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SHAMIS v. AMBASSADOR FACTORS CORP.
January 27, 1999
ROBERT SHAMIS, AS ASSIGNEE OF WISHBONE TRADING COMPANY, LIMITED, A HONG KONG CORPORATION, AND ROBERT SHAMIS, INDIVIDUALLY, PLAINTIFF,
AMBASSADOR FACTORS CORPORATION, DLB/A AMBASSADOR FACTORS, A DIVISION OF FLEET FACTORS CORP., A RHODE ISLAND CORPORATION, S. ROBERTS, INC., A NEW YORK CORPORATION, CHRISTY LYNN, A NEW YORK CORPORATION, ABC COMPANIES (FICTITIOUS NAMES OF CORPORATE AFFILIATES OF DEFENDANTS S. ROBERTS, INC. AND JAY VEE, INC. WHOSE IDENTITIES ARE PRESENTLY UNKNOWN), NATHAN KORMAN, A/K/A LAWRENCE KORMAN, STEVEN PESNER, AS EXECUTOR OF THE ESTATE OF LEONARD KAYE, AND MAHONEY COHEN & COMPANY, P.C., A NEW YORK PROFESSIONAL CORPORATION, DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
Defendant Ambassador Factors Corporation ("Ambassador"), defendants S.
Roberts, Inc. ("Roberts"), Christy Lynn, Inc. ("Christy"), Angela
Christy, Inc. ("Angela"), Jay Vee, Inc. ("Jay Vee") and Nathan L. Korman
("Korman" and collectively "The Roberts Defendants") and defendant
Mahoney Cohen Rashba Pokart and Company ("Mahoney Cohen") (collectively,
the "Defendants") have moved to dismiss this action, pursuant to
Fed.R.Civ.P. 37, based on plaintiff Robert Shamis ("Shamis") alleged
discovery abuses, or, in the alternative, for sanctions.
The Roberts Defendants, pursuant to Fed. R.Civ.P. 56, move for summary
judgment dismissing Shamis' Sixth Clalm*fn1 for relief against Korman,
and dismissing Shamis' Seventh and Eighth Claims for Relief against
Angela and Christy.*fn2
For the reasons set forth below, Defendants' motion to dismiss is
denied. The Roberts Defendants motion for summary judgment is granted in
part and denied in part.
Plaintiff Shamis is a citizen of Israel and a British national, and at
all times relevant to this action, was a shareholder, officer and
director of Wishbone. Shamis is Wishbone's assignee.
Wishbone was a Hong Kong-based apparel exporter that shipped goods
primarily to the United States. In December 1993, Wishbone was placed in
receivership and ultimately liquidated in accordance with Hong Kong law.
Defendant Roberts is a New York-based wholesale distributor of women's
Defendants Jay Vee, Inc., Angela, Christy Lynn and ABC Companies are
successor corporate entities of Roberts.
Defendant Korman was an officer and a 60% stockholder of Roberts.
Defendant Ambassador is a Rhode Island corporation that provides
account receivable factoring services between importers and distributors
in the garment industry.
Defendant Mahoney Cohen is a New York based accounting company that
performs private and public accounting, as well as related consulting and
On November 20, 1995, Shamis filed his initial complaint (the
"Complaint") which alleged eleven causes of action against the above
named defendants. On February 28, 1996, Shamis filed an amended complaint
(the "Amended Complaint"), pursuant to Fed.R.Civ.P. 15(a), substituting
Steven Pesner ("Pesner") as a defendant for Leonard Kaye ("Kaye").*fn3
On March 21, 1996, Ambassador moved pursuant to Fed.R.Civ.P. 12
(b)(6), to dismiss the Complaint for failure to state a claim upon which
relief can be granted and failure to plead fraud with particularity,
pursuant to Fed.R.Civ.P. 9(b). By opinion and order dated August 12,
1996, Ambassador's motion was denied. See Shamis v. Ambassador Factors
Corp., No. 95 Civ. 9818, 1996 WL 457320 (S.D.N.Y. August 14, 1996).
