The opinion of the court was delivered by: John G. Koeltl, District Judge
This diversity action arises from a commercial dispute involving the delivery of and payment for certain apparel. The plaintiff, Nanjing Textiles Imp/Exp Corp., Ltd. ("Nanjing"), filed a complaint on January 4, 2006 and an Amended Complaint ("Compl.") on January 25, 2006 asserting a number of claims for, among other things, breach of contract and fraud. The plaintiff also sought preliminary relief to seize apparel in the defendants' possession and for an attachment. On August 4, 2006, upon discovering new evidence, the plaintiff again sought preliminary relief in the form of an attachment and additionally sought a preliminary injunction freezing defendants' assets.
Defendants NCC Sportswear Corp. ("NCC"), Sunshine Apparel Group LLC, Charles Sobel, and Robert Cesaria (collectively, the "NCC Defendants") have opposed the plaintiff's request for preliminary relief and moved to dismiss the Amended Complaint.
Defendants Israel Discount Bank of New York, IDB Capital Corp., and IDB Factors (collectively, the "IDB Defendants" or "IDB") similarly oppose the request for preliminary relief and seek to dismiss the Amended Complaint against them.
In October 2004, Nanjing began doing business with NCC. (Compl. ¶ 11.) NCC ordered custom made clothing from Nanjing in China (Id. ¶ 12), and Nanjing delivered the apparel to NCC in the United States (Id. ¶ 20). Between October 2004 and June 2005, Nanjing delivered $2,369,848.00 worth of custom made clothes to NCC. (Id. ¶ 27.) NCC did not pay $106,413.00 of this amount based on allegations that the delivered goods failed to comply with specifications. (Id.)
Between June 9 and November 14, 2005, Nanjing delivered an additional twenty-one shipments of clothes for an outstanding balance of $1,553,780.31. (Id. ¶ 29.) It was the practice for NCC to pay Nanjing for each shipment three months after NCC's receipt of the shipment. (Id. ¶ 30.) Beginning in at least September 2005, Nanjing began to demand payment and NCC began to offer to pay only a small fraction of the outstanding balance. (Id. ¶ 31.) Nanjing stopped delivering clothes to NCC. (Id. ¶ 32.) As of January 3, 2006, NCC allegedly owed Nanjing $1,553,780.31 and Nanjing was storing at its expense $293,358.50 worth of custom made clothes for NCC. (Id. ¶¶ 33, 34.)
NCC disputes that it did business with Nanjing. NCC maintains that it always did business only with a company called Union Apparel Group, Ltd. ("Union") and not Nanjing. (Decl. of Charles Sobel, dated Jan. 5, 2006, ¶¶ 3-6 ("Sobel 1/5/06 Decl.").) Union is a New York corporation (Compl. ¶ 14), while Nanjing is a Chinese corporation with its principal place of business in China (See Compl. ¶ 5). NCC is a New York corporation with its principal place of business in New York. (See id. ¶ 6.)
On December 28, 2005, NCC filed suit against Nanjing and Union in the Supreme Court of the State of New York. (Sobel 1/5/06 Decl. Ex. A.) NCC alleged, among other things, that the defendants breached their agreement to provide goods to NCC and provided defective goods and that the defendants made misrepresentations to NCC. Nanjing then filed this action on January 4, 2006 asserting various causes of action against NCC and seeking to recover the amount owed for the goods together with consequential damages.
Apart from NCC, Nanjing has sued several other defendants. Defendants Marvin Newman and Robert Cesaria are allegedly joint owners of NCC, and defendant Charles Sobel is an officer of NCC and Nanjing's contact at NCC. (Compl. ¶ 7.) Nanjing alleges that Sunshine Apparel Group, LLC ("Sunshine") is a corporation that NCC does business as. (Id. ¶ 6.) IDB Factors had a factoring agreement with NCC. (See Id. ¶ 22, Ex. D.) Under the factoring agreement, IDB Factors would purchase NCC's accounts receivable at a discounted rate. (Id. ¶ 18.) NCC would then use the money it received from IDB Factors to pay for the apparel from Nanjing. (Id. ¶ 19.) The third-party customers purchasing the apparel from NCC would then pay IDB Factors directly. (Id.) Based on this relationship, Nanjing asserts a number of causes of action against IDB Factors and the other IDB Defendants. Israel Discount Bank of New York and IDB Factors are allegedly subsidiaries of IDB Capital Corp, a New York corporation. (Id. ¶ 8.) There is complete diversity of citizenship between Nanjing, an alien, and all of the defendants who are citizens of various states.
On January 6, 2006, Nanjing filed an Order to Show Cause seeking to reclaim the apparel it had delivered to NCC and further seeking to attach certain of defendants' assets. Nanjing also sought a temporary restraining order to prevent defendants from transferring funds received from the sale of Nanjing's apparel pending the Court's resolution of the Order to Show Cause. (See Order to Show Cause, Jan. 6, 2006.) The Court denied Nanjing's request for a temporary restraining order. (See Jan. 6, 2006 Hr'g Tr. 27-29.)
