United States District Court, S.D. New York
MEMORANDUM OPINION & ORDER
VALERIE CAPRONI, UNITED STATES DISTRICT JUDGE
International Corp., as assignee for Yick Bo Trading Limited
(“Yick Bo”), is suing Yick Bo's former sole
shareholder, Worldwide Dreams LLC (“Worldwide
Dreams”), for reimbursement for merchandise purchased
on behalf of Worldwide Dreams and for commissions earned on
those purchases, and is suing Roger Gimbel
(“Gimbel”) and Allan Feldman
(“Feldman”), former officers and directors of
both Yick Bo and Worldwide Dreams, for breach of their
fiduciary duty to Yick Bo. Defendants move for summary
judgment as to both claims. For the following reasons,
Defendants' motion is granted in part and denied in part
as to both of Plaintiff's claims.
Worldwide Dreams and Its Wholly Owned Subsidiaries, Yick Bo
and Worldwide Dreams International
Dreams was a wholesale accessories import business founded by
Gimbel and Feldman, Pl. 56.1 Stmt. ¶¶ 5, 7; it is
incorporated in Delaware and had its principal place of
business in New York, id. ¶ 6. In 2005, Yick
Bo, a Hong Kong company, became a wholly owned subsidiary of
Worldwide Dreams. Id. ¶¶ 8, 20. Yick Bo
was a sourcing and purchasing agent for Worldwide Dreams and
Worldwide Dreams' other wholly owned Hong Kong
subsidiary, Worldwide Dreams International Limited
(“WWDI”). Id. ¶ 9. Yick Bo placed
orders with Hong Kong factories on behalf of Worldwide Dreams
and WWDI for accessories, including handbags, neckwear,
cosmetic bags, wallets, and other small leather goods.
Id. ¶ 10. Worldwide Dreams would resell these
accessories to customers in the United States, such as Target
and Walmart, whereas WWDI would resell these accessories to
customers outside of the United States. Id. In
addition to acting as a sourcing and purchasing agent for
Worldwide Dreams and WWDI, Yick Bo traded on its own behalf
with vendors outside the United States. Id. ¶
was funded in part from the revenue generated by WWDI, and
Yick Bo relied on both Worldwide Dreams and WWDI to pay its
operational expenses, such as payroll and rent. Id.
¶¶ 12, 72. The amount that Yick Bo needed from
Worldwide Dreams and WWDI to cover its operational expenses
varied weekly given Yick Bo's own income from trading
activities with non-U.S. third party customers. Id.
and Feldman managed the operations of Worldwide Dreams, and
they were Directors of both Yick Bo and WWDI. Id.
¶ 14. Norman Abramson (“Abramson”) was the
Chief Operating Officer of Worldwide Dreams, and he ran its
day-to-day operations. Id. ¶ 15. Reddy Chu
(“Chu”) was a Director, Chief Financial Officer,
and Corporate Secretary of Yick Bo, and he ran Yick Bo's
daily operations. Id. ¶¶ 16-17. Yick
Bo's Articles of Association provide that Directors may
hold interests in companies with which Yick Bo contracts so
long as such interests are disclosed. Id. ¶¶
and Worldwide Dreams had various agency agreements, but the
operative version for purposes of this litigation was from
2008 (“Agency Agreement”). Id. ¶
25; Gordon Decl. Ex. 11 (Dkt. 202-11). Pursuant to the Agency
Agreement, Yick Bo agreed to “place orders (if
necessary) with manufacturers on behalf of [Worldwide
Dreams], ” and Worldwide Dreams agreed “to pay to
[Yick Bo] a commission of 7% on factory price for all FOB
Sales and stock/warehouse orders for the merchandise and
services handled by [Yick Bo] on behalf of [Worldwide
Dreams].” Pl. 56.1 Stmt. ¶ 25; Gordon Decl. Ex.
