Opinion
010302-10.
December 10, 2010.
Papers Read on this motion:
Order to Show Cause, Affidavit in Support, Affirmation and Exhibits ......................................... x Plaintiff's Memorandum of Law in Support ......................... x Affidavit in Support of A. Stewart and Exhibits .................. x Affidavit in Opposition of J. Lively and Exhibits ................ x Affidavit in Opposition of D. Hushion and Exhibits ............... x Affirmation in Opposition ........................................ x Reply Affidavit in Support ....................................... x
This matter is before the court on the Order to Show Cause filed by Plaintiff James Kerin ("Kerin") and Millenium Alliance Group, LLC ("Millennium") (collectively "Plaintiff') on May 27, 2010 and submitted on November 24, 2010. For the reasons set forth below, the Court denies Plaintiff's Order to Show Cause and vacates the temporary restraining order previously issued by the Court. The Court, however, directs Defendants, on or before January 7, 2011, to make available to Kerin and his counsel for inspection, and copying at Kerin's expense, all records relating to the bank account that Defendants admit was opened without Plaintiff's knowledge, which currently contains funds of Premium Pursuit Consulting Group, LLC. Defendants are directed to provide all records of this account, from the day that it was opened through the date of inspection by Plaintiff, including but not limited to account statements, checks, signatory cards and correspondence. Based on the Court's determination that this directive does not constitute injunctive relief, the Court will not require the posting of a bond.
Although the caption of the Verified Complaint appears to list two plaintiffs, it refers to them as "Plaintiff' in the singular.
BACKGROUND
A. Relief Sought
Plaintiff seeks an Order 1) pursuant to Article 64 of the CPLR, appointing a temporary receiver to protect the assets and/or business opportunities of Premium Pursuit Consulting Group, LLC ("Premium Pursuit") from misuse and/or diversion by Defendants Daniel Hushion ("Hushion") and Joseph Lively, Esq. ("Lively"), to preserve the value of Premium Pursuit; 2) enjoining the Defendants, their agents, affiliates, officers, directors, members and employees, and all persons acting in concert with them or on their behalf, pursuant to CPLR § 6301, from a) selling, transferring, pledging, assigning, using, disposing, diverting, leasing or otherwise encumbering Premium Pursuit's, or the Unknown Entities' monies and/or assets and/or business opportunities, except that said entities may, in the ordinary course of their business, accept funds in payment of accounts receivable, provided all checks are duly endorsed and all such funds and/or proceeds (whether by check or otherwise) are deposited into a Premium Pursuit account; b) disbursing any funds of Premium Pursuit or the Unknown Entities or incurring any credit card charges; c) applying for or incurring any debt or opening any lines of credit or credit cards or credit accounts in the name of Premium Pursuit; 3) directing Defendants to provide Kerin and/or his representative(s) access to the documents of the corporation, including client and company files, books and records of Premium Pursuit and the Unknown Entities, including but not limited to all receipt and disbursement journals and/or reports, accounts receivable and payable journals and/or reports, financial statements, bank, account statements, check registers, payroll reports and tax returns; and 4) directing Defendants Lively and Hushion to return to Premium Pursuit all money they have allegedly taken from Premium Pursuit accounts since December 1, 2009, and directing that no further distributions be made.
On May 27, 2010, the Court granted a temporary restraining order ("TRO") that enjoined the Defendants, their agents, affiliates, officers, directors, members and employees, and all persons acting in concert with them or on their behalf, from: 1) selling, transferring, pledging, assigning, disposing, diverting, leasing or otherwise encumbering Premium Pursuit or the Unknown Entities' monies and/or assets and/or business opportunities, except that said entities may, in the ordinary course of their business, accept funds in payment of accounts receivable, provided all checks are duly endorsed and all such funds and/or proceeds (whether by check or otherwise) are deposited into a Premium Pursuit account; 2) disbursing any funds of Premium Pursuit; and 3) applying for or opening any lines of credit or credit card accounts in the name of Premium Pursuit.
Defendants oppose Plaintiff's motion.
