U.S. Small Bus. Admin. Funding Corp. v. Feinsod
347 F. Supp. 3d 147
E.D.N.Y2018Background
- Elk Associates Funding Corp. (an SBIC) became a wholly-owned subsidiary of Ameritrans; Elk received SBA leverage and executed custodian/intercreditor arrangements requiring certain notice and restrictions on using SBA-backed assets.
- From 2009–2013 Elk transferred substantial funds (over $14 million alleged) to Ameritrans through expense payments, cash transfers, and a $4.5M intercompany loan; Elk’s cash was largely depleted by 2013.
- Plaintiff (SBA as court-appointed receiver for Elk) alleges these transfers occurred after Elk became capital-impaired/insolvent, bypassed custodian requirements, and were made despite knowledge Ameritrans could not repay.
- Elk and the SBA previously settled a 2012 lawsuit; Elk surrendered its SBIC license but later defaulted on the settlement and the SBA became receiver in 2013 and brought this suit on Elk’s behalf.
- Causes of action: breach of fiduciary duty, ultra vires acts, waste of assets, conversion, negligence/gross negligence, aiding and abetting breach of fiduciary duty, and civil conspiracy. Defendants moved to dismiss under Rule 12(b)(6).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Breach of fiduciary duty: did defendants owe duties to Elk and pleadably breach them after insolvency? | Defendants owed duties to Elk (as receiver) once Elk was insolvent and breached them by diverting Elk assets to Ameritrans for no consideration. | Defendants argue duties belonged to Ameritrans/parent prior to insolvency, business judgment rule shields actions, and some defendants lacked involvement. | Court: Denied dismissal. Once Elk is alleged insolvent (Dec. 31, 2010), duties shift to creditors/Elk; complaint plausibly rebuts business judgment rule and alleges participation by directors. |
| Ultra vires acts under NYBCL §203 based on SBIA/regulation violations | SBIA/regulation breaches (13 C.F.R. §§107.730, 107.885) made transactions ultra vires and actionable under §203(a)(2). | Defendants: no private right of action under SBIA; exemptions and notice provisions (SEC exemption, Form 468s) may excuse conduct; business judgment rule should apply. | Court: Denied dismissal. No private SBIA cause needed; complaint plausibly alleges knowing regulatory violations and §203 claim survives at pleading stage. |
| Aiding and abetting breach of fiduciary duty (duplication) | In the alternative, defendants aided others’ breaches even if a particular defendant did not personally breach. | Defendants: duplicative when same defendants are alleged primary breachers. | Court: Granted dismissal as duplicative of primary breach claims. |
| Civil conspiracy (as pleaded) | Conspiracy connects defendants to underlying torts (agreement, overt act). | Defendants: duplicative of other tort claims and fails to add independent factual allegations. | Court: Granted dismissal as duplicative (as to Feinsod, Feinstein, Mullens); conspiracy claim dismissed. |
| Conversion and Waste of Assets | Elk owned funds; defendants intentionally diverted/used them to pay Ameritrans, constituting conversion and corporate waste. | Defendants: transfers authorized/accounted for as intercompany receivables or for corporate purposes. | Court: Denied dismissal. Complaint sufficiently alleges possession/unauthorized dominion (conversion) and transactions so adverse to Elk’s interest as to constitute waste. |
Key Cases Cited
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (establishing the plausibility pleading standard)
- Ashcroft v. Iqbal, 556 U.S. 662 (two-step analysis for assessing legal conclusions and plausible factual allegations)
- Norlin Corp. v. Rooney, Pace Inc., 744 F.2d 255 (duty of loyalty and self-dealing principle)
- Auerbach v. Bennett, 47 N.Y.2d 619 (New York formulation of the business judgment rule)
- Credit Agricole Indosuez v. Rossiyskiy Kredit Bank, 94 N.Y.2d 541 (doctrine that directors of insolvent corporation owe duties to creditors / trust-fund doctrine)