Opinion
01 Civ. 3044 (GEL)
March 6, 2003
Gordon Locke, New York, for Plaintiff, TLC Merchant Bankers, Inc.
Frank M. Graziadei, P.C., for Defendants, Gerald Brauser, Bernice Brauser, and Special Care Home Health, Inc.
OPINION AND ORDER
Plaintiff TLC Merchant Bankers, Inc. ("TLC"), having failed to collect a California Superior Court judgment for $291,958.00 against defendant Special Care Home Health, Inc. ("SCHH"), sues here to obtain a judgment against defendants Gerald and Bernice Brauser ("the Brausers"), claiming that they were the beneficiaries of various fraudulent transfers of assets from SCHH after SCHH became insolvent. (Am. Compl. ¶¶ 30, 33.) TLC also appears to seek a determination that the Brausers "have a duty and obligation, as the principal shareholders and as officers of SCHH to cause SCHH to pay the judgment to the extent it has the wherewithal to so do." (Am. Compl. ¶ 24.) In the alternative, TLC seeks a judgment against SCHH, "[i]f the court declines to enforce the [California] judgment," for damages arising from the same breach of contract upon which the California judgment was based. (Am. Compl. ¶¶ 26-27.)
The parties have filed cross-motions for summary judgment. Defendants' motion will be granted in part and denied in part. Plaintiffs motion will be denied in its entirety.
BACKGROUND
The following facts are undisputed by the parties unless otherwise indicated. In 1992, Gerald Brauser bought a controlling interest in SCHH and some time later became its CEO. (Brauser Tr. 16-17, 35.) On May 11, 1995, Brauser, on behalf of SCHH, entered into a written agreement engaging TLC to find a buyer for SCHH. (D. Ex. 1.) The agreement provided that SCHH would pay TLC a finder's fee upon consummation of the sale of SCHH, regardless of whether the buyer had been introduced to SCHH by TLC or through SCHH's independent efforts. SCHH located a buyer, Flagship Healthcare, Inc. ("Flagship"), executing an Asset Purchase Agreement with Flagship on March 10, 1997 (D. Ex. 3), and closing the sale on or about July 1, 1997 (Brauser Tr. 66-68). SCHH never paid a finder's fee to TLC, maintaining that it had cancelled its finder's agreement with TLC no later than January 23, 1997 — early enough, SCHH claimed, to relieve it of any liability to TLC for the Flagship deal.
On September 22, 1998, TLC filed a Demand for Arbitration pursuant to an arbitration clause in the finder's agreement, seeking to recover a finder's fee of $290,000. (P. Ex. N.) SCHH responded in October, 1998, raising the cancellation defense. The arbitrator entered an award in favor of TLC, for the amount requested, on May 3, 1999. (P. Ex. R.) TLC sought confirmation of that award in California Superior Court, and, on November 1, 1999, was awarded a judgment against SCHH for $291,958, representing the arbitration award plus attorney's fees and costs. (P. Ex. T.)
SCHH has not paid any part of the California judgment. At the time of the sale of its assets, SCHH was insolvent, at least partly because of liabilities to the Medicare program that the Brausers claim existed prior to their acquisition of SCHH. Thus, under New York's Debtor and Creditor Law, any transfers made by SCHH without consideration are constructively fraudulent and may be set aside by this Court.
Neither party challenges the applicability of New York law. As the Court previously found, "most of the sale transaction, including the negotiations leading to it and importantly, the closing of that transaction, [took] place in New York." (Oral Arg., Oct. 19, 2001, at 14.)
