Alpha Funding Group, Inc. v Aspen Funding LLC

[*1] Alpha Funding Group, Inc. v Aspen Funding LLC 2007 NY Slip Op 52160(U) [17 Misc 3d 1126(A)] Decided on October 29, 2007 Supreme Court, Kings County Demarest, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 October 29, 2007
Supreme Court, Kings County

Alpha Funding Group, Inc., Plaintiff,

against

Aspen Funding LLC, et al.,, Defendants.



19204/07



For Plaintiff:

James F. Woods, Esq.

Woods Verzani, LLP

292 Madison Ave. - 22nd Floor

New York, NY 10017

For Defendants:

Roman V. Popik, Esq.

Law Office of Roman V. Popik, PC

1500 Broadway Suite 2013

New York, NY 10036

Carolyn E. Demarest, J.

Upon the foregoing papers in this action by plaintiff Alpha Funding Group, Inc. (Alpha) alleging claims of breach of fiduciary duties, unfair competition, intentional interference with a contractual relationship, breach of the duty of good faith and loyalty, and conversion, and seeking to recover damages, defendants Aspen Funding LLC (Aspen) and Roman Popik (Popik) move, pursuant to CPLR 3211 (a) (7), to dismiss Alpha's amended complaint as against them for failure to state a cause of action, and pursuant to CPLR 3212, for summary judgment dismissing Alpha's amended complaint as against them. Aspen and Popik, in their motion, further move, pursuant to CPLR 3013, to dismiss Alpha's amended complaint based upon the ground that it is inadequately pleaded so as not to provide them with notice of the causes of action being asserted against them. Aspen and Popik also seek an order, pursuant to Rules of the Chief Administrator (22 NYCRR) § 130-1.1 (a) and (b), [*2]imposing sanctions on Alpha and awarding them costs and attorney's fees based upon the ground that Alpha and its counsel have engaged in frivolous conduct in asserting Alpha's claims against them.

Alpha is a corporation, formed in 2003, which is engaged in the mortgage brokerage business. It performs brokerage and consulting services for clients seeking financial lending for residential and commercial real estate acquisitions. Michael Levitis (Levitis), an attorney, is Alpha's president and sole shareholder. From January 1, 2004 up until March 17, 2005, Yury Polonsky (Polonsky) was Alpha's vice-president. Levitis claims that in March 2005, Polonsky gave him an ultimatum that he had to sell his business (i.e., Alpha) to him or he would take all of Alpha's loan officers and all of Alpha's business and go to another mortgage brokerage company. According to Levitis, when he informed Polonsky that he would not be coerced into selling his business to him, Polonsky, on March 17, 2005, left Alpha and negotiated agreements with all of Alpha's loan officers to leave Alpha and take all of the existing client files and information on previous clients to a new mortgage brokerage company. Levitis states that Polonsky, Alpha's loan officers, and all of Alpha's existing clients were then taken to G & T Capital Inc. (G & T), where Polonsky began working.

In March 2005, based upon the above, Alpha and Levitis brought an action (Alpha Funding Group, Inc. v Polonsky, Sup Ct, Kings County, index No. 8821/05)(the G & T action) against G & T, Polonsky, and Julia Polonsky, Olga Reym (Reym), Ruben Rubel (Rubel), Errol Donaldson (Donaldson), and Alex Tokarev (Tokarev) (who were Alpha's employees that had allegedly left Alpha to join Polonsky in the competing mortgage brokerage business). The G & T action raised, among other claims, claims of breach of fiduciary duty and unfair competition. The commencement of the G & T action had followed an action brought by Polonsky (Polonsky v Levitis, Sup Ct, Kings County, index No. 8819/05) (the Polonsky action), in which Polinsky had claimed that he had formed Alpha with Levitis in April 14, 2003, but that Levitis did not inform the New York State Banking Department (which approved Alpha's application for a mortgage broker license on May 12, 2003) of his ownership interest in Alpha. Polonsky asserted, in the Polonsky action, that he was the majority shareholder of Alpha (holding 52.5 % of its issued and outstanding shares), and that Levitis held the other 47.5% of Alpha's shares, pursuant to a Founders Stockholders' Agreement, which they had entered into on January 1, 2004. Polonsky, in the Polonsky action, alleged, among other claims, a breach of that Founders Stockholders Agreement, and he sought damages. As of the spring of 2006, Popik became the attorney for Polonsky in the Polonsky action and for Polonsky, Julia Polonsky, and Reym in the G & T action.

