Sungchang Interfashion Co. v. Stone Mountain Accessories, Inc.
| Decision Date | 25 September 2013 |
| Docket Number | 12 Civ. 7280 (ALC) (DCF) |
| Parties | SUNGCHANG INTERFASHION CO., LTD., Plaintiff, v. STONE MOUNTAIN ACCESSORIES, INC., STONE MOUNTAIN USA LLC, STONE MOUNTAIN USA CORP., KENNETH R. ORR, CHARLES ATANASIO, ROSENTHAL & ROSENTHAL, INC. Defendants. |
| Court | U.S. District Court — Southern District of New York |
Defendants Stone Mountain USA LLC ("SMU LLC") and Stone Mountain USA Corp. ("SMU Corp.", and together with SMU LLC, "New SMA"), Rosenthal & Rosenthal ("R&R"), Kenneth Orr and Charles Atanasio (collectively, the "Moving Defendants") move separately to dismiss claims against them. On December 12, 2012, Plaintiff SungChang Interfashion ("SungChang"), a Korean-based manufacturer of ladies' handbags, filed its Amended Complaint ("Am. Compl."), alleging that after receiving millions of dollars of SungChang's merchandise, former customer, Defendant Stone Mountain Accessories ("SMA"), engaged in a series of transactions with the Moving Defendants. These transactions allegedly allowed SMA to extinguish the heavy debts it owed to unsecured creditors like SungChang and allowed New SMA to acquire SMA's assets to the detriment of SMA's unsecured creditors.1
SungChang sues all Defendants for fraudulent conveyance under New York Debtor & Creditor Law §§ 276, 276-a (Count I) and constructive fraudulent conveyance under New York Debtor & Creditor Law §§ 273-275 (Counts II, III & IV). SungChang also sues all Defendants for conspiracy to commit fraudulent conveyance (Count V). SungChang sues SMA only for breach of contract and account stated (Counts VI & VII)2; sues New SMA for successor liability (Count VIII); sues both SMA and Orr in his personal capacity for fraud and promissory estoppel (Counts IX & X); and sues New SMA, Rosenthal and Orr and Atanasio in their personal capacity for quantum meruit/unjust enrichment (Count XI). In addition to compensatory damages of no less than $2,667, 510.65 plus interest, SungChang seeks punitive damages.
Defendant Stone Mountain Accessories ("SMA") is a Georgia corporation with principal place of business in New York. (Am. Compl. ¶ 10). SMA was in the business of designing, importing, selling and distributing ladies' accessories, small leather goods, wallets, and leather handbags, (id.), at least some of which were provided by SungChang, a handbag manufacturer based in Seoul, South Korea. Defendant Kenneth Orr was the chief executive officer of SMA. Defendant R&R was the factor for SMA, loaning funds in exchange for accounts receivable. In 2011 and 2012, SMA ordered shipments of handbags from SungChang approximately one to two times a month. SungChang provided SMA with an invoices, (id. ¶ 19), and alleges that SMA owes $2,667,510.65 for unpaid shipments sent in 2011 and 2012, (id. ¶ 8).
Until November 2011, SMA made timely payments to SungChang, (id. ¶ 21), but beginning November 3, 2011, SMA ceased making payments for the goods it received fromSungChang, (id. ¶ 22). Cho, the executive director and vice president of SungChang, repeatedly demanded payment from Orr, (id. ¶ 23), who allegedly told Cho that payment was forthcoming and requested that SungChang continue to ship handbags to SMA and release ocean bills of lading so that SMA could take possession of the handbags once delivered, (id. ¶ 24-25). Orr allegedly explained that the release of the bills of lading and shipment of more handbags was necessary for SMA to obtain funds to make payments on older orders. (Id. ¶ 26). Relying on these representations, SungChang continued to fulfill orders and ship handbags to SMA. SMA never rejected the goods or complained about their quality or condition and upon information and belief resold the goods at a significant markup. (Id. ¶ 31-32).
SungChang alleges that SMA was unable to pay its debts and functionally insolvent by early 2012. (Id. ¶ 35). In March 2012, Orr sought out Atanasio, a long time friend as a potential business partner. (Id. ¶ 36). On April 11, 2012, Atanasio formed two corporate entities, SMU Corp. and SMU LLC, the New SMA entities "for the sole purpose of acquiring SMA's assets and inventory, but excluding any of its liabilities." (Id. ¶ 37).
