SANDS BROTHERS VENTURE CAPITAL II LLC III LLC IV LLC GP v. HUFF LLC O2HR LLC LLC LLC LLC LLC WA LLC LLC (2020)

The following e-filed documents, listed by NYSCEF document number (Motion 012) 358, 359, 360, 361, 362, 365, 367, 368, 369, 370, 371, 372, 373, 374, 375, 376, 377, 378, 379, 380, 381, 391 were read on this motion to/for DISMISSAL

Upon the foregoing documents, Stephen B. Pence's motion (i) to dismiss based on lack of personal jurisdiction or, in the alternative, (ii) for summary judgment is denied in its entirety.

The Relevant Facts and Circumstances

This lawsuit arises from a $58 million fraud masterminded by Wilbur Anthony Huff in which he allegedly directed other co-conspirators to divert money from O2HR, LLC (O2HR), a company that provided outsourced management of payroll, tax, and insurance obligations for client companies (NYSCEF Doc. No. 226, ¶¶ 1-4, 35). Mr. Huff was indicted by the United States Attorney for the Southern District of New York, pled guilty in December 2014, and sentenced to 12 years in prison (id. ¶ 2).

The gravamen of the Amended Complaint is that O2HR was rendered insolvent as a result of Mr. Huff and the defendants' fraud and, as a result, O2HR has now defaulted on certain promissory notes (id., ¶¶ 37-41). To wit, the Complaint alleges that in 2008 and 2009, O2HR issued five promissory notes (collectively, the Notes) in favor of Sands Brothers Venture Capital II, LLC, Sands Brothers Venture Capital III, LLC, Sands Brothers Venture Capital IV, LLC, and Genesis Merchant Partners LP (collectively, the Plaintiffs) (id., ¶¶ 26-30). And, the value in O2HR was allegedly fraudulently transferred to entities controlled by Mr. Huff, including River Falls Investments, LLC, River Falls Financial Services, LLC, River Falls Holdings, LLC (River Falls Investments, LLC, River Falls Financial Services, LLC, and River Falls Holdings, LLC, collectively, the River Falls Entities), SDH Realty LLC, among others (the River Falls Entities and SDH Realty LLC, collectively, the Huff-Controlled Entities) (id., ¶ 4).

The Plaintiffs further allege that approximately $10 million was moved out of O2HR and channeled into 15,657,410 shares of common stock of General Employment Enterprises, Inc. (GEE), a publicly traded company (id., ¶ 49). And approximately $44 million was routed through defendants River Falls Investments and River Falls Financial Services, among other entities (id., ¶ 50).

A. Mr. Pence's Alleged Involvement

Mr. Pence is a citizen of the Commonwealth of Kentucky, its former Lieutenant Governor and U.S. Attorney, who was indicted by the Securities and Exchange Commission for aiding and abetting the cover up of O2HR derived assets that were diverted through GEE (id., ¶ 14). The Plaintiffs allege that while the Notes and underlying loan agreements were procured, Mr. Pence held meetings with the Plaintiffs' representatives and "touted the safety and benefits" of the Notes (id., ¶ 32).

When O2HR was rendered insolvent by Mr. Huff's fraud, Mr. Huff allegedly transferred approximately $8 million to River Falls Financial Services, which $8 million was then transferred to Accredited Investor Services, Inc. (AIR) (id., ¶¶ 53-54). In turn, AIR purported to loan $3.14 million to Mr. Pence, which was reflected by two separate promissory notes made by Mr. Pence personally, which notes were unsecured and on which no interest was paid (id. ¶¶ 55-57). Mr. Pence then used the loan from AIR to buy 9,737,415 shares of GEE which were placed in PSQ, LLC (PSQ), of which Mr. Pence owned a 100% interest (id., ¶ 59). Mr. Pence subsequently became Chairman of the Board of GEE on July 1, 2009 (id., ¶ 62).

