The opinion of the court was delivered by: SWEET
Defendant Daniel Palmadessa ("Daniel") has moved for dismissal of the Amended Complaint of plaintiffs Red Ball Interior Demolition 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, to Rule 9(b) Fed. R. Civ. P., for failure to plead fraud with sufficient particularity, and to Rule 56(b), Fed. R. Civ. P., for summary judgment.
Daniel has also moved to strike certain allegations, pursuant to Rule 12(f); to dismiss or sever all claims and allegations in the Amended Complaint pertaining to Red Ball Recycling, Inc. ("Red Ball Recycling"), pursuant to Rule 42(b), or, in the alternative, to sever all claims pertaining to Supreme Recycling, Inc. ("Supreme") and Fortune Interior Dismantling Corp. ("Fortune"); to sever all claims pertaining to Secluded Acres Farm, Inc. pursuant to Rule 42(b); and to impose sanctions upon Plaintiffs pursuant to Rule 11.
In addition, Daniel has moved to compel Plaintiffs to relinquish a copy of the transcripts and notes of any deposition given by Avishai Oz ("Oz"); to direct a hearing, if required, to determine the facts surrounding the deposition of Oz; to dismiss the Amended Complaint; and to disqualify William Dunnegan ("Dunnegan"), counsel to Plaintiffs.
Red Ball has moved to disqualify Donald Horowitz, ("Horowitz"), counsel to Daniel, from representing any defendant in this action. Red Ball has also moved to compel Defendants Daniel, Donald Palmadessa ("Donald"), William Palmadessa ("William"), Supreme Recycling, Inc., and Fortune Interior Dismantling Corp. to submit a final pretrial order.
For the reasons discussed below:
1. Daniel's motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6) will be denied.
2. Daniel's motion to dismiss for failure to plead fraud with sufficient particularity pursuant to Rule 9(b) will be denied.
3. Daniel's motion for summary judgment pursuant to Rule 56 will be granted in part and denied in part. Specifically, Daniel's motion will be granted with regard to the First Claim, the RICO claim against Daniel; the Second Claim, for common law fraud against Daniel; and those elements of the other claims that pertain to the alleged diversion of funds to Daniel's Horse Farm that occurred prior to June 6, 1988. The motion will be denied with regard to all other claims.
4. Daniel's motion to strike certain allegations will be granted in part and denied in part. Specifically, Daniel's motion will be granted with regard to the allegations concerning settlement negotiations. The motion will be denied with regard to all other allegations.
6. Daniel's motion to sever or dismiss all claims and allegations pertaining to Fortune and Supreme will be denied.
7. Daniel's motion for Rule 11 sanctions will be denied.
8. Daniel's motion to compel Plaintiffs to relinquish a copy of the transcripts and notes of any deposition given by Oz will be granted.
9. Daniel's motion for a hearing to determine the facts surrounding the deposition of Oz will be denied.
10. Daniel's motion to dismiss the Amended Complaint in its entirety will be denied.
11. Daniel's motion to disqualify William Dunnegan will be denied.
12. Red Ball's motion to disqualify Donald Horowitz will be granted.
13. Plaintiffs' motion to compel Defendants to submit a final pretrial order will be granted.
Plaintiff John founded the family carting and demolition business which became Red Ball in 1958. He is Red Ball's sole shareholder at present. 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, both of which are New Jersey corporations.
Prior Proceedings and Factual Allegations
I. Facts Alleged in the Amended Complaint
As is discussed in detail below, in the face of a Rule 12(b)(6) motion to dismiss, a plaintiff's factual allegations are presumed to be true and all factual inferences are drawn in the plaintiff's favor. Therefore, the factual allegations set forth in this sub-section do not constitute findings of fact by the Court.
John went into the carting business in 1958. He was later joined by Daniel and they, along with John's wife, Mary Palmadessa ("Mary"), became the only shareholders in their first corporation in 1961. John and Daniel formed 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 Patrizio (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 Daniel's 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 million, with himself as sole beneficiary. The 1986 Agreement provided that in the event of the death of either brother, 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 million 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 (the "Horse Farm"). By November 1987, Daniel had diverted more than $ 1.7 million from Red Ball to the improvement of the Farm.
