Knopf v. Phillips ( 2020 )

18-661
Knopf v. Phillips
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A SUMMARY
ORDER FILED ON OR AFTER JANUARY 1, 2007, IS PERMITTED AND IS GOVERNED BY FEDERAL RULE OF
APPELLATE PROCEDURE 32.1 AND THIS COURT=S LOCAL RULE 32.1.1. WHEN CITING A SUMMARY ORDER
IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE EITHER THE FEDERAL APPENDIX OR AN
ELECTRONIC DATABASE (WITH THE NOTATION ASUMMARY ORDER@). A PARTY CITING TO A SUMMARY
ORDER MUST SERVE A COPY OF IT ON ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second Circuit,
held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of
New York, on the 25th day of February, two thousand twenty.
PRESENT:
RALPH K. WINTER,
SUSAN L. CARNEY,
JOSEPH F. BIANCO,
Circuit Judges.
_____________________________________
NORMA KNOPF, MICHAEL KNOPF,
Plaintiffs-Appellants,
v. No. 18-661
MICHAEL PHILLIPS,
Defendant-Cross-Claimant-Appellee.
PURSUIT HOLDINGS (NY), LLC, FKA
PURSUIT HOLDINGS, LLC, MICHAEL
HAYDEN SANFORD,
Defendants-Cross-Defendants-Appellees.
_____________________________________
FOR PLAINTIFFS-APPELLANTS: ERIC W. BERRY, Berry Law
PLLC, New York, NY.
FOR DEFENDANT-CROSS-CLAIMANT-APPELLEE
MICHAEL PHILLIPS: LORRAINE NADEL, Nadel &
Ciarlo P.C., New York, NY.
FOR DEFENDANT-CROSS-DEFENDANT-APPELLEE
PURSUIT HOLDINGS (NY), LLC: No appearance.
FOR DEFENDANT-CROSS-DEFENDANT-APPELLEE
MICHAEL HAYDEN SANFORD: MICHAEL HAYDEN SANFORD,
pro se, Montauk, NY.
Appeal from a judgment of the United States District Court for the Southern District of
New York (Cote, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED, ADJUDGED, AND
DECREED that the judgment of the District Court is AFFIRMED IN PART and VACATED
IN PART and the cause is REMANDED for further proceedings.
Appellants Michael and Norma Knopf (the “Knopfs”) appeal from a judgment of the
United States District Court for the Southern District of New York (Cote, J.) dismissing their state
law contract and tort claims. In summary, the Knopfs alleged as follows: Defendant Michael
Hayden Sanford established a hedge fund in 2000. The Knopfs were limited partners of the fund,
and invested $11.6 million in it. In 2006, the Knopfs withdrew several million of the $11.6 million
dollars that they had invested in the fund and loaned it to Sanford to enable him to purchase several
pieces of real estate (the “Properties”), including a penthouse condominium in New York City (the
“PHC”), through his company, Defendant Pursuit Holdings, LLC (“Pursuit”). In connection with
the loans, Sanford and Pursuit agreed to execute a mortgage lien on the Properties in favor of the
Knopfs and promised not to sell or otherwise encumber the Properties without the Knopfs’
permission.
Sanford and Pursuit did not timely repay the loans or execute the mortgage, and in 2009,
the Knopfs sued both in state court for breach of contract. Sanford and Pursuit removed that action
to the federal District Court on the basis of diversity jurisdiction.
2
While the state court action was pending, Pursuit listed the PHC for sale. Michael Phillips,
a real estate developer who owned a separate unit in the same building as the PHC, expressed an
interest in purchasing it, and, in 2013, Phillips executed a purchase-and-sale contract on the PHC
with Pursuit. In 2014, Phillips made a $100,000 loan to Sanford and took a mortgage on the PHC.
In February 2016, Pursuit and Phillips closed the sale for the PHC for a $3 million purchase price.
