Opinion
600698/07.
Decided on April 21, 2008.
Defendants move, pursuant to CPLR 3211 (a) (1) and (a) (7), to dismiss the first and second causes of action, and pursuant to CPLR 3016 to dismiss the third through sixth causes of action. Plaintiff cross moves for leave to file a second amended complaint.
Plaintiff, UBS Real Estate Securities Inc. (UBS), brings this action to recover $974,620,00, against defendant Fairmont Funding, Ltd. (Fairmont), which is the amount due under a default provision of an indemnification agreement, dated February 14, 2007 (the Indemnification Agreement), entered into between UBS and Fairmont. UBS also seeks damages for breach of fiduciary duty and fraudulent conveyance against the individual defendants, who are principals of defendant Fairmont. Defendants move to dismiss on the grounds that they were fraudulently induced into signing the Indemnification Agreement and that UBS has failed to plead its claims for fraudulent conveyance with the requisite particularity.
Fairmont is a mortgage lender which is engaged in the business of originating and selling residential mortgage loans. UBS is in the business of purchasing, trading and "securitizing" mortgages. The parties had a business relationship which was governed by a Master Mortgage Loan Sale Agreement (the Purchase Agreement), which they entered into in January 2005, wherein UBS agreed to purchase certain first lien residential mortgage loans from Fairmont.Pursuant to the terms of the Purchase Agreement, Fairmont agreed to re-purchase, at UBS's option, any loan in which one of the first three scheduled monthly payments became delinquent (Delinquent Loans), or to indemnify UBS as to any Delinquent Loan not re-purchased.
In 2005 and 2006, Fairmont sold UBS loans totaling in excess of $24 million and $41 million, respectively.UBS alleges that, during 2006, Fairmont became insolvent, and that its liabilities, including its contingent liabilities under the Purchase Agreement, exceeded its assets. UBS also alleges that while it was insolvent, Fairmont paid dividends and/or distributions to the individual defendants totaling $935,000.
In its complaint, UBS alleges that, at an unspecified date, it demanded that Fairmont repurchase or indemnify UBS as to certain Delinquent Loans. Fairmont did not re-purchase the loans, and thereafter, on February 14, 2007, the parties entered into the Indemnification Agreement.
Pursuant to the Indemnification Agreement, Fairmont agreed that:
(1) in lieu of repurchasing the Delinquent Loans, Fairmont would indemnify UBS in an agreed amount for the reduction in value of the Delinquent Loans and the related losses to UBS;
(2) the indemnification and loss payment Fairmont owed to UBS totaled $974,620 and that the payment was due from Fairmont to UBS as of February 14, 2007;
(3) UBS would temporarily forbear from enforcing its right to collect the indemnity payment from Fairmont if:
(a) Fairmont repurchased three specific mortgage loans no later than February 15, 2007; and
(b) Fairmont paid UBS a total of $309,324 in a series of installments beginning on February 15, 2007 and concluding on July 16, 2007; and finally,
(4) should Fairmont fail to make any of the installment payments, UBS's forbearance would terminate and Fairmont's total indemnity payment of $974,620, less any installments paid would immediately become due as of February 14, 2007 (Brown Aff., Ex. B).
UBS states that Fairmont did not make payments under the Indemnity Agreement and that $974,620 is now due to UBS. In its amended complaint, UBS alleges causes of action for breach of contract against Fairmont (first cause of action) breach of fiduciary duty against the individual defendants (second cause of action), as well as three causes of action for constructive fraudulent conveyance under various sections of the Debtor and Creditor Law (third through fifth causes of action). UBS also seeks attorneys fees incurred in this action (sixth cause of action).
In support of its motion to dismiss the first cause of action, Fairmont states that its principals were tricked into signing the Indemnification Agreement. Defendants allege that, in January 2007, without any prior notice, UBS terminated its account. That action put Fairmont under severe economic pressure in that it stopped receiving sales proceeds from UBS. In order to fund the loans which it originates and then sells, Fairmont borrows money on a short term basis from warehouse lenders until the mortgages are packaged and sold to institutional investors such as UBS. Proceeds from the sales are used by Fairmont to reduce the warehouse loan. Without the sales proceeds, Fairmont was at risk of losing its warehouse line of credit. In addition, at the time that UBS terminated its account, Fairmont had approximately 30 loans which UBS had already cleared for funding but then did not close on. Since Fairmont was committed to the loans, it had no choice but to sell them at deeply discounted prices. Fairmont was therefore anxious to reactivate its account.
