VANESSA WILLIAMS and KORY TURNER, individually and on behalf of all persons similarly situated v. EQUITABLE ACCEPTANCE CORPORATION, SLF CENTER, LLC, INTEGRA STUDENT SOLUTIONS, LLC, JEFFREY D. HENN, and TERESA HENN
18 Civ. 7537 (NRB)
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
January 14, 2021
NAOMI REICE BUCHWALD UNITED STATES DISTRICT JUDGE
Plaintiffs have brought this action under the Racketeer Influenced and Corrupt Organizations Act (“RICO“) and related state claims against defendants. Plaintiffs allege that defendants operated a scheme (the “Dealers-EAC Scheme“) to fraudulently induce individuals with federal student loan debts to purchase certain services from dealers and to finance that purchase with a loan from defendant Equitable Acceptance Corporation (“EAC“). EAC‘s prior motion to dismiss plaintiffs’ RICO claim was denied by the Court in its Memorandum & Order of March 11, 2020.
BACKGROUND
The Court detailed the background of this case in the RICO Order. The Court assumes familiarity with this decision and states here only those facts and procedural history necessary to resolve the pending applications.
1. The Dealers-EAC Scheme
As described more fully in the RICO Order, plaintiffs allege that around 2015, EAC conspired with dozens of dealers (“Dealers“)
Because Dealers were prohibited from receiving payments directly from Borrowers under federal regulations, Dealers referred Borrowers to EAC to finance the purchase of Services. Id. ¶¶ 131-32. EAC would then send the Borrowers a document packet containing a “Purchase Agreement,” setting forth the terms of the Borrower‘s purchase of Services from the Dealer and another document entitled “Equitable Acceptable Revolving Credit Plan” (the “Credit Plan“). Id. ¶¶ 171-72. Through the Credit Plan, EAC extended a new loan to each Borrower in the form of a maxed-out “line of credit” for the full price of the Services. Id. ¶ 5. Once the Borrowers signed the Credit Agreement, they were then required to pay back this loan to EAC - along with 21% interest
According to the SAC, EAC then used the Credit Plans as collateral to obtain commercial loans (“EAC‘s Commercial Loans“) from ten to twenty-five commercial lenders (the “Lenders“) including Western Bank in Bloomington, Minnesota and Voyager Bank in Minnetonka, Minnesota. Id. ¶ 406. Plaintiffs allege that EAC used the Borrowers’ payments to satisfy these obligations, and on information and belief, allege that EAC repaid these obligations at the rate of approximately $500,000 per month through at least April 2020.3 Id. ¶¶ 409, 644-45.
2. Jeffrey Henn‘s Involvement in the Scheme
During the course of the alleged Dealers-EAC Scheme, Jeffrey Henn served as President and CEO of EAC. Plaintiffs allege that Jeffrey took an active role in the scheme including, inter alia, by: (1) drafting and approving the master agreement between Dealers and EAC (the “Master Dealer Agreement“) (SAC ¶¶ 350-52); (2) recruiting Dealers and personally reviewing applications of Dealers to determine which were qualified to work with EAC (SAC ¶¶ 346-49); (3) directing and controlling the payment structure between EAC, Dealers and Borrowers, including control over the
3. The Henns’ Trusts
On December 9, 2016 the Henns each established personal trusts. SAC ¶ 401. Jeffrey transferred the entirety of his “tangible personal property” into the Jeffrey D. Henn Revocable Trust (“Jeffrey‘s Trust“) of which both Henns were designated co-trustees. Id. at ¶ 402. Upon its creation, Jeffrey assigned his 50% interest in EAC - along with his interest in several other companies, and rights to sales and royalties in a line of knives - to Jeffrey‘s Trust. Id. at ¶ 403. In addition, five parcels of jointly-owned land were transferred by quitclaim deed to a second trust, the Teresa Henn Revocable Trust (“Teresa‘s Trust“).4 Again, both the Henns were designated co-trustees. Id. at ¶ 404.
