Am. Federated Title Corp. v. GFI Mgmt. Servs., Inc.

• Court: Court of Appeals for the Second Circuit
• Decided: November 16, 2017
• Docket: 16-3148-cv
• Status: Unpublished

Opinion

16-3148-cv Am. Federated Title Corp. v. GFI Mgmt. Servs., Inc.

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

SUMMARY ORDER

1 RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A 2 SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED 3 BY FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. 4 WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY 5 MUST CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE 6 NOTATION “SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A 7 COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.

8 At a stated term of the United States Court of Appeals for the Second Circuit, held at 9 the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York, 10 on the 16th day of November, two thousand seventeen. 11 12 PRESENT: GERARD E. LYNCH, 13 SUSAN L. CARNEY, 14 Circuit Judges, 15 ALVIN K. HELLERSTEIN,* 16 District Judge. 17 _________________________________________ 18 19 AMERICAN FEDERATED TITLE CORPORATION, a 20 Florida corporation, 21 22 Plaintiff-Counter-Defendant-Appellant, 23 24 ROBERT CORNFELD, 25 26 Counter-Defendant, 27 28 v. No. 16-3148-cv 29 30 GFI MANAGEMENT SERVICES, INC., a New York 31 corporation, ALLEN I. GROSS, EDITH GROSS, 32 33 Defendants-Counter-Claimants-Appellees. 34 _________________________________________

* Judge Alvin K. Hellerstein, of the United States District Court for the Southern District of New York, sitting by designation. 1 FOR APPELLANT: FRANKLIN L. ZEMEL, Arnstein & Lehr, 2 LLP, Fort Lauderdale, FL (Joshua M. 3 Atlas, Arnstein & Lehr, LLP, Fort 4 Lauderdale, FL; Marc J. Rachman, 5 Davis & Gilbert LLP, New York, NY, on 6 the brief). 7 8 FOR APPELLEES: JOSEPH ZELMANOVITZ (Abraham 9 Neuhaus, on the brief), Stahl & 10 Zelmanovitz, New York, NY. 11 12 Appeal from a judgment of the United States District Court for the Southern District 13 of New York (Wood, J.).

14 UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED, 15 ADJUDGED, AND DECREED that the judgment entered on August 12, 2016, is 16 AFFIRMED.

17 In 2007, plaintiff-appellant American Federated Title Corporation (“AFTC”) 18 negotiated a Purchase and Sale Agreement (“PSA”) with GFI Acquisition, LLC (“GFIA”)— 19 one of several entities owned by defendants-appellees Allen I. Gross and Edith Gross—by 20 which AFTC would sell real property in Florida to GFIA. Since 2007–08, the parties have 21 been involved in protracted litigation arising from the PSA and the bankruptcies of three 22 other related companies controlled by the Grosses (“the A&M companies”).1 AFTC now 23 sues GFI Management Services, Inc. (“GFIM”) and the Grosses (collectively, “defendants”) 24 to recover on judgments totaling $7.5 million entered against GFIA and the A&M 25 companies in bankruptcy court in the Southern District of New York. After a three-day 26 bench trial, the District Court rendered a mixed verdict, finding for AFTC on some of its 27 claims and against it on others. The court later denied AFTC’s motion for reconsideration of 28 that verdict. AFTC alone appeals, arguing that the District Court erred in: (1) concluding 29 under New York law that management fee payments made by the A&M companies to 30 GFIM were not constructively fraudulent conveyances; and (2) declining to pierce the A&M

1 The A&M companies are: A&M Florida Properties, LLC (“A&M I”); A&M Florida Properties II, LLC (“A&M II”); and A&M Florida Properties III, LLC (“A&M III”). 2 1 companies’ and GFIA’s corporate veils so as to permit AFTC to recover against the Grosses 2 and GFIM on the bankruptcy court judgments. We assume the parties’ familiarity with the 3 underlying facts, the procedural history of the case, and the issues on appeal, to which we 4 refer only as necessary to explain our decision to affirm.

5 On appeal from a district court’s judgment entered after a bench trial, “we review the 6 court’s findings of fact for clear error and its conclusions of law de novo.” Merck Eprova AG v. 7 Gnosis S.p.A., 760 F.3d 247, 255 (2d Cir. 2014) (quoting Tiffany (NJ) Inc. v. eBay Inc., 600 F.3d 8 93, 96 (2d Cir. 2010)). “In considering claims based in New York law (as here), this Court 9 ‘determine[s] de novo what the law of New York is.’” In re Sharp Int’l Corp., 403 F.3d 43, 49 (2d 10 Cir. 2005) (quoting McCarthy v. Olin Corp., 119 F.3d 148, 153 (2d Cir. 1997)).2 To determine 11 New York law, we look first to decisions of the New York Court of Appeals, and, if that 12 court has not ruled on the issue, we “may consider lower New York court opinions as the 13 best indicators of how the Court of Appeals might decide an issue.” Id. (internal quotation 14 marks omitted). To the extent AFTC challenges the District Court’s denial of its motion for 15 reconsideration, we review that decision for abuse of discretion. See RJE Corp. v. Northville 16 Indus. Corp., 329 F.3d 310, 316 (2d Cir. 2003) (per curiam).