On January 18, 2007, Abraham Brown, Director of Operations for Fairmont, submitted a proposed settlement to UBS whereby Fairmont would agree to a payment plan and repurchase certain early default loans if UBS would reactivate Fairmont's account. After several phone calls, and numerous e-mails, during which time Brown stressed that any agreement was contingent upon Fairmont's account being reactivated, the parties agreed to a payment plan.
On February 14, 2007, at approximately 4 p.m., Abraham Brown received the following e-mail from Pamela Walpole of UBS:
Abraham,
Attached is the funding letter reflecting the payment schedule we have discussed and agreed on. Please execute the agreement and fax to my attention at fax 212-713-4533 (let me know when it has been faxed). In addition Brian Bowes [Director of UBS] has had numerous discussions with our credit department to persuade them to reactivate your account. This is a difficult request for our credit department to agree to for an account that is on a payment plan. That being said, your account has been reactivated and will be contingent on the payment plan and repurchasing of the 3 loans you had agreed to repurchase. Please let me know if you have any questions.
Pam
(Brown Aff., Ex. F) (emphasis added).
Brown immediately signed the agreement and faxed it to Walpole. In an e-mail sent to Walpole on February 14th at 4:17 p.m., Brown stated:
Hi,
I had the agreement signed and it has been faxed to the number you provided in the email below. As soon as I get the wiring instructions, I will have the first payment wired. Please have an executed copy sent back to me at your earliest convenience.
Thanks.
ABRAHAM BROWN
( Id.).
Thirty minutes later, at 4:47 p.m., Walpole responded:
Thank you very much Abraham. One note, I misunderstood that timing on the reactivation. I thought it had already occurred however this decision is still pending with our credit department. We should hear back by the morning. I should have the instructions shortly and will forward them. I will also have the executed copy returned ASAP.
Pam( Id.)
Brown states that the next morning, on February 15th, he e-mailed Walpole asking if the Fairmont account had been approved for reactivation. In response, Walpole stated that Brian Bowes, had not gotten to the office yet but should be there shortly. Thereafter Brown states that he made numerous phone calls which went unreturned. Later, on February 16th, at 11:29 a.m. Brian Bowes responded, stating, in part, as follows:
As we discussed in person, getting an account re-activated after taking a huge write-down is difficult. . . .
Regardless of whether the account is re-activated, Fairmont is still obligated to re-purchase all epds. The proposal I made was extraordinarily generous and I expect that you will re-purchase the three loans and make us whole on the others after the huge discount I gave. . . .
( Id., Ex. H).
Fairmont's UBS account was never re-activated.
Fairmont moves to dismiss UBS's first cause of action for breach of contract on the ground that the documentary evidence conclusively demonstrate that UBS fraudulently induced Fairmont to enter into the letter agreement and is therefore void. However, documentary evidence warrants dismissal under CPLR 3211 (a) (1) only if it "resolves all factual issues as a matter of law, and conclusively disposes of the plaintiff's claim'" ( Fortis Fin. Servs., LLC v Fimat Futures USA, Inc., 290 AD2d 383, 383 [1st Dept 2002] quoting Scadura v Robillard, 256 AD2d 567, 567 [1st Dept 1998]). The e-mails submitted by Fairmont do not satisfy that burden. They do not, for example, prove that UBS knowingly made material misrepresentations to Fairmont with fraudulent intent ( see Camofi Master LDC v College Partnership, Inc., 452 F Supp2d 462, 474 [SD NY 2006]). Intent to defraud . . ." is ordinarily a question of fact which cannot be resolved on a motion for summary judgment,' or, in this case, a motion to dismiss" ( Shisgal v Brown , 21 AD3d 845, 847 [1st Dept 2005] quoting Grumman Aerospace Corp. v Rice, 199 AD2d 365, 366 [2nd Dept 1993]). That part of the motion to dismiss the first cause of action is therefore denied.
UBS's second cause of action is for breach of fiduciary duty against the individual defendants. UBS asserts that during the period from April 1 to September 20, 2006, when Fairmont was already insolvent, it transferred $935,000 to the individual defendants in the form of dividends or other distributions. UBS contends that Fairmont's insolvency imposed a fiduciary duty on the individual defendants, as officers and directors of an insolvent corporation, in favor of Fairmont's creditors, including UBS. UBS further contends that defendants breached that duty first, by causing Fairmont to made the transfers to them; and second, by causing Fairmont to enter into the Indemnification Agreement while knowing that Fairmont was unable to satisfy its obligations thereunder.
