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HAGGIAG v. BROWN

January 12, 1990

ROBERTO HAGGIAG AND PRODEX, N.V., INDIVIDUALLY AND ON BEHALF OF ROSE HILL PROPERTY ASSOCIATES, INC., PLAINTIFFS,
v.
HARRY JOE BROWN, JR., PETER OBERLINK, GEORGE ACKERMAN, TAN HOLDING CORPORATION, BUSHNELL CORPORATION, H.J. BROWN PROPERTIES, INC. A/K/A H.J. BROWN, INC. AND "JOHN DOES" 1 THROUGH 10, DEFENDANTS.



The opinion of the court was delivered by: Leisure, District Judge.

This is an action alleging fraud, breach of fiduciary duty, and violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. (hereinafter "RICO"). Plaintiffs have come before the Court seeking provisional relief in the form of, first, a preliminary injunction preventing defendants from transferring any assets of Rose Hill Property Associates Inc. ("Rose Hill"); second, an order pursuant to Fed.R.Civ.P. 64 attaching the assets of certain defendants, and third, the appointment of a temporary receiver to manage and control the assets of Rose Hill pending final disposition of this matter. Defendants have cross-moved for dismissal of the action. The case originally came to the Court in the form of an Order to Show Cause dated November 21, 1989. The matter was heard by the Honorable John E. Sprizzo, United States District Judge of this Court, on November 22, 1989. At that time Judge Sprizzo entered a temporary restraining order which, in part, required that all corporate checks of Rose Hill in amount of $1000 or greater be countersigned by Howard Adler, Esq., the attorney-in-fact for plaintiffs, and enjoining any transfer of assets of Rose Hill other than those necessary in the ordinary course of business. Transcript of Proceedings on November 22, 1989, at 4. A further hearing was held before this Court on December 5, 1989, at which time the parties agreed to extend the temporary restraining order until the parties could prepare for, and the Court could hear, plaintiffs' arguments for preliminary relief. One change was made in the order of Judge Sprizzo: the minimum amount for checks required for countersignature was raised from $1000 to $1500. Transcript of Proceedings on December 5, 1989, pp. 6-7.

A partial evidentiary hearing was held before this Court on January 3, 1990, after each party had the opportunity to fully brief its positions and present appropriate documentary evidence. After a half day of testimony, the Court indicated to the parties its ability to rule based on the information before it.*fn1 At that time, the Court entered the following rulings: first, the Court denied plaintiffs' motion for a broad preliminary injunction freezing Rose Hill's assets. The Court, however, did issue a preliminary injunction which required that all Rose Hill checks in amounts greater than $1500 be countersigned by Howard Adler, that Howard Adler and the members of the Rose Hill board be notified in writing of all proposed leases, sales, and opening of all banking or transactional accounts involving Rose Hill, including investment accounts, that Howard Adler be given ten days from receipt of notification to object to any of the above actions, that Howard Adler should not unreasonably withhold his approval of any of the above actions, and that any violation of the above should subject the violator to sanctions and a possible finding of contempt. Second, the Court denied plaintiffs' motion for an order of attachment. Third, the Court denied plaintiffs' motion for the Court appointment of a receiver. Fourth, the Court denied defendants' motion to dismiss. The Court reserved its findings of facts and conclusions of law as required under Fed.R.Civ.P. 52(a) to this opinion. Transcript of Proceedings on January 3, 1990, at 92-94.

