The opinion of the court was delivered by: Honorable Richard J. Arcara United States District Judge
Plaintiff L. Andrew Bernheim filed this action on February 23, 2005 against defendants David Elia, Daniel Elia, the Estate of Alfred Elia, the Alfred Elia Trust, the Estate of Josephine Elia, Bernadette Elia, Tina Elia, and John Does 1 through 100 (collectively, the defendants or "Elia defendants"). In his complaint, Bernheim asserts that he is either part or sole owner of D.A. Elia Construction Corp. ("Elia Construction") and that the defendants have wrongfully deprived him of ownership profits and benefits. David Elia is an officer of Elia Construction and he purports to be the owner of Elia Construction. It is not clear whether any of the other defendants claim to have an ownership interest in Elia Construction.
Currently before the Court are objections to a report and recommendation of Hon. H. Kenneth Schroeder, Jr., wherein Magistrate Judge Schroeder recommended that defendants' motion to dismiss the complaint as untimely be denied, and that partial summary judgment be granted in favor of plaintiff on his claim that he is sole owner of Elia Construction.
For the reasons stated, this Court declines to adopt Magistrate Judge Schroeder's report and recommendation, finds that plaintiff's claim of sole ownership must be dismissed as a matter of law, and finds that plaintiff's remaining claims are all time-barred.
The events giving rise to this dispute date back to 1987. To fully appreciate the nature of the dispute and the relationship of the parties, a thorough recitation of the facts and related proceedings is necessary.
A. New Jersey Bankruptcy Proceedings
In 1982, Bernheim filed a Chapter 11 bankruptcy petition in United States Bankruptcy Court for the District of New Jersey. Plaintiff's Chapter 11 plan was confirmed in 1985 and modified in October 1986.
After plaintiff's bankruptcy was confirmed, plaintiff purportedly engaged in a business transaction with the Elia defendants wherein he agreed to purchase a one-third interest in all of the outstanding stock of Elia Construction. That transaction occurred sometime around May 1987. Plaintiff asserts that the remaining two-thirds ownership interest was held by defendants Daniel Elia and David Elia, with each having a one-third interest. In 1987 or 1988, Daniel Elia sold his one-third share back to the corporation, which according to Bernheim then made him a one-half owner of the company, along with David Elia.
Sometime around 1990, a dispute arose between Bernheim and the Elia defendants regarding Bernheim's ownership interest in Elia Construction. Bernheim brought an adversary proceeding in the New Jersey bankruptcy court to resolve the dispute. See Bernheim v. D.A. Elia Constr. Corp., Dkt. No. 90-03356 (Bankr. D.N.J. 1990). ("New Jersey Adversary Proceeding"). In that action, Bernheim alleged ownership of Elia Construction, wrongful deprivation of ownership profits and benefits, diversion of corporate assets, false arrest and malicious prosecution. (See Compl., Dkt. No. 1, at ¶ 15).
In 1994, the New Jersey Adversary Proceeding was administratively closed. It is not clear from the record why the matter was administratively closed. The Elia defendants assert that it was closed because Bernheim failed to prosecute. Bernheim asserts that it was closed because of a clerical error. In any event, Bernheim moved to reinstate the proceeding in December 1997, and in February 1998, the case was reopened. Litigation in that case proceeded without resolution until sometime in 1999, when the parties attempted to settle that dispute. As part of the settlement, the parties entered into a Stipulation and Order and a Confidential Settlement Agreement. The Stipulation and Order, entered on June 5, 2000, stipulated that, subject to the terms of the Confidential Settlement Agreement, plaintiff was the "sole owner" of Elia Construction from 1987 through 1999. The relevant language of that stipulation provides as follows:
Bernheim filed a complaint against Elias, as well as against [Elia] Construction Corp. on or about September 1990. In that suit, Bernheim alleged that he was the true owner of Construction Corp. Subject to the Confidential Settlement Agreement entered into by Bernheim, the Elias and Construction Corp., Bernheim was the sole owner of Construction Corp. for the years 1987 through 1999, inclusive.
(See Dkt. No. 46-3, Exh. A (June 5, 2000 Stipulation and Order)(emphasis added)). The stipulation further provided that "the Elias will not settle their litigation with Bernheim concerning ownership of [Elia] Construction Corp. unless [the New Jersey Bankruptcy Court first] determines the tax liability of the Elias for the years 1987 through and including 1999," and that, since Bernheim was the sole owner of Elia Construction during that period, the Elia defendants owed no taxes for profits to Elia Construction during that time. The Stipulation and Order was signed by Hon. William H. Gindin, the bankruptcy judge presiding over the New Jersey Adversary Proceeding.
