JAMES L. GARRITY, JR., Bankruptcy Judge.
Basic Food Group LLC, the debtor herein ("Basic Food" or the "Debtor"), and its sole members, Jae Ho Lee ("Lee") and his wife, Soyoun Park ("Park"), are the plaintiffs (the "Plaintiffs") in this adversary proceeding.
In their Second Amended Complaint (the "Complaint" or "SAC"), the Plaintiffs assert seven causes of action against various parties involved in the transaction.
This Court has subject matter jurisdiction over the Motion pursuant to 28 U.S.C. §§ 1334(a) and 157(a) and the Amended Standing Order of Referral of Cases to Bankruptcy Judges of the United States District Court for the Southern District of New York (M-431), dated January 31, 2102 (Preska, C.J.). In Counts 5 and 6 of the Complaint, the Plaintiffs seek damages under state law from Kim based upon his alleged pre-petition (i) breach of contract and the covenant of good faith and fair dealing implied in all contracts, and (ii) fraud in the inducement, respectively. Those Counts do not fall within the Court's core jurisdiction because they are state law causes of action that neither "arise under title 11," nor "arise-in" a case under title 11. See 28 U.S.C. §§ 1334(b), 157(b)(1); see also Stern v. Marshall, 564 U.S. 462, 476 (2011) ("Under our reading of the statute, core proceedings are those that arise in a bankruptcy case or title 11."); J.T. Moran Fin. Corp. v. Am. Consol. Fin. Corp. (In re J.T. Moran Fin. Corp.), 124 B.R. 931, 937 (S.D.N.Y. 1991) (stating that core jurisdiction encompasses proceedings which "invoke a substantive right provided by title 11" or that "would have no existence outside of the bankruptcy case."). Non-core proceedings are those that are not core "but that [are] otherwise related to a case under title 11." See 28 U.S.C. § 157(c)(1); see also Stern v. Marshall, 564 U.S. at 477 ("The terms `non-core' and `related' are synonymous" (quoting Collier on Bankruptcy ¶ 3.02[2], p.3-26, n.5 (16th ed. 2010))). The Debtor's claims against Kim in Counts 5 and 6 fall within the scope of the Court's non-core related-to jurisdiction because any recovery by the Debtor from this litigation will impact the value of the estate. See Robinson v. Daley (In re Daley), 224 B.R. 207, 313 (Bankr. S.D.N.Y. 1998) ("Causes of action owned by the debtor prior to its bankruptcy and which become property of the debtor's estate, as well as suits between third parties which have an effect on the bankruptcy estate are bases for related-to jurisdiction." (citing Celotex v. Edwards, 514 U.S. 300, 308 n.5 (1995))); see also Parmalat Capital Fin., Ltd. v. Bank of Am. Corp., 639 F.3d 572, 579 (2d Cir. 2011) ("[A] civil proceeding is `related to' a title 11 case if the action's outcome might have any conceivable effect on the bankruptcy estate.").
However, that jurisdiction does not extend to Lee and Park's claims against Kim. The resolution of those claims will have no impact on the Debtor's estate or assets. See, e.g., In re Johns-Manville Corp., 517 F.3d 52, 65 (2d Cir. 2008) (noting that "a third-party action does not create `related to' jurisdiction when the asset in question is not property of the estate and the dispute has no effect on the estate. Shared facts between the third-party action and a debtor-creditor conflict do not in and of themselves suffice to make the third-party action `related to' the bankruptcy. . . ."); cf. Victory Markets, Inc. v. NYS Unemployment Ins., Unemployment Ins. Div., Dep't of Labor, State of New York (In re Victory Markets Inc., 263 B.R. 9, 15 (Bankr. N.D.N.Y. 2000) (noting that "the scope of a bankruptcy court's `related to' jurisdiction is further limited where non-debtor third parties are involved. Because an endless array of cases would `relate to' any single bankruptcy administration, the Second Circuit has limited `related to' jurisdiction to `significant' relation and not simply a remote connection.") (citations omitted). Although not raised by the parties, the Court considers whether it has jurisdiction over those claims based on principles of supplemental jurisdiction pursuant to 28 U.S.C. § 1367. Under that section, "in any civil action of which the district courts have original jurisdiction, the district courts shall have supplemental jurisdiction over all other claims that are so related to claims in the action within such original jurisdiction that they form part of the same case or controversy under Article III of the United States Constitution." 