Brown v Parfums Jacques Bogart S.A.

[*1] Brown v Parfums Jacques Bogart S.A. 2006 NY Slip Op 51481(U) [12 Misc 3d 1187(A)] Decided on May 31, 2006 Supreme Court, New York County Kornreich, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on May 31, 2006
Supreme Court, New York County

Ray Brown and Click Model Management, Inc., Plaintiffs,

against

Parfums Jacques Bogart S.A. a/k/a Jacques Bogart S.A., the Fragrance Group, Ltd., Balenciaga, Inc., Parfums Ted Lapidus, Inc., Select Sales, Inc., Bogart Fragrances, Inc., Houbigant, Inc., French Fragrances, Inc., and John Does, 1-10, Defendants.



606329/98

Shirley Werner Kornreich, J.

This is an action to pierce the corporate veil and void fraudulent transfers in order to enforce an unsatisfied judgment that plaintiffs obtained against defendant The Fragrance Group, Ltd. ("TFG"). Plaintiffs move on their first and third causes of action to impose penalties, pursuant to C.P.L.R. §3126 and the doctrine of spoliation, for the destruction of records relating to the relationship between TFG, its subsidiaries, and its parent corporation. Plaintiffs ask for various penalties to be imposed on defendants as a sanction, including the entry of summary judgment in plaintiffs' favor, striking defendants' defenses, resolving in plaintiffs' favor the issue of whether the corporate veil should be pierced, and/or precluding defendants from presenting evidence on the issue of piercing the corporate veil.

The facts, with few exceptions, are undisputed. Plaintiffs are a modeling agency and a model, who entered into a contract with TFG to use the model's image to promote a cologne, "Balenciaga Pour Homme," which was distributed by TFG in the United States for the parent corporate defendant, Parfums Jacques Bogart S.A. a/k/a/ Jacques Bogart S.A. ("JBSA") . The contract was for the period March 1, 1993 through February 28, 1994 ("Contract"). The judgment was entered in this Court on November 12, 1998 ("Judgment"), in an action entitled Ray Brown and Click Model Management, Inc. v. The Fragrance Group, Inc., Index No. 120904/93 ("Prior Action"). The complaint in the Prior Action was filed in August of 1993. This action was commenced in December of 1998.

TFG is a wholly-owned United States subsidiary of JBSA, a French corporation. Defendants Balenciaga, Inc. ("BI"), Parfums Ted Lapidus, Inc. ("PTLI"), Select Sales, Inc.("SSI") and Bogart Fragrances, Inc. ("BFI"), are wholly-owned United States subsidiaries of [*2]TFG (TFG and its subsidiaries will be referred to collectively as, "US Subsidiaries"and JBSA and the US Subsidiaries will be referred to collectively as"defendants.").

Jacques Konckier ("Konckier") is the chairman and chief executive officer of TFG and the US Subsidiaries. This action was dismissed as against Konckier for lack of personal jurisdiction by order of Justice Bransten, dated May 28, 2004. During a hearing before Special Referee Marian R. Lewis, defendants stipulated that since 1995 Konckier has been the sole officer of TFG and the US Subsidiaries. Special Referee's Report, dated September 16, 2003 ("Referee's Report"). Defendants admit in their answer [FN1] that Konckier is the controlling shareholder of JBSA and that Konckier or JBSA are the sole, majority or controlling shareholders of the US Subsidiaries.

Defendants claim that TFG ceased operations as United States distributor of JBSA's fragrances just before it entered into the Contract. The Contract was reflected in a purchase order prepared by defendants' advertising agency, Carlson & Partners, Inc., dated December 28, 1992, which was accepted by the plaintiff modeling agency on January 5, 1993. Plaintiffs ascribe sinister motives to this sequence of events, claiming that Konckier substituted defendant Houbigant, Inc. ("HI"), to distribute fragrances for JBSA to avoid TFG's liability for the Contract. Defendants counter that due to financial losses, the US Subsidiaries ceased operations on December 15, 1992, except for operations of BI and TFG's operations as a distributor for HI. See Exhibits 30 and 56 to Plaintiff's Moving Papers, Defendants' Response to Plaintiff's Second Set of Interrogatories, Response 6(a). The record contains an agreement between JBSA, TFG and HI, dated December 15, 1992, in which HI agreed to be a "sub-distributor" of JBSA's fragrances in the United States, while TFG was the distributor. HI went bankrupt in December of 1993, terminating its agreement with TFG. Id. On March 17, 1994, JBSA entered into a distribution agreement with Fragrance Marketing Group, Inc. ("FMGI"). Id. By the end of 1995, TFG and the US Subsidiaries other than BI became inactive. Id. TFG's President, Mark Mondschein, died in March of 1996. Id. In April of 1996, JBSA consented to an assignment of the FMGI distribution agreement to French Fragrances, Inc. ("FFI"). The distributor agreements with HI, FMGI and FFI are annexed as Exhibits C, E and F, respectively, to the affirmation of Charles L. Rosenzweig, dated September 22, 2005. The parties agree that HI, FMGI and FFI are entities with ownership and management unrelated to JBSA and the US Subsidiaries.

The parties do not agree about the relationship between BI and TFG. Plaintiffs allege that BI operated as TFG's alter-ego, and that BI was an undisclosed principal in the Contract. Defendants allege that BI is a distributor of JBSA's women's clothing and was never involved in fragrance distribution.

The first cause of action in the first amended complaint alleges that BI is principally liable for the Judgment because TFG acted as its authorized agent in breaching the Contract. The third cause of action seeks to pierce the corporate veil and hold JBSA and the US Subsidiaries, inter alia, jointly and severally liable for the Judgment.

On September 28, 1999, defendants moved to dismiss the complaint for lack of jurisdiction and failure to state a cause of action. The personal jurisdiction issues were referred to a Special Referee. On May 28, 2004, Justice Eileen Bransten confirmed the Referee's Report [*3]and decided the motion, dismissing some causes of action and giving plaintiffs leave to replead. Defendants' answer to the first amended complaint is dated January 7, 2005. On January 17, 2005, plaintiffs served their first request for production of documents and their first interrogatories. Discovery,thus, did not commence until 2005.

On April 30, 2005, defendants made the following statement in response to plaintiffs' demands for documents relating to transfers of funds between the US Subsidiaries, TFG and JBSA: these US subsidiaries of J.Bogart SA have lost money every year from their date of incorporation until they ceased doing business in 1993 (for all subsidiaries except BALENCIAGA INC. which ceased doing business in 1998 and also lost money from day one). These US subsidiaries never gave any loan to J.Bogart SA. They from time to time paid some invoices for merchandise. In 1994, as shown by the consolidated financial statements, the US subsidiaries owed J.Bogart SA an amount of 11 518 511 USD accumulated losses were 12 578 304 USD.

JBSA submitted two affidavits in 2005 describing its attempts to find records responsive to plaintiff's demands. Emile Ohayon, Chief Financial Officer of JBSA and its subsidiaries, submitted an affidavit stating that he had searched all the records and archives of JBSA and its subsidiaries for all existing and relevant documents requested in plaintiffs' document demands and interrogatories. He further stated that documents relating to JBSA's "own dealings with its subsidiaries" are stored in France and are destroyed after ten years according to French law. With respect to "records of the US companies and concerning their own business in the US, the documents were stored in a New Jersey warehouse, and "[t]o the best of our knowledge, all documents were destroyed when TFG ceased operations and paying for storage in or around 1997." A second affidavit submitted by defendants' counsel, Alexander Stotland, stated that his firm and its predecessor firm had represented the defendants in various matters since 1983, that he had made a diligent search, and that the firm had no documents responsive to plaintiffs' discovery requests other than those that had already been provided. He confirmed that the U.S. Subsidiaries had discontinued operations in the early 1990s.

Defendants have admitted various facts bearing on spoliation and disregard for the separate corporate existence of JBSA and TFG. Records relating to dealings between JBSA and the US Subsidiaries were destroyed after this action was commenced. In a July 2005 Order, this Court permitted plaintiffs to serve a second set of interrogatories directed at document retention and spoliation of evidence. Defendants' response admitted that the records of JBSA's "own dealings with its subsidiaries" for the years 1989,1990, 1991, 1992, 1993 and 1994 ("French Records") were destroyed in 2000, 2001, 2002, 2003, 2004, and 2005, respectively. See Exhibits to Plaintiffs' Motion for Summary Judgment, Vol. III, Exhs. 29 and 30, Interrogatories 13 through 18 and responses thereto. Defendants also admit in their responses to interrogatories that TFG was capitalized with only $5,200.00. Id., Exh. 18, Response to Interrogatory 15. JBSA also forgave TFG's indebtedness in March of 1999. Id., Exh. 54. In 1999, defendants' attorneys advised TFG's accountants that it should not release documents relating to the US Subsidiaries other than TFG in connection with proceedings to enforce the Judgment. Id., Exh. 44.

Defendants argue that the documents in the New Jersey Warehouse were destroyed [*4]before this action was commenced and that plaintiffs have received other records through subpoenas served on TFG's accountants in 1998, which include the following: TFG financial statements for the years 1995 through September 1998; consolidated tax returns for the period 1992 through 1997, trial balances and general ledgers. In addition, plaintiffs deposed the Vice-President of BI, Paulette Mondschein. Defendants also produced the agreements with HI, FMGI and FFI. Included in the record of this motion are consolidated financial statements of the US Subsidiaries, audited in accordance with generally accepted accounting principles, for calendar years 1991 through 1998. The records produced demonstrate that JBSA forgave loans of over $11,000,000.00 for BI and guaranteed its bank loan.

The defense to the motion is that TFG has no assets and records because it lost money and ceased doing business; that the documents provided to plaintiffs prove this; that plaintiffs have received whatever records exist; that plaintiff did not pursue all available discovery; and that plaintiffs failed to identify any key records that it needs to prove its case. Additionally, defendants rely on the disposal of the US Subsidiaries' New Jersey records in the window between close of discovery in the Prior Action and the interposition of the complaint in this action, and French law regarding record retention.

A court may pierce the corporate veil where necessary to prevent fraud or to achieve equity. Billy v. Consolidated Machine Tool Corp., 51 NY2d 152, 163 (1980). The party seeking to disregard the corporate form must show a transaction injurious to the plaintiff as a result of "direct intervention by the parent in the management of the subsidiary to such an extent that the subsidiary's paraphernalia of incorporation, directors and officers' are completely ignored." Id.; see also Morris v. State Dep't of Taxation & Fin., 82 NY2d 135, 141-142 (1993). The following factors should be considered: (1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own.

Wm. Passalacqua Builders v. Resnick Developers S., 933 F.2d 131, 139 (2d Cir. 1991).

The Court cannot avoid the conclusion that JBSA committed spoliation of evidence that has prevented plaintiffs from proving their third cause of action. The missing French Records relate to JBSA's dealing with the US Subsidiaries in the years of the Contract and the ensuing Judgment, the very essence of the claim to pierce the corporate veil.

JBSA's records of its dealings with the US Subsidiaries, if they were available, would prove whether or not corporate formalities were observed, or TFG was deliberately bankrupted to avoid its debts, as plaintiff alleges. In addition, the record on the motion demonstrates other [*5]factors that militate in favor of allowing the judgment against TFG to be enforced against JBSA: undercapitalization of TFG; overlap in ownership, directors and officers; and forgiveness of TFG's debts.

Spoliation is an "evolving rule" for punishing parties who destroy evidence. MetLife Auto & Home, v. Joe Basil Chevrolet, Inc., 1 NY3d 478, 483 (2004). It is separate and apart from the sanctions contained in C.P.L.R. §3126. Id. Sanctions for spoliation should be imposed when a party disposes of key evidence before the other party has an opportunity to examine it, whether the loss of evidence is wilful or negligent, "since a party's negligent loss of evidence can be just as fatal to the other party's ability to present a defense." Squitieri v. City of New York, 248 AD2d 201, 202-203 (1st Dept. 1998); Mudge, Rose, Guthrie, Alexander & Ferdon v. Penguin Air Conditioning Corp., 221 AD2d 243 (1st Dept.1995). In the absence of pending litigation or notice of a specific claim, a defendant should not be sanctioned for discarding items in good faith and pursuant to its normal business practices, but sanctions should be imposed where party destroys evidence, once litigation is pending. Conderman v. Rochester Gas & Elec. Corp., 262 AD2d 1068, 1070 (4th Dept. 1999). Sanctions for spoliation may be imposed if a party destroys evidence prior to a notice or order to produce it, or prior to becoming a party, so long as the party is on notice that the evidence might be needed for the future. MetLife Auto & Home, v. Joe Basil Chevrolet, Inc., supra, citing DiDomenico v. C&S Aeromatik Supplies, Inc., 252 AD2d 41, 53 (2d Dept. 1998); Conderman, supra.

A proper sanction is dismissal if the lost evidence is key to a claim, a less drastic sanction may be imposed where the loss does not deprive the non-responsible party of the means of establishing his or her claim or defense. Marro v. St. Vincent's Hosp. & Med. Ctr., 294 AD2d 341, 342 (2d Dept. 2002). Dismissal is warranted where, without the evidence, the trial would be a rank swearing contest. DiDomenico v. C&S Aeromatik Supplies, Inc., supra at 53.

Applying these principles to the case at bar, summary judgment is granted in favor of plaintiffs as against JBSA on the third cause of action. It is fundamentally unfair to require plaintiffs to come forward with evidence that the destroyed French Records are key evidence of JBSA's complete dominion and control over TFG, when plaintiff has no way of knowing what records were destroyed. That is exactly why there are sanctions for spoliation. Plaintiffs will never know what was in the records, or whether TFG was deliberately denuded of assets, which is why JBSA should have preserved the records. In an action to pierce the corporate veil, records of transactions between the related corporate entities is perhaps the only evidence, other than self-serving statements of the principals seeking to disprove domination and control. The French record retention laws did not relieve JBSA of the obligation to preserve evidence relating to this case, which was in active litigation when records were destroyed. JBSA was on notice that the records of transactions between JBSA and TFG would be needed since the complaint was filed in late December of 1998. Defendants submitted Konckier's affidavit in opposition to this motion and, therefore, there is nothing further to be gained from a trial where he would repeat the same self-serving statements.

However, summary judgment on the third cause of action is denied as against the US Subsidiaries (other than TFG) because there is no proof that they destroyed any records while this action was pending. Maliszewska v. Potamkin NY LP Mitsubishi Sterling, 281 AD2d 353 (1st Dept. 2001). Although these defendants knew that TFG had no assets to satisfy the Judgment since 1992, before the Prior Action was filed, they did not have notice of this action, [*6]until after the records were disposed of by the New Jersey warehouse. There are issues of fact as to whether the knowledge that TFG was inactive and in debt from the time the Prior Action was brought was sufficient to put the US Subsidiaries on notice that the records in the New Jersey warehouse should have been preserved, despite the cost. Lawrence Ins. Group, Inc. v. KPMG Peat Marwick L.L.P., 5 AD3d 918, 920 (3d Dept. 2004)(issues of fact whether unexplained deficit, in-house communications on topic and other lawsuits put defendant on notice to preserve accountants' work papers). Moreover, there are some extant records of the US Subsidiaries, which plaintiffs received from TFG's accountants.

With respect to the first cause of action, which alleges that BI was the undisclosed principal of TFG and therefore liable for the Judgment, the motion for summary judgment or other sanctions is denied. There is no evidence that BI destroyed any records during the pendency of this action and plaintiffs do not explain why they declined to pursue the depositions of Judith Boucaud, Paulette Mondschein, and Jacob Rosenberg, CPA, respectively, a former employee, vice president and auditor of BI.[FN2] This Court ordered all depositions to be completed by June 30, 2005. A later order extended the date to July 8, 2005 for American witnesses, and September 30, 2005 for French witnesses. The Court's records reflect that plaintiffs' time to file the note of issue was stayed by the pendency of this motion, which was made on August 8, 2005. Having failed to avail themselves of all avenues for uncovering evidence relating to the relationship between BI and TFG, plaintiffs are not entitled to summary judgment or other sanctions relating to the first cause of action. Accordingly, it is

ORDERED that the motion is granted solely to the extent that summary judgment is granted in favor of plaintiffs and against Parfums Jacques Bogart S.A. a/k/a Jacques Bogart, S.A. on the third cause of action in the first amended complaint, in the sum of $181,541.00, plus

interest from November 13, 1998 and costs; and it is further

ORDERED that the remainder of the action is severed and shall continue as a separate action; and it is further

ORDERED that balance of the motion is denied in all respects; and it is further

ORDERED that the Clerk shall enter judgment accordingly.

Dated: May 31, 2006

ENTER:

______________________________________

J.S.C. Footnotes

Footnote 1:The pleadings are plaintiffs' first amended complaint and defendants' answer thereto.

Footnote 2:Paulette Mondschein and Jacob Rosenberg were deposed, but only on the limited issue of personal jurisdiction over JBSA and Konckier.