C. L. King & Assocs., Inc. v. Salisbury Bank & Trust Co.
| Decision Date | 23 September 2019 |
| Docket Number | 1:18-CV-833 |
| Citation | 405 F.Supp.3d 362 |
| Parties | C. L. KING & ASSOCIATES, INC., Plaintiff, v. SALISBURY BANK AND TRUST COMPANY, Defendant. |
| Court | U.S. District Court — Northern District of New York |
SEYFARTH, SHAW LAW FIRM, OF COUNSEL: EDWARD M. FOX, ESQ., OWEN R. WOLFE, ESQ., Attorneys for Plaintiff, 620 Eighth Avenue, New York, NY 10018
HINCKLEY, ALLEN LAW FIRM, OF COUNSEL: CHRISTOPHER V. FENLON, ESQ., Attorneys for Defendant, 30 South Pearl Street, Suite 901, Albany, NY 12207
BECKER, GLYNN LLP, OF COUNSEL: ALEC P. OSTROW, ESQ., Special Litigation Counsel for the Trustee, 299 Park Avenue, New York, NY 10171
On June 12, 2018, plaintiff C.L. King & Associates, Inc. ("C.L. King" or "plaintiff"), a New York-based brokerage, filed this action in Supreme Court, Albany County, against defendant Salisbury Bank and Trust Company ("Salisbury" or "defendant"), a Connecticut-based bank, in an effort to partially satisfy a $13 million money judgment it holds against a former client, William F. Nicklin ("Nicklin").
At issue is $500,000 Nicklin shelled out to pay off a bank loan shortly before he went bankrupt. C.L. King contends this was not an ordinary, arm's length transaction between Nicklin and his lender but rather a preference payment made to placate one of Nicklin's own business clients at plaintiff's expense. According to plaintiff, Nicklin's transfer therefore amounts to a type of fraudulent conveyance made avoidable by creditors under various provisions of the Uniform Fraudulent Conveyance Act ("UFCA").
As C.L. King explains, Ira Effron ("Effron"), a co-founder and the former chairman of the board of directors at Riverside Bank ("Riverside"), initially hired NSB Advisors, LLC ("NSB Advisors"), Nicklin's investment advisory firm, to handle certain employee retirement investment accounts controlled by Effron in his capacity as president of his family's business.
Thereafter, Nicklin employed risky trading strategies in both his personal accounts and in the investment accounts he managed for clients like Effron. For Nicklin's personal account, the high-risk scheme involved borrowing substantial sums of money on credit from plaintiff to make big bets on the stock market. According to plaintiff, Nicklin managed to rack up over $40,000,000 in losses in his personal account in just a few short months.
Nicklin's failed investment strategies hit his clients' accounts hard, too. So, facing a demand from C.L. King that he immediately deposit the roughly $13 million necessary to bring his own personal brokerage account out of the red, Nicklin opted instead to use his remaining liquidity to try to keep his own business clients happy.
As relevant here, C.L. King alleges that Nicklin repaid the $500,000 bank loan from Riverside a full six months early and, in exchange, Effron agreed to keep his family's substantial business accounts invested with Nicklin's advisory firm. Riverside merged into Salisbury in 2014, making the successor entity the target of this clawback suit.
On July 13, 2018, Salisbury removed this action to federal court and then moved under Federal Rule of Civil Procedure ("Rule") 12(b)(6) to dismiss C.L. King's complaint in its entirety. After plaintiff amended its complaint as of right, defendant renewed its motion to dismiss, which was fully briefed in early December of 2018.
On June 6, 2019, with the motion to dismiss pending, C.L. King filed a letter alerting the Court to the fact that Nicklin had recently filed for chapter 7 bankruptcy relief. This action was then stayed for a period of ninety days to allow time for Daniel J. Ventricelli, the chapter 7 bankruptcy trustee (the "Trustee"), to investigate the claims asserted by plaintiff in this action and decide whether and how to proceed with this suit.
On September 17, 2019, the parties jointly advised that the Trustee has chosen to substitute for C.L. King as plaintiff in this action and that Salisbury has consented to the change in the named plaintiff. The parties also requested that the Court lift the stay and rule on defendant's pending motion to dismiss, which has been fully briefed and will be decided without oral argument.
The following facts are taken from C. L. King's amended complaint, Dkt. No. 9, and are assumed true for the purpose of resolving Salisbury's motion to dismiss.
From 2004 through May 2009, Nicklin worked as a registered advisor at Brown Advisory Holdings, Inc., an investment management firm. Am. Compl. ¶ 36. Over those years, Nicklin cultivated an investment advising relationship with Effron, who exercised control over two employee pension plans maintained by EFCO Products, Inc. ("EFCO Products"), the Effron family's business. Id. ¶¶ 32-35, 37.
Beginning in 2009, Nicklin opened his own personal stock trading account with C.L. King, a brokerage firm in Albany, New York. Am. Compl. ¶¶ 2, 7-10. As part of that business relationship, plaintiff advanced to Nicklin "margin credit," which is a kind of loan secured by the value of securities in a client's account.1 See id. ¶¶ 8-9, 13-14.