11 ¶¶ 2(c), 3.
purchase orders Yick Bo provided to the Hong Kong factories
from which it purchased accessories on behalf of Worldwide
Dreams identified Yick Bo as an agent acting for Worldwide
Dreams as the disclosed principal. Pl. 56.1 Stmt. ¶ 27;
see, e.g., Gordon Decl. Ex. 12 (Dkt. 202-12). But,
invoices prepared by the Hong Kong factories stated that the
invoiced amounts were “to be paid by Yick Bo Trading
Ltd, ” although many of the invoices also stated
“Sold To: Worldwide Dreams LLC.” See,
e.g., Galin Decl. Ex. H (Dkt. 212-2). In affidavits
submitted in the fall and winter of 2011 in lawsuits brought
by various Hong Kong factories against Worldwide Dreams for
payment of purchases made by Yick Bo on Worldwide Dreams'
behalf, Worldwide Dreams' controller averred that Yick Bo
had “assumed sole payment responsibility” for the
goods at issue. See Galin Decl. Ex. L ¶ 1 (Dkt.
about 2008, Worldwide Dreams began to experience cash flow
problems. Pl. 56.1 Stmt. ¶ 30. In about 2009, Gimbel and
Feldman, who were getting on in age and keen to retire, began
to consider selling Worldwide Dreams and its subsidiaries.
Id. ¶ 31. After consultation with Chu,
Abramson, and consultants, Gimbel and Feldman decided to sell
Worldwide Dreams and its subsidiaries as an integrated
wholesale accessory import business. Id. ¶ 33.
Gimbel and Feldman believed that by selling Worldwide Dreams
and its subsidiaries as an integrated going concern, Yick Bo
would be able to pay its Hong Kong suppliers and Worldwide
Dreams would be able to pay its secured creditors.
Id. ¶ 34.
The Factoring Agreements
and Feldman believed that in order to best position Worldwide
Dreams and its subsidiaries for sale, it was critical that
Worldwide Dreams and its subsidiaries continue operations.
Pl. 56.1 Stmt. ¶ 36. To continue operating, the company
needed a credit line. See Id. After its previous
factor filed for bankruptcy, Gimbel and Feldman searched for
a replacement factor. Id. ¶¶ 37-39. In May
2010, Worldwide Dreams received a proposal from Capital
Business Credit LLC (“CBC”) for a line of credit
of up to $9.5 million, solely to facilitate the sale of
Worldwide Dreams and its subsidiaries. Id.
¶¶ 40-41, 44. Gimbel and Feldman considered the
interests of Yick Bo, WWDI, and Worldwide Dreams when
deciding whether to accept CBC's proposed factoring
agreement. Id. ¶ 47. Before the CBC factoring
agreement was executed, Abramson, Gimbel, and Feldman
informed Chu of the terms of the agreement, and Chu
participated in the due diligence process on behalf of Yick
Bo. Id. ¶¶ 48, 50. On July 30, 2010,
Worldwide Dreams executed a factoring agreement with CBC
(“Factoring Agreement”). Id. ¶ 52.
to the Factoring Agreement, CBC agreed to advance up to 85%
of eligible account receivables and up to 50% of eligible
inventory in exchange for a first and only security interest
in essentially all of Worldwide Dreams' assets.
Id. ¶¶ 42-43. The Factoring Agreement
required payments on accounts receivable in which CBC held a
perfected security interest to be made directly to CBC.
Id. ¶ 52. Worldwide Dreams and its subsidiaries
agreed not to dispose of any collateral, which included cash,
except for: (1) the sale of inventory in the ordinary course
of business, and (2) obsolete equipment. Id.
¶¶ 53-54; Gordon Decl. Ex. 19 ¶ 6.3(a) (Dkt.
202-19). Worldwide Dreams was required to give CBC control of
its bank accounts, which were to be maintained in Hong Kong
and were to hold all of Worldwide Dreams' cash; this
allowed CBC to pay the Hong Kong factories directly. Pl. 56.1
Stmt. ¶ 56.
