People v College Network, Inc.

[*1] People v College Network, Inc. 2016 NY Slip Op 51571(U) Decided on August 19, 2016 Supreme Court, Albany County Melkonian, 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 This opinion is uncorrected and will not be published in the printed Official Reports.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 August 19, 2016
Supreme Court, Albany County

People of the State of New York by Eric T. Schneiderman, Attorney General of the State of New York, Petitioner,

against

The College Network, Inc.; American Credit Exchange, Inc.; Gary Eyler, Individually and as an Officer of The College Network, Inc. and American Credit Exchange, Inc.; and Southeast Financial Credit Union, Respondents.



2978-15



Eric T. Schneiderman

Attorney General of the State of New York

Attorney for Petitioner

(Jane M. Azia, Bureau Chief, Laura J. Levine, Deputy Bureau Chief, Amy D. Scallop, Assistant Attorney General, Emily L. Auletta, Assistant Attorney General, of Counsel)

The Capitol

Albany, New York 12224-0341

Harris Beach, PLLC

Attorneys for the Respondents the College Network, Inc. and Gary T. Eyler, Individually and as an Officer of The College Network, Inc.

(Karl J. Sleight, Esq., Francine Vero, Esq., of Counsel)

677 Broadway

Albany, New York 12207

Hinckley, Allen & Snyder, LLP

Attorneys for Respondents American Credit Exchange, Inc. and Gary Eyler, as an Officer of American Credit Exchange, Inc.

(Michael L. Koenig, Esq., Christopher V. Fenlon, Esq., of Counsel)

30 South Pearl Street

Suite 901 Albany, New York 12207

Gleason, Dunn, Walsh & O'Shea

Attorneys for Respondent Southeast Financial Credit Union

(Richard C. Reilly, Esq., of Counsel)

40 Beaver Street

Albany, New York 12207

Waller, Lansden, Dortch & Davis, LLP

Attorneys for Respondent Southeast Financial Credit Union

(Chanelle R. Acheson, Esq., John E. Haubenreich, Esq., of Counsel)

511 Union Street

Suite 2700

Nashville, Tennessee 37219
Michael H. Melkonian, J.

DECISION AND ORDER

On June 4, 2015, petitioner The People of the State of New York, by Eric T. Schneiderman, Attorney General of the State of New York ("petitioner") commenced this special proceeding pursuant to Executive Law § 63(12) and General Business Law ("GBL") article 22—A §§ 349 and 350, Personal Property Law ("PPL") article 10 § 412-a and PPL article 10-a § 428 against respondents The College Network, Inc. and Gary T. Eyler, Individually and as an Officer of the College Network, Inc., American Credit Exchange, Inc. and Gary Eyler, as an Officer of American Credit Exchange, Inc. and Southeast Financial Credit Union (collectively referred to herein as "respondents") for injunctive relief, restitution, disgorgement, recision, civil penalties and costs based upon, among other things, their specific fraudulent, deceptive and illegal acts.

In pre-answer motions to dismiss dated July 30, 2015, respondents The College Network, Inc. ("TCN") and Southeast Financial Credit Union ("Southeast Financial") moved for an Order, inter alia, pursuant to CPLR § 3211 and CPLR § 404(a) dismissing the petition. Respondent Gary Eyler ("Mr. Eyler"), Individually and as an Officer of TCN and American Credit Exchange, Inc. ("ACE") also moved for relief identical to that of TCN and Southeast Financial. In a Decision and Order dated March 21, 2016, this Court, inter alia, denied respondents' motions to dismiss and directed respondents to serve answers to the petition. Familiarity with the prior decision is assumed.

Subsequent to issuing its March 21, 2016 Decision and Order, it was brought to this Court's attention that the Court failed to specifically address Mr. Eyler's motion to dismiss the petition. Mr. Eyler contends, among other things, that petitioner's fraud claim under Executive Law § 63(12) is time-barred. Mr. Eyler also contends that the petition fails to state a cause of action against him and that the Court has no jurisdiction over him.

Southeast Financial now moves for an order pursuant to CPLR §§ 2201 and 5519(c) staying the enforcement of the Court's March 21, 2016 Decision and Order, pending an appeal to the Appellate Division. TCN and ACE each cross-move for the same relief.