BACKGROUND

Rose Hill Property Associates is a New York corporation whose principal asset is an office building located at 461 Park Avenue South, New York, New York. Rose Hill is owned jointly by plaintiff Roberto Haggiag ("Haggiag") and defendant Harry Joe Brown, Jr. ("Brown").*fn2 This action is not the first time there has been a dispute between these parties. In early 1987, a dispute arose over the operation of Rose Hill. Plaintiffs' Memorandum of Law at 2. That dispute was finally settled through an agreement between Haggiag and Brown dated July 15, 1987 ("July 15, 1987 Agreement"). Under that agreement, Brown was placed in charge of the corporate records and was authorized to take certain actions on behalf of Rose Hill, including the placement of a mortgage on the property, not to exceed $5 million. July 15, 1987 Agreement, attached as Exhibit A to Affidavit of Howard B. Adler, Esq., sworn to on November 20, 1989 ("Adler Aff."). The agreement further permitted Haggiag or his agent to examine the books or records of Rose Hill on 24 hours' advance written notice, and required all Rose Hill checks in amounts greater than $1500 be countersigned by Haggiag's agent, Howard Adler. Id.

Eight months later, on March 1, 1988, there was a meeting of the Rose Hill Board of Directors at which the operations of Rose Hill were further clarified. At that meeting of the Board, Brown was named president of Rose Hill, Gail Silver ("Silver") was named secretary,*fn3 and Peter Oberlink ("Oberlink") was named assistant secretary and treasurer. Minutes of Meeting of Directors of Rose Hill, dated March 3, 1988, attached as Exhibit B to Adler Aff. Soon after that meeting, Brown, on behalf of Rose Hill and with the knowledge and approval of the Board of Directors, executed a mortgage in the amount of $1.8 million, the proceeds of which were used to buy out John Campione ("Campione"), a shareholder and former president of Rose Hill. A second mortgage, for $400,000, was executed in May 1988 for the purpose of renovating portions of 461 Park Avenue South. This mortgage was also taken with the approval of the Rose Hill Board of Directors. Adler Aff. ¶ 19.

In June 1988, a $3 million mortgage was executed with a second bank to prepay the previous mortgages. After that prepayment, some $800,000 remained in cash. That money was deposited in an account at Kidder, Peabody & Co ("Kidder, Peabody"). Plaintiffs were aware of these actions, but allege that they were unaware of the creation or existence of the Kidder, Peabody account prior to this transaction. Adler Aff. ¶ 25.

Soon after these mortgages were executed, the relationship between the parties began to deteriorate. Plaintiffs claim that they requested information regarding the proceeds of the renovation mortgage which was never provided to them. Adler Aff. ¶ 20. Plaintiffs also allege that, beginning in November 1988, Oberlink ceased to send Rose Hill's monthly operating statements to Adler, despite Adler's requests to receive those documents. Adler Aff. ¶¶ 22-23.*fn4 In December 1988, defendants Brown and Oberlink filed a federal tax return for Rose Hill that incorrectly stated that Brown was the sole officer and shareholder of Rose Hill. Reply Aff., Exhibit M.; Transcript of Proceedings on January 3, 1990 at 38-51. Meanwhile, defendants Brown and Oberlink were operating the property. During the period from September 1988 when Brown was named president, to October 1989, the rent roll of the building at 461 Park Avenue South increased from approximately $20,000 a month to almost $60,000 a month. Affidavit of George Ackerman, sworn to on December 5, 1989 ("Ackerman Aff."), Exhibits E, F. That building is old and was not in fully marketable condition at the time the current Rose Hill management took control of its operations. Brown Aff. ¶ 12.

During 1989, defendants continued their efforts to lease portions of 461 Park Avenue South. It is the manner in which these and other transactions took place that is in dispute. Pursuant to the minutes of the March 1, 1988 meeting, the sixth floor of 461 Park Avenue South had been leased to defendant Tan Holding Corporation ("Tan"), a company controlled by defendant Brown. Tan undertook the renovation of that space and has subleased that space at a profit. Subsequently, and apparently without Adler's approval, Rose Hill leased the seventh and tenth floors of 461 Park Avenue South to defendant Brown, the fifth and eleventh floors to defendant Bushnell Corporation ("Bushnell"), which plaintiffs allege is controlled by Brown, and the fourth floor to Tan. Affidavit of Howard B. Adler, Esq., sworn to on December 27, 1989 ("Reply Aff."), Exhibits G through K. These spaces are being subleased at a profit to the lessees. However, it appears that in each case lessees committed money to renovating the space prior to the entry of any sublease.

