of New York, 44 A.D.3d 733, 736 (2d Dep't 2007); see also Moezinia v. Ashkenazi, 136 A.D.3d 990, 992 (2d Dep't 2016); Lang-Salgado v. Mount Sinai Med. Ctr., Inc., 157 A.D.3d 532, 533 (1st Dep't 2018); see generally CPLR 203(f); Liberty Co. v. Boyle, 272 A.D.2d 380, 381, 708 N.Y.S.2d 122 (N.Y.App. Div.2d Dep't 2000) ("New York state law fixes the limitations period for claims under the DCL. A claim based on actual fraud under DCL Section 276 must be brought within the later of six years from the date of the fraud or conveyance, or two years from the date that the fraud should have been discovered."); In re Allou Distributors, Inc., 446 B.R. 32, 67 (Bankr. E.D.N.Y. 2011) (a claim based on constructive fraud must be brought within six years from the date of the conveyance as the two-year discovery rale applicable to actual fraud claims does not apply to constructive fraud claims.). "For the rule allowing relation back to...be operative in an action in which a party is added beyond the applicable limitations period, a plaintiff is required to prove that (1) both claims arose out of the same conduct, transaction, or occurrence, (2) the new party is united in interest with the original defendant, and by reason of that relationship can be charged with such notice of the institution of the action that the new party will not be prejudiced in maintaining its defense on the merits by the delayed, otherwise stale, commencement, and (3) the new party knew or should have known that, but for a mistake by the plaintiff as to the identity of the proper parties, the action would have been brought against that party as well." See Austin v. Interfaith Med. Ctr., 264 A.D.2d 702, 703 (2d Dep't 1999). All of the conditions are satisfied here. See id ("With respect to the third prong, the Supreme Court providently exercised its discretion in permitting the plaintiff's amended complaint...to relate back...since there was no showing of bad faith on the part of the plaintiff or prejudice to the third-party defendants in failing to initially identify them."); see also Priestley, 134 A.D.3d at 643 (finding no prejudice or surprise).
In Motion Sequence 014, defendants Halket Weitz LLP and Theodore Weitz, Esq. (collectively the "Halket Weitz defendants") move, pursuant to CPLR 3212, for summary judgment dismissing Plaintiff's causes of action for fraudulent conveyance, aiding and abetting a fraud and tortious interference with collection of a money judgment.
In Motion Sequence 015, defendants Dwight Yellen, Esq., and his former law firm, Ballon Stoll Bader & Nadler, P.C. ("BSBN") (collectively the "Ballon Defendants") move, pursuant to CPLR 3212, for partial summary judgment on Plaintiff's causes of action for punitive damages, tortious interference with enforcement of judgment, and for fraudulent conveyances under Sections 273, 273-a, 275, and 276 of the New York Debtor and Creditor Law ("DCL").
Background
Defendant PanMedix, Inc. ("Panmedix") was formed as a Delaware corporation in 1995 with a principal place of business in New York City. Panmedix developed technology for healthcare, pharmaceutical, research and academic purposes. Defendant McDonald Comrie served as President and CEO of Panmedix from the company's founding until its dissolution in 2014. Defendant Phillip Yee was Director and Technology Officer of PanMedix. Defendant David Erlanger was the Chief Scientific Officer of PanMedix, Panmedix's business utilized cognitive tests developed by defendant Headminder, Inc.
Mr. Comrie was also the President of defendant Electronic Knowledge Publishing, Inc., which is now defunct.
Plaintiff had been a shareholder in Panmedix's predecessor company, Xcape, Inc., and on March 15, 2001, a Consent of Shareholders was executed and Plaintiff became one of the Directors of PanMedix. On April 6, 2001, Plaintiff loaned $750,000 to Panmedix pursuant to a Senior Secured Promissory Note and a Patent Security Agreement. The Senior Secured Promissory Note granted Plainitff a security interest in "all personal property of every kind and nature, including ... accounts ... patents ... copyrights ... and all recorded data" of Panmedix. See Senior Secured Promissory Note § 5.1. The Patent Security Agreement separately granted Plaintiff a security interest in "(i) all Patents; (ii) all General Intangibles connected with the use of or symbolized by the Patents; and (iii)...all Proceeds and products of any and all of the foregoing and all collateral security and guarantees given by any person with respect to any of the foregoing." See Patent Security Agreement § 2. On April 9, 2001, Plaintiff publicly recorded her security interests by filing a UCC-1. In August 2001, Plaintiff acquired 20,777 shares of PanMedix common stock - 18.85% of PanMedix shares - for $100.00.
On April 6, 2002, when the $750,000 principal of the Senior Secured Promissory Note was due to be repaid, PanMedix was unable to repay Plaintiff. After extended discussions, Plaintiff sent a notice of default on June 23, 2003 but on June 25, 2003 opted to lend an additional $85,000 to Panmedix. When repayment issues again emerged, Plaintiff sent another notice of default on November 30, 2005. On March 9, 2006, Plaintiff filed an action in New York State Supreme Court seeking payment, but voluntarily dismissed her case on April 13, 2006 and the parties entered into negotiations relating to repayment. Notably, in April 2006, Plaintiff's UCC-1 expired as five years had elapsed since it was filed in April 2001. The UCC-1 was not renewed.
After settlement discussions failed, Plaintiff filed a second action in New York State Supreme Court on April 20, 2006, seeking payment on the Promissory Note. However, that action also ended by voluntary discontinuance on November 27, 2006. Plaintiff next filed a diversity suit in federal court on February 16, 2007. On August 28, 2008, the Hon. Harold A. Baer, Jr. entered judgment for Plaintiff in the amount of $1,603,716.51 against McDonald Comrie, David Erlanger, Philip Yee, Panmedix, Electronic Knowledge Publishing, Inc., and Headminder, Inc. The judgment was later changed to eliminate all but Panmedix and Electronic Knowledge Publishing, Inc. as judgment debtors.
However, after an extended period of negotiations, the judgment was still unpaid. In July 2009, defendant Theodore Weitz, Esq., a partner at defendant Halket Weitz LLP and outside counsel for Panmedix, discovered that Plaintiff's UCC-1 had not been renewed. After discussing this with McDonald Comrie in his capacity as President of Panmedix and with litigation counsel for Panmedix - defendant Dwight Yellen of defendant BSBN - Mr. Weitz prepared a security agreement that was sent to certain persons and entities who had loaned money or extended credit to Panmedix, specifically:
• Defendant Halket Weitz LLP.: $1,398,003.91 (unpaid legal fees).(hereinafter, the "signatory Defendants"). Pursuant to the Security Agreement dated August 24, 2009, the Creditors agreed to forbear on their claims until January 1, 2010 in exchange for a security interest in Panmedix's assets. Panmedix also granted each Creditor a 13% interest rate on debts due to the Creditor, unless the Creditor's prior agreement provided for a higher rate. The creditors signed the agreement, apparently without negotiation. The creditors' UCC-1s were prepared and filed soon thereafter. The filings stated that the acknowledgements should be sent to Panmedix, not the individual creditors.
• Defendant McDonald Comrie: $777,500 (back pay) and $302,954.13 (14 loans).
• Defendant Curtis Comrie: $592,100 (back pay) and $148,670.24 (13 loans).
• Defendant Philip Yee: $594,850 (back pay) and $36,950 (12 loans).
• Defendant Tanya Kaushik: $270,600 (back pay).
• Defendant Little Rock, Ltd.: $250,000 (promissory note).
• Defendant Melvin Heller: $175,000 (two promissory notes of $125,000 and $50,000).
• Defendant Ballon Stoll Bader & Nadler, P.C. (BSBN): $105,058.13 (unpaid legal fees).
