Emerald Asset Advisors, LLC v. Schaffer

Decision Date06 September 2012
Docket NumberNo. 11–CV–1871 (ADS)(WDW).,11–CV–1871 (ADS)(WDW).
Citation895 F.Supp.2d 418
PartiesEMERALD ASSET ADVISORS, LLC, Plaintiff, v. H. CY SCHAFFER, Susan Wong, Mastermind Venture Partners, Shane A. Swetel, Selective Development, LLC, Walter Ross, and Ross Pacific Trade Corporation, Defendants.
CourtU.S. District Court — Eastern District of New York

OPINION TEXT STARTS HERE

Jeffrey L. Rosenberg, Jeffrey L. Rosenberg & Associates, LLC, New York, NY, for Plaintiff.

H. Cy Schaffer, Henderson, NV, pro se.

SPATT, District Judge.

The Plaintiff Emerald Asset Advisors, LLC (“Emerald” or “the Plaintiff) commenced this diversity action against the Defendants H. Cy Schaffer (“Schaffer” or “the Defendant), Susan Wong, Mastermind Venture Partners (MVP), Shane A. Swetel, Selective Development, LLC (Selective), Walter Ross, and Ross Pacific Trade Corporation (Ross Pacific) (collectively the “Additional Defendants), seeking the return of $200,000 that Emerald transmitted to the Defendant's escrow account as part of a deal where MVP would obtain financing for Emerald's subsidiary company, Eternal Image, Inc. (“Eternal”). Presently before the Court is: (1) a motion by the Defendant Schaffer pursuant to Federal Rule of Civil Procedure (Fed. R. Civ.P.) 12(b)(2) to dismiss the complaint for lack of personal jurisdiction or, in the alternative, for a change of venue pursuant to 28 U.S.C. § 1406 or § 1404(a); and (2) a motion by the Plaintiff for sanctions against Schaffer pursuant to Fed.R.Civ.P. 11. For the reasons set forth below, both motions are denied.

I. BACKGROUND
A. Factual Background

Emerald is a limited liability company, formed under the laws of Delaware and qualified to do business in the State of New York. The company is in the business of financing and capitalizing businesses and business ventures through methods such as capital infusions, investments, bridge loans, and debentures. (Compl. at ¶ 5.) The Defendant H. Cy Schaffer is an attorney admitted to practice law in the State of California. In addition, the Complaint states that, upon information and belief, he is also currently practicing law in the State of Nevada and lives there.

The Defendant Susan Wong is a citizen of the State of Connecticut. MVP is a partnership formed and/or existing under the laws of the State of California. The Defendant Shane A. Swetel is a citizen of the State of Nevada. Selective is a limited liability company formed and existing under the laws of the State of Nevada. The Defendant Walter Ross is a citizen of the State of California. Ross Pacific is a corporation formed and existing under the laws of the State of California, and is allegedly owned and controlled by the Defendant Ross. (Compl. at ¶ 15.)

Emerald's subsidiary company Eternal is a corporation that was formed under the laws of the State of Delaware and maintains its principal office in Michigan. The company is a manufacturer and distributer of branded, licensed funeral products, such as caskets, urns, and vaults. In 2009, Eternal was in need of capital financing in order to expand its business. Specifically, it was looking for financing in the sum of approximately $2 million. Thus, in or about April 2009, Eternal began discussions with Wong and MVP to facilitate a financing arrangement (“the $2 Million Financing”). According to the Complaint, Wong represented that MVP was a sophisticated and experienced financial services and investment banking enterprise, which would be able to accommodate Eternal's financing needs.

After several months of discussions, Wong allegedly explained for the first time to Clint Mytych, President and Chief Executive Officer of Eternal, that Eternal would need to post ten percent of the financing—$200,000.00—as security for the $2 Million Financing because the company was in its early development stages and did not have the asset base required for the deal. Specifically, Eternal was to place the $200, 00.00 in an interest bearing escrow account to be maintained by the Defendant Schaffer, as legal counsel for MVP.

Eternal did not have the adequate funds to post the $200,000.00 security deposit. However, one of Eternal's large shareholders—the Plaintiff Emerald—was willing and able to do so. As of November 20, 2009, Emerald owned approximately 145 million shares of Eternal common stock, aggregating approximately ten percent of Eternal's issued and outstanding common stock. Thus, Emerald was a major shareholder of Eternal and would likely derive economic gains obtained from an expansion in Eternal's business.