The NCC Defendants and the IDB Defendants each filed oppositions to Nanjing's Order to Show Cause and cross-moved to dismiss Nanjing's Amended Complaint. On August 4, 2006, while these motions were still pending, Nanjing filed another Order to Show Cause seeking to attach and freeze the assets of defendants Sobel, Cesaria, NCC, and Sunshine Apparel Group LLC. Nanjing claimed new facts that allegedly showed that those defendants had been fraudulently disbursing and secreting assets. (See Aff. of Jenny Chen, dated Aug. 2, 2006 ("Chen 8/2/06 Aff."), ¶¶ 4, 8, 10.) The new information was that NCC is no longer in business and that its offices are closed with a notice that the landlord has reclaimed the premises. That day, the Court granted a temporary restraining order against the transfer of assets by those defendants, which it vacated on August 8, 2006 following a hearing on the second Order to Show Cause.
Nanjing's Order to Show Cause dated January 6, 2006 seeks two forms of preliminary relief. First, pursuant to NY UCC § 2-702(2), Nanjing seeks to seize the apparel that it delivered to NCC. That statute provides a limited right to reclamation for sellers in cases where a buyer has misrepresented its solvency. Second, Nanjing seeks an order of attachment against the defendants' assets pursuant to NY CPLR § 6201. In Nanjing's second Order to Show Cause, dated August 4, 2006, Nanjing renews its request for an order of attachment based on alleged new evidence and further requests that the Court grant a preliminary injunction against the transfer of assets of the NCC Defendants.
NY CPLR § 7102 governs Nanjing's request for the seizure of the apparel.*fn1 Section 7102 creates the procedural mechanism for the seizure of a chattel in New York. Section 7102(d) provides that an order to seize chattels may issue upon the presentation of an affidavit and undertaking and upon a finding that it is probable that plaintiff will succeed on the merits and that the facts are as stated in the affidavit. In the affidavit, the plaintiff must demonstrate, among other things, that it "is entitled to possession by virtue of the facts set forth" and that "the chattel is wrongfully held by the defendant named." See NY CPLR § 7102(c). The plaintiff bears the burden of establishing the grounds for the seizure order. NY CPLR § 7102(d).
The plaintiff alleges that it is entitled to possession of the goods under NY UCC § 2-702(2), which provides sellers with a limited reclamation right in cases where a buyer receives goods while insolvent. An "insolvent" person is one "who either has ceased to pay his debts in the ordinary course of business or cannot pay his debts as they become due or is insolvent within the meaning of the federal bankruptcy law." NY UCC § 1-201(23). NY UCC § 2-702(2) provides:
Where the seller discovers that the buyer has received goods on credit while insolvent he may reclaim the goods upon demand made within ten days after the receipt, but if misrepresentation of solvency has been made to the particular seller in writing within three months before delivery the ten day limitation does not apply. Except as provided in this subsection the seller may not base a right to reclaim goods on the buyer's fraudulent or innocent misrepresentation of solvency or of intent to pay.
The first part of section 2-702 provides that if a buyer receives goods on credit while insolvent, the seller may reclaim those goods upon demand within ten days of the buyer's receipt of the goods. Nanjing does not allege that they made any such demand within the ten day limit, and thus this provision does not apply. The second part of section 2-702 provides that the ten-day limit is inapplicable in cases where a buyer has misrepresented its solvency in writing within three months before delivery. Nanjing argues that this provision applies and that it is thus entitled to reclaim the apparel from defendants.
At they very least, NY UCC § 2-702(2) requires Nanjing to establish (1) that the defendant was insolvent when it received the goods and (2) that it misrepresented its solvency in writing within three months prior to delivery. The only defendant to which this provision might possibly apply is NCC. Nanjing has failed to adduce sufficient evidence to establish its right to reclamation against NCC.
First, Nanjing has failed to offer evidence that NCC was insolvent at the time it received the apparel shipments up to October 2005. At the time the original motion for seizure was briefed, Charles Sobel, NCC's President, stated unequivocally in February 2006 that NCC was solvent and had no plans to liquidate assets to avoid any claims. (See Decl. of Charles Sobel, dated Feb. 17, 2006 ("Sobel 2/17/06 Decl."), ¶¶ 45-52.) Sobel swore that NCC employed more than 35 individuals and had never transferred or dissipated assets to avoid the claims of a creditor. (Id. ¶ 49.) The only evidence of insolvency to which Nanjing pointed was three dishonored checks in a total amount of $171,207.49. (Decl. of Aiping "Jenny" Chen, dated Mar. 9, 2006 ("Chen 3/9/06 Decl."), ¶ 14.) However, as Sobel points out, each of these checks was in fact replaced by wire transfer and each of the checks were for prior shipments of clothes for which Nanjing was paid. (Sobel 2/17/06 Decl. ¶ 46.) Thus, Nanjing failed to prove that NCC was insolvent at the time it received the shipments of clothes for which it claims it was not paid.