In June 2007, based upon Polonsky's deposition testimony in the G & T action, Alpha and Levitis learned that Polonsky, after working for G & T, had started working for Aspen [FN1] in June or July 2005, just a few months after he had left Alpha. Aspen is a mortgage [*3]brokerage company, which was formed by Popik, who is its sole owner and its president. Aspen's license to operate as a registered mortgage broker was issued to Aspen by the New York State Banking Department on May 10, 2005. According to Popik, Aspen's actual business operations started on September 8, 2005, when Popik hired Polonsky to manage his business.

Alpha and Levitis assert that while Polonsky was at Aspen, working with Popik, and Popik was serving as the attorney in the pending actions, Polonsky continued to

solicit Alpha's loan officers, requesting them to leave Alpha and take existing business and client information to Aspen. They also assert that these loan officers were promised improper forms of compensation beyond the commissions that they would receive as loan officers, including a percentage of title premiums and other fees on mortgages closed.

On May 29, 2007, Alpha commenced the instant action against Aspen and Polonsky, Reym, Rubel, Donaldson, and Tokarev, as well as Mark Brodsky, Igor Litvak, Ekrem Cilo, Dmitry Morozov, Anna Levina, Boris Yanovsky, and Milan Schwartz (additional former employees of Alpha) (collectively, the employee defendants). On June 27, 2007, Alpha filed an amended summons and complaint, adding Popik as a defendant. Alpha's amended complaint asserts that from its inception in 2003, it has been solely owned by its president, Levitis, and that it employed and/or used the services of loan officers or processors in connection with its business. It alleges that from 2003 to date, it has expended an extensive amount of time, labor, and money to develop financial contacts and a compilation of proprietary and confidential client information, including, but not limited to, the identity of the contact and/or key person for each client. It further alleges that this confidential information constitutes a trade secret and it was made known to no one except Alpha's employees and loan officers.

Alpha's amended complaint also alleges that between July 2003 and October 2005, the employee defendants worked for Alpha at different points in that time period, and had unrestricted access to Alpha's proprietary and confidential client information, including the contact and/or key person of each client, the nature and extent of the client's business activities with it, plans and information in connection with ongoing work for the clients, and information regarding prospective work for the clients. Alpha's amended complaint states that the employee defendants formed a group and misappropriated its trade secrets and /or proprietary and confidential information regarding its clients during and subsequent to each employee defendant's employment by it. It claims that the employee defendants copied its compilation of proprietary and confidential client information, used its confidential and proprietary information to develop a competing business, and solicited its clients by using its trade secrets and/or proprietary and confidential client information.

Alpha's amended complaint specifically asserts that Polonsky induced its employees to quit Alpha and join him in the operation of the mortgage business at Aspen, and that they diverted business opportunities away from Alpha and to them. It states that the employee defendants have solicited Alpha's clients and induced them to do business directly with them [*4]and with Aspen, instead of Alpha. It further states that the employee defendants misappropriated Alpha's trade secrets and/or proprietary and confidential client information in order to advance their business activities or those of Aspen, and to drive Alpha out of business. Alpha's amended complaint asserts that the employee defendants are working in the mortgage business at Aspen, since on or after June 2005 to date, in direct competition with Alpha, using Alpha's trade secrets and proprietary and confidential client information.

Alpha's amended complaint alleges five causes of action. Alpha's first cause of action asserts a claim of breach of fiduciary duties as to the employee defendants, Alpha's second cause of action alleges a claim of unfair competition as to all defendants, Alpha's third cause of action asserts a claim of intentional interference with contractual relations as to the employee defendants, Alpha's fourth cause of action alleges a claim of a breach of the duty of good faith and loyalty as to the employee defendants, and Alpha's fifth cause of action alleges a claim of conversion as against all defendants. Thus, only the second and fifth causes of action are asserted as against Aspen and Popik, and are the subject of their instant motion.

