The opinion of the court was delivered by: FREDERICK J. SCULLIN, JR.
This case involves a number of claims of intentional and constructive fraud under the New York Debtor & Creditor law, as well as claims of breach of contract and fiduciary duty, arising out of a bank loan and a series of intercompany transfers and defaulted obligations. Plaintiff initiated this action alleging that a subsidiary of the defendant Melson Incorporated entered into a transaction without fair consideration, rendering the subsidiary insolvent and intentionally defrauding the plaintiff. This matter is before the court on defendants' motions for summary judgment.
Defendant Royal Bank of Canada ("Royal Bank" or "the Bank") moves for summary judgment on various grounds, arguing that Canadian law applies, and, further, that the plaintiff is required to obtain an order from the Ontario Court of Justice giving it permission to proceed with this action against the Bank. For the reasons hereinafter stated, the court addresses this motion as one brought pursuant to Rule 12, Fed. R. Civ. P., and denies it. The court does find, however, that the rule of comity requires that the plaintiff secure permission from the Ontario Court of Justice prior to proceeding against defendant Royal Bank.
Defendants Carol Simpson, Dorothy Simpson and Scott Simpson move for summary judgment as to their alleged alter ego liability. The court finds that there are genuine issues of material fact which preclude summary judgment on those claims.
In addition, the defendants Carol Simpson, Dorothy Simpson and Scott Simpson have moved to dismiss the complaint for failure to plead fraud with the requisite particularity, and defendants Royal Bank, Carol Simpson, Dorothy Simpson and Scott Simpson have moved to dismiss the complaint for failure to join necessary parties. The court finds these motions to be without merit.
Finally, the plaintiff has moved for a continuance pursuant to Rule 56(f), Fed. R. Civ. P. The plaintiff's motion is denied as moot.
The facts in this action are complicated by the relationships among the defendants (see Fig. 1). Defendant Melson Incorporated ("Melson") was a holding company
that operated through two wholly owned subsidiaries: Compro, Limited ("Compro") and Frink America, Inc. ("Frink America").
In 1990, Scott Simpson was Executive Vice President of Melson (the holding company), President of Compro (one of the Melson subsidiaries), and an officer of Frink America (the other Melson subsidiary). He was also an officer of Frink Canada (one of the Compro divisions). Along with Dinyar Pavri (Vice President, Treasurer and Chief Financial Officer of both Melson and Compro) and William Edwards (Vice President of Compro, President of Frink America, and President of Frink Canada),
Scott Simpson prepared a reorganization plan dubbed "Operation Windrow," with the goal of combining the manufacturing for both Frink Canada and Frink America in one location. Production was to be moved temporarily to Frink Canada's Ontario plant, until a modern production facility could be built in the United States. Elgin App.,
One impediment to the plan was that Frink America was indebted to Key Bank of Central New York ("Key Bank") for approximately $ 2.8 million US. To solve this problem, Compro applied for a loan from Royal Bank, a Canadian bank that also has branch offices in New York state. (Compro had other outstanding loans and lines of credit from Royal Bank totalling approximately $ 6 million Cdn.) Security for the loan included all of Compro's assets, as well as a second mortgage on Frink America's property located in Clayton, New York. Carol Simpson Aff., Ex. 11.
A loan of "$ 4,500,000 Cdn. equiv. of U.S. $ 3,750,000" was approved to "facilitate the consolidation of Frink America operations with Frink Canada."
An advance was wired from Royal Bank "through the Compro and Frink America accounts" to Key Bank to satisfy Frink America's debt.
The funds were used to pay off Frink America's debt to Key Bank, and in August 1991 Frink America's production was transferred to Frink Canada's Ontario facility.
Plaintiff Elgin Sweeper Company ("Elgin"), a manufacturer of street sweeping equipment, had maintained a distributorship agreement with Frink Canada for many years. When the agreement was renewed on August 6, 1991, Elgin was not aware of the loan or the plan to combine the production facilities of Frink America and Frink Canada.
Between September and November 1991, Elgin shipped fourteen street sweeping vehicles and parts to Frink Canada to fill orders from cities in the Province of Quebec. Invoice amounts totalled $ 1,095,266.
A check, drawn on Frink Canada's account at Royal Bank, was issued to Elgin on May 15, 1992, in the amount of $ 92,825.00 US, but payment was stopped on June 2, 1992. Compl. Ex. 3. Frink Canada's debt to Elgin remains unpaid.
On June 30, 1992, Compro filed for protection under the Canadian Companies Creditors Arrangement Act (CCAA).
The company continued to deteriorate, and was abandoned by defendant Carol Simpson and most of the other directors. Elgin App., Ex. 6, 11B, 11F. Royal Bank petitioned the Ontario Court of Justice for a final bankruptcy judgment, which was granted on October 30, 1992. Frink America was listed in Compro's bankruptcy as owing Compro's Frink Canada division a debt of $ 450,583.83. Elgin App., Ex. 12C.
A receiver was appointed over Compro's assets, and in November of 1992, the assets were sold for $ 9 million Cdn. Royal Bank, a secured creditor, received all of the proceeds of the sale. Elgin, an unsecured creditor, received nothing. The plaintiff requested Compro's bankruptcy trustee to pursue the claim that the $ 2.8 million loan advance was fraudulent, and that Royal Bank's security interest was therefore invalid. The trustee refused.
The plaintiff claims that Royal Bank's security was based upon a fraudulent conveyance, and the distribution of Compro's assets to Royal Bank should therefore be set aside. The plaintiff also claims that Mel son and the Simpsons used Compro fraudulently for their own gain and are therefore liable for damages in the amount of Frink Canada's debt to the plaintiff.
Finally, in February 1993, Carol Simpson and Dorothy Simpson sold their Melson stock to David K. Lowry and Frink Environmental, Inc.
Royal Bank is currently one of the three principal shareholders of Frink Environmental, Inc. Elgin App., Ex. 14F.
Following the discussion of Royal Bank's motions, the court will address the identical motions of defendants Carol Simpson, Dorothy Simpson and Scott Simpson. These defendants also seek summary judgment, or in the alternative, dismissal of the complaint for failure to plead fraud with the requisite particularity.
Finally, the court will address the motions of defendants Royal Bank, Carol Simpson, Dorothy Simpson and Scott Simpson to dismiss the complaint for failure to join necessary parties, and the plaintiff's motion for a continuance.
I. Royal Bank's "Summary Judgment" Motion
Although the Notice of Motion filed by defendant Royal Bank (Docket # 15) describes its motion as one for summary judgment, pursuant to Fed. R. Civ. P. 56, it is clear from its memoranda of law that the Bank intends this motion as a motion to dismiss pursuant to Fed. R. Civ. P. 12. The court will therefore ...