Integral to this scheme was a "sham" public sale of SMA's assets undertaken by R&R, purporting to act in compliance with the Uniform Commercial Code, (id. ¶¶ 39-40), and a purported surrender of those assets to R&R by a fraudulent Peaceful Possession Agreement ("PPA"), (id. ¶¶ 41-48). On April 27 and April 30, 2012, R&R placed ads in the New York Times and Crain's Classified, respectively, advertising the public sale of SMA's assets to be held on Monday, May 7, 2012 at 10 AM. (Id. ¶¶ 50-52). On the day of the sale, R&R opened the auction with its starting credit bid of $300,000 for all SMA's tangible and intangible assets. (Id. ¶ 52). SungChang contends that R&R did not conduct an inventory of SMA's assets and so the bid was "a severe undervaluation" of SMA's assets. (Id. ¶ 53-54).
On the same day as the public auction, SMA entered the Peaceful Possession Agreement ("PPA") with R&R. (Id. ¶42). The PPA states that SMA owed R&R "at least $3,350,420." In the PPA, SMA purported to surrender assets to R&R while "liabilities and/or obligations are and shall remain the sole and exclusive liability of SMA." (Id. ¶ 45). But according to SungChang, the PPA is a part of the fraud "to give the appearance of legitimacy to the fraudulent transfer of assets and inventory from SMA to the New SMA and Atanasio." (Id. ¶ 46). Instead, the Defendants intentionally overstated the amount of indebtedness and R&R does not have a legal or valid security interest in the amount asserted in the PPA. (Id. ¶¶ 47-48).
SungChang did not receive of the auction until after auction was scheduled to take place. By letter dated May 18, 2012, Orr announced the closure of Stone Mountain Accessories, Inc. effective May 7, 2012." (Id. ¶ 57). The letter also stated that SMA would be unable to satisfy its outstanding obligations to its trade creditors. By email dated May 21, 2012, Orr further explained that "the new Company does not have financial responsibility for past shipments" which "create[d] a tremendous shortfall for SungChang." (Id. ¶ 64).
After the public auction, New SMA purchased SMA's assets from R&R for a total purchase price of $1.5 million, to be paid in annual installments of 2% of New SMA's net sales. (Id. ¶ 62). Orr, CEO of SMA, is president of New SMA. (Id. ¶ 66). Atanasio is its CEO. (Id. ¶ 67). The majority of SMA's former employees were hired by New SMA and New SMA operates the same line of business from the same address as SMA. (Id. ¶ 68).
To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), a claim must contain "sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). A claim has facial plausibility "when the plaintiff pleads factual content that allows the Court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal, 556 U.S. at 678.
On a motion to dismiss, the court will accept the plaintiff's allegations as true, see Kassner v. 2nd Ave. Delicatessen Inc., 496 F.3d 229, 237 (2d Cir. 2007), and must "draw all reasonable inferences in favor of the plaintiff," id. (citing Fernandez v. Chertoff, 471 F.3d 45, 51 (2d Cir. 2006)). However, the court need not accept allegations that are merely conclusions of law. Kassner, 496 F.3d at 237 (). Therefore, on a motion to dismiss, "[t]he appropriate inquiry is not whether a plaintiff is likely to prevail, but whether he is entitled to offer evidence to support his claims." Fernandez, 471 F.3d at 51 (internal quotation marks and citation omitted).
"In considering a motion to dismiss, the Court may consider documents attached as an exhibit thereto or incorporated by reference, documents that are "integral" to plaintiff's claims, even if not explicitly incorporated by reference, and matters of which judicial notice may be taken. Thomas v. Westchester County Health Care Corp., 232 F. Supp. 2d 273, 275 (S.D.N.Y. 2002) (internal citations omitted). To incorporate a document by reference, "the Complaint must make a clear, definite and substantial reference to the document[ ]." Id. at 275-76. Moreover, "when a plaintiff chooses not to attach to the complaint or incorporate by reference a [document] upon which it solely relies and which is integral to the complaint, the defendant may produce[the document] when attacking the complaint for its failure to state a claim, because plaintiff should not so easily be allowed to escape the consequences of its own failure." Cortec Industries, Inc. v. Sum Holding L.P., 949 F.2d 42, 47-48 (2d Cir. 1991); Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002) (). Notably, a plaintiff's reliance on the terms and effect of a document in drafting the complaint is a necessary prerequisite to the court's consideration of the document on a dismissal motion; mere notice or possession is not enough. Chambers, 282 F.3d at 153.
"Rule 12(b) gives district courts two options when matters outside the pleadings are presented in response to a 12(b)(6) motion: the court may exclude the additional material and decide the motion on the complaint...
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