Ezra v. Wilton Grp. Inc.

• Decision Date: 16 July 2020
• Docket Number: INDEX NO. 655277/2017
• Citation: 2020 NY Slip Op 32351 (U)
• Court: New York Supreme Court
• Parties: JOSEPH EZRA, JAMIL EZRA, KAMIL SHASHOUA, KAMIL SHASHOUA AND JAMIL EZRA, AS TRUSTEES OF THE KS 2005 GRAT AGREEMENT, JOSEPH S. EZRA AND JAMIL EZRA, AS TRUSTEES OF THE JSE 2005 GRAT AGREEMENT, JAMIL EZRA AND ARLETTE SHASHOUA AS TRUSTEES OF THE JE 2005 GRAT AGREEMEN, Plaintiffs, v. WILTON GROUP INC.,CUPCAKE HOLDINGS, LLC,WILTON HOLDINGS INC.,WILTON BRANDS INC.,WILTON PROPERTIES INC.,E K SUCCESS LTD., DIMENSIONS CRAFTS LLC,WILTON INDUSTRIES, INC.,E K DESIGNS, LLC,K & COMPANY LLC,WILTON INDUSTRIES CANADA COMPANY, WILTON GLOBAL SOURCING LLC,XZY CORPS. 1-10, THOSE COMPANIES WHOSE NAMES ARE PRESENTLY UNKNOWN TO PLAINTIFFS AND BEING THE ENTITIES THAT ACQUIRED AN OWNERSHIP INTEREST IN, OR ASSETS OF, E K SUCCESS LTD. Defendants.

2020 NY Slip Op 32351(U)

JOSEPH EZRA, JAMIL EZRA, KAMIL SHASHOUA,KAMIL SHASHOUA AND JAMIL EZRA, AS TRUSTEES OF THE KS 2005 GRAT AGREEMENT,JOSEPH S. EZRA AND JAMIL EZRA, AS TRUSTEES OF THE JSE 2005 GRAT AGREEMENT,JAMIL EZRA AND ARLETTE SHASHOUA AS TRUSTEES OF THE JE 2005 GRAT AGREEMEN, Plaintiffs, v. WILTON GROUP INC.,CUPCAKE HOLDINGS,LLC,WILTON HOLDINGS INC.,WILTON BRANDS INC.,WILTON PROPERTIES INC.,E K SUCCESS LTD.,DIMENSIONS CRAFTS LLC,WILTON INDUSTRIES, INC.,E KDESIGNS, LLC,K & COMPANY LLC,WILTON INDUSTRIES CANADA COMPANY,WILTON GLOBAL SOURCING LLC,XZY CORPS. 1-10,THOSE COMPANIES WHOSE NAMES ARE PRESENTLY UNKNOWN TO PLAINTIFFSAND BEING THE ENTITIES THAT ACQUIRED AN OWNERSHIP INTEREST IN,OR ASSETS OF, E K SUCCESS LTD.Defendants.

INDEX NO. 655277/2017

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: COMMERCIAL DIVISION PART IAS MOTION 39EFM

July 16, 2020

NYSCEF DOC. NO. 84

MOTION DATEN/A

MOTION SEQ.NO.002

DECISION + ORDER ON MOTION

HON. SALIANN SCARPULLA:

The following e-filed documents, listed by NYSCEF document number (Motion 002) 39, 40, 41, 42, 43, 44, 45, 46, 47, 48, 49, 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63, 64, 65, 66, 67, 68, 69, 70, 71, 72, 73, 74, 76, 78, 81 were read on this motion to/for AMEND CAPTION/PLEADINGS.

Upon the foregoing documents, it is

In this action to recover damages for alleged fraudulent conveyances, plaintiffsJoseph Ezra, Jamil Ezra, Kamil Shashoua, Kamil Shashoua and Jamil Ezra, As Trustees Of The KS2005 GRATAgreement, Joseph S. Ezra And Jamil Ezra, As Trustees Of TheJSE 2005 GRATAgreement, Jamil Ezra and Arlette Shashoua As Trustees Of The JE2005 GRAT Agreement (together "plaintiffs") move pursuant to CPLR 3025(b) and (c) to amend the complaint dated August 9, 2017("Original Complaint").DefendantsWilton Group Inc., Cupcake Holdings, LLC, Wilton Holdings Inc., Wilton Brands Inc., Wilton Properties Inc., E K Success Ltd., Dimensions Crafts LLC, Wilton Industries, Inc., E K Designs, LLC, K & Company LLC, Wilton Industries Canada Company, and Wilton Global Sourcing LLC(together "defendants") oppose the motion.

Background

On or about February 17, 2006, plaintiffs and non-partyUCG Paper Crafts Group, Inc.("UCG") entered into an agreement to purchase plaintiffs' company, defendantEK Success Ltd.("EK Success").Pursuant to the terms of the agreement, UCG paid $120 million upon closing and executed six promissory notes in favor of plaintiffs totaling $15 million in principal, with interest compounding annually ("Notes").The Notes were due in full on February 17, 2014.

UCG defaulted on the Notes and plaintiffs commenced an action against UCG in New York Supreme Court, captioned Ezra et al. v. UCG Paper Crafts Group, Inc., IndexNo. 162355/2014.In that action, the Court entered a judgment against UCG in favor of plaintiffs on each of the Notes for a total of $25,654,907.05 ("Underlying Judgment").UCG has failed to pay the Underlying Judgment and the parties began post-judgment discovery.

