The opinion of the court was delivered by: ROBERT W. SWEET
Defendants Daniel Palmadessa ("Daniel"), Donald Palmadessa ("Donald"), William Palmadessa ("William"), Supreme Recycling, Inc. ("Supreme") and Fortune Interior Dismantling Corporation ("Fortune") have moved for dismissal of the complaint (the "Complaint") of plaintiffs Red Ball Interior Demolition Corporation, a New York corporation ("Red Ball") and John Palmadessa ("John") pursuant to Rule 12(b)(6) Fed. R. Civ. P. for failure to plead claims upon which relief can be granted and Rule 9(b) Fed. R. Civ. P. for failure to plead fraud with sufficient particularity. Defendants also move for summary judgment pursuant to Rule 56(b) Fed. R. Civ. P. The plaintiffs have moved for summary judgment on their Seventh Claim, for repayment of debts owed to plaintiff corporation by defendants, and on their Eighth Claim, for intentional refusal to repay monies owed.
The defendants have also made a cross-motion which purports to be a motion for summary judgment regarding the Complaint in its entirety, but in fact only addresses plaintiffs' Eighth Claim for relief. For the reasons set forth below, the defendants' motion to dismiss will be granted with respect the RICO and common law fraud claims, partially granted with respect to plaintiffs' claim for breach of fiduciary duty, and denied regarding plaintiffs' other claims. Defendants' motions for summary judgment will be denied, as will plaintiffs'.
Plaintiff John founded the family carting and demolition business, which became Red Ball in 1958, and is presently Red Ball's sole shareholder. Defendant Daniel is John's brother and was his partner in several family businesses, including Red Ball. Daniel's sons, defendants Donald and William were employed by Red Ball and later incorporated Supreme and Fortune.
John instituted a proceeding seeking the court-ordered dissolution of Red Ball in New York State Supreme Court, on January 30, 1989, alleging fraud and deadlock of directors. That action was dismissed on October 20, 1989.
Daniel then commenced an action for injunctive relief against John in New York State Supreme Court on April 3, 1990. That action was removed to this Court, Daniel Palmadessa, et al. v. John Palmadessa, 90 Civ. 2429 (RJW), and John again sought dissolution of Red Ball via a counterclaim in that action. In 1990, pursuant to that litigation and under the supervision of the Honorable Robert J. Ward of this Court, Daniel and John executed an amendment (the "1990 Amendment") to the shareholders' agreement they executed in 1986 (the "1986 Agreement") the terms of which are discussed below. The 1990 Amendment was "so ordered" by Judge Ward.
On August 11, 1992, during the course of the prior litigation, Judge Ward issued an Order (the "August 1992 Order") adjudging Daniel in contempt of Court with regard to the 1990 Amendment for cutting off John's salary. Daniel was ordered to cause Red Ball and the other corporations owned by him and John to pay each of them a salary of $ 3,000 per week.
John's counterclaim for dissolution in the prior action was ultimately resolved when, on June 2, 1994, John purchased all of Daniel's Red Ball shares, in addition to other assets of Daniel's, for $ 1.2 million in cash and notes. That action was closed on September 23, 1994. The Complaint in this action was filed four days after John's purchase of Daniel's shares, on June 6, 1994 and is brought by Red Ball, and by John, its sole shareholder, against Daniel, his brother, former partner and shareholder of Red Ball, Daniel's two sons Donald and William, and their corporations, Fortune and Supreme, which operate in lines of business related to that of Red Ball.
Defendants' motion to dismiss and for summary judgment was filed on July 28, 1994. Defendants also filed an Answer on August 5, 1994. Oral argument on defendants' motion to dismiss and for summary judgment was heard on August 24, 1994. Plaintiffs' motion for summary judgment on their Seventh Claim was filed on November 17, 1994 and oral argument was heard on December 14, 1994. Plaintiffs' motion for summary judgment on their Eighth Claim was filed on December 1, 1994 and defendants' cross-motion for summary judgment was filed on December 12, 1994. On December 21, 1994 oral argument was heard regarding plaintiffs' motion for summary judgment on their Eighth Claim and defendants' cross-motion for summary judgment.
John went into the carting business in 1958. He was later joined by Daniel and they, along with John's wife Mary, became the only shareholders in their first corporation in 1961. John and Daniel formed plaintiff corporation Red Ball in 1967. John and Daniel were Red Ball's only shareholders. Red Ball developed into a successful business.
From the late 1970's through 1986, John did not work full-time due to ill-health but shared equally with Daniel in the proceeds of the business. Daniel ran the financial aspects of Red Ball and its operations were managed by employees. During these years Daniel installed William and Donald, and an employee named Anthony Patrizzio (who was loyal to Daniel rather than John) in key management positions within Red Ball.
From 1986 to 1993 Daniel mailed to John weekly financial statements regarding, inter alia, Red Ball's cash position and officers' loan accounts. Daniel also mailed to John Red Ball's annual financial report. These mailings failed to disclose Daniels diversion of Red Ball's resources and business opportunities, discussed below.
In 1986, in view of John's failing health, Daniel and John entered into the 1986 Agreement which required each to secure a life insurance policy on the other in the amount of $ 3,000,000, with himself as sole beneficiary. In the event of the death of either brother, the 1986 Agreement provided that the surviving brother would immediately pay the entirety of the life insurance proceeds to the deceased brother's estate in consideration for all of the deceased brother's shares of Red Ball. By the terms of the 1986 Agreement sale of the deceased brother's shares by his estate for the $ 3,000,000 insurance proceeds was mandatory.
At some time prior to November of 1987, Daniel began diverting labor and other assets of Red Ball to the improvement of a farm he owns in West Milford, New Jersey. By November 1987, Daniel had diverted more than $ 1.7 million from Red Ball to the improvement of his farm.
In 1988 Daniel caused Red Ball to cease paying John's salary, which was his only form of income from Red Ball. Also in 1988 Daniel had Mary, John's wife, ejected from Red Ball's corporate offices when she inquired as to the Red Ball's finances.
For some period of time prior to 1989 William and Donald operated a business known as "Sunset" in competition with Red Ball while still on the Red Ball payroll. Daniel knew of and permitted this activity.
In 1990, as mentioned above, Daniel and John executed the 1990 Amendment under Judge Ward's supervision. That Amendment required that they receive equal regular salary payments from Red Ball, and that, in the event of the death of either brother, sale of the deceased brother's shares in Red Ball would only be at the option of both parties, rather than mandatory, as had been required by the terms of the 1986 Agreement. This amendment gave Daniel an incentive to reduce, rather than increase the value of Red Ball.
At a meeting and in several telephone conversations late in 1991, Daniel and John discussed the declining financial condition of Red Ball. During this meeting and these conversations Daniel omitted to disclose to John any information about his diversion of Red Ball's resources and business opportunities.
At some time after August 11, 1992 Daniel began to subcontract Red Ball's work to Fortune and Supreme, without John's knowledge, thereby reducing Red Ball's profitability and diverting profitable opportunities to the benefit of his sons alone, without an opportunity for John to share in that benefit.