Mr. Eyler's motion to dismiss the petition and the motion/cross-motions seeking a stay are consolidated for disposition.

The crux of petitioner's claims is that TCN and Mr. Eyler deliberately and fraudulently induced prospective nursing students to pay thousands of dollars for ineffective study guides. The petition alleges that TCN preyed on as many as two thousand New York consumers who sought to obtain associate degrees in nursing. Petitioner alleges that through advertising and high pressure sales tactics, TCN created the false impression that it was offering online nursing degrees that consumers could earn "in just 18 months" and that it was affiliated with Excelsior College, an accredited institution based in Albany, New York that offers such degrees. The petition further alleges that after consumers responded to the online advertisements, TCN dispatched sales representatives, referred to as "program advisors," to consumers' homes who reinforced the false impression that TCN was affiliated with Excelsior College and engaged in high-pressure sales pitches to induce consumers to sign up for TCN's "program." Petitioner alleges, however, that the "program" consisted of little more than a series of study guides that many consumers found difficult to understand and that, contrary to the company's representations, did not prepare them for the required exams they needed pass in order to obtain course credit.

The petition further alleges that TCN promised consumers "24/7" access to "academic advisors" who were touted as experts in the subject matters covered in the study guides and who could assist consumers who were having trouble understanding the material. Many consumers complained that these so-called advisors had no substantive expertise in the subject matter and were unable to help consumers who asked for assistance. Petitioner alleges that TCN charged consumers approximately $500.00 for each study guide and required consumers to purchase study guides up front for every course they would need to earn their degree from Excelsior College. In many cases, the total cost of TCN's program exceeded $10,000.00, which forced most consumers to accept the financing offered by TCN. Petitioner alleges that TCN did not disclose that these loans were being provided by Southeast Financial, a credit union, not TCN. Petitioner alleges that Southeast Financial partnered with TCN to provide financing to consumers who purchased TCN's "program."

Petitioner further alleges that TCN employed "program advisors" to convince consumers to finance third-party test administration fees by creating the false impression that TCN would readily provide consumers with a check to sit for an exam. Petitioner alleges that these fees added as much as $3,000.00 or more to the total amount of the loan. According to petitioners, when consumers contacted TCN to obtain a check so that they could register for an exam, they were informed that TCN would not send them a check until they scored as high as 90% on online quizzes and practice exams. Many consumers were unable to achieve the required score and those who managed to qualify then often had to wait months for the checks needed to pay Excelsior College.

Petitioner further alleges that consumers discovered TCN had misled them only after the five-day cancellation period in their contracts had already expired. Petitioner alleges that when consumers attempted to cancel their contracts, they were falsely told by TCN, Southeast Financial and ACE, a collection agency operated by Mr. Eyler that attempted to collect from consumers who defaulted on their loans, that the debts were valid and that they were obligated to [*2]continue making payments. Petitioner further alleges that TCN violated New York law by failing to provide the required notices of cancellation and by failing to provide refunds to consumers who did not use their study guides and cancelled their contracts.

The Court turns first to Mr. Eyler's pre-answer motion which is to dismiss the petition for lack of personal jurisdiction.