• Defendant Alexis Theodoracopulos: $101,350 (back pay, partially paid).
• Defendant Relide Realty: $69,788.41 (back rent).
• Defendant David Erlanger: $51,200 (9 loans).
• Defendant John Theodoracopulos: $35,000 (promissory note).
• Defendant Linda Bierer: $30,000 (loan)
• Defendant Richard Peck: $30,000 (promissory note).
• Defendants Nicole and Darin Kaplan: $30,000 (two $15,000 promissory notes).
• Defendant Mabel Truesdell: $30,000 (promissory note).
• Defendant Roberta Comrie: $29,000 (two promissory notes of $10,000 and $19,000).
• Defendant Mary Erlanger: $24,500 (loan)
• Defendant Stephanie Park: $9,600 (backpay)
• Defendant Tara Macleod: $58,280 (loan, partially repaid).
Accordingly, when Plaintiff attempted to execute on the federal judgment on December 3, 2009 by delivering it to the New York City Marshal, the resulting public sale of Panmedix's assets was halted when defendant Yellen delivered a letter on December 11, 2009 notifying the Marshal that "substantially all of the assets of PanMedix, Inc. have been pledged pursuant to [a] Security Agreement dated August 24, 2009 to the scheduled Secured Creditors," who "assert a lien superior to judgment creditor Katherine Priestley."
The First Department has since clarified that "because plaintiff possessed a valid judgment at the time of the fraudulent conveyance, she was not required to also have a lien on the property to enforce the claim." Priestley v. Panmedix, Inc., 134 A.D.3d 642, 643 (1st Dep't 2015) (citing James v. Powell, 25 A.D.2d 1 (1st Dep't 1966).
This action was subsequently commenced on November 8, 2010. However, Plaintiff also pursued relief in federal court. See Priestley v. Panmedix, 18 F.Supp.3d 486 (S.D.N.Y 2014). On May 1, 2014, the Hon. Paul A. Engelmayer - applying New York law - ruled in favor of Plaintiff in the federal action ("the Engelmayer Decision"). See id. at 495-504. Judge Engelmayer "decline[d] to exercise ancillary jurisdiction over" the creditors "who were not parties to the lawsuit that led to the original Judgment" by Judge Baer and instead focused on "the heart of this matter - ... whether the transferor, Panmedix, acted with fraudulent intent." See id. at 495-496. Judge Engelmayer held, in relevant part, that:
Notably the federal action was commenced on July 10, 2013 - subsequent to an arbitration award dated August 17, 2011 that eventually granted Panmedix an interest in certain patents and a judgment in the amount of $108,931.14 against a company called Cognition.
A. Constructive Fraudulent Conveyance
New York law "'identifies several situations involving 'constructive fraud,' in which a transfer made without fair consideration constitutes a fraudulent conveyance, regardless of the intent of the transferor.'" Relevant here, a conveyance by a debtor is deemed
constructively fraudulent under DCL § 273-a if (1) it is "made without fair consideration"; (2) "the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him"; and (3) "after final judgment for the plaintiff, the defendant fails to satisfy the judgment."
Panmedix has stipulated to facts satisfying the second and third prongs of the test: At the time Panmedix executed the Security Agreement, the Judgment had been entered against it, and to this day, no part of the Judgment has been paid to Priestley. Accordingly, the dispositive question is whether the Security Agreement was made without "fair consideration." If so, it cannot take priority over Priestley's interest.
... 1. The Benefit Panmedix Received was Disproportionately Small to the Property it Pledged
The Security Agreement lacked fair consideration because the benefit that Panmedix received from its creditors—solely four months' forbearances—was not a "fair equivalent" and was "disproportionately small" to the valuable security rights that Panmedix relinquished.
First, the contractual forbearance period was only four months. Respondents have not adduced any evidence that Panmedix faced a liquidity crunch or similar problem during that period such that the four-month extension served materially to assist Panmedix. The benefit Panmedix obtained from its creditors' forbearance was de minimis. It was not a fair equivalent to the significant value of the security interest that Panmedix chose to convey, which consisted of a security interest in all of Panmedix's present and future assets. Respondents observe that the Security Agreement was later amended to extend the period of forbearance. But that is of no moment. These later acts cannot be transported back in time to rehabilitate the original Security Agreement as of the moment Panmedix chose to enter into it.
Second, significantly, few if any of Panmedix's creditors were seeking repayment from it. In adopting the Security Agreement, Panmedix could not, therefore, have reasonably believed that the four-month forbearance term would provide it any practical benefit.
... Similarly, the creditors did not appear to view themselves as giving up anything of value when they entered into the Security Agreement. They signed the agreement with minimal discussion; and no creditor appears to have bargained with Panmedix concerning the terms of the Security Agreement.
In sum, in context, there is no reason to believe that Panmedix had any bona fide business reason to enter into the Security Agreement. The Security Agreement instead advantaged the Respondent Creditors relative to Panmedix's longtime nemesis Priestley. The nominal benefit Panmedix received from the agreement—four months' forbearance—was so miniscule, and so practically unnecessary, that it cannot credibly be said that Panmedix received consideration that was a "fair equivalent" of or "not disproportionately small" relative to the security it pledged.
2. The Security Agreement Gave Preferential Treatment to a Controlling Group of Shareholders
The Security Agreement between Panmedix and the Respondent Creditors is, separately, void for lack of good faith, because it gave preferential treatment to a controlling group of Panmedix shareholders.
... The Security Agreement gave preferential treatment regarding Panmedix's pre-existing obligations to the Respondent Creditors, who together own 73.39% of Panmedix's shares, by granting them security interests in Panmedix's assets superior to that of another creditor, Priestley (herself a shareholder, owning 18.87% of Panmedix's shares). It therefore lacks good faith.
To be sure, not all respondent creditors are shareholders of Panmedix; several are not. But the inclusion of some non-shareholders among the preferred group does not inoculate Panmedix's preferential treatment of a controlling group of its shareholders. Otherwise, insiders and controlling shareholders would be able to evade the restrictions on preferential treatment of shareholders by structuring a preferential arrangement to nominally benefit selected outside creditors. ... Panmedix's shareholder-creditors held 57.88% of the principal secured by the Security Agreement, and Panmedix's outside counsel held an additional 29.50% of the secured principal, such that almost 90% of the secured principal was held by either shareholders or the company's outside counsel. Further, 33.60% of the principal secured by the agreement was owed to Panmedix's two largest shareholders, Comrie and Yee, who are also Panmedix's only officers and directors and, between the two of them, form a controlling bloc, with 41.28% and 12.78% of Panmedix's shares, respectively.
As the foregoing statistics underscore, the Security Agreement fails for lack of good faith. Viewed as a whole, it serves to benefit corporate directors, shareholders, and insiders, to the detriment of creditor Priestley.
B. Actual Fraud
The Security Agreement is also voidable as a conveyance based on actual fraud. The actual fraud provision of the DCL provides that "[e]very conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors." DCL § 276. A showing of actual fraud "does not require proof of unfair consideration or insolvency." Wall St. Assoc. v. Brodsky, 257 A.D.2d 526, 684 N.Y.S.2d 244, 247 (1st Dep't 1999). "'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. ... Among such circumstances are: [1] a close relationship between the parties to the alleged fraudulent transaction; [2] a questionable transfer not in the usual course of business; [3] inadequacy of the consideration; [4] the transferor's knowledge of the creditor's claim and the inability to
pay it; and [5] retention of control of the property by the transferor after the conveyance." Wall St. Assoc., 684 N.Y.S.2d at [247-]248.