28 U.S.C. § 1367(a). "Claims are `part of the same case or controversy' when they `derive from a common nucleus of operative facts,' and `are such that [the claimant] would ordinarily be expected to try them all in one judicial proceeding[.]'" Picard v. HSBC Bank PLC (In re Bernard L. Madoff Inv. Sec. LLC), 561 B.R. 334, 348 (Bankr. S.D.N.Y. 2016) (internal quotations and citations omitted). There is authority in the Second Circuit that a bankruptcy court may exercise supplemental jurisdiction under 28 U.S.C. § 1367. See Lionel Corp. v. Civale & Trovato, Inc. (In re Lionel Corp.), 29 F.3d 88, 92 (2d Cir. 1994); see also Shafferman v. The Queens Borough Public Library (In re JMK Constr. Grp., Ltd.), 502 B.R. 396, 403 n.4 (Bankr. S.D.N.Y. 2013); Gowan v. HSBC Mortg. Corp. (In re Dreier LLP), No. 10-5456 (SMB), 2012 WL 4867376, at *5 (Bankr. S.D.N.Y. 2012). Here, as described below, it is clear that the claims of the Debtor and Lee and Park against Kim derive from a common nucleus of operative facts—namely, the underlying Acquisition and Loan transactions with the Seller Defendants—and it would not be judicially economical to try these overlapping matters in different proceedings. Accordingly, the Court concludes that it has supplemental jurisdiction to adjudicate Lee and Park's claims against the Seller Defendants in this action.
In non-core "related to" matters, a bankruptcy judge cannot enter a final, appealable order unless the parties consent. See 28 U.S.C. § 157(c)(2) ("[T]he district court, with the consent of all the parties to the proceeding, may refer a proceeding related to a case under title 11 to a bankruptcy judge to hear and determine and to enter appropriate orders and judgments. . . ."). On the record of the hearing on the Motion, the Plaintiffs and Seller Defendants consented to this Court's entry of a final judgment on this Motion. As such, the Court is satisfied that it has the authority to enter final orders and judgments with respect to the Plaintiffs' claims against Kim.
The Debtor is a limited liability company whose sole members are Lee and Park. It is also a chapter 7 debtor herein.
The Plaintiffs contend that in 2012, Kim was indebted to Noah Bank on account of financing from the bank in connection with his acquisition of Basic Food (the "Noah-Kim Loan"), and his acquisition of Aspen, a deli/café operation in Hoboken, New Jersey.
The closing of the Loan and Acquisition transactions took place at Noah Bank's offices in Palisades Park, New Jersey, on December 13, 2012. At that time, Lee and Kim executed the Purchase Agreement and Buy-Back Agreement.
The Plaintiffs allege that after the transactions closed, Lee and Park learned that the NY Deli was not profitable. See SAC ¶ 93. In addition, they say that in or around the summer of 2014, Lee and Park received notice that Basic Food "may be in violation" of certain provisions of the New York State Labor Law and was facing potential fines, allegedly stemming from Kim's operation of the NY Deli. See id. ¶¶ 93-95. According to the Plaintiffs, Kim and the Bank Defendants actively concealed the fact of those violations from Lee. See id.
In their Complaint, the Plaintiffs assert seven claims for relief against some or all of the following defendants: Noah Bank, Shin, Ahne, Ahne Law, Kim, and Aspen. Those claims consist of: (i) claims under the Racketeer Influenced and Corrupt Organizations Act (the "RICO Claims") against all defendants (Counts 1 and 2), (ii) a claim of breach of fiduciary duty against Ahne and Ahne Law (Count 3), (iii) a request for a declaratory judgment against all defendants (Count 4), (iv) a claim of breach of contract and implied covenant of good faith and fair dealing against all defendants (Count 5), and (v) separate claims for fraud in the inducement against Kim and Aspen (Count 6), and Shin and Noah Bank (Count 7).
In July 2016, the Court granted the defendants' joint motion to dismiss the RICO Claims pursuant to Fed. R. Civ. P. 12(b)(6). See Memorandum Decision on Defendants' Motions to Dismiss dated July 1, 2016 [ECF No. 20]; see also Order Dismissing RICO Claims in Adversary Proceeding dated July 13, 2017 [ECF No. 23]. Thereafter, the Seller Defendants filed a joint answer to the Complaint. See Answer, Counterclaims, and Crossclaims of Cheol Min Kim and Aspen Market Place, Corp. to Second Amended Complaint After Dismissal of RICO Claims, Counts One and Two [ECF No. 36]. On the record of the hearing on the Motion, the Plaintiffs confirmed that the declaratory relief they seek in Count 4 is moot, and that they are not asserting any claims against Aspen. Accordingly, Aspen is dismissed from the Complaint and Count 4 is dismissed as moot. Defendant Kim now seeks summary judgment dismissing the remaining claims in the Complaint asserted against him — i.e., Count 5 (Breach of Agreement and Implied Covenant of Good Faith and Fair Dealing) and Count 6 (Fraud in the Inducement).