By the time the Trusts were created, the SAC alleges that Jeffrey was on notice that Dealers were engaging in fraudulent activity and that law enforcement was beginning to investigate. In January of 2016, an associate of Jeffrey told him that the
After the Court denied EAC‘s motion to dismiss plaintiffs’ RICO claims, plaintiffs filed the SAC, adding the Henns as defendants and asserting RICO and fraud-based claims against Jeffrey personally. The SAC also asserted fraudulent transfer claims under New York and Minnesota law against the Henns, as co-trustees of the Trusts to which Jeffrey‘s assets were transferred and quitclaimed, and against EAC alleging that EAC had transferred and continues to transfer the profits of the Dealers-EAC Scheme to the Lenders. On July 10, 2020, plaintiffs filed a motion for a preliminary injunction (ECF No. 109) to prohibit the Henns from moving assets out of their Trusts and directing EAC to cease all transfers of funds collected as the profits of the Dealers-EAC Scheme. On July 21, 2020, EAC filed a motion to dismiss plaintiffs’ fraudulent conveyance claim against it. ECF No. 122. Finally, on August 21, 2020, the Henns filed a motion to dismiss each of the claims raised against them. ECF No. 143. The motions were fully briefed on October 2, 2020.
DISCUSSION
1. Defendants’ Motions to Dismiss
a. Legal Standard
To survive a motion to dismiss for failure to state a claim
b. EAC‘s Motion to Dismiss Plaintiffs’ Fraudulent Conveyance Claim (“Claim 14“)
In the SAC, plaintiffs added a claim against EAC for actual fraudulent conveyance under New York and Minnesota law. The SAC asserts that the payments made by EAC to the Lenders to satisfy their obligations on EAC‘s Commercial Loans and secured by the collateralization of the Credit Agreements are “voidable as [conveyances] made with actual intent to hinder, delay, or defraud the Borrowers.” SAC ¶ 648. In its motion to dismiss, EAC raises four arguments in support of its position that the claim of actual fraudulent conveyance must be dismissed: (1) plaintiffs fail to
Before addressing the merits of EAC‘s arguments, we resolve the choice-of-law issue raised by the parties. While plaintiffs bring Claim 14 under both New York and Minnesota law, EAC argues that Minnesota law must apply because EAC was located in Minnesota at all relevant times, and under New York‘s Debtor and Creditor Law (“NYDCL“), “[a] claim for relief . . . under this article is governed by the local law of the jurisdiction in which the debtor is located when the transfer is made or the obligation is incurred.”
The text of New York and Minnesota‘s actual fraudulent transfer statutes are identical: “A transfer made or obligation incurred by a debtor is voidable as to a creditor, whether the creditor‘s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation . . . with actual intent to hinder, delay, or defraud any creditor of the debtor.”
Plaintiffs first assert that the Court should presume that EAC‘s Commercial Loans were entered into with fraudulent intent under the “Ponzi scheme presumption.” They write:
In a Ponzi scheme, investors are promised false returns in order to defraud them into paying for a valueless investment. Here, the Dealers and EAC promised Borrowers access to valueless services to defraud them into paying the predatory and usurious costs and fees of the Credit Plans. As in a Ponzi scheme, where funds from the later defrauded investors are used to pay off debts to earlier investors, EAC used funds collected from the Borrowers to pay off the debts that it obtained from the Lenders. EAC‘s use of the Credit Plans as collateral essentially acted as a promise to do exactly this-to continue to obtain payments from an ever-growing pool of newly defrauded Borrowers in order to pay off the obligations incurred to start and facilitate the fraud, and in order to compensate for EAC‘s reduced revenue as Borrowers identified the fraud and refused to pay. As in a Ponzi scheme, where ongoing payments to earlier investors serve to shield the scammer from discovery and an end to its fraud, EAC‘s collection of funds from the Borrowers and transfers of those funds in payments to the Lenders serve to protect EAC by preventing the Lenders from seizing the fraudulent Credit Plans, enforcing any personal guarantees, and ending the Scheme.
