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Teras International Corp. v. Gimbel

United States District Court, S.D. New York

September 1, 2017

TERAS INTERNATIONAL CORP., Plaintiff,
v.
ROGER GIMBEL, ALLAN FELDMAN, and WORLDWIDE DREAMS LLC, Defendants.

          MEMORANDUM OPINION & ORDER

          VALERIE CAPRONI, UNITED STATES DISTRICT JUDGE

         Teras 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.

         BACKGROUND[1]

         I. Worldwide Dreams and Its Wholly Owned Subsidiaries, Yick Bo and Worldwide Dreams International

         Worldwide 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. ¶ 11.

         Yick Bo 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. ¶¶ 72-73.

         Gimbel 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.[2] Id. ¶¶ 20-21.

         Yick Bo 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].”[3] Pl. 56.1 Stmt. ¶ 25; Gordon Decl. Ex. 11 ¶¶ 2(c), 3.

         The 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. 212-3).

         In 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.

         II. The Factoring Agreements

         Gimbel 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.

         Pursuant 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.

         The 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. ¶¶ 13(b), 20.10.

         When 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.

         Pursuant 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.

         III. The Payoff Projections and the Failed LF USA Deal

         From 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.

         In 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.

         On 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.

         On 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. ¶ 91.

         In 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.”[4] Gordon Decl. Ex. 48 (Dkt. 202-48).

         IV. Unwinding Worldwide Dreams And Its Subsidiaries

         After 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).

         In June 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. ¶ 108.

         Chu 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.

         V. Yick Bo's Liquidation

         On 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.

         Yick Bo 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.

         At the time of the voluntary liquidation, the companies' books and records showed an intercompany payable from Worldwide Dreams to Yick Bo totaling $14.68 million[5] 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;[6] 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. ¶ 122.

         VI. Procedural History

         On May 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.

         In June 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.[7] 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.

         DISCUSSION

         I. Summary ...


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