A New York court may exercise personal jurisdiction over a non-domiciliary who, either in person or through his or her agent, "transacts any business within the state or contracts anywhere to supply goods or services in the state" (CPLR § 302[a][1]; see, Stardust Dance Prods., Ltd. v Cruise Groups Intl., Inc., 63 AD3d 1262, 1263—1264 [3rd Dept. 2009]). Notably, CPLR § 302(a)(1) is a "single act statute" and, therefore, "proof of one transaction in New York is sufficient to invoke jurisdiction ... so long as the defendant's activities here were purposeful and there is a substantial relationship between the transaction and the claim asserted" (Kreutter v McFadden Oil Corp., 71 NY2d 460, 467 [1988]; see, Stardust Dance Prods., Ltd. v Cruise Groups Intl., Inc., 63 AD3d 1262, 1264 [3rd Dept. 2009]). As the party seeking to assert personal jurisdiction, petitioner bears the burden of proof in this regard (see, People v Frisco Mktg. of NY LLC, 93 AD3d 1352, 1353 [4th Dept. 2012]; Stardust Dance Prods., Ltd. v Cruise Groups Intl., Inc., 63 AD3d 1262, 1264 [3rd Dept. 2009]). "Such burden, however, does not entail making a prima facie showing of personal jurisdiction; rather, [petitioner] need only demonstrate that [it] made a sufficient start' to warrant further discovery" Bunkoff Gen. Contrs. v State Auto. Mut. Ins. Co., 296 AD2d 699, 700 (3rd Dept. 2002), quoting Peterson v Spartan Indus., 33 NY2d 463, 467 (1974); see, People v Frisco Mktg. of NY LLC, 93 AD3d 1352, 1353 (4th Dept. 2012). The facts pleaded in the petition and affidavits should be construed in the light most favorable to the petitioner (Sokoloff v Harriman Estates Dev. Corp., 96 NY2d 409, 414 [2001]).

Petitioner argues that as the Chief Executive Officer and Chairman of the TCN and as the Chief Executive Officer and sole owner of ACE, Mr. Eyler played an active role in defrauding the consumers and directly profited from such deceptive and unlawful practices. Petitioner alleges that Mr. Eyler reviewed TCN's website, reviewed certain BBB complaints and reviewed company marketing decisions. Petitioner also submits that Mr. Eyler met with Excelsior College's General Counsel in New York at its offices to discuss Excelsior College's concerns, among other things, that TCN was creating the misleading impression that TCN was affiliated with Excelsior College. Petitioner also submits that Mr. Eyler sent a letter to Excelsior's New York offices responding to concerns expressed by Excelsior College regarding misleading representations made by TCN representatives. Petitioner further submits that Mr. Eyler is aware that TCN's advertising is misleading as he was advised by Excelsior College on numerous occasions that the advertising materials were misleading. Petitioner also submits that Mr. Eyler is aware of a prior settlement with the State of Arkansas Attorney General's Office involving conduct similar to the conduct at issue here. Petitioner submits that as the sole owner of ACE, which operates from the same office suite as TCN, Mr. Eyler is well aware that ACE repeatedly attempts to collect on debts in connection with the study guides.

Nonetheless, Mr. Eyler argues that he is a resident of the State of Nevada, that he does not own any property or maintain offices in New York, and he does not personally conduct any business in New York. Mr. Eyler further contends that petitioner has failed to allege that he conducted any business in New York in his capacity as an officer of ACE. With respect to TCN, [*3]Mr. Eyler argues that all of his contacts with New York were conducted in his corporate capacity and do not confer jurisdiction over him as an individual. In his affidavit in support of his motion to dismiss, Mr. Eyler concedes that he "may" have traveled to New York for business and "on each such occasion it was exclusively for the purpose of conducting business on behalf of TCN and/or ACE."

New York has rejected the "fiduciary shield doctrine" (Kreutter v McFadden Oil Corp., 71 NY2d 460, 468—471 [1988]; see, also, People v Allied Mktg. Group, 213 AD2d 256 [1st Dept.1995]). Thus, Mr. Eyler may not avoid jurisdiction because he was working as an officer of TCN or ACE while accruing contacts with New York. This is especially true since it is alleged that Mr. Eyler enjoyed almost total control over TCN and ACE as their owners (see, Kreutter v McFadden Oil Corp., 71 NY2d 460, 467 [1988]).

In addition, "[s]o long as a party avails itself of the benefits of the forum, has sufficient minimum contacts with it, and should reasonably expect to defend its actions there, due process is not offended if that party is subjected to jurisdiction even if not present' in that State" (Kreutter v McFadden Oil Corp., 71 NY2d 460, 466 [1988]). Based upon the aforementioned contacts that Mr. Eyler had with New York, this Court finds that due process is not offended by subjecting Mr. Eyler to the jurisdiction of the New York courts.

Considering all of the evidence and accepting the allegations in the petitioner as true, as the Court must on a motion to dismiss (see, Leon v Martinez, 84 NY2d 83, 87—88 [1994]), this Court concludes that jurisdiction is proper (Fischbarg v Doucet, 9 NY3d 375, 380 [2007]; Deutsche Bank Sec., Inc. v Montana Bd. of Invs., 7 NY3d 65, 71 [2006]).

