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Ficus Investments, Inc. v. Private Capital Management

January 20, 2009

FICUS INVESTMENTS, INC., ET AL., PLAINTIFFS-APPELLANTS-RESPONDENTS,
v.
PRIVATE CAPITAL MANAGEMENT, LLC, ET AL., DEFENDANTS,
THOMAS B. DONOVAN, ET AL., DEFENDANTS-RESPONDENTS-APPELLANTS.
FICUS INVESTMENTS, INC., ET AL., PLAINTIFFS-RESPONDENTS,
PRIVATE CAPITAL MANAGEMENT, LLC, ET AL., DEFENDANTS-APPELLANTS,
GERARD M. BAMBRICK, ESQ., ET AL. DEFENDANTS.
FICUS INVESTMENTS, INC., ET AL., PLAINTIFFS-RESPONDENTS,
PRIVATE CAPITAL MANAGEMENT, LLC, ET AL., DEFENDANTS,
THOMAS B. DONOVAN, DEFENDANT-APPELLANT.



Appeals from an order of the Supreme Court, New York County (Bernard J. Fried, J.), entered May 14, 2007, which converted temporary restraining orders into a preliminary injunction; from an order, same court and Justice, entered April 4, 2008, which directed that certain mortgage assets be placed in escrow; from an order, same court and Justice, entered April 24, 2008, hich granted defendant Donovan's motion for reimbursement and advancement of legal expenses but denied such relief to defendants Chalavoutis and Kamran; and from order, same court and Justice, entered July 8, 2008, which denied defendant Donovan's motion for appointment of a temporary receiver for plaintiff Private Capital Group LLC.

The opinion of the court was delivered by: Lippman, P.J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.

Jonathan Lippman, P.J., Luis A. Gonzalez, Karla Moskowitz, Rolando T. Acosta & Dianne T. Renwick, JJ.

600926/07

This action arises out of allegations that Thomas Donovan and other named defendants misappropriated millions of dollars in funds and assets from plaintiff Private Capital Group, LLC. There have been extensive pretrial proceedings, and the parties are appealing four orders granting various forms of relief. The primary issue we address is whether certain individual defendants are entitled to advancement of their expenses under the company's Operating Agreement.

Plaintiff Ficus Investments, Inc. is a Florida corporation with its principal place of business in Florida. Ficus is the managing member and 80% owner of plaintiff Private Capital Group, LLC (the Company), a Florida limited liability company with its principal place of business in New York. The Company is in the business of buying, managing and selling non-performing real estate mortgages. Defendant Private Capital Management (PCM), a New York limited liability company with its principal place of business in New York, is the Company's minority member and holds the remaining 20% ownership. PCM is owned equally by defendant Thomas B. Donovan and former defendant Lawrence A. Cline.*fn1

The Company began operations in December 2005, capitalized by a series of documented loans provided by Ficus totaling approximately $314 million. Plaintiffs allege that Donovan and Cline soon became dissatisfied with their compensation and, in July 2006, began transferring money from the Company to PCM in a series of undocumented loans. In January 2007, Donovan and Cline transferred $9.872 million from the Company to PCM. Donovan and Cline freely admit that they took this money but assert that, despite the absence of any type of security agreement, the distribution had been authorized by a Ficus representative. When Ficus discovered the transfer, it demanded that the money be returned. Donovan and Cline refused and instead apparently attempted to negotiate changes to the Operating Agreement.

Ficus representatives met with Donovan and Cline on March 20, 2007 to advise them that, as manager, Ficus would be taking control of the Company's accounts, funds and any major new commitments. Since Donovan and Cline maintained the position that they had the authority to manage the Company, Ficus adopted resolutions giving itself authority over the Company's operations and advised Donovan, Cline and the Company's banks of the change.

Plaintiffs commenced this action on or about March 21, 2007, asserting several causes of action, including breach of fiduciary duty, conversion and unjust enrichment. That same morning, plaintiffs allege that defendants began removing books, records and financial information from the Company's Jericho, New York office. The complaint asserts that when Ficus representatives arrived at the premises and began their review of the Company's operations, Donovan and other named defendants were evasive and uncooperative.

During this time, plaintiffs allege, Donovan continued to transfer Company funds to accounts under his control. In support of this allegation, Cline provided an affidavit stating that approximately $12.5 million in Company funds, along with about $3 million remaining from the disputed $9.872 million "loan," were transferred to a bank account in the name of defendant Private Lender Warehouse Corp. After the balance was transferred to another Private Lender Warehouse Corp. account, about $12.5 million of the money was deposited into an account in the name of Private Capital Management Corp. (a separate entity from PCM, the LLC with 20% membership interest in the Company). Plaintiffs allege that the $12.5 million was disbursed to defendants, or to entities under their control many with confusingly similar names. The balance was apparently disbursed to some of the individual defendants and was used to pay for defendants' litigation expenses.

On March 26, 2007, Supreme Court granted plaintiffs a temporary restraining order preventing defendants from making transfers or distributions in contravention of the resolutions that gave Ficus operational authority, preventing them from removing, destroying, concealing or altering Company books and records or documents pertaining to Company business, and requiring defendants to cooperate with Ficus and give Ficus free access to the premises, books and records.

On April 10, 2007, nearly every Company employee resigned and went to work for Donovan at his new business, Private Capital Management Group of New York, LLC. Ficus then obtained another temporary restraining order giving it control over the Company's day-to-day operations and assets, directing that defendants provide information and Company records pertaining to another entity, Copperfield Investments, Inc.,*fn2 and preventing defendants from removing or destroying such records. Several days later, the court issued yet another temporary restraining order, requiring the return of any Company assets that had been transferred to Copperfield without full consideration. The court noted, however, that it did not have the power to enjoin Copperfield itself, as Copperfield had not yet been made a party. The court also denied PCM's motion for the appointment of a temporary receiver to run the Company. Later that night, before the complaint was amended to include Copperfield as a defendant, Donovan and Cline placed Copperfield into bankruptcy.

On May 14, 2007, the three temporary restraining orders were consolidated into a preliminary injunction without objection. A few weeks later, Supreme Court issued another injunction this time preventing defendants from transferring, concealing or otherwise disposing of the "approximately $9,000,000" that Donovan and Cline had taken ...


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