Cobalt Multifamily Investors I, LLC v. Shapiro

9 F.Supp.3d 399

COBALT MULTIFAMILY INVESTORS I, LLC, et al., Plaintiffs

v.Mark A. SHAPIRO, et al., Defendants.

No. 06 Civ. 6468KMWMHD.

United States District Court, S.D. New York.

Signed March 28, 2014.

Joseph E. Gasperetti, Leonard Weintraub, Paduano & Weintraub, New York, NY, for Plaintiffs.

Robert F. Cohen, Esq., Hartford, CT, pro se.

OPINION & ORDER

KIMBA M. WOOD, District Judge.

Anthony Paduano, the court-appointed receiver (the “Receiver”) for Plaintiffs Cobalt Multifamily Investors I, LLC, and its related entities, including Vail Mountain Trust (the “Trust”) (collectively, “Cobalt”) has moved for summary judgment against defendants Robert F. Cohen (“Cohen”), an attorney, and his law firm, Cohen & Werz LLC (“C & W”) (collectively, the “Cohen Defendants”) on claims of breach of fiduciary duty, unjust enrichment, conversion, and aiding and abetting. [Dkt. No. 211]. For the following reasons, the Receiver's motion for summary judgment is GRANTED in part and DENIED in part.

I. PROCEDURAL BACKGROUND

This case is related to an enforcement action filed by the Securities and Exchange Commission (the “SEC”) in May 2006. See S.E.C. v. Cobalt Multifamily Investors I, Inc., 06 Civ. 2360 (S.D.N.Y.) [hereinafter the “SEC Enforcement Action ”]. The SEC's action arose out of a massive fraud perpetrated by three of Cobalt's principals—Mark A. Shapiro (“Shapiro”), Irving J. Stitsky (“Stitsky”), and William B. Foster (“Foster”) (collectively, the “Cobalt Principals”)—who allegedly “issued numerous false and misleading private placement memoranda and brochures,” “engaged in a widespread cold-calling scheme to persuade members of the public to invest millions of dollars in the Cobalt entities,” and “then siphoned off much of the invested funds for their own personal use, and for other fraudulent purposes.” SEC Enforcement Action, 542 F.Supp.2d 277, 279 (S.D.N.Y.2008) (Wood, J.). In a criminal case charging the Cobalt Principals with the same conduct, all three were found guilty after a jury trial on substantive and conspiratorial counts of securities fraud, wire fraud, and mail fraud. See United States v. Shapiro, 06 Cr. 357 (S.D.N.Y.).¹

In the SEC Enforcement Action, Judge Mukasey appointed Anthony Paduano to act as temporary Receiver for Cobalt. See SEC Enforcement Action, Dkt. No. 2 at 21–24 (S.D.N.Y. March 25, 2006). On July 20, 2006, Judge Mukasey made the Receiver's appointment permanent. See id., Dkt. No. 56 at 1 (S.D.N.Y. July 20, 2006).

In August 2006, the Receiver filed this suit against the Cohen Defendants, as well as other defendants who have since settled or been dismissed.² On April 30, 2013, the Receiver moved for summary judgment against the Cohen Defendants. [Dkt. No. 211]. Pursuant to Rule 56.1 of the Local Civil Rules of the United States District Courts for the Southern and Eastern Districts of New York (“Local Rule 56.1 ”),³ the Receiver submitted a Local Rule 56.1 Statement of Material Facts. [Dkt. No. 214].

At the time the Receiver moved for summary judgment, the Cohen Defendants were represented by legal counsel. Prior to responding to the Receiver's motion, however, Cohen removed his counsel and began representing himself and his former law firm pro se. [Dkt. Nos. 215, 220].

On July 8, 2013, the Cohen Defendants submitted a memorandum of law in opposition to the Receiver's motion for summary judgment, [Dkt. No. 221], but they failed to submit a Responsive Statement of Material Facts, as required by Local Rule 56.1(b),⁴ despite referencing Local Rule 56.1 in their memorandum's opening sentence. Because the Cohen Defendants were represented when the Receiver moved for summary judgment, they did not receive a Local Rule 56.2 Notice. (Local Rule 56.2 requires “[a]ny represented party moving for summary judgment against a party proceeding pro se” to submit a notice to the pro se litigant explaining the requirements of Local Rule 56.1 and the importance of summary judgment. Local R. 56.2.) On December 5, 2013, the Court issued an Order attaching the Local Rule 56.2 Notice and giving the Cohen Defendants an additional opportunity to file a Responsive Statement of Material Facts pursuant to Local Rule 56.1(b). [Dkt. No. 232 (citing Fed.R.Civ.P. 56(e)(1) ) ]. Even after having been permitted this second opportunity, however, the Cohen Defendants did not file a Responsive Statement of Material Facts.