The Appellate Division, First Department in Matter of People by Schneiderman v Trump Entrepreneur Initiative LLC, 137 AD3d 409 (1st Dept. 2016) held that the statute of limitations for petitioner's fraud claim under Executive Law § 63(12) is six years. Accordingly, to the extent Mr. Eyler moves to dismiss petitioner's Executive Law § 63(12) claim as barred by the applicable statutory period of limitations, the motion his denied.

The Court tuns next to that part of Mr. Eyler's motion which is to dismiss for failing to state a cause of action against him.

On a CPLR § 3211 (a)(7) motion to dismiss for failure to state a claim, the Court may not inquire into whether the moving party has defenses (Unadilla Silo Co., Inc. v Ernst & Young, 234 AD2d 754 [3rd Dept. 1996]) or search the record to address the merits of the cause of action. The Court's inquiry on these motions is limited to deciding whether the facts as alleged in the complaint fit within a cognizable legal theory (Maas v Cornell University, 94 NY2d 87 [1999]; Cron v Hargro Fabrics, 91 NY2d 362 [1998]). When doing so, the Court must afford the complaint a liberal construction, accept as true the allegations contained therein, and accord the proponent of the cause of action the benefit of every favorable inference and cognizable legal theory (Skibinsky v State Farm Fire & Cas. Co., 6 AD3d 975 [3rd Dept. 2004]; 1455 Washington Ave. Assoc. v Rose & Kiernan, Inc., 260 AD2d 770 [3rd Dept. 1999]). Further, whatever can reasonably be implied from allegations in the pleadings and plaintiff's supporting affidavits must be deemed to be true (Cron v Hargro Fabrics, 91 NY2d 362 [1998]; Korenman v Zaydelman, 237 AD2d 711 [3rd Dept. 1997]). This same standard applies to motions pursuant to CPLR § 3211(a)(5) (Gingold v Beekman, 183 AD2d 870 [2nd Dept. 1992]).

The petition contains nine causes of action.[FN1] The first, fourth, seventh, eighth and ninth causes of action are asserted against all respondents, including Mr. Eyler. The first cause of action pursuant to Executive Law § 63(12) alleges fraud. Executive Law § 63(12) prohibits repeated fraudulent acts or persistent fraud in the carrying on, conducting, or transaction of business. The fourth cause of action pursuant to Executive Law § 63(12) alleges a violation of GBL § 349 Deceptive Practices. GBL § 349 provides that it is unlawful to engage in deceptive acts or practices in the conduct of any business, trade or commerce or in the furnishing of any services in the State of New York. The seventh cause of action pursuant to Executive Law § 63(12) alleges a violation of GBL § 350 False Advertising. GBL § 350 makes it unlawful to engage in false advertising in the conduct of any business or trade or commerce in New York State. The eighth cause of action alleges violations of Executive Law § 63(12) and of Personal Property Law Article 10, § 412-a. The thirteenth cause of action (referred to as the ninth by the Court) alleges violations pursuant to Executive Law § 63(12) and Personal Property Law Article 10-A, § 428. It is alleged that the respondents failed to comply with a consumer's notice of a right of cancellation within three days of the contract execution.

In support of its allegations and demands for relief, petitioner submits voluminous materials, including the affidavits of and documents pertaining to thirty-six consumers. Each of these consumers describes the circumstances surrounding their enrollment in TCN's program and their very unhappy experience therewith.

"Executive Law § 63(12)...does not create independent claims, but merely authorizes the Attorney General to seek injunctive and other relief on notice prescribed by the statute in cases involving persistent fraud or illegality." People v Charles Schwab & Co., Inc., 109 AD3d 445, 449 (1st Dept. 2013). "As used in this statute, the term fraud' includes any deception, misrepresentation, concealment, suppression, false pretense, false promise or unconscionable contractual provisions...[and] applies to fraudulent conduct actionable at common law, as well as to conduct for which liability arises solely from statute." State of New York v Cortelle Corp., 38 NY2d 83, 87 (1975).

