United States District Court, Southern District of New York
July 30, 2003
THE CADLE COMPANY, PLAINTIFF,
ROCHFORT ENTERPRISES (BAHAMAS) LIMITED, ET AL., DEFENDANTS.
The opinion of the court was delivered by: Lewis Kaplan, District Judge.
This is essentially a fraudulent conveyance action brought here on the basis of diversity of citizenship. Defendants Rochfort Enterprises (Bahamas) Limited ("Rochfort"), Sheldon Salcman, and Atead Consulting S.A. ("Atead") move to dismiss the amended complaint as to them on the grounds that it fails to allege fraud with particularity as required by Fed.R.Civ.P. 9(b) and fails to state a claim upon which relief may be granted.
According to the amended complaint, the allegations of which are deemed true for purposes of this motion, the action centers on Mademoiselle Knitwear, Inc. ("Mademoiselle"), which formerly was a New York company engaged in the garment industry. Its president and majority shareholder was Shraga Newhouse, the husband of defendant Miriam Newhouse.
In 1989, Mademoiselle executed an unlimited guaranty of all present and future liabilities of one of its shareholders, Ernesto Brach, in favor of a predecessor in interest to First New York Bank for Business (the "Bank"). In 1991, Mademoiselle executed a promissory note in the amount of $2 million in favor of Brach, who in turn executed an allonge assigning the note to the Bank. In addition, he gave his own note to the Bank, also in the amount of $2 million. Plaintiff acquired all right, title and interest in and to both notes and the guaranty from the Federal Deposit Insurance Corporation as receiver for the Bank.
At about this time, Shraga Newhouse was heavily in debt, and he remained so through his death in 1998. His outstanding obligations exceeded $2 million in 1992 and $13 million in August 1994. During the entire period, he was earning "hundreds of thousands of dollars per year as the owner of Mademoiselle."*fn1 Nevertheless, the money never was placed in his own name. Allegedly with intent to defraud his creditors, he transferred his earnings from Mademoiselle — more than $2.7 million over the period November 1992 through May 1998 — to his wife, Miriam Newhouse, by causing Mademoiselle to transfer funds from a corporate account into an account held solely in her name.*fn2 Shraga Newhouse was authorized to sign checks on, and held a power of attorney with respect to, his wife's account, which was used to pay household and personal bills and as a source of cash.
On July 24, 1996, plaintiff obtained a judgment against Shraga Newhouse in the amount of $2,467,883.87 in a state court action. In early 2001, plaintiff obtained also a judgment against Miriam Newhouse in a prior action in this court for almost $3.5 million.
During the course of the earlier litigation, plaintiff learned that Mademoiselle in 1991 had obtained a key man life insurance policy on Shraga Newhouse of which Mademoiselle was both owner and beneficiary. In or about 1997, at a time when Mademoiselle was insolvent, Shraga and Miriam Newhouse caused the beneficiary to be changed from Mademoiselle to Miriam Newhouse without consideration and allegedly with actual intent to hinder, delay or defraud creditors.*fn3 On or about June 11, 1998, following the death of her husband, Miriam Newhouse collected over $7 million in insurance proceeds on this policy. A few days later, Miriam Newhouse transferred over $1 million to her son, Avrohom Newhouse, with actual intent to hinder, delay and defraud creditors.
During the period May through August 1998, Miriam Newhouse conspired with Rochfort and Salcman to defraud her creditors and those of Mademoiselle. In furtherance of that scheme, Newhouse wired $6 million to Meyer Wassenaar and Banach, a Canadian law firm, on behalf of Rochfort and Salcman.
During the same period, Newhouse conspired also with Atead as well as Rochfort and Salcman to defraud creditors. In furtherance of this either separate or overlapping scheme, she wired another $750,000 to the same Canadian law firm on behalf of Rochfort, Salcman and Atead and caused two mortgage liens in favor of Atead to be placed on real estate she owned in Monsey, New York, all without consideration.
The amended complaint alleges five claims for relief:
• The first is brought against Miriam Newhouse on
the theory that the change of beneficiary of the
life insurance policy, as well perhaps as the
transfers from Mademoiselle to her account, were
made with actual intent to hinder, delay or defraud
creditors and thus were fraudulent transfers under
Section 276 of the New York Debtor and Creditor
• The second is brought against Newhouse,
Rochfort and Salcman and alleges that the conspired
to make, and made, the $1 million and $6 million
wire transfers with actual intent to hinder, delay
or defraud creditors. They rely here as well on
N.Y. Debtor and Cred. L. § 276.
• The third is brought against all four
defendants and attacks as fraudulent transfers the
$750,000 million wire and the granting of the
mortgages on the Monsey property under the same
• The fourth appears to be brought against all
four defendants. It attacks the transfers, mortgages
and change of beneficiary on the life insurance
policy on the theory that they were made without
consideration at a time when the transferors were
insolvent or that the transfers rendered them so.*fn4
• The fifth seeks recovery of attorneys' fees
under Section 276-a of the Debtor and Creditor Law.
Rochfort, Salcman and Atead move to dismiss. They contend that the transfers in which they allegedly participated — two wire transfers and the grant of the mortgages on the Monsey real estate — were in satisfaction of an antecedent debt and therefore were made for fair consideration. They contend also that the complaint fails to comply with Rule 9(b).
The amended complaint alleges that all of the transfers were made without consideration. Insofar as the motion rests on the contention that the transfers at issue on the motion were made on account of an antecedent debt, it is based on matters outside the pleading — specifically, an affirmation of Sheldon Salcman — which are not properly considered on a motion to dismiss.
To be sure, a district court may consider matters outside the pleading on a Rule 12 motion and, after appropriate notice, thus to convert the motion to one for summary judgment. In the circumstances of this case, the Court declines to do so. Plaintiff should be afforded an appropriate opportunity to conduct discovery.
Rule 9(b) requires that the circumstances constituting an alleged fraud be pleaded with particularity. This requires, among other things, the allegation of facts giving rise to a strong inference of fraudulent intent.
Insofar as it relates to the moving defendants, the amended complaint asserts that Miriam Newhouse gave power of attorney and check writing authority to her husband with respect to an account that was used to divert millions of dollars from Mademoiselle and participated in changing the beneficiary of the key man insurance policy from the company to herself at a time when her husband was deeply in debt. She thus is alleged to have been a participant in her husband's fraud, an object of which was to benefit her. Upon his death, she received $7 million in insurance proceeds. She immediately transferred over $1 million to her son and then discussed with the moving defendants what to do with the rest of the money. Following those discussions, she sent $6 million to a law firm in Canada for Rochfort and Salcman, transferred another $750,000 to the same firm for Rochfort, Salcman and Atead, and encumbered her real estate in favor of Atead, all without consideration. If these facts do not give rise to a strong inference of fraudulent intent, it would be difficult to imagine how that standard might be satisfied.
For the foregoing reasons, the motion to dismiss is denied.