The opinion of the court was delivered by: Ramon E. Reyes, Jr., U.S.M.J.:
FINDINGS OF FACT & CONCLUSIONS OF LAW
Wells Fargo Bank, N.A., ("Plaintiff"), commenced this diversity action against defendants National Gasoline, Inc. ("National Gasoline" or "National"), Chaim Lax ("Lax"), David Rishty ("Rishty"), 86 Gas Corp., Baisley Gas Corp., Melrose Gas Corp., 111th Street Gas Corp., Neptune Oil Corp., 100 Rockaway Gas Corp., Cooper Gas Corp., 2061 Gas Corp., 8521 Gas Corp., Forest Gas Corp., Doe, Inc. 1 through 10, and John and/or Jane Does 1 through 10 for fraud, breach of contract, and conversion under New York State law and for related claims under the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1962© & (d) on April 21, 2010.
On December 13, 2010, Plaintiff filed an amended complaint against all original defendants and added the following additional defendants: Maira Rishty, Shlomo Arje a/k/a Michael Arje ("Arje"), National Gasoline Wholesale, LLC ("National Wholesale"), 971 Gas Corp., Sun Fuel Corp., 2509 Gas Corp., Irivington Oil Corp., Flatbush Oil Corp., Leahs Equities, Inc., Wrightstown Gas Corp., Caton Gas Corp., Superior Gas, Inc., and 31st Gas Corp. In the defendants' answer National Gasoline counterclaimed for breach of contract and Rishty counterclaimed for defamation.
Plaintiff then moved for summary judgment on all of its claims and the two counterclaims. On February 26, 2013, the Court issued a written opinion granting Plaintiff summary judgment on its conversion and breach of contracts claims, as well as on the remaining counterclaim. (Dkt. No. 127 ("Summ. J. Op.") at 16.) The Court found National Gasoline liable for breach of contract, Lax liable for breach of his personal guaranty, and Rishty, Lax, Arje, and Maira Rishty liable for conversion. (Id.)
The Court held a three-day bench trial from October 15-17, 2012, to determine the amount of damages for the breach of contract and conversion claims, and whether, or to what extent, liability on the conversion counts is joint and several. Six witnesses testified, Wells Fargo Senior Vice President Mark Long ("Long"), Wells Fargo Senior Vice President Robert Ostrowe ("Ostrowe"), Rishty, Maira Rishty, Arje, and Lax. In general, the Court finds Long and Ostrowe's testimony to be credible, while Arje, Rishty, Lax, and Maira Rishty were not credible, especially in light of substantial documentary evidence contradicting their testimony. The Court makes the following findings of fact and conclusions of law. See FED. R. CIV. P. 52(a)(1).
I. The Credit and Security Agreement and Note
On August 27, 2009, Plaintiff and National Gasoline entered into a Credit and Security Agreement (the "Credit Agreement") and revolving note (the "Note") establishing a $6,500,000 revolving line of credit (the "Loan"). (Exh. 1 ("Credit Agreement"); Exh. 7.) Lax signed the Credit Agreement and the Note on behalf of National Gasoline. (Oct. 15 Tr.*fn1 115:2-3; Credit Agreement at 27; Exh. 7.) The Note included National Gasoline's promise to make certain payments to Plaintiff and to perform various other obligations. (Exh. 7.) Lax also signed a personal guaranty (the "Guaranty") promising to pay all of National Gasoline's outstanding obligations. (Oct. 15 Tr. 23:16-20; Exh. 9 ("Guaranty").)
Under the Credit Agreement, National Gasoline granted Plaintiff a security interest in certain "Collateral" to secure the performance of its obligations. (Credit Agreement § 2.1.) Section 1.6(a) of the Credit Agreement provides that all proceeds of accounts and other Collateral should be deposited in the "Collection Account" each business day upon receipt or collection. (Credit Agreement §1.6(a).) Section 1.6(b) of the Credit Agreement also provides that, until deposited, National Gasoline shall hold all such payments and proceeds in trust for Plaintiff without commingling them with other funds or property. (Id.) The Collection Account is National Gasoline's HSBC Bank USA, N.A. ("HSBC") Account No. XXX-XX814-9. (Oct. 16 Tr. 206:3-25; 239:2-24).*fn2
Additionally, any accounts owned by affiliates of National Gasoline are not "Eligible Accounts" and could not be used to calculate the borrowing base for the Loan. (Oct. 15 Tr. 19:2-20:2; Credit Agreement at A-3, A-4). An "Affiliate" is defined as "any Person controlled by, controlling or under common control with Company, including without limitation any Subsidiary of Company." (Id.) The Credit Agreement defines "Control," as "the power to direct the management and policies, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise." (Credit Agreement at A-1).