Applying these standards, the Court finds that the causes of action in the petition do on their face state legally recognizable claims. Summary determination based upon Mr. Eyler's submissions and based upon the submissions of the corporate entities is inappropriate upon a pre-answer motion to dismiss. In any event, summary determination would not be granted based upon the multiple factual issues raised by the submissions. Mr. Eyler's motion to dismiss the petition in its entirety is denied.

The Court turns next to respondents' respective motions pursuant to CPLR §§ 2201 and 5519(c) to stay the March 21, 2016 Decision and Order, denying respondents' motions to, inter alia, dismiss the petition, pending resolution of the appeal of this Court's March 21, 2016 Decision and Order and pending resolution of the appeal filed in Matter of People by Schneiderman v Trump Entrepreneur Initiative LLC, 137 AD3d 409 (1st Dept. 2016).

CPLR § 2201 provides that "[e]xcept where otherwise prescribed by law, the court in which an action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just." CPLR § 5519 (c) authorizes a court to "stay all proceedings to enforce the [*4]judgment or order appealed from pending an appeal." The granting of a stay pending an appeal rests in the sound discretion of the court (Burgdorf v Kasper, 183 AD3d 1553 [4th Dept. 2011]). Courts consider the following factors when determining whether a discretionary stay is appropriate, i.e., whether (1) the appeal has merit, (2) any prejudice will result from granting or denying a stay, and (3) the stay is designed to delay proceedings (Application of Mott, 123 NYS2d 603, 608 [Sup Ct., Oswego County 1953]).

Here, the Court finds that there is no basis for granting a stay under CPLR § 5519(c) or § 2201.

In the underlying Decision and Order, the Court found that summary disposition of the petitioner's petition was inappropriate.

As a basis for staying the proceeding, Southeast argues that the Court erred in failing to dismiss its pre-answer motion to dismiss and, as such, its appeal will be meritorious. In this regard, Southeast argues that petitioner indeed lacks standing to obtain relief for consumers based on the "Holder Rule" notice in Southeast's promissory notes and petitioner failed to allege sufficient facts to establish a cause of action for aiding and abetting fraud.

"[A] plaintiff alleging an aiding-and-abetting fraud claim must allege the existence of the underlying fraud, actual knowledge, and substantial assistance. This Court has stated that actual knowledge need only be pleaded generally, cognizant, particularly at the prediscovery stage, that a plaintiff lacks access to the very discovery materials which would illuminate a defendant's state of mind. Participants in a fraud do not affirmatively declare to the world that they are engaged in the perpetration of a fraud. The Court of Appeals has stated that an intent to commit fraud is to be divined from surrounding circumstances (see, Eurycleia Partners, LP v Seward & Kissel, LLP, 12 NY3d 553 [2009])." Oster v Kirschner, 77 AD3d 51, 55—56 (1st Dept. 2010).

Here the "surrounding circumstances" described in the petition clearly permit the reasonable inference that Southeast actually knew of TCN's alleged fraud. Petitioner alleges not merely that Southeast was a passive beneficiary of TCN's fraudulent procurement of loans for the nursing guides, but that Southeast turned a blind eye to evidence that consumers of TCN's study guides were being defrauded. Indeed, petitioner submitted several affidavits from consumers who indicated that they complained directly to Southeast that they had been defrauded by TCN. Further, Southeast admits that its former General Counsel had two conversations with petitioner regarding its investigation of TCN. Indeed, Southeast acknowledges that it continued to provide financing TCN's consumers until September 9, 2014, approximately 10 months after those conversations took place. At the pre-answer motion to dismiss stage, such an allegation is sufficient to state a claim for aiding and abetting fraud (see, Oster v Kirschner, 77 AD3d 51, 57 [1st Dept. 2010]).

Southeast's argument regarding the "Holder Rule" is without merit.

With respect to the merit of TCN and ACE's appeals of this Court's Decision and Order denying their motions to dismiss, the Court finds that petitioner has submitted sufficient evidence in support of its numerous claims against TCN, including claims that it induced consumers to enroll in its "program" by misleading them about its status, its affiliation with Excelsior College and the nature and quality of the goods and services it would provide, to withstand a pre-answer motion to dismiss. ACE similarly faces a formidable challenge in its appeal of the Court's decision at this stage of the proceeding.

