OPINION & ORDER Comfortex Company, Ltd. (“Comfortex), a Chinese garment manufacturer, seeks to hold Xcel Brands (“Xcel”), H Heritage Licensing, and Xcel Design Group (together, “Defendants”) liable for an unsatisfied judgment against non-parties Halston Operating Company, LLC, H Company IP, LLC and House of Halston, LLC (together, the “Halston Entities”). Comfortex alleges that Defendants used their domination and control over the Halston Entities to fraudulently drain their assets, leading to the Halston Entities’ insolvency and resulting inability to pay Comfortex. Comfortex alleges causes of action for: (1) constructive fraudulent conveyance; (2) actual fraudulent conveyance; (3) alter ego liability; and (4) successor liability. Doc. 1. Before the Court are Comfortex’s motion to exclude expert testimony, Doc. 44, and Defendants’ motion1 for summary judgment, Doc. 42. For the reasons set forth below, Comfortex’s motion is GRANTED and Defendants’ motion is DENIED. I. BACKGROUND A. Factual Background The following facts are undisputed except where otherwise noted. 1. The Parties and the Halston Entities Comfortex is a garment manufacturer based in Hong Kong. Doc. 1 19.2 Defendants are Delaware corporations with their principal place of business in New York. Doc. 1
20-22. Together, the Halston Entities sold garments under the “Halston” and “Halston Heritage” trademarks. See Doc. 47-6 (Malka Tr.) at 21:18 to 21:20. Two of the three non-parties, Halston Operating Company and H Company IP, are wholly owned by the third non-party, the House of Halston LLC (“House of Halston”). Doc. 57 (Pl.’s Response to Defs.’ Rule 56.1 Statement and Counter-Statement of Undisputed Material Facts) at 2. Ben Malka was the CEO and equity owner of House of Halston. Doc. 47-6 at 24:18 to 24:19. He also served on the Xcel Board for which he received incentive compensation from Xcel, although the precise amount of compensation is not alleged. Doc. 57 at 2. Comfortex asserts that Malka controlled the Halston Entities, which acted as a single enterprise. Doc. 57 at 2. Defendants dispute the characterization that Malka had full control over the Halston Entities, and note that other Halston Operating Company employees were involved in the Halston Entities’ production process and worked with retailers. Doc. 63 at 29 (Defs.’ Reply to Pl.s’ Statement of Undisputed Facts).3 2. Xcel’s Acquisition of the “H by Halston” and “H Halston” Brands On December 23, 2014, Xcel acquired, from one of the Halston Entities,4 the “H by Halston” and “H Halston” brands. Doc. 49 (Defs.’ Statement of Uncontested Material Facts) at 1. According to Comfortex, the “H by Halston” and “H Halston” brands are secondary lines of merchandise of the “Halston” and “Halston Heritage” trademarks. Doc. 1 5. As consideration for these acquisitions, Xcel paid approximately $18 million dollars and 1 million shares of Xcel common stock. Doc. 49 at 1. From 2014 until July 1, 2017, Xcel licensed the “H by Halston” and “H Halston” brands to two prominent retailers, Dillard’s and the Hudson Bay Company (“Hudson Bay”). Id. at 1-2. During that time, Xcel provided design services for Dillard’s and Hudson Bay, and in exchange was paid a royalty fee based on retail sales. Id. at 2. In mid-2017, Xcel claims it entered into an oral agreement to license certain products from brands, including products under the “H Halston” brand, to the Halston Operating Company. Id. According to Xcel, the terms of the oral agreement were consistent with a draft license agreement between Xcel and the Halston Operating Company. Id. Pursuant to the draft licensing agreement, Xcel was to provide the Halston Operating Company with an “exclusive, non-transferable, non-assignable license” to source and manufacture, sell, and advertise products from the brands. See Doc. 47-4 (draft licensing agreement).5 Xcel also agreed to provide “a reasonable number of [d]esigns” on “a regular basis” as “reasonably requested” by the Halston Operating Company. Doc. 47-4 §4.1. In exchange, the Halston Operating Company paid Xcel licensing fees based on the net wholesale of products under the brands as well as design fees. See Doc. 47-4 at 1 (Schedule A in the draft licensing agreement outlining licensing and design fees).6 Between January 30, 2018 and September 18, 2018, the Halston Operating Company paid Xcel over $1.5 million dollars in purported licensing and design fees. Doc. 57 at 9. Comfortex disputes the existence of the oral licensing agreement, claiming that the draft agreement was never properly executed. Doc. 57 at 7-8. 