U.S. Small Bus. Admin. Funding Corp. v. Feinsod, 17-CV-3586 (JFB)(AYS)

• Decision Date: 01 October 2018
• Docket Number: No. 17-CV-3586 (JFB)(AYS),17-CV-3586 (JFB)(AYS)
• Citation: 347 F.Supp.3d 147
• Parties: UNITED STATES SMALL BUSINESS ADMINISTRATION as Receiver of Elk Associates Funding Corp., Plaintiff, v. Michael FEINSOD, Silvia Mullens, Richard Feinstein, Gary Granoff, Steven Etra, John Laird, Ivan J. Wolpert, Howard Sommer, Murray Indick, Elliott Singer, and Peter Boockvar, Defendants.
• Court: U.S. District Court — Eastern District of New York

347 F.Supp.3d 147

UNITED STATES SMALL BUSINESS ADMINISTRATION as Receiver of Elk Associates Funding Corp., Plaintiff,

v.Michael FEINSOD, Silvia Mullens, Richard Feinstein, Gary Granoff, Steven Etra, John Laird, Ivan J. Wolpert, Howard Sommer, Murray Indick, Elliott Singer, and Peter Boockvar, Defendants.

No. 17-CV-3586 (JFB)(AYS)

United States District Court, E.D. New York.

Signed October 1, 2018

Arlene M. Embrey, U.S. Small Business Administration Office of General Counsel, 409 3rd Street, SW, 7th Floor, Washington, D.C. 20416; and Steven Weinberg and Kelsey Bilodeau, Gottesman, Wolgel, Weinberg & Lee, P.C., 11 Hanover Square, 4th Floor, New York, New York 10005, for Plaintiff.

Justin V. Shur, MoloLamken LLP, 600 New Hampshire Avenue, NW, Washington, D.C. 20037, and Justin Weiner, MoloLamken LLP, 300 North LaSalle Street, Chicago, Illinois 60654, for Defendants Michael Feinsod and Richard Feinstein.

Martin L. Seidel, Willkie Farr & Gallagher LLP, 787 Seventh Avenue, New York, New York 10019, for Defendant Peter Boockvar, Murray Indick, John Laird, Elliott Singer, Howard Sommer, and Ivan J. Wolpert.

Wendy Michael, Greenspoon Marder, P.A. P.C., 1270 Avenue of the Americas, New York, New York 10020, for Defendants Silvia Mullens.

Edward M. Spiro and Miriam L. Glaser, Morvillo Abramowitz Grand Iason & Anello P.C., 565 Fifth Avenue, New York, New York 10017, for Defendant Gary Granoff.

Mark A. Kornfeld, Keith R. Murphy, and Michael A. Sabella, Baker & Hostetler LLP, 45 Rockefeller Plaza, New York, New York 10111, for Defendant Steven Etra.

MEMORANDUM AND ORDER

Joseph F. Bianco, United States District JudgePlaintiff Elk Associates Funding Corporation ("Elk"), by and through its court-appointed receiver, the U.S. Small Business Administration ("the SBA," and as receiver for Elk, "plaintiff"), brings this action against former Elk officers and directors Michael Feinsod, Silvia Mullens, Richard Feinstein, Gary Granoff, Steven Etra, John Laird, Ivan J. Wolpert, Howard Sommer, Murray Indick, Elliott Singer, and Peter Boockvar (collectively, "defendants") for breach of fiduciary duty, ultra vires acts, waste of assets, conversion, negligence, aiding and abetting a breach of fiduciary duty, civil conspiracy, and gross negligence.

Presently before the Court are defendants' motions to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons set forth below, the Court grants the motions in part and denies the motions in part. More specifically, defendants' motions to dismiss are granted as to plaintiff's claim for aiding and abetting breach of fiduciary duty, and defendants Feinsod's, Feinstein's, and Mullens' motions to dismiss are granted as to plaintiff's claim for conspiracy. Defendants' motions to dismiss are denied in all other respects.

I. BACKGROUND

A. Facts

The Court takes the following facts from the complaint (ECF No. 1), unless indicated otherwise herein. The Court assumes these facts to be true in deciding the motion to dismiss, and construes them in the light most favorable to plaintiff.

1. Regulatory Background

The Small Business Investment Act of 1958 ("SBIA"), 15 U.S.C. § 661 et seq. was enacted to stimulate the national economy by promoting small businesses in need of financing. 15 U.S.C. § 661. To that end, the SBIA authorizes the SBA to license small business investment companies ("SBICs") to invest in qualified small businesses. Id. § 681. The SBA then makes favorable loans to the SBICs for investment in the small businesses. Id. §§ 683, 685. SBICs also receive funding from private parties. (See Compl. ¶ 36.)

Section 687(c) of the SBIA authorizes the SBA to enact regulations governing SBICs. These regulations are codified at Title 13 of the Code of Federal Regulations, Part 107. The following two regulations are relevant to this action: 13 C.F.R. §§ 107.730 and 107.885. Section 107.730 prohibits an SBIC from self-dealing to its prejudice by providing financing to an associate¹ without a prior written exemption from the SBA. Id. § 107.730(a). However, it provides an exception for SBICs that receive an exemption from the U.S. Securities and Exchange Commission. See id. § 107.730(f). Those SBICs "need not obtain SBA's approval of the transaction[,] [h]owever, [they] must promptly notify SBA of the transaction and satisfy the public notice requirements."

Id. Section 107.885 provides that, except with the SBA's prior written approval, an SBIC cannot dispose of assets to an associate if they have outstanding leverage.