Nor does the Court find that the pending appeal in Matter of People by Schneiderman v Trump Entrepreneur Initiative LLC, 137 AD3d 409 (1st Dept. 2016) provides grounds for staying this proceeding. It is axiomatic that this Court is bound by the determination of the Appellate Division, First Department in Trump and it must not hold an adjudication in abeyance, or impede the course of litigation, pending a change in the law which may occur at some future date (In re Weinbaum's Estate, 51 Misc 2d 538 [Surr.Ct., Nassau Co. 1966]). Notwithstanding, the Third Department has consistently found a stand-alone cause of action for fraud under Executive Law § 63(12) (see, e.g., People v Applied Card Sys., Inc., 27 AD3d 104, 107 [3rd Dept. 2005]; People v JAG NY, LLC, 18 AD3d 950 [3rd Dept. 2005]; People ex rel. Spitzer v Telehublink Corp., 301 AD2d 1006, 1008 [3rd Dept. 2003]).

Other issues raised by respondents have been considered by this Court and found to be without merit.

Accordingly, it is ORDERED that respondents' motions to stay the proceedings are denied.

This constitutes the Decision and Order of the Court. This Decision and Order is returned to the attorneys for the petitioner. All other papers are delivered to the County Clerk. The signing of this Decision and Order shall not constitute entry or filing under CPLR 2220. Counsel is not relieved from the applicable provisions of this rule with regard to filing, entry and Notice of Entry.

SO ORDERED.

Dated: Troy, New York

August 19, 2016

MICHAEL H. MELKONIAN

Acting Supreme Court Justice

Papers Considered:

Verified Petition dated June 1, 2015, with exhibits annexed;

Notice of Motion dated July 30, 2015;

Notice of Motion dated July 30, 2015;

Notice of Motion dated July 30, 2015;

Affidavit of Mark Ivory dated July 27, 2015, with exhibits annexed;

Affidavit of Ryan S. Sallee dated July 27, 2015, with exhibits annexed;

Affidavit of Joel Kimzey dated July 27, 2015, with exhibits annexed;

Affidavit of Thomas A. Brodnik dated July 28, 2015, with exhibits annexed;

Affidavit of Glynis Jordan dated July 28, 2015;

Affidavit of Elizabeth Floss dated July 28, 2015;

Affirmation of Karl J. Sleight, Esq., dated July 29, 2015, with exhibits annexed;

Affidavit of Gary Flair dated July 29, 2015, with exhibits annexed;

Affidavit of John Jacoway dated July 29, 2015;

Affidavit of Mike Worden dated July 29, 2015;

Affidavit of Tomekia Pegram dated July 29, 2015;

Memorandum of Law dated July 30, 2015, with exhibits annexed;

Memorandum of Law dated July 30, 2015;

Memorandum of Law dated July 30, 2015;

Memorandum of Law dated August 27, 2015;

Affirmation of Amy Shallop, Esq., dated August 27, 2015, with exhibits annexed;

Correspondence dated March 1, 2016;

Correspondence dated March 2, 2016;

Notice of Motion dated May 5, 2016;

Affirmation of John E. Haubenreich, Esq., dated May 5, 2016, with exhibits annexed;

Memorandum of Law dated May 5, 2016;

Affirmation of Amy Shallop, Esq., dated May 24, 2016, with exhibit annexed;

Notice of Cross-Motion dated June 9, 2016;

Affirmation of Karl J. Sleight, Esq., dated June 9, 2017, with exhibits annexed;

Notice of Cross-Motion dated June 9, 2016;

Affirmation of Christopher V. Fenlon, Esq., dated June 9, 2016;

Affirmation of Amy Shallop, Esq., dated June 16, 2016;

Memorandum of Law dated June 16, 2016;

Correspondence dated June 21, 2016, with attachment;

Correspondence dated June 22, 2016, with attachment. Footnotes

Footnote 1:The ninth cause of action is mistakenly referred to as the "thirteenth" cause of action.