As part of the settlement, the parties also entered into a Confidential Settlement Agreement. Under the terms of that Confidential Settlement Agreement (which is no longer confidential because it was filed with this Court as part of these proceedings), the Elias agreed to pay Bernheim a sum of $48,500, along with an additional sum to be determined in binding arbitration. In exchange, Bernheim agreed to resell all of his ownership interest in Elia Construction back to the Elias. Like the June 5, 2000 Stipulation and Order, the Confidential Settlement Agreement recited the anticipated tax treatment as to Bernheim and the Elias flowing from this resolution. More specifically, the agreement provided that the Elias would personally keep any tax refunds from the IRS and New York State, but that the Elias would pay Bernheim any tax savings received from the IRS and New York State by reason of his sole ownership for the time period in question. Finally, the agreement provided that it would be binding upon the wiring of $48,500 to Bernheim by 5 p.m. on October 24, 2000, and that time was of the essence. (See Confidential Settlement Agreement, Dkt. No. 46-3, Exh. B).
Based upon the June 5, 2000 Stipulation and Order and the Confidential Settlement Agreement, Bankruptcy Judge Gindin entered orders dated June 15, 2000, and June 21, 2000, directing the New York State Department of Finance and Taxation and the Internal Revenue Service (IRS) to return tax payments made by the Elia defendants on behalf of Elia Construction from 1987 through 1999. (See June 15, 2000 and June 21, 2000 Orders of Hon. William H. Gindin, Dkt. No. 46-3, Exh. C (filed as Dkt. Nos. 203 and 204 in Bernheim v. Elia Constr. Corp., No. 90-03356)).
Not surprisingly, the IRS appealed Judge Gindin's June 15th and June 21st orders. On December 14, 2000, Hon. Anne E. Thompson, United States District Court Judge for the District of New Jersey, issued an order vacating those orders and remanded the matter for further proceedings. (See December 14, 2000 Order of Hon. Anne E. Thompson, Dkt. No. 46-3, Exh. D (filed in I.R.S. v. D.A. Elia Constr. Corp., et al., 00-3394 (D.N.J.)). Judge Thompson stated that she was unable to understand the support for and effect of the June 15th and June 21st bankruptcy court orders.
Upon remand, the matter was reassigned to United States Bankruptcy Judge Raymond T. Lyons, Jr. The parties then attempted to persuade Judge Lyons to approve of their settlement agreement and related tax determinations. Judge Lyons refused and ultimately dismissed the entire adversary proceeding for lack of subject matter jurisdiction.*fn1 Judge Lyons' oral ruling provides insight into the dealings of the parties in bankruptcy court and therefore, his ruling is quoted extensively as follows:
[F]ollowing his exit from bankruptcy in 1985 Mr. Bernheim engaged in some transactions with the Elia Construction Company and members of the Elia family who were principals in that construction company. And apparently Mr. Bernheim was asked to invest in the Elia Construction Company and he did in fact put up substantial sums of money. I think that one of his advances was in the neighborhood of $150,000 and there may have been another advance so that he put into the Elia Company over $200,000.
But these transactions occurred at the earliest in 1987. And there is a discrepancy in the understanding of the parties which apparently was never reduced to writing as to exactly what Mr. Bernheim was to get for his investment in this company and whether it was a loan or an equity investment, and if an equity investment, what ownership interest he would have. . . . [And then] there was a later transaction where Mr. Bernheim needed some cash. Apparently he was incarcerated somewhere and in order to get out, to post bail, I think he had to come up with some cash and he prevailed upon the Elias to provide that cash to him. Again the exact details are disputed, but generally a transaction similar to that happened.
And thereafter, say the Elias, there was an agreement that if Bernheim did not repay the money that had been advanced for his criminal law problems, that he would transfer his stock interest back to the company for a relatively modest additional payment, somewhere in the area of $50,000. So the Elias take the position that Bernheim no longer has the right to any stock interest in the corporation and Bernheim says, I'm still a stockholder and I'm entitled to my share of the corporation.
As I said, those transactions started in 1987 and when the dispute arose, Mr. Bernheim came to this court and filed a complaint against the Elias in 1990.
The case seemed to make no further progress towards trial until December of 1999 when Bernheim and the Elias announced that they had reached a resolution and they filed a settlement document, which I haven't seen. Apparently it's supposedly filed under seal somewhere ...