In a Ponzi scheme, “money contributed by later investors is used to pay artificially high dividends to the original investors, creating an illusion of profitability, thus attracting new investors.” Ades-Berg Inv‘rs v. Breeden (In re The Bennett Funding Grp., Inc.), 439 F.3d 155, 157 n.2 (2d Cir. 2006); accord Bear, Stearns Sec. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 12 (S.D.N.Y. 2007) (“A key factor [in a Ponzi scheme] is that the Ponzi schemer requires - and secures - new investors to keep the sham arrangement afloat . . . . Another factor is that new monies are used to pay off earlier investors.“).
Plaintiffs’ allegations share none of these characteristics. The glaring difference between the Dealers-EAC Scheme and a Ponzi scheme is that EAC owes nothing to the students; rather, the students as Borrowers owe money to EAC. Nor is there any factual support that EAC‘s Commercial Loans were necessary to keep the scheme afloat.
Rather than EAC paying the proceeds of the fraud to earlier investors, it instead - according to plaintiffs’ allegations - used the proceeds to obtain and then pay back financing from Lenders. Payment to Lenders, however, in no way created “an illusion of profitability” which then would attract additional
EAC‘s collateralization of the Credit Agreement to obtain loans from the Lenders therefore did not further the Dealers-EAC Scheme. But that is the critical feature behind the “Ponzi scheme presumption“: Payments made to early investors allow the fraudster to continue the scheme by attracting new investors with the promises of inflated returns. The presumption is only warranted when “transfers made in the course of a Ponzi scheme could have been made for no purpose other than to hinder, delay or defraud creditors.” Bear Stearns Secs. Corp. v. Gredd (In re Manhattan Inv. Fund Ltd.), 397 B.R. 1, 8 (S.D.N.Y. 2007) (internal quotations omitted). Here, however, plaintiffs acknowledge an alternative purpose in their pleadings: to “access the profits of the scheme upfront.” SAC ¶ 405. Indeed, rather than as a ploy to defraud Borrowers, it is far more likely that EAC borrowed their loans from Lenders at much lower interest rates than they collected from the student Borrowers, thus providing an additional source of
Plaintiffs suggest that that EAC‘s profiting from its commercial borrowing somehow caused further injury to the Borrowers. In an effort to conjure up some new harm to the plaintiffs from EAC‘s borrowing, plaintiffs focus on the use of the Credit Agreements to collateralize the loans. Regardless of how such collateralization could have been a source of profit to EAC, it had no impact on plaintiffs. Their obligations remained the same.
Therefore, plaintiffs have failed to allege a Ponzi scheme, and thus there can be no presumption that the use of the Credit Agreements to collateralize the presumably profitable borrowing from the Lenders was done with the intent to defraud the Borrowers.
Because the “Ponzi scheme presumption” does not apply, plaintiffs must demonstrate that EAC‘s Commercial Loans were entered into with intent to “hinder, delay or defraud” the Borrowers. They cannot. Plaintiffs rely on the Court‘s upholding of their RICO claim, but this does not in itself establish that EAC had fraudulent intent in procuring commercial loans, which is required to sustain plaintiffs’ claim for fraudulent conveyance. Indeed, plaintiffs conflate the Dealers-EAC Scheme with the subsequent lending arrangement between EAC and Lenders. For the reasons previously discussed, EAC‘s loan borrowing did not further the Dealers-EAC Scheme.
The Second Circuit‘s decision in In re Sharp Intern. Corp. well illustrates the distinction. There, officers of a corporation raised funds from a bank by fraudulently falsifying sales records and then looted those funds from the company for personal enrichment. 403 F.3d 43, 46-47 (2d Cir. 2005). When the bank discovered the scheme, it demanded that the corporation secure new financing from investors to pay back its debt to the bank. After the officers’ fraud was exposed and the corporation filed for bankruptcy, the new investors sued to have the transfers to the
The Dealers-EAC Scheme alleged in the SAC is between EAC and the Dealers and involved a plan to induce Borrowers into taking out loans from EAC in order to purchase Services from the Dealers. The Borrowers were misled into believing these Services would reduce their student debt obligations. This resulted in Borrowers indebting themselves to EAC by entering into the Credit Agreements. As was the case in Sharp, the fraud alleged was antecedent to payments made to the Lenders, but those payments were not themselves part of the fraud against Borrowers.