17 I. Management fee payments

18 In challenging the District Court’s conclusion that the management fee payments to 19 GFIM should not be deemed constructively fraudulent conveyances, AFTC argues: (1) that 20 the District Court should have applied an “irrebuttable presumption that the management fee 21 payments lacked good faith,” Appellant’s Br. 19 (emphasis in original); and (2) that the 22 District Court did not properly consider the good faith element of fair consideration in its 23 analysis. We find neither argument persuasive.

24 Sections 272, 273, and 273-a of New York’s Debtor and Creditor Law together 25 provide the building blocks for identifying fraudulent conveyances under New York law. 26 Sections 273 and 273-a provide that, to be deemed fraudulent, payments for such 27 conveyances must have been made “without a fair consideration,” in addition to the

2 The parties agree that New York law governs this dispute. 3 1 transferor failing to meet certain requirements related to its financial health. See N.Y. Debt. 2 & Cred. Law § 273; see also N.Y. Debt. & Cred. Law § 273-a. New York law deems “fair 3 consideration” to have been given “for property, or obligation” in two circumstances:

4 a. When in exchange for such property, or obligation, as a fair 5 equivalent therefor, and in good faith, property is conveyed or an 6 antecedent debt is satisfied, or 7 b. When such property, or obligation is received in good faith to 8 secure a present advance or antecedent debt in amount not 9 disproportionately small as compared with the value of the 10 property, or obligation obtained. 11 N.Y. Debt. & Cred. Law § 272 (emphasis added).

12 We have recognized that, under New York law, “even the preferential repayment of 13 pre-existing debts to some creditors does not constitute a fraudulent conveyance, whether or 14 not it prejudices other creditors, because the basic object of fraudulent conveyance law is to 15 see that the debtor uses his limited assets to satisfy some of his creditors; it normally does not 16 try to choose among them.” HBE Leasing Corp. v. Frank, 48 F.3d 623, 634 (2d Cir. 1995) 17 (internal quotation marks and alteration omitted) (emphasis in original). We have also held, 18 however, that this general rule does not apply to repayment of a pre-existing debt when that 19 debt is owed to “an officer, director, or major shareholder of the transferor.” See Atlanta 20 Shipping Corp., Inc. v. Chem. Bank, 818 F.2d 240, 249 (2d Cir. 1987).

21 The thrust of AFTC’s first argument—that the District Court erred in finding that 22 the management fee payments to GFIM were made for “fair consideration”—is that we 23 should not adhere to our decision in HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995). 24 In HBE Leasing, we distinguished “preferential payments of pre-existing obligations . . . to a 25 debtor corporation’s shareholders, officers, or directors” from transfers made in exchange 26 for “contemporaneous advance[s] of funds.” Id. at 634–35 (first emphasis added). We observed 27 there that the latter category of payments “could not be found to be fraudulent[ ]” because 28 “a present advance of commensurate value does not ordinarily prejudice other creditors” 29 and thus does not trigger an irrebuttable presumption of an absence of good faith. Id. at 635.

4 1 AFTC claims that HBE Leasing is no longer good law because “state court appellate 2 decisions have all evolved beyond, if not having all outright contradicted, the good faith 3 limitation in HBE.” Reply Br. 5. In support of this sweeping contention, AFTC cites three 4 New York appellate division cases (from two different departments), as well as a mix of 5 district court and bankruptcy court decisions, some of which predate our decision in HBE 6 Leasing. But the cited appellate division cases present factual scenarios materially different 7 from that at hand.3 And at least one of the decisions on which AFTC relies condemns 8 transfers for contemporaneous value only upon a specific finding that the purportedly 9 fraudulent transfer harmed the creditor. See Matter of Bernasconi v. Aeon, LLC, 105 A.D.3d 10 1167, 1169 (N.Y. App. Div. 3d Dep’t 2013) (“[W]here . . . a corporate insider participates in 11 both sides of the transfer and the insider controls the transferee, the transfer will be deemed 12 to have been made in bad faith if made to a creditor’s detriment . . . .” (emphasis added)). Here, 13 the District Court found the opposite had occurred. See Am. Federated Title Corp. v. GFI Mgmt. 14 Servs., Inc., 126 F. Supp. 3d 388, 411 (S.D.N.Y. 2015) (“As transfers made for equivalent 15 value, the management fees could not have served to reduce the value of the A&M companies 16 and frustrate AFTC’s efforts to collect its debts.” (emphasis in original)).

