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Little Rest Twelve, Inc., et al v. Raymond Visan

July 20, 2011


The opinion of the court was delivered by: John G. Koeltl, District Judge:


This Opinion and Order concerns three cases featuring common counsel, related parties, and a convoluted procedural history. In each case, there is a dispute over the proper management of a plaintiff -- Little Rest Twelve, Inc. ("LRT") in Little Rest Twelve, Inc. v. Raymond Visan, No. 11 Civ. 2306 ("Visan"), and Little Rest Twelve, Inc. v. Nina Zajic, 11 Civ. 2307 ("Zajic"); Mutual Offshore Benefit Fund ("MBOF") in Mutual Benefit Offshore Fund v. Emanuel Zeltser ("MBOF"), No. 11 Civ. 2769. The cases are fraught with allegations of fraud and misconduct. For ease of reference, this Opinion and Order will refer to the entities and persons represented by Mr. Katz and Mr. Zeltser as "old management," and those represented by Gusrae Kaplan Bruno & Nusbaum, PLLC ("GKBN") as "new management."*fn1

All three cases come to this Court after being removed from the New York State Supreme Court, New York County, by counsel for the old management. The old management claims that each case is related to proceedings in the United States Bankruptcy Court for the Southern District of Florida (the "Bankruptcy Court") and that removal was proper pursuant to 28 U.S.C. §§ 1334 and 1452. The old management also claims that Visan contains a trademark issue and is removable pursuant to 28 U.S.C. §§ 1441 and 1446. The new management moves in Visan and MBOF for abstention under 28 U.S.C. §§ 1334 and 1452. After the new management filed its motions to remand, three motions to intervene were filed. A group of creditor intervenors (the "Creditor Intervenors") moved to intervene and opposed remand in Visan and MBOF, and a former employee of LRT, Hicham Azkour, moved to intervene and opposed remand in Visan. The new management opposes intervention.

I. Facts and Procedural History

The facts of this case are undisputed unless otherwise noted.

A. State Court Proceedings Prior to the Bankruptcy Petitions

1. Little Rest Twelve

LRT owns a New York City restaurant formerly known as "Buddha Bar" and now known as "Ajna Bar." (Zajic Compl. ¶ 9; Zajic Decl. ¶ 3.) LRT is the subject of a management dispute, the merits of which are not at issue on these motions. On March 5, 2007, LRT and ImedInvest Partners ("ImedInvest") filed suit by Sternik & Zeltser ("S&Z"), counsel retained by the old management, against Raymond Visan and his wife, along with several business entities allegedly owned or controlled by the Visans (collectively, the "Visan Defendants") and Jean-Yves Haouzi. (Visan Compl. ¶¶ 5-25.)*fn2 The complaint alleges that Raymond Visan defrauded ImedInvest into investing in his enterprises in 2002. (Visan Compl. ¶¶ 26-33.) Then, once those investments failed, the Complaint alleges, Visan convinced ImedInvest to open the Buddha Bar, which Visan fraudulently represented to be a "unique concept." (Visan Compl. ¶¶ 34-35, 41.) Visan allegedly "inserted" Haouzi as an officer of LRT, the corporation formed to operate the restaurant venture in New York City, and Visan and Haouzi began misusing Haouzi's authority to the detriment of ImedInvest and LRT. (Visan Compl. ¶¶ 36-39, 43, 47-49.) The Visan complaint pleads causes of action including fraud, breach of contract, conversion, tortious interference with contractual relationship, and unjust enrichment. (Visan Compl. ¶¶ 50-79.)

