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.
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"),
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
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
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
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