On or around November 17, 2010, Mr. Pence allegedly transferred 100% of his interest in PSQ, LLC to defendant Gregory Skaggs in exchange for PSQ's agreement to take over debts Mr. Pence personally owed to AIR (id., ¶ 64). This agreement was executed by River Falls Financial Services as a "member" of AIR (id., ¶ 65).

The Plaintiffs further allege that Mr. Pence was involved in concealing the transfer of O2HR derived assets into a $2,300,000 certificate of deposit at Park Avenue Bank to be credited to GEE (id., ¶ 113). Pence became Chairman of the Board of GEE on July 1, 2009 (id., ¶ 62). After he learned that the $2,300,000 was transferred to Park Avenue Insurance, and not a purported certificate of deposit, Mr. Pence allegedly assisted in concealing the true nature of the $2,300,000 transfers and induced GEE's auditor to issue an unqualified audit letter, which allowed Mr. Pence to sign GEE's Form 10-K while knowing the statements therein were false and misleading (id., ¶ 114-120).

B. Relevant Procedural History

The Plaintiffs commenced this action on November 30, 2012. In a decision and order (NYSCEF Doc. No. 175, the First Dismissal Order), dated June 3, 2015, the court (Ramos, J.) dismissed the action against certain defendants for lack of personal jurisdiction, which defendants were largely entities that were allegedly recipients of funds fraudulently transferred out of O2HCR and based on the court's determination that because the defendants did not do business in New York, there was no factual basis to ground personal jurisdiction under CPLR § 302 (a)(2) over those defendants as co-conspirators to Mr. Huff's purported tortious acts in New York (id.).

On April 24, 2017, the Plaintiffs filed their Second Amended Complaint (SAC) alleging eight causes of action against Mr. Pence for: (i) fraud (first cause of action), (ii) aiding and abetting fraud (second cause of action), (iii) aiding and abetting fraudulent conveyance (sixth cause of action), (iv) conspiracy to fraudulently convey (seventh cause of action), (v) aiding and abetting breach of fiduciary duty (ninth cause of action), (vi) aiding and abetting conversion (fourteenth cause of action), (vii) equitable restitution (sixteenth cause of action), and (viii) unjust enrichment (seventeenth cause of action). Note of issue was filed on October 1, 2019, and Mr. Pence filed the instant motion based, among other things, on lack of personal jurisdiction. Although Mr. Pence raised personal jurisdiction as a defense in his Second Amended Answer, he never moved with respect to this defense.

Discussion

A. Mr. Pence's Motion to Dismiss for Lack of Personal Jurisdiction

A court in New York may exercise personal jurisdiction over a non-domiciliary defendant where (i) the court has long-arm jurisdiction over the defendant under CPLR § 302, and (ii) the exercise of such jurisdiction comports with due process (Williams v. Beemiller, Inc., 33 NY3d 523, 528, 106 N.Y.S.3d 237, 130 N.E.3d 833 [2019]).

Under CPLR § 302 (a)(1), a court may exercise personal jurisdiction over a party where its activities are purposeful and there is a substantial relationship between the transaction and the claim asserted, even if only one transaction takes place in New York (Fischbarg v. Doucet, 9 NY3d 375, 380 [2007]; Kreutter v. McFadden Oil Corp., 71 NY2d 460, 467 [1988]). In other words, the defendant must avail "itself of the privilege of conducting activities within the forum State, thus invoking the benefits and protections of its laws" (Fischbarg, 9 NY3d at 380).

Mr. Pence argues that the action should be dismissed against him for lack of personal jurisdiction because the Plaintiffs cannot base jurisdiction solely on allegations that (i) Mr. Pence accompanied Mr. Huff to meetings with Mr. Sands, a principal and owner of the Plaintiffs, and (b) that Mr. Pence stated at one meeting that GEE would be run competently, and generally vouched for Mr. Huff's business acumen.