Plaintiffs offer two additional arguments to support their contention that EAC‘s Commercial Loans were entered into with intent to defraud the Borrowers, neither of which is convincing. First, plaintiffs suggest that the loans “facilitated the
Second, plaintiffs argue that there must be fraudulent intent because, since “the obligations were secured by the Credit
Because plaintiffs have not alleged fraudulent intent, Claim 14 is dismissed. The Court need not reach EAC‘s additional grounds for dismissal.
c. The Henns’ Motion to Dismiss
i. The Trust Claims
In addition to the fraudulent conveyance claim raised against EAC, plaintiffs bring two claims of fraudulent conveyance (the “Trust Claims“) against the Henns. Plaintiffs assert that, with notice that law enforcement was opening investigations into Dealers’ activities vis-à-vis Borrowers, Jeffrey transferred his interests in several businesses (including his 50% interest in EAC) and real property owned jointly with Teresa into the Trusts, with Jeffrey and Teresa serving as co-trustees. SAC ¶¶ 628-34. The Henns move to dismiss the Trust Claims on three grounds: (1)
Plaintiffs do not contest that the Trusts are revocable. Under the laws of both New York and Minnesota,7 the property of a revocable trust is subject to the claims of the settlor‘s creditors.
In response, plaintiffs’ only argument is that because Teresa was designated as a co-trustee of the Trusts, she is therefore empowered to act unilaterally and independently to bind the Trusts, i.e., she can dispose of the assets of the Trusts at any time. Further, plaintiffs argue that because Teresa did not have this authority prior to the creation of the Trusts, Jeffrey effectively transferred his assets to Teresa. ECF No. 154 at 8. Plaintiffs offer no support in the case law for the theory that Teresa‘s authority under the Trusts instruments effectively constitutes a transfer of the corpus to her, and logic does not support such a
proposition. The settlor retains power over the trust assets and may revoke the trust at any time. See
ii. Personal Jurisdiction over the Jeffrey Henn
The Henns further argue that the RICO and fraud-based claims (claims 1, 2, and 8) as against Jeffrey must be dismissed for lack of personal jurisdiction. In determining whether it has personal jurisdiction over a defendant, the Court employs a two-step inquiry. First, the Court must determine whether there is a
Here,
We therefore turn to New York‘s long-arm statute to determine whether Jeffrey had minimum contacts with the state sufficient to exercise personal jurisdiction.
New York courts have also held that a corporation can act as an agent on behalf of an individual and that the corporation‘s contacts can be imputed to the individual in order to satisfy
The SAC is devoid of specific allegations relating to Jeffrey‘s contacts in New York. However, “[i]n reviewing a motion to dismiss pursuant to
Even disregarding those specific contacts, plaintiffs have established that EAC “engaged in purposeful activities in this State in relation to [the RICO and fraud-based claims] for the benefit of and with the knowledge and consent of [Jeffrey] and
EAC‘s contacts with New York are well established, and the Court‘s personal jurisdiction over EAC arising from its participation in the Scheme has never been in dispute. Cf. People of the State of New York vs. Debt Resolve, Inc., et al., Case No. 18-cv-9812, ECF No. 111 (Stipulated Final Judgment and Order as to Equitable Acceptance Corporation), ¶ 4 (“[EAC] admits the facts necessary to establish the Court‘s jurisdiction over it” in case brought by the New York Attorney General on the same underlying facts). Plaintiffs have satisfied a prima facie case that Jeffrey was a “primary actor” with regards to EAC‘s transactions in New York. The SAC alleges that Jeffrey was intimately involved in numerous aspects of the alleged scheme between EAC and Dealers, from recruiting Dealers and approving the Master Dealer Agreement
“Having established that the [defendant has] minimum contacts
iii. Venue
Lastly, the Henns argue that the claims against Jeffrey should be dismissed for improper venue. Under the general venue statute,
Venue would also be proper under the general venue statute. Venue may be proper although a forum is not the only possible forum, Fisher v. Hopkins, No. 02-7077, 2003 WL 102845, *3 (S.D.N.Y. Jan. 9, 2003), and even when a greater part of the events giving rise to a claim occurred in another forum. Id.; Astor Holdings, Inc. v. Roski, No. 01-1905, 2002 WL 72936, at *8 (S.D.N.Y. Jan. 17, 2002). “[C]ourts are not, in general, required to determine the ‘best venue,’ but merely a logical one with a substantial connection to the litigation.” Reliance Ins. Co. v. Polyvision Corp., 474 F.3d 54, 59 (2d Cir. 2007). Thus, “venue may properly lie in any judicial district in which significant events or omissions material to the plaintiff[s‘] claim have occurred.” Gulf Ins. Co. v. Glasbrenner, 417 F.3d 353, 354 (2d Cir. 2005).
