Epiphany Cmty. Nursery Sch. v. Levey

• Decision Date: 05 February 2019
• Docket Number: Index 654655/16,6695
• Citation: 94 N.Y.S.3d 1
• Parties: EPIPHANY COMMUNITY NURSERY SCHOOL, Plaintiff-Appellant, v. Hugh W. LEVEY, et al., Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

94 N.Y.S.3d 1

EPIPHANY COMMUNITY NURSERY SCHOOL, Plaintiff-Appellant,

v.Hugh W. LEVEY, et al., Defendants-Respondents.

6695

Index 654655/16

Supreme Court, Appellate Division, First Department, New York.

ENTERED: FEBRUARY 5, 2019

Loeb & Loeb, LLP, New York (John A. Piskora, Jason R. Lilien and Helen Gavaris of counsel), for appellant.

Harter Secrest & Emery LLP, Rochester (Peter H. Abdella, Samantha A. Maurer, Brian M. Feldman and Lauren R. Mendolera of counsel), for Hugh W. Levey, Claire Gruppo, Gruppo, Levey & Co., Gruppo, Levey Holdings Inc., January Management, Inc., and Frog Pond Partners L.P., respondents.

Woods Oviatt Gilman LLP, Rochester (Brian J. Capitummino of counsel), for Davie Kaplan CPA, P.C, respondent.

David Friedman, J.P., Judith J. Gische, Peter Tom, Cynthia S. Kern, Anil C. Singh, JJ.

SINGH, J.

There are two central issues on this appeal. The first involves the application of the statute of limitations. The second is whether plaintiff has pleaded the element of justifiable reliance to support its cause of action sounding in fraud pertaining to unauthorized bank transfers made by defendants between 2007 and 2013. We find the fraud claim relating to the bank transfers is not time-barred and that justifiable reliance has been sufficiently pleaded. Accordingly, we reinstate plaintiff's fraud claims relating to the bank transfers.

The facts are taken from plaintiff Epiphany Community Nursery School's (Epiphany) complaint. For the purposes of defendants' motion to dismiss we "accept as true the facts as alleged in the complaint [and] ... accord plaintiffs the benefit of every possible favorable inference and determine only whether the facts as alleged fit within any cognizable legal theory" ( Sokoloff v. Harriman Estates Dev. Corp. , 96 N.Y.2d 409, 414, 729 N.Y.S.2d 425, 754 N.E.2d 184 [2001] ).

In 1973 Wendy Levey (Wendy) married defendant Hugh Levey (Hugh). Two years later Wendy founded Epiphany, a not-for-profit corporation that operates a kindergarten and nursery school on the Upper East Side of Manhattan.

Hugh is an investment banker with an undergraduate degree from Yale University and a M.B.A. from Harvard. Hugh and defendant Claire Gruppo co-founded defendant Gruppo Levey & Co. (GLC), a small investment banking firm that provides strategic advice and private capital raising services to businesses, financial sponsors and management teams throughout the United States. Defendant Gruppo, Levey Holdings Inc. (GLH) is GLC's parent company, and defendant Frog Pond Partners L.P. (Frog Pond) is a limited partnership owned indirectly by Hugh and Gruppo. Of this group, all but Hugh are the "collateral defendants." Defendant Davie Kaplan CPA, P.C. (Davie Kaplan) was an outside auditor for Epiphany from 2010 to 2012.

The complaint alleges two sets of fraudulent acts. These acts were allegedly uncovered in a matrimonial action between Wendy and Hugh that was settled in October 2016. Wendy and Hugh are now divorced.

The first series of fraudulent acts occurred between 2002 and 2003 when Hugh induced Epiphany to sell its extracurricular programs to nonparty Magic Management LLC (Magic) for an unreasonably low price. At that time, Hugh had a 100% ownership interest in defendant January Management, Inc., general partner of nonparty January Partners, L.P., which was the sole member of Magic.

Pursuant to an asset purchase agreement dated February 12, 2003, Epiphany sold its extracurricular programs to Magic for $ 300,000, $ 30,000 of which was paid in cash and the remaining $ 270,000 was to be paid pursuant to a promissory note payable over 10 years in installments of $ 27,000, plus interest. Magic also agreed to pay monthly rent to use Epiphany's facilities. Hugh claimed that although Magic occupied less than 10% of Epiphany's space, Magic's rent would be $ 481,026. Magic's rent was represented to be more than $ 100,000 above Epiphany's rent for the building.

Wendy, Epiphany's Executive Director, did not have a financial background. She believed it was in the school's best interest to have someone with Hugh's financial expertise to assist with Epiphany's financial affairs. Wendy signed the asset purchase agreement on Epiphany's behalf without obtaining her own appraisal or verifying whether Magic paid the school what it owed.

The complaint alleges that the $ 300,000 purchase price was based on a fraudulent valuation commissioned by Hugh, which was "substantially inaccurate." By applying false figures, Hugh allegedly reduced the purchase price by $ 1.5 million. The complaint further alleges that if the valuation had been properly calculated the purchase price would have exceeded $ 1.8 million.