Then, in March of that year, Nicklin left his job at Brown Advisory Holdings, Inc. and started NSB Advisors, his own investment advising firm. Am. Compl. ¶¶ 38-39. Effron followed Nicklin, moving his personal accounts and the EFCO Products pension plan accounts over to NSB Advisors. Id. ¶¶ 40-41. Effron, acting as trustee to the pension plans, granted Nicklin, acting as principal for NSB Advisors, control over investment decisions for those accounts. Id. ¶¶ 11, 35, 42-47.
Shortly after NSB Advisors opened for business in early 2009, Riverside, with Effron sitting as chairman of the bank's board of directors, extended to Nicklin one or more business loans to help him get his own shop started. Am. Compl. ¶¶ 29-31, 48. In January of 2010, Riverside refinanced Nicklin's various debts into one consolidated loan for $3,050,000 (the "Riverside loan"). Id. ¶ 49. According to C.L. King, Nicklin used the Riverside loan to fund his advisory business as well as his other securities trading activities. Id. ¶¶ 51-53.
Notably, Nicklin secured the Riverside loan by initially pledging the value of his personal brokerage account at C.L. King (the "Pledged Account") and 2,000 shares of stock in PMFG, Inc. ("PMFG"). Am. Compl ¶ 54. However, in August of 2010 Riverside released the Pledged Account, leaving only the stock in PMFG as collateral for the loan.2 Id. ¶ 58. PMFG is or was some kind of investment vehicle used by other clients of NSB Advisors, including the EFCO pension plans, Nicklin's wife and family, and even Nicklin's dentist. Id. ¶¶ 55-56.
Between December 2011 and April of 2012, Nicklin's margin-heavy trading strategy blew up in his face. Am. Compl. ¶¶ 8-9, 12. By April, Nicklin had lost over $40,000,000 in his personal account at C.L. King. Id. According to plaintiff's complaint, Nicklin's investment decisions also caused the loss of substantial sums of money in his clients' trading accounts, including Effron's personal account and the accounts for the two EFCO pension plans. Id. ¶ 60.
Because the value of his personal trading account had fallen below a certain required minimum value, C.L. King and regulatory entities like the New York Stock Exchange ("NYSE") sent to Nicklin a series of letters warning him that the remainder of his trading account would be forfeited if he did not immediately replenish its value with new cash or other securities by a date certain. Am. Compl. ¶¶ 15-17.
Nicklin, knowing he could not satisfy these "margin calls" from C.L. King or the NYSE, never deposited any more money in his personal trading account. Am. Compl. ¶¶ 17, 19. Instead, by letter dated May 7, 2012, Nicklin advised all of his clients, including Effron, that he was in a bit of personal financial trouble and that his own personal trading account would probably be liquidated soon. Id. ¶ 61.
On May 15 and 16, 2012, C.L. King made good on its threats, liquidating Nicklin's personal account and recovering all but $13,097,946.12 of the margin losses Nicklin owed to plaintiff (the "Margin Claim Amount"). Am. Compl. ¶¶ 20-22. Thereafter, plaintiff continued to demand immediate repayment of the Margin Claim Amount. Id. ¶ 22. Nicklin ignored those demands, instead setting out to shelter his remaining assets from creditors (such as plaintiff) and to salvage his business contacts (such as Effron). See id. ¶¶ 22, 24, 63-107.
In late May of 2012, Nicklin allegedly disclosed to Effron that he owed C.L. King $13 million. Am. Compl. ¶ 62. Two weeks later, Nicklin instructed a representative at Riverside, where he still held a personal checking account, to deduct $500,000 to pay off the outstanding balance on the Riverside loan, which was not due for another six months. Id. ¶¶ 59, 63-66.
According to C.L. King, this early repayment of the Riverside loan occurred as part of an arrangement to keep Effron happy and to ensure that the two pension plans he controlled stayed with NSB Advisors. Am. Compl. ¶¶ 67-68. Plaintiff supports this accusation by pointing to certain suspect provisions of a revised investment agreement that NSB Advisors and EFCO Products executed shortly after Nicklin repaid the Riverside loan. Id. ¶¶ 70-82.
On August 9, 2012, C.L. King sought to recover the $13 million Margin Claim Amount by filing an arbitration proceeding against Nicklin before the Financial Industry Regulatory Authority ("FINRA"). Am. Compl. ¶ 23. According to plaintiff, Effron stepped down as chair of Riverside the very same day. Id. ¶ 31. Two years later, in December of 2014, Riverside merged into Salisbury.
C.L. King alleges that Nicklin drew out the FINRA arbitration proceeding for as long as possible in an effort to avoid repayment. Am. Compl. ¶ 24. Plaintiff further alleges that Nicklin used this extra time to execute another sophisticated financial strategy, only this time the goal was to shield Nicklin's remaining assets...
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