Second, even assuming NCC was insolvent at the time it received the goods, Nanjing has failed to prove that NCC misrepresented its solvency in writing. Nanjing argues that NCC misrepresented its solvency in writing through the tender of the three dishonored checks and NCC's signature on shipping invoices, which represented that the goods were "received in good order," coupled with oral promises to pay. (See Aff. of Aiping "Jenny" Chen, dated Jan. 3, 2006 ("Chen 1/3/06 Aff."), Ex. B.) On these facts, Nanjing has failed to produce sufficient evidence that the dishonored checks or the shipping invoices constituted misrepresentations of solvency.
Standing alone, a check makes no representation of solvency. A solvent party, while perfectly willing and able to satisfy all outstanding debts, may issue a check that is later dishonored because the particular account from which the check is drawn contains insufficient funds. Conversely, an insolvent party may issue a check that is later honored. The insolvent party may have sufficient funds in a particular account to satisfy a particular debt, yet still face debts that exceed its overall assets. As such, while the check may contain a representation that that drawer will pay the stated sum, it does not make a broader representation regarding the drawer's solvency. Similarly, the statement that goods are "received in good order" does not alone have any relationship to solvency. The question then is whether the surrounding circumstances supply any basis for inferring that the checks and the shipping invoices were in fact representations of solvency.
Nanjing has failed to provide any evidence that solvency was an issue during its business relationship with NCC in the three months prior to the delivery of the goods. In the absence of any evidence that solvency was an issue between the parties, the Court cannot find that the shipping invoices and checks -- all ordinary incidents of a standard commercial transaction -- are representations of solvency.*fn2 Cf. Mullen v. Sweetheart Cup Corp. (In re Bar-Wood, Inc.), 15 UCC Rep. 828, 1974 WL 21662 (Bankr. S.D. Fla. Sep. 24, 1974) ("There must be something more such as an intention of the parties to treat the checks as a representation of solvency, or a reliance on them as such a representation."); In re Regency Furniture, Inc., 7 UCC Rep. 1381, 1970 WL 12546 (Bankr. E.D. Tenn. July 15, 1970) (finding that several purchase orders were not written misrepresentations of solvency); but cf. Liles Bros. & Son v. Wright, 638 S.W.2d 383, 386-87 (Tenn. 1982) (provision of a post-dated check under the facts and circumstances of the case found to be a representation of solvency).
For these reasons, Nanjing's request for an order of seizure is denied.
Nanjing also seeks to "freeze the bank accounts and assets of the defendants in the amount of $1,660,193.31." (Order to Show Cause, Jan. 6, 2006.) Pursuant to Federal Rule of Civil Procedure 64, New York law governs Nanjing's request for an order of attachment. Under New York law, to obtain an order of attachment, the moving party must demonstrate that (1) it has a cause of action for a money judgment, (2) there is a probability of success on the merits, (3) one or more of the enumerated statutory grounds for attachment under NY CPLR § 6201 exists, and (4) the amount demanded exceeds the amount of all counterclaims known to the party seeking the attachment. See NY CPLR §§ 6201, 6212(a); JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. and Trade Servs., Inc., 306 F.Supp.2d 482, 485 (S.D.N.Y. 2004); Trafalgar Power, Inc. v. Aetna Life Ins. Co., 131 F.Supp.2d 341, 346 (N.D.N.Y. 2001); Bank of Leumi Trust Co. of New York v. Istim, Inc., 892 F.Supp. 478, 481 (S.D.N.Y. 1995).
Nanjing relies on two of the statutory grounds enumerated in NY CPLR § 6201. Against Sobel alone, Nanjing relies on NY CPLR § 6201(1), which permits an order of attachment when "the defendant is a nondomiciliary residing without the state...." As against all of the defendants, Nanjing relies on NY CPLR § 6201(3), which provides that a court may grant an order of attachment where "the defendant, with intent to defraud his creditors or frustrate the enforcement of a judgment that might be rendered in plaintiff's favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts...."
"[T]he provisional remedy of attachment is a particularly harsh remedy, and is a creature of statute in derogation of the common law and is thus to be strictly confined to its statutory authorization which is construed against the one seeking the attachment." Ashland Oil, Inc. v. Gleave, 540 F.Supp. 81, 83 (W.D.N.Y. 1982). "Fraud cannot be inferred; it must be proved." Anderson v. Malley, 181 N.Y.S. 729, 730 (App. Div. 1920). The intent to defraud cannot be presumed from the mere fact that the defendant has liquidated or disposed of some of its business assets. See, e.g., Ashland Oil Inc., 540 F.Supp. at 84; Eaton Factors Co. v. Double Eagle Corp., 232 N.Y.S.2d 901, 903 (App. Div. 1962) (per curiam); Sylmark Holdings, Ltd. v. Silicone Zone Intern. Ltd., 783 N.Y.S.2d 758, 774 (Sup. Ct. 2004). The moving papers must contain evidentiary facts, as ...