TLC alleges, in its complaint and in its motion for summary judgment, that the Brausers were the recipients of several such transfers. At the closing, it is undisputed that the Brausers received, out of the $15.6 million purchase price paid by Flagship, back wages and compensation for past benefits. The Brausers' W-2 forms from SCHH for 1997 indicate that, before taxes, Bernice Brauser received $52,272.20 and Gerald Brauser $106,427.32. (D. Ex. 7) In addition, an employment contract executed between Gerald Brauser and Flagship provided for his employment as Director of Acquisitions for Flagship for two years at a salary of $125,000 per year. (P. Ex. I.) Gerald Brauser, at deposition, indicated that he did receive some salary from Flagship under this contract, but could say nothing more definite as to the amount he received than that "I don't know if I was [paid for the full two years] or not, but it's possible that I was," and "I would assume that I was paid for the two years." (Brauser Tr. 99-100.) In a later affidavit he states that he "mis-spoke," at deposition and that upon examining his tax records, he realized that he had never received any salary after the closing. (Brauser Aff. in Support ¶ 31.) His 1998 tax return and W-2 forms are consistent with the later statement, showing that the only wages reported were attributable to an entity other than Flagship. (D. Ex. 7.)
Prior to production of these documents, Gerald Brauser testified at deposition that he received "[s]omething like" $50,000 in back compensation, and that his wife received "[m]aybe 5 or $6,000." (Brauser Tr. 130-31.)
In addition to these salary payments, TLC cites three other conveyances that it seeks to set aside or have converted into a judgment for cash. (1) At closing, $400,000 of the sale proceeds from Flagship were transferred to York Management, Inc. ("York"). TLC alleges that York was "a company controlled by G. Brauser and B. Brauser" (P. Mem. 6), to which Gerald Brauser responds that "[m]y wife did not control York Management" (Brauser Aff. in Response ¶ 11). (2) Bernice Brauser received 130,250 shares of Flagship stock from SCHH out of 132,500 that were conveyed by Flagship to SCHH as part of the purchase price. (P. Ex. J, K.) Gerald Brauser states, and TLC does not dispute, that soon after the closing, Bernice Brauser returned all of this stock to Flagship as indemnification for its losses arising from SCHH's Medicare liabilities. (Brauser Tr. 132,154; Brauser Aff. in Response ¶¶ 8, 12; P. Reply Mem. 8.) (3) Gerald Brauser also received stock options for 7,704 shares of Flagship stock at $25.96 per share. (P. Ex. L.) These options expiry on July 1, 2002 (P. Ex. L), and plaintiff makes no claim that they were ever exercised.
TLC also appears to claim that because the entire $7.1 million in cash that Flagship transferred to SCHH as consideration for SCHH's assets was subsequently transferred from SCHH to third parties "at the direction of Gerald Brauser" (Am. Compl. ¶ 19), the transfers were constructively fraudulent, rendering Brauser personally liable at least to the extent that the payments satisfied the personal guaranties made by the Brausers to institutional lenders on behalf of SCHH. (P. Opp. at 10.)
DISCUSSION
I. Standard for Summary Judgment
When adjudicating a motion for summary judgment, a court must resolve all ambiguities in favor of the nonmoving party, although "the nonmoving party may not rely on conclusory allegations or unsubstantiated speculation." Scott v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998). The court "is not to weigh the evidence but is instead required to view the evidence in the light most favorable to the party opposing summary judgment, to draw all reasonable inferences in favor of that party, and to eschew credibility assessments." Weyant v. Okst, 101 F.3d 845, 854 (2d Cir. 1996). Summary judgment is appropriate only if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). Since "[t]he party seeking summary judgment has the burden to demonstrate that no genuine issue of material fact exists," Boyd v. Reynolds, 316 F.3d 351, 354 (2d Cir. 2003), the motion must be denied "if there is any evidence in the record that could reasonably support a jury's verdict for the non-moving party," Pinto v. Allstate Ins. Co., 221 F.3d 394, 398 (2d Cir. 2000). In particular, "[D]oubts about the credibility of an affidavit or deposition are generally left to the factfinder." Brock v. Wright, 315 F.3d 158, 161 (2d Cir. 2003). In short, "[t]he evidence of the non-movant is to be believed." Anderson v. Liberty Lobby. Inc., 477 U.S. 242, 255 (1986).
