with the Defendants, are therefore highly probative of issues relating to
both liability and damages.
Shamis does not contend that the destroyed documents are irrelevant,
rather he claims that Defendants currently possess enough information to
enable them to address liability and damages. The copies Shamis had made
of documents that pertained to S. Roberts have all been produced in
discovery. Shamis maintains that these are the documents that bear upon
the relation between Wishbone and Roberts and thus, upon the transactions
from which all the claims of liability arise. Shamis avers that the
documents that were destroyed were not "unique," but were rather basic
commercial documents pertaining to Wishbone's relations with other
customers, or with suppliers, shippers and lenders. Furthermore, Shamis
maintains that to the extent that such documents contained any of the raw
data that would be incorporated into any overall analysis of Wishbone's
finances, it was produced to Defendants from other sources in this
Given Shamis' admissions that 3,000 cartons of business documents and
documents relating to Wishbone's other customers, suppliers, and lenders
were destroyed, his assertion that "virtually all categories" of
documents are available elsewhere seems improbable. Shamis' contention
that the "relevant" documents were copied and produced is also
unavailing. Indeed, a determination of what is and is not relevant varies
substantially based on the parties' different theories of the case.
Here, since Shamis' suit claims damages based on the failure of Wishbone
in its entirety, and not just the money purportedly owed by Roberts,
document production limited only to documents between Wishbone and
Roberts is insufficient. Moreover, although the parties dispute the
quantity and quality of production from other sources, there remain gaps
in the discovery produced in this case.
Arguably, the destroyed documents in the instant case, of which
Defendants remain deprived, are not only relevant and bear directly upon
the issues of damages and liability, but also would have been offered
into evidence. Accordingly, the Defendants may be entitled to a jury
instruction explaining that destroyed documents are presumed to be
damaging to the party responsible for destruction.*fn7 Such an "adverse
inference charge" serves two purposes — remediation and
punishment. See Shaffer, 169 F.R.D. at 25; Turner, 142 F.R.D. at 74. The
remedial purpose of the sanction serves to place the prejudiced party in
the same position with regard to its ability to prove its case as it
would have been if the evidence had not been destroyed. See Id. The
punitive purpose both deters parties from destruction of relevant evidence
and directly punishes the party responsible for spoilation. See Id. The
strength of the adverse inference instruction given to the jury "will
vary according to the facts and evidentiary posture of a given case."
Welsh v. United States, 844 F.2d 1239, 1247 (6th Cir. 1988). To the
extent that relevant documents that were destroyed cannot or have not be
reproduced, the jury will be permitted to infer from the unavailability
of these documents that they would have been unfavorable to Shamis. See
e.g., Blinzler v. Marriott Int'l Inc., 81 F.3d 1148 (1st Cir. 1996);
Donato v. Fitzgibbons, 172 F.R.D. 75; Shaffer v. RWP Group, 169 F.R.D. 19
(E.D.N.Y. 1996); Alliance to End Repression v. Rochford, 75 F.R.D. 438
(N.D.Ill. 1976); General Atomic Co. v. Exxon Nuclear Co.,Inc., 90 F.R.D.
290 (S.D.Cal. 1981). However, Shamis will remain free at trial to proffer
an explanation for the missing documents.
2. Waiver of the Hong Kong Bank Secrecy Laws
By Order dated February 27, 1997, this Court held:
8. Shamis shall, upon the request of any party, the
Provisional Receiver, Appropriate Authority or any
entity listed in Paragraphs 5, 6 and 7 from which
Ambassador has sought non-party discovery, execute and
provide to the person or entity making the request, or
to such other person, entity or governmental authority
as the requestor may designate, such waivers,
authorizations, consent or documents of like tenor as
may reasonably be required to effectuate any waiver of
Hong Kong's bank secrecy laws as they may apply to
discovery sought by Ambassador . . .
On March 7, 1997, Plaintiff's counsel wrote to the Provisional
Receivers and requested a waiver. The Provisional Receiver responded that
the waiver had to be obtained from the Official Receiver. Accordingly,
plaintiff's counsel sent a formal request to the Official Receiver on
March 24, 1997. On July 17, 1997, plaintiff's counsel informed counsel
for Ambassador that the Official Receiver conditioned issuance of a
waiver upon plaintiff's agreement to indemnify him from any claims that
might result from a grant of the waiver. Shamis refused to provide the
indemnification required by the Official Receiver.
