N. Fork Partners Inv. Holdings v. Bracken
| Docket Number | 20-cv-2444 (LJL) |
| Decision Date | 07 June 2023 |
| Parties | NORTH FORK PARTNERS INVESTMENT HOLDINGS, LLC, Plaintiff, v. W. CHRISTOPHER BRACKEN, et al., Defendants. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff North Fork Partners Investment Holdings, LLC (“Plaintiff” or “North Fork”) initiated a lawsuit against defendants W. Christopher Bracken, William Henagan, Richard Spencer, Kenneth Elias, and Christopher Erb (collectively, “Defendants”) related to a mezzanine loan to Patriot LLC (“Patriot”). Defendant Bracken moves for summary judgment as to the single claim for fraud against him, Dkt No. 127, defendants Elias and Erb move for summary judgment as to the single claim for fraud against them, Dkt. No. 122 and defendants Henagan and Spencer move for summary judgment as to the claims for fraud and fraudulent transfers against them, Dkt. No. 132.
For the following reasons, the motions for summary judgment are granted.
The following facts, which are largely drawn from the parties' Local Rule 56.1 statements of facts, Dkt. Nos 124, 128, 133, 140-1, 142-1, 143-1, are undisputed unless otherwise indicated and are construed in favor of the non-moving party.
Plaintiff is a Delaware limited liability company. Dkt. No. 140-1 ¶ 4. Plaintiff's Managing Director is Noah Cutler and its principal is John Fernando. Dkt. No. 143-1 ¶ 7; Dkt. No. 140-1 ¶ 21.
The present matter relates to a mezzanine loan that Plaintiff provided to Patriot. Patriot was in the business of making consumer loans to private individuals in Georgia that met certain creditworthiness criteria. Dkt. No. 140-1 ¶ 6; Dkt. No. 143-1 ¶ 1. Henagan and Spencer were two members of Patriot's three-member board of managers. Dkt. No 143-1 ¶ 2. The third Manager was Bracken, who was the Chief Operating Officer of Patriot. Id.; see also Dkt. No. 140-1 ¶ 3; Dkt. No. 142-1 ¶ 7.
On or about December 18, 2017, Patriot and Congressional Bank (“Congressional”) entered into a Loan and Security Agreement, pursuant to which Congressional agreed to provide a credit line to Patriot of $6,500,000 at an interest rate of approximately 5.7% (the “Congressional Loan”). Dkt. No. 140-1 ¶ 9; Dkt. No. 143-1 ¶ 4. Erb and Elias were officers of Congressional. Dkt. No 140-1 ¶ 1; Dkt. No. 143-1 ¶ 4. Congressional's loan facility had an advance rate of 72.50% of the outstanding principal balance on eligible receivables, requiring Congressional to fund 72.50% of the principal balance of Patriot's eligible loans to consumers. Dkt. No. 140-1 ¶ 11. Patriot sent monthly collateral reports to Congressional as required under the Congressional Loan. Dkt. No. 142-1 ¶ 69. Goldpoint was the loan servicing system Patriot used, and the data for Patriot's monthly reports came from this system. Id. ¶ 70.
During a March 28, 2018 phone call, Fernando and Cutler discussed Patriot with Erb. Dkt. No. 140-1 ¶ 24. There is no evidence that Elias participated in the call. Id. ¶¶ 27-28. Plaintiff claims that during the phone call, Erb stated to Fernando and Cutler that “there was a great opportunity to invest in Patriot.” Id. ¶ 33.
Erb introduced Plaintiff to Patriot via email on or about March 28, 2018. Dkt. No. 140-1 ¶ 11. An introductory phone call between Plaintiff and Patriot occurred within a week of this email. Dkt. No. 142-1 ¶ 14. Elias and Erb were not part of this phone call. Id. ¶ 15. After the introduction, Plaintiff and Patriot proceeded to exchange emails about Plaintiff providing a loan to Patriot; neither Erb, Elias, nor anyone else from Congressional were included on the emails. Dkt. No. 140-1 ¶ 37.
In connection with potentially providing a loan to Patriot, Plaintiff conducted due diligence, although the parties dispute whether it was Plaintiff's normal due diligence. Dkt. No. 140-1 ¶¶ 39-40; Dkt. No. 142-1 ¶ 19, 33. Patriot gave Plaintiff everything it asked for in its due diligence requests. Dkt. No. 142-1 ¶ 19. North Fork received data on Patriot's actual finances through May 31, 2018, and forecasted financial data through the closing. Id. ¶ 27. No one from Plaintiff asked for monthly financial forecasts from before May 31, 2018, although Plaintiff notes that this was because it was unaware that those earlier forecasts existed. Id. ¶ 30.
Plaintiff ultimately closed on a $650,000 mezzanine loan to Patriot on August 3, 2018, with an interest rate of 18% per annum (the “North Fork Loan”). Dkt. No. 140-1 ¶ 38; Dkt. No. 143-1 ¶ 5. The North Fork Loan advance rate was 12.5%. Dkt. No. 142-1 ¶ 49. With the advance rates of 72.5% and 12.5% between the Congressional Loan and North Fork Loan, Patriot used debt financing for 85% of its loans and was responsible only for funding the remaining 15% itself. Id. ¶ 50. Congressional and Plaintiff were sources of capital used to fund part of every loan Patriot made. Id. ¶ 51. As a mezzanine loan, the North Fork Loan was subordinate to the Congressional Loan. Id. ¶ 78.