Federal Rule of Civil Procedure 56, made applicable to this case under Federal Rule of Bankruptcy Procedure 7056, provides that "[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56. Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the [movant] is entitled to a judgment as a matter of law." Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The movant bears the initial burden of proof that the undisputed facts entitle it to summary judgment as a matter of law. See Rodriguez v. City of New York, 72 F.3d 1051, 1060-61 (2d Cir. 1995); see also Hellstrom v. U.S. Dep't of Veterans Affairs, 46 F. App'x 651, 654 (2d Cir. 2002) ("The moving party bears the initial burden of informing the . . . court of the basis for its motion, and identifying those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact.") (internal quotation marks omitted). Where the nonmoving party bears the burden of persuasion at trial on an issue, the moving party can satisfy its initial burden on the motion by demonstrating the absence of factual support for an essential element of the nonmoving party's claim. See Jaramillo v. Weyerhaeuser Co., 536 F.3d 140, 145 (2d Cir. 2008). If the movant meets that standard, the burden shifts to the non-moving party to produce "sufficient specific facts to establish that there is a genuine issue of material fact for trial." Lipton v. Nature Co., 71 F.3d 464, 469 (2d Cir. 1995) (citation omitted). The court must view the facts in the light most favorable to the non-moving party, and must resolve all ambiguities and draw all inferences against the moving party. See NetJets Aviation, Inc. v. LHC Commc'ns, LLC, 537 F.3d 168, 178 (2d Cir. 2008) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986)). However, "the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment[.]" Liberty Lobby, Inc., 477 U.S. at 247-48. "An issue of fact is `genuine' if the evidence is such that a [trier of fact] could return a verdict for the non-moving party," Senno v. Elmsford Union Free School Dist., 812 F.Supp.2d 454, 467 (S.D.N.Y. 2011) (citing SCR Joint Venture L.P. v. Warshawsky, 559 F.3d 133, 137 (2d Cir. 2009)), and a fact is only "material" if it might affect the outcome of the litigation under the relevant law. Id. (citation omitted); see also Scotto v. Almenas, 143 F.3d 105, 114 (2d Cir. 1998) (noting that opposition to a summary judgment motion cannot be based on "conclusory allegations or unsubstantiated speculation."); Senno, 812 F. Supp. 2d at 467 (stating "mere denials or unsupported alternative explanations of its conduct" will not suffice in opposing summary judgment) (citing SEC v. Grotto, 05 Civ. 5880, 2006 WL 3025878, at *7 (S.D.N.Y. Oct. 24, 2006)). Rather, the non-moving party must still come forward with "specific facts showing that there is a genuine issue for trial" in order to defeat a properly supported summary judgment motion. Liberty Lobby, 477 U.S. at 256.
Rule 7056-1 of the Local Bankruptcy Rules for the Southern District of New York is applicable herein. Like Local Civil Rule 56.1, its counterpart in the district court, the rule is "intended to streamline the consideration of summary judgment motions by freeing the [bankruptcy] courts from the need to hunt through voluminous records without guidance from the parties." Holtz v. Rockefeller & Co., Inc., 258 F.3d 62, 74 (2d Cir. 2001). To that end, the rule mandates that all summary judgment motions include "a separate, short, and concise statement, in numbered paragraphs, of the material facts as to which the moving party contends there is no genuine issue to be tried." LBR 7056-1(b). In turn, the party opposing summary judgment must include in its papers "a correspondingly numbered paragraph responding to each numbered paragraph in the statement of the moving party." LBR 7056-1(c). If necessary and appropriate, that party can include "additional paragraphs containing a separate, short, and concise statement of additional material facts as to which it is contended that there is a genuine issue to be tried." Id. The statements in support of, or in opposition to, a summary judgment motion "shall be followed by citation to evidence which would be admissible." LBR 7056-1(e).