II. FACTUAL BACKGROUND

“A nonmoving party's failure to respond to a Rule 56.1 statement permits the court to conclude that the facts asserted in the statement are uncontested and admissible.” T.Y. v. New York City Dep't of Educ., 584 F.3d 412, 418 (2d Cir.2009). Under Local Rule 56.1(c), if a nonmoving party “fails to controvert a fact so set forth in the moving party's Rule 56.1 statement, that fact will be deemed admitted.” Giannullo v. City of New York, 322 F.3d 139, 140 (2d Cir.2003) ; see also Fed.R.Civ.P. 56(e)(2). However, “ ‘[t]he local rule does not absolve the party seeking summary judgment of the burden of showing that it is entitled to judgment as a matter of law, and a Local Rule 56.1 statement is not itself a vehicle for making factual assertions that are otherwise unsupported in the record.’ ” Giannullo, 322 F.3d at 140 (quoting Holtz v. Rockefeller & Co., Inc., 258 F.3d 62, 74 (2d Cir.2001) ). The Court has therefore reviewed the supporting evidence for those paragraphs of the Receiver's Rule 56.1 Statement that are cited herein, and the Court finds those paragraphs to be adequately supported.

Cobalt's purported business was to acquire, develop, and market residential housing properties. (Receiver's 56.1 Stmt. ¶ 17). Cobalt raised capital for its operations through the sale of securities of Cobalt Multifamily Investors I, LLC to public investors. (Id. ¶ 15). Cobalt solicited investors to purchase these securities through private placement memoranda, which contained numerous misrepresentations. (Id. ¶¶ 16, 18). For instance, the private placement memoranda made no mention of Shapiro's or Stitsky's roles at Cobalt or their criminal histories; in 2001, Shapiro was convicted of bank fraud and conspiracy to defraud the Internal Revenue Service, and in 2002, Stitsky was convicted of conspiracy to commit securities fraud. (Id. ¶¶ 20–23). Cobalt raised more than $22 million from more than 300 investors. (Id. ¶ 24).

Cohen is—and at all relevant times was—an attorney licensed to practice law in the state of Connecticut. (Id. ¶ 26). From 2002 until December 31, 2007, Cohen was a partner of C & W; as of December 31, 2007, the firm was dissolved. (Id. ¶¶ 27–28). From January 1, 2008, until present, Cohen has been practicing law as a solo practitioner. (Id. ¶ 29).

Cohen represented Shapiro and his companies on matters beginning in the 1980s, involving eviction proceedings, general litigation, divorce proceedings, and real estate closings. (Id. ¶¶ 30, 33). Prior to beginning any work on behalf of Cobalt, Cohen was aware that Shapiro had been convicted of felony fraud offenses. (Id. ¶¶ 31–32).

The real estate matters in which Cohen represented Shapiro and Cobalt included the closing of a second mortgage for Cobalt's office in Springfield, Massachusetts; the purchase of a house in Glastonbury, Connecticut; and the purchase of condominium units in Miami Beach, Florida. (Id. ¶ 34). Cohen purchased the house in Glastonbury and one of the Miami Beach condominium units in his own name, and he took out several mortgages on the latter, even though both properties were intended to be residences for Shapiro. (Id. ¶¶ 35–36). Cohen never asked Shapiro why Shapiro did not want to purchase the properties in his own name. (Id. ¶ 37).

At Shapiro's request, Cohen prepared the documents for the creation of a trust, the Vail Mountain Trust (the “Trust”), under Connecticut law, and he served as its trustee. (Id. ¶¶ 38–39). The beneficiary of the Trust is listed as Due Diligence, LLC (“Due Diligence”). (Id. ¶ 40). The Trust provides that Cohen, as trustee, is “to use and expend any part of the current net income and/or any part of the principal of this Trust, for the benefit of Due Diligence, LLC, during its existence, and upon its termination, to its successors ....” (Id. ¶ 41). Shapiro asked Cohen to set up the Trust as a spendthrift trust, so that the proceeds would be free from creditors. (Id. ¶ 42). The Trust contained an inalienability clause providing that: “No beneficiary shall have the right to alienate in any way part of the income or principal of the trust or the separate trusts, and payment from the trusts shall be made directly to the beneficiary or its legal representatives, or deposited in a bank to its credit, free from the interference or control of the creditors of the beneficiary.” (Id. ¶ 43). At no time did Cohen ask Shapiro what Due Diligence was or why Shapiro wanted Due Diligence listed as the beneficiary of the Trust. (Id. ¶ 44). Cohen prepared the restated trust documents for the Trust, in which the beneficiary remained Due Diligence. (Id. ¶ 47).

The Trust provided that Cohen, as Trustee, was entitled to “reimbursement for expenses incurred” in the Trust's administration and “reasonable compensation,” which would “be deemed reasonable if it does not exceed, the greater of $1,000 or 1% of the income of the trust” per year. (Id. ¶ 45). Cohen offered no testimony that income was generated by the Trust. (Id. ¶ 46).

The Trust was related to Cobalt. (Id. ¶ 38). At least nearly $2.8 million of Cobalt funds were transferred from Cobalt to the Trust's bank accounts. (Id. ¶ ¶ 25, 50). According to Cobalt's corporate documents, the Trust owned portions of various Cobalt entities: eighty percent of Cobalt Financial Inc., forty percent of Cobalt Realty Trust, and seventy-nine percent of Cobalt Capital Partners LP; Cobalt Capital Partners LP in turn owned ninety-nine percent of Cobalt Capital Funding LLC, as well as significant portions of other Cobalt entities. (See Decl. of Steven Castaldo in Supp. of the Receiver's Mot. for Summ. J.,...