This case is brimming with badges of fraud. First, as noted, the parties to the Security Agreement are closely related. Fifty-eight percent of the principal secured by the agreement was owed to Panmedix's shareholders, of which 33.60% was owed to CEO McDonald Comrie and Board Secretary Phillip Yee, the company's sole officers and directors, who also constituted a majority of shareholders; an additional 15.17% was owed to Comrie's siblings; and another 9.10% was owed to other shareholders. In addition, 29.50% was owed to outside legal counsel, and most of that, 27.44%, was owed to the firm that drafted the Security Agreement, Halket Weitz LLP. Second, the transfer was unusual, in that Panmedix pledged as security all of its present and future assets. Third, the forbearance period of four months was clearly inadequate consideration for this extremely broad grant of security. Fourth, Panmedix was well aware of Priestley's claim, as it was represented by counsel in the litigation concerning her claim, and it was also aware of its inability to pay her, as a year had elapsed since the Judgment was rendered, and in that year Panmedix had paid nothing. Finally, Panmedix retained the control of its pledged assets after the transfer, and appears to retain them to this day.
The chronology of events, in fact, compellingly supports the conclusion that Panmedix entered the security agreement not as a bona fide response to the demands of its creditors, but as part of a plan "to hinder [or] delay" Priestley. Priestley had given Panmedix its largest loan, $750,000, and she was the only creditor pursuing litigation to obtain repayment. In July 2009, Weitz, outside counsel for Panmedix, engaged in a detailed search to determine if her security interest was still good, checking with the New York Secretary of State, the U.S. Patent Office, and the "Uniform Check Credit." CEO Comrie then directed Weitz to prepare the Security Agreement, and he reached out to the creditors and "offered" them the Security Agreement. The creditors signed the agreement without negotiation. The creditors' UCC-1s were prepared by Comrie and filed by either Comrie or Halket Weitz, LLP, Panmedix's outside counsel; the filings stated that the acknowledgements should be sent to Panmedix, not the individual creditors. From start to finish, the agreement was thus the brainchild of Panmedix, apparently hatched for the benefit of Panmedix and its insiders and close affiliates, and to the detriment of its major creditor, Priestley. These circumstances strongly suggest that the Security Agreement was entered into opportunistically, to displace Priestley's priority claim on the pledged assets, after Comrie became aware of her failure to make the UCC-1 filing.
In one respect, this is an unusual fraudulent conveyance case. In the paradigmatic such case, a debtor corporation denudes the company of assets by giving them away to preferred insiders or creditors, frustrating the rightful demands of other creditors. Here, in contrast, the debtor corporation's intent in displacing the rightful creditor was, apparently, to keep operating, because the creditor's claim was upon the corporation's few remaining productive assets (e.g., its patents). To do this, the company sought to place the claims of its insider-creditors (its officers and directors, their relatives, and outside counsel) ahead of that creditor, with the aim perhaps of blocking the creditor from taking those assets and thereby fortifying the company, rather than enriching these insider-creditors. But the
law equally forbids such a conveyance as fraudulent. Petitioner Priestley has provided overwhelming indicia of fraud, and the respondents have failed utterly to demonstrable a bona fide purpose for the Security Agreement, other than to block and hinder Priestley from getting at corporate assets to which she was lawfully entitled. The Security Agreement is, therefore, a fraudulent conveyance within the meaning of DCL § 276.Priestley v. Panmedix, 18 F.Supp.3d at 497-504 (citations omitted). On January 22, 2015, this Court, pursuant to a Decision of the First Department dated December 29, 2015, granted Plaintiff leave to join Weitz and Yellen as defendants in this case, to serve and file the Second Amended Complaint, and to assert additional causes of action against all of the defendants. See Priestley v. Panmedix Inc., 134 A.D.3d 642, 642 (1st Dep't 2015).
... For the foregoing reasons, the Court holds that Respondents' Security Agreement is a fraudulent conveyance under DCL §§ 273-a and 276, Priestley's motion for summary judgment is granted; respondents' motion for summary judgment is denied.
Summary Judgment Standard
"The drastic remedy of summary judgment may only be granted where, viewing the facts in the light most favorable to the non-movant, 'the moving party has "tender[ed] sufficient evidence to demonstrate the absence of any material issues of fact," and the nonmoving party has subsequently 'failed to establish the existence of material issues of fact which require a trial of the action'" . . . Summary judgement disposition is inappropriate where varying interferences may be drawn, because in those cases it is for the factfinder to weigh the evidence and resolve any issues necessary to a final conclusion." Dormitory Authority v. Samson Constr. Co., 30 N.Y.3d 704, 717 (2018) (citing Vega v. Restani Const. Corp., 18 N.Y.3d 499, 503 (2012)); see also Cambridge Factors, Inc. v. Stagecoach Bus Sys., Inc., 155 A.D.2d 267, 268 (1st Dep't 1989) ("The function of the court upon a motion for summary judgment is issue finding, not issue determination").
Collateral Estoppel and Res Judicata
As a threshold matter, Plaintiff argues that summary judgment is warranted in light of the Engelmayer Decision under the principle of collateral estoppel. "Collateral estoppel is a component of the broader concept of res judicata, wherein the parties to a litigation and those in privity with them are conclusively bound by a judgment on the merits by a court of competent jurisdiction regarding issues of fact and questions of law necessarily decided therein in any subsequent action." Zimmerman v. Tower Ins. Co. of New York, 13 A.D.3d 137, 139 (1st Dep't 2004); see also Landau, P.C. v. LaRossa, Mitchell & Ross, 11 N.Y.3d 8, 13 (2008); Ryan v. N.Y. Telephone Co., 62 N.Y.2d 494, 500 (1984) ("The doctrine of collateral estoppel, a narrower species of res judicata, precludes a party from relitigating in a subsequent action or proceeding an issue clearly raised in a prior action or proceeding and decided against that party or those in privity, whether or not the tribunals or causes of action are the same.").
State res judicata rules determine the preclusive effect of a federal judgment when the federal judgment references state law. Paramount Pictures Corp. v. Allianz Risk Transfer AG, 31 N.Y.3d 64, 70 (2018); see also Semtek Intern. Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508 (2001). The Engelmayer Decision applied New York law, so New York res judicata rules determine the preclusive effect of the Engelmayer Decision. See Priestley, 18 F.Supp.3d at 497. "New York law analyzes res judicata questions using a transactional approach. '[O]nce a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.' If the party against whom res judicata is invoked had a full and fair opportunity to litigate the claim in a prior proceeding based on the same transaction, but did not raise it therein, he will be barred from raising it in a subsequent action.'" Schwartzreich v. E.P.C. Carting Co., 246 A.D.2d 439, 440-441 (1st Dep't 1998) (quoting O'Brien v. City of Syracuse, 54 N.Y.2d 353, 357 (1981)).
"The party seeking the benefit of collateral estoppel has the burden of demonstrating the identity of the issues in the present litigation and the prior determination, whereas the party attempting to defeat its application has the burden of establishing the absence of a full and fair opportunity to litigate the issue in the prior action." Kaufman v. Eli Lilly and Co., 65 N.Y.2d 449 (1985). "Whether facts are deemed to constitute a single factual grouping for res judicata purposes 'depends on how the facts are related in time, space, origin, or motivation, whether they form a convenient trial unit, and whether ... their treatment as a unit conforms to the parties' expectations or business understanding or usage.'" UBS Securities, LLC v. Highland Capital Management, L.P., 86 A.D.3d 469, 474 (1st Dep't 2011). "[T]he issue must have been material to the first action and 'essential to the decision rendered therein,' and it must be the point that is to be determined in the second action, such that 'a different judgment in the second action would destroy or impair rights or interests established by the first.'" 74 Eldert, LLC v. Sharp, 138 A.D.3d 819, 820 (2d Dep't 2016) (quoting Ryan, 62 N.Y.2d at 500, 501).
