FESI Holdings, Inc. v Kamylon Holdings, LLC 2025 NY Slip Op 31784(U) May 15, 2025 Supreme Court, New York County Docket Number: Index No. 161957/2023 Judge: David B. Cohen Cases posted with a "30000" identifier, i.e., 2013 NY Slip Op 30001(U), are republished from various New York State and local government sources, including the New York State Unified Court System's eCourts Service. This opinion is uncorrected and not selected for official publication. INDEX NO. 161957/2023 NYSCEF DOC. NO. 165 RECEIVED NYSCEF: 05/15/2025
SUPREME COURT OF THE STATE OF NEW YORK NEW YORK COUNTY PRESENT: HON. DAVID B. COHEN PART 58 Justice ---------------------------------------------------------------------------------X INDEX NO. 161957/2023 FESI HOLDINGS, INC.,TIMOTHY J FALLON 09/13/2024, Plaintiff, 09/16/2024, MOTION DATE 10/02/2024 -v- MOTION SEQ. NO. 006 007 008 KAMYLON HOLDINGS, LLC,TRANSFORMATIVE HEALTHCARE LLC, DECISION + ORDER ON Defendant. MOTION
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The following e-filed documents, listed by NYSCEF document number (Motion 006) 104, 105, 106, 139, 140, 141, 148, 149, 150 were read on this motion to/for SEAL .
The following e-filed documents, listed by NYSCEF document number (Motion 007) 107, 108, 109, 110, 111, 112, 113, 114, 115, 116, 117, 118, 119, 120, 121, 122, 123, 124, 125, 126, 127, 128, 129, 130, 131, 132, 133, 134, 135, 136, 137, 138, 145, 147, 151, 153, 154, 155, 158, 159 were read on this motion to/for DISMISSAL .
The following e-filed documents, listed by NYSCEF document number (Motion 008) 143, 144, 146, 152, 156, 157, 160, 161, 162 were read on this motion to/for CONSOLIDATE/JOIN FOR TRIAL .
Defendants Kamylon Holdings, LLC (Kamylon) and Transformative Healthcare LLC
(Transformative) move by order to show cause for certain records to remain permanently sealed
(motion sequence 006), for dismissal of plaintiffs’ second amended and supplemented complaint
(SAC) (motion sequence number 007), and for consolidation of this action with another pending
action in this court (motion sequence number 008). Motion sequence numbers 6, 7, and 8 are
consolidated for disposition.
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I. PERTINENT BACKGROUND
Plaintiff FESI Holdings, Inc. (Fesi) is a Massachusetts corporation with its principal place
of business there, and is the holding company through which plaintiff Fallon owns membership
units in defendant Transformative. Fallon has a primary residence in Massachusetts and is the
president and owner of FESI (NYSCEF 109, SAC, ¶ 21-22).
Defendant Kamylon, a Delaware limited liability company with a principal place of
business in Massachusetts, is a private equity fund with a controlling interest in Transformative,
and has at least one member whose primary residence is in Massachusetts (id., ¶ 23).
Fallon previously owned Fallon Ambulance Service (the ambulance service), and he,
Kamylon, and Transformative entered into a Contribution and Exchange Agreement (NYSCEF
114, the CEX Agreement), by which Fallon transferred the ambulance service to Transformative.
The CEX agreement provides that, before the closing date, Fallon was to form FESI and
make FESI party to the CEX Agreement. Fallon would contribute all the equity in the
ambulance service to FESI; FESI would transfer all that equity to Transformative; and, in
exchange, Transformative would issue 290,000 Transformative Common Units (the Exchange
Units) to FESI (id., 1.1 [a], [d]). “Concurrently,” Transformative would make a loan to FESI in
the amount of $3 million pursuant to a promissory note to be given by Fallon at the closing (id.,
[d]), and Fallon would use the loan to satisfy various debts listed on Schedule 1.2 (b) of the CEX
Agreement (id., 1.2 [b]).