II. Fraudulent Transfer Claims
The substance of TLC's complaint is that the Brausers, at the closing of Flagship's purchase of SCHH'S assets or afterwards, were the recipients of various transfers of cash and other assets, which, in light of SCHH's insolvency and TLC's claim, and the absence of any consideration, were "fraudulent conveyances" under New York law:
Every conveyance made and every obligation incurred by a person who is or will be thereby rendered insolvent is fraudulent as to creditors without regard to his actual intent if the conveyance is made or the obligation is incurred without a fair consideration.
N.Y. Debt. Cred. L. § 273. If TLC establishes that the Brausers received such transfers, it is entitled to have them set aside:
Where a conveyance or obligation is fraudulent as to a creditor, such creditor, when his claim has matured, may, as against any person except a purchaser for fair consideration without knowledge of the fraud at the time of the purchase, or one who has derived title immediately or mediately from such a purchaser,
a. Have the conveyance set aside or obligation annulled to the extent necessary to satisfy his claim. . . .
Id. § 278(1). In general, `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."'Manufacturers and Traders Trust Co. v. Lauer's Furniture Acquisition. Inc., 641 N.Y.S.2d 947, 948 (4th Dep't 1996) (quoting Marine Midland Bank v. Murkoff, 508 N.Y.S.2d 17, 25 (2d Dep't 1986)). Where the assets fraudulently transferred were subsequently sold by the defendant to a third party in order to benefit both transferer and transferee over other creditors, a cash judgment may be entered against the defendant to satisfy his liability to the creditor for an amount up to the value of the fraudulently transferred assets. Id.
A. Payments on Behalf of SCHH
TLC's broadest allegation is that, "[i]n connection with the sale of SCHH's assets to Flagship, approximately $7,100,000 of the purchase price paid by Flagship was transferred, without consideration, at the direction of Gerald Brauser." (Am. Compl. ¶ 19.) This Court previously ruled that the allegation that Gerald Brauser "assert[ed] control over the proceeds of the sale in his own personal capacity" was sufficient to avoid dismissal for failure to state a cause of action. (Oral Mg., Oct. 19, 2001, at 19.) However, at this stage of the proceedings, in order to obtain a judgment against the Brausers, TLC must identify and seek to set aside particular conveyances lacking consideration that benefitted the Brausers. Federal Deposit Ins. Corp. v. Porco, 75 N.Y.2d 840, 842 (1990). As defendant correctly argues, "New York's Debtor and Creditor law does not create a remedy for money damages against parties who were neither transferees of assets nor beneficiaries of conveyances." (D. Mem. 6, citing Porco.)
TLC asserts that a portion of this sum "satisfied the personal guarantees of [the Brausers] to [institutional] lenders," and thereby benefitted them. It admits that "the record is not fully developed" that any such guarantees existed, but gamely asks the court to "take judicial notice that institutional lenders to privately held companies always require personal guarantees of the companies['] obligations." (P. Opp. 10 n. 1.) The Court declines to do so. While the practice referred to is indeed common under certain circumstances, the Court may not, in the guise of "judicial notice," simply assume the existence of personal obligations and underlying transactions not documented in the record, and on the basis of that assumption find as a matter of law that the Brausers benefitted by the presumed extinction of the hypothesized obligations.
Since the "mere participation [of the individual defendant] in the transfer of [the] debtor's property" does not create a cause of action,Porco, 75 N.Y.2d at 842, TLC is not entitled to a judgment against the Brausers individually on the basis of their alleged assertion of individual control over the $7,100,000 in sale proceeds. Defendant will be granted summary judgment as to any allegation that one or both of the Brausers personally directed the disposition of the consideration received by SCHH for its assets.
B. Stock and Options
It is undisputed that the stock options given to Gerald Brauser have expiry without being exercised, and therefore never benefitted him. Accordingly, whether or not the grant of the options could be considered a fraudulent transfer, no relief is available to TLC.