Here, Plaintiff has met her burden by demonstrating that the Engelmayer Judgment dealt with the same fact pattern and Security Agreement as the present action. Priestley, 18 F.Supp.3d at 504. Additionally, all Defendants to the present action were named parties to the Engelmayer Judgment or in privity with named parties. See All Terrain Properties Inc. v. Hoy, 265 A.D.2d 87, 92 (1st Dep't 2000) ("The party to be estopped must have been either a party to the prior proceeding or in privity with a party to that proceeding."). Accordingly, all of the requirements of collateral estoppel are present.
All of the Defendants in this case were named Defendants in the federal action culminating in the Engelmayer Decision except for Mr. Weitz and Mr. Yellen. Mr. Weitz and Mr. Yellen were partners of and in privity with named defendants Halket Weitz, LLP and Ballon, Stoll, Bader & Nadler, P.C., respectively. Buechel v. Bain, 97 N.Y.2d 295, 304-05 (2001) ("Privity clearly extends to the partners comprising the law firm..."); see also Acad. Health Professionals Ins. Ass'n v. Lester, 30 A.D.3d 328, 330 (1st Dep't 2006) (holding that law partners are in privity with their firm and with one another for the purposes of collateral estoppel). Accordingly, for purposes of collateral estoppel review, all of the Defendants had a full and fair opportunity to litigate the issue in the prior action. Separately, Relide Realty, Co. is a named Defendant to the federal proceeding that is named as Relide Realty in this action.
The Engelmayer Decision made several significant legal conclusions - most notably that "the Security Agreement lacked fair consideration...is, separately, void for lack of good faith...is also voidable as a conveyance based on actual fraud...[that] the respondents have failed utterly to demonstrate a bona fide purpose for the Security Agreement, other than to block and hinder Priestley from getting at corporate assets to which she was lawfully entitled...[and that the Security Agreement is] a fraudulent conveyance under DCL § 273-a and 276." See Priestley, 18 F.Supp.3d at 498-504. However, Judge Engelmayer only directly ruled on DCL § 273-a and 276. Accordingly, summary judgment is granted on Plaintiff's first cause of action pursuant to DCL § 273-a and fourth cause of action pursuant to DCL § 276 and the court turns to remaining causes of action.
Defendants make much of Engelmayer's comment that this is an "unusual" case where the company was trying to hold a creditor at bay in order to stay afloat rather than trying to enrich certain creditors. The DCL expressly forbids not just defrauding creditors but also efforts to "hinder" and "delay" them. This principle was articulated by Justice Cardozo: "A conveyance is illegal if made with an intent to defraud the creditors of the grantor, but equally it is illegal if made with an intent to hinder and delay them. Many an embarrassed debtor holds the genuine belief that, if suits can be staved off for a season, he will weather a financial storm, and pay his debts in full. The belief, even though well founded, does not clothe him with a privilege to build up obstructions that will hold his creditors at bay." Shapiro v. Wilgus, 287 U.S. 348, 354 (1932) (citations omitted).
Notably, Plaintiff is not entitled to summary judgment on the first, second, third, fourth, fifth, sixth, seventh or eighth causes of action as against Electronic Knowledge Publishing, Inc., Headminder, Inc., Dwight Yellen or Theodore Weitz as they are neither transferors nor transferees of the fraudulent conveyance.
The Debtor and Creditor Laws
This case presents an illustrative example of the limited remedies available pursuant to the Debtor and Creditor Laws. Plaintiff is entitled to summary judgment on liability for multiple provisions of the DCL: the first and fourth causes of action pursuant to DCL § 273-a and 276 granted above, the third cause of action pursuant to DCL § 275, and the sixth cause of action pursuant to the enforcing provisions of DCL § 278. However, with the notable exception of DCL § 276-a discussed below, Plaintiff's remedies under the DCL are limited to voiding the fraudulent conveyance - which due to protracted litigation occurred too late to recover any assets of notable value - and to recovering the fraudulently conveyed assets. See Federal Deposit Ins. Corp. v. Porco, 75 N.Y.2d 840, 842 (1990) ("[A] creditor's remedy for the transfer of its debtor's assets...is...to obtain a nullification of the conveyance and, where undertaken after judgment, additionally to secure the assets in satisfaction of the debt."); see also DCL § 278.
Effective April 4, 2020, the Debtor and Creditor Laws in New York was amended to conform with the Uniform Voidable Transactions Act. The facts of this case predate that amendment and the court's analysis focuses on the Debtor and Creditor Laws as they existed prior to the recent amendments.
Summary judgment is premature on the second cause of action pursuant to DCL § 273. In order to satisfy the requirements of DCL § 273 (or DCL § 275), Plaintiff must establish a lack of fair consideration - which was determined in the Engelmayer judgment. See DCL § 273; see also Priestley, 18 F.Supp.3d at 498 ("the Security Agreement lacked fair consideration."). DCL § 273 also requires that Plaintiff establish Panmedix's insolvency, as defined in DCL § 271, at the time of the Security Agreement - but this is a question of fact that precludes summary judgment. See DCL § 271; see also Priestley, 18 F.Supp.3d at n.6 ("the record is unclear whether Panmedix was insolvent, because it does not establish the value of Panmedix's assets at the time of the Security Agreement."). By contrast, DCL § 275 does not require a finding of insolvency, but rather a finding that "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." See DCL § 275. The uncontested record supports a finding that Panmedix believed that it would not be able to afford to pay the Priestley judgment whenever Plaintiff sought to collect it. See, e.g., Transcript of McDonald Comrie deposition, p. 108, line 9 - p. 112, line 17 ("We were going out of business...they found this thing...that would protect the company, protect the investors. ...The purpose of this was to blunt the execution of - you know, of the company going out of business. ...The idea was that this will protect the company from liquidation. ...I had kind of resigned myself at that time to just going out of business."). Accordingly, summary judgment is granted on the third cause of action pursuant to DCL § 275, but not on the second cause of action pursuant to DCL § 273. See also Tae H. Kim v. Ji Sung Yoo, 776 Fed. Appx. 16, 22 (2nd Cir. 2019) ("[Defendants] argue that—for the purposes of DCL § 273—Mr. Yoo's debts should have been calculated based on his subjective belief of his liabilities, not his actual liabilities. However, DCL § 271, which defines insolvency for the purposes of DCL § 273, sets forth an objective standard... Nothing in this definition allows for subjective assessment...the court found the conveyances fraudulent under § 273 as well as § 275, and under § 273 his subjective beliefs are irrelevant."): Shelly v. Doe, 249 A.D.2d 756 (3d Dep't 1998).
By transferring interests in its assets to shareholders without fair consideration, Panmedix was able to continue operating for years and until their assets were of almost no value. Furthermore, because Panmedix transferred security interests in their assets rather than the assets themselves, Plaintiff cannot now recover any transferred assets as no assets were transferred. See, e.g., Roselink Investors, LLC v. Shenkman, 386 F.Supp.2d 209, 226-227 (S.D.N.Y. 2004) ("there can be no action for damages against a party who did not receive any of the property sought by the creditors."); see also Farm Stores, Inc. v. School Feeding Corp., 102 A.D.2d 249, 256 (2d Dep't 1984); Sullivan v. Kodsi, 373 F.Supp.2d 302, 309 (S.D.N.Y. 2005).
To be sure, Defendants argue that Panmedix's assets were also of little to no value at the time of the fraudulent conveyance. Plaintiff argues that they were worth tens of millions of dollars. That is a question for trial.
