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Posted: June 13, 2016

Commercial Division Remands Party To Jail For Civil Contempt

On June 3, 2016, Justice Kornreich of the New York County Commercial Division issued a decision in Gem Holdco, LLC v. Changing World Technologies, L.P., 2016 NY Slip Op. 31028(U), holding defendants and cross-claim defendants Dennis M. Danzik and RDX Technologies, Inc. (“RDX”) in civil contempt for violating Justice Kornreich’s prior: (a) March 18, 2015 Order attaching certain assets that Danzig and RDX had misappropriated and (b) May 5, 2015 TRO freezing the assets of RDX.

Gem Holdco is a three-and-half-year-old case with an extensive procedural history, but as it relates to the contempt, Danzik was the CEO of RDX, a publicly traded energy company. RDX purchased a renewable diesel fuel plant from the defendants known as the “CWT Parties.” In connection with that purchase, RDX agreed that certain tax credits (the “Tax Credits”) that were owed by the U.S. Government to the CWT Parties for events that occurred prior to the sale, and which would be paid initially to RDX, as the new owner of the plant, would then be immediately remitted to the CWT Parties. Initially, the CWT Parties, Danzik and RDX were all sued by plaintiff GEM Holdco based on the claim that the sale of the plant violated certain agreements with GEM. Ultimately, however, the CWT Parties on one hand and Danzik and RDX on the other had a falling out because RDX had failed to make the required payments in connection with the sale. More importantly, the CWT Parties learned that Danzik and RDX had misappropriated $5,000,000 out of $6,000,000 of the Tax Credits. Indeed, the CWT Parties had learned that Danzik had taken the money for himself and had stolen about $2,000,000 through a secret bank account.

On March 18, 2015, Justice Kornreich ordered that the Tax Credits be set aside in a segregated account and if RDX no longer had possession of them, Danzik was to cause RDX to return the money. Danzik and RDX failed to comply with this order. On May 5, 2015, the CWT Parties moved by Order to Show Cause for contempt which application included a TRO (signed by Justice Kornreich) freezing the assets of RDX. Immediately thereafter, Danzik and RDX set up a shell company (M2R Licensing LLC) to divert the receivables of RDX in violation of the TRO.

Justice Kornreich began a civil contempt evidentiary hearing in November 2015. The hearing was adjourned to January 2016, by which time Danzik and RDX had filed for bankruptcy. Danzik had argued that the hearing should not continue because of the automatic stay. Justice Kornreich held that this position was meritless:

The RDX Parties’ position that they were excused, without prior leave of Court, from this contempt by virtue of the automatic stay contrary to the weight of legal authority. Under the circumstances, the automatic stay does not deprive this Court of its ability to compel compliance with its Orders and hold the RDX Parties in contempt for past misconduct.

On the merits of the Contempt Motion. Justice Kornreich held Danzik and RDX in civil contempt for violating the Attachment Order and the TRO:

[Danzig’s] sole profit basis for not complying with the March 18, 2015 Attachment Order, which obligated him personally to put the tax credit funds into a segregated account, is that he lacked sufficient funds to do so. That was a lie. As Ms. Blazar explained, when the Federal Government sent RDX a tax credit funds, Danzik had her open and deposit the money into [a secret account at a separate bank]. He then transferred funds to accounts belonging to himself, his family members and their businesses. That money was, at least in part, used to pay Danzik’s personal expenses. Indeed, Ms. Blazar testified that the money transferred to the businesses did not correspond to actual RDX expenses. Ms. Blazar was not speculating. She was RDX’s CFO and was privy to all of its financial information. Her candor and understanding of RDX’s finances buttressed her credibility.

(Emphasis in the original).

Based on this finding, Justice Kornreich gave Danzik one more opportunity to purge himself of contempt, which was to return the $5 million in tax credits by June 15, 2016. Otherwise Danzig is to be imprisoned with the imposition of civil and criminal monetary penalties.

NOTE: Jeffrey M. Eilender, Bradly Nash and Vitali Rosenfeld of this firm represent the CWT Parties.

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