On May 13, 1997, Shamis filed a motion for leave to file a second
amended complaint and thereby sought, among other things, to add a fraud
claim against Mahoney Cohen and two RICO claims against Roberts,
Ambassador, Korman, Jay Vee, and Mahoney Cohen. The Roberts Defendants
cross-moved to dismiss the entire action. By opinion and order dated
August 15, 1997, the Court granted the motion to dismiss, denied Shamis'
motion to amend the complaint, and granted Shamis leave to replead the
state law claims upon a showing that the receivers were citizens of a
foreign state recognized by the United States Department of State. See
Shamis v. Ambassador Factors Corp., No. 95 Civ. 9818, 1997 WL 473577
(S.D.N.Y. August 18, 1997).
On October 10, 1997, Shamis filed a motion to vacate the judgment
dismissing his Complaint, and for leave to file a second amended
complaint, adding two state law claims: (1) common law fraud against
Mahoney Cohen; and (2) breach of contract against Ambassador. By opinion
and order dated February 20, 1998, the Court granted the motion to vacate
and granted leave to file the proposed second amended complaint. See
Shamis v. Ambassador Factors Corp., No. 95 Civ. 9818, 1998 WL 75828
(S.D.N.Y. February 20, 1998). Shamis filed his Second Amended Complaint
on March 4, 1998, alleging claims against the various defendants based
upon fraud, breach of contract, breach of implied covenant of good faith,
goods sold and delivered, fraudulent conveyance, successor liability and
third party beneficiary.
On September 4, 1998, Ambassador moved to dismiss this action pursuant
to Fed. R.Civ.P. 37. On September 15, 1998 Mahoney Cohen filed its motion
to dismiss. The Roberts Defendants filed their motion to dismiss on
September 23, 1998. Oral argument was heard on November 4, 1998, at which
time leave was granted to all parties to file additional submissions.
Additional papers were received through December 22, 1998, at which time
the motions were deemed fully submitted.
In 1986, Korman controlled and operated a garment wholesaler known as
El Jay. Shamis alleges that Korman, on behalf of El Jay, received
financing from Manufacturers Hanover Bank (the "Bank"), which was secured
by El Jay's receivables and inventory. According to Shamis, although the
financing arrangement allowed El Jay to borrow against receivables only
after product was shipped to a customer, El Jay nevertheless submitted
invoices to the Bank for goods that had not been ordered and/or shipped
to customers. Shamis claims that the Bank learned of this fraudhlent
practice, and began recouping the advances it had paid to El Jay.
The Bank's recoupments contributed to El Jay filing a Chapter 11
bankruptcy petition in early 1987.
II. The Roberts/Ambassador Relationship
According to Shamis, Ambassador was first introduced to Korman when,
pursuant to a court order, the company was appointed to be the factor for
El Jay as debtor-inpossession. Furthermore, Shamis alleges that when
Ambassador undertook this assigument, Ambassador learned about Korman and
El Jay's fraudulent "pre-invoicing" practice.
On August 26, 1988, Roberts and Ambassador entered into a written
agreement (the "Factoring Agreement") in which Roberts appointed
Ambassador as its exclusive factor of all accounts receivable that
resulted from Roberts' sales of finished goods to various retailers. In
exchange, Ambassador received, among other things, a percentage
commission, and security interests in both Roberts' accounts receivable
and, some of Roberts' inventory.
