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January 27, 1999


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.

The Parties

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 dresses.

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 auditing services.

Prior Proceedings

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.


I.Historical Background

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 Agreement.

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.

IV. The Alleged Fraud

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

Shamis further alleges that Ambassador was aware by early 1991 that Roberts was pre-invoicing, but, nevertheless continued to purchase all Roberts's receivables without demanding the required proof of shipment and delivery. In April 1991, Ambassador charged back to Roberts' account approximately $1.7 million in receivables and thereafter substituted a "cash basis" manner of payment for the receivables, whereby it withheld payment of funds to Roberts until it had proof that a retail customer had paid a given invoice.

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 ...

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