Insofar as Aspen and Popik's motion seeks summary judgment, such a request is premature since issue has not yet been joined by their service of an answer (see CPLR 3212 [b]). As to Aspen and Popik's motion to dismiss, it is noted that on a motion to dismiss, pursuant to CPLR 3211 (a) (7), the court must accept the facts alleged by the plaintiff as true and liberally construe the complaint, according it the benefit of every possible favorable inference (see Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414 [2001]; Leon v Martinez, 84 NY2d 83, 87-88 [1994]).

Alpha's second cause of action for unfair competition alleges that as a proximate result of all of defendants' acts of unfair competition, it has been damaged in a sum of not less than $500,000, plus interest. In addressing this claim, the court notes that in the absence of a nonsolicitation agreement or restrictive covenant, "a former employee may freely compete with a former employer," and even incorporate a competing business (Pearlgreen Corp. v Yau Chi Chu, 8 AD3d 460, 461 [2004]; see also Falco v Parry, 6 AD3d 1138, 1138 [2004]; Wallack Frgt. Lines v Next Day Express, Inc., 273 AD2d 462, 463 [2000]; Starlight Limousine Serv. v Cucinella, 275 AD2d 704, 705 [2000]), and he or she is also not prevented from asking other employees to join in a new business (see Prohealth Care Assoc., LLP v April, 4 Misc 3d 1017 [A], 2004 NY Slip Op 50919 [U], *6 [2004]). However, an employee may not do so by misappropriating trade secrets or employing fraudulent methods (see Don Buckwald & Assoc., Inc. v Marber-Rich, 11 AD3d 277, 279 [2004]; Pearlgreen Corp., 8 AD3d at 461; Starlight Limousine Serv.,275 AD2d at 705; Wallack Frgt. Lines, 273 AD2d at 463; Walter Karl, Inc.v Wood, 137 AD2d 22, 27 [1988]; Long Is. Women's Health Care Assoc., M.D., P.C. v Haselkorn-Lomasky, 10 Misc 3d 1068 [A], 2005 NY Slip Op 52186 [U], *3 [2005]).

A claim of unfair competition is generally predicated "upon the alleged bad faith misappropriation of a commercial advantage belonging to another by exploitation of [*5]proprietary information or trade secrets'" (Beverage Mktg. USA, Inc. v South Beach Beverage Co., Inc., 20 AD3d 439, 440 [2005], quoting Eagle Comtronics v Pico Prods., 256 AD2d 1202, 1203 [1998]; see also Ruder & Finn v Seaboard Sur. Co., 52 NY2d 663, 671 [1981]; Bender Ins. Agency v Treiber Ins. Agency, 283 AD2d 448, 450 [2001]; CBS Corp. v Dumsday, 268 AD2d 350, 353 [2000]; Laro Maintenance Corp. v Culkin, 267 AD2d 431, 432 [1999]). Significantly, the "[r]esolution of . . . [an unfair competition] issue requires a complex factual analysis of a variety of factors including the character and circumstances of the business" (Capitaland Heating & Cooling v Capitol Refrig. Co., Inc., 134 AD2d 721, 722 [1987]).

Here, Alpha predicates its unfair competition claim on the alleged bad faith misappropriation of its proprietary client information, which it alleges is confidential and constitutes a trade secret in its mortgage brokerage business. "Solicitation of an entity's customers by a former employee . . . is not actionable unless [a] customer list could be considered a trade secret or there was wrongful conduct by the employee . . . such as physically taking or copying files or using confidential information" (Starlight Limousine Serv., 275 AD2d at 705; see also Repair Tech Inc. v Zakarin, 8 Misc 3d 1022 [A], 2005 NY Slip Op 51233 [U], *5 [2005]).

