All You Need Is Love… And An Articulable Nexus Of Fraud
January 06, 2022
What can you do when the parties you are suing are effectively judgment-proof? Oftentimes, plaintiffs will try to go after a defendant’s family member or related entity. However, as we see in a recent case from the courtroom of Manhattan Commercial Division Justice Robert R. Reed, New York courts require more than just a family connection to hold such attenuated actors liable.
The pertinent allegations in Lanaras v. Premium Ocean LLC, et al (as taken from the Complaint) are as follows: Sometime in 2013, the principal Defendant is alleged to have convinced her longtime friend (the Plaintiff) into “loaning” substantial sums to assist her and her business associates in establishing and operating a shrimp import business. Between 2013 and 2017, Plaintiff loaned a total of $3.4 million to the venture, and Defendant expanded the business into wholesale fish and retail sectors (creating two new entities, respectively).
Due, in part, to the longstanding friendship between Plaintiff and Defendant and certain oral assurances made, the parties never put the terms of the “loan” in writing.
In a twist that will surprise none of the readers of this blog, the businesses are now struggling and Plaintiff has not received repayment of any portion of the principal or interest on her loan to date. Equally unsurprisingly, Plaintiff sued her former friend, the business associates, and the corporations for various breaches of contract, fiduciary duties, unjust enrichment, and fraud-based claims.
The motion to dismiss before Justice Reed, however, concerns Defendant’s Husband, who is the principal of several successful businesses unrelated to the claims in the action. Plaintiff alleged that Defendant issued regular distributions of company assets into joint accounts shared with her Husband, and therefore, the Husband was a beneficiary of his wife’s alleged fraudulent conveyances by virtue of their joint property holdings and joint bank accounts. Plaintiff thus named Husband for unjust enrichment, fraudulent conveyances under NY DCL §273, and constructive trust.
Justice Reed granted dismissal of all three claims against the Husband.
On the unjust enrichment claim, the Court first noted the Departmental split on whether a three-year statute of limitations (Second Department) or six-year statute of limitations (First Department) should apply. The Court opted to follow the rule in the First Department and applied a six-year statute of limitations, rendering the claim timely.
But timeliness was not enough to salvage it. The Court held that while the allegations need not establish privity between Plaintiff and the Husband, they must at least “assert a connection between the parties that [is] not too attenuated” (quoting Georgia Malone & Co.). In other words, the fact that the Husband is married to Plaintiff’s longtime friend (i.e. the Defendant), alone, is not enough to establish the requisite relationship between Plaintiff and the Husband sufficient to cause reliance or inducement, warranting dismissal of the unjust enrichment claim.
The Court likewise dismissed the constructive trust claim on similar grounds. The claim requires “a confidential or fiduciary relationship, a promise, a transfer in reliance thereon, and unjust enrichment.” Again, being a “family friend”, alone, is not enough to satisfy the elements of the claim.
As for the constructive fraudulent conveyance claim under NY DCL §273, Plaintiff argued that Defendant issued regular distributions of company assets that rendered the companies insolvent (as the companies were apparently floating along on Plaintiff’s cash infusions), and transferred these distributions into joint accounts shared with her Husband. The Court found this argument unpersuasive. Even if the Husband was a beneficiary of the conveyances (assuming the alleged facts as true for the purposes of the motion), Plaintiff still failed to demonstrate that the conveyances were fraudulent. The Husband is not an officer nor holds any role in the businesses, so the conveyances cannot be viewed as “presumptively fraudulent”. Nor was it alleged that the conveyances were made for no consideration, as the Plaintiff herself acknowledged that the Husband previously made loans to the businesses.
Accordingly, the Court dismissed all claims against the Husband.
It can be tempting for a plaintiff to go after the “deep pocket”, especially when the “deep pocket” is a family member of the true targets who are effectively judgment-proof. However, courts in the Commercial Division will not allow such a claim to skate through unless there is some relationship between the “deep pocket” and the plaintiff, as well as an articulable nexus between the “deep pocket” and the alleged fraud, regardless of the legal theory under which it is framed.