II. Relationships Among the Defendants and the Affiliated Entities
National Gasoline is a wholesale gas distributor owned and operated by
individual defendants Arje, Lax, Rishty, and Maira Rishty. (Exhs. 1,
29, 44, 71-73, 88.) Michael Arje is the brother of Maira Rishty
(formerly Maira T. Arje). (Oct. 17 Tr. 259:23-24.) Rishty and Maira
Rishty are husband and wife. (Oct. 17 Tr. 255:4-5). Rishty and Maira
Rishty had only one joint bank account for personal use. (Oct. 17 Tr.
264:3-17.) Defendants Arje,*fn3 Lax,*fn4
Rishty,*fn5 and Maira Rishty*fn6 (the "Conversion Defendants") own or
control numerous retail gas stations and other businesses (the
As owners or officers of the Affiliated Entities, the Conversion Defendants were authorized signatories for these entities and also drew salaries or other compensation. The Conversion Defendants all received compensation from National Gasoline. (Exhs. 6, 25-26.) Between August 2009 and April 2010, Rishty, Maira Rishty, and Arje each regularly received checks from Affiliated Entities. (Exh. 27.) In particular, Rishty received weekly payroll checks from 86 Gas Corp, 2061 Gas Corp., Baisley Gas Corp., Melrose Gas Corp., and Neptune Oil Corp. between August 2009 and December 7, 2009. (Exh. 27.) Rishty and Maira Rishty agreed to redirect these payroll checks to Maira Rishty in December 2009 after discussing problems with Plaintiff stemming from his ownership of undisclosed Affiliated Entities. (Oct. 16 Tr. 229:8-20).
Maira Rishty began receiving weekly payroll checks from 86 Gas Corp, 2061 Gas Corp., Baisley Gas Corp., Melrose Gas Corp., and Neptune Oil Corp. on or around December 21, 2009 and continuing through April 2010. (Exh. 27; Oct. 16 Tr. 229:8-20).
National Gasoline submitted Daily Collateral Reports and A/R Aging Detail Reports to Plaintiff as required by the Credit Agreement. (Oct. 15 Tr. 61:1-22; Exhs. 10-12.) Rishty was responsible for reporting this financial data. (Oct. 15 Tr. 61:1-22). The Daily Collateral Reports and A/R Aging Detail Reports listed as eligible accounts receivable due from the following entities: 100 Rockaway Gas Corp. a/k/a 100-07 Rockaway, Forest Gas Corp. a/k/a 1234 Forest, Flatbush Oil Corp. a/k/a 1267 Flatbush, Irvington Oil Corp. a/k/a 1399 Chestnut Ave. 2, 8521 Gas Corp. a/k/a 1611 Avenue Y2, Baisley Gas Corp. a/k/a 168-07 Baisley, Caton Gas Corp. a/k/a 1981 Ocean Ave., Sun Fuel Corp. a/k/a 2001 Neptune Ave., 2317 Ralph Ave. a/k/a Ralph Gas and Store, Inc., 2509 Gas Corp. a/k/a 2509 Victory Blvd., Neptune Oil Corp. a/k/a 292 Neptune Ave., 86 Gas Corp. a/k/a 2965 86th Street, Wrightstown Gas Corp. a/k/a 5004 Hwy. 33 & 34, Cooper Gas Corp. a/k/a 65-20 Cooper Ave., Melrose Gas Corp. a/k/a 871 2, 2061 Gas Corp. a/k/a 902 Westchester Ave. 2, 111th St. Gas Corp. a/k/a 94-02 111 St., 971 Gas Corp. a/k/a 971 Remsen, and Leahs Equities, Inc. a/k/a Bordentown. (Exhs. 10-12.)
National Gasoline submitted requests for borrowing to Plaintiff throughout the course of the Credit Agreement based on eligible accounts receivable due to National Gasoline. (Oct. 15 Tr. 57:17-58:1); (Exhs. 14, 15.) Plaintiff advanced funds into National Gasoline's HSBC Account No. XXX-XX831-9 (the "Operating Account") based on the Daily Collateral Reports and A/R Aging Detail Reports. (Oct. 15 Tr. 57:14-58:15; Exh. 4 ¶ 24; Exh. 16.) National Gasoline then used the funds advanced by Plaintiff to purchase and supply gasoline to the Affiliated Entities. (Exh. 4 ¶¶ 24, 27; Exh. 16.) National Gasoline was the sole supplier for each of the Affiliated Entities for the two years before those stations closed. (Exh. 20 at 89:11-15).