On or about the date of the closing on the North Fork Loan, Plaintiff learned that Patriot was in default under the Congressional Loan, although Plaintiff contends that the default was improperly characterized as a minor technical default by Erb. Dkt. No. 140-1 ¶ 62. Patriot's default concerned a negative covenant governing the extent of permitted adjusted net income losses. Id. ¶ 65. Congressional reviewed the default and determined that it would agree to waive the default, although the parties dispute exactly why Congressional agreed to waive it. Id. ¶ 66. Congressional circulated the proposed Waiver of Default to both North Fork and Patriot on August 3, 2018. Id. ¶ 67. Prior to August 3, 2018, North Fork never asked Erb or Elias about the status of the Congressional Loan. Id. ¶ 68.
North Fork was represented by counsel, Nelson Mullins, on the date of the closing on the North Fork Loan. Id. ¶ 71. North Fork reviewed Congressional's proposed Waiver of Default and North Fork signed off on the waiver, with North Fork's counsel writing “We're signed off on the amendment and waiver”; North Fork, however, notes that it only signed off because of “the false statements and material omissions of Erb.” Id. The Waiver of Default was incorporated into the North Fork Loan. Id. ¶ 73. Nothing prevented Plaintiff from delaying closing on the North Fork Loan beyond August 3, 2018. Id. ¶ 76.
Pursuant to the North Fork Loan, Patriot sent to Plaintiff copies of the same monthly collateral reports it sent to Congressional. Dkt. No. 143-1 ¶ 10. The last monthly report that Bracken sent to Congressional and/or North Fork was sent on or about July 12, 2019 (the “July 12 Report”). Dkt. No. 143-1 ¶ 23. Bracken was terminated by Patriot on or about July 15, 2019 based upon the company's poor performance. Id. ¶ 24; see also Dkt. No. 142-1 ¶¶ 72-73. After Bracken's termination, Tim Harrelson was hired to serve as interim Chief Executive Officer (“CEO”) of Patriot; however, he immediately became seriously ill and was unable to perform his duties of interim CEO of Patriot. Dkt. No. 143-1 ¶ 25.
On or around August 5, 2019, another monthly report was sent to Congressional and Plaintiff from Patriot; the report reflected data as of July 31, 2019 (the “July 31 Report”). Id. ¶ 26. Henagan and Harrelson had to contact Bracken after his termination to get help with the format of the monthly report, having never prepared one previously. Id. ¶ 28. In order to prepare the July 31 Report, Henagan and Harrelson had to pull data from the Goldpoint system. Id. Henagan and Harrelson had no prior experience using the Goldpoint system and received little or no assistance with it. Id. The July 31 Report was sent in compliance with the Congressional Loan and North Fork Loan and not to seek additional loan amounts from Congressional or Plaintiff. Id. ¶ 29.
Cutler testified that he found “discrepancies” between the July 31 Report sent by Henagan and Harrelson and the July 12 Report that had been prepared and sent by Bracken. After analyzing the two reports, Cutler concluded that the contents of the July 31 Report were accurate and that the July 12, 2019 report was inaccurate. Id. ¶ 30. North Fork never fully investigated the discrepancies between the July 12 Report and the July 31 Report, and North Fork never completed a formal collateral audit. Dkt. No. 140-1 ¶ 104.
By July 2019, Patriot was unable to satisfy its loan obligations with Congressional and all borrowing against Congressional's line of credit ceased. Dkt. No. 143-1 ¶ 108. North Fork assisted in shopping Patriot's assets to third parties, but Patriot was unable to find a buyer. Id. ¶ 109. Pursuant to the Intercreditor Agreement between North Fork and Congressional, North Fork had the right to buy out Congressional's senior obligations prior to foreclosure on Patriot. Id. ¶ 118. North Fork considered, but opted not to exercise, its purchase rights under the Intercreditor Agreement. Id. ¶ 119.
Congressional foreclosed on Patriot's collateral in late-2019 or early-2020. Id. ¶ 120. Congressional administered the collateral and recovered its full principal plus some interest and fees on the Congressional Loan. Id. ¶ 121. Patriot ceased business operations in 2020 because of its unprofitability and was administratively dissolved by the Georgia Secretary of State on or about October 22, 2020. Dkt. No. 143-1 ¶ 33. Plaintiff lost the entire amount of its loan plus costs and expenses. Dkt. No. 44 ¶ 3.
In 2018, Henagan Spencer Capital Partners (“HSCP”) billed Patriot an annual management fee of $50,000 for the management services that Henagan and Spencer rendered to Patriot during 2018. Dkt. No. 143-1 ¶ 16. Patriot paid only two-thirds of the $50,000 amount owing to HSCP for management services during 2018. Id. ¶ 17. In...
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