Factoring Agreement defined an “Event of Default”
to include “any attachment, injunction, execution or
judgment in excess of $10, 000” issued or filed against
Worldwide Dreams or any “legal action or proceeding . .
. which results in damages in excess of $100, 000.”
Gordon Decl. Ex. 19 ¶ 13(a)(x), (xv). Upon an Event of
Default, CBC could accelerate loan repayment and exercise its
rights to possess its collateral. Id. ¶¶
Worldwide Dreams executed the Factoring Agreement, Gimbel,
Feldman, and Chu agreed that Yick Bo would guarantee
Worldwide Dreams' payment and performance of all
obligations and liabilities under the Factoring Agreement,
and Gimbel and Feldman agreed that WWDI would also provide a
guarantee. Pl. 56.1 Stmt. ¶¶ 62-63. Chu prepared a
certificate memorializing the resolution of Yick Bo's
Directors to guarantee Worldwide Dreams' payment
obligations to CBC, and the certificate provided that the
Directors had resolved that Yick Bo would “obtain
benefits” from guaranteeing Worldwide Dreams'
obligations under the Factoring Agreement and that the
guarantee was “necessary and convenient to the conduct,
promotion and attainment of the business of . . . [Yick
Bo].” Id. ¶¶ 64-65. Gimbel, Feldman,
and Chu believed that the Factoring Agreement was necessary
and in the best interests of Yick Bo and its creditors.
Id. ¶ 66.
to the terms of the Factoring Agreement, from August 2010
through March 2011, CBC made payments directly to Yick Bo.
Id. ¶ 67. CBC made five payments to Yick Bo in
February and March 2011 that were designated to pay specific
Hong Kong factory invoices. Id. ¶ 92. Chu
oversaw Yick Bo's accounts payable, made requests to CBC
for payment, prepared weekly account statements for amounts
due to the Hong Kong factories, and set up the means by which
CBC could make payments to either Yick Bo or to the Hong Kong
factories directly. Id. ¶¶ 68, 70.
The Payoff Projections and the Failed LF USA Deal
September 2010 through March 2011, Gimbel and Feldman
directed Abramson to collaborate with Worldwide Dreams'
and its subsidiaries' accountant, WeiserMazars LLP, to
prepare schedules for payments to Yick Bo's suppliers
from the proceeds of a hypothetical sale of Worldwide Dreams
and its subsidiaries. Pl. 56.1 Stmt. ¶ 75. Abramson
prepared these payout schedules, which showed how the
proceeds from a sale would be distributed at different price
thresholds. Id. ¶ 76. On September 28, 2010,
Abramson sent WeiserMazars a payout schedule that
contemplated a $2.9 million payment to the Hong Kong factory
creditors if Worldwide Dreams and its subsidiaries sold for
$9 million. Id. ¶ 77.
approximately November or early December 2010, Worldwide
Dreams and LF USA Inc. (“LF USA”) began
negotiating for LF USA to purchase Worldwide Dreams and its
subsidiaries; the draft term sheets provided that LF USA
would pay Worldwide Dreams $6.5 million up front and an
additional payment at a later date for inventory.
Id. ¶ 78. In light of these proposed terms, on
December 6, 2010, Abramson sent WeiserMazars a payout
schedule showing $2.9 million to be paid to the Hong Kong
factories if Worldwide Dreams and its subsidiaries were sold
for $6.5 million plus a future payment of $5 million for
inventory. Id. ¶ 79.
December 22, 2010, Worldwide Dreams and LF USA entered in a
non-binding term sheet. Id. ¶¶ 80, 83.
Shortly thereafter, based on the execution of the term sheet,
Abramson expressed optimism to Chu about being able to pay
the Hong Kong factories. Id. ¶ 84. Counsel for
LF USA and Worldwide Dreams proceeded to exchange draft asset
purchase agreements, and between December 2010 and March
2011, Gimbel, Feldman, Chu, and Abramson oversaw due
diligence and continued to negotiate the asset purchase
agreement with LF USA. Id. ¶¶ 85-87.