III. The Roberts/Ambassador/ Wishbone Relationship
In 1988, Korman was introduced to Shamis and the two began discussions
about a business arrangement pursuant to which Wishbone would manufacture
clothing for Roberts. On October 27, 1989, Roberts and Wishbone entered
into a three-year agreement (the "Master Agreement"), in which Roberts
appointed Wishbone as its exclusive purchasing agent for all of its
finished goods manufactured in the Far East, Turkey, India and
elsewhere. The Master Agreement established that Wishbone would finance
Roberts' inventory purchases by extending letters of credit to
merchandise suppliers. Wishbone also agreed to provide certain support
services with those suppliers on Roberts' behalf. In return, Roberts
granted Wishbone (1) security interests in Roberts' inventory, accounts
receivable and other assets; (2) a six percent commission on the value of
goods imported through Wishbone and a three percent commission, on all
sums which it financed on Roberts' behalf; and (3) an assignment of 50%
of the payments made by Ambassador to Roberts under the Factoring
To establish a payment mechanism for Roberts' obligations to Wishbone
under the Master Agreement, Ambassador and Roberts then entered into a
written agreement, dated November 20, 1989 (the "Assignment of Factoring
Proceeds Agreement"), which provided that Ambassador would pay directly
to Wishbone one-half of the 80% of the accounts receivable payments which
otherwise would have been paid to Roberts under the Factoring Agreement.
This Agreement further provided that Ambassador would subordinate its
security interest under the Factoring Agreement to, Wishbone's security
interest under the Master Agreement with respect to inventory and
receivables that would arise from the sale of the inventory that Wishbone
had supplied and/or financed.
Shamis claims that the Factoring Agreement specifically provided that
any receivable sold to Ambassador would be accompanied by proof of
delivery of the underlying goods to the customer in order to eliminate
the possibility that Korman and Roberts would repeat the fraudulent
invoicing scheme allegedly perpetrated by El Jay.
According to Shamis, Wishbone supplied Roberts with finished goods
until approximately June 1991, at which time Roberts's debt to Wishbone
had reached approximately $20,000,000.
Shamis alleges that in April 1992, ten months after its final shipment
of goods to Roberts, Wishbone discovered that Roberts had fraudulently
pre-invoiced, in violation of the Factoring Agreement.*fn4
According to Shamis, Ambassador, motivated by its desire to avert a
default by Roberts, intentionally failed to notify Wishbone of the
problems connected with the Factoring Agreement. By continuing to pay
Wishbone its 50% share of the receivables pursuant to the Assignment of
Factoring Proceeds Agreement, Ambassador "lulled Wishbone into a false
sense of security." Had Shamis been aware of the improprieties, it would
have ceased shipping goods to Roberts on credit and would have exercised
its rights under both the Master Agreement and the Assignment of
Factoring Proceeds Agreement to foreclose on its security interests.
V. Mahoney Cohen's Audit of Roberts
Shamis alleges that in September 1990, Wishbone determined that it
needed independent accountants to audit Roberts' books. Shamis
recommended to Roberts that it engage the accounting firm of Mahoney
Cohen to audit Roberts. Roberts retained Mahoney Cohen shortly thereafter
to audit the nine-month period ending September 30, 1990. Shamis claims
that in the course of performing audit due diligence, Mahoney Cohen
became apprised of Korman's pre-invoicing conduct at El Jay. Shamis
further alleges that Mahoney Cohen found a large quantity of inventory in
a warehouse for which invoices had been written-up, and for which funds
allegedly had been advanced without proof of shipment. According to
Shamis, Mahoney Cohen realized Roberts' fraudulent activity and discussed
it with Korman. Although Korman immediately shipped the goods, further
examination of Roberts' books and records by Mahoney Cohen revealed that
Roberts had incorrectly recorded the completed sales in its books.
Shamis asserts that Mahoney Cohen failed to take proper action upon
discovering the fraudulent activity; Mahoney Cohen neither resigned the
account, alerted Wishbone to the existence of the allegedly fraudulent
practices, nor recommended that Roberts adjust Its income in accordance
with generally accepted accounting principles, which would have reflected
a loss for 1990. Shamis claims that Mahoney Cohen then mailed the
misleading financial statement to Wishbone in Hong Kong, in order to
"defraud Wishbone into extending further credit to Roberts and forbearing
from foreclosing on its various security interests." Shamis contends that
Wishbone thereafter extended additional credit to Roberts in reliance
upon the statement prepared by Mahoney Cohen.
