Emigrant Bus. Credit Corp. v. Hanratty
| Decision Date | 29 November 2022 |
| Docket Number | Index No. 158207/2022,Motion Seq. No. 001 |
| Citation | 2022 NY Slip Op 34029 (U) |
| Parties | EMIGRANT BUSINESS CREDIT CORPORATION, Plaintiff, v. JOHN ARTHUR HANRATTY, EBURY STREET CAPITAL, LLC, EBURY FUND 1, LP, EBURY FUND 2, LP, EBURY 1EMI LLC, EBURY 2EMi LLC, EB 1EMIALA LLC, EB 2EMIALA LLC, EB 1EMIFL, LLC, EB 2EMIFL, LLC, EB 1EMIIN, LLC, EB2EMIIN, LLC, EB 1EMIMD, LLC, EB 2EMIMD, LLC, EB 1EMINJ, LLC, EB2EMINJ, LLC, EB 1EMINY, LLC, EB 2EMINY, LLC, EB 1EMISC, LLC, EB 2EMISC, LLC, RE 1EMI LLC, RE 2EMI LLC, EB 1EMIDC, LLC, ARQUE TAX RECEIVABLE FUND (MARYLAND), LLC, EBURY FUND 1FL, LLC, EBURY FUND 2FL, LLC, EBURY FUND 1NJ, LLC, EBURY FUND 2NJ, LLC, RED CLOVER 1, LLC, EBURY RE LLC, and XYZ CORPS. Defendants. |
| Court | New York Supreme Court |
MOTION DATE 10/18/2022.
DECISION + ORDER ON MOTION
The following e-filed documents, listed by NYSCEF document number (Motion 001) 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 15, 21, 22, 23, 24, 25, 26, 27, 28, 29, 30, 31 were read on this motion to/for PREL INJUNCTION/TEMP REST ORDR.
In this action, plaintiff lender Emigrant Business Credit Corporation alleges causes of action for breach of contract, fraudulent inducement, and fraudulent transfer against defendants. In its attempt to recover the amounts it loaned to defendants Ebury 1EMI LLC and Ebury 2EMI LLC (), plaintiff seeks an order which, in short, would enjoin defendants from (1) transferring their general assets (with an ordinary and necessary business expense carveout), (2) depositing certain proceeds into escrow, and (3) requiring defendants to give plaintiff twenty-four hours' notice prior to defendants' transfer of assets exceeding $50,000.[1 ]Defendants oppose the motion.
Plaintiff is a New York-based specialty finance company (NYSCEF # 1 -Complaint, ¶ 5). Defendant John Hanratty is the manager of defendant Ebury Street Capital, LLC (ESC), the manager or general partner of all the other corporate defendants (collectively with ESC, the Ebury Entities) (id. ¶' s 8-9). Plaintiff claims that "ESC and each of the Ebury Companies is an alter ego of Hanratty and of one another with respect to the transactions with respect to the transactions described in this Complaint." (id., ¶ 18).
On March 9, 2017, plaintiff extended credit facilities to Borrowers 1EMI and 2EMI in amounts totaling $10,000,000 and $5,000,000, respectively, with 1EMI's facility later increased to $15,000,000 (id., ¶ 33). Hanratty and various Ebury Entities issued guaranties in connection with the credit facilities (id., ¶'s 15, 37, 39).
The funds were to be used to finance the purchase of tax lien certificates that municipalities place on properties when an owner fails to pay municipal taxes (id., ¶'s 32; 22). Certain investors purchase tax lien certificates from municipalities to profit from the interest rate chargeable on the certificate and to enable ownership of the underlying real estate through foreclosure (id., ¶ 25).
Plaintiff explains that the credit facilities were structured to allow the Borrowers to draw down revolving lines of credit against the value of a pool of eligible assets serving as collateral (id., ¶'s 27; 34). The total amount the Borrowers could draw down equals the advance rate, which ranged from 70% to 85%, multiplied by the amount of eligible collateral (id., ¶'s 28; 34). Any tax lien certificate that defendants purchased using the credit facilities, and its proceeds, served as the collateral (id., ¶ 34).
Plaintiff alleges that "[d]efendants misappropriated advances to the credit facilities as well as EBCC's collateral to pay tens of millions of dollars in distributions to company insiders - including Defendant John Hanrraty - as well as other investors" (id. ¶ l). Also, the Borrowers failed to repay the principal and interest for the credit facilities when they came due on November 10, 2021, which default has continued even after plaintiff sent a default notice on November 29, 2021 (id., 1 38). Plaintiff alleges that the outstanding amounts exceed $21.8 million (id, ¶ 38).