17 Moreover, post-HBE Leasing decisions of several state and federal courts echo the 18 distinction that we drew in HBE Leasing. See, e.g., Bank of Commc’ns v. Ocean Dev. Am., Inc., 904 19 F. Supp. 2d 356, 361 (S.D.N.Y. 2012); Staudinger+Franke GMBH v. Casey, No. 13 Cv. 20 6124(JGK), 2015 WL 3561409, at *11 (S.D.N.Y. June 8, 2015). And in Cilco Cement Corp. v. 21 White, 55 A.D.2d 668 (N.Y. App. Div. 2d Dep’t 1976), a pre-HBE Leasing case, the Appellate 22 Division declined to apply the presumption of impropriety for which AFTC argues, instead 23 concluding that continued salary payments to corporate officers of a failing corporation were 24 not fraudulent conveyances in light of services contemporaneously rendered. See 55 A.D.2d 25 at 668–69. Just as the insider’s salary was approved so that he could “try[ ] to keep the

3 See Matter of Bernasconi, v. Aeon, LLC, 105 A.D.3d 1167, 1167 (N.Y. App. Div. 3d Dep’t 2013) (noting

transfer of “entire remaining bank balance”); Matter of Mega Pers. Lines, Inc. v. Halton, 9 A.D.3d 553, 554 (N.Y. App. Div. 3d Dep’t 2004) (“[Transferor] transferred substantially all of its assets to [transferee] . . . .”); Mfrs. & Traders Tr. Co. v. Lauer’s Furniture Acquisition, Inc., 226 A.D.2d 1056, 1057 (N.Y. App. Div. 4th Dep’t 1996) (same). 5 1 struggling debtor ‘afloat’ and save the business,” Reply Br. 10, so too the management fee 2 payments here compensated GFIM for work that enabled the AFTC-owned properties to 3 retain their rental and sale values.4 We therefore find no reason to fault the District Court for 4 following HBE Leasing and declining to apply an irrebuttable presumption that the payments 5 for contemporaneous value lacked fair consideration.

6 We also identify no error in the District Court’s ruling that the transfers were not 7 shown to be tainted by an absence of good faith. Although, in its initial bench trial ruling on 8 the conveyances, the District Court did not explicitly evaluate the good faith element of fair 9 consideration, it did so in its ruling on AFTC’s motion for reconsideration. See Am. Federated 10 Title Corp. v. GFI Mgmt. Servs., Inc., 13-CV-6437 (KMW), 2016 WL 4290525, at *3–*5 11 (S.D.N.Y. Aug. 11, 2016). There, the District Court observed pointedly that AFTC adduced 12 no evidence that the transfers were made in bad faith. No more was required.5

13 II. Piercing the corporate veil

14 AFTC also challenges the District Court’s decision not to pierce the corporate veil, 15 thereby preventing AFTC from reaching the Grosses’ and GFIM’s assets to satisfy the 16 bankruptcy court judgments.

17 The parties agree that the New York Court of Appeals’ decision in Matter of Morris v. 18 New York State Department of Taxation and Finance, 82 N.Y.2d 135 (1993), establishes the 19 applicable standard under New York law. In Morris, the court stated, “Generally, . . . piercing 20 the corporate veil requires a showing that: (1) the owners exercised complete domination of 21 the corporation in respect to the transaction attacked; and (2) [ ] such domination was used 22 to commit a fraud or wrong against the plaintiff which resulted in plaintiff’s injury.” Id. 23 at 141; see id. at 141–42 (requiring proof of “a wrongful or unjust act toward plaintiff,” in

4Although AFTC asserts that it did not stipulate to the reasonableness of the management fee payments, it does not affirmatively argue on appeal (and apparently did not argue before the District Court) that they were unreasonable in amount. 5To the extent AFTC asserts that it “demonstrated at trial” that the Grosses orchestrated a fraudulent scheme, see Appellant’s Br. 28, the District Court found to the contrary, see Am. Federated Title Corp., 126 F. Supp. 3d at 410–11. AFTC has fallen well short of establishing on appeal that this factual finding was clearly erroneous. 6 1 addition to “complete domination”). Significantly, the Morris court further observed that the 2 decision to pierce the corporate veil in a given instance does not rest on a mechanistic 3 analysis: it “will necessarily depend on the attendant facts and equities.” Id. at 141.