Shamis maintains that pursuant to the February 27, 1997, Order, he is
simply required to provide the Official Receiver with a written request
that it waive to the same non-party entities any rights they might have
had under the Hong Kong Bank Secrecy Laws concerning Wishbone. Shamis
asserts that the Order cannot reasonably be read to comprise
indemnification, particularly since he does not know for what potential
liability, if any, he might be called upon to indemnify the Official
Shamis has underestimated what was required by this Court's Order. The
burden of complying with this Court's instruction to obtain a waiver
falls on Shamis. See Graco, Inc. v. Kremlin Inc., 101 F.R.D. 503, 527
(N.D.Ill. 1984) (the foreign statute interfering with discovery was not
the "problem" of either the court or the party seeking discovery; it was
the "problem" of the party whose documents were shielded from discovery
by foreign laws). Regardless of the risk of potential claims against
him, Shamis is obligated to obtain a waiver from the Official Receiver.
See Compagnie Francaise d'Assurance Pour le Commerce Exterieur v.
Phillips Petroleum Co., 105 F.R.D. 16 (S.D.N.Y. 1984) (Plaintiff was
directed to make the demanded production, even though it placed plaintiff
at a risk of being prosecuted under foreign law).
Accordingly Shamis is ordered to provide an indemnification to the
Official Receiver in order to obtain the waiver he was previously ordered
to furnish. A failure to provide an indemnification will be sanctionable
and may result in dismissal or preclusion of evidence and testimony. See
Societe' internationale v. Rogers, 357 U.S. 197, 78 S.Ct. 1087, 2 L.Ed.2d
1255 (good faith of the party resisting discovery is a key factor in the
decision whether to impose sanctions when foreign law prohibits the
3. The hong Kong Depositions
On July 17; 1997, Shamis served notices of deposition of various
individuals, including the Provisional Receivers appointed to oversee the
liquidation of Wishbone, Gabriel C.K. Tam and N.P, Etches (the
"Provisional Receivers"). By order dated August 7, 1997, this Court
ordered Shamis to pay Defendants' fees and travel expenses relating to
the out-of-state depositions. Shamis subsequently canceled the
depositions. In a letter dated May 26, 1998, Shamis advised Korman's
counsel that he intended to call the Provisional Receivers at trial.
Shamis maintains that the Court did not order him "to proceed with, the
depositions. Defendants counter that the order was unambiguous and that
Shamis was not entitled to circumvent it by unilaterally canceling the
The depositions in dispute were of the purported assignors of the
claims asserted by Shamis in this action The Professional Receivers
likely possess information regarding issues of this case, such as
plaintiff's claim that Wishbone was "out of ratio" with its lenders, see
Second Amended Complaint ¶¶ 98, 103, 114, 118 and 125, and the value
of the assets that the Provisional Receivers themselves liquidated. In
light of the
destroyed documents, there is arguably a greater need for these
depositions. See Bank of New York v. Meridien BIAO Bank Tanzania Ltd.,
171 F.R.D. 135 (S.D.N Y 1997) (In requiring plaintiff to obtain documents
from its assignor, the court noted that "it would be patently unfair if
[plaintiff-assignee] were able to continue to discover relevant
information from [defendant] while relegating [defendant] to seek
information from [the assignor] as a non-party").
Accordingly, if Defendants choose to depose the Provisional Receivers,
Shamis will be required to pay the travel expenses of defense counsel and
reasonable counsel fees for travel time.
4. The BankBoston Documents
On or about January 24, 1997, Ambassador subpoenaed BankBoston to
provide testimony and produce documents related to this action. In
response, BankBoston produced many documents, but also produced a
document entitled "Privilege Log Bank of Boston Production" (the
"Privilege Log"). Subsequently, BankBoston delivered all of the withheld
documents to plaintiff's counsel and advised Ambassador's counsel to seek
their production from plaintiff's counsel. Shamis has not turned over the
documents and seemingly asserts a claim of "common interest" privilege.