Rishty and other agents or employees of National Gasoline deposited checks into the Collection Account in anticipation of collecting receivables from National Gasoline's customers, before collecting the receivables. (Exh. 6. at 382:6-383:20). Rishty regularly received blank checks from National Gasoline's customers, including gas stations owned by Arje, and then drafted, signed and deposited the checks into National Gasoline's Collection Account. (Id. at 397:6-398:20). Rishty wrote and signed checks on behalf of the Affiliated Entities, including the following: 100 Rockaway Gas Corp., 111th St. Gas Corp., 2061 Gas Corp., 2509 Gas Corp., 31st Gas Corp., 8521 Gas Corp., 86 Gas Corp., 971 Gas Corp., Baisley Gas Corp., Caton Gas Corp., Cooper Gas Corp., Forest Avenue Gas Corp., Irvington Oil Corp., Leahs Equities, Melrose Gas Corp., Neptune Oil Corp., Ralph Avenue Gas and Store, Sun Fuel Corp., and Wrightstown Gas Corp. (Exh. 6 at 122:20-123:8, 125:25-126:13, 150:17-23, 155:1-7; Exh. 70.)
III. Conversions and National's Default Under the Credit Agreement
The Conversion Defendants were required to deposit all accounts receivable into the Collection Account. (Oct. 15 Tr. 16:2-15, 17:3-11; Oct. 16 Tr. 210:19-211:3; Oct. 17 Tr. 332:17-333:2; Exh. 6 at 378:18-22, 379:21-380:7; Credit Agreement §1.6(a)). However, they took cash collections from customers, including the Affiliated Entities, and deposited them into accounts other than the Collection Account, including National Gasoline's HSBC Account No. XXX-XX887-4 and 31st Street Gas Corp. HSBC Account No. XXX-XX650-2. (Exhs. 18, 19; Exh. 6. at 163:4-165:16, 329:20-330:25; Exh. 20 70:5-71:24, 76:8-18, 115:4-121:21; Exh. 21. 170:19-172:22). This failure to hold Collateral in trust for Plaintiff, including accounts receivable owed to National Gasoline, was an event of default under the Credit Agreement. (Credit Agreement § 6.1).
Chaim Lax and/or David Rishty transferred funds (the "2009 Converted Funds") from the Collection Account into National Gasoline Account No. 681-90887-4 between August 30, 2009 and December 8, 2009. (Exh. 18.) The following entities thereafter received transfers of the 2009 Converted Funds: $1,524,000 to the Operating Account; $1,427,265.13 to U.S. Management Firm; $21,000 to Mustang Bulk Carriers, Inc.; $20,000 to 31st Gas Corp.; and $840 to 971 Gas Corp. (Exhs. 18, 86.)
On April 13, 2010, Plaintiff formally notified National Gasoline of its default under the Credit Agreement. (Exh. 23.) Six days later, Plaintiff accelerated amounts due under the Credit Agreement. (Exh. 24.) National Gasoline stopped transferring funds from the Collection Account to Plaintiff after Plaintiff notified National Gasoline of its defaults under the Credit Agreement. (Oct. 16 Tr. 241:7-10).
Between April 13, 2010 and July 6, 2012, Chaim Lax and/or David Rishty transferred $13,624,574.77 (the "2010 Converted Funds") from the Collection Account directly to accounts owned by persons other than Plaintiff. (Exh. 4 ¶¶ 28-29; Exh. 7.) The 2010 Converted Funds were transferred to bank accounts owned by the following entities: $28,000 to 1267 Flatbush, LLC; $55,000 to 31st Gas Corp.; $15,000 to 971 Gas Corp.; $19,000 to Caton Gas Corp.; $650,000 to Global Companies, a fuel distributor; $41,866.41 to Leahs Equities; $50,000 to Mustang Bulk Carriers, a fuel transport company owned by Rishty and Arje; $9,512,075 to National Gasoline accounts other than the Collection Account; $3,070,633.36 to National Gasoline Wholesale, LLC; $125,000 to Petrofox, a fuel distributor; and $58,000 to unknown accounts. (Exh. 4. ¶¶ 28-29; Exh. 87.)
At the same time, Arje, Rishty and Lax began operating National Wholesale to continue selling gas to National Gasoline's customers after the Credit Agreement default. (Oct. 16 Tr. 207:7-14). National Wholesale purchased gasoline from National Gasoline on or after April 16, 2010. (Oct. 17 Tr. 284:1-4) On April 16, 2010, Arje opened three HSBC accounts (Account Nos. XXX-XX366-5, XXX-XX367-3 and XXX-XX639-6) in National Wholesale's name. (Exh. 41.) Arje opened two additional HSBC accounts (Account Nos. XXX-XX370-3 and XXX-XX384-3) in National Gasoline Wholesale's name on June 16, 2010. (Id.) As a customer of National Gasoline, National Wholesale had no legitimate reason to receive transfers of funds from National Gasoline, Inc. (Oct. 17 Tr. 287:3-6.)
The Conversion Defendants have not returned any of the converted funds. ...