In support of the Motion, the Seller Defendants submitted a statement of uncontested facts supported by admissible evidence (the "Seller Defendants' 7056 Statement"). See supra n.3. Although the Plaintiffs oppose the Motion, they failed to respond to that statement. Evidently, they overlooked the statement, as they mistakenly contend that the Seller Defendants "totally failed to submit any Statement of Material Fact in compliance with Local Rule 56.1 [sic]." See Plaintiffs' MOL at 2. Nonetheless, in an apparent effort to comply with LBR 7056-1 (even as they erroneously assert that the Seller Defendants are in breach of that rule), the Plaintiffs purport to "adopt by incorporation" the Statement of Material Facts that they filed in opposition to the Bank Defendants' motion for summary judgment. See supra nn. 4, 11. The Seller Defendants contend that the Court would be "justified" in deeming the Plaintiffs to admit the truth of the facts asserted in the Seller Defendants' 7056 Statement, and to find that those facts establish grounds for granting summary judgment in their favor. To be sure, by application of the local rule, the Plaintiffs are deemed to admit the material facts asserted in the Seller Defendants' 7056 Statement. See LBR Rule 7056-1(d) (stating that "[e]ach numbered paragraph in the statement of material facts required to be served by the moving party shall be deemed admitted for purposes of the motion unless specifically controverted by a correspondingly numbered paragraph in the statement required to be served by the opposing party."). However, it does not follow that the Plaintiffs' breach of the local rule, in and of itself, is grounds for granting Kim summary judgment dismissing Counts 5 and 6 of the Complaint. Application of the local rule "does not absolve the party seeking summary judgement of the burden of showing that it is entitled to judgment as a matter of law[.]" In re Haimil Realty Corp., No. 14-11779, 2015 WL 1396610 at *4 (Bankr. S.D.N.Y. March 24, 2015); see also Zanghi v. Incorporated Village of Old Brookville, 752 F.2d 42, 47 (2d Cir. 1985) ("The proponent of a summary judgment motion has the initial burden under Rule 56 to show the absence of a genuine issue concerning any material fact. . . . If the movant fails to meet that burden, the opponent will prevail even if the opponent submits no evidentiary matter to establish that there is indeed a genuine issue for trial."). The Seller Defendants do not object to the Court's consideration of the Plaintiffs' Incorporated Statement, except that they contend that the statement fails to comply with LBR 7056-1 because it is "far from short and concise and [the facts cited therein] are not supported by citation or admissible evidence." Reply at 2. The Court will assess the adequacy of the facts alleged in that statement as necessary. In this light, the Plaintiffs' failure to comply with LBR-7056-1 is a "matter of form rather than substance," as their papers (including the Plaintiffs' Incorporated Statement) clearly address evidentiary matters relevant to Counts 5 and 6 of the Complaint. See, e.g., In re Haimil Realty Corp., 2015 WL 1396610 at *4 (finding that plaintiff's failure to submit statement in response to defendant's LBR 7056-1 statement in support of summary judgment motion was not fatal to the defense of the motion, as the plaintiff clearly identified the facts in dispute).
As relevant to this Motion, in Count 5 of the Complaint, the Plaintiffs seek to recover damages from Kim for his alleged breach of contract and breach of the covenant of good faith and fair dealing that is implied in every contract. They allege that the "covenant of good faith and fair dealing" is implied in the contracts between the Plaintiffs and Kim. See SAC ¶ 147. They contend that by his "acts, omissions and breaches[,]" Kim breached his agreements with the Plaintiffs, as well as the implied covenant of good faith and fair dealing. Id. ¶ 148. The Complaint identifies two documents executed by Kim: (i) the Purchase Agreement; and (ii) the Buy-Back Agreement.
Under New York law,
An indispensable element of the Plaintiffs' claims against Kim in Count 5 is that they are parties to a contract with him. The record indisputably shows that no such agreement exists between Park or Basic Food on the one hand, and Kim on the other. As such, as a matter of law, they cannot demonstrate grounds for relief under Count 5 against Kim. See, e.g., Johnson v. Chesebrough-Ponds, Inc., 104 F.3d 355, at *2 (2d Cir. 1996) ("As the contracts do not exist, Chesebrough could not have violated implied covenants in them."); Village on Canon v. Bankers Trust Co., 920 F.Supp. 520, 534 (S.D.N.Y. 1996) ("[T]here was no contract between [the defendant] and [the plaintiff] so there was no implied covenant for [the defendant] to have breached."); Frutico S.A. de C.V. v. Bankers Trust Co., 833 F.Supp. 288, 301 (S.D.N.Y. 1993) ("No agreement was reached, and the parties did not owe each other this alleged duty [of good faith and fair dealing.]"); Snipes v. City of New York, 990 N.Y.S.2d 440, at *4 (N.Y. Sup. Ct. 2014) (dismissing plaintiff's claim for breach of implied covenant of good faith and fair dealing because "it is well settled that a cause of action based upon a breach of a covenant of good faith and fair dealing requires a contractual obligation between the parties," and there was no such relationship) (internal quotation marks and citations omitted).