It is uncontested that the fraudulent conveyance has already been voided and that the transferred security interests in a now-defunct company are of no value. Accordingly, despite entitlement to summary judgment as to liability for the first, third, fourth and sixth cause of action pursuant to the enforcing provisions of DCL § 278, there is no remedy relating to these causes of action beyond what Plaintiff has already achieved. As Plaintiff cannot collect any damages relating to the first, second, third, fourth or sixth causes of action, these causes of action are dismissed.
"[A] court of equity may award a personal judgment against a party in lieu of setting aside a transfer." Schwartz v. Boom Batta, Inc., 137 A.D.3d 512, 521 (1st Dep't 2016). However, such an award is not appropriate in this matter.
Aiding and Abetting
Plaintiff's eighth cause of action seeks relief under a theory of aiding and abetting a fraudulent conveyance - a remedy that is not available under the DCL. See Porco, 75 N.Y.2d at 842 ("Nor is there merit to plaintiff's argument that [the DCL] created a creditor's cause of action in conspiracy, assertable against nontransferees or nonbeneficiaries solely for assisting in the conveyance of a debtor's assets.").
As a threshold matter, only transferors, transferees and beneficiaries of the fraudulent conveyance can be held liable under aiding and abetting, so defendants Electronic Knowledge Publishing, Inc., Headminder, Inc., Dwight Yellen or Theodore Weitz cannot be held liable under this theory. See, e.g., Amusement Indus., 820 F.Supp.2d at 533 ("a fraudulent conveyance claim may be brought against a defendant who assisted in the fraudulent conveyance where the defendant was itself a transferee of the assets or a beneficiary of the conveyance."); see also Cantor Fitzgerald & Co. v. 8AN Cap. Partners Master Fund, LP, 132 A.D.3d 402, 402 (1st Dep't 2015) ("receipt of a salary from the transferee corporation as an officer of the corporation is not sufficient to render the officer a transferee or beneficiary of the transfer"); BBCN Bank v. 12th Ave. Rest. Group, Inc., 150 A.D.3d 623, 623-24 (1st Dep't 2017) (aiding and abetting not maintained against attorneys who were "not alleged to have been a transferee").
Defendants argue that the signatories of the Security Agreement are not transferees because they did not end up receiving any property. Receipt of actual property is not a requirement of being a transferee, just as Panmedix was deemed a transferor by Judge Engelmayer without transferring actual property. See DCL § 270. The signatories to the Security Agreement were transferred security interests and other rights and thereby qualify as transferees. Retention of the actual property by the transferor is not uncommon and is a recognized badge of fraud in some cases.
"The elements of a cause of action alleging aiding and abetting fraud are 'an underlying fraud, [the] defendants' knowledge of this fraud, and [the] defendants' substantial assistance in the achievement of the fraud.'" Swartz v. Swartz, 145 A.D.3d 818 (2d Dep't 2016) (citing Ginsburg Dev. Cos., LLC v. Carbone, 134 A.D.3d 890, 893-894 (2d Dep't 2015)); Global Mins. & Metals Corp. v. Holme, 35 A.D.3d 93, 102, 824 N.Y.S.2d 210, 217 (1st Dep't 2006). The first prong of this test - an underlying fraud - has been established by the holding of the Engelmayer Decision and the uncontested factual record. See Priestley, 18 F. Supp. 3d at 504 (S.D.N.Y. 2014); see generally Paramount, 31 N.Y.3d at 72. ("the determination of an essential issue is binding in a subsequent action, even if it recurs in the context of a different claim.").
The second prong of the test - knowledge of the fraud - is denied by almost all of the defendants and is a question of fact. See, e.g., Quiroz v. 176 N. Main, LLC, 125 A.D.3d 628 (2d Dep't 2015) ("'[o]n a motion for summary judgment..., self-serving statements of an interested party which refer to matters exclusively within that party's knowledge create an issue of credibility which should not be decided by the court but should be left for the trier of facts' (Sacher v. Long Is. Jewish-Hillside Med. Ctr., 142 A.D.2d 567, 568)." However, even viewing the facts in the light most favorable to the non-movant, defendants McDonald Comrie, Halket Weitz, LLP, and Ballon Stoll Bader & Nadler, P.C. were all aware of the Priestley judgment's existence and were all involved in key portions of drafting the Security Agreement, securing signatures, or notifying the public marshal of its existence so as to prevent the public sale of Panmedix assets. This, in combination with Judge Engelmayer's determination that "the respondents have failed utterly to demonstrable [sic] a bona fide purpose for the Security Agreement, other than to block and hinder Priestley from getting at corporate assets to which she was lawfully entitled," satisfy the second prong - knowledge of the fraud - as against defendants McDonald Comrie, Halket Weitz, LLP, and Ballon Stoll Bader & Nadler. P.C. See Priestley, 18 F.Supp.3d at 504.
Philip Yee and David Erlanger were named Defendants on the original Baer judgment and cannot credibly claim that they were unaware of Priestley's claim. However, knowledge of the Priestley judgment alone is insufficient to establish the "knowledge of the fraud" prong of the aiding and abetting analytical framework.
The third prong of aiding and abetting - substantial assistance - "exists 'where (1) a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed, and (2) the actions of the aider/abettor proximately caused the harm on which the primary liability is predicated.'" Stanfield Offshore Leveraged Assets, Ltd. v. Metropolitan Life Ins. Co., 64 A.D.3d 472, 476 (1st Dep't 2009). Based on this definition, and viewing the facts in the light most favorable to Plaintiff, no reasonable jury could find that any of the Defendants other than Panmedix, McDonald Comrie, Halket Weitz, LLP, Theodore Weitz, Ballon Stoll Bader & Nadler, P.C., Dwight Yellen, Philip Yee or David Erlanger provided "substantial assistance." See id. Furthermore, in order to substantially assist, defendant must have "actual knowledge of any fraud perpetrated" and this has not been established for defendants Philip Yee and David Erlanger. See Mateo v. Senterfitt, 82 A.D.3d 515, 517 (1st Dep't 2011). Accordingly, the court limits its analysis of substantial assistance to defendants McDonald Comrie, Halket Weitz, LLP, and Ballon Stoll Bader & Nadler, P.C.
However, as noted, an aiding and abetting claim cannot be maintained against Theodore Weitz or Dwight Yellen.
The uncontested facts relating to McDonald Comrie's actions - including directing (on advice) preparation of the Security Agreement and soliciting the signatures of the signatories - satisfy the requirements of substantial assistance while acting in his capacity as president for Panmedix. However, Defendants Halket Weitz, LLP and Ballon Stoll Bader & Nadler, P.C. argue that they merely furnished legal services at their client's direction. See Ulico Ins. Co. v. Wilson, Elser, Moskowitz & Dicker, 56 A.D.3d 1, 15, 865 N.Y.S.2d 14, 23 (1st Dep't 2008) ("In order to establish that an attorney for an adverse party provided substantial assistance in any effort to defraud, a plaintiff must do more than show that the attorney carried out his client's intentions."). In Oster v. Kirschner, the First Department allowed a claim of aiding and abetting fraud to proceed against a law firm and its partner despite them "assert[ing] that they did nothing more than draft PPMs [Private Placement Memoranda, a type of legal document] for a client." 77 A.D.3d 51, 57 (1st Dep't 2010). The First Department held that "Preparation of PPMs constitutes 'substantial assistance'" because the documents were "from their inception objectionable":
Normally, in order to sustain a claim "against a shareholder of a corporation in his or her individual capacity for actions purportedly taken on behalf of the corporation" plaintiff must establish "that the shareholder exercised complete domination and control over the corporation and abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice." See D'Mel & Assoc. v. Athco, Inc., 105 A.D.3d 451, 452 (1st Dep't 2013). "Factors to be considered in determining whether the owner has abused the privilege of doing business in the corporate form include whether there was a failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use." Id (citing East Hampton Union Free School Dist. v. Sandpebble Bldrs., Inc., 66 A.D.3d 122, 127 [2d Dep't 2009] and noting that "the factors mentioned in East Hampton remain relevant even in a fraudulent conveyance case."); see also Symbax, Inc. v. Bingaman, 219 A.D.2d 552, 554 (1st Dep't 1995). However, it is not necessary to pierce the corporate veil where, as here, the officer is also a transferee. Cf. id ("the Goldmans—who were not transferees of either conveyance—cannot be held liable without piercing the corporate veil unless they benefited from the conveyances.").