3. Degree of Closeness between Xcel and the Halston Entities During the Oral Licensing Agreement During the course of the oral licensing agreement, Xcel was involved in negotiations with Chinese manufacturers over the price of production. Doc. 57 at 9. Seth Burroughs, Xcel’s Executive Vice President, would travel to the Halston Operating Company’s offices once every other month allegedly to “coordinate” the licensing agreement. Id. at 8. Additionally, the Halston Operating Company’s employees Cynthia Allen, Tracey Powell, and Stephanie Lee — who initially worked at Xcel and then were directly hired by the Halston Operating Company — occupied desks in Xcel’s offices and performed the same tasks as they did at Xcel. Id. at 6. 4. The Sale of the “Halston” and “Halston Heritage” Trademarks to Xcel Comfortex alleges that sometime in July 2018, Burroughs reviewed the books and records of the Halston Entities and concluded that their liabilities exceeded the value of their assets — or in other words, that the Halston Entities were insolvent — with the exception of the value of the “Halston” and “Halston Heritage” trademarks. Doc. 57 at 9. Defendants dispute that they knew the Halston Entities were insolvent in July 2018. Doc. 63 at 30. On July 6, 2018, Xcel obtained an appraisal of the trademarks prepared by Consensus Securities LLC (“Consensus”). Doc. 57 at 15. By August 4, 2018, the Halston Entities owed the Bank of HaPoalim, an Israeli bank, approximately $5.5 million dollars. Doc. 49 at 3. On October 9, 2018, Xcel and the Halston Entities signed a letter of intent to transfer the “Halston” and “Halston Heritage” trademarks to Xcel for $11 million dollars. Doc. 57 at 18. Consensus provided a second appraisal of the trademarks to Xcel on November 18, 2018. Doc. 57 at 15. In December 2018, the Xcel Board of Directors heard a presentation about potentially acquiring the “Halston” and “Halston Heritage” trademarks that were then owned by H Company IP. Doc. 49 at 3. At some time before January 2019, Xcel asked Consensus to prepare a fairness opinion to determine an appropriate purchase price for the “Halston” and “Halston Heritage” trademarks. Id. at 4. On January 23, 2019 Consensus presented its findings (the “Consensus Report”). Id. The Consensus Report provided a $17,170,000 low value estimation, $21,655,000 middle value estimation, and $29,088,000 high value estimation. Id. The Consensus Report also expressly referred to the July 6 and November 21, 2018 appraisals performed by Consensus. Doc. 41-2 at 3. On February 11, 2019, H Company IP sold the “Halston” and “Halston Heritage” trademarks to Xcel in exchange for $8.35 million dollars in cash plus 777,778 shares of Xcel’s common stock, subject to the terms of a separate pledge agreement. Doc. 49 at 4-5. Pursuant to the purchase agreement, Xcel and H Company IP agreed to certain indemnification provisions. Doc. 47-25 at 42-47. As partial collateral security for Xcel’s indemnification obligations, H Company IP pledged both the 1 million shares of Xcel common stock it acquired in connection with the 2014 sale of the “H by Halston” and “H Halston” brands, as well as the 777,778 shares of stock it was supposed to acquire in connection to the 2019 sale of the trademarks (the “Pledge Agreement”). Doc. 49 at 4; Doc. 47-27. After closing the deal, Xcel claims it paid approximately $6.9 million to the Bank of HaPoalim, to pay off the Halston Operating Company’s debt. Doc. 49 at 5. On April 12, 2019, after the closing of the Halston” and “Halston Heritage” deal, Malka filed a report with the SEC disclosing that he personally acquired 1 million shares of Xcel stock. Doc. 56-14. B. Procedural Background 1. Comfortex’s Litigation Against the Halston Entities Between 2017 and 2018, Comfortex manufactured and shipped garments pursuant to orders placed by the Halston Entities. Doc. 56-12