In August 2016, the Knopfs sued Phillips and Pursuit for tortious interference with contract
and fraudulent conveyance. 1 The Knopfs added Sanford as a defendant when they filed their
Second Amended Complaint in September. They asserted that Sanford had breached a fiduciary
duty to them, that they were entitled to a judgment holding him liable as an alter ego of Pursuit,
and that they were entitled to a constructive trust on Sanford’s membership interest in Pursuit. In
December 2016, the District Court entered a default judgment against Pursuit on the Knopfs’
breach-of-contract claim because no attorney had entered an appearance on its behalf and, as a
corporation, it could not proceed pro se. Also in December, the District Court granted Phillips’s
motion to dismiss with respect to the Knopfs’ tortious interference claim against him. One year
later, in 2017, the court granted summary judgment to Phillips on the sole claim remaining against
him—fraudulent conveyance. In its 2017 order, however, the District Court also partially granted
the Knopfs’ summary judgment motion with respect to Sanford, holding that Sanford was an alter
ego of Pursuit. It ordered their remaining claims against Sanford—actual and constructive
fraudulent conveyance, breach of fiduciary duty, and imposition of a constructive trust—to go to
trial. In January 2018, the parties submitted pre-trial materials but, after the pre-trial conference,
the District Court dismissed the Knopfs’ remaining claims against Sanford, vacated the default
judgment against Pursuit, and dismissed the claims against Pursuit. We assume the parties’
1
The Knopfs sued in federal court, on the basis of diversity jurisdiction.
3
familiarity with the underlying facts, the procedural history of the case, and the issues on appeal,
to which we refer only as necessary to explain our decision to affirm in part and vacate in part.
I. Motion to Dismiss
We review de novo the dismissal of a complaint for failure to state a claim. Chambers v.
Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002). A complaint must plead “enough facts to
state a claim to relief that is plausible on its face,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570
(2007), and “allow[] the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged,” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). On motions to dismiss, district
courts must construe complaints liberally, accepting as true all factual allegations “drawing all
reasonable inferences in the plaintiff’s favor.” Chambers, 282 F.3d at 152.
Nevertheless,“[t]hreadbare recitals of the elements of a cause of action, supported by mere
conclusory statements, do not suffice” to state a claim. Iqbal, 556 U.S. at 678.
Under New York law, “[t]ortious interference with contract requires the existence of a valid
contract between the plaintiff and a third party, defendant’s knowledge of that contract,
defendant’s intentional procurement of the third-party’s breach of the contract without
justification, actual breach of the contract, and damages resulting therefrom.” Lama Holding Co.
v. Smith Barney, Inc., 88 N.Y.2d 413, 424 (1996). In dismissing the Knopfs’ tortious interference
claim against Phillips under Rule 12(b)(6), the District Court concluded that they had failed to
allege “facts showing that Pursuit would not have breached the Loan Agreements but for the
actions of Phillips.” Knopf v. Phillips, No. 16-cv-6601, 2016 WL 719102, at *4 (S.D.N.Y. Dec.
12, 2016). On appeal, the Knopfs contend that the District Court misconstrued their complaint
when it inferred that “Pursuit [had] publicly listed PHC for sale on at least three real estate listing
websites” before Phillips offered to purchase the unit, id., because Pursuit did not list the PHC for
4
sale until June 2014, after Phillips had contracted with Pursuit to buy the PHC.2 Thus, the Knopfs
argue, those listings did not foreclose Phillips’s actions as a proximate cause of their loss.3
Although we agree with the Knopfs in that respect, we nevertheless conclude that they
failed to allege sufficient facts in support of the “procurement” element of their tortious
interference claim, and therefore that dismissal was justified. The complaint states only that
Phillips “procured” the complained-of breach by loaning money to Pursuit and contracting to buy
the PHC. App’x 98-102. It provides no details as to those transactions, including about who
initiated the sale—allegations that are crucial to show that it was Phillips who “intentional[ly] and
improper[ly]” (and therefore tortiously) caused Pursuit and Sanford to breach their contract with
the Knopfs. See Carlyle, LLC v. Quik Park 1633 Garage LLC, 160 A.D.3d 476, 477 (N.Y. App.