4 AFTC first argues that the District Court applied an incorrect legal standard to 5 AFTC’s veil-piercing demand, in that the court required proof of an “intentionally unjust” 6 act. See Appellant’s Br. 39. But as Morris reflects, in New York as elsewhere, “a simple breach 7 of contract, without more, does not constitute a fraud or wrong warranting the piercing of 8 the corporate veil.” Bonacasa Realty Co., LLC v. Salvatore, 109 A.D.3d 946, 947 (N.Y. App. 9 Div. 2d Dep’t 2013). The District Court correctly recognized a sound justification for the 10 rule: “If a controlling party could be held liable for any corporate transaction, regardless of 11 the intent with which it was carried out, then proof of external control and causation alone 12 could suffice to pierce the corporate veil.” Am. Federated Title Corp., 126 F. Supp. 3d 13 at 404 n.7.

14 Although Morris does not explicitly restrict the types of “wrong[s]” that may justify 15 veil piercing to those committed purposefully, the Morris court found probative in its 16 decision not to pierce that it had before it no “evidence of an intent to defraud.” See 82 17 N.Y.2d at 143 (emphasis added). Here, the District Court’s emphasis on the evidence (or 18 lack thereof) of any wrongful intent in defendants’ acts reflected a similar effort to 19 distinguish wrongs that, while perhaps giving rise to a claim for contract damages, fall short 20 of supporting the extraordinary remedy of piercing the corporate veil. As in Morris, analysis 21 of defendants’ intent here offered one method of assessing whether the corporate form was 22 sufficiently abused to permit veil piercing. The District Court’s analysis of the veil-piercing 23 claim is therefore fully consistent with Morris and New York law.

24 Second, AFTC takes issue with the District Court’s resolution of several factual 25 questions underlying its decision against piercing.6 In doing so, it attempts to recast

6 The District Court declined to decide whether AFTC was required to prove its constructively fraudulent conveyance and veil-piercing claims by a preponderance of the evidence or a clear-and-convincing evidentiary standard. See Am. Federated Title Corp., 126 F. Supp. 3d at 405–06. We too decline to decide this question, as 7 1 disagreements with many of the District Court’s factual findings as errors of law. For 2 example, the District Court rejected AFTC’s contention that the reason defendants, the 3 A&M companies, and GFIA pursued aggressive litigation strategies was to effectuate an 4 asset-stripping scheme. See Am. Federated Title Corp., 126 F. Supp. 3d at 412 (“Through the 5 PSA Action, the A&M companies and GFIA fought to compel AFTC to close on the PSA, 6 which would have eliminated the A&M companies’ arrearages and granted GFIA title to the 7 leased properties.”); id. (finding that A&M companies pursued bankruptcy stays to preserve 8 status quo pending resolution of PSA Action).7 AFTC casts these as legal errors, but they are 9 in essence factual findings about motivation. AFTC has failed to demonstrate any clear error 10 in these findings.

11 Similarly, the District Court rejected AFTC’s argument that veil piercing was 12 warranted because GFIA pursued plainly meritless litigation as an undercapitalized 13 “dummy” entity. See Am. Federated Title Corp., 2016 WL 4290525, at *3. In so ruling, the 14 District Court noted that it “previously found[ ] [that] GFIA had legitimate reasons for 15 pursuing the PSA Action.” Id. Even reviewed de novo, this determination appears to be 16 entirely correct. The litigation’s ultimate lack of success does not establish or even suggest 17 that GFIA was a “dummy” entity. AFTC’s willingness to contract with GFIA in the PSA, 18 with full knowledge of its status, tends to confirm the correctness of this conclusion. 19 However strongly AFTC may have believed in its defenses to the PSA Action, the District 20 Court found that GFIA pursued that action for legitimate reasons. See Am. Federated Title 21 Corp., 126 F. Supp. 3d at 412. We are not persuaded that this conclusion was erroneous, 22 much less clearly erroneous.

23 We therefore find no error in the legal standard applied by the District Court to 24 AFTC’s veil-piercing claim or in the District Court’s evaluation of the evidence that AFTC 25 presented to support that claim.

neither AFTC nor defendants appealed the District Court’s ruling in this regard and our resolution of this appeal is the same under either standard. 7The “PSA Action” was the March 2008 suit GFIA and the A&M companies brought against AFTC, in which GFIA and the A&M companies alleged “that AFTC had fraudulently induced, and then breached, the PSA.” Am. Federated Title Corp., 126 F. Supp. 3d at 397. 8 1 * * *

2 We have considered the remainder of AFTC’s arguments and conclude that they are 3 without merit. The judgment of the District Court is AFFIRMED.

4 FOR THE COURT: 5 Catherine O’Hagan Wolfe, Clerk of Court