March 8, 2011, Abramson sent Worldwide Dreams' controller
a payout schedule that forecasted that $3, 355, 000 would be
paid to the Hong Kong suppliers given an anticipated $6.5
million payment from LF USA at closing plus $3, 888, 000 in
inventory sales and $5, 244, 000 in account receivable
proceeds, which would be used to pay CBC. Id. ¶
88. At that time, $3, 355, 000 constituted nearly the entire
debt owed to Yick Bo's third party Hong Kong creditors,
including the Hong Kong factory suppliers. Id.
¶ 89. On March 25, 2011, in an email to Chu, Abramson
expressed his belief, shared by Gimbel and Feldman, that
“CBC will transfer money into your existing accounts to
pay the factories.” Id. ¶ 90. Throughout
the negotiation of the acquisition, Gimbel and Feldman
believed that the acquisition would yield sufficient proceeds
to pay all debt owed to the Hong Kong factories. Id.
April 2011, the LF USA deal collapsed unexpectedly due to the
departure of the person at LF USA who was primarily
responsible for orchestrating the deal. Id. ¶
94. After the collapse of the LF USA deal, Gimbel, Feldman,
and Abramson held out some hope that they could find another
buyer, and Worldwide Dreams was in discussions with proposed
purchasers as of April 2011. Id. ¶¶ 95-96.
On April 28, 2011, in response to a request from Yick
Bo's auditors for a plan to settle the amount Worldwide
Dreams owed to Yick Bo, Worldwide Dreams' controller
informed Chu that “[d]ue to our efforts to reorganize
our company, at this point in time, I am not able to provide
you with a payment schedule.” Gordon Decl. Ex. 48 (Dkt.
Unwinding Worldwide Dreams And Its Subsidiaries
the LF USA deal collapsed, CBC insisted that Worldwide
Dreams' and its subsidiaries' assets be sold to
satisfy the debt owed to CBC, and it reduced its cash
advances to a level that was not sustainable. Pl. 56.1 Stmt.
¶¶ 98-99. Gimbel and Feldman decided that they had
no choice but to wind down Worldwide Dreams' operations
and sell its assets piecemeal at prices substantially lower
than originally anticipated. Id. ¶ 100. By May
19, 2011, Worldwide Dreams was in the process of negotiating
an asset purchase agreement with Accessory Exchange LLC.
Galin Decl. Ex. N (Dkt. 212-3).
2011, Worldwide Dreams sold its neckwear division to
Accessory Street LLC for $940, 000 and its handbag and small
leather good divisions to Accessory Exchange LLC for $1.65
million, comprising a total of approximately $2.6 million.
Pl. 56.1 Stmt. ¶ 103. Pursuant to the Factoring
Agreement, the proceeds from the sales were placed under
CBC's control, which paid itself first pursuant to its
first priority lien. Id. ¶ 104. After CBC paid
itself, Worldwide Dreams used the remaining proceeds to pay
its California distribution center $800, 000 because it had a
priority lien on inventory that was sold in the asset
purchase transaction. Id. ¶ 107 (see
response); Gordon Decl. Ex. 4 Tr. 38:3-39:12 (Dkt. 202-4).
Worldwide Dreams also used the proceeds to pay $284, 000 owed
in rent to its landlord, the Empire State Building. Pl. 56.1
Stmt. ¶ 107 (see response); Ismail Report
¶ 48(2) (Dkt. 208-1). The remaining proceeds were
insufficient to pay the Hong Kong factories in full. Pl. 56.1
Stmt. ¶ 106. Gimbel and Feldman did not profit from the
asset sales, and they lost the entirety of their capital
contributions to Worldwide Dreams. Id. ¶ 107.