For its fraud claim, plaintiff alleges as follows: Hanratty consistently claimed that plaintiff was secured by collateral worth more than the outstanding amounts (id., ¶ 43). For example, one of plaintiff s employees conveyed concerns to Hanratty about the 2019 financial audits, which valued the tax lien investments at around $17.2 million, being less than the approximately $18 million outstanding balance owed at the time (id., ¶ 47). Hanratty responded that plaintiff was actually secured by $32 million in tax lien collateral, plus additional collateral amounts (id., ¶ 47).
Hanratty's claims of over collateralization were intentionally false, and Hanratty even bragged about his ability to mislead plaintiffs employee (id., ¶'s 47-49).
The credit facilities required the Borrowers to deliver the tax lien certificates they purchased to a designated third-party custodian, which the parties agreed would be MTAG Services, LLC (the Custodian) (id, ¶'s 50; 52). In March of 2021, plaintiff discovered that certain of the collateral was not held by the Custodian (id., ¶ 55). Plaintiff alleges that Hanratty subsequently misled plaintiff about the custodial status of the collateral. To wit, defendant shared a spreadsheet purporting to be from the Custodian and indicated that as of August 31, 2021, the Custodian had 6,782 tax lien certificates (id., ¶ 55-57). The Custodian has since confirmed to plaintiff that as of that date, it only had custody of 518 tax lien certificates worth a fraction of the amount the spreadsheet had indicated (id., ¶ 57). Hanratty admitted he was self-servicing almost 90% of the collateral (id., ¶ 58).
Additional allegations of fraud include that Hanratty improperly inflated the value of certain liens, altered origination dates for hundreds of certificates, and misrepresented that certain advances would be used to finance purchases of tax lien certificates when they were instead used for investor distributions and settlements (id., ¶'s 63; 68; 69-81). Further, defendants were required to deposit proceeds from sales of tax lien certificates into plaintiffs lockbox account, but not only did defendants fail to do so, Hanratty also falsely represented that he owned the liens and that they were increasing in value (id., ¶'s 94-96). And, because proceeds of tax lien certificates are treated as collateral, this means any owned real property that resulted from a foreclosure on a tax lien should also have been included as collateral. But defendants have been effecting transfers without receipt of fair consideration, so to prevent plaintiff from receiving sale proceeds (id., ¶'s 97-100).
"The provisional remedy of a preliminary injunction in New York civil actions is governed by CPLR 6301" (Credit Agricole Indosuez v Rossiyskiy Kredit Bank, 94 N.Y.2d 541, 544 [2000]), which provides in relevant parts:
A preliminary injunction may be granted in any action where it appears that the defendant threatens or is about to do, or is doing or procuring or suffering to be done, an act in violation of the plaintiffs rights respecting the subject of the action, and tending to render the judgment ineffectual or in any action where the plaintiff has demanded and would be entitled to a judgment restraining the defendant from the commission or continuance of an act, which, if committed or continued during the pendency of the action, would produce injury to the plaintiff. . . .
(CPLR 6301).
The "remedy of granting a preliminary injunction is a drastic one which should be used sparingly" (McLaughlin, Piven, Vogel, Inc. v W.J. Nolan & Co., 114 A.D.2d 165, 172 [2d Dept 1986]). (1234 Broadway LLC v West Side SRO Law Project, 86 A.D.3d 18, 23 [1st Dept 2011], citing Doe v Axelrod, 73 N.Y.2d 748 [1988]).
Whether to grant a preliminary injunction is "committed to the sound discretion of the motion court" (Harris v Patients Med., PC, 169 A.D.3d 433, 434 [1st Dept 2019]). The existence of triable issues of fact does not require the denial of a preliminary injunction when the movant meets its burden of establishing that the three prerequisites for injunctive relief have been met (Bell & Co, P.C v Rosen, 114 A.D.3d 411, 411 [1st Dept 2014]; CPLR 6312 [c]). "The purpose of a preliminary injunction is to maintain the status quo and prevent the dissipation of property that could render a judgment ineffectual" (1650 Realty Assocs., LLC v Golden Touch Mgmt, Inc., 101 A.D.3d 1016, 1018 [2d Dept 2012]).
Plaintiff argues that it is likely to succeed on the merits (NYSCEF # 4 - MOL at 6-12; NYSCEF # 28 - Reply at 1-4). The first basis plaintiff puts forward is its claim for breach of contract. "To establish a breach of contract claim, the plaintiffs must allege the specific terms of the agreement, the consideration, the plaintiffs' performance, and the defendants' breach of the agreement" (Sylmark Holdings Ltd. v Silicone Zone Int'l Ltd., 5 Misc.3d 285, 295 [Sup Ct, NY County 2004]). Plaintiff argues that this has been met because the Borrowers promised to repay all principal and interest outstanding at the maturity date - November 10, 2021 - but failed to do so (NYSCEF...
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