Div. 1st Dep’t 2018) (internal quotation marks omitted). Such conclusory assertions are
insufficient. We therefore affirm the District Court’s dismissal of this claim.
II. Summary Judgment
We turn next to the District Court’s grant of summary judgment to Phillips with respect to
the Knopfs’ fraudulent conveyance claim, a decision we review de novo, “resolv[ing] all
ambiguities and draw[ing] all inferences against the moving party.” Garcia v. Hartford Police
Dep’t, 706 F.3d 120, 127 (2d Cir. 2013) (per curiam). As we have explained elsewhere,
2
The earliest of the listings described in the Knopfs’ Second Amended Complaint was posted on
June 4, 2014. Critically, although the Second Amended Complaint alleges that Phillips contracted
to buy the PHC in December 2014, Phillips admitted in his motion to dismiss that the contract was
executed in December 2013.
3
To the extent the District Court arrived at this conclusion based on the print-out listings submitted
by Phillips in support of his motion to dismiss (as opposed to the listings described in the complaint
itself), such reliance would constitute a factual determination that is improper at the motion to
dismiss stage. See Chambers, 282 F.3d at 152 (court must construe all factual allegations in the
complaint as true).
5
“[s]ummary judgment is proper only when, construing the evidence in the light most favorable to
the non-movant, there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Doninger v. Niehoff, 642 F.3d 334, 344 (2d Cir. 2011) (internal
quotation marks omitted).
New York law contemplates that a transaction may be either actually or constructively
fraudulent. A constructively fraudulent conveyance is one “made without ‘fair consideration,’”
where “(i) the transferor is insolvent or will be rendered insolvent by the transfer in question; (ii)
the transferor is engaged in or is about to engage in a business transaction for which its remaining
property constitutes unreasonably small capital; or (iii) the transferor believes that it will incur
debt beyond its ability to pay.” Sharp Int’l Corp. v. State St. Bank & Tr. Co. (In re Sharp Int’l
Corp.), 403 F.3d 43, 53 (2d Cir. 2005). Fair consideration is given:
a. When in exchange for such property, or obligation, as a fair equivalent therefor,
and in good faith, property is conveyed or an antecedent debt is satisfied, or
b. When such property, or obligation is received in good faith to secure a present
advance or antecedent debt in [an] amount not disproportionately small as
compared with the value of the property, or obligation obtained.
N.Y. Debt & Cred. Law § 272 (emphases added). An actually fraudulent conveyance, on the other
hand, is one made with actual intent to defraud, “regardless of the adequacy of consideration
given.” In re Sharp Int’l Corp., 403 F.3d at 56 (internal quotation marks omitted). Bad faith of the
transferee is therefore an element of either type of fraudulent conveyance.
The District Court premised its award of summary judgment to Phillips on its conclusion
that the Knopfs had failed to adduce evidence showing that Phillips acted in bad faith. In so
concluding, however, the District Court erred. The general rule in New York is that a defendant
need have only actual or constructive knowledge of the fraud in order to lack good faith. See Sardis
v. Frankel, 113 A.D.3d 135, 143 (1st Dep’t 2014). The linchpin of the District Court’s decision,
6
however, was the absence of any allegations that Phillips had actually participated in any
“dishonesty.” Knopf v. Phillips, No. 16-cv-6601, 2017 WL 6561163, at *8 (S.D.N.Y. Dec. 22,
2017) (explaining that knowledge of any fraudulent scheme was not dispositive). The District
Court’s stated rationale makes clear that it applied an incorrect, higher standard, one that derives
from decisions in which the allegedly fraudulent conveyance was in satisfaction of antecedent
debt. See, e.g., In re Sharp Int’l Corp., 403 F.3d at 54-55 (explaining that, in antecedent debt
context, something more than knowledge of alleged fraud is required to demonstrate lack of good
faith).