The only defendant who responded to the complaint was Haouzi. Haouzi answered and filed counterclaims and third-party claims against LRT; ImedInvest; Grosvenor Trading House Ltd. ("Grosvenor"), a shareholder in LRT; and several individuals affiliated with the old management, including LRT officers Nina Zajic and Joseph Kay (collectively, the "Haouzi Counterclaim Defendants").*fn3 (Haouzi Ans. & Countercls. ¶¶ 4-8; Haouzi Third-Party Compl. ¶¶ 2-8.) Haouzi alleged that the Haouzi Counterclaim Defendants had "demanded that he execute fake documents implicating [Visan]" in wrongdoing and both fired him from his positions with LRT and sued him after he refused. (Haouzi Ans. & Countercls. ¶¶ 5-8.) Haouzi brought state law causes of action for conversion, unjust enrichment, breach of contract, breach of fiduciary duty, prima facie tort, and an accounting. (Haouzi Ans. & Countercls. ¶¶ 9-13; Haouzi Third-Party Compl. ¶¶ 19-37.)*fn4 The Haouzi Counterclaim Defendants, in turn, brought third-party counterclaims against Haouzi for conversion and for various breaches of the New York Business Corporation Law ("NYBCL"). (Haouzi Counterclaim Defs.' Ans. & Counterclaim ¶¶ 30-58.)

As far as the parties have disclosed, no further action took place in this case until June 22, 2009, two years later, when the old management moved for a default judgment against the Visan Defendants. (Wickline Decl. ¶ 6.) The Visan Defendants cross-moved to dismiss the complaint for failure to effect proper service or for failure to take proceedings for entry of judgment within one year after the alleged default. (Wickline Decl. ¶ 7.) New York State Supreme Court Justice Bernard Fried referred the service question to a special referee. As of early 2010, the case remained at this stage.

On or about March 31, 2010, a hotly contested management dispute boiled up at LRT. The new management claims that the shareholders legally removed the existing board of directors and officers, terminated LRT's relationship with S&Z, the attorneys retained by the old management, and appointed Haouzi as COO. (New Mgmt. Mem. of Law in Supp. of its Mot. for Remand in Visan ("New Mgmt. Visan Mem.") at 3.)

The old management, on the other hand, claims that Haouzi and three GKBN attorneys led an armed raid of LRT's premises "accompanied by approximately twenty to thirty men armed with handguns and batons." (Zajic Decl. ¶ 7.) The old management claims that Haouzi and the attorneys "threatened LRT's employees, drilled through a lock in [LRT's] safe and took possession of some $50,000 in cash contained therein," falsely represented that they had court orders and that the armed intruders were city marshals, and displayed their weapons threateningly. (Zajic Decl. ¶ 7-8.) The new management asserts that these claims are untrue. (Kruzhkov Decl. of Apr. 11, 2011 ("Kruzhkov Visan Decl.") ¶ 17.)

Whatever the truth of the matter, LRT filed the Zajic complaint in New York State Supreme Court around the same time, through GKBN, the attorneys retained by the new management. This complaint alleged that Zajic and other members of the old management engaged in "a course of misconduct whereby they have committed[,] among other things, corporate waste, embezzlement, self-dealing and corporate negligence." (Zajic Compl. ¶ 1.)

The complaint alleged causes of action for corporate waste, breach of fiduciary duty, negligence, conversion, unjust enrichment, prima facie tort, and various violations of the NYBCL. (Zajic Compl. ¶¶ 25-31, 35-56.)

The old management filed "cross claims" against the GKBN attorneys on or about April 12, 2010, alleging that the GKBN attorneys' conduct during the "wild-west style raid" and pending litigation had violated New York Judiciary Law § 487, and involved the commission or aiding and abetting of fraud, assault, and battery. (Zajic Cross-cls. ¶¶ 4, 52-71.)

Shortly after the events of March 31, the old management applied for injunctive relief before Justice Fried in Visan. After Justice Fried declined to issue a temporary restraining order, GKBN appeared on behalf of the new management and sought to withdraw the application for injunctive relief. (Kruzhkov Visan Decl. ¶¶ 15, 17.) Justice Fried determined that an evidentiary hearing was necessary to identify LRT's proper representative and he ordered expedited discovery and scheduled an evidentiary hearing for May 11, 2010. (Kruzhkov Visan Decl. ¶ 18.) After the first day of taking evidence, Justice Fried requested evidence on the ownership of LRT and set the continuation of the hearing for June 1, 2010. (Kruzhkov Visan Decl. ¶ 19.)