Because this is a diversity case, New York law governs privilege
issues. See Bowne of New York City, Inc. v. AmBase Corp., 150 F.R.D.
465, 470 (S.D.N.Y. 1993); Fine v. Facet Aerospace Products Co., 133
F.R.D. 439, 443 (S.D.N.Y. 1990). Although New York has enacted a statute
defining the attorney-client privilege, N.Y.C.P.L.R. § 4503, the New
York Court of Appeals has described the statue as a ""mere re-enactment
of the common law rule.'" Spectrum Sys. Int'l Corp. v. Chemical Bank,
581 N.E.2d 1055, 1060, 78 N.Y.2d 371, 377, 575 N.Y.S.2d 809, 814 (1991)
(quoting Hurlhart v. Hurlburt, 28 N.E. 651, 652, 128 N.Y. 420, 424
(1891)). Thus, "New York law governing the attorney-client privilege is
generally similar to accepted federal doctrine, albeit with certain
variants . . ." Bowne, 150 F.R.D. at 470; see also Niesig v. Team I,
149 A.D.2d 94, 101, 545 N.Y.S.2d 153, 156-57, aff'd, 558 N.E.2d 1030,
76 N.Y.2d 363, 559 N.Y.S.2d 493 (1990).
The decisions of the Second Circuit and of the New York Court of
Appeals explicitly place upon the party invoking the protection of a
privilege the burden of proving the facts upon which the claim is based.
See e.g., United States v. Goldberger & Dubin, P.C., 935 F.2d 501, 504
(2d Cir. 1991); von Bulow by Auersperg v. von Bulow, 811 F.2d 136, 144
(1987); Matter of Jacqusline F., 47 N.Y.2d 215, 219, 417 N.Y.S.2d 884,
887, 391 N.E.2d 967 (1979). Local Rule 26.2 requires that "[w]here a
claim of privilege is asserted in objecting to any means of discovery or
disclosure, . . . the attorney asserting the privilege . . . [must]
identify the nature of the privilege (including work product) which is
being claimed." Local Rule 26.2(a). This information must "be furnished
in writing at the time of the response to such discovery . . . unless
otherwise ordered by the Court." Local Rule 26.2(c). The requirement of
specifying the privilege asserted in a log is more than a mere
"hypertechnicality" but rather is of great importance. Carte Blanche
(Singapore) PTE., Ltd. v. Diners Club Int'l Inc., 130 F.R.D. 28, 32
(S.D.N.Y. 1990) (upholding finding of magistrate judge that plaintiff
waived any work product immunity because it violated Local Rule 46(e),
predecessor to Local Rule 26.2, by submitting a privileged document list
that merely made the prophylactic assertion of "privilege" as to the
documents withheld). Indeed, failure to satisfy Local Rule 26.2 "will be
considered presumptive evidence that the claim of privilege is without
factual and legal foundation" and any privilege or immunity asserted over
the documents is waived. Allstate Life Ins. Co. v. First Trust Nat'l
Ass'n, 1993 WL 138844 at *2 (S.D.N.Y. April 23, 1993) (quoting Grossman
v. Schwarz, 125 F.R.D. 376, 386-87 (S.D.N.Y. 1989)).
The Privilege Log furnished by BankBoston fails to identify the nature
of the privilege being claimed, and is thus insufficient. Despite his
continued claim of privilege now that the documents are in his
possession, Shamis has failed to rectify this deficiency.
Moreover, to the extent that Shamis and Bank Boston seemingly assert
the "common interest" doctrine with respect to the withheld documents,
their reliance on that rule is misplaced. The "common interest" rule is a
limited exception to the general rule that the attorney-client privilege
is waived when a protected communication is disclosed to a third party
outside the attorney-client relationship. The "common interest" doctrine
typically applies where multiple persons are represented by the same
party — "join representation — and accordingly both clients
are working together with a single attorney toward a common goal."
International Ins. Co. v. Neunnont Mining Corp., 800 F. Supp. 1195, 1196
(S.D.N.Y. 1992). The weight of authority suggests that the "common
interest" rule can apply where parties are represented by separate
counsel that engage in a common legal enterprise. See United States v.