The CEX Agreement and a subsequent letter that modified certain aspects of the
agreement (the Letter) were dated January 17, 2018. Ultimately, Transformative transferred to
FESI 205,000 units of equity in Transformative with each unit having a value of $41.32984
(NYSCEF 110, the Letter, ¶ 1, 4) and loaned FESI $1,676,664 (NYSCEF 111, the promissory
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note). The promissory note, secured by FESI’s equity in Transformative, was between FESI and
Fallon, on the one hand, and Kamylon and Transformative, on the other.
Plaintiffs aver that the parties initially agreed on an unsecured note, and allege that
nonparty Charles Lelon, Kamylon’s CEO, fraudulently induced Fallon and FESI into pledging
all FESI’s equity in Transformative as collateral for the note and into signing a secured note.
Shortly before the closing of the transfer of the ambulance service to Transformative, Lelon
represented to Fallon that Transformative’s EBITDA1 had increased from approximately $2
million in 2016 to $3.9 million in 2017 (NYSCEF 109, ¶ 6). FESI and Fallon did not know that
Transformative’s true 2017 EBITDA was below $150,000 (id.). Lelon also told Fallon that the
promissory note would benefit FESI by providing it with the opportunity for a “’true-up’” at the
time of an exit transaction, so that FESI would receive at least the agreed-upon value of
$41.32984 for each unit of FESI’s equity in Transformative (id., ¶ 7).
Plaintiffs allege that Lelon made these statements to induce them into signing the secured
note, and if Lelon told Fallon the truth about Transformative’s 2017 EBITDA, plaintiffs would
never have agreed to sign a secured note (id., ¶ 8). Plaintiffs also allege that, after they signed
the note, Kamylon fraudulently concealed material financial information about Transformative,
including audited financial statements.
Sometime thereafter, plaintiffs defaulted on the note. On June 17, 2024, Transformative
convened a foreclosure sale at which Transformative was the only participant. At the sale,
FESI’s equity in Transformative was sold to Transformative “by way of an arbitrary credit bid”
of $450,000 (NYSCEF 109, ¶ 15). Plaintiffs allege that that their equity in Transformative was
1 EBITDA means earnings before depreciation, taxes, interest, and amortization; measures a business's value through financial performance, and can be calculated with the data on a balance sheet or income statement) (Anne M. Payne, New York Limited Liability Companies and Partnerships: A Guide to Law and Practice § 11:18 [2d Edition, Oct 2024 update, Westlaw: NYPRAC-LIMLIAB § 11:18]) 161957/2023 FESI HOLDINGS, INC. ET AL vs. KAMYLON HOLDINGS, LLC ET AL Page 3 of 18 Motion No. 006 007 008
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initially valued at $8.4 million, that it had increased in value since then, and that defendants
reduced the value of the collateral so that they could obtain it at a price far lower than what it
was worth (id., ¶ 81).
Plaintiffs maintain that defendants engaged in a fraudulent scheme to take their equity in
Transformative and deprive them of Capital Transaction Proceeds, as follows: as part of the
transfer of the ambulance service from plaintiffs to Transformative, Kamylon, Transformative,
and FESI entered into the Amended and Restated Operating Agreement of Transformative (the
operating agreement), dated March 19, 2018, by which FESI was made a member of
Transformative. The operating agreement recites that FESI contributed equity to Transformative
(NYSCEF 131 at 1) and defines a Capital Transaction as any liquidation of Transformative or
any sale of all or substantially all its assets (id., ¶ 12.02).
Capital Transaction Proceeds are the net receipts from a Capital Transaction and shall be
distributed to members pro rata in proportion to their units (id., ¶ ¶ 8.02 [a], 12.02 at 41). The
operating agreement also provides as follows. “Offset. Whenever Transformative is obligated to
pay any sum to any Member, any amounts” owed by the member to Transformative may be
deducted from said sum before payment (id., ¶ 13.01 at 45).
The SAC alleges that FESI’s collateral in Transformative is subject to a gain in value
because Transformative engaged in a Capital Transaction by selling three of its businesses and
thereby gaining tens of millions in Capital Transaction Proceeds (NYSCEF 109, ¶ 55).