On May 28, 2010, four days before the hearing was to continue, the old management moved to disqualify GKBN and to reargue the Court's decision to conduct a hearing on ownership. (Kruzhkov Visan Decl. ¶ 20.) A month later, Justice Fried denied this motion and scheduled the evidentiary hearing to continue on September 13, 2010. (Kruzhkov Visan Decl. ¶ 21.) After three more days of hearing, Justice Fried set a scheduling conference for October 14, 2010. (Kruzhkov Visan Decl. ¶ 22.) The day before that conference was to occur, the old management filed an emergency application with the Appellate Division seeking relief from Justice Fried's denial of the temporary restraining order and his decision to conduct a hearing on the issue of counsel, as well as a stay of the evidentiary hearing. (Kruzhkov Visan Decl. ¶ 23.) The Appellate Division denied the motion for a stay and eventually denied the remainder of the motion. (Kruzhkov Visan Decl. ¶ 23, Ex. R.) After additional delays due to a missing expert report and the unavailability of a member of the old management for testimony, the hearing concluded on December 16, 2010. (Kruzhkov Visan Decl. ¶¶ 24-26.) The hearing had included eleven days of testimony from ten witnesses and the introduction of 140 exhibits. (Kruzhkov Visan Decl. ¶ 26.) Both parties then submitted proposed findings of fact and conclusions of law, with supplemental findings due March 21, 2011. (Kruzhkov Visan Decl. ¶¶ 26-27.)

2. Mutual Benefits Offshore Fund

Mutual Benefits Offshore Fund was formed to invest in the death benefits of life insurance policies that it purchased from Mutual Benefits Corporation ("MBC"), a corporation that was placed into receivership in 2004 in the wake of widespread fraud. (MBOF Compl. ¶¶ 2, 14, 16-17; Zeltser Countercls. ¶¶ 3-9.) An investment company named Kayley Investments ("Kayley"), which was associated with Joseph Kay (a member of the old management of LRT), invested $15 million in MBOF. (MBOF Compl. ¶¶ 15, 19; Zeltser Countercls. ¶¶ p, 12-13.) MBOF retained Emanuel Zeltser of S&Z to seek recovery from the MBC receiver. (MBOF Compl. ¶¶ 19-21; Zeltser Countercls. ¶ 45.)*fn5

Zeltser was able to recover some amount from the receiver. (MBOF Compl. ¶ 25; Zeltser Ans. ¶ 25.) Thereafter, accounts diverge: MBOF, represented by GKBN, claims that Zeltser and associates embezzled these funds and otherwise acted improperly; those on the side of Zeltser and Joseph Kay argue that MBOF wrongfully ousted Zeltser and has acted to Kayley's detriment. On July 21, 2009, MBOF sued Zeltser, Joseph Kay, S&Z, and others in New York State Supreme Court, New York County, for fraud, conversion, breach of contract, breach of fiduciary duty, and unjust enrichment; S&Z, acting as trustee for Kayley, and Joseph Kay counterclaimed for, among other claims, fraud, conversion, and unjust enrichment. (MBOF Compl. ¶¶ 47-86; Zeltser Countercls. ¶¶ 49-64.)

Justice Fried heard this case as well. On November 1, 2010, he dismissed all counterclaims on the grounds that Kayley was not a party to the complaint and had not intervened, and that Joseph Kay failed to state a claim. (Kruzhkov Decl. of May 13, 2011 ("Kruzhkov MBOF Decl.") Ex. G at 3.) Discovery has been proceeding on MBOF's claims for over a year. According to MBOF, discovery is nearly complete, but for the depositions of Zeltser and another S&Z defendant, which MBOF claims have been adjourned or otherwise delayed by the defendants several times. (Kruzhkov MBOF Decl. ¶¶ 18-28.)