In addition, throughout the time they managed Worldwide
Dreams, Gimbel and Feldman had taken nominal annual salaries
of $25, 000 and took no distributions of profits or interest
payments on their subordinated loans. Id. ¶
retired from Yick Bo on May 31, 2011. Id. ¶
109. Through the fall of 2011, Gimbel and Feldman continued
to direct Worldwide Dreams' controller in the wind-down
of Worldwide Dreams' operations. Id. ¶ 110.
Yick Bo's Liquidation
October 26, 2011, Yick Bo's members resolved to
voluntarily wind down the company. Pl. 56.1 Stmt. ¶ 112.
That same day, a notification was filed with the Hong Kong
Companies Registry to convert the Members' Voluntary
Liquidation into a Creditors' Voluntary Liquidation.
Id. ¶ 113.
had been solvent until April 2011 when the LF USA deal
collapsed. Id. ¶ 101. After Yick Bo became
insolvent, Worldwide Dreams made four payments to Yick Bo
totaling approximately $260, 000. Id. ¶ 105.
The list of creditor claims and proofs of debt in the
liquidation proceeding show that 98% of the purchase orders
reflecting outstanding debt owed by Yick Bo to third party
suppliers ($2, 233, 485) were placed in or before March 2011,
when Yick Bo was solvent. Id. ¶ 102.
time of the voluntary liquidation, the companies' books
and records showed an intercompany payable from Worldwide
Dreams to Yick Bo totaling $14.68 million and an
intercompany payable from Yick Bo to WWDI totaling $6.2
million, making WWDI Yick Bo's largest creditor.
Id. ¶ 114. Yick Bo's creditors initially
claimed a total of $3.8 million. Id. ¶ 115. The
parties dispute whether that $3.8 million has been reduced to
$2.5 million: Defendants claim that Worldwide Dreams settled
claims on its and Yick Bo's behalf in February 2012 for
approximately $1.3 million; Plaintiff contends Worldwide
Dreams did not have the legal authority to settle debts owed
by Yick Bo when Yick Bo was in liquidation. See Id.
¶¶ 115, 117-121. But Plaintiff admits that,
according to the liquidators' own calculations, as of
July 12, 2013, Yick Bo owed its third party creditors (other
than WWDI) approximately $2.5 million. Id. ¶
24, 2013, the liquidators assigned their claims against
Defendants to Plaintiff in consideration for 60% of the net
recovery in this action, meaning Plaintiff could retain 40%
of the net recovery. Pl. 56.1 Stmt. ¶ 128; Gordon Decl.
Ex. 63 ¶ 2.1 (Dkt. 202-63); see also Id. Ex. 64
(Dkt. 202-64) (expanding scope of assignment to include
claims against Gimbel and Feldman). Plaintiff filed its
Complaint in this action in September 2013, and the case was
transferred to the Undersigned in March 2014.
2014, while a motion to dismiss was pending, the Court
granted Plaintiff's motion for leave to amend. Dkt. 64.
Plaintiff's Amended Complaint alleged a civil RICO claim
against all individual defendants (Count One), a breach of
fiduciary duty claim against Gimbel and Feldman (Count Two),
and a claim for reimbursement and commissions against
Worldwide Dreams (Count Three). Dkt. 66. Defendants moved to
dismiss the Amended Complaint in its entirety, and Plaintiff
moved for summary judgment as to Count Three. Dkts. 67, 74.
The Court granted Defendants' motion to dismiss Count One
and dismissed three individual defendants from the case; the
Court denied Plaintiff's motion for summary judgment as
to Count Three. Dkt. 96. The Court subsequently held that
Hong Kong law would apply to Plaintiff's remaining
claims, and thus the Court applies Hong Kong law in deciding
summary judgment. Dkt. 157. On February 24, 2016, the Court
ruled that Plaintiff was estopped from pursuing a duty of
care claim in light of Plaintiff's previous
representations to the Court that it was only pursuing a duty
of loyalty claim (known under Hong Kong law as a fiduciary
duty claim). Dkt. 175. Defendants then moved for summary
judgment. Dkt. 200.