This case, however, did not involve a transfer to satisfy an antecedent debt. At no time
before the sale contract was signed in December 2013 was Phillips a creditor with respect to
Sanford or Pursuit. The loans that Phillips made to Sanford in 2014 and 2015, secured by
mortgages on the penthouse, do not affect the analysis because they were initiated only after the
sale contract was executed in December 2013. Moreover, evidence adduced by the Knopfs
suggests that Phillips was aware of the Knopfs’ claim to the PHC when he signed the sale contract
and later extended the loans. Cf. Long Oil Heat, Inc. v. Spencer, 375 F. Supp. 3d 175, 198
(N.D.N.Y. 2019) (“‘A creditor of an insolvent debtor must stop at securing his or her debt, and if
the creditor has knowledge of the debtor’s fraudulent purpose in making the preference, such
preference will be avoided in favor of other creditors.’” (quoting 30 N.Y. Jur. 2d Creditors’ Rights
§ 389 (2d ed. 2019))). This case is thus distinguishable from cases in which courts have required
more than knowledge to show lack of good faith.4 See, e.g., In re Sharp Int’l Corp., 403 F.3d at
46-47 (requiring more than knowledge where debt was created prior to alleged fraud).
4
Further, no party contends that the PHC was sold for the sole purpose of satisfying any debt
resulting from Phillips’s loans (totaling approximately $500,000) in exchange for a mortgage on
that unit. Instead, the purpose of the sale was to transfer to Phillips ownership of the PHC, a unit
in a building in which he already owned an apartment, in exchange for money.
7
Applying the correct standard now, we conclude that the Knopfs submitted evidence
sufficient, at the very least, to raise genuine issues of material fact as to whether Phillips acted with
actual or constructive knowledge of a fraudulent scheme to deprive the Knopfs of their rights to
the PHC or to the proceeds of its sale. See Sardis, 113 A.D.3d at 143; see also HBE Leasing Corp.
v. Frank, 48 F.3d 623, 636 (2d Cir. 1995) (“[W]here, as here, a transferee has given equivalent
value in exchange for the debtor’s property, the statutory requirement of good faith is satisfied if
the transferee acted without either actual or constructive knowledge of any fraudulent scheme.”
(internal quotation marks omitted)). The Knopfs submitted evidence supporting their allegations
that Phillips: (1) was familiar with the details of the state court litigation (including that the Knopfs
had obtained summary judgment on their breach of contract claim); (2) knew of the various court
orders that had restricted the sale of the PHC; and (3) actively prevented his title company from
learning all of the details of the state court litigation. See Sardis, 113 A.D.3d at 142 (“[W]here the
transferee is aware of an impending enforceable judgment against the transferor, the conveyance
does not meet the statutory good faith requirement and generally will be set aside as constructively
fraudulent.”). The District Court thus erred in granting summary judgment to Phillips on this claim.
III. Pre-Trial Dismissal
In dismissing the Knopfs’ remaining claims against Sanford and Pursuit, the District Court
relied, at least in part, on its determination in the summary judgment motion. Because we identify
error in the District Court’s summary judgment decision, we also vacate its pre-trial dismissal.5
* * *
We have considered all of the parties’ remaining arguments and conclude that they are
without merit. Accordingly, we AFFIRM the District Court’s dismissal of the tortious interference
5
We further note that the District Court’s dismissal of the remaining claims was based on its
apparent misunderstanding of the Knopfs’ complaint. Contrary to the court’s statement that the
8
claim against Phillips, VACATE the District Court’s summary judgment and pre-trial dismissal
orders, and REMAND for further proceedings.
FOR THE COURT:
Catherine O=Hagan Wolfe, Clerk of Court
breach of fiduciary duty claim had never concerned the hedge fund activities, the Second Amended
Complaint clearly and specifically alleged that the sale of the PHC, as well as several other actions
by Sanford, constituted breaches of the fiduciary duty that he owed to the Knopfs because of their
limited partner status in the hedge fund.
9