In support of Count 5, Lee asserts that Kim breached the Buy-Back Agreement when he refused to take back the Basic Food units after Lee discovered that the business was failing and that he had purchased it in reliance upon financial statements that Lee says are fraudulent. See Plaintiffs' MOL at 12; see also Lee Depo. Tr. at 75:13-76:3 (stating that he had a conversation with Kim around April 2013 about buying back Basic Food, but that in the end, Kim only wanted to manage the NY Deli, not to buy it back). Nonetheless, Kim says that, as a matter of law, he is entitled to summary judgment dismissing Lee's breach of contract claim because the Buy-Back Agreement gave him the option of buying back Basic Food's interests from Lee. It did not give Lee the right to put those interests to him.
Lee next contends that the Buy-Back Agreement should have been drafted to vest Lee with the option to put the Basic Food interests back to Kim. In that regard, Lee maintains that Kim was aware of the purported drafting error in the document and breached his covenant of good faith and fair dealing under that agreement by not alerting Lee of the error. See Plaintiffs' MOL at 12, 14, 17. However, there is no evidence in the record to support that claim. Neither Kim nor Lee testified that either of them had intended for the Buy-Back Agreement to be drafted to vest Lee with a put option. To that end, neither of them testified that they had ever discussed the idea of a buy-back or negotiated the terms of the Buy-Back Agreement, let alone agreed that it should inure to Lee's benefit.
However, even assuming that Lee could show that a disputed issue of fact exists as to whether the Buy-Back Agreement should have been drafted to enable Lee to force Kim to buy back the Basic Food business, and could point to evidence that Kim had knowledge of the drafting error but deliberately did not advise Lee of that error, the claim nonetheless fails as a matter of law. The implied covenant of good faith and fair dealing cannot be used to impose on Kim obligations that are inconsistent with, or contrary to, those in the Buy-Back Agreement. See 1357 Tarrytown Road Auto, LLC v. Granite Props., LLC, 37 N.Y.S.2d 341, 343 (2d Dept 2016) ("[N]o obligation may be implied that would be inconsistent with other terms of the contractual relationship."). Here, a finding that Kim breached the covenant would contradict the explicit and unambiguous terms of the Buy-Back Agreement, and create obligations on Kim not contained therein. If true, Kim's alleged failure to ensure that the agreement was drafted for Lee's benefit might be relevant in considering whether Kim fraudulently induced Lee to enter into the Acquisition transaction. It does not support a claim for breach of the covenant of good faith and fair dealing. See East Point Sys., Inc. v. Maxim, 13-CV-00215, 2014 WL 523632 at *5 (D. Conn. Feb. 7, 2014) (finding that allegations of misrepresentations not tied to specific terms of contract may support a claim for fraudulent inducement to enter agreement, but does not support a claim of breach of the covenant of good faith and fair dealing under that agreement).
Lee also argues that Kim is not entitled to summary judgment dismissing Count 5 because he violated the covenant of good faith and fair dealing in the Buy-Back Agreement by engaging in a so-called "kickback" scheme with Shin. He bases that claim on the facts alleged in the declaration of Byung Hoon Kim ("B.H. Kim").
In Count 6, Lee seeks damages from Kim based on his alleged fraud in inducing Lee to purchase Basic Food. Fraud in the inducement consists of material misrepresentations by one party to induce the other party to enter into a transaction or agreement. See Revak v. SEC Realty Corp., 18 F.3d 81, 91 (2d Cir. 1994); see also Gen'l Media, Inc. v. Shooker, No. 97 Civ. 510, 1998 WL 401530, at *6 n.6 (S.D.N.Y. July 16, 1998) ("Fraud in the `inducement' indicates a misrepresentation that goes to the subject matter underlying the transaction but does not challenge the fact that an agreement of some kind was reached."). To prevail on this claim, Lee must prove (1) that Kim made a representation, (2) as to a material fact, (3) which was false, (4) and known by him to be false, (5) that the representation was made for the purpose of inducing Lee to rely upon it, (6) and that Lee rightfully did so rely, (7) in ignorance of its falsity (8) to his injury. See Computerized Radiological Servs. v. Syntex Corp., 786 F.2d 72, 76 (2d Cir. 1986) (citation omitted). In addition, "[u]nder New York law, fraud must be proved by clear and convincing evidence." Id. (citing Accusystems, Inc. v. Honeywell Info. Sys., Inc., 580 F.Supp. 474, 482 (S.D.N.Y. 1984)). See also Urstadt Biddle Prop., Inc. v. Excelsior Realty Corp., 885 N.Y.S.2d 510, 512 (2d Dept 2009) (stating that the elements of a cause of action for fraud in the inducement are "representation of a material existing fact, falsity, scienter, reliance, and injury."). Kim contends that he is entitled to summary judgment dismissing Count 6 because Lee has not demonstrated that he misrepresented any material facts to Lee with respect to the Acquisition and Loan transactions. Kim also asserts that Lee could not have reasonably relied on any representation that he made with respect to the transactions because Lee conducted no due diligence in connection with his acquisition of Basic Food, notwithstanding that he had access to all of Basic Food's books and records. See id. at 12; see also Reply at 3 of 5.
