Antitrust Law Daily Wrap Up, ANTITRUST—S.D.N.Y.: Bid rigging claims based on “sham” sale of accessories distributor fail, (Sep 11, 2013)

By Tobias J. Gillett, J.D., LL.M.

A Hong Kong supplier of ladies’ handbags and accessories failed to plead Sherman and Clayton Act bid rigging claims against entities in the business of importing and distributing ladies’ accessories, predicated on an alleged scheme involving the sham sale of some of the entities to avoid creditors such as the Hong Kong company, the federal district court in New York has ruled (Tommy Lee Handbags Manufacturing Ltd. v. 1948 Corp., September 9, 2013, Carter, A.). However, the court declined to dismiss the supplier’s fraudulent conveyance claims and found that the supplier had adequately pled that the corporate veil could be pierced to reach the chief executive officer of the distributor and later entities allegedly established to carry on the distributor’s business.

Stone Mountain Accessories (SMA) and its subsidiary 1948 Corporation, doing business as Stone & Co. (“Stone I”), designed, imported, sold, and distributed ladies’ accessories and leather goods, including goods provided by Tommy Lee Handbags Manufacturing Ltd. Rosenthal & Rosenthal, Inc. (R&R) was Stone I’s factor, loaning funds in exchange for accounts receivable.

According to Tommy Lee’s complaint, when Stone I encountered financial difficulties, its chief executive officer, Kenneth Orr, colluded with another R&R client to continue Stone I’s business, but without its financial liabilities. To that end, they established Stone Mountain USA LLC and Stone Mountain USA Corp. (“Stone II”). R&R then allegedly conducted a sham public sale of Stone I’s assets, which R&R itself acquired for its $300,000 starting bid when no other bids were submitted. SMA and 1948 then entered into Peaceful Possession Agreements with R&R.

Tommy Lee filed suit against the Stone I and Stone II entities, R&R, and Orr, asserting claims for bid rigging under the Sherman and Clayton Acts and fraudulent conveyance and constructive fraudulent conveyance under New York Debtor & Creditor Law. It sought to pierce the corporate veil between the Stone I entities, the Stone II entities, and Orr. The Stone II entities, R&R, and Orr moved to dismiss.

The court granted the motion to dismiss as to the bid rigging claims, concluding that Tommy Lee lacked standing to bring them. The court explained that antitrust standing required a plaintiff to satisfy two requirements: (1) that it suffered an “antitrust injury,” and (2) that it would be an “efficient enforcer” of the antitrust laws. Even if Tommy Lee adequately alleged bid rigging, it failed to satisfy either of these requirements, according to the court.

Tommy Lee alleged bid rigging based on R&R’s failure to sufficiently advertise the public sale, a non-disclosure agreement between the defendants not to discuss the impending sale, and R&R’s low and unopposed bid. However, the allegations failed to “satisfy the elements of an antitrust injury,” in the court’s view. Tommy Lee did not allege “why the so-called bid rigging was anticompetitive,” the court observed, and did not allege that any disinterested bidders were impeded from attending the auction. Orr’s alleged fear that a certain competitor could appear at the auction and purchase the assets would tend to show “that the Defendants were not in control of the auction,” rather than that it was anticompetitive. Moreover, the only alleged injury was the lack of funds to pay Stone I’s debts, which was a private injury, not an injury to competition.

Finally, even if Tommy Lee had alleged an antitrust injury, it would not be an “efficient enforcer” of the antitrust laws because “[t]he alleged harm is indirect; there is no basis for Tommy Lee to vindicate the public interest; the injury … is highly speculative; and it is difficult to calculate damages due to the Defendants’ alleged bid-rigging,” the court concluded.

The court declined to dismiss the fraudulent conveyance claims and found that Tommy Lee sufficiently pled facts that would permit piercing the corporate veil as to Orr under New York law. The court also found that the Stone II entities could be held liable as successors to the Stone I entities, but not as their alter egos, at least for pleading purposes.

The case is 12 Civ. 3638 (ALC) (DCF).

Attorneys: Misha Wright (Loanzon Sheikh LLC) for Tommy Lee Handbags Manufacturing Ltd. Brendan Michael Scott (Klestadt & Winters, LLP) for Stone Mountain USA, LLC. Michael D. Sirota (Cole Schotz Meisel Forman & Leonard, PA) for Kenneth Orr.

Companies: Tommy Lee Handbags Manufacturing Ltd.; 1948 Corp.; Stone & Co.; Stone Mountain Accessories, Inc.; Stone Mountain USA, LLC; Rosenthal & Rosenthal, Inc.

Cases: Antitrust NewYorkNews