On May 1, 1989, Brown hired defendant George Ackerman ("Ackerman") to provide accounting and other financial services support to Rose Hill. Ackerman Aff. ¶¶ 1-2. Ackerman was hired without Adler's approval and apparently without his knowledge. Reply Aff. ¶ 11. Plaintiffs allege that an unauthorized Board of Directors meeting was held on June 11, 1989, of which neither Silver nor Adler received notice until June 22 when they were requested to approve such minutes. Adler Aff. ¶ 27. Additionally, plaintiffs allege that defendants opened bank accounts at European American Bank and investment accounts at Kidder, Peabody, without the knowledge or approval of Adler or Silver, and made numerous transactions involving these accounts without the knowledge or approval of Adler or Silver.

Plaintiffs also assert that checks were submitted to Adler for countersignature during September 1989, some of which, plaintiffs claim, were for the personal benefit of defendants. Additionally, plaintiffs claim the defendants wrote a series of checks for their personal benefit in amounts of $1500 or less in order to avoid the need to submit those checks to Adler for countersignature. Reply Aff., Exhibits A, O. Finally, plaintiffs assert that the individual defendants prevented Adler from obtaining access to the books and records, and also constantly refused, during the summer and fall of 1989, to give Adler accurate and complete information about the operations and finances of Rose Hill.

Defendants claim that the dispute between the parties arises from what is, in essence, a question of contract interpretation. They assert that the actions taken by the parties at the March 1, 1988 Board of Directors meeting superseded the July 15, 1987 Agreement. Specifically, defendants point out that the minutes for the March 1, 1988 Board meeting indicated that Brown was made president of Rose Hill "with the same powers, benefits and duties as held by the former President." Adler Aff., Exhibit A. Defendants claim that the former president, Campione, was empowered to take all corporate actions without explicit Board approval and without notification of Adler or any other party. Affidavit of Harry Joe Brown, Jr., sworn to on December 18, 1989 ("Brown Aff. II"), ¶¶ 5-6. There is no documentary evidence indicating the scope of Campione's powers, nor is there an affidavit from Campione indicating his understanding of the scope of his authority.

Further, defendants assert that when they did attempt to cooperate with Adler, he was difficult to reach and impeded defendants' efforts to improve Rose Hill's operating results. Defendants claim that they attempted to continue to keep Adler up to date on the activities of Rose Hill as a courtesy. Brown Aff. II, ¶¶ 14, 23; Affidavit of Peter C. Oberlink, sworn to on December 18, 1989 ("Oberlink Aff. II"), ¶¶ 12, 14, 30.

There was substantial correspondence between the parties during the fall of 1989. Plaintiffs, dissatisfied with the results of this contact, filed this action seeking immediate and extraordinary relief.

DISCUSSION

Plaintiffs have demanded three separate provisional remedies: a preliminary injunction, an order of attachment, and the appointment of a receiver. Defendants have cross-moved to dismiss. The Court will address these requests for relief in turn.

A) Preliminary Injunction

It is well settled in the Second Circuit that, "A party seeking a preliminary injunction must demonstrate that it is likely to suffer possible irreparable harm if the requested relief is not granted and `either (1) a likelihood of success on the merits of its case or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in its favor.'" Citibank, N.A. v. Nyland (CF8) Ltd., 839 F.2d 93, 97 (2d Cir. 1988), quoting Coca-Cola Co. v. Tropicana Products, Inc., 690 F.2d 312, 314-15 (2d Cir. 1982). In general, "the purpose of a preliminary injunction is to preserve the status quo . . ." Tucker Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 972 (2d Cir. 1989). "As a general rule, of course, a party may not obtain injunctive relief where it is claiming a loss that can be adequately remedied by an award of money damages." Green v. Drexler, 760 F.2d 406, 416 (2d Cir. 1985) (citations omitted). One of those situations is where there is a showing that assets may be transferred in a manner that would frustrate the relief. Id. However, "inequitable conduct alone cannot justify the entry of a preliminary injunction. The linchpin of such interim relief is that threatened irreparable harm will be prevented by that injunction." Buckingham Corporation v. Karp, 762 F.2d 257, 262 (2d Cir. 1985).