"A trade secret or confidential information includes a compilation of information which is used in one's business and which gives the possessor of the information a competitive advantage over one's competitors who do not possess this information" (Hair Say, Ltd. v Salon Opus, Inc., 6 Misc 3d 1041 [A], 2005 NY Slip Op 50382 [U],* 5 [2005]; see also Ashland Mgt. v Janien, 82 NY2d 395, 407 [1993]; Eagle Comtronics, Inc. v Pico, Inc., 89 AD2d 803, 803 [1982]). In determining whether information is a trade secret, the court should consider:

" (1) the extent to which the information is known outside of [the] business ; (2) the extent to which it is known by employees and others involved in [ the] business; (3) the extent of measures taken by the [the business] to guard the secrecy of the information; (4) the value of the information to [the business] and [its] competitors; (5) the amount of effort and money expended by [ the business ] in developing the information; (6) the ease or difficulty with which the information could be properly acquired or duplicated by others'" (Ashland Mgt., 82 NY2d at 407, quoting Restatement of Torts, § 757, comment b; see also Eagle Comtronics, 89 AD2d at 803-804; Hair Say, Ltd., 2005 NY Slip Op 50382 [U], *5).

"Trade secret protection will not attach to customer lists where such customers are readily ascertainable from sources outside the former employee's business unless the employee has stolen or memorized the customer lists"(Repair Tech Inc., 2005 NY Slip Op 51233 [U], *5 ; see also Atmospherics, Ltd. v Hansen, 269 AD2d 343, 343 [2000] ). On the other hand, "[a] customer list will be treated as a trade secret where the names and addresses of the customer[s] are not known in the trade or can be obtained only through extraordinary effort" (Hair Say, Ltd., 2005 NY Slip Op 50382 [U], *4; see also Stanley Tulchin Assoc. v [*6]Vignola, 186 AD2d 183, 185 [1992]; Greenwich Mills Co. v Barrie House Coffee Co., 91 AD2d 398, 402 [1983]; Repair Tech Inc., 2005 NY Slip Op 51233 [U], * 5). "The question of whether or not a customer list is a trade secret is generally a question of fact" (A. F. A. Tours, Inc. v Whitchurch, 937 F2d 82, 89 [2d Cir 1991]; Golden Eagle / Satellite Archery v Epling, 291 AD2d 838, 838 [2002]; Spectron Glass & Elecs. v Marianovsky, 273 AD2d 374, 374 [2000]; Long Is. Women's Health Care Assoc., M.D., P.C., 2005 NY Slip Op 52186 [U], *4).

Aspen and Popik argue that notwithstanding the expenditure of time and money by Alpha to create its alleged contact list, Alpha should not be entitled to any protection since the lending institutions and real estate brokers' information are publicly available over the Internet, and the customers are members of the public at large. Aspen and Popik point to the fact that Alpha noted, in its opposing papers, that closing statements on transactions obtained by Popik in discovery in the G & T action were being used to benefit Polonsky and Aspen. Aspen and Popik argue that these U.S. Department of Housing and Urban Development settlement statements (HUD-1s) are not trade secrets. They state that these HUD-1s were requested in discovery to assist Polonsky in determining the damages sustained by him since they provide full disclosure of all payments made to the mortgage broker. They further state that these HUD-1s only pertain to Alpha's clients who received mortgage loans through Alpha from January 1, 2003 through December 31, 2005.

The court notes, however, that HUD-1s contain nonpublic personal information of its customers, and Popik concedes that their disclosure was subject to a Confidentiality Agreement. Moreover, the confidential client information which Alpha claims was misappropriated by defendants include their customers' names, social security numbers, and specific loan requests for particular residences. Such information is not readily available to the public. Thus, the court finds that questions of fact are involved as to whether Alpha's client information actually constituted a trade secret and/or was maintained with the requisite degree of confidentiality (see Golden/Eagle Satellite Archery, 291 AD2d at 838; Long Is. Women's Health Care Assoc., M.D., P.C., 2005 NY Slip Op 52186 [U],*4).