Contrary to Mr. Pence's characterization of the facts, the SAC alleges that Mr. Huff and Mr. Pence travelled to Manhattan and held substantive meetings with the Plaintiffs' representatives where they touted the safety and benefits of the Notes (NYSCEF Doc. No. 226, ¶¶ 32-33). At his deposition, Mr. Pence admitted to accompanying Mr. Huff on trips to New York where Mr. Huff was raising money and at other times, giving money to people (NYSCEF Doc. No. 370 at 44:22-45:19). Mr. Pence stated that his role was to accompany Mr. Huff and "be there if he needed something" (id. at 45:12-13). Significantly, Mr. Pence acknowledged that his attendance as a former U.S. Attorney and Lieutenant Governor of Kentucky may have had added gravitas to the meetings (id. at 45:20-46:2). Although, Mr. Pence also stated that he had never had a substantive conversation with the Plaintiffs' principals, he had been in Steven Sands' office (id. at 47:20-48:1). In addition, there is evidence from the Plaintiffs that Mr. Pence made certain representations during meetings with Mr. Sands (NYSCEF Doc. No. 359).

Under these circumstances, it cannot be said that Mr. Pence was merely a passive witness to Mr. Huff's dealings, as Mr. Pence purposely availed himself of the privilege of conducting business in New York by travelling to attend New York meetings with Mr. Huff for the purposes of providing requisite assistance if necessary and using his position to add "gravitas" and credibility to these meetings. Further, there is a substantial nexus between the alleged discussions concerning the Notes and the causes of action concerning those funds that were allegedly diverted and as a result, unpaid pursuant to the Notes. The totality of the circumstances thus indicates that Mr. Pence is subject to personal jurisdiction under CPLR § 302 (a)(1) (see George Reiner & Co. v. Schwartz, 41 NY2d 648, 654 [1977] [explaining that the nature and quality of one visit to New York may serve as the basis for personal jurisdiction] ).

To the extent that Mr. Pence argues that his circumstances are similar to those of defendants who were granted dismissal pursuant to the First Dismissal Order, this argument is unavailing because the factual background here is entirely different. The previously dismissed defendants were primarily entities that O2HR allegedly diverted funds through where there were no factual allegations that the dismissed defendants or their representatives had ever travelled to New York or conducted meetings with Mr. Huff, much less participated in the alleged conspiracy to divert O2HR funds (NYSCEF Doc. No. 226, ¶¶ 52-121). Accordingly, the branch of Mr. Pence's motion to dismiss for lack of personal jurisdiction is denied.

B. Mr. Pence's Motion for Summary Judgment

On a motion for summary judgment pursuant to CPLR § 3212 (b), the movant "must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to demonstrate the absence of any material issues of fact" (Alvarez v Prospect Hosp., 68 NY2d 320, 324 [1986], citing Winegrad v New York Univ. Med. Ctr., 64 NY2d 851, 853 [1985]). Only once this showing is made, does the burden shift to the opposing party to produce evidence in admissible form sufficient to establish the existence of a triable issue of fact (Zuckerman v New York, 49 NY2d 557, 562 [1980]).

In support of his summary judgment motion, Mr. Pence proffers (i) the Plaintiffs' response to his interrogatories in an allegedly similar action in Jefferson Circuit Court (NYSCEF Doc. No. 359, the Interrogatory Response), (ii) the expert report Jeff Johnson, Chartered Financial Analyst (NYSCEF Doc. No. 360, the Report), dated July 1, 2019, pursuant to which Mr. Johnson traced the flow of funds invested in O2HR by the Plaintiffs, and (iii) excerpts of Mr. Johnson's expert deposition (NYSCEF Doc. No. 361).

1. Fraud (First Cause of Action)

Mr. Pence moves for summary judgment on the fraud claim arguing that he disputes making the alleged misrepresentations, but that the statements do not demonstrate fraud in any event because they constitute mere puffery that the Plaintiffs could not have relied on. However, as the Plaintiffs argue in their opposition papers, Mr. Pence has failed to meet his burden of coming forward with prima facie evidence entitling him to judgment under Alvarez so as to shift the burden to the Plaintiffs to demonstrate a material issue of fact.