In addition, Magic failed to pay rent or the amount owed on the promissory note. The complaint alleges that Hugh manipulated Epiphany's corporate and financial records to hide Magic's failure to pay.

The second set of fraudulent acts allegedly took place between 2007 and 2013. Hugh made unauthorized transfers of over $ 5.9 million from Epiphany's bank accounts to himself and some of the collateral defendants by linking the bank accounts to his private banking portfolio. Hugh, with the assistance of Davie Kaplan, falsely recorded these transfers in Epiphany's general ledgers as "loans." However, there were no documents to memorialize these "loans." Nor were any loan payments ever made. The "loans" were subsequently characterized as "other receivables." At the end of each year, the other receivables were offset by fake charges Epiphany owed GLC or GLH for "consulting fees" and "lease commissions."

In September 2010, Hugh allegedly arranged for his long-time personal accountant, David Pitcher, who was employed by defendant Davie Kaplan to serve as Epiphany's outside auditor. Davie Kaplan delivered 2010, 2011, and 2012 audit reports. Davie Kaplan also performed an audit for fiscal year 2013 but it did not issue a 2013 audit report.

Epiphany commenced this action on August 31, 2016. It alleges 13 causes of action, including: (1) fraud by Hugh and Davie Kaplan; (2) aiding and abetting fraud by collateral defendants and Davie Kaplan; (3) breach of fiduciary duty by Hugh; and (4) aiding and abetting breach of fiduciary duty by the collateral defendants and Davie Kaplan.

Defendants moved to dismiss the complaint. Supreme Court granted the motion and dismissed the complaint with prejudice. The motion court held that the first set of fraud claims were time-barred. The second set of fraudulent acts constituted conversion and were also time-barred. Supreme Court also found that the nonfraud claims sounded in accounting malpractice and were time-barred as well. Epiphany appealed.

A fraud claim must be commenced within "the greater of six years from the date the cause of action accrued or two years from the time the plaintiff ... discovered the fraud, or could with reasonable diligence have discovered it" ( CPLR 213[8] ).

On a motion to dismiss a fraud claim based on the two-year discovery rule, a defendant must make a prima facie case that a plaintiff was on inquiry notice of its fraud claims more than two years before it commenced the action, in this case, before August 31, 2014. The burden then shifts to the plaintiff to establish that even if it had exercised reasonable diligence, it could not have discovered the basis for its claims before that date (see Berman v. Holland & Knight, LLP , 156 A.D.3d 429, 430, 66 N.Y.S.3d 458 [1st Dept. 2017] ; Aozora Bank, Ltd. v. Deutsche Bank Sec. Inc. , 137 A.D.3d 685, 689, 29 N.Y.S.3d 10 [1st Dept. 2016] ).

"The issue of when a plaintiff, acting with reasonable diligence, could have discovered an alleged fraud ... involves a mixed question of law and fact, and, where it does not conclusively appear that a plaintiff had knowledge of facts from which the alleged fraud might be reasonably inferred, the cause of action should not be disposed of summarily on statute of limitations grounds. Instead, the question is one for the trier-of-fact"

( Berman , 156 A.D.3d at 430, 66 N.Y.S.3d 458 [internal quotation marks omitted]; see also Sargiss v. Magarelli , 12 N.Y.3d 527, 532, 881 N.Y.S.2d 651, 909 N.E.2d 573 [2009] ; Trepuk v. Frank , 44 N.Y.2d 723, 725, 405 N.Y.S.2d 452, 376 N.E.2d 924 [1978] ).

Turning first to the sale of Epiphany's extracurricular programs in 2002 and 2003, the Supreme Court properly dismissed as time-barred this branch of the fraud claim. The action was commenced more than six years after this cause of action accrued. Accordingly, to be timely, the action must have been brought within two years from the time that Epiphany discovered the alleged fraud, or from when it could have discovered it in the exercise of reasonable diligence.

We find that Epiphany could have discovered the alleged fraud when Wendy, as Epiphany's Executive Director, signed the asset purchase agreement on Epiphany's behalf in 2003. She signed it without obtaining her own appraisal. Further, Epiphany did not question the disproportionally high rent, which was the basis for the undervaluation of the asset. Nor did Epiphany verify whether Magic paid the rent due or made payments on the promissory note (see Aozora Bank, Ltd. , 137 A.D.3d at 689, 29 N.Y.S.3d 10 ; Gutkin v. Siegal , 85 A.D.3d 687, 688, 926 N.Y.S.2d 485 [1st Dept. 2011] ).

As for the second set of fraudulent acts relating to the unauthorized bank transfers that occurred between 2007 and 2013, we find that the unauthorized transfers sound in fraud, not conversion and that the fraud claim is timely under the two-year discovery rule.

The complaint alleges that Hugh—with assistance from Davie Kaplan's employee, David Pitcher—devised a fraudulent scheme to intentionally falsify the financial statements and books and records of Epiphany and kept the knowledge of these transfers from the school. Hugh made the alleged illicit and unauthorized transfers from Epiphany's bank accounts and fraudulently concealed them by falsely designating the entries in Epiphany's books and records...