Aspen further argues that the amended complaint must be dismissed as against it based upon the ground that it did not engage in any wrongdoing. However, where a former employee makes improper use of a former employer's proprietary secrets, "third parties who have knowingly participated in the breach may be held accountable" (Schneider Leasing Plus v Stallone, 172 AD2d 739, 741 [1991]; see also Bender Ins. Agency, 283 AD2d at 450; Execulease Corp. v Jacobs, 188 AD2d 580, 581 [1992 ]). Here Alpha's amended complaint alleges that Aspen knew that the clients and customers belonged to Alpha and that it has used its trade secrets and proprietary and confidential client information to develop its business. [*7]

Additionally, Alpha, to support its claim, has submitted an affidavit of Milan Schwartz,[FN2] in which he attested that on June 26, 2007, Polonsky and Gary Kanfer of Aspen solicited him to leave and take business from Alpha, and to work at Aspen with them for greater compensation and other financial incentives. However, Milan Schwartz, thereafter, in an affidavit dated August 15, 2007, stated that his prior affidavit misrepresented that Polonsky or anyone associated with Aspen ever suggested to him or asked him to disclose the identities of Alpha's current clients or any similar information. He retracts the statements made in his prior affidavit and attests that he was never approached by officers of Aspen with the offer to leave Alpha, taking any clients or records. Milan Schwartz states that Levitis had told him that the only way to receive his paycheck for prior earned brokerage commissions owed to him by Alpha was to sign the prior affidavit.

Milan Schwartz's conflicting affidavits and Aspen's contention that it did not commit any wrongdoing raise issues of fact and credibility which cannot be summarily resolved on a motion to dismiss (see Don Buchwald & Assoc, Inc., 11 AD3d at 279; Howard Berger Co. v Ye, 272 AD2d 445, 445 [2000]; Long Is. Women's Health Care Assoc., M.D., P.C., 2005 NY Slip Op 52186 [U],*4 ). In addition, contrary to Aspen's argument that Alpha's amended complaint does not satisfy the pleading mandates of CPLR 3013, the amended complaint adequately asserts a scheme to divert Alpha's former customers and business to Aspen, in which Aspen participated, and the conduct complained of is set forth in sufficient detail to give the court and it notice of the transactions intended to be proved and the material elements of Alpha's cause of action (see generally Healthcare Capital Mgt. v Abrahams, 300 AD2d 108, 109 [2002]; Shearson Lehman Bros. v Bagley, 205 AD2d 467, 467 [1994]; Two Clinton Sq. Corp. v Friedler, 91 AD2d 1193, 1194 [1983]). Thus, the court concludes that Alpha's unfair competition claim against Aspen is sufficient to withstand Alpha's motion to dismiss at this juncture (see CBS Corp., 268 AD2d at 353; Rao v Verde, 222 AD2d 569, 570 [1995]).

With respect to Popik, Popik (as noted above) is the sole member of Aspen, which is a limited liability company. Limited Liability Company Law § 609 (a) provides that neither a member, manager, or agent of a limited liability company "is liable for any . . . liability of the limited liability company . . . whether arising in tort . . . or otherwise, solely by reason of being such member, manager or agent or acting . . . in such capacities or participating in the conduct of the business of the limited liability company." Thus, Popik is insulated from [*8]liability unless he personally participated in the commission of a tort (see Retropolis, Inc. v 14th St. Dev. LLC, 17 AD3d 209, 211 [2005]).

Alpha's amended complaint contains no specific allegations against Popik other than in his capacity as the owner and mortgage license holder of Aspen. The only specific allegation in the amended complaint regarding Popik is merely that he "has served as the preferred closing attorney for the bank on the mortgage closing at Aspen"[FN3] which is insufficient to support an unfair competition claim. There are also no allegations pleaded to pierce the "corporate veil"[FN4] of Aspen. Thus, there is no basis to sustain a cause of action for unfair competition against Popik. Dismissal of Alpha's second cause of action as against Popik is, therefore, warranted (see CPLR 3211 [a] [7]).