The case of National Westminster Bank v Weksel, relied on by defendants, is distinguishable...The recent case of Art Capital Group, LLC v Neuhaus may also be differentiated...Weksel and Art Capital Group involved attorneys who had represented parties in transactions later found to be objectionable. Here, on the other hand, investments in Cobalt were from their inception objectionable.See id; see also Nat'l Westminster Bank v. Weksel, 124 A.D.2d 144 (1st Dep't 1987); Art Capital Group, LLC v. Neuhaus, 70 A.D.3d 605 (1st Dep't 2010). Here, there was no "bona fide purpose for the Security Agreement, other than to block and hinder Priestley from getting at corporate assets to which she was lawfully entitled." See Priestley, 18 F.Supp.3d at 504. Thus the Security Agreement was not a legitimate document that was subsequently used fraudulently - it was itself a fraudulent conveyance with no other bona fide purpose. See id. To paraphrase Oster: unlike the attorneys in Weksel and Art Capital Group who had represented parties in transactions later found to be objectionable, the Security Agreement was "from [its] inception objectionable." See Oster, 77 A.D.3d at 56. Defendant attorneys argue that they did not have knowledge of the fraud they helped perpetuate, but this is drawing distinctions based on gradations of knowledge that are simply not tenable. See id ("To say that defendant attorneys merely furnished legal services to help solicit investments in the Cobalt Multifamily entities, and did not have knowledge of the fraud they helped perpetrate, is drawing distinctions based on gradations of knowledge that are simply not tenable. This Court cannot and will not endorse what is essentially a "see no evil, hear no evil" approach.").
Defendant Halket Weitz LLP argues that the preparation of the Security Agreement itself did not have "any impact on plaintiff" and that "[w]ithout the agreement to join in and sign the Security Agreement, it would have had no meaning or effect." However, drafting a fraudulent conveyance with no "bona fide purpose...other than to block and hinder Priestley from getting at corporate assets to which she was lawfully entitled," only to argue that it was meaningless until signed is precisely the "see no evil, hear no evil" approach that Oster rejects. See Priestley, 18 F.Supp.3d at 504; Oster, 77 A.D.3d at 57. This is particularly true considering Halket Weitz LLP then signed the Security Agreement.
Additionally, Halket Weitz LLP and Ballon Stoll Bader & Nadler, P.C. then proceeded to sign the fraudulent conveyance that they substantially assisted - a decision without precedent that this court is aware of. Cf. BBCN Bank v. 12th Ave. Rest. Group, Inc., 150 A.D.3d 623, 623-24 (1st Dep't 2017) (aiding and abetting not maintained against attorneys who were "not alleged to have been a transferee..."). Accordingly, Plaintiff is entitled to summary judgment as to liability on the eighth cause of action as against Defendants McDonald Comrie, Halket Weitz, LLP and Ballon Stoll Bader & Nadler, P.C.
However, the remedies available in an aiding and abetting fraudulent conveyance action are virtually identical to the remedies available under DCL § 278. See, e.g., Amusement Indus., 820 F.Supp.2d at 533 ("a fraudulent conveyance claim may be brought against a defendant who assisted in the fraudulent conveyance where the defendant was itself a transferee of the assets or a beneficiary of the conveyance. But in such an instance, there is no need to resort to a claim of 'aiding and abetting.' Instead, such a defendant may be sued directly for the fraudulent conveyance."); see also Chemtex, LLC v. St. Anthony Enteprises, Inc., 490 F.Supp.2d 536, 548 (S.D.N.Y. 2007) ("[A] creditor cannot seek monetary damages against a party on an aiding and abetting theory of fraudulent conveyance."). Despite meeting the requirements of aiding and abetting as against some of the Defendants, Plaintiff has no damages to collect and so the seventh cause of action is dismissed as against all defendants.
Punitive Damages
"[P]unitive damages may now be awarded in a case of fraudulent conveyance, but only if the defendant's conduct was gross and wanton and involved high moral culpability." Blakeslee v. Rabinor, 182 A.D.2d 390, 392 (1st Dep't 1992); see also Murphy v. RMTS Assocs., LLC, 71 A.D.3d 582, 583 ("the alleged fraud was not so gross and wanton as to justify an award of punitive damages"); Keen v. Keen, 113 A.D.2d 964, 965-966 (3d Dep't 1985); but see Marine Midland, 120 A.D.2d at 132 ("punitive damages are not properly awarded in a fraudulent conveyance action."). As in almost all fraudulent conveyance cases, no reasonable jury could find that the conduct in this case meets the high bar of "gross" and "wanton" conduct required for punitive damages. But see James v. Powell, 26 A.D.2d 525, 525 (1st Dep't 1966) ("that transfer, deliberately made by defendant Adam Powell, a Member of Congress, to defeat enforcement of a judgment obtained but two weeks earlier, fully justifies substantial punitive damages against him...").
DCL § 276-a
Plaintiff's fifth cause of action is pursuant to DCL § 276-a. DCL § 276-a has a remedy for attorneys' fees distinct from the remedies available in the rest of the DCL:
The First Department has clarified that an action cannot be maintained if the only remedy is DCL § 276-a. See Murphy, 71 A.D.3d 582 ("fraudulent conveyance claims cannot be prosecuted for the sole purpose of obtaining a finding of actual intent to deceive and thus an award of attorneys' fees. Under these circumstances, such an award would be tantamount to an award of punitive damages."). Plaintiff in this action is able to proceed to trial on DCL § 276-a and tortious interference, however.
In an action...brought by a creditor...to set aside a conveyance by a debtor, where such conveyance is found to have been made by the debtor and received by the transferee with actual intent...to hinder, delay or defraud either present or future creditors, in which action...the creditor...shall recover judgment, the justice...presiding at the trial shall fix the reasonable attorney's fees of the creditor...and the creditor...shall have judgment therefor against the debtor and the transferee who are defendants in addition to the other relief granted by the judgment.DCL § 276-a. Judge Engelmayer declined to consider Plaintiff's DCL § 276-a claims as an improper exercise of ancillary jurisdiction. See Priestley, 18 F.Supp.3d at 496. It is uncontested that this court has jurisdiction to consider Plaintiff's DCL § 276-a claims.
"[T]he relevant inquiry under DCL § 276-a is whether [the transferor] made transfers, and [the transferee] received those transfers, with the actual intent to hinder, delay or defraud either present or future creditors." See In re Allou Distributors, Inc., 446 B.R. 32, 74-75 (Bankr. E.D.N.Y. 2011); see also In re All American Petroleum Corp., 259 B.R. 6, 19 (Bankr. E.D.N.Y. 2001) ("Under New York law, an award of attorneys' fees in a fraudulent conveyance action is not appropriate in the absence of a showing of actual intent on the part of the defendant... Pursuant to DCL § 276-a, a party that succeeds in voiding a transfer on the grounds of actual fraud under § 276 is entitled to recover its attorney's fees."); In re Best Products Co., Inc., 168 B.R. 35, 56-57 (Bankr. S.D.N.Y. 1994) ("Imputed fraud does not satisfy § 276-a."); Carey v. Crescenzi, 923 F.2d 18, 21 (2d Cir.1991).