Schwimmer, 892 F.2d 237, 243-44 (2d Cir. 1989). This version of the
"common interest" doctrine has been described as follows:
A community of interest exists among different persons
or separate corporations where they have an identical
legal interest. . . . The key consideration is that
the nature of the interest be identical, not similar,
and be legal, not solely commercial. The fact that
there may be an overlap of a commercial and legal
interest for a third party does not negate the effect
of the legal interest in establishing a community of
North River Ins. Co. v. Columbia Cas. Co., 1995 WL 5792 at *3 (S.D.N.Y.
January 5, 1995) (quoting Duplan Corp. v. Deering Milliken, Inc.,
397 F. Supp. 1146, 1172 (D.S.C. 1974)). "What is important is not whether
the parties theoretically share similar interests but rather whether they
demonstrate actual cooperation toward a common legal goal." Id. at *4.
Although Shamis and BankBoston would both benefit from a judgment in
favor of the plaintiff, they do not share identical legal interests.
Indeed, sharing a desire to succeed in an action does not create a
"common interest". See International Ins. Co., 800 F. Supp. at 1196.
Shamis has not produced any agreement between plaintiff and his counsel
and BankBoston establishing a joint prosecution of plaintiff's claims.
There is no evidence of a coordinated legal strategy between Shamis and
BankBoston. BankBoston is not and has never been party to this action.
BankBoston has not exercised control over the conduct of this action, nor
has it contributed to Shamis' legal expenses. See North River Ins. Co.,
1995 WL 5792 at *5 ("common interest" doctrine did not apply because the
parties were not represented by same counsel; one party did not contribute
to the other's legal expenses, nor exercise control over the conduct of
the legal proceedings and no evidence was presented of a coordinated
Accordingly, the BankBoston documents are not privledged, and must be
5. The Interrogatories
On January 16, 1997, Ambassador served its second set of
interrogatories (the "Interrogatories") to plaintiff. On February 25,
1997, Shamis responded, objecting to each and every interrogatory.
Besides objecting to relevance, form and overbreadth, Shamis objected
that the Interrogatories were "not a more practical method of obtaining
the information under [then] Local Rule 46(b)."*fn8 Shamis maintains
that document requests and depositions were a more practical way of
obtaining the information sought by the Interrogatories.
Anbassador asserts that it propounded the Interrogatories precisely
because Shamis failed to produce requested documents and was unable to
provide any meaningful information at his deposition. Ambassador requests
that the Court direct plaintiff to respond to Interrogatories 7, 8, 9,
15, 19 and 20.
Interrogatories 7 and 8 seek information concerning individuals and
entities who acted
on behalf of the Official and Provisional Receivers.*fn9 They seek
identification of witnesses who may have knowledge of (i) the winding up
of the assets of Wishbone; (ii) substantial transactions between/among
Wishbone, entities related to Wishbone, and entities related to Shamis;
(iii) action taken by Shamis in the final years of Wishbone s existence
which impacted the viability of Wishbone; and (iv) relevant records of
Wishbone which plaintiff permitted to be destroyed (and whether any
remaining records exist). Because the Interrogatories seek the identity
of potential witnesses, these Interrogatories are proper under Local Rule
Interrogatories 15 and 18 relate directly to Shamis' damage claim.*fn10
Interrogatory 18 specifically seeks information concerning the
calculation of damages and is this within the express purview of Local
Interrogatories 19 and 20 seek information relating to documents
produced in this case.*fn11 Although Interrogatories 19 and 20 seek
information outside of the purview of Local Rule 33.3(a), they
nevertheless are proper because they are arguably the most practical
method of obtaining this information. The information requested by
Ambassador relates to documents originally located in Hong Kong. The
difficulties Ambassador would face in determining the circumstances
surrounding these documents and their belated production are
significant, while plaintiff should be able to obtain information
concerning documents that he and his counsel produced.
Accordingly, Shamis will respond to Interrogatories 7, 8, 9, 15, 19 and
20. Further, Shamis is advised that an assertion of lack of knowledge is
not a sufficient response to an interrogatory. See Hansel v. Shell Oil
Corp., 169 F.R.D. 303, 305 (E.D.Pa. 1996) ("If a party is unable to
supply the requested information, the party may not simply refuse to
answer, but must state under oath that he is unable to provide the
information and set forth the efforts he used to obtain the
information"). "A party cannot plead ignorance to information that is
from sources within its control." Transcontimental Fertilizer Co. v.