Also in 1988, Daniel caused the illegal dumping of debris at Secluded Acres Farm ("Secluded Acres"), a property adjacent to Daniel's Horse Farm. The debris came from the Horse Farm, and some may have come originally from the premises of Red Ball. Daniel was responsible for the dumping at Secluded Acres and knew that it was unlawful. The New Jersey Department of Environmental Protection (the "DEP") investigated the Secluded Acres site and commenced an administrative action against Daniel and Red Ball (the "DEP Action"). In addition, Daniel and Red Ball were indicted on criminal charges related to the dumping at Secluded Acres.
On December 9, 1988, after the indictment, Horowitz met with Daniel, and Daniel requested that Horowitz represent him and Red Ball in the criminal litigation. Horowitz asserts that he was never involved in litigating or considering the merits of the Secluded Acres Action. Instead, he sought an administrative consent order, or pretrial diversion (a "PTI"), for Daniel and Red Ball. In entering into the PTI, Daniel, seeking to divest himself of responsibility for the incident, obligated Red Ball for the costs of remediation of Secluded Acres, divesting himself of responsibility. Red Ball has expended over $ 100,000 to remediate the Secluded Acres site and to pay legal fees.
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. In the Matter of the Petition of John Palmadessa, Petitioner, For the Dissolution of Red Ball Interior Demolition Corporation, Pursuant to Sections 1104 and 1104-A of the BCL, and Daniel Palmadessa, Respondents, Index No. 1856/89. S. Mac Gutman ("Gutman"), counsel to Daniel in this action, represented both Red Ball and Daniel in that action. That action was dismissed on October 20, 1989.
At the same time, John instituted two related proceedings in the same court: In the Matter of the Petition of John Palmadessa, Petitioner, For the Dissolution of United City Contractors Co., Inc., Pursuant to Secs. 1104 and 1104-A of the BCL, and Daniel Palmadessa, Respondents, Index No. 02094/89, in which Gutman represented United City and Daniel, and In the Matter of the Petition of John Palmadessa, Petitioner, For the Dissolution of Palma Terminal, Inc., Pursuant to Secs. 1104 and 1104-A of the BCL, and Daniel Palmadessa, Respondents, Index No. 02095/89, in which Gutman represented Palma and Daniel. (These three proceedings are referred to as "the Dissolution Actions".)
In the course of the Dissolution Actions, Daniel denied under oath that any expenses had been improperly incurred and blamed the increased costs to which John's petitions referred on the rising cost of dumping.
Subsequent to the New York court's dismissal of the Red Ball Dissolution Action, and while a motion to reargue was pending, the parties negotiated toward a settlement in which Daniel would purchase John's shares in Red Ball. John and Daniel were unable to close the transaction, because Daniel would not negotiate in good faith, seeking to pay John less than they had agreed.
At the end of 1989, the parties came to another agreement, pursuant to which Daniel would purchase John's shares in the jointly owned corporations. Again, although John and Daniel attempted to close the transaction, they were unable to do so, because Daniel would not negotiate in good faith.
For some period of time prior to 1989, William and Donald, Daniel's sons, operated Sunset in competition with Red Ball while still on the Red Ball payroll. Daniel knew of and permitted this activity.
On February 23, 1990, John and Daniel entered into a revised shareholders agreement, pursuant to which John would sell his shares in the corporations they owned jointly, including Red Ball, for a total of $ 4.4 million, provided certain conditions were met. Daniel later cancelled that agreement.
In March 1990, John borrowed $ 232,000 from Red Ball's bank accounts, charging-the withdrawals to John's officers' loan account. Daniel commenced an action for injunctive relief against John in New York State Supreme Court on April 3, 1990, related to John's March loan. That action was removed to this Court, Palmadessa v. Palmadessa, 90 Civ. 2429 (RJW), and John again sought dissolution of Red Ball through a counterclaim in that action. John was represented by Dunnegan, counsel to John and Red Ball in this action. During the course of that litigation, Daniel sought to regain John's trust and to undermine John's trust in John's attorneys.
In 1990, pursuant to that litigation and under the supervision of the Honorable Robert J. Ward, Daniel and John executed an amendment (the "1990 Amendment") to the 1986 Agreement. 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 be only 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 to increase, the value of Red Ball.
