Comfortex Company, Ltd. v. Xcel Brands, Inc.

Background

Comfortex, a garment manufacturer, obtained a default judgment against Halston Operating Company, LLC, H Company IP, LLC, and House of Halston, LLC, but was unable to collect it. Comfortex then sued Xcel Brands, Inc., H Heritage Licensing, LLC, and Xcel Design Group, LLC. It alleged that the defendants used their control over the Halston entities to drain assets and leave them insolvent.

Comfortex asserted four theories: constructive fraudulent conveyance, actual fraudulent conveyance, alter-ego liability, and successor liability. The alleged transfers included more than $1.5 million in licensing and design fees paid to Xcel in 2018 and the February 2019 sale of the “Halston” and “Halston Heritage” trademarks to Xcel for $8.35 million in cash plus 777,778 shares of Xcel common stock.

Expert testimony

Comfortex moved to exclude an expert report prepared by Andrew Jassin. Jassin criticized a Consensus Securities valuation report, but he did not provide his own valuation of the trademarks. He also did not review two earlier Consensus appraisals that the later report referenced. Comfortex argued that the omission made Jassin’s analysis unreliable and that his report lacked useful evidence about the trademarks’ value.

The Court granted Comfortex’s motion. Under Federal Rule of Evidence 702, expert testimony must be based on sufficient information and reliable methods. The Court found that the two unreviewed appraisals were directly relevant because they included information about factors Jassin said were necessary for a fair-market valuation. Because Jassin did not review those materials, the Court concluded that his opinion rested on inadequate data and excluded it under Rule 702. The Court did not separately decide whether to exclude the report under Rule 403.

Summary judgment

The Court denied Defendants’ motion for summary judgment. Summary judgment is appropriate only when there is no genuine dispute about a fact that could affect the outcome and the moving party is entitled to judgment under the law.

For the constructive fraudulent-conveyance claims, the Court explained that Comfortex would have to show, among other things, that the transfers lacked “fair consideration”—a fair exchange of value and good faith. The defendants offered evidence that the licensing and design fees were paid under an oral licensing arrangement, but they did not establish as a matter of law that the more than $1.5 million payment was fair value for the services. Comfortex also did not establish the proper value of those services. The resulting factual dispute prevented summary judgment on the claims concerning the fees.

The parties also disputed the fair value of the trademarks. Defendants argued that the 2019 purchase price was fair, while Comfortex relied on Consensus valuations ranging from $17.17 million to $29.088 million. The Court found that Defendants had not presented evidence establishing the trademarks’ fair value, and the excluded Jassin report did not provide such a valuation. The Court therefore denied summary judgment on the constructive fraudulent-conveyance claims concerning the trademark sale.

For actual fraudulent conveyance, Comfortex had to show that the transfers were made with actual intent to hinder, delay, or defraud creditors. The Court noted factual disputes about the parties’ closeness, the adequacy of consideration, the defendants’ control, the timing of the transfers, and whether Xcel knew the Halston entities were insolvent. Because fraudulent intent ordinarily presents a factual question about the parties’ states of mind, the Court declined to grant summary judgment on this claim.

For alter-ego liability, Comfortex argued that House of Halston was Xcel’s alter ego. Under New York law, this theory requires evidence that the owner completely dominated the corporation in the transaction and used that domination to commit a fraud or wrong that injured the plaintiff. The Court found a factual dispute about whether Xcel’s control went beyond the ordinary control a trademark licensor may exercise. Evidence cited included shared personnel and office space, the alleged operation under an unsigned oral licensing agreement, and the disputed adequacy of consideration. The Court denied summary judgment on the alter-ego theory.

For successor liability, Comfortex relied on a possible de facto merger. A de facto merger is a transaction that is formally an asset sale but operates like a merger. The Court found factual disputes about fair consideration and whether Ben Malka’s ownership of Xcel stock was connected to Xcel’s purchase of the trademarks. Because continuity of ownership is a required part of a de facto merger, the Court denied summary judgment on the successor-liability theory.

Disposition

The Court granted Comfortex’s motion to exclude Andrew Jassin’s expert report and denied Defendants’ motion for summary judgment. The opinion did not determine that Defendants were liable; it determined that factual disputes required the claims to proceed. Judge Edgardo Ramos directed the parties to appear for a telephone pretrial conference on April 25, 2024.