Samsung Co. Ltd., 108 F.R.D. 650, 653 (E.D.Pa. 1985). Indeed, a party is
"charged with knowledge of what its agents know and the contents of its
available records." American Rockwool, Inc. v. Owens — Corning
Fiberglas Corp., 109 F.R.D. 263, 266 (E.D.N.C. 1985). Shamis is also
advised that it is unacceptable to respond to an interrogatory by
directing the interrogating party to deposition transcripts and documents
without identifying the specific document and indicating the page and
paragraphs that are responsive.
See In re Savitt/Adler Litig., 176 F.R.D. 44 49 (N.D.N.Y. 1997).
II. The Roberts Defendants' Motion for Summary Judgment is Denied as to
Korman and Granted as to Christy
A. Standard for Summary Judgment
Rule 56(e) of the Federal Rules of Civil Procedure provides that a court
shall grant a motion for summary judgment "if the pleadings,
depositions, answers to interrogatories, and admissions on file, together
with affidavits . . . show that there is no genuine issue as to any
material fact and that "the moving party is entitled to judgment as a
matter of law." Silver v. City University, 947 F.2d 1021, 1022 (2d Cir.
"The party seeking summary judgment bears the burden of establishing
that no genuine issue of material fact exists and that the undisputed
facts establish her right to judgment as a matter of law." Rodriguez v.
City of New york, 72 F.3d 1051, 1060 (2d Cir. 1995). In determining
whether a genuine issue of material fact exists, a court must resolve all
ambiguities and draw all reasonable inferences against the moving party.
See Matsushita Elee. Indus. v. Zenith Radio Corp., 475 U.S. 574, 587, 106
S.Ct. 1348, 89 L.Ed.2d 538 (1986); Brady v. Town of Colchester,
863 F.2d 205, 210 (2d Cir. 1988). If there is any evidence in the record
regarding the issues on which summary judgment is sought from which a
reasonable inference could be drawn in favor of the nonmoving party,
summary judgment is improper. See Knowles v. New York City Dept. of
Corrections, 904 F. Supp. 217, 220 (S.D.N.Y. 1995).
A party seeking to defeat a summary judgment motion cannot "rely on
mere speculation or conjecture as to the true nature of facts to overcome
the motion." Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995).
Rather, the responding party "must show the existence of a disputed
material fact in light of the substantive law." Peer Int'l Corp. v. Luna
Records, Inc., 887 F. Supp. 560, 564 (S.D.N.Y. 1995). In the absence of
any disputed material fact, summary judgment is appropriate.
B. The Action is Dismissed as Against Angela
Shamis does not oppose the motion for summary judgment in favor of
Angela and advises the Court that "he agrees to dismiss Angela from the
1itigation." (Plaintiff's Brief at 3). Thus, the action is dismissed as
C. The Motion for Summary Judgment as to Korman is Denied
Plaintiff's Sixth Claim for Relief names Korman, along with Roberts and
Mahoney Cohen, and charges all three with fraud. Shamis alleges that
"upon information and belief, Roberts — through its principals,
including Korman — engaged in the practice of pre-invocieing goods
both prior to and after the termination of their relationship with
Wishbone." Shamis further contends that Roberts — through Korman
and Mahoney — purposefully concealed from Wishbone its regular
business practice of issuing fraudulent invoices, throughout the
negotiation of and performance under the Master Agreement and "Assignment
of Factoring Proceeds, and that Roberts — also through Korman
— misrepresented to Wishhone the amounts of Roberts' actual
receivables and unsold inventory, and concealed from Wishbone that
Roberts' inventory derived from Wishbone had been diverted to Jay Vee."