The Engelmayer Decision holds that Defendant Panmedix possessed actual intent, so Plaintiff may collect reasonable attorneys' fees from the now-defunct Panmedix. See Panmedix, 18 F.Supp.3d at 502-504; see also Posner v. S. Paul Posner 1976 Irrevocable Family Trust, 12 A.D.3d 177, 179 (1st Dep't 2004) ("the conveyance was done with the actual intent to hinder, delay or defraud...That is all section 276-a requires."). However, Panmedix acting with actual intent does not establish actual intent for each Defendant and a separate analysis is necessary. See, e.g., In re All American, 259 B.R. at 20 ("Attorneys' fees may not be awarded against a defendant who is a grantee of a fraudulent conveyance without a specific finding that he was aware of and participated in the actual fraud.").
Defendants argues that Judge Engelmayer affirmatively held that only Panmedix had actual intent, noting that Judge Engelmayer said "[f]rom start to finish, the agreement was thus the brainchild of Panmedix," as support for the contention that "Judge Engelmayer's specific factual finding that the agreement was PanMedix's brainchild precludes plaintiff from relitigating the issue" of who could be held responsible for the Security Agreement. See Priestley, 18 F.Supp.3d at 503. This is unpersuasive. Judge Engelmayer explained that he was limiting his analysis to Panmedix for jurisdictional reasons. Judge Engelmayer by his own jurisdictional analysis could not find that the other Defendants lacked intent. Defendants also misconstrue the significance of referring to the Security Agreement as "the brainchild of Panmedix." This description does not exclude the potential involvement of other defendants.
Firstly, DCL § 276-a does not extend to defendants who were not a transferor or transferee of the fraudulent conveyance, so Plaintiff's DCL § 276-a claims are dismissed as against Electronic Knowledge Publishing, Inc., Headminder, Inc., Theodore Weitz, Esq., and Dwight Yellen, Esq. See, e.g., Federal Deposit Ins. Co. v. Porco, 75 N.Y.2d 840, 842 (1990). For the signatory Defendants, "actual intent under Section 276-a may be shown under a badges of fraud analysis." See In re Allou, 446 B.R. at 75 (citing In re Jacobs, 394 B.R. 646 (Bankr. E.D.N.Y. 2008)). "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.' Among such circumstances are: a close relationship between the parties to the alleged fraudulent transaction; a questionable transfer not in the usual course of business; inadequacy of consideration; the transferor's knowledge of the creditor's claim and the inability to pay it; and retention of control of the property by the transferor after the conveyance." Wall St. Assocs. V. Brodsky, 257 A.D.2d 526 (1st Dep't 1999) (quoting Pen Pak Corp. v. LaSalle Nat'l Bank of Chicago, 240 A.D.2d 384, 386 (2d Dep't 1997)). "Of course, the flip side of these badges of fraud is that their absence... would constitute evidence that there was no intent to defraud. The existence of actual intent to defraud is never presumed, and intent to defraud cannot be found 'based merely on suspicion, conjecture, or doubtful inference.'" Lippe v. Bairnco Corp., 249 F.Supp.2d 357 (S.D.N.Y. 2003) (quoting Lowendahl v. Baltimore & Ohio R. Co., 247 A.D. 144 (1st Dep't 1936)).
Judge Engelmayer conducted an extensive analysis of the badges of fraud present in this matter:
This case is brimming with badges of fraud. First, as noted, the parties to the Security Agreement are closely related. Fifty-eight percent of the principal secured by the
agreement was owed to Panmedix's shareholders, of which 33.60% was owed to CEO McDonald Comrie and Board Secretary Phillip Yee, the company's sole officers and directors, who also constituted a majority of shareholders; an additional 15.17% was owed to Comrie's siblings; and another 9.10% was owed to other shareholders. In addition, 29.50% was owed to outside legal counsel, and most of that, 27.44%, was owed to the firm that drafted the Security Agreement, Halket Weitz LLP. Second, the transfer was unusual, in that Panmedix pledged as security all of its present and future assets. Third, the forbearance period of four months was clearly inadequate consideration for this extremely broad grant of security. Fourth, Panmedix was well aware of Priestley's claim, as it was represented by counsel in the litigation concerning her claim, and it was also aware of its inability to pay her, as a year had elapsed since the Judgment was rendered, and in that year Panmedix had paid nothing. Finally, Panmedix retained the control of its pledged assets after the transfer, and appears to retain them to this daySee Priestley, 18 F.Supp.3d at 503. Per the Engelmayer Decision, the Security Agreement was "a questionable transfer not in the usual course of business" that lacked "[a]dequacy of consideration" and resulted in "retention of control of the property by the transferor after the conveyance." See Wall St. Assocs. V. Brodsky, 257 A.D.2d at 526. These badges of fraud are present for all of the signatory Defendants but, even viewing the facts in the light most favorable to the non-movant, there is insufficient additional support to maintain a badges of fraud analysis against any of the signatory Defendants except McDonald Comrie, Philip Yee, David Erlanger, Halket Weitz, LLP, and Ballon Stoll Bader & Nadler, P.C.
The chronology of events, in fact, compellingly supports the conclusion that Panmedix entered the security agreement not as a bona fide response to the demands of its creditors, but as part of a plan "to hinder [or] delay" Priestley. Priestley had given Panmedix its largest loan, $750,000, and she was the only creditor pursuing litigation to obtain repayment. In July 2009, Weitz, outside counsel for Panmedix, engaged in a detailed search to determine if her security interest was still good, checking with the New York Secretary of State, the U.S. Patent Office, and the "Uniform Check Credit." CEO Comrie then directed Weitz to prepare the Security Agreement, and he reached out to the creditors and "offered" them the Security Agreement. The creditors signed the agreement without negotiation. The creditors' UCC-1s were prepared by Comrie and filed by either Comrie or Halket Weitz, LLP, Panmedix's outside counsel; the filings stated that the acknowledgements should be sent to Panmedix, not the individual creditors. From start to finish, the agreement was thus the brainchild of Panmedix, apparently hatched for the benefit of Panmedix and its insiders and close affiliates, and to the detriment of its major creditor, Priestley. These circumstances strongly suggest that the Security Agreement was entered into opportunistically, to displace Priestley's priority claim on the pledged assets, after Comrie became aware of her failure to make the UCC-1 filing.
In so holding, the court does not weigh on the credibility of any of the parties' testimony. See, e.g., Quiroz v. 176 N. Main, LLC, 125 A.D.3d at 628 (2d Dep't 2015). Some of the signatory defendants' testimony raises questions as to what was known when the Security Agreement was signed. See, e.g., Roberta Comrie deposition, page 15, line 12 - page 16, line 8; Heller Affidavit in Support of Motion Sequence 011. Nonetheless, the court has conducted the badges of fraud analysis for each defendant and there is insufficient support except as against defendants McDonald Comrie, Philip Yee, David Erlanger, Halket Weitz, LLP, and Ballon Stoll Bader & Nadler, P.C. Notably, the court did not conduct a badges of fraud analysis for defendants Electronic Knowledge Publishing, Inc., Headminder, Inc., Theodore Weitz, Esq., or Dwight Yellen, Esq as they were neither transferors or transferees.
Even viewing the facts in the light most favorable to the non-movant, there are sufficient badges of fraud to establish actual intent for Defendants McDonald Comrie, Ballon Stoll Bader & Nadler, P.C. and Halket Weitz, LLP. These defendants had a "close relationship...to the alleged fraudulent transaction" and "knowledge of the creditor's claim and the inability to pay it." See Wall St. Assocs., 257 A.D.2d at 526; see also Oster v. Kirschner, 77 A.D.3d 51, 57 (1st Dep't 2010); see, e.g., Carey, 923 F.2d at 21-22 (individuals who had "ownership and control" of a company can be held liable under DCL § 276-a).