Furthermore, Shamis contends that Mahoney Cohen discussed with Korman
the creation of a separate company, Jay Vee, which would be formed for
the purpose of avoiding the debt to Wishbone by taking over Roberts'
business and entering into a new factoring agreement with Ambassador.
This new arrangement would bypass the Assignment of Factoring Proceeds
Agreement that had been entered into with Wishbone.
VI. The Creation of Jay Vee
Jay Vee was formed in or shortly before July 1991. Shamis asserts that
Jay Vee acted as the "alter ego" of Roberts and that Ambassador began
factoring for it shortly after its inception. Shamis also asserts that,
at about this time, Korman made assurances to Wishbone that Roberts' debt
to Wishbone would be fully repaid, and thereafter sent additional false
statements to Wishbone.
Shamis contends that Korman, Jay Vee, and Ambassador all benefitted
from this new arrangement, while Wishbone suffered. For Korwan and Jay
Vee, funds that previously would have been sent from Ambassador to
Wishbone could now be paid directly to them. In this way, Ambassador
reduced its risk that Roberts would be unable to repay its debt if
Ambassador could not collect the factored receivables. Shamis claims that
Ambassador, Korman and Mahoney Cohen all understood the implications of
this new arrangement and went along with the fraud. According to Shamis,
Wishbone continued to receive partial but insufficient payments
from Ambassador until October 1992, the purpose of which was to keep
Wishbones suspicions at bay.
VII. The Alleged Continuing Pattern of Fraud
According to Shamis, by the summer of 1992, Jay Vee had disposed of
most of Wishbone's inventory and was in need of new sources of goods and
therefore, financing. To achieve these ends, Korman allegedly targeted an
individual named Lampert, and persuaded Lampert to invest $4.1 million in
Jay Vee. Shamis asserts that Jay Vee once again engaged in phony
invoicing and never repaid Lampert. Ultimately, Jay Vee splintered into
entities named Angela, Christy Lynn, and ABC.
I. Defendants' Motion to Dismiss This Action is Denied
Defendants contend that Shamis has engaged in a "pattern of intentional
activities designed to defeat and frustrate [Defendant's] attempts to
obtain discovery," and has thereby substantially impaired their ability
to defend themselves at trial. Good Aff. ¶ 51. Defendants allege that
Shamis has obstructed discovery in this case in the following ways: (i)
Shamis had notice of the imminent destruction of Wishbone's business
records in the possession of Wishbone's Receiver, but permitted all but a
select number of documents to be destroyed, without any notice to
Defendants or the Court; (ii) Shamis failed to obtain a waiver of Hong
Kong Bank Secrecy Laws from Wishbone's receivers, despite a Court Order
expressly directing him to do so; (iii) Shamis was directed by the Court
to bear certain costs associated with deposing Wishbone's Provisional
Receivers, Gabriel C.K. Tam and N.P. Etches, and thwarted that order by
canceling the depositions; (iv) Shamis caused BankBoston to deliver to
him documents subpoenaed by Ambassador, and asserted unwarranted
privilege claims to these non-party documents; and (v) Shamis failed to
answer Ambassador's Second Set of Interrogatories, and instead "asserted
spurious objections to each and every interrogatory." (Ambassador's Brief
at 1). Defendants maintain that this "pattern of discovery abuse"
warrants the sanction of dismissal pursuant to Rule 37(d).
A. Defendants' Motion is Timely
As a preliminary matter, Shamis maintains that Defendants have failed
to meet their burden, as parties seeking discovery, to bring any
perceived deficiencies in his compliance with discovery requests and
orders to the Court's attention in a timely fashion. Shamis notes that
during the long and contentious discovery in this action, Defendants
never raised before the Court the abuses which they now claim ...