At this time, John believed that Daniel desired to deal with John in good faith, and John trusted Daniel. In fact, Daniel had agreed to the 1990 Amendment to avoid the judicial dissolution of Red Ball, with the ultimate goals of fraudulently embezzling money and property from Red Ball and transferring ownership of Red Ball to his sons, excluding John's family.
To accomplish this goal, Daniel sought to embezzle money and property from Red Ball to weaken its financial condition, in order to pressure John to sell his shares to Daniel at deflated prices. Among the actions taken by Daniel to accomplish this goal was his displacement of his own responsibility for remediation of the Secluded Acres site, described above, onto Red Ball. In addition, Daniel sought further to reduce the value of Red Ball by refusing to negotiate the rent demanded by the landlord of Red Ball's transfer station, by overpaying its workers, and by undercharging its customers.
In October 1991, Red Ball was in the process of terminating its pension plan, the Red Ball Pension Trust (the "Pension Trust"). Because they were of different ages, John was entitled under federal law to receive a larger distribution from the Pension Trust than Daniel. Daniel asked John to give Daniel a bonus equal to the difference between the distribution that John and Mary would receive over that which Daniel and his wife, Jacqueline, would receive. John agreed to pay Daniel that bonus, providing that the federal tax on the overfunding of the Red Ball Pension Trust was paid before Daniel received the bonus. John and Daniel therefore executed a unanimous consent of the Directors of Red Ball on or about November 7, 1991, to that effect. The amount agreed to was $ 492,892. On January 28, 1992, Daniel transferred $ 478,093 from the Pension Trust account to Red Ball's account. At the same time, he wrote a check for the same amount from Red Ball's account to his personal account. No federal tax was paid on that distribution. Red Ball is the successor in interest to the Pension Trust, which has been dissolved.
Having achieved his goal of embezzling sufficient money and property from Red Ball to seriously weaken its financial condition, Daniel then attempted to persuade John to sell his shares at an unreasonably low price. During a meeting in December 1991, and in several telephone conversations before and after it, Daniel discussed with John the financial condition of Red Ball and the reasons for its declining financial condition. Daniel cited the increased cost of the rent on the transfer station as one of the reasons. Daniel failed to disclose at this time to John that he had fraudulently embezzled the money and property of Red Ball as a part of his scheme to buy John's shares in Red Ball for an unreasonably low amount.
On August 11, 1992, during the pendency of Palmadessa v. Palmadessa, 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 the two brothers a salary of $ 3,000 per week. During the course of the proceedings leading to this Order, Daniel swore that the financial condition of Red Ball justified the decrease in salaries.
Daniel repeatedly proposed to John that they wind down Red Ball and give each of their sons one-third of the company: to Daniel's sons, William and Donald, and to John's son, Douglas. John rejected this proposal several times as inequitable. In an effort to legitimize his proposal, Daniel caused Gutman, Red Ball's attorney at that time, to draft a letter to both John and Daniel suggesting that the corporation be wound down in the manner Daniel had proposed. John once again refused.
On October 24, 1991, Daniel's son William, at the direction of Daniel, incorporated Recycling under the laws of the State of New York. William and Daniel anticipated that William would use this corporation to take over the business of Red Ball in the manner described in Gutman's letter, except that John's children would be excluded from the new corporation. Daniel and William concealed the existence of Recycling from John, and John did not learn of its existence until this action was commenced.
Prior to June 2, 1993, Daniel met several times with John, during which meetings Daniel sought to gain John's trust. Daniel did not disclose to John during these meetings that Daniel had helped to divert business to Supreme and Fortune. On June 2, 1993, as a result of these meetings, Daniel persuaded John to sign a document that the former had prepared, agreeing to put up certain properties for sale, to complete the jobs currently underway, and not to pursue any further business. The agreement also stated that "Douglas, Willie and Donald will be free to do whatever they want to do, where ever [sic] and however they want to do it." John would not have signed the document had Daniel disclosed to him the fact that Daniel had been diverting business to Daniel's sons, that Daniel's sons were standing ready to take over the operating business of Red Ball, and that Daniel believed that there was a profitable business in the interior demolition business and was, in fact, financing his sons in taking advantage of that opportunity. In the months after this agreement was signed, Daniel diverted several other Red Ball resources and potential customers to Supreme and Fortune.