Plaintiffs have alleged that significant events or omissions material to plaintiffs’ claims took place in this district. The account of one of the named plaintiffs, Vanessa Williams, as detailed in the SAC, demonstrates that significant events material to plaintiffs’ claims took place in the district. Within the district, Williams received communications from EAC and a Dealer (SAC ¶¶ 412-29), entered into a Credit Plan with EAC (SAC ¶¶ 430-34), made payments to EAC, and was injured from increased student loan interest rates and a negative impact on her credit score. SAC ¶¶ 437-40, 451, 454-55. See Kirk v. New York State Dep‘t of Educ., No. 08-CV-6016 (CJS), 2008 WL 819632, at *4 (W.D.N.Y. Mar. 25, 2008) (noting the “fact that the Plaintiff suffers harm in a particular judicial district is [sometimes] sufficient to satisfy
Moreover, Jeffrey maintained a continuous business relationship with White Plains-based Bellmare, and while the Dealer for which Bellmare was CEO was not responsible for the harms alleged to named plaintiffs, plaintiffs have averred that Bellmare‘s Dealers were involved in the overarching Dealers-EAC Scheme along with Jeffrey and EAC. ECF No. 155, Ex. 1.12
Because personal jurisdiction and venue are proper, the Henns’ motion to dismiss Claims 1, 2 and 8 as to Jeffrey is denied.
2. Plaintiffs’ Motion for a Preliminary Injunction
Having addressed EAC‘s and the Henns’ motions to dismiss, the Court turns last to plaintiffs’ motion for a preliminary injunction. ECF No. 109. Plaintiffs move for preliminary injunctions prohibiting the Henns from moving assets out of their Trusts and directing EAC to cease all distributions of funds collected as the profits of the Dealers-EAC Scheme.
The basis for plaintiffs’ motion is the assertion that they are likely to succeed on the merits of their fraudulent transfer claims against EAC. Given the Court‘s decision to grant EAC‘s motion to dismiss Claim 14, and its decision to grant the Henns’ motion to dismiss the Trust Claims, the motion must be denied. “[B]ecause the underlying claim[s are] being dismissed, Plaintiff[s] cannot establish the necessary prerequisites for grant of a motion for preliminary injunction, specifically that the party seeking the injunction is likely to succeed on the merits or that there are sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in favor of the moving party.” Marshall v. Nat‘l Ass‘n of Letter Carriers BR36, No. 02 CIV. 1754 LTS AJP, 2004 WL 2202574, at *5 (S.D.N.Y. Sept. 30, 2004).13
CONCLUSION
For the foregoing reasons, EAC‘s motion to dismiss Claim 14 of the SAC is GRANTED, the Henns’ motion to dismiss is GRANTED as to the Trust Claims (Claims 12 and 13) against Jeffrey and Teresa Henn and DENIED as to the RICO and fraud claims (Claims 1, 2 and 8) against Jeffrey Henn, and plaintiffs’ motion for a preliminary injunction is DENIED. The Clerk of Court is respectfully directed to terminate the motions pending at ECF No. 109, ECF No. 122, and ECF No. 143.
SO ORDERED.
Dated: New York, New York
January 14, 2021
NAOMI REICE BUCHWALD
UNITED STATES DISTRICT JUDGE