However, Transformative did not pay FESI the Capital Transaction Proceeds to which FESI was
entitled as a Transformative member. Plaintiffs allege that the proceeds would have offset what
they owed on the note (id., ¶ 57).
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Motion to dismiss the SAC (motion sequence number 007)
Fraudulent Inducement against Kamylon (First Cause of Action)
A. Applicable law
Defendants move to dismiss this claim pursuant to CPLR 3211(a)(1) and (7) and CPLR
3016, arguing that the claim that plaintiffs were fraudulently induced into signing the promissory
note is time-barred pursuant to CPLR 202.
On a motion to dismiss pursuant to CPLR 3211(a)(7), the allegations in plaintiff's
complaint are accepted as true, constructed liberally, and given every favorable inference
(Connaughton v Chipotle Mexican Grill, Inc., 29 NY3d 137, 141 [2017]). Dismissal of the
complaint is warranted only “if the plaintiff fails to assert facts in support of an element of the
claim, or if the factual allegations and inferences to be drawn from them do not allow for an
enforceable right of recover” (id. at 142).
When a nonresident sues in New York on a cause of action accruing outside New York,
CPLR 202 requires that the cause of action be timely under the limitation periods of both New
York and the jurisdiction where the claim arose (Matter of Part 60 RMBS Put–Back Litig., 195
AD3d 40, 47 [1st Dept 2021]). “Consequently . . . it is the shorter of the two states’ statutes of
limitations that controls the timeliness of the action” (id.). When applying CPLR 202, known as
the borrowing statute, the New York court borrows the other state’s statute of limitations and
also that state’s rules on tolling its statute of limitations (Antone v General Motors Corp., Buick
Motor Div., 64 NY2d 20, 31 [1984]).
That plaintiffs reside in Massachusetts and that their claims accrued there is not disputed.
Under the discovery rule, where a plaintiff has suffered an "inherently unknowable" wrong, for
accrual to occur, a plaintiff must have knowledge or sufficient notice of two related facts: (1) that
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he was harmed; and (2) that his harm was caused by the defendant's conduct (Harrington v.
Costello, 467 Mass 720, 725 [2014).
Fraud claims in Massachusetts have a three-year statute of limitations (Massachusetts
General Laws Annotated 260 § 2A). Under the Massachusetts discovery rule, a fraud claim
accrues when the plaintiff discovers or reasonably should have discovered that it was harmed and
that the harm was caused by the defendant’s conduct (First Choice Armor & Equip., Inc. v
Toyobo Am., Inc., 839 F Supp 2d 407, 413 [D Mass 2012]; Harrington v Costello, 467 Mass 720,
725, 7 NE3d 449 [2014]). The court asks what a reasonable person in the plaintiff’s position
would have known or inquired about at relevant times or upon being put on inquiry notice
(AA&D Masonry, LLC v South St. Business Park, LLC, 93 Mass App Ct 693, 699-700 [2018];
Crocker v Townsend Oil Co., 464 Mass 1, 8, 979 NE2d 1077 [2012]).
“Inquiry notice triggers the obligation of a reasonable person to investigate the possible
claim and assert a cause of action within the period provided by the statute of limitations”
(Szymanski v Boston Mut. Life Ins. Co., 56 Mass App Ct 367, 371, 778 NE2d 16 [2002]). An
action will be tolled until the time that the plaintiff discovers the facts giving rise to the cause of
action (id. at 370). The limitations period will not be tolled if the plaintiff has the means to
acquire the facts underlying its cause of action (Gattineri v Williams-Sonoma Stores, Inc., 103
Mass App Ct 1117, 223 NE3d 1237 [2023]).
In New York, the limitations period on a fraud claim is six years from the time of the
fraud or two years from the time the fraud was discovered or with reasonable diligence, could
have been discovered, whichever is later (CPLR 213[8]; Sargiss v Magarelli, 12 NY3d 527, 532
[2009]; Parrish v Unidisc Music, Inc., 68 AD3d 566, 567 [1st Dept 2009]). A fraudulent
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inducement claim accrues at the time the plaintiff completes the act induced by the fraudulent
misrepresentations (Prichard v 164 Ludlow Corp., 49 AD3d 408, 408 [1st Dept 2008]).