B. The Bankruptcy Petitions

On March 17, 2011, a group of creditors, including the Creditor Intervenors here, filed petitions for involuntary bankruptcy in the Bankruptcy Court against LRT, MBOF, and a third company, Fischer Island Investments ("FII"). In re Little Rest Twelve, Inc., No. 11-17061-AJC ("In re LRT"); In re Mutual Benefits Offshore Fund, Ltd., No. 11-17051-AJC ("In re MBOF"); In re Fischer Island Investments, Inc., No. 11-17047-AJC ("In re FII"). The creditors also filed ex parte motions to administer jointly the three bankruptcies. E.g., In re LRT, No. 11-17061- AJC, Doc. No. 3 (Mar. 21, 2011). On March 21, old management answered on behalf of all three companies, admitting the allegations in the Petition and consenting to the bankruptcies. E.g., id., Doc. No. 5 (Mar. 21, 2011).

The following day, new management appeared through counsel to oppose the petitions and moved to strike the old management's answers. E.g., id., Doc. No. 8 (Mar. 22, 2011). Three days later, Bankruptcy Judge A. Jay Cristol heard the motions. After questioning whether "something smell[ed] about a case being filed and instantly consented to . . . immediately followed by someone saying [the consenting counsel] didn't have the authority to do it in the first place," Judge Cristol granted relief from any automatic stay in all pending cases and granted the petitions to administer jointly the three bankruptcies for the limited purposes of determining the validity of the creditors' promissory note and the legitimate representatives and attorneys of the three companies. (Kruzhkov Visan Decl. Ex. T at 6, Ex. U at 5.) Judge Cristol made it clear that, "for the time being, we're not going to interfere with any existing litigation that's out there in any court in any jurisdiction by virtue of the fact that an involuntary has been filed in this case." (Kruzhkov Visan Decl. Ex. T. at 64.) Judge Cristol noted again the "smell" surrounding the involuntary petitions and suggested that the creditors' promissory note was "a rather unusual promissory note" and might be "an extension of Alice in Wonderland." (Kruzhkov Visan Decl. Ex. U at 2, 4-5.) The promissory note is in the amount of $28.5 million and the makers of the note included Zajic as Chief Executive Officer of LRT, Joseph and David Kay as officers of FII, and a purported principal of MBOF. (Kruzhkov Visan Decl. Ex. U at 3; Zeltser Decl. Ex. 5 at 30-35.)

C. State Court Proceedings After the Bankruptcy Petitions

1. Little Rest Twelve Cases

Justice Fried held a conference in Visan on March 28, 2011, three days after Judge Cristol granted stay relief. Justice Fried set summations on the representation issue for April 5, 2011 and stated: "I have spent some time on this and am looking forward to the summations with great anticipation and when I am finished, I expect to render a decision which will resolve what I consider to be disputed issues." (Kruzhkov Visan Decl. Ex. V at 12.)

Justice Fried did not have the chance to render that decision. On April 4, the day before summations were scheduled to take place, the old management, acting on behalf of LRT and ImedInvest, filed a notice of removal in both Visan and Zajic. In both cases, it asserted that jurisdiction was proper under 28 U.S.C. § 1334 and removal proper under 28 U.S.C. § 1452 because the claims and third-party claims or counterclaims "raise disputed claims of ownership and control of debtor LRT and, therefore[,] claims arising under Title 11." Visan, 11 Civ. 2306, Doc. No. 1 at ¶ 10 (Apr. 4, 2011); Zajic, 11 Civ. 2307, Doc. No. 1 at ¶ 10. (Apr. 4, 2011). In Visan, the old management also claimed jurisdiction under 28 U.S.C. § 1334 because the action "relates to rights in and to a federally-registered trademark and associated trade dress." Visan, 11 Civ. 2306, Doc. No. 1 at ¶ 9. Aside from the proffered trademark ground in Visan, the two notices are substantially identical.

The parties appeared before Justice Fried on April 5, at which point he stated that, if the case were remanded, he "want[ed] to be notified of that remand immediately" and would then "tak[e] the motion under submission, and . . . issue a decision without any ...

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