People v Sangamon Mills, Inc.

[*1] People v Sangamon Mills, Inc. 2014 NY Slip Op 50198(U) Decided on February 6, 2014 Supreme Court, Albany County Lynch, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 February 6, 2014
Supreme Court, Albany County

The People of the State of New York, by ERIC T. SCHNEIDERMAN, Attorney General of the State of New York, Petitioner,

against

Sangamon Mills, Inc., MICHAEL SCOTT, Individually, as an officer of, and doing business as SANGAMON MILLS, INC., Respondents.



6235-13



STATE OF NEW YORK

OFFICE OF THE ATTORNEY GENERAL

Attorneys for Petitioner

(Amy Schallop, Esq., of Counel)

The Capitol

Albany, New York 12224-0341

FARER AND SCHWARTZ, P.C.

Attorneys for Respondents

(Steven D. Farer, Esq., of Counsel)

12 Century Hill Drive

Latham, New York 12110

Michael C. Lynch, J.

By Order to Show Cause (Connolly, J.) dated November 14, 2013 and initially returnable December 4, 2013, the Attorney General instituted this special [*2]proceeding pursuant to Executive Law §63[12] and General Business Law (GBL Article 22-A contending that respondents engaged in fraudulent and illegal practices in connection with their mail order textile business. The core contention is that respondents cashed checks received on numerous orders without delivering the product (Sunflower dishcloths) or otherwise informing customers of the delay and/or their right to a refund, conduct which has continued even after the facility was closed in April 2013 due to building code violations.

The respondents are Sangamon Mills, Inc. and Michael Scott. The submissions show that the corporation was established around 1960 by Mr. Scott's grandmother, Ella M. Fisher. When Mrs. Fisher passed away in September, 2011, Michael Scott inherited 49% of the corporate shares; his mother, who is not involved in the business, inherited 51% of the shares. The corporation was dissolved by proclamation on January 25, 2012 for failure to pay franchise taxes pursuant to Tax Law §203-a (see Exhibit "A" annexed to Schallop Affirmation dated November 14, 2013).

A temporary restraining order has been issued that prohibits respondents from accepting orders or payments for goods or transferring assets. In addition, the corporate bank account at First Niagara Bank has been frozen (see Order to Show Cause [Connolly, J.] dated November 14, 2013).

To begin, it is important to recognize that the respondent corporation has not filed an answer and is in default. Notably, the dissolution under Tax Law §203-a does not insulate the corporation from liability (see Moran Enterprises, Inc v. Hurst, 66 AD3d 972, 975). The dissolution terminates the corporate legal existence and prohibits it from conducting new business, but does not preclude the corporation from winding up its affairs (Id; see BCL §1006).

Moreover, in his answer, respondent Scott has challenged the petition only insofar as petitioner seeks to hold him personally liable.

Petitioner's submissions document, without refute, more than one hundred consumer complaints of having placed orders and paid for dishcloths, without having received the product or a refund (see Exhibits "D" and "M" annexed to Petition). Some orders have been outstanding for more than a year despite orders promising delivery within either a 4 to 6 or 6 to 8 week time frame. In his Answer, respondent Scott admits that respondents engaged in a telephone and mail order business involving, for the most part, bulk sales of dishcloths to charitable and/or religious groups. What is particularly galling is that the business has continued to accept orders and payments after the facility was closed in April, 2013. Notwithstanding the corporate dissolution these funds have been deposited [*3]in the corporate bank account at First Niagara Bank (see Exhibit "K").

Executive Law §63[12] authorizes the Attorney General to prosecute "any person" who engages in "repeated fraudulent or illegal acts or otherwise demonstrate[s] persistent fraud or illegality in...conducting...business". Here, the record abundantly establishes that the respondent corporation engaged in repeated fraudulent conduct in violation of Executive Law §63[12] (see People (Abrams) v. Apple Health & Sport Clubs, 80 NY2d 803; State of New York v. Princess Prestige Co., 42 NY2d 140). The same holds true with respect to petitioner's claim that the corporation's deceptive business practices reiterated in the various customer complaints violated Article 22-A of the General Business Law (see GBL §349; 350; Matter of People v. Applied Card Sys., Inc. 27 AD3d 104; People v. Empyre Inground Pools, 227 AD2d 731). Moreover, the respondents mail-order business was conducted in violation of GBL §396-M, given the failure of timely delivery, the failure to notify and provide timely refunds to the customers and the continued false advertising as to the availability of the product (see, also 16 CFR Part 435).

Accordingly, the petition is granted to the extent that respondent Sangamon Mills, Inc. is permanently enjoined from violating the recited statutory provisions; and further enjoined from engaging in the textile or mail order business within the State of New York until such time as its manufacturing facility is capable of timely delivering products and a $50,000 performance bond is filed with the Attorney General by a surety or bonding company licensed by and in good standing with the NYS Department of Insurance, guaranteeing compliance with this injunction.

In addition, petitioner is awarded a judgment against the respondent corporation in the amount of $72,117.61, representing the amount documented by petitioner as received by respondents from customers who did not receive the product they ordered.

Also, the Court imposes a civil penalty against the respondent corporation in the amount of $25,000 for the violations of Article 22-A of the GBL (see GBL §350-d). Petitioner is also awarded statutory costs in the amount of $2,000 (CPLR §8303[a][6]).