With respect to the Flagship stock transferred to SCHH and then to Bernice Brauser, it is quite possible that the transfer to Bernice Brauser was fraudulent under § 273, since SCHH was insolvent and she apparently provided no consideration in return. However, it is undisputed that she subsequently returned those shares to Flagship in order to satisfy an indemnification clause of the asset sale agreement, rendering moot any action to set aside the conveyance to her.
TLC argues that since Bernice Brauser transferred those shares to a third party, Flagship, it may get a money judgment against her for their value to satisfy SCHH's debt to TLC. However, the return of the shares to Flagship does not fall within the Lauer's Furniture exception, since that reconveyance did not itself benefit Bernice Brauser. True, the shares were returned in partial satisfaction of SCHH's liability to Flagship under an indemnity clause in the asset sale agreement. But Bernice Brauser was not personally responsible for indemnifying Flagship: Only the "sellers" of SCHH's assets were liable under the indemnification clause (P. Ex. T at 42), and the "sellers" were SCHH and its corporate affiliates (id. at 1). In other words, SSCH sold its assets for Flagship stock, and in effect returned the stock to satisfy its obligation to Flagship, with no net benefit to Bernice Brauser. This might have been fraudulent to the extent it preferred Flagship as a creditor of SCHH over TLC, but the beneficiary on that theory was Flagship, not Bernice. At most, Bernice participated, as a temporary owner of the shares, in giving the preference to Flagship — a role in the transaction for which, as discussed above, § 273 creates no liability. However one may characterize the transactions, there was no sale by Bernice Brauser to Flagship "in order to benefit both . . . over other creditors," Lauer's Furniture, 641 N.Y.2d at 948 (emphasis added), and thus the general rule that the plaintiff can reach only the shares themselves applies. As explained in the ultimate authority for this exception, a century old New York Court of Appeals decision cited in Lauer's Furniture, it is when the recipient of the fraudulent transfer has "conveyed [the property] to a purchaser . . . and received its value in money" that a court has "the power to compel him to pay this money . . . and . . . a personal judgment [is] proper." Valintine v. Richardt, 126 N.Y. 272, 278 (1891). Here, the Brausers received no money or economic benefit from the stock transfer. Therefore, summary judgment will be granted to defendants with respect to the transfer of the Flagship stock and stock options.
C. Transfer to York Management
The transfer of $400,000 cash to York Management, Inc., cannot on this record be the basis of a judgment against the Brausers. First, TLC has not alleged that the transfer to York was without consideration, and there is uncontradicted (albeit self-serving) evidence in the record that those payments were made in return for prior management services. (Brauser Tr. 94-95, Brauser Aff. in Response ¶ 11.)
But even if, as TLC claims, the transfer to York was constructively fraudulent, that would permit TLC to recover from York, not from the Brausers. "Those seeking to pierce a corporate veil . . . bear a heavy burden of showing that the corporation was dominated as to the transaction attacked and that such domination was the instrument of fraud or otherwise resulted in wrongful or inequitable consequences." TNS Holdings, Inc. v. MKI Securities Corp., 92 N.Y.2d 335, 339 (1998). Whether or not this transaction constituted constructive fraud for the purposes of § 273 — a provision that denotes certain transactions as "fraudulent . . . without regard to . . . actual intent" — there is no showing here of the purposeful abuse of the corporate form required to pierce the corporate veil so as to reach individual stockholders: "The determinative factor is whether `the corporation is a "dummy" for its individual stockholders who are in reality carrying on the business in their personal capacities for purely personal rather than corporate ends.'" Port Chester Elec. Const. Co. v. Atlas, 40 N.Y.2d 652, 657 (1976) (quoting Walkovszky v. Carlton, 18 N.Y.2d 414, 418 (1966)). TLC has not alleged, much less pointed to evidence, that York and the Brausers were related in this fashion. Therefore, defendants' motion for summary judgment will be granted as to this transfer.
