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Sequel Capital, LLC v. William Pearson

March 29, 2011


The opinion of the court was delivered by: Judge Robert M. Dow, Jr.


Defendants Anthony Graffia, Sr., and Anthony Graffia, Jr., filed a motion for summary judgment [134] as to Counts III(A) and III(B) of Plaintiff Sequel's second amended complaint, which allege violations of the Racketeering Influenced and Corrupt Organizations Act ("RICO").*fn1 For the reasons below, the Court grants in part and denies in part Defendants' motion [134].

I. Background

The Court takes the relevant facts primarily from the parties' Local Rule ("L.R.") 56.1 statements [136, 139, 140], as well as from the parties' briefing on the instant motion [see 134, 138, 142]. *fn2

This case originated with a $2 million loan ("the Sequel loan") that Plaintiff Sequel Capital, LLC ("Plaintiff") issued in 2002 to William Pearson ("Pearson") on behalf of Argus Industries, Inc. ("Argus"), a manufacturer and distributor of cameras. Pearson, who was the president of Argus, personally guaranteed the loan and secured it by granting Plaintiff a security interest in some of Argus's cameras. Plaintiff perfected its security interest and recorded a UCC-1 form. In addition to the Sequel loan, Argus obtained international letters of credit from J.P. Morgan Chase Bank & Co. ("Chase"). Plaintiff alleges that it entered into an intercreditor agreement with Chase pursuant to which both entities acknowledged Plaintiff's priority position over the Argus cameras.

Argus defaulted on its loans from Plaintiff and Chase in the fall of 2002. In the spring of 2003, Chase introduced Pearson to Anthony Graffia, Sr., and Anthony Graffia, Jr. (collectively, "Defendants"), who were employees of the Hartford Computer Group ("Hartford"). Defendants advised Pearson (on behalf of Argus) to enter into a pre-packaged assignment of certain Argus inventory (including cameras) to Hartford for the benefit of Argus's creditors. Accordingly, in June of 2003, Pearson assigned Argus's receivables and inventory (including Argus's cameras) to a Trustee-Assignee. The Trustee-Assignee then entered into a contract of sale with Hartford, pursuant to which Hartford agreed to buy the Argus assets for $2.5 million. Hartford also agreed to tender $200,000 as bond within three days of signing the agreement. Hartford entered into a collection agreement to collect Argus's existing receivables on a percentage fee basis, according to which Hartford would receive a thirty percent collection fee.

An auction of the Argus assets was scheduled to take place on July 15, 2003. Plaintiff alleges that Hartford had not tendered the required bond by that time. Plaintiff further alleges that it had expressed some initial interest in purchasing the Argus assets at auction but Defendants and the Trustee-Assignee persuaded it to abstain from bidding and to support Hartford's purchase of the assets instead. Plaintiff acquiesced, and on July 15, 2003, John T. Iwanski, the chief financial operator of Sequel, and Graffia, Jr., as president of Hartford, signed a letter ("the July 2003 contract"), set forth on Sequel letterhead, that stated in pertinent part:

This letter shall confirm our agreement regarding Argus Industries, Inc.'s ("Argus") Assignment for the Benefit of Creditors. Sequel Capital, LLC ("Sequel") being a secured creditor of Argus shall release the Argus assets to which it has a security interest an[d] shall assist Hartford Computer Group, Inc. ("Hartford") to become the successful bidder at the auction of Argus' assets held by the Argus Trustee-Assignee to be completed on July 15, 2003. In the event Hartford is the successful bidder at the auction and purchases the Argus assets, as consideration for the release and assignment of Sequel, Hartford agrees as follows:

1. Hartford (subject to the condition that it is able to reach a fee agreement with the attorney representing Argus in the Argus v Office Max litigation) agrees to include the Office Max receivable as a receivable it will attempt to collect under the terms of its Collection Agreement with the Trustee-Assignee.

2. Hartford shall defer its 30% fee on all Argus inventory sold and receivables collected until Sequel is repaid the secured debt it is owed from Argus. As of June 30, 2003 the amount of the secured debt is $2,828.007.70 (plus allowed sums paid as agreed to at the assignee sale) with additional interest of $852.22 per day until the above amount is reduced.

3. Hartford agrees to pay Sequel 30% of the Gross Contribution Margin earned by Hartford from the sale of Argus products, excluding Argus existing inventory, until Sequel has received payment both from The Argus Estate and from such margin payments in the full amount of the above debt owed to Sequel and all accumulated interest. Upon Sequel's receipt of such full payment, Sequel agrees to assign to Hartford the full amount of the remaining debt owed by Argus to Sequel together with Sequel's security interest in the Argus accounts receivables so as to make Hartford a secured creditor of Argus in the amount paid by Hartford to Sequel.

[134-5 (emphasis added).]

Hartford was the sole bidder on the Argus assets at the July 15, 2003, auction. Hartford purchased the Argus assets at auction for $1.3 million (slightly more than half of the $2.5 million price to which it agreed in the contract of sale). The Trustee-Assignee immediately tendered the $1.3 million purchase price to Chase. Plaintiff did not receive any of the sale proceeds, nor has it been repaid the secured debt in the years since the auction.

Plaintiff also alleges the following: After Hartford bought the Argus assets from the Trustee-Assignee on July 15, 2003, retailers returned to Hartford an unspecified number of Argus cameras ("the used Argus cameras"). In addition to lawfully selling the Argus cameras that Hartford bought at auction, Hartford unlawfullyrepackaged and resold as new the used Argus cameras that the retailers had returned. Hartford received approximately $1.69 million in exchange for selling the used Argus cameras as new. In March 2005, Hartford fraudulently transferred the Argus assets to Impero, another enterprise owned, operated, and managed by Defendants. Impero illegally resold used Argus cameras as new between 2005 and 2006. Plaintiff did not learn that Defendants were repackaging and reselling as new the used Argus cameras until the late fall of 2006. Defendants informed Sequel Principal and Owner Havey Kinzelberg after the July 15 auction that returned inventory forced Defendants to incur additional expenses, that accounts receivables were significantly overstated, and that secured creditors would never receive full recovery. Plaintiff contends that these statements were misrepresentations that were intended to induce Plaintiff's agreement on December 31, 2003, to a modification of the July 15, 2003 contract,*fn3 and to an October 26, 2004 release by Plaintiff of all claims and actions against Hartford arising out of the ...

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