Lee asserts that Kim induced him to acquire Basic Food by intentionally and fraudulently overstating the profitability of its business both verbally and through the Basic Food tax returns, which Lee says intentionally overstated the level of Basic Food's income. See, e.g., Plaintiffs' MOL at 8, 10; SAC ¶¶ 59-60. As to the former, Lee alleges that on several occasions in the course of the discussions leading up to the sale, Kim falsely told him that Basic Food was "profitable" and "doing great," and that its owners could expect to realize annual compensation/distributions in the "low six figures"—i.e., between $200,000 and $400,000. See, e.g., Lee Depo. Tr. at 10:4-7 (stating that in October or November of 2012, Kim represented to Lee that the store was profitable); id. at 94:21-23 (stating that Kim represented that the store "produces about 300 to 400, 350 to 400 in profit per year[.]"). As to the latter, Lee contends that Kim knew that he was going to finance his acquisition of Basic Food with an SBA guaranteed loan from Noah Bank, and that as part of the loan request he would be required to submit Basic Food's tax returns for the years 2009, 2010 and 2011. See Plaintiffs' MOL at 6. Lee says that those tax returns, and the 2012 tax return, overstated Basic Food's income because in each of those returns, Kim intentionally under-reported the amount of "wages and salaries" that Basic Food paid its employees during those years by approximately $800,000 a year. See id. at 8. Lee contends that Kim did so in order to mislead him into believing that Basic Food's business was profitable, when it was actually losing money.
Lee's reliance on the tax returns in opposing the Motion and in support of Count 6 is misplaced because he has not demonstrated that there is evidence in the record supporting his contentions. First, the 2009 and 2010 tax returns are not part of the record of this Motion, and the Plaintiffs have not elicited testimony from any witness with respect to those returns. The 2012 tax return is in the record of this Motion. See Ex. 1, Kimm Declaration (Kim Depo. Tr., Ex. CMK-5) [ECF No. 94-1]. However, it was not filed until March 23, 2013 — well after the December 2012 closing. It is irrelevant to the matters at issue herein. Finally, the Plaintiffs have cited no evidence to support their assertion that Basic Food under-reported its "wages and salaries" on its 2011 and 2012 tax returns, let alone in the sum of $800,000 per year. At his deposition, Kim testified that he recalled that Basic Food's monthly payroll in 2009 was $80,000. See Kim Depo. Tr. at 46:3-20. He did not testify that Basic Food's payroll was $1 million in 2010 and 2011 — or any other amount — and there is no evidence in the record to support such a contention. Instead, Plaintiffs' counsel used the $80,000/month rate to arrive at the approximately $1 million figure for each year.
In considering whether to acquire the Basic Food stock, Lee did not merely turn a blind eye to the tax returns. He concedes that he "did not do any diligence at all" in connection with the transaction. Id. at 93:17-94:5. Although Lee testified that he visited the store four or five times before purchasing it (see id. at 13:11), he explained that in each instance, he merely "stopped by" and did not spend a meaningful amount of time at the store. Id. at 93:23.
