Mitchell v. Lyons Professional Services, Inc.
109 F. Supp. 3d 555
E.D.N.Y2015Background
- Plaintiffs are judgment creditors (former employees) of Lyons Professional Services, Inc. (LPS) holding a $266,590 judgment for sexual-harassment/assault claims.
- After judgment, LPS principal Christopher Lyons signed a “consulting agreement” with competitor Garrison Protective Services; Lyons was paid $300,000 and clients moved to Garrison; LPS received no value.
- The agreement described the transferred item as Lyons’ customers and said Lyons would resign from LPS but continue servicing clients; in practice Garrison serviced most LPS clients immediately using largely the same guards.
- The district court originally found the deal a fraudulent conveyance under New York Debtor & Creditor Law § 273‑a and entered judgment against Garrison and Lyons; the Second Circuit vacated and remanded to consider whether the transferred “book of business” was assignable/transferable property under CPLR § 5201.
- On remand, the court found no written client contracts introduced, accepted evidence that customers were terminable at will, but concluded the transfer still moved valuable business opportunity from LPS to Garrison and that Lyons acted in his corporate capacity to effect the conveyance.
- Court granted plaintiffs’ motion again, holding that New York fraudulent-transfer law (DCL Article 10) reaches this transfer and entered joint-and-several judgment against Lyons and Garrison for $266,590.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether LPS’s customer list/business opportunity is "property" subject to turnover under CPLR § 5201 | The transferred customer accounts/book of business had value belonging to LPS and are property subject to turnover | Garrison: no written contracts; customers terminable at will; value belonged to Lyons personally, not LPS | Court: under CPLR § 5201 assignability matters for turnover proceedings, but factual record (instant transfer, immediate customer continuation) supports finding of a transferable business opportunity for purposes of relief; turnover granted via federal procedure. |
| Whether the transfer is avoidable under New York Debtor & Creditor Law (DCL Article 10) even if clients had at‑will relationships | Lyons transferred LPS’s valuable business opportunity to thwart creditors; DCL focuses on debtor conduct and can reach transfers of valuable interests even if not formally assignable | Defendants argue DCL shouldn't capture intangible, non‑assignable goodwill where clients had no contractual commitments | Court: DCL is broader, targets debtor conduct; movement of an interest with economic value that hinders creditors is avoidable even if not strictly assignable. |
| Whether Lyons acted for LPS or personally (ownership of the asset) | Plaintiffs: Lyons acted in corporate capacity and could not strip LPS of its asset to benefit himself | Lyons/Garrison: contract language and affidavits characterize contacts as Lyons’ clientele and deny LPS’s interest | Court: factual finding that Lyons, as LPS owner/manager, used his corporate position to move LPS’s business; substance over form; Lyons could not appropriate corporate asset. |
| Appropriate remedy and defendant liability | Plaintiffs seek judgment against Lyons and Garrison to satisfy the judgment | Garrison argues no fraudulent conveyance if asset was personal to Lyons; alternative structures (e.g., bankruptcy sale) were available | Court: entered joint-and-several monetary judgment against Lyons and Garrison for plaintiffs’ judgment amount; transferee liable. |
Key Cases Cited
- Verizon New England, Inc. v. Transcom Enhanced Servs., Inc., 21 N.Y.3d 66 (N.Y. 2013) (discusses when intangible interests qualify as property under CPLR § 5201)
- Brown v. Henderson, 257 F.3d 246 (2d Cir. 2001) (party cannot create factual issues by contradicting prior deposition testimony)
- Glosband v. Watts Detective Agency, Inc., 21 B.R. 963 (D. Mass. 1981) (customer lists/business opportunity can be property and subject to fraudulent conveyance liability)
- Nader v. Citron, 372 Mass. 96 (Mass. 1977) (transfer of a company’s client list to a new employer may state a UFCA claim)
- HBE Leasing Corp. v. Frank, 48 F.3d 623 (2d Cir. 1995) (courts look to substance over form in evaluating transactions for fraud or evasion of liabilities)
- In re Tronox, 503 B.R. 239 (Bankr. S.D.N.Y. 2013) (fraudulent-transfer analysis disregards form when substance shows intent to defraud creditors)