The SBIA provides that the SBA may enforce its provisions and regulations by, among other things, suspending or revoking the SBIC's license, 15 U.S.C. § 687a, removing or suspending management, id. § 687e, or imposing monetary fines for failure to adhere to reporting requirements, id. § 687g. In addition, the SBA may also seek judicial intervention to "take exclusive jurisdiction of the licensee or licensees and the assets thereof," id. § 687c(b), and to appoint the SBA as "trustee or receiver of the licensee," id. § 687c(c).

2. The Parties

Elk, a New York corporation, became licensed as an SBIC on July 24, 1980. (Compl. ¶¶ 10, 26.) Elk's Certificate of Incorporation states that "[t]he corporation is organized and chartered solely for the purpose of performing the functions and conducting the activities contemplated under the Small Business Act of 1958, as amended from time to time." (Id. ¶ 27.)

Defendants are former officers and directors of Elk. Defendants Feinsod, Feinstein, and Mullens served as officers of Elk. (Id. ¶¶ 11-13.) Feinsod also served as a director of Elk, and Feinstein participated in Board of Director meetings. (Id. ¶¶ 11, 128.) Defendants Granoff, Etra, Laird, Wolpert, Sommer, Indick, Singer, and Boockvar (collectively, "the Independent Director defendants") served as directors of Elk, but did not hold management roles. (Id. ¶¶ 14-21.)² Defendants, as Elk's officers and directors, were required to undergo a background check and submit a Statement of Personal History (Form 182) to the SBA, in which defendants acknowledged that they were providing the information "for the purpose of determining [their] eligibility for the Small Business Investment Company Program." (Id. ¶¶ 29-30.)

3. Elk and the SBA

In September 1993, Elk received a loan from the SBA. (Id. ¶ 37.) In connection with the loan, Elk and the SBA entered into several agreements, which the complaint refers to as the "SBA Security Agreement," the "SBA Agreement," the "Intercreditor Agreement," and the "Custodian Agreement." (Id. ¶¶ 37-40, 44.)

The Custodian Agreement appointed Israel Discount Bank ("IDB") as custodian of Elk's assets for the benefit of the SBA and the other private lenders. (Id. ¶ 44.) Pursuant to the Custodian Agreement, Elk was required to assign and deliver to IDB "Custodian Collateral," including Elk's "notes, security agreements, financing statements, assignments of financing statements, and other instruments and securities." (Id. ¶¶ 45-46.) Elk had the discretion to sell its "interest in any note or other evidence of indebtedness," as long as it delivered to IDB a "written certification" that the net proceeds from such sale would be used immediately to pay down Elk's "Senior Indebtedness." (Id. ¶ 49.) However, in the event that Elk intended to use the net sale proceeds for another purpose, Elk was required to provide the SBA and the other lenders advance notice of the proposed sale and an opportunity to object. (Id. ¶¶ 49-50.)

4. Elk and Ameritrans

In 1998, Elk was reorganized as a wholly-owned subsidiary of Ameritrans Capital Corporation ("Ameritrans"). (See id. ¶ 60.) Ameritrans was not licensed as an SBIC, and, therefore, had "greater flexibility in its investment and lending business activities than the investment policies of Elk." (Decl. of Justin Shur in Supp. of Defs. Omnibus Mot. ("Shur Decl.") Ex. A at 9, ECF No. 47-2.)³

Elk sought approval from the SBA and the SEC to reorganize as a wholly-owned subsidiary under Ameritrans. (Compl. ¶ 61; Shur Decl. Exs. B-D.) In order to secure SEC approval, Elk and Ameritrans filed an application for an order granting certain exemptions from SEC regulations that might otherwise apply. (Shur Decl. Exs. B, C.) In the application, Elk and Ameritrans detailed how the corporations would be organized. Specifically, the application disclosed that Elk and Ameritrans would operate as "one company" (Shur Decl. Ex. C at 14); that "Ameritrans [would] engage directly and/or through its principal subsidiary [Elk] primarily in the business of making loans to small businesses" (id. at 5); and that the companies would share a Board of Directors (id. at 43).

The application also sought exemptions to allow the following transactions: (1) "making of loans or advances by any of Elk or any Future Subsidiary to Ameritrans or to any other of Elk or any Future Subsidiary," (id. at 18); (2) "lending of money or other property by Elk ... to Ameritrans or another Subsidiary" (id. at 30); (3) "borrowing of money or other property by Ameritrans from Elk" (id. ); and (4) financial reporting by "Ameritrans, Elk, and Future ... Subsidiaries ... on a consolidated basis" (id. at 38-39).

The SBA approved Ameritrans' acquisition of Elk on September 21, 1999, after receiving confirmation that Elk's assets could not be used to collateralize any indebtedness to Ameritrans. (Compl. ¶¶ 61-67.) On December 7, 1999, the SEC granted the application for exemptions. (Shur Decl. Ex. D.)

Defendants, aside from Mullens and Feinstein, served as directors of Ameritrans (Feinstein participated in meetings). (Compl. ¶¶ 11, 13-21, 128.) Defendants, aside from Feinstein and Indick, were also shareholders of Ameritrans. (Id. ¶¶ 11-12, 14-18, 20-21.)

5. Financial Difficulties and Alleged Improper Transactions

Following the Great Recession, Elk and Ameritrans faced financial difficulties. (See, e.g., id. ¶¶ 84-96.) Board of Director meeting minutes in 2009 reflect that Ameritrans, in particular,...