Under the trust fund doctrine, officers and directors of an insolvent corporation are said to hold the remaining corporate assets in trust for the benefit of its general creditors ( Credit Agricole Indosuez v Rossiyskiy Kredit Bank ( 94 NY2d 541, 549). Defendants move to dismiss this cause of action on the ground that the trust fund doctrine has no application where, as here, the creditor has not yet obtained a judgment on the debt. Defendants rely on Credit Agricole Indosuez v Rossiyskiy Kredit Bank, supra., wherein, referring to the trust fund doctrine, the Court of Appeals stated that ". . . our courts have never deviated from the prevailing majority rule that the trust fund doctrine does not automatically create an actual lien or other equitable interest as such in corporate assets upon insolvency [citations omitted]." ( 94 NY2d at 549). Nonetheless, Agricole Indousuez involved a request for a preliminary injunction. Thus the Court further held as follows:
Most significantly with respect to the possible application of the trust fund doctrine in the context of this case, we have followed the general rule that a simple contract creditor may not invoke the doctrine to reach transferred assets before exhausting legal remedies by obtaining judgment on the debt and having execution returned unsatisfied [citations omitted]. This militates heavily against the use of the trust fund doctrine by a general creditor, having no cognizable interest in the debtor's property, to get a preliminary injunction in aid of a money judgment not yet obtained"
( Id., at 550).
In this case, UBS does not seek a preliminary injunction, and thus does not seek to encumber property it does not yet have an interest in. It merely seeks to avoid the necessity of commencing two separate actions; the first, to obtain a judgment against Fairmont, and the second, to hold the individual officers and directors liable if it should be unable to enforce that judgment as a result of the corporations insolvency. Moreover, the act of asserting causes of action against the individual defendants, in conjunction with the action against Fairmont does not encumber property against which UBS has no interest. UBS has adequately alleged a claim for breach of fiduciary duty against the individual defendants (see Hughes v BCI Intl. Holdings, Inc., 452 F Supp 2d 290 [SD NY 2006]). That part of defendants' motion to dismiss the second cause of action is therefore denied.
The third and fourth causes of action are brought pursuant to Debtor and Creditor Law, sections 273 and 274, respectively. Section 273 provides that: "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." Section 274 provides as follows:
Every conveyance made without fair consideration when the person making it is engaged or is about to engage in a business or transaction for which the property remaining in his hands after the conveyance is an unreasonably small capital, is fraudulent as to creditors and as to other persons who become creditors during the continuance of such business or transaction without regard to his actual intent.
UBS's fifth cause of action is brought pursuant to Debtor and Creditor Law, section 276 which is entitled "Conveyance made with intent to defraud." That section provides that: "Every 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." The sixth cause of action is a related claim for attorneys fees under section 276-a.
Defendants move to dismiss each of UBS's fraudulent conveyance claims on the grounds that these claims are not pleaded with the specificity required by CPLR 3016, and because they are plead "upon information and belief." As to the third and fourth causes of action, sections 273 and 274 do not require that a plaintiff plead or prove intent. CPLR 3016 is therefore inapplicable to these sections ( Menaker v Alstaedter, 134 AD2d 412, 413 [2nd Dept 1987]).
Section 276 does require that the plaintiff prove that the defendant acted with intent to defraud, and therefore, pursuant to CPLR 3016 (b), the plaintiff must state the circumstances constituting the wrong in detail. However, inasmuch as the parties have not yet conducted pre-trial discovery, and the facts regarding any transfers of Fairmont's assets are exclusively within the knowledge of the defendants, the motion to dismiss is denied. Defendants may move for summary judgment dismissing this, or any other cause of action, after discovery.
In its proposed second amended complaint, UBS seeks to add a seventh and alternative cause of action against Fairmont for breach of the original Purchase Agreement, should the Indemnification Agreement be determined to be unenforceable. UBS further seeks to add an eighth cause of action for the repurchase of additional Delinquent Loans which were not included in the Indemnification Agreement, and a ninth cause of action for breach of warranty based upon certain mortgages that were obtained through fraud, and which Fairmont sold to UBS.
The motion is granted. Leave to amend is freely granted, and defendants have not asserted unfair prejudice or surprise. In addition, pleading alternative theories of liability is permitted ( Jeremy's Ale House Also, Inc. v Joselyn Luchnick Irrevocable Trust , 22 AD3d 6, 10 [1st Dept 2005]).
Accordingly, based upon the foregoing it is
ORDERED that the motion by defendants Fairmont Funding, Ltd., Arthur Deitel, Charles Katz and Michelle Katz to dismiss the complaint is denied; and it is further
ORDERED that the motion by plaintiff UBS Real Estate Securities Inc. for leave to serve and file a second amended complaint is granted; and it is further
ORDERED that the proposed second amended complaint, in the form annexed to moving papers shall be deemed served upon service of a copy of this order; and it is further
ORDERED that the defendants shall answer the second amended complaint within 20 days from the date thereof.