D. Salaries
With respect to both the back pay received by the Brausers in 1997 and the putative $250,000 salary received by Gerald Brauser under his post-sale employment contract with Flagship, the record presents triable issues of material fact. The record establishes that the Brausers received $158,000 in pre-tax compensation from SCHH and its affiliate Special Care Home Health of Palm Beach during 1997. (D. Ex. 7.) A reasonable jury could conclude that the Brausers received these salaries without providing in return significant consideration in the form of services. When asked to describe the work he performed for SCHH, Gerald Brauser was vague and inconsistent:
Q: Did you ever give instructions to the people at [SCHH] or any of the other companies I mentioned before?
A: Give instructions?
Q: On operations.
A: I didn't know as much as the people that were there.
Q: When you were there, what did you do?
A: What did I do? It's hard to say exactly.
Q: Well, as best you can say it.
A: I used to hear of complaints and different things. And how Dr. Maytime is crooked, is this and that.
(Brauser Tr. 40-41.) When pressed as to what he did specifically during 1997, Brauser was a little clearer:
Q: What services were you providing to Special Care Home Health, Inc. in 1997?
A: Well, I was CEO up to the time that [Flagship] took over.
Q: Well, but you said that they were already managing the company.
A: Yeah. I never had anything to do with the books, if that's what you're asking me.
Q: No. I'm asking what did you have to do with the operation?
A: Well, I negotiated with the subcontractors . . .
Q: . . . [Y]ou were still signing new subcontracting agreements?
A: Well, subcontracting . . . was the business of [SCHH] . . . . That's how . . . it got visits. When it got a visit, it got reimbursed from Medicare . . . .
Q: Why don't you explain the business.
A: Well, I learned it light . . . .
(Id. at 91-92.) Brauser was similarly vague in justifying his wife's salary. After eliciting testimony from him that she had received a salary from SCHH and its affiliates from 1993 to 1997, the following exchange took place:
Q: And what was Mrs. Brauser doing for the salary that she was being paid?
A: She was, as best I can describe it, . . . a listening post for the various women that had problems, and she tried to help them out.Id. at 50. A reasonable factfinder might or might not infer from these exchanges that the Brausers performed "[in]sufficient work to justify their salaries," so as to render one or both of the salaries fraudulent conveyance under New York law. Local 445 Welfare Fund v. Wein, 855 F.2d 62, 64 (2d Cir. 1988). Gerald Brauser's uncontradicted testimony that he was the CEO of SCHH until Flagship took over supports an inference that he played a significant role in its operations. On the other hand, his description of the specific functions that he and his wife performed is vague and might well be viewed skeptically by a factfinder if presented the same way at trial. Since at the summary judgment stage "doubts about the credibility of an affidavit or deposition are generally left to the factfinder," Brock, 315 F.3d at 161, the effect of this testimony may not here be settled as a matter of law.
Plaintiff asserts that "It is the Defendant's burden to come forward with evidence her wages were fair and reasonable in light of her experience and performance," citing Wein and Glenmore Distilleries Co. v. Seidman, 267 F. Supp. 915, 919 (E.D.N.Y. 1967). (P. Opp. at 5-6.) Neither case supports, or even suggests, this proposition, nor does the Court see any reason to upset the usual rule that the plaintiff bears the burden of proving the elements of his or her claim.
With respect to the salary Gerald Brauser purportedly received from Flagship, two factual issues preclude summary judgment for either side. First, although defendants do not raise the issue, any money received by Brauser for services performed to Flagship was not a transfer, at least formally, from the insolvent SCHH. Flagship, as a going concern, was entitled to hire Brauser and pay him a salary out of its own assets if it chose. If in fact Brauser extracted a no-show consulting agreement for himself from Flagship as part of the consideration for the sale of SCHH's assets, that "salary" might under certain circumstances be deemed an appropriation by Brauser of consideration properly due to SCHH, and therefore be available to SCHH's creditors under § 273. Since the defendants failed to raise this defense, the record is murky on these issues, and summary judgment cannot be granted to defendants on this theory.