In New York, the well-established rule is "if the facts represented are not matters peculiarly with the party's knowledge, and the other party has the means available to him of knowing, by the exercise of ordinary due diligence, the truth or the real quality of the subject of the representation, he must make use of those means, or he will not be heard to complain that he was induced to enter into the transaction by misrepresentations." Schumaker v. Mather, 133 N.Y. 590, 596 (1892). See also Gray v. Wackenhut Servs., Inc., 721 F.Supp.2d 282, 292 (S.D.N.Y. 2010), aff'd, 446 F. App'x 352 (2d Cir. 2011) ("The law has long required plaintiffs to make full use of the facts known to them, and their ordinary intelligence, before asserting a cause of action for misrepresentation."). That rule "rejects the claims of plaintiffs who have been so lax in protecting themselves that they cannot fairly ask for the law's protection." DDJ Mgmt. LLC v. Rhone Grp. L.L.C., 15 N.Y.3d 147, 154 (2010). That is because in those cases, "the plaintiff `may truly be said to have willingly assumed the business risk that the facts may not be as represented.'" Id. (quoting Rodas v. Manitaras, 59 A.D.2d 341, 343 (1st Dept 1990)). At issue in this Motion is whether Lee's admitted failure to do any diligence in advance of the Loan and Acquisition transactions renders his reliance on Kim's statements as to Basic Food's profitability unreasonable as a matter of law. See MBIA Ins. Corp. v. Countrywide Home Loans, Inc., No. 602825/08, 2013 WL 1845588, at *5 (N.Y. Sup. Ct. 2013). In evaluating whether Lee's alleged reliance on Kim was reasonable, this Court will consider the "entire context" of the Loan and Acquisition transaction, including its complexity and magnitude, the sophistication of the parties, and the content of any agreement between them. See Emergent Capital Inv. Mgmt., LLC v. Stonepath Grp., Inc., 343 F.3d 189, 195 (2d Cir. 2003) (citations omitted). Lee was an experienced deli/café owner who had been running a successful business for more than a year when he elected to purchase Basic Food. In March of 2011, he purchased Hudson Produce, Inc. ("Hudson"), a similar a deli/café business in New York City, for $1.5 million. See Lee Depo. Tr. at 86:1-18. He operated the business as a 24-hour business and employed 15-16 people. See id. at 84:23; 91:19-22. He was familiar with the risks associated with a "turnkey" transaction, and issues relating to financing such a transaction, because Lee purchased the equity of Hudson and financed the purchase with a loan from Noah Bank. See id. at 90:20-23. Prior to acquiring Hudson, Lee conducted extensive diligence. See id. at 87:21-89:4. To that end, he observed store operations for close to 7 days, both during the day and night, even when the seller was not present. In addition, he met with Hudson's accountant, twice, and reviewed Hudson's books and records including: sales receipts, tax returns, time cards, payroll records, and sales reports. See id.
In this light, the Loan and Acquisition transaction was neither large nor complex. It was well within the scope of Lee's business experience, as it virtually mirrored his acquisition of Hudson. Lee does not contend otherwise. However, although Lee had relevant experience at the time of the transaction, in assessing the reasonableness of his alleged reliance on Kim, the Court must consider the extent of Lee and Kim's personal relationship. See generally Aloi v. Nat'l Staffing, Inc., 74 A.D.3d 436, 436 (1st Dept 2010) (declining to find reliance unreasonable as a matter of law where transaction was not arms-length between strangers and plaintiff relied on representations made by his niece); Braddock v. Braddock, 60 A.D.3d 84, 88 (1st Dept 2009) (noting that where the plaintiff and defendant were cousins, plaintiff's reliance on defendant's good faith "may be found to be reasonable even where it might not be reasonable in the context of an arms' length transaction with a stranger."). Cf. Lance v. Tillman (In re Tillman), 197 B.R. 165, 171 (Bankr. D.C. 1996) (stating, in the context of evaluating "justifiable reliance" under the standards for a non-dischargeability determination based on fraud pursuant to section 523(a)(2)(A), that "there are numerous cases finding that evidence of friendship or a close personal relationship weighs heavily in favor of finding at least justifiable reliance if not the higher level of reasonable reliance.").
Lee testified that he and Kim had known one another since Lee immigrated to the United States in 2002, and that over the course of their relationship they had become "the closest people" who had friends in common and socialized frequently. See Lee Depo. Tr. at 12:4-12; see also Kim Depo. Tr. at 72:19-74:10. He asserts that he relied on Kim for all aspects of the Basic Food Acquisition — that Kim would help him secure financing with Noah Bank (see Lee Depo. Tr. at 18:8-19), that Kim would sell Basic Food to him at "a cheap price" (see Lee Depo. Tr. at 20:9-22; 95:20-96:1), and that Kim was telling him the truth as to Basic Food's profitability. Beyond their friendship, Lee also says that he trusted Kim's representations as to Basic Food's profitability because at that time, Kim was acquiring another deli business in New Jersey (i.e., Aspen) for approximately $13 million (see Kim Depo. Tr. at 49:9-50:8), and thus, Lee believed that Kim was making significant profits from Basic Food's operations. See Lee Depo. Tr. at 10:25-11:19; 13:3-6.