Plaintiff's Second Amended Complaint characterizes two types fraudulent
invoicing. Shamis define's "phony invoicing" as submitting to a factor an
invoice that does not reflect an actual order placed by a customer. He
defines "pre-invicing" as submitting an invoice which doe's not reflect
an actua1 customer order, yet which are submitted before the ordered
shipment is shipped or delivered to the customer who placed the
According to Shamis, from late 1989 through January 1992, Korman made,
and participated in making of material false statements of fact with
respect to: (1) the aount of sales that Roberts was making; (2) the
amount of inventory which Roberts had on hand; and (3) the accounts
receivable. Shamis avers that in July 1991, Korman made, and participated
in the making of
fraudulent statements as to Roberts being an ongoing business concern.
According to Shamis, at the time that Korman made and/or caused to be
made, these statements, Roberts had actually fraudulently transferred its
inventory to another entity controlled by Korman, Jay Vee, for no
Shamis contends that Wishbone relied upon the representations of
Korman, and other such representations made with the authorization and
direction of Korman, in extending credit to Roberts, and in refraining
from foreclosing on Wishbone's security interest. As a result, Shamis
maintains that Wishbone suffered damages of not less than $34 million in
Hong Kong dollars.
To prevail on a fraud claim under New York law, Shamis must show: (1)
misrepresentation of a material fact; (2) the falsity of that
misrepresentation; (3) scienter, or intent to defraud; (4) reasonable
reliance on that representation; and (5) damage caused by such reliance.
May Dep't Stores Co. v. International Leasing Corp., 1 F.3d 138, 141 (2d
Cir. 1993); Katara v. D.E. Jones Commodities, Inc., 835 F.2d 966, 970-71
(2d Cir. 1987); Red Ball Interior Demolition Corp. v. Palmadessa,
874 F. Supp. 576, 584 (S.D.N.Y. 1995).
Additionally, in a diversity action alleging fraud, the plaintiff must
comply with the heightened pleading standard of Rule 9(b),
Fed.R.Civ.P., which requires that the circumstance constituting the fraud
must be stated with particularity. See Shields v. Citytrust Bancorp,
Inc., 25 F.3d 1124, 1127 (2d Cir. 1994); In re Time Warner, Inc. Sec.
Litig., 9 F.3d 259, 265 (2d Cir. 1993); Sheintob v. Shearson, Hammill &
Co., 448 F.2d 442, 444-45 (2d Cir. 1971). The pleading must be
sufficiently particular to serve the three goals of Rule 9(b), which are
(1) to provide a defendant with fair notice of the claims against him;
(2) to protect a defendant from harm, to his reputation or goodwill by
unfounded allegations of fraud; and (3) to reduce the number of strike
suits. See Di Vittorio v. Equidyne Extractive Indus., Inc., 822 F.2d 1242,
1247 (2d Cir. 1987); O'Brien v. Price Waterhouse, 740 F. Supp. 276, 279
(S.D.N.Y. 1990), aff'd, 936 F.2d 674 (2d Cir. 1991).
Defendants contend, in essence, that the Second Amended Complaint fails
to satisfy the pleading requirements of Rule 9(b). However, plaintiff's
allegations of Korman's involvement in the alleged fraud are specific as
to the time, the place, and the nature of the fraudulent activity:
Accordingly, Shamis has plead the circumstances of the alleged fraud with
particularity. See Cadillac v. Cadillac, 58 F.R.D. 534, 535 (E.D.N Y
Shamis has also adequately plead scienter. Rule 9(b) states that
scienter may be averred generally. Although mere conclusory allegations
are insufficient, a strong inference of fraudulent intent can be
established either by alleging facts showing a motive and clear
opportunity for committing fraud or, "[w]here motive is not apparent, by
identifying circumstances indicating conscious behavior by the
defendant." Beck v. Manufacturers Hanover Trust Co., 820 F.2d 46, 50 (2d
Shamis alleges that Korman had the opportunity to deceive Wishbone as
Korman had knowledge of all the material facts, and was perfectly
positioned to misrepresent those facts to Wishbone. Conscious behavior,
too, is clear from the face of the Second Amended Complaint. Shards
alleges that Korman knowingly and deliberately conveyed false information
about Roberts' financial condition to Wishbone, and presented bogus
projections to Wishbone, thereby convincing it to forego foreclosure on
Roberts' inventory. Shamis has, thus, alleged scienter with sufficient
Shamis avers that Korman was in the "middle of crucial decisions and
representations constituting the fraud." Storch Supp. Aff. ¶ 14. The
Roberts Defendants maintain that Korman was simply a dress stylist and
was not involved in the financial affairs of Roberts or any of the other
corporate entities. According to the Roberts Defendants, "the
responsibilities, which go to the heart of plaintiff's unsupported fraud
claim (invoicing, shipping, factoring and maintaining of inventory), were
not the province of Korman." Olitt Supp.Aff. ¶ 21. Thus, there remain
disputed issues of material fact as to (1) whether Korman actively
directed the fraudulent billing practices at issue; (2) whether Korman
repeatedly participated in the dissemination of false information showing
sales that had not taken place; (3) whether Korman repeatedly
misrepresented to Shamis and others at Wishbone the fiancial status of
Roberts; and (4) whether Korman actively participated in a fraudulent
conveyance of Roberts inventory to Jay Vee in order to avoid Wishbone's
security interest. Accordingly, summary judgment as to Korman on
plaintiff's fraud claim is inappropriate.