B. Arguments and Analysis
The sale of plaintiffs’ ambulance service to Transformative closed on March 19, 2018
(NYSCEF109, ¶ 8), the same day as the note (NYSCEF 111). Defendants claim that plaintiffs
knew the truth about Transformative’s 2017 EBITDA on March 14, 2018, when Kamylon sent
an email attaching Transformative’s 2017 financial statements to nonparty Sean Tyler at his
request (NYSCEF 154); Tyler was allegedly a “key executive” of Fallon’s (NYSCEF 109, ¶ 44).
Defendants claim that the emailed statements show that Transformative’s 2017 EBITDA
was not $3.9 million, that the statements informed Tyler of this, and that Tyler’s knowledge was
imputed to plaintiffs. Defendants argue that the fraud claim thus accrued on March 19, 2018, the
date that the parties entered into their transaction, and therefore, pursuant to Massachusetts law,
plaintiffs had three years, until March 19, 2021, to bring a fraud claim, but this action was not
commenced until December 11, 2023.
Defendants also observe that under New York law, the statute of limitations on fraud
began to run on the date of the transaction and lapsed six years until March 2024. As the shorter
Massachusetts period prevails over the longer New York period, defendants contend that the
fraudulent inducement claim is time-barred.
Plaintiffs aver that Tyler’s knowledge cannot be imputed to them because he was not
their agent or, rather, that he was a disloyal agent. About Tyler, the SAC alleges:
To conceal that drop in EBITDA from Fallon, Lelon informed one of Fallon’s key executives, Sean Tyler, that he would be promoted to serve as President of the entire Transformative operation, thereby currying favor with Tyler. Lelon informed Tyler, who became beholden to Lelon, that Tyler’s duties did not run to Fallon, but rather to the company, Transformative. Lelon did not permit Tyler to share material financial developments with Fallon.
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(NYSCEF 109, ¶ 44).
Tyler became the president of Transformative after the note was signed. Plaintiffs allege
that it was not until 2022 that they learned what Tyler allegedly knew in 2018. Specifically,
plaintiffs contend that in or about September 2021, Fallon learned concerning information about
the billing practices of the companies that Transformative owned before it acquired the
ambulance service. As a result, about September 20, 2021, Fallon made a public record request
to a state health insurance agency concerning Transformative’s records.
“By that time, Fallon also had still not received audited financial statements for
Transformative despite Kamylon’s and Transformative’s duties to make them available to FESI
promptly after each fiscal year at substantially the same time as Kamylon received them”
(NYSCEF 109, ¶ 48). “Fallon had diligently attempted to raise these and related financial issues
with” Tyler, Transformative’s accounting firm, and Transformative’s attorneys (id., ¶ 49).
Plaintiffs further allege that “[T]hese communications led to Fallon learning in 2022” that
Transformative’s 2017 EBITDA in 2017 was not at least $3.9 million as Lelon had represented,
but below $150,000 (id., ¶ 50). They maintain that Fallon could not have learned of the
fraudulent inducement claim before 2022, notwithstanding his due diligence, as Transformative
and Kamylon controlled and restricted his access to pertinent information before he signed the
closing documents and in response to later requests by him (id., ¶ 51). Plaintiffs argue that the
statute of limitations period for fraud did not begin to run until 2022, when they were put on
inquiry notice, and therefore, their fraud claim was timely asserted in 2023.
Here, plaintiffs sufficiently allege that Tyler was not their true agent. When an agent acts
for its own benefit, “the presumption that he has disclosed [to his principal] all the facts that have
come to his knowledge no longer prevails” (Warshaw v Mendelow, 2011 NY Slip Op 33972[U],
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*14 [Sup Ct, NY County 2011]; see also Baker v Latham Sparrowbush Assos., 72 F3d 246, 255
[2d Cir 1995]). Whether Tyler can be deemed to have been plaintiffs’ agent will determine
whether the statute of limitations began to run upon Tyler’s receipt of Transformative’s 2017
financial records. Thus, defendants do not yet establish that the fraudulent inducement claim is
time-barred.