To establish "reasonable reliance," Lee must demonstrate that he was justified both in believing Kim's representations about the profitability of the Basic Food business and in foregoing all diligence in response to those representations. See Lanzi v. Brooks, 388 N.Y.S.2d 946 (3d Dept 1976) ("[I]n order to be actually deceived by a false representation, a party must not only reasonably believe that the representation is true, but he must also be justified in taking action in reliance thereon."), aff'd 402 N.Y.S.2d 384 (1977). "The question of what constitutes reasonable reliance is always nettlesome because it is so fact intensive." Schlaifer Nance & Co. v. Estate of Warhol, 119 F.3d 91, 98 (2d Cir. 1997). For that reason, "whether or not reliance is reasonable under any particular set of circumstances is generally not resolved as a matter of law, but is a question of fact." Maltz v. Union Carbide Chemicals & Plastics Co., Inc., 992 F.Supp. 286, 306 (S.D.N.Y. 1998) (collecting cases). That is the case here. Contrary to Kim's assertions, there are genuine issues of material fact that must be resolved in determining whether Lee reasonably relied on Kim's alleged misrepresentations. Kim is not entitled to dismiss Count 6 as a matter of law.
Based on the foregoing, and for the reasons stated, the Motion is GRANTED in part and DENIED in part, as follows:
Counsel are directed to appear at a pre-trial conference in this matter on November 27, 2018, at 2:00 p.m., in Room 601, United States Bankruptcy Court, One Bowling Green, New York, New York 10004.
IT IS SO ORDERED.
The Plaintiffs also cite to the exhibits annexed to their opposition to the Bank Defendants' Joint Motion for Summary Judgment [ECF No. 94], as follows: (i) deposition transcript of Cheol Min Kim; (ii) deposition transcript of Irvin Chai (Vice-President at Noah Bank); (iii) deposition transcript of Jae Ho Lee; (iv) deposition transcript of Samuel Ahne, Esq.; (v) Expert Report of Jordan Yuelys, Esq.; (vi) Declaration of Non-Party Byung Hoon Kim (the "B.H. Kim Declaration"); and (vii) Declaration of Jae Ho Lee in Opposition to Defendants Noah Bank and Edward Shin's Purported Motion for Summary Judgment (the "Lee Declaration").
LBR 7056-1(b)-(e).
To the extent that Lee relies on the testimony of Irvin Chai (of Noah Bank) as support for the contention that the Buy-Back Agreement should have given Lee a put option to force Kim to buy back the business, such reliance is unavailing. It is true that Chai testified that he understood that a buy-back agreement would "protect the buyer." See, e.g., Chai Depo. Tr. at 146:12-16. However, Chai also repeatedly testified that the purpose of a buy-back agreement was also to protect the lender—i.e., Noah Bank—by keeping the seller obligated on the business loan. Thus, even under Chai's understanding, a buy-back is not a put option exercisable at the buyer's discretion, but triggered only upon a default of the business loan. See, e.g., id. at 143:14-18; 144:4 ("If the buyer defaults, we would think that the seller would be obligated to repay the loan."); 145:20-25. In any event, Chai's "understanding" of the purpose of the buy-back agreement has no evidentiary bearing on whether Kim agreed that the Buy-Back should have been drafted in Lee's favor, whether Kim knew it was drafted incorrectly, or whether Kim had breached a covenant of good faith in his dealings with Lee. Indeed, Chai did not (and could not) testify as to how Kim had understood the Buy-Back Agreement or what negotiations Kim had with Lee on the terms of the Buy-Back Agreement.
Lee Depo. Tr. at 93:21-94:2.
Lee Depo. Tr. at 94:19-95:8.
Lama Holding Co. v. Smith Barney, 88 N.Y.2d 413, 421 (1996) (internal quotation marks and citations omitted). Thus, here, Lee's pecuniary loss will be calculated as the difference between the amount he paid for the stock, and the value of that stock. See Rather v. CBS Corp., 68 A.D.3d 49, 58 (1st Dept 2009) ("Rather was required to plead that he had something of value, was defrauded by CBS into relinquishing it for something of lesser value, and that the difference between the two constituted Rather's pecuniary loss."). Accordingly, Kim is not entitled to summary judgment on the basis that Lee cannot prove damages, because a material fact in dispute among the parties is whether Lee paid $200,000 in cash at the closing.