Mr. Pence claims that he does not recall making the purported representations as set forth in the Interrogatory Response:

Subject to and without waiving objections, Plaintiffs note that Mr. Pence visited New York on several occasions in or about 2007 and 2008 along with Wilbur Anthony Huff to raise money. During the course of those meetings and conversations over more than a year, Mr. Pence (alone and in groups settings with one or more of Huff, Ron Heineman, Tom Bean, and others) discussed myriad topics with the Plaintiffs, including the safety of their loans to O2HR; the fact that his presence as former US Attorney and Lieutenant Governor would ensure that all operations at O2HR would be above-board, non-fraudulent, and safe; the fact that the ongoing operations of O2HR were above-board, non-fraudulent, and safe; opportunities for O2HR to buy other companies; the status of Plaintiff's loans and the refinancing of same; and various other matters concerning the running and prospects of O2HR.

(NYSCEF Doc. No. 459, at 4).

To the extent that Mr. Pence cannot recall or disputes the contents of the alleged conversation, this, at most, merely creates a factual issue. It does not dispose of the fraud claim. And even if the purported statements were taken to be true, Mr. Pence's statement about ongoing operations of O2HR could constitute a material misrepresentation about an existing fact, which is actionable (compare MBIA Ins. Corp. v. Countrywide Home Loans, Inc., 87 AD3d 287, 293 [1st Dept 2011] [first element of fraud is a material misrepresentation of an existing fact], with Sidamonidze v. Kay, 304 AD2d 415, 416 [1st Dept 2003] [mere puffery, opinions of value or future expectations do not support a fraud claim] ). Under these circumstances, Mr. Pence has not adduced sufficient evidence to establish a prima facie showing that summary judgment should be granted in his favor on the fraud claim. Accordingly, that branch of Mr. Pence's motion for summary judgment on the first cause of action for fraud is denied.

2. The Remaining Causes of Action

Mr. Pence relies on the Report to argue that none of the Plaintiffs' investments in O2HR could be traced to him. However, the Report indicates that the Plaintiffs were partially repaid for Notes issued by O2HR through River Falls Financial, an entity listed in the Report's repayment summary (NYSCEF Doc. No. 360 at 11). Further, the Plaintiffs adduced evidence that Mr. Pence obtained a 100% interest in River Falls Financial Services, LLC pursuant to a purchase agreement, dated January 1, 2009, by and between H2H Holdings, LLC, as purchaser, and Sheri D. Huff, as seller, where Mr. Pence as Manager signed on behalf of H2H Holdings, LLC (NYSCEF Doc. No. 374). Although the Report does not specifically trace O2HR funds to Mr. Pence, the record indicates that River Falls Financial issued some payments for the Notes and Mr. Pence purportedly had an interest in River Falls Financial Services, LLC. Put another way, the Report does not eliminate the question of whether O2HR funds were diverted to an entity either owned or controlled by Mr. Pence.

Mr. Pence also does not otherwise address the remaining claims against him for (i) aiding and abetting fraud (the second cause of action), (ii) aiding and abetting fraudulent conveyance (sixth cause of action), (iii) conspiracy to fraudulently convey (seventh cause of action), (iv) aiding and abetting breach of fiduciary duty (ninth cause of action), (v) aiding and abetting conversion (fourteenth cause of action), (vi) equitable restitution (sixteenth cause of action), and (vii) unjust enrichment (seventeenth cause of action). Therefore, Mr. Pence's motion for summary judgment with respect to those claims is also denied.

Accordingly, it is ORDERED that Mr. Pence's motion to dismiss based on lack of personal jurisdiction or, in the alternative, for summary judgment is denied in its entirety.

Andrew Borrok, J.