Breach of Contract against Kamylon and Transformative (Second Cause of Action)
Plaintiffs allege that Transformative failed to adhere to the foreclosure terms in the
promissory note, which provided that if plaintiffs defaulted by failing to make a payment when
due, Transformative had “the right to foreclose upon the Collateral” and transfer to Kamylon any
portion thereof necessary to satisfy any outstanding amounts owed to Transformative, “with any
Exchange Units being so transferred being valued at the Per Unit Price” (NYSCEF 111, ¶ 6).
The collateral on the note consisted of FESI’s ownership, designated as Exchange Units, in
Transformative.
Plaintiffs contend that Transformative foreclosed upon more units than necessary to
satisfy the debt on the note and that the units were valued at less than the agreed value for each
unit. Plaintiffs allege that Transformative should have foreclosed on fewer than 50,000 units and
provided adequate credit to “true-up” the value of the units (NYSCEF 109, ¶ 18, 95).
According to defendants, section 6 of the Note provides them with the right to proceed by
foreclosure, but not the obligation to do so, which is reemphasized in section 5 which provides
that, in the event of a default, defendants may exercise any and all rights and remedies available
to them in law or equity or otherwise. Moreover, defendants allege that section 6 applies only to
a specific default event, and that plaintiffs’ bankruptcy filing triggered a different default event,
for which section 6 does not apply (NYSCEF 138).
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As section 6 only applies to a specific default event and gives defendants the right, but
not the obligation, to proceed by way of foreclosure, and as defendants did not foreclose but
rather conducted a UCC sale and, as a default event occurred that was not covered by section 6,
defendants demonstrate that plaintiffs’ breach of contract claim, premised on defendants’ alleged
violation of section 6 of the Note, must be dismissed.
Violation of the UCC against all defendants (Third Cause of Action)
A motion to dismiss based on documentary evidence pursuant to CPLR 3211(a) (1) may
be appropriately granted where the evidence utterly refutes a fact alleged by the plaintiff and
conclusively establishes a defense to the asserted claims as a matter of law” (Interstate Indem.
Co. v East 77 Owners Co., LLC, 224 AD3d 456 [1st Dept 2024]; M & E 73-75, LLC v 57 Fusion
LLC, 189 AD3d 1, 6 [1st Dept 2020]). UCC 9-610(b) requires that every aspect of the
disposition of collateral, including the method, manner, time, and place, must be commercially
reasonable.
Plaintiffs allege, among other things, that defendants precluded them from participating
in the June 2024 foreclosure sale, withheld information from them and other potential
participants, conducted the sale on short notice, failed to adequately market the units to potential
participants, and wrongly held the sale on a Sunday evening (NYSCEF 109, ¶ ¶ 80, 101). They
also argue that Kamylon and Transformative concealed from plaintiffs and interested bidders
financial information that would have enabled an understanding of the amount of Capital
Transaction Proceeds that were attached to the units (id., ¶ 67).
Moreover, plaintiffs claim that the notice of foreclosure and public sale violated UCC 9-
613 as it lacked a clear statement entitling the debtors to an accounting of the unpaid
indebtedness (id., ¶ 110). Plaintiffs contend that defendants, by precluding plaintiffs’
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participation in the auction and by failing to adequately market the membership units, thereby
effectively orchestrated a transfer of all of FESI’s equity (initially valued at $8,472,617.20) to
themselves for not only less than fair market value but for little more than 1/20th of plaintiffs’
initial investment.
Defendants provide documentary evidence to show that they noticed the auction three
separate times over the course of seven months (NYSCEF 118, 112, 113) and that each notice
was circulated to potential bidders (NYSCEF 132 – 137), comprised of a select group of 25
companies that operate or invest in the ambulance service industry (NYSCEF 16) and to
investors (NYSCEF 129). Moreover, Transformative’s counsel invited plaintiffs’ counsel to
provide a list of potential buyers (NYSCEF 16), and Transformative adequately marketed the
collateral by publishing notices in newspapers on November 22, 2023 (NYSCEF 127, 128).