On August 9, 2017, plaintiffs commenced this action asserting causes of action for fraudulent conveyance under New York Debtor and Creditor Law("DCL"), as well as claims to pierce the corporate veil and hold defendants liable pursuant to the doctrine ofsuccessor liability.Plaintiffs claim that defendants engaged in a series of transactions and restructuring tactics to prevent plaintiffs from collecting on the Notes from UCG.Defendants moved to dismiss the complaint and, in a decision dated October 2, 2018("2018 Decision") I upheld the DCL claims but dismissed the successor liability and veil-piercing claims.

Plaintiffs now move to amend the complaint to add and clarify certain factual allegations and to supplement the allegations regarding the previously dismissed claims.They argue that because UCG had obstructed plaintiffs' post-judgment discovery efforts, at the time of filing the Original Complaint, plaintiffs did not have information regarding defendants' internal operations, transfers and structural changes.According to plaintiffs, this lack of information prevented them from making fulsome allegations concerning the successor liability and veil-piercing causes of action.Now that the parties have engaged in extensive discovery, plaintiffs maintain that they have the information necessary to prevail on these two causes of action.

Plaintiffs allege that after UCG acquired EK Success in 2006, UCG transferred EK Success' assets into defendants for no consideration and engaged in other fraudulent conveyances to render itself judgment-proof.Plaintiffs maintain that defendants are UCG's subsidiaries and that UCG is unable to repay the Notes because of UCG's and defendants' conduct.

Plaintiffs claim that defendants are essentially "one entity" that purposefully transfer funds among each other for no consideration and comingle cash.Moreover,plaintiffs allege that defendants engaged in a pattern of pushing EK Success down the corporate chain to prevent EK Success from having to pay on the Notes.Plaintiffs further argue that, in 2014, UCG and defendants engaged in a series of asset "write downs" made to give the appearance that UCG had no assets, that certain defendants directly under UCG had no assets, and thus, that UCG's interest in its subsidiaries (i.e., defendants) was worthless.

Plaintiffs argue that the motion to amend the complaint should be granted and the previously dismissed claims should be reinstated because plaintiffs did not have access to certain facts prior to discovery.Plaintiffs argue that the allegations in the proposed amended complaint ("PAC") do not prejudice defendants because all of the information that forms the basis of the allegations in the PAC were in defendants' possession.Plaintiffs also maintain that the new claims are not palpably improper.

Discussion

Under CPLR § 3025(b) leave to amend or supplement the pleadings "shall be freely given upon such terms as may be just including the granting of costs and continuances."A plaintiff seeking to amend the complaint must "simply show that the proffered amendment is not palpably insufficient or clearly devoid of merit."MBIA Ins. Corp. v. Greystone & Co., Inc., 74 A.D.3d 499, 500(1st Dept.2010);see alsoGiunta's Meat Farms, Inc. v. Pina Construction Corp., 80 A.D.3d 558, 559(2d Dept.2011)("a court should not examine the merits or legal sufficiency of the proposed amendment unless it is palpably insufficient or patently devoid of merit on its face").

Successor Liability

In the Original Complaint, plaintiffs alleged that defendants are liable for the obligations of UCG under the theory of successor liability, because UCG is a "mere continuation of UCG's business operations" and that UCG had transferred its assets to one or more defendants as part of a scheme to evade UCG's creditors.In my 2018 Decision, I noted that generally, corporations that acquire the assets of another are not liable for the torts of its predecessor, unless certain exceptions are met.I found that plaintiffs' allegations in the Original Complaint failed to establish that any of these exceptions were met.Specifically, I determined that plaintiffs failed to allege a successor liability claim based on the "mere continuation" exception because essential to that exception is the allegation that the predecessor corporation is extinguished.Because the Original Complaint failed to allege that UCG was dissolved or extinguished, I found that plaintiffs failed to state a claim based on mere continuation.I also dismissed the cause of action based on the "de facto merger" exception, finding that "[t]he complaint only alleges that UCG is now known as a different entity, which is insufficient to support a finding that UCG's ownership or management continues through [defendants]"(NYSCEF Doc. No. 22at 11).

Now, plaintiffs move to amend the complaint to add allegations to support the successor liability cause of action.Plaintiffs allege that new facts learned during discovery allow plaintiffs to adequately plead a successor liability claim under three separate exceptions.

"It is the general rule that a corporation which acquires the assets of another is not liable for the torts of its predecessor."Schumacher v. Richards Shear Co., 59 N.Y.2d 239, 244(1983).However, there are four exceptions to this rule and "[a] corporation may be held liable for the torts of its predecessor if (1) it expressly or impliedly assumed the predecessor's tort liability, (2) there was a consolidation or merger of seller and purchaser, (3) the purchasing corporation was a mere continuation of the selling corporation, or (4) the transaction is entered into fraudulently to escape such obligations."Id. at 245.Plaintiffs ground their successor liability claim in the first, second, and fourth exceptions.

Exception # 1: Defendants Expressly or Impliedly Assumed UCG's Liabilities

In its PAC, plaintiffs allege that "Sub Holdings, Inc., Sub Holdings LLC, and Brands are successors to UCG, assumed liability for the Notes and, as a result, are liable under the Notes"(NYSCEF Doc. No. 41 at ¶ 104).In its memorandum of law in support of its motion, plaintiffs claim that Sub Holdings, Inc., Sub Holdings LLC, and Brands acquired UCG's assets and assumed liability for the Notes and acknowledged this in three separate bank agreements and UCG's audited financial statements.In opposition, defendants maintain that these bank agreements are not evidence of an assumption of liability.Defendants further maintain that "Plaintiffs do not (and cannot point) point to any board minutes, intercompany agreements or other corporate documents reflecting an assumption by a Wilton entity of any UCG liability to anyone"(NYSCEF Doc. No. 56at 18).

"[A] corporation may be held liable where it expressly or impliedly agreed to assume its predecessor's liabilities.While no precise rule governs the finding of implied liability, the authorities suggest that the conduct or...