As in the aiding and abetting analysis, Plaintiff need not pierce the corporate veil as Mr. Comrie is a transferee in his individual capacity. Cf. D'Mel, 105 A.D.3d at 452.
Halket Weitz LLP and Mr. Weitz assert that they had "no understanding as to whether or not any such security agreement would take precedence over plaintiff's unfiled judgment and he expressed that to Mr. Comrie and Mr. Yellen. Indeed, the Halket Weitz defendants did not then or ever express any opinion to any party as to the priority of the liens created by such security agreement." This contradicts the testimony of Mr. Comrie, Mr. Yellen, and Mr. Weitz himself. See Weitz deposition, p.20. However, the court can not and need not weigh on the credibility of the dueling testimony as actual intent is established by applying uncontested facts viewed in the light most favorable to the non-movant to the badges of fraud framework. See Wall St. Assocs., 257 A.D.2d at 526.
Accordingly, Plaintiff's motion for summary judgment as to DCL § 276-a is granted as against Defendants McDonald Comrie, Ballon Stoll Bader & Nadler, P.C. and Halket Weitz, LLP. Plaintiff's DCL § 276-a is dismissed as against all defendants except McDonald Comrie, Ballon Stoll Bader & Nadler, P.C., Halket Weitz, LLP, Philip Yee, and David Erlanger. The determination of "reasonable attorney's fees" should occur at the end of trial. See DCL § 276-a.
Tortious Interference
"Under New York law, there exists a common law cause of action for tortious interference with enforcement of a judgment." Priestley v. Panmedix Inc., 134 A.D.3d 642, 643 (1st Dept. 2015) (citing Quinby v. Strauss, 90 N.Y. 664 (1882)). "At common law, whoever by improper means interfered with the execution of a judgment was liable for the damage he caused to the judgment creditor." Strachman v. Palestinian Auth., 901 N.Y.S.2d 582, 584-585 (1st Dep't 2010). "Included among the factors to be considered are the nature of the conduct of the person who interferes (a chief factor in determining whether conduct is improper), the interest of the party being interfered with . . . and the relationship between the parties.'" See Guard-Life Corp. v. S. Parker Hardware Mfg. Corp., 50 N.Y.2d 183, 190 (1980). Applying these factors to the facts of this case, Plaintiff may be able to establish tortious interference against Defendants Panmedix, McDonald Comrie, Ballon Stoll Bader & Nadler, P.C., Philip Yee, David Erlanger, Theodore Weitz, Dwight Yellen, and/or Halket Weitz, LLP - but not the other Defendants. See Priestley, 134 A.D.3d at 643.
Defendants argue that Plaintiff may not assert a tortious interference based on res judicata because it was not asserted in an earlier proceeding, but the First Department has already resolved the issue of whether Plaintiff can assert a tortious interference claim in this action. See Priestley, 134 A.D.3d at 643; see generally James v. Powell, 25 A.D.2d 1 (1st Dept. 1966). Defendants also argue that Plaintiff has not established damages and therefore cannot maintain the tortious interference cause of action. In general, a plaintiff must be able to establish her damages with reasonable certainty. See Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261, 502 N.Y.S.2d 131 (1986). Damage claims based on speculation and conjecture are insufficient and warrant dismissal of the action. See Awards.Com. LLC v. Kinko's, Inc., 42 A.D.3d 178, 185, 834 N.Y.S.2d 147 (1st Dep't 2007). "As a general rule, the creditor's remedy in a fraudulent conveyance action is limited to reaching the property which would have been available to satisfy the judgment had there been no conveyance." Schwartz v. Boom Batta, Inc., 137 A.D.3d 512, 513 (1st Dep't 2016); see also Fed. Deposit Ins. Corp. v. Heilbrun, 176 A.D.2d 294, 294 (1st Dep't 1990) (personal judgment against transferees in a fraudulent conveyance action "may be obtained where the transferee has made it impossible to return the property to the creditor, by, for example, disposing of wrongfully conveyed property or depreciating it."). Here, supra, it appears that no property was actually transferred - but this is not controlling as to the damages of a tortious interference with a judgment action. A cause of action for unlawful interference with enforcement of a judgment "is neither a suit on the judgment nor for the same relief, and not even specifically to collect it. It is for damages resulting from a tort. The amount of the judgment is not the measure of the damages; it is rather the loss or expense caused by the interference. Conceivably, this could embrace the judgment itself, in which event satisfaction of the judgment so obtained would also operate to satisfy the original judgment." Strachman v. Palestinian Auth., 73 A.D.3d 124, 129 (2d Dep't 2010); See also James v. Powell, 25 A.D.2d 1, 4, 266 N.Y.S.2d 245 (1st Dep't 1966) rev'd on other grounds. Plaintiff is entitled to collect on the depreciation of assets from those who tortiously interfered with the judgment. Plaintiff avers that Defendants depreciated the value of Panmedix's assets, most notably the C-105 patent from $70 million in 2009 to zero in 2014. Conversely, the Defendants argue that the C-105 patent was worthless in 2009. Defendants argue that there are numerous issues with Plaintiff's expert report, but that is an issue for trial. Defendant also argues that Panmedix was never profitable and that Plaintiff has not produced a reasonable means of calculating the amount of the millions in theoretical profits that the expert projects. See Mehta v. New York City Dept. of Consumer Affairs, 12 A.D.2d 236, 237 (1st Dep't 1990). This too is an issue for trial. See, e.g., White v. Farrell, 20 N.Y.2d 487, 501 (2013) (holding that fair market value is an issue of fact, and conflicting evidence purporting to establish different fair market values precludes summary judgment).
Nonetheless, tortious interference does not have an equivalent to the badges of fraud analysis conducted above and is a fact-intensive inquiry. The First Department has cautioned against summary judgment in cases involving tortious interference with a judgment, clarifying "that a cause of action for unlawful interference with enforcement of a judgment has long been recognized in New York, and that it was always an action triable by a jury." Strachman, 901 N.Y.S.2d at 584-585. Plaintiff's request for summary judgment as to the ninth cause of action for tortious interference with a judgment is accordingly denied.
Notably, piercing the corporate veil is also not necessary for tortious interference as "a corporate officer who participates in the commission of a tort may be held individually liable, . . . regardless of whether the corporate veil is pierced." See, e.g., Fletcher v. Dakota, Inc., 99 A.D.3d 43, 49 (1st Dep't 2012).
Conclusion
The motions for summary judgment are resolved in accordance with the above. The action is dismissed as against all Defendants other than Panmedix, McDonald Comrie, Ballon Stoll Bader & Nadler, P.C., Halket Weitz, LLP, Philip Yee, David Erlanger, Theodore Weitz and Dwight Yellen. Plaintiff is entitled to summary judgment on the fifth cause of action pursuant to DCL § 276-a as against Defendants Panmedix, McDonald Comrie, Ballon Stoll Bader & Nadler, P.C. and Halket Weitz, LLP with determination of reasonable fees to occur at the end of trial. Plaintiff's DCL § 276-a claims may also proceed to trial as against Defendants Philip Yee and David Erlanger. Plaintiff may proceed to trial on the ninth cause of action for tortious interference as against Defendants Panmedix, McDonald Comrie, Philip Yee, David Erlanger, Ballon Stoll Bader & Nadler, P.C., Theodore Weitz, Dwight Yellen and Halket Weitz, LLP.
This constitutes the decision and order of the court. Dated: April 9, 2021
ENTER:
/s/_________
Hon. Kelly O'Neill Levy