D. The Motion for Summary Judgment as to Christy is Denied in Part and
Granted in Part
1. Successor Liability
Plaintiff's Seventh Claim alleges that Christy is a corporate successor
to Roberts; that Roberts assigned to Christy, without adequate
consideration, a portion of its assets, stock and/or business; that there
has been a co-mingling of Roberts' inventory with Christy's inventory,
including inventory in which Wishbone purportedly holds a security
interest; and that Roberts transferred business to Christy in an
transaction tantamount to a consolidation and/or merger. (Second Amended
Complaint ¶¶ 128, 129, 132).
A corporation that purchases the assets of another entity normally is
liable under New York law for the debts and liabilities or the seller
only in certain "exceptional circumstances:
A corporation may be held liable for the torts of its
predecessor if (1) it expressly or impliedly assumed
the predecessor's tort liability, (2) there was a
consolidation or merger of seller and purchaser, (3)
the purchasing corporation was a mere continuance of
the selling corporation, or (4) the transaction is
entered into fraudulently to such obligations.
Schumacher v. Richard Shear Co., Inc., 451 N.E.2d 195, 198, 59, N.Y.2d
239, 464 N.Y.S.2d 437, 440.
Based upon the second Ammended Complaint Shamis seems to contend that
Christy should be held to be Robert's successor under the second, third
and fourth exceptions.*fn14
a. Consolidation or Merger
A successor corporation is liable for the debts and, liabilities of its
predecessor where there is a merger or consolidation of the two firms. The
Second Circuit has held:
[T]o find that a de facto merger has occurred there
must be a continuity of the selling corporation,
evidenced by the same management, personnel, assets
and physical location; a continuity of stockholders,
accomplished by paying for the acquired corporation
with shares of stock; a dissolution of the selling
corporation, and the assumption of liabilities by the
Arnold Graphics Industries, Inc. v. Independent Agent Center, Inc.,
775 F.2d 38, 42 (2d Cir. 1985) (quoting Ladjevardian v.
Laidlaw-Coggeshall, Inc., 431 F. Supp. 834, 838 (S.D.N.Y. 1997)).
The "continuity of ownership" factor looks to whether shareholders of
the predecessor become, at the time of the sale of the assets,
shareholders of the successors corporation. See Diaz v. South Bend Lathe
Inc., 707 F. Supp. 97 (E.D.N.Y. 1989); Arnold Graphics, 775 F.2d at 42.
The parties do not dispute that Roberts was owned by Leonard Kaye and
Stephanie Robbins. Neither Korman nor his wife, Angela Korman, had an
ownership interest in Roberts. Christy was capitalized through an
investment made by Angela Korman, with funds she acquired through a loan
obtained from a financial institution. Angela Korman is and has been sole
shareholder of Christy. Thus, the continuity of stockholders required for
a finding of a de facto merger is not present here.
There is also no continuity of physical location. While Roberts
maintained its place of business at 1400 Broadway, New York, New York,
Christy maintained and continues to maintain its business at 1001 Sixth
Avenue, New York, New York. As to continuity of assets, Shamis presents
no evidence that any assets, stock, inventory or business of Roberts was
transferred to Christy.