Alpha's fifth cause of action for conversion alleges that Aspen is conducting business with Alpha's clients or customers and knows that these clients or customers are those of Alpha. It asserts that defendants are obligated to account to Alpha for conversion of all revenue, taken for their own use and benefit, derived from customers, funds, and profits belonging to Alpha, and that Alpha has been damaged in the sum of approximately $500,000, plus interest.

" The rule is clear [,however,] that, to establish a cause of action in conversion, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question . . . to the exclusion of the plaintiff's rights" (Estate of Giustino v Estate of DelPizzo, 21 AD3d 523, 523 [2005], quoting Independence Discount Corp. v Bressner, 47 AD2d 756, 757 [1975]; see also Batsidis v Batsidis, 9 AD3d 342, 343 [2004]; Fiorenti v Central Emergency Physicians,305 AD2d 453, 454-455 [2003]; Hart v City of Albany, 272 AD2d 668, 668 [2000]; Long Is. Women's Health Care Assoc., M.D., P.C., 2005 NY Slip Op 52186 [U], *4; Hairsay, Ltd., 2005 NY Slip Op 50382 [U], *6; Prohealth Care Assoc., LLP, 2004 NY Slip Op 50919 [U], *4). Moreover, "[t]angible personal property or specific money must be involved (Independence Discount Corp., 47 AD2d at 757; see also Batsidis, 9 AD3d at 343; Long Is. Women's Health Care Assoc., M.D., P.C., 2005 NY Slip Op 52186 [U], *4).

Here, Alpha merely alleges that its mortgage customers were taken away by Aspen and that the funds derived from their mortgage closings were its property. It does not allege, however, that it was deprived of its customers or excluded from its own customer lists and information; Alpha retained possession of its customer information and could have similarly solicited these customers and attempted to retain them. There was, therefore, no [*9]unauthorized possession of these customers' information to the exclusion of the rights of Alpha, and this essential element of establishing a cause of action for conversion is lacking (see Rao, 222 AD2d at 570; Long Is. Women's Health Care Assoc., M.D., P.C. , 2005 NY Slip Op 52186 [U], *4). Moreover, this loss of mortgage customers does not involve items of tangible personal property or specific money (see Rao, 222 AD2d at 570; Prohealth Care Assoc., LLP, 2004 NY Slip Op 50919 [U], *7). Thus, dismissal of Alpha's fifth cause of action for conversion is mandated (see CPLR 3211 [a] [7]).

Aspen and Popik also seek sanctions, pursuant to Rules of the Chief Administrator ( 22 NYCRR ) § 130 -1.1. They point to the fact that Alpha also brought two other actions against competing mortgage brokerage companies ( i.e., the G & T action and the Continental action), and argue that this shows that the present action is frivolous. Such argument must be rejected since Aspen and Popik have failed to show that Alpha lacks a good faith basis for its claims in this action (see Hair Say, Ltd., 2005 NY Slip Op 50382 [U], *10-11).

Accordingly, Aspen and Popik's motion is granted to the extent that Alpha's second cause of action for unfair competition is dismissed as against Popik, and Alpha's fifth cause of action for conversion is dismissed as against Popik and Aspen; Aspen and Popik's motion is denied in all other respects.

This constitutes the decision and order of the court.

E N T E R,

J. S. C. Footnotes

Footnote 1: According to Polonsky, he also worked as a loan officer for Lighthouse Funding LLC prior to joining Aspen.

Footnote 2: It is noted that Milan Schwartz is a defendant in this action as well as in another action. (Alpha Funding Group, Inc. v Continental Funding LLC, Sup Ct, Kings County, index No. 13784/06) (the Continental action), which was filed, on May 2, 2006, against Continental Funding, LLC (Continental), which is another mortgage brokerage business. Alpha alleges claims against Continental similar to those raised as against G & T in the G & T action, and as against Aspen in this action.

Footnote 3: Popik denies this and asserts that he has never represented any lending institutions at real estate closings.

Footnote 4: The doctrine of piercing the corporate veil is applicable to limited liability companies (see Matias v Mondo Props. LLC, 43 AD3d 367, 368 [2007]; Retropolis, Inc., 17 AD3d at 210).