Plaintiffs originally moved for a broad and intrusive preliminary injunction. They requested an order "preliminarily enjoining defendants from transferring any assets of Rose Hill Property Association [sic] Inc. ("Rose Hill") pending resolution of this action." Order to Show Cause dated November 21, 1989, pp. 1-2 (emphasis added). Such an order would, in effect, freeze the operations of Rose Hill as it would, on its terms, prevent the paying of any bills or salaries during the period of the injunction. The Court finds that such an injunction is both inappropriate and unwarranted. Both sides to this litigation have asserted that Rose Hill is in somewhat precarious financial condition. An injunction such as that demanded by plaintiffs, even if issued in conjunction with an order appointing a temporary receiver, would likely worsen the current condition of Rose Hill rather than improve it. Defendants are the parties most familiar with the current operations of Rose Hill and with any and all on-going negotiations for the leasing of space and/or renovations in 461 Park Avenue South. A change in management could result in just the sort of dissipation of corporate assets, though unintentional, that plaintiffs appear to fear.

Furthermore, it is clear that the relief sought is not in proportion to the actual showing made by plaintiffs in this matter. Such relief is not simply an attempt to maintain the status quo during the pendency of the action, but is an attempt to take control of property away from defendants. If this were property owned solely or in large part by plaintiffs, and defendants were simply managers and/or minority holders, plaintiffs would have a far better case for the broad injunction that they are seeking. However, such is not the case. Plaintiffs are the minority holder. Their interest is in seeing that the value of their holdings is not improperly or fraudulently diminished. The injunction demanded may in fact cause just the sort of diminishment that plaintiffs wish to avoid.

Plaintiffs have not demonstrated that the Court should impose a provisional remedy that goes beyond maintaining the status quo. Plaintiffs have provided some evidence that defendants may be using certain corporate assets for their personal benefit. This evidence consists of the leases granted to certain defendants for extended terms at a rate significantly below the rate at which the space has subsequently been subleased, evidence that a series of checks have been written to defendants on Rose Hill accounts in amounts of $1500 or less to avoid Adler's scrutiny, the filing of an apparently improper tax return, the opening of numerous and unexplained banking and investment accounts and transactions between those accounts and defendants, and apparently misleading actions taken regarding the alleged June 11, 1989 Board of Directors meeting. However, the Court also notes that there is compelling evidence that the financial condition of Rose Hill has improved substantially in the time that defendants have managed the property. The Court also fails to find any significant evidence of any massive dissipation of assets of the sort which would be required in order for the drastic remedy sought by plaintiffs to be appropriate.

This does not mean, however, that the Court believes that no provisional remedy should be imposed. The Court finds that there is a sufficiently serious question of law going to the merits in this case relating to plaintiffs' rights to participate in and be informed about the operation of Rose Hill. The issue is the status of the July 15, 1987 Agreement between the parties regarding the operation of Rose Hill. Plaintiffs argue that that agreement is still in effect and that defendants have abrogated the terms of said agreement. Defendants assert that the March 1, 1988 Board of Directors meeting superseded any previous agreement.

This is an important contract question for this case. If plaintiffs are correct, then some of the actions taken by defendants are in violation of the July 15, 1987 Agreement. However, if defendants are correct in their interpretation, then it may necessarily follow that Brown is free to take all actions taken by the previous president of Rose Hill. It is also important ...


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