However, defendants’ evidence does not conclusively refute plaintiffs’ allegations that
the disposal of the units was not commercially reasonable, as whether a term or requirement is
commercially reasonable is generally an issue of fact (Clover Private Credit Opportunities
Origination (Levered) II, L.P. v Sanberg, 227 AD3d 540, 541 [1st Dept 2024]; Atlas MF
Mezzanine Borrower, LLC v Macquarie Tex. Loan Holder LLC, 174 AD3d 150, 165 [1st Dept
2019]).
Conversion against all defendants (Fourth Cause of Action)
The SAC alleges that defendants exercised unauthorized control over FESI’s membership
units in Transformative or that portion of the membership units not needed to cover FESI’s
obligation under the note, thus converting said units. As the conversion claim is thus duplicative
of the breach of contract claim, it is dismissed (see Richbell Info. Servs., Inc. v Jupiter Partners,
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L.P., 309 AD2d 288, 306 [1st Dept 2003]; Fesseha v TD Waterhouse Inv. Servs., Inc., 305 AD2d
268, 269 [1st Dept 2003]).
Accounting, Declaratory Judgment, and Injunctive Relief under the NY UCC
against all defendants (Fifth Cause of Action)
As defendants fail to show that plaintiffs are not entitled to an accounting pursuant to
UCC 9-613, that portion of the claim is not dismissed.
Plaintiffs seek a permanent injunction to restrain defendants from taking any further
actions towards transferring FESI’s units until issues regarding UCC 9-613(a)(4) and 9-610(b)
are fully adjudicated.
Defendants state that the units were cancelled by operation of law after Transformative
acquired them, pursuant to Limited Liability Company Act, Delaware Code, 6 Del. C. § 18-
702(e). Defendants also argue that the law of the case doctrine bars the remedy of a permanent
injunction because, when denying plaintiffs’ application for a preliminary injunction staying the
auction, this court held that plaintiffs “failed to demonstrate that they would suffer a harm that
could not be compensated by money damage” (NYSCEF 45, April 17, 2024 decision).
However, an order denying a preliminary injunction is not the law of the case regarding
the propriety of a permanent injunction, as permanent injunction is a final judgment issued on the
merits of the claims (R.C. v City of New York, 229 AD3d 173, 176 [1st Dept 2024]), and the party
seeking a permanent injunction must prevail on the underlying merits of its case (see Town of N.
E. v Vitiello, 159 AD3d 766 [2d Dept 2018]). As the merits have yet to be determined, this claim
is not dismissed (Meyer v Stout, 45 AD3d 1445 [4th Dept 2007] [grant or denial of preliminary
injunction is not law of the case or ruling on merits of claim for permanent injunction]).
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Plaintiffs also seek a declaration that the notice of foreclosure and sale were not
compliant with the terms of the note and the CEX Agreement and UCC 9-613(a)(4), that the sale
itself was commercially unreasonable and in contravention of UCC 9-610(b), and that any
transfer of units pursuant to the notice are invalid or void (NYSCEF 109, ¶ 116). As the
declaratory judgment claim is duplicative of the other claims, it is dismissed (Tahari v Narkis,
216 AD3d 557, 560 [1st Dept 2023]; Colfin SNP–1 Funding, LLC v Security Natl. Props.
Servicing Co., LLC, 199 AD3d 406, 407 [1st Dept 2021]).
Rescission against Transformative (Sixth Cause of Action)
Plaintiffs seek to rescind the foreclosure sale, however, they presumably seek rescission
of the note and the CEX Agreement. In general, rescission of a contract is granted for a breach
that is “material and willful, or, if not willful, so substantial and fundamental as to strongly tend
to defeat the object of the parties in making the contract” (RR Chester, LLC v Arlington Bldg.
Corp., 22 AD3d 652, 654 [2d Dept 2005] [citation and internal quotation marks omitted]). The
rescission of a contract will lie only where there is no adequate remedy at law and where the
status quo may be substantially restored (Lantau Holdings Ltd. v Gen. Pac. Grp. Ltd., 163 AD3d
407, 409 [1st Dept 2018]).
Defendants deny that the status quo can be restored since plaintiffs are incapable of
repaying the note as they already defaulted on it. Moreover, defendants allege that as plaintiffs
seek monetary damages, a remedy at law exists.
As plaintiffs do not demonstrate that they do not have an adequate remedy at law, they do
not state a claim for rescission.
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Constructive Trust against all defendants (Seventh Cause of Action)
The elements of a constructive trust are a confidential or fiduciary relationship, a
promise, a transfer in reliance on the promise, and unjust enrichment on the part of the transferee
(Sharp v Kosmalski, 40 NY2d 119, 121 [1976]).
Plaintiffs seek to impose a constructive trust on the units and any proceeds from the units
alleging that a confidential or fiduciary relationship exists between them, on the one hand, and
Kamylon and Transformative, on the other hand, “established through the business dealings and
agreements, including Kamylon’s role as a controlling equity holder, that eventually led FESI
and Fallon to agree to the transfer of a security interest or pledge of Transformative units in
connection with the Note” (NYSCEF 109, ¶ 126).
However, plaintiff does not demonstrate that the parties were in anything but “an arm’s
length borrower-lender relationship” (River Glen Assocs., Ltd. v Merrill Lynch Credit Corp., 295
AD2d 274, 275 [1st Dept 2002]). As a constructive trust will not be imposed under those
circumstances, the claim is dismissed.
Motion to seal (motion sequence number 006)
Defendants move, by order to show cause, (1) to permanently seal the Supplemental
Affirmation of Charles T. Lelon in Opposition to Plaintiffs’ Application for an Attachment
(“Supplemental Lelon Affirmation”) (NYSCEF 86) and Exhibit A attached thereto (NYSCEF
87) and to file publicly a version of the Supplemental Lelon Affirmation with the financial
information in paragraph 11 redacted; and (2) for a temporary restraining order directing that
NYSCEF 86 and 87 will remain under seal pending the hearing on the order to show cause,
accessible only to the parties, their counsel, and court personnel. On September 19, 2024, the
temporary restraining order issued (NYSCEF 141).
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Defendants move pursuant to Uniform Rules for Trial Courts (22 NYCRR) 216.1, which
empowers courts to seal documents upon good cause; it provides in pertinent part:
Except where otherwise provided by statute or rule, a court shall not enter an order in any action or proceeding sealing the court records, whether in whole or in part, except upon a written finding of good cause, which shall specify the grounds thereof. In determining whether good cause has been shown, the court shall consider the interests of the public as well as of the parties.
There is a broad presumption that the public is entitled to have access to judicial
proceedings and court records (Mosallem v Berenson, 76 AD3d 345, 348 [1st Dept 2010]). The
"party seeking to seal court records has the burden to demonstrate compelling circumstances to
justify restricting public access" to the documents (id. at 349 [citations omitted]). Good cause
must "rest on a sound basis or legitimate need to take judicial action" (Danco Lab Ltd. v
Chemical Works of Gedeon Richter, Ltd., 274 AD2d 1, 8 [1st Dept 2000] [internal quotation
marks omitted]).
NYSCEF 87 is Transformative’s 2017 nonpublic unaudited financial statements,
including a monthly balance sheet, monthly statement of operations, and a statement of cash
flows (NYSCEF 106, moving affirmation). However, defendants withdrew the request to seal
this exhibit (NYSCEF 149, ¶ 9), since plaintiffs were able to obtain it from the Massachusetts
Department of Public Health in response to a public record request (NYSCEF 148, opposing
affirmation).
That leaves the part of the motion to seal NYSCEF 86, which is paragraph 11 of Lelon’s
supplemental affirmation, containing “nonpublic, confidential financial information” (NYSCEF
106). Paragraph 11 of the Supplemental Lelon Affirmation (NYSCEF 86) addresses defendants’
method for setting the minimum bid of $450,000 for the collateral at the auction, and the
proposed redacted items are the total value of Transformative’s 2024 balance sheet, the
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outstanding preferred equity in Transformative, total common equity, the percentage of total
common equity to which FESI was entitled, and the total value of the FESI units at the time of
the auction (NYSCEF 150, redacted version). Defendants’ counsel states that this information is
nonpublic and confidential (NYSCEF 106).
Good cause exists where the documents sought to be sealed will disclose confidential or
proprietary information, the public disclosure of which would cause harm, and where there is no
overriding public interest in disclosure of the documents (Mavel, a.s. v Rye Dev., LLC, 79 Misc
3d 1231[A], 2023 NY Slip Op 50758[U], *3-4 [Sup Ct, NY County 2023]). In the business
context, courts permit records to be sealed when trade secrets are involved or when the
disclosure of information “could threaten a business's competitive advantage” (Mosallem, 76
AD3d at 350-351). Sealing has been allowed to preserve the confidentiality of records
concerning the internal finances of a party which are of minimal public interest (see D'Amour v
Ohrenstein & Brown, LLP, 17 Misc 3d 1130[A], 2007 NY Slip Op 52207[U] [Sup Ct, NY
County 2007]), and in the absence of “any legitimate public concern,” where a business’s
partners and clients wish to keep their financial arrangements private (Dawson v White & Case,
184 AD2d 246, 247 [1st Dept 1992] [internal quotation marks and citation omitted]).
Here, while defendants demonstrate that there is no legitimate public concern in
Transformative’s financial information, they do not establish that disclosure could cause any
harm to Transformative and its stakeholders or that the information contains trade secrets or
would threaten Transformative’s competitive advantage.
Motion to consolidate actions (motion sequence number 008)
Defendants move, pursuant to CPLR 602(a), to consolidate for all purposes including
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joint discovery and trial the instant action with the action titled Transformative Healthcare, LLC
v. FESI Holdings. Inc et al., Index No. 655010/2024, in which Transformative seeks to recover
the amount still owing on the note. As plaintiffs assent to the consolidation (NYSCEF 162), and
it appears that the actions involve common question of law and fact, the motion is granted.
Conclusion
It is hereby
ORDERED that defendants’ motion to permanently seal certain records (motion
sequence number 006) is denied; and it is further
ORDERED that defendants’ motion to dismiss the second amended complaint (motion
sequence number 007) is granted to the extent that the second cause of action for breach of
contract, the fourth cause of action for conversion, the sixth cause of action for rescission, and
the seventh cause of action for a constructive trust are dismissed, and the fifth cause of action is
dismissed only to the extent of dismissing the demand for a declaratory judgment, and the
motion is otherwise denied; and it is further
ORDERED that defendants shall answer the second amended complaint within 30 days
of receipt of this decision, and it is further
ORDERED that defendants’ motion to consolidate the above captioned action with
another action, Transformative Healthcare, LLC v FESI Holdings. Inc. et al., Index No.
655010/2024, commenced in this court (motion sequence number 008), for joint discovery and
trial is granted; and it is further
ORDERED that the above-captioned action shall be jointly tried with Transformative
Healthcare, LLC v FESI Holdings. Inc. et al., Index No. 655010/2024, pending in this court; and
it is further
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ORDERED that upon payment of the appropriate calendar fees and the filing of notes of
issue and statements of readiness in each of the above actions, the Clerk of the Trial Support
Office shall place the aforesaid actions upon the trial calendar for a joint trial; and it is further
ORDERED that at same joint trial, plaintiffs in the instant action shall have the right to
open and close before the jury; and it is further
ORDERED as no answer has yet been filed in the other action as a motion to dismiss is
pending, the parties in the joined actions shall appear for a preliminary conference on September
2, 2025 at 9:30 am, at 71 Thomas Street, Room 305, New York, New York.
5/15/2025 DATE DAVID B. COHEN, J.S.C. CHECK ONE: CASE DISPOSED X NON-FINAL DISPOSITION
GRANTED DENIED X GRANTED IN PART OTHER
APPLICATION: SETTLE ORDER SUBMIT ORDER
CHECK IF APPROPRIATE: INCLUDES TRANSFER/REASSIGN FIDUCIARY APPOINTMENT REFERENCE
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