The Plaintiff's Managing Member, Michael Xirinachs, began to communicate directly with Wong and MVP regarding the security. Wong met with Xirinachs at Emerald's offices in New York in October and November 2009. Wong allegedly represented to Xirinachs and Mytych at that time that if the $200,000.00 security deposit was made, that she and MVP would guarantee at least $1 million in funding, if not the entire $2 million requested. In addition, the Complaint states that Wong represented to Xirinachs that the full balance of the $200,000.00 escrow amount, plus all interest accrued, would be returned to Emerald when the $2 Million Financing was paid off.

On or about November 20, 2009, Wong represented to Mytych and Xirinachs that MVP had completed arrangements to loan the $2 million in financing, as long as the escrow requirement was satisfied. The $200,000.00 was to be deposited in Schaffer's escrow/trust account, because Wong represented that he was acting as the attorney for MVP. Therefore, the Plaintiff, on behalf of Eternal, wired $200,000.00 to the H. Cy Schaffer Client Trust Account”, maintained at Wells Fargo Bank, Beverly Hills, California, via four successive wire transfers in the respective amounts of $75,000.00 on November 24, 2009; $75,000.00 on November 27, 2009; $30,000.00 on November 30, 2009; and $20,000.00 on December 1, 2009.

On December 3, 2009, Wong confirmed to Xirinachs via email that the $2 Million Financing would be available in a few days. Email communications over the next several weeks between Wong and the Plaintiff indicate that Wong was working on the paperwork and continually assured Emerald that the “wires [were] going out.” (Compl. at ¶ 55.) However, the $2 Million Financing was never completed.

Thereafter, Emerald made a demand to Wong and Schaffer to return the $200,000.00 escrow deposit, with accrued interest. Both Wong and Schaffer confirmed that the deposit would be repaid. However, in or about mid to late December 2009, Schaffer admitted to Xirinachs that the $200,00.00 had been disbursed by him from his client trust account, not for the purposes agreed upon, but for his personal use and that of others, including Wong.

Wong placed the blame for the missing funds on Schaffer. In addition, Wong allegedly told the Plaintiff that the Defendant Shane A. Swetel transferred some or all of the $200,000.00 escrow deposit for his own purposes. For example, an email was supposedly sent from Wong to Xirinachs on January 7, 2010, advising him that Schaffer and Swetel had transferred the funds to a third party for the purposes of implementing an unspecified bond deal. However, also according to the Complaint, Wong knew or should have known that the $200,000.00 had been disbursed by Schaffer, including a $60,000.00 disbursement to her.

Schaffer allegedly promised to repay the Plaintiff on several occasions over the following six month period, from November 2009 through May 2010. On this basis, Emerald agreed to withhold from instituting legal action against Schaffer and those that acted with him. During this time, Schaffer recruited his close friend and business associate, the Defendant Walter Ross and his company Ross Pacific Trade Corp., as well as the Defendant Swetel, to assist him in making the repayments to Emerald. In this regard, the Plaintiff's attorney had several conversations with Schaffer, Ross, and Swetel, regarding the repayment. According to Emerald, Ross and Swetel were working for the purpose of attempting to induce Emerald to withhold from initiating legal action against Schaffer. However, once it became clear that the money was not going to be returned, the Plaintiff brought the instant action.

B. Procedural History

On April 15, 2011, the Plaintiff commenced this action, asserting causes of action for fraudulent and negligent misrepresentations; breach of fiduciary duty; promissory estoppel; unjust enrichment; conversion; civil conspiracy to commit conversion; aiding and abetting conversion; and breach of the implied covenant of good faith and fair dealing.

Currently pending before the Court is a motion to dismiss filed by the Defendant Schaffer, seeking to either dismiss the complaint against him for lack of personal jurisdiction or, in the alternative, to transfer venue. In addition, on the basis of this motion, the Plaintiff filed a motion for sanctions against Schaffer pursuant to Rule 11.

II. DISCUSSION
A. As to Whether the Case Should be Dismissed Against the Additional Defendants

As an initial matter, the Court must determine whether the named Defendants in this case have been properly served. As of today, only one Defendant has actually appeared in this case—the Defendant H. Cy Schaffer—after an alternative means of service was granted by United States Magistrate Judge William D. Wall. However, none of the other Defendants have appeared in this action, nor, apparently, has the Plaintiff pursued this case against any of the other Defendants, because no affidavits of service have been filed with this Court.

Therefore, on July 16, 2012, the Court issued an order directing the Plaintiff to show cause as to why the Court should not dismiss this case pursuant to Fed.R.Civ.P. 41(b) against Susan Wong, MVP, Shane A. Swetel, Selective, Walter Ross, and Ross Pacific (the Additional Defendants) for failure to prosecute. ( See Docket Entry No. 27.)

In response, through its attorney, Jeffrey L. Rosenberg, Esq., the Plaintiff submitted a Declaration...

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