On July 10, 1993, Daniel directed William to incorporate Supreme and Fortune under the laws of New Jersey. However, Daniel did not allow Fortune and Supreme to begin operations at that time, because of the pendency of the contempt proceeding before Judge Ward. On or about January 1993, after the completion of the contempt proceeding, Daniel lent William money to begin operations, and Daniel then, in a further effort to oust his brother and to enrich himself and his sons, 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 Daniel's sons alone, without an opportunity for John to share in that benefit.
John's counterclaim for dissolution in Palmadessa v. Palmadessa was ultimately resolved when, on June 2, 1994, John purchased all of Daniel's Red Ball shares, in addition to other of Daniel's assets, for $ 1.2 million in cash and notes. That action was closed on September 23, 1994. The Initial Complaint in this action was filed four days after John's purchase of Daniel's shares, on June 6, 1994. Red Ball and John filed the Initial Complaint in this action as related to Palmadessa v. Palmadessa. On June 24, 1994, Judge Ward declined to accept this case as related to Palmadessa v. Palmadessa.
The parties offer conflicting sets of facts with regard to the involvement of Horowitz in the administrative action following the dumping at Secluded Acres. Certain facts are not in dispute. After the DEP took action against Daniel and Red Ball, as described above, Horowitz undertook to aid in representing Red Ball, in conjunction with Gutman; Halima Akhtar-Gutman ("Akhtar-Gutman"), Gutman's associate; and Michael Elder ("Elder"), an environmental attorney retained by Red Ball.
During the course of that representation, Daniel alleges, Horowitz became aware of the identities of three witnesses who could testify that John knew about the dumping at the Horse Farm at the time it occurred. Daniel alleges that Horowitz has, in connection to this Action, failed to disclose the identities of these individuals to Defendants or their counsel. Horowitz asserts that he served in a limited capacity. In discussions with the DEP, he declares, Red Ball was represented by Elder and by Akhtar Gutman. He served only as criminal attorney to Daniel and Red Ball, in aiding them to work to escape criminal indictment. In the course of that representation, he attended some of the meetings with DEP personnel, and he was involved in transmitting some documents.
As a result of the combined representation, as noted above, both Red Ball and Daniel escaped criminal prosecution. An administrative consent order placed the burden of remediating Secluded Acres on Red Ball, not on Daniel.
Horowitz asserts that during the course of representing Daniel and Red Ball in the course of this criminal investigation, he did not conduct an investigation of the case, nor did he receive any confidential information from either Red Ball or Daniel about the facts of the case. He asserts that any knowledge of John's involvement in the dumping at the Farm was gained during his representation of Daniel in the instant case, not from the prior litigation.
Daniel asserts that Horowitz retained certain documents related to this action. Horowitz claims that he does not have any documents relating to the matter.
Horowitz has never represented John in the latter's capacity as an individual, and he has never seen, met, or conversed with John. Horowitz asserts that despite the fact that John's first petitions for judicial dissolution were brought less than one month after Daniel signed Horowitz's retainer agreement, Horowitz was not advised of the action for dissolution and was completely unaware of the friction between John and Daniel.
Horowitz and Dunnegan spoke by telephone on January 3, 1990. At that time, Daniel alleges, Dunnegan did not advise Horowitz of the friction between John and Daniel, thus alerting him to the potential for a conflict of interest. Daniel alleges further that Dunnegan deluded Horowitz into continuing to believe that his continuing to represent Red Ball and Daniel prior to their settlement of the criminal matter was free from conflicts of interest.
Dunnegan and Horowitz met on January 5, 1995, to discuss settlement of this case. Dunnegan did not take immediate action to disqualify Horowitz.
III. Factual Allegations Concerning Dunnegan
On May 15, two days after Judge Ward denied Daniel's motion to set aside the offer of settlement, Oz moved documents from Red Ball's offices at 575 Washington Street ("Washington Street") to Red Ball's offices in New Jersey. Daniel has declared that at that time, no original documents were removed from the premises. Plaintiffs allege that Daniel, William, and three unidentified others destroyed a number of documents ...