Second, the record contains conflicting evidence, albeit generated entirely by Gerald Brauser himself, as to whether he actually received any salary at all under the two-year employment agreement with Flagship. TLC argues that Brauser should be estopped from claiming that he received no compensation under this employment agreement with Flagship because he at first appeared to maintain, at deposition, that he did receive the salary. (P. Reply Mem. 8.) But even ignoring Brauser's later affidavit that he received no such salary, the deposition testimony by itself is inconclusive, since it consists, at its most definite, only of a statement by Brauser that he "assume[d] that [he] was paid for the two years." (Brauser Tr. 100.) This leaves both the fact of the salary and the amount in doubt. TLC is correct that summary judgment cannot be awarded to a defendant who, having at first made statements under oath indicating that he received a salary under an employment agreement, later swears otherwise and produces partial tax records that are insufficient to prove the asserted negative. But neither can summary judgment be awarded to plaintiff for transfers that were contracted for, but which the record does not clearly establish were received.
Plaintiff also argues that defendants should be precluded from relying on tax returns to demonstrate that the money was not received, since the returns were not at first provided in discovery. (P. Opp. at 7-8.) But defendants do not rely on the returns, which in any event would only be defendants' own self-serving unsworn statements, but on Gerald Brauser's affidavits, executed, apparently, after he refreshed his memory by examining his tax records (some of which TLC has now received). In any case, plaintiff would be entitled to impeach such testimony at trial with any inconsistent statements made on the tax returns. Defendants are directed to produce their complete tax returns, including all supporting W-2 and 1099 forms, for 1997, 1998, and 1999, at risk that similar testimony at trial could be precluded, or an adverse inference directed, if the records are not produced.
E. Summary
Both plaintiffs and defendants' motions for summary judgment will be denied with respect to plaintiffs claim that the salaries received from SCHH by the Brausers were fraudulent transfers. With respect to any and all other transfers by SCHH, defendant's motion for summary judgment will be granted and plaintiffs motion denied.
III. Other Claims
TLC, in its "First Claim," asserts that "The individual Defendants have a duty and obligation, as the principal shareholders and as officers of SCHH to cause SCHH to pay the judgment to the extent it has the wherewithal to do so." (Compl. ¶ 24.) It is unclear what form of relief TLC seeks on this basis. Indisputably, those in control of a corporation have a legal obligation to cause the corporation to satisfy judgments entered against it. However, plaintiff admits that "SCHH is no longer in existence" and therefore "does not have any assets to pay its obligation to TLC." (P. Mem. 16.) Thus, any declaration or directive that defendants should take action to require SCHH to act could not benefit the plaintiff in any way. Whatever relief TLC seeks on this claim is therefore moot.
TLC argues that summary judgment on the first claim is mandated by the requirement that federal courts give full faith and credit to state-court judgments pursuant to 28 U.S.C. § 1738. (P. Mem. 10.) TLC could indeed invoke the full faith and credit requirement in seeking some form of enforcement directly against SCHH. But this claim clearly asks for relief as against the "individual Defendants," against whom no court has yet awarded judgment. Nothing in plaintiffs submissions suggests how the first claim can be read as seeking any enforcement of its judgment against SCHH, such as a demand for seizure of any of SCHH's assets located within this Court's jurisdiction. Therefore, full faith and credit is irrelevant to the claim as pled.
TLC, in its second claim, asks for an award of contract damages against SCHH in the event "the court declines to enforce the judgment" already entered against SCHH. TLC, however, has not asked this Court to enforce that judgment; rather, it seeks additional relief against different defendants. In any case, relitigation here of the underlying breach of contract action against SCHH is barred by the doctrine of res judicata. Defendants' motion for summary judgment on this claim is therefore granted.
CONCLUSION
For the reasons stated above, plaintiffs motion for summary judgment is denied in its entirety, and defendant's motion for summary judgment is granted as to all claims except TLC's fraudulent conveyance claims arising from the salaries received by the Brausers from SCHH and Flagship during and after 1997.
SO ORDERED: