Holme v Global Mins. & Metals Corp.

[*1] Holme v Global Mins. & Metals Corp. 2009 NY Slip Op 50252(U) [22 Misc 3d 1123(A)] Decided on January 12, 2009 Supreme Court, New York County Lowe, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 January 12, 2009
Supreme Court, New York County

James W. Holme, Plaintiff,

against

Global Minerals and Metals Corp., GMMC ENTERPRISE CORP., GMMC, INC., GLOBAL MINERALS AND METALS CORP. (LONDON), GMMC, LLC, R. DAVID CAMPBELL, B. H. SHAH, "JOHN DOES" 1 THROUGH 20, AND "JOHN DOE ENTITIES" 1 THROUGH 20, Defendants.



600232/08



Appearances of Counsel:

Plaintiff: Graubard Miller LLP

Irving P. Seidman

For Defendant: Arnold and Porter LLP

Richard B. Lowe, J.

Motion sequence number 001, 002, and 003 are consolidated herein for disposition. This matter arises in connection with the efforts of plaintiff, James W. Holme, to secure a judgment against defendant Global Minerals and Metals Corp. (Global), which, according to defendants, is no longer actively conducting business, and is no longer in good standing in its state of incorporation for failure to pay franchise taxes.

BACKGROUND

Holme and Global apparently entered into a series of agreements under which Global was to make three $1.5 million payments to Holme. Global did not make the second and third payments, and commenced an action against Holme in New York County, styled Global Minerals and Metals Corp. v James W. Holme et al., Index No. 605084/00.[FN1] In that action, Holme counterclaimed seeking money damages for the unpaid amounts. On or about May 3, [*2]2006, a final judgment in the amount of $5,105,135.40 was entered by the County Clerk, New York County, in favor of Holme and against Global (the Judgment).

In June 2007, a deputy sheriff from the Office of the Sheriff, New York County, served an execution of the Judgment on Global's purported offices at 712 Fifth Avenue, New York, New York. The deputy was advised that Global was no longer doing business in the offices, and returned the execution of the Judgment to Holme's attorneys marked "Unsatisfied."

Defendants GMMC Enterprise Corp. (Enterprise), GMMC, Inc. (Old GMMC), Global Minerals and Metals Corp. (London) (Global London), and GMMC, LLC (New GMMC) (sometimes, together with Global, collectively hereinafter referred to as the Corporate Defendants), are alleged alter egos of Global. In addition, defendants R. David Campbell and B. H. Shah (the Individual Defendants) allegedly controlled, dominated, and/or used Global and the Corporate Defendants as alter egos.

In support of these allegations, the complaint states that New GMMC is engaged in essentially the same business, with the same owners, officers and employees, at the same location as Global and Old GMMC. In addition, the complaint alleges that Global monies were used to pay excessive salaries and the personal legal expenses of the Individual Defendants, New GMMC acquired fixtures and assets of Global for no consideration, and the debts of Global and the Individual Defendants were paid out of Global funds, while Holme received no payments. In addition, the complaint alleges that the assets of Global were intentionally depleted in 1999-2000, and Global claimed large business expenses from 2000-2003, despite reporting no revenues for the five-year period starting November 1, 2000.

DISCUSSION

Holme now brings this action against the Corporate and Individual Defendants for the Judgment. The first three causes of action reference Debtor and Creditor Law (DCL) §§ 273, 273-a, and 276, respectively. The fourth cause of action seeks to establish the liability of New GMMC for the Judgment on the basis of de facto merger. The fifth cause of action seeks to hold the Individual Defendants liable for the Judgment based on alter-ego theory.

Under motion sequence number 001, Global London moves to dismiss the complaint for lack of personal jurisdiction. Under motion sequence number 002, all defendants, except Shah, move to dismiss the complaint in its entirety pursuant to CPLR 3013, 3016, and 3211 (a) (7). Motion sequence 003 is Shah's motion to dismiss the complaint with prejudice, pursuant to the same CPLR sections enumerated in motion sequence number 002, and pursuant to the statute of limitations given in CPLR 213 (1).

Upon each of these motions, the complaint will be afforded a liberal construction. The court will accept the facts as alleged in the complaint as true, and accord Holme the benefit of every possible favorable inference. In this regard, the task upon this motion to dismiss is solely to determine whether the facts as alleged fit within any cognizable legal theory, thus answering the query of whether Holme has a cause of action, not whether he has proven, or can prove, a cause of action (Leon v Martinez, 84 NY2d 83, 87-88 [1994]; Morone v Morone, 50 NY2d 481, 484 [1980]; Rovello v Orofino Realty Co., 40 NY2d 633, 636 [1976]).

Personal Jurisdiction over Global London (Sequence Number 001)

Personal jurisdiction over a parent corporation, such as Global, does not in and of itself [*3]give rise to jurisdiction over a wholly-owned subsidiary, such as Global London. Generally, in order for jurisdiction to be established, the plaintiff must establish that the parent so controlled and dominated the subsidiary that it was a mere department of the parent, and the subsidiary's independent corporate existence should be disregarded (Frummer v Hilton Hotels Intl., 19 NY2d 533, cert denied 389 US 923 [1967]).

Piercing the corporate veil in order to find personal jurisdiction here will require a showing that Global exercised complete domination over Global London with respect to transactions attacked, and that such domination was used to commit a fraud or wrong against Holme which resulted in his injury (Shisgal v Brown, 21 AD3d 845, 848 [1st Dept 2005], quoting Matter of Morris v New York State Dept. of Taxation & Fin., 82 NY2d 135, 141 [1993]; Williams Oil Co. v Randy Luce E-Z Mart One, 302 AD2d 736, 739-740 [3rd Dept 2003] ).

At this juncture, however, Holme generally "ha[s] no obligation to demonstrate evidentiary facts to support the allegations contained in the complaint" (see Stuart Realty Co. v Rye Country Store, 296 AD2d 455, 456 [2nd Dept 2002]; Paulsen v Paulsen, 148 AD2d 685 [2nd Dept 1989]), even if those allegations alone, though fitting the general requirements to pierce the corporate veil, are insufficient for judgment.

Nonetheless, although the complaint only states (solely "upon information and belief") that "Global London was doing business in New York," and participated in "wrongful acts set forth herein," Holme has demonstrated that facts may exist to establish personal jurisdiction over Global London (O'Brien v Hackensack Univ. Med. Ctr., 305 AD2d 199 [1st Dept 2003]; Ying Jun Chen v Lei Shi, 19 AD3d 407 [2nd Dept 2005]). For example, Holme submits the statement of defendant Shah, in which he states that he was an officer and director of Global London and Global until 2003, at which time he resigned and transferred his shares in Global to defendant Campbell. Not only did Global London fail to acknowledge this relationship in the original affidavit submitted by its Chairman and Director Colin Goodwin, but the affidavit does not indicate whether Goodwin was with Global London at the time of the alleged transactions.

There is, in any event, a reasonable inference that one of the factors necessary to pierce the corporate veil is present: both Shah and Campbell were directors of Global London at the time of the alleged avoidance of the Judgment against Global (see John John, LLC v Exit 63 Dev., LLC, 35 AD3d 540, 541 [2nd Dept 2006]; Matter of Island Seafood Co. v Golub Corp., 303 AD2d 892, 893-894 [3rd Dept 2003]). Although overlapping directors is intrinsic to a parent-subsidiary relationship, and is not determinative of an action to pierce the corporate veil (Porter v LSB Indus., 192 AD2d 205, 213-214 [4th Dept 1993]), the existence and timing of these transactions between Shah, Campbell, and Global London (during the prior litigation) indicates a "sufficient start" to proving that the basis of jurisdiction is "not frivolous" (Peterson v Spartan Indus., 33 NY2d 463, 467 [1974] ).

As such, it would be, at the very least, premature to dismiss the complaint as against Global London at this early stage of the litigation, when it is possible, even if remotely, that personal jurisdiction may be established (People of State of Ill., ex rel. Washburn v Frank B. Hall & Co., 174 AD2d 562 [2nd Dept 1991]). The motion to dismiss, pursuant to CPLR 3211 (a) (8), for lack of personal jurisdiction over Global London is held in abeyance pending a determination ordered hereunder.

Motion to Dismiss as Against All Defendants Except Shah (Sequence Number 002)

[*4]Fraudulent Conveyances under DCL §§ 273, 273-a, and 276 (1st-3rd Causes of Action)

All defendants except Shah move, pursuant to CPLR 3013, 3016, and 3211 (a) (7), to dismiss the fraudulent conveyance causes of action because they are not plead with sufficient specificity, and, in any event, fail to state a cause of action upon which relief may be granted.

Under DCL § 273, "[e]very conveyance made ... 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 ... without a fair consideration." Holme alleges that Shah and Campbell paid 5.9 million dollars to themselves from 1999 to 2001. In addition, Holme enumerates multiple transfers between Global and New GMMC in 2003 (see Bernfeld Affidavit, ¶ 22). Finally, Holme notes the rapid depletion of the assets of Global, essentially coinciding with the start of the prior litigation in 2000.

Defendants argue that these allegations do not give notice of the transactions challenged because Holme has not provided the specific dates of the transfers, or allege what consideration was given for the transfers.

Under the prevalent policy of "notice pleading" embodied in CPLR Article 30, a pleading need only "give notice' of the event out of which the grievance arises" (Siegel, NY Prac § 208, at 301 [4th ed]). Under the prior Civil Practice Act, a pleader was required to state "facts," but was not required to produce "evidence." The drafters of the CPLR intentionally omitted the word "facts" from pleading requirements (see id. § 207, at 300-301). The level of specificity demanded by defendants is dated and incorrect.

The pleading requirements of CPLR 3016 (b) do not extend to every potential detail, but, rather, have the purpose of informing the defendants of incidents complained of (Pludeman v Northern Leasing Sys., 10 NY3d 486 [2008]). Presumably, defendants were not engaged in paying themselves salaries so in excess of 5.9 millions dollars in the alleged two-year period that they cannot identify which transactions are being challenged. Moreover, it would not behoove defendants to insist that they made so many transfers between Global and New GMMC that they cannot identify which transactions were made from information comprising the sender, recipient, and dollar amount within a three-year period.

Furthermore, CPLR 3211 (d) allows for latitude in pleading requirements for facts unavailable to the non-movant. Thus, the argument that Holme, who claims no (or no "fair") consideration, must identify what consideration was actually exchanged is specious. Defendants' reference to IDC (Queens) Corp. v Illuminating Experiences (220 AD2d 337 [1st Dept 1995]) is misguided. In that matter, the court dismissed an action for fraudulent conveyance where the plaintiff gave no indication of the value of the property transferred, and made no showing of why the consideration given therefor was inadequate. Here, Holme objects, primarily, to the conveyance of monies, in specified amounts, has indicated the value of the assets transferred, and claims there was no consideration. Defendants are free to demonstrate that there was fair consideration for the transfers, but cannot simply point to an alleged gap in Holme's proof, about information within defendants' control, to gain dismissal (compare Calderone v Town of Cortlandt, 15 AD3d 602, 602-603 [2nd Dept 2005]["a party does not carry its burden in moving for summary judgment by pointing to gaps in its opponent's proof, but must affirmatively demonstrate the merit of its claim or defense"]).

Defendants do not specifically comment on the second cause of action, claiming [*5]fraudulent conveyances under DCL § 273-a. That section provides that "[e]very conveyance made without fair consideration when 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, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment."

Here too, Holme has clearly stated a cause of action, having alleged all the specific elements of DCL § 273-a. Defendants, by their failure to offer any arguments or proofs related to the fairness of the consideration for the challenged transfers, cannot prevail on a motion to dismiss the second cause of action.

The third cause of action is based upon DCL § 276. That section 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." As noted above, the complaint identifies the sender, recipient, amounts, and approximate time period of the challenged transfers (compare Lanzi v Brooks, 43 NY2d 778 [1977]; see also Parsons & Whittemore v Abady Luttati Kaiser Saurborn & Mair, P.C., 309 AD2d 665 [1st Dept 2003]). This satisfies CPLR 3016.

Defendants, comparing this matter to New York Fruit Auction Corp. v City of New York (81 AD2d 159 [1st Dept 1981], affd 56 NY2d 1015 [1982]), claim that the complaint is deficient. This argument is misplaced. New York Fruit Auction Corp. was a matter dealing with reliance, and not fraudulent conveyances. Here, there is no reliance at issue. Also, in New York Fruit Auction Corp., the plaintiff claimed fraud on the part of city officials, but did not name them. The court could not allow plaintiff to proceed where no party upon whom plaintiff could have relied was identified. Holme, in contrast, is quite specific about the parties he claims were involved in the violations of DCL § 276: they are the named Corporate and Individual Defendants.

Finally, even before the more liberal pleading standard was adopted, it was accepted that "[t]he general allegation that a conveyance or transfer of property was made with the intent to hinder, delay, and defraud creditors is broad and sweeping in its operation and effect. It involves many elements, and may, before it can be deemed established, require proof of many other facts and circumstances, which may be given in evidence under the general charge, without inserting them in the pleading" (Citizens' Nat. Bank v Hodges, 30 NYS 445, 448 (Sup Ct, 3rd Dept 1894). Holme is not required to provide any further detail supporting his allegations at this early stage of the litigation. The motion to dismiss the first through third causes of action for violations of DCL §§ 273, 273-a, and 276, respectively, is denied.

De Facto Merger (4th Cause of Action)

The complaint states that Global, Old GMMC, Global London, and Enterprise were all merged into New GMMC, and, thus, New GMMC is liable for the Judgment. The de facto merger doctrine is an exception to the general rule that an acquiring corporation does not automatically become responsible for the pre-existing liabilities of the acquired corporation. The factors indicating a de facto merger are: (i) continuity of ownership; (ii) cessation of ordinary business and dissolution of the acquired corporation; (iii) assumption by the successor of the liabilities for the continuation of the business of the acquired corporation; and (iv) continuity of management, personnel, physical location, assets and general business operation (Fitzgerald v [*6]Fahnestock & Co., 286 AD2d 573 [1st Dept 2001]).

Here, defendants argue that the complaint fails to state a claim for de facto merger. Specifically, defendants note that there are insufficient facts alleged to indicate continuity of ownership between Global and New GMMC. Moreover, defendants claim that the complaint fails to allege that Global dissolved its business, or that New GMMC assumed the liabilities of Global necessary for continuation of Global's business.

These arguments are unavailing because the de facto merger doctrine is rooted in equity, and has the purpose of avoiding "patent injustice which might befall a party simply because a merger has been called something else" (Cargo Partner AG v Albatrans, 352 F3d 41, 46 [2nd Cir 2003] [citation omitted]; see also Matter of New York City Asbestos Litigation, 15 AD3d 254, 258 [1st Dept 2005] [purpose of doctrine is "to ensure that a source remains to pay for the victim's injuries"]).

Thus, New York courts agree that a "corporation that acquires the assets of another ... may be held liable for the torts of its predecessor if ... the transaction is entered into fraudulently to escape such obligations (Schumacher v Richards Shear Co., 59 NY2d 239, 244-245 [1983]; see also Ladenburg Thalmann & Co. v Tim's Amusements, 275 AD2d 243 [1st Dept 2000]; Sweatland v Park Corp., 181 AD2d 243 [4th Dept 1992]). As the complaint flatly alleges that the transactions of cash, shares, and assets were all geared toward fraudulently avoiding the Judgment, a cause of action is sufficiently stated to avoid the motion to dismiss.

Alter Ego Liability of Individual Defendants (5th Cause of Action)

The fifth cause of action seeks to pierce the corporate veil of the Corporate Defendants to impose liability on the Individual Defendants. Courts in New York do not favor disregarding the corporate form. As a result, it has long been held that courts will pierce the corporate veil only when necessary to prevent fraud or to achieve equity (see e.g. International Aircraft Trading Co. v Manufacturers Trust Co., 297 NY 285, 292 [1948]; see also Matter of Morris v New York State Dept. of Taxation and Fin., 82 NY2d 135 [1993]).

A decision on whether to pierce the corporate veil in a given instance will necessarily depend on the attendant facts and equities. Thus, there are no "definitive rules governing the varying circumstances when the power may be exercised [citation omitted]. Generally, however, piercing the corporate veil requires a showing that: (1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiff's injury" (Morris, 82 NY2d at 141).

The complaint states that the Individual Defendants were common owners, operated the same business, at the same physical location, with the same assets, business operation, and many of the same employees as the Corporate Defendants. These allegations are sufficient to suggest domination and control (compare Ledy v Wilson, 38 AD3d 214, 215 [1st Dept 2007]; Teachers Ins. Annuity Assn. of Am. v Cohen's Fashion Opt. of 485 Lexington Ave., 45 AD3d 317, 319 [1st Dept 2007]).

Moreover, the allegations that the Individual Defendants transferred money, shares, and assets to enrich themselves and their other companies, including New GMMC, while stripping Global of its assets and making it judgment proof, sufficiently alleges a wrong or injustice against Holme which resulted in his injury. This is sufficient to withstand a motion to dismiss [*7](see e.g. Teachers Ins. Annuity Assn. of Am., 45 AD3d at 319; Simplicity Pattern Co. v Miami Tru-Color Off-Set Serv., 210 AD2d 24 [1st Dept 1994]; 29/35 Realty Assoc. v 35th St. NY Yarn Ctr., 181 AD2d 540, 541 [1st Dept 1992]).

The theory of piercing the corporate veil involves a fact laden inquiry, which is unsuited for resolution on a pre-answer, pre-discovery motion to dismiss (see Ledy, 38 AD3d at 215; Forum Ins. Co. v Texarkoma Transp. Co., 229 AD2d 341, 342 [1st Dept 1996]). What is more, for pleading purposes, at this procedural juncture, when the standard is much less exacting than on a motion for summary judgment (see Thompson v Cooper, 24 AD3d 203, 205-206 [1st Dept 2005]; Aetna Cas. & Sur. Co. v LFO Constr. Corp., 207 AD2d 274, 277 [1st Dept 1994]; Baskin & Sears, P.C. v Lyons, 188 AD2d 307, 308 [1st Dept 1992] ), the complaint is sufficient to withstand a motion to dismiss.

Motion to Dismiss as Against Defendant Shah (Sequence Number 003)

Defendant Shah moves to dismiss the complaint as against him on the bases alleged in motion sequence number 002, and pursuant to CPLR 213 (1), which indicates a statute of limitations of six years for actions with no otherwise prescribed limitations period. In addition, Shah claims that since the de facto merger (fourth) cause of action seeks recovery from New GMMC, and he was never a member of New GMMC, this cause of action must be dismissed. The motion is denied.

First, the arguments with regard to the fourth cause of action are unnecessary because the cause of action does not mention Shah. Second, Shah's arguments with regard to the remaining cause of action are largely indistinguishable from the arguments under motion sequence number 002, and, thus, are similarly unavailing.

With regard to the statute of limitations argument, Shah states, incorrectly, that CPLR 213 (1) applies. In actuality, CPLR 213 (8) is more appropriate. That section provides that in an action based upon fraud, the limitations period is the greater of six years from the accrual date, or two years from the time the plaintiff discovered the fraud. The complaint alleges that in June 2007, upon service of an execution of the Judgment at Global's offices, plaintiff discovered that New GMMC had replaced Global by conducting essentially the same business, with the same owners, officers and employees, at the same location. The Judgment was returned unsatisfied that same month, and this action commenced in 2008 (see e.g. Scola v Morgan, 66 AD2d 228, 233-234 [1st Dept], appeal dismissed 47 NY2d 799 [1979]). Thus, the action was commenced within two years of the discovery of the alleged fraud and is timely.

What is more, the complaint clearly indicates that Holme seeks to enforce the Judgment against the Corporate and Individual Defendants based on alter ego theory. Ergo, all defendants may be treated as a single personality for purposes of enforcement of the Judgment. The references to the fraudulent conveyances in the complaint are part of Holme's claim to pierce the corporate veil, and if the alter ego claim is proved, the normal statute of limitations period applicable to fraud would be supplanted by the period given by CPLR 211 (b), which provides for a twenty-year limitations period to enforce a judgment (compare Solow v Domestic Stone Erectors, 229 AD2d 312, 313 [1st Dept 1996]; see also Commissioners of State Ins. Fund v Ramos, 38 AD3d 445 [1st Dept 2007]; Matter of Arbitration between Holborn Oil Trading and Interpetrol Bermuda, 774 F Supp 840, 841, 847 [SD NY 1991]). As such, especially at this procedural juncture (see Chase Manhattan Bank N.A. v 264 Water St. Assoc., 174 AD2d 504 [1st [*8]Dept 1991] ), the motion to dismiss must be denied.

CONCLUSION

Accordingly, it is hereby

ORDERED that the issue of personal jurisdiction (motion sequence number 001), pursuant to CPLR 301 and 302 (a), over defendant Global Minerals and Metals Corp. (London) is referred to a Special Referee to hear and report with recommendations, except that, in the event of and upon the filing of a stipulation of the parties, as permitted by CPLR 4317, the Special Referee, or another person designated by the parties to serve as referee, shall determine the aforesaid issue; and it is further

ORDERED that motion sequence number 001 is held in abeyance pending receipt of the report and recommendations of the Special Referee and a motion pursuant to CPLR 4403 or receipt of the determination of the Special Referee or the designated referee; and it is further

ORDERED that counsel for the plaintiff shall, within 30 days from the date of this order, serve a copy of this order with notice of entry, together with a completed Information Sheet (copies are available in Rm. 119 at 60 Centre Street, and on the Court's website), upon the Special Referee Clerk in the Motion Support Office in Rm. 119 at 60 Centre Street, who is directed to place this matter on the calendar of the Special Referee's Part (Part 50 R) for the earliest convenient date; and it is further

ORDERED that the remaining motions of defendants to dismiss the complaint (motion sequence numbers 002 and 003) are denied; and it is further

ORDERED that the defendants Global Minerals and Metals Corp., GMMC Enterprise Corp., GMMC, Inc., GMMC, LLC, R. David Campbell, and B. H. Shah are directed to serve an answer to the complaint within 10 days after service of a copy of this order with notice of entry.

Dated: January 12, 2009ENTER:

______________________

J.S.C. Footnotes

Footnote 1:Affirmed by Global Minerals and Metals Corp. v Holme, 35 AD3d 93 (1st Dept 2006), lv denied 8 NY3d 804 (2007).