The remaining issue is whether respondent Scott should be held personally responsible for the actions of the corporation described above. "Offiicers and directors of a corporation may be held liable for fraud if they participate in it or have actual knowledge of it" (People [Abrams] v. Apple Health & Sports Clubs, supra, 80 NY2d at 807). Employees, on the other hand, "may be held liable for a company's deceptive sales practices only if they carried out those sales practices" [*4](Matter of People v Telehublink Corp., 301 AD2d 1006, 1010). In his answer and opposing affidavit, Michael Scott acknowledges that he inherited a minority ownership interest in the corporation, but denies that he was ever an officer or director of the corporation. Mr. Scott avers that he was an employee and "not involved in any of the financial aspects of the business" (Scott Affidavit at paragraph 4). He maintains he did not have access to the corporation mail (paragraph 5); that Jane Wheeler, the Chief Fiscal Officer, made all the bank deposits and wrote all the checks (paragraph 10); that he instructed Ms. Wheeler not to accept any customer orders after the facility was shut down in April 2013 (paragraph 18); that he never took an order, never made a bank deposit and had no access to the bank records or the computer records of the business (paragraph 19); and that he did not know the corporation had been dissolved by proclamation (paragraph 20). In short, Mr. Scott denies having any knowledge of or participation in any of the fraudulent practices outlined above. For this reason, he seeks outright dismissal of the petition as against him individually or, at least, a full evidentiary hearing on the issue.

As petitioner counters, there is evidence to the contrary demonstrating Mr. Scott had a much more active role in the business operations. To begin, in his affirmed statement given to the Attorney General's investigator on September 18, 2013, Mr. Scott described himself as the "owner of Sangamon Mills" (Exhibit "L"). He explained that "prior to my grandmother passing away, I was the manager of the business and I reported directly to Ella Fisher. I was the manager for approximately 4 years" (Id). He explained that he and Jane Wheeler were "the only people who had access to the bank accounts" and "the only people authorized to write checks" (Id). Moreover, Mr. Scott's own opposition affidavit shows that he knew orders "were 6-7 months" behind schedule when he inherited the business (Scott affidavit at paragraph 9); that he obtained signing authority on the corporate bank account (paragraph 10); and that he endeavored "to get the mill back on track to complete the backlog of orders" (paragraph 11). Moreover, the bank signature cards identify Michael Scott as "Finance Vice Pres." (See Schallop Reply Affirmation, Exhibit "B").

In a special proceeding, the Court is required to "make a summary determination upon the pleadings, papers and admissions to the extent that no triable issues of fact are raised (CPLR 409[a]; see Matter of People v. Telehublink Corp., supra, 301 AD2d 1006, 1007). As discussed above, the Court has rendered a summary determination on the submissions with respect to the claim against the corporate respondent. Given the dispute as to Mr. Scott's actual role in the [*5]corporation, as well as his participation in and actual knowledge of the fraudulent conduct described above, an issue of fact has been raised as to his culpability (Id at p. 1010). A trial on this issue must be scheduled "forthwith" (CPLR 410). In the meantime, this interlocutory judgment is being issued against the corporate respondent.

Accordingly, it is hereby

ORDERED and ADJUDGED that the petition is granted to the extent that respondent Sangamon Mills, Inc. is permanently enjoined from violating Executive Law §63[12], Article 22-A of the GBL and GBL §396-m; and it is further

ORDERED and ADJUDGED, that the respondent corporation is enjoined from engaging in the textile or mail order business within the State of New York until such time as its manufacturing facility is capable of timely delivering products and a $50,000 performance bond is filed with the New York State Attorney General by a security or bonding company licensed by and in good standing with the New York State Department of Insurance; and it is further

ORDERED and ADJUDGED that petitioner is awarded damages against respondent Sangamon Mills, Inc. in the amount of $72,117.61; and it is further

ORDERED and ADJUDGED, that respondent Sangamon Mills, Inc. shall pay to plaintiff a civil penalty in the amount of $25,000 for the violations of Article 22-A of the General Business Law; and it is further

ORDERED and ADJUDGED that petitioner is awarded statutory costs against respondent Sangamon Mills, Inc. in the amount of $2,000 pursuant to CPLR §8303(a)(6); and it is further

ORDERED, that the parties are directed to appear for a conference with the Court on February 21, 2014 at 10:30 a.m. for purposes of scheduling a trial regarding the claim against respondent Scott for the reasons set forth above.

This Memorandum constitutes the Decision and Order of the Court. This original Decision and Order is being returned to the attorney for petitioner. The below referenced original papers are being mailed to the Columbia County Clerk. The signing of this Decision and Order shall not constitute entry or filing

under CPLR 2220. Counsel is not relieved from the provision of that rule regarding filing, entry, or notice of entry.

SO ORDERED!

ENTER.

Dated: Albany, New York [*6]

February 6, 2014

_________________________________________

Michael C. Lynch

Justice of the Supreme Court

Papers Considered:

1.Order to Show Cause (Connolly, J.) returnable December 4, 2013, with Verified

Petition dated November 14, 2013, Affirmation of Amy Schallop, Esq. dated

November 14, 2013, and Exhibits "A" - "M"; Memorandum of Law dated

November 14, 2013;

2.Verified Answer of Respondent Scott dated December 23, 2013; Affirmation

of Steven Farer, Esq. dated December 23, 2013; Affidavit of Michael Scott

dated December 23, 2013, with Exhibits "1" - "7"; and

3.Reply Affirmation of Amy Schallop, Esq. dated January 15, 2014 with

Exhibits "A" - "D".