B. The Parties' History
The Verified Complaint ("Complaint") (Ex. A to OSC) alleges as follows:
Premium Pursuit is a limited liability company that is engaged in the business of appealing workman's compensation premiums. Its clients hire Premium Pursuit to challenge various classifications of employees which, if successful, saves the clients workers compensation insurance premiums. Premium Pursuit receives a percentage of those savings.
Premium Pursuit was initially a venture between Kerin and Hushion. Kerin and Hushion agreed that all profits of Premium Pursuit would be evenly divided between them, and that each would have an equal membership interest in Premium Pursuit.
Premium Pursuit and Hushion engaged the legal services of Lively, an attorney with a principal place of business in Farmingdale, New York, to establish Premium Pursuit and draft its Operating Agreement. Lively established Premium Pursuit in 2005 but never drafted an Operating Agreement, or any agreement, between Kerin and Hushion.
Subsequently, Hushion approached Kerin about involving Lively in Premium Pursuit due to his ability to attract clients. Kerin consented to Hushion's proposed change to Premium Pursuit's payment structure so that Lively would receive one-third (1/3) of all profits on business initiated by Lively, and Kerin and Hushion would evenly divide the remaining two-thirds (2/3) of those profits. Lively would receive no distribution or money for Premium Pursuit business other than for business that he originated. The parties operated Premium Pursuit under this arrangement for several years, and distributions were made by Premium Pursuit pursuant to the oral agreements between Kerin and Husshion.
In or about January of 2010, personal issues arose between Kerin and Hushion, the nature of which is unknown to Kerin, prompting Hushion to wind down Premium Pursuit's business. Kerin consented to this winding down, and anticipated that the parties would address the distribution of revenue that was earned, but not yet paid by clients of Premium Pursuit.
In or about April of May of 2010, Lively and Hushion advised Kerin that they had opened a new bank account ("Account") for Premium Pursuit and funded it with Premium Pursuit money. They refused to provide Kerin with information regarding this Account, including where it was maintained. Lively and Hushion also advised Kerin that at least $100,000 of fees ("Fees") recently earned by Premium Pursuit had been placed in the Account, and Hushion had removed $30,000 from the Account. Lively and Hushion arranged for Premium Pursuit's clients to send the Fees to Hushion to be deposited into the Account.
Lively and Hushion also advised Kerin that additional Fees of at least $83,000 have been, or will soon be, deposited into the Account. Lively and Hushion have refused to provide Kerin with documentation regarding the Fees or the Account, or to discuss these matters with him. Lively and Hushion also allegedly threatened to make false allegations about Kerin to "the insurance department" (Compl. at ¶ 28). The Complaint alleges that Kerin and Hushion owe a fiduciary duty to each other by virtue of their status as co-members of Premium Pursuit.
The Complaint also alleges that Defendants "Unknown Entities 1-10" are intended to be those entities, currently unknown to Plaintiff, to which Defendants have diverted assets or opportunities belonging to Plaintiffs, or which otherwise benefited at Plaintiffs' expense.
The Complaint contains fourteen (14) causes of action: 1) a request for an accounting as to all Defendants, 2) against Lively and Hushion for waste, 3) against Lively and Hushion for diversion of business opportunities, 4) against Lively, Hushion and Premium Pursuit for conversion, 5) against Lively, Hushion and Premium Pursuit for failure to pay profit distributions, 6) against Lively and Hushion for unjust enrichment, 7) against Unknown Entities 1-10 for unjust enrichment, 8) against Lively and Hushion for tortious interference with prospective economic advantage, 9) against Lively and Hushion for breach of fiduciary duty, 10) against all Defendants for a constructive trust, 11) against Lively and Hushion for a permanent injunction, 12) against Lively for attorney malpractice, 13) against Lively for attorney breach of fiduciary duty and canons of ethics, and 14) against Hushion for breach of oral and written contracts.
In his Affidavit in Support, Kerin affirms the truth of the allegations in the Complaint. He avers that he has made numerous requests for details and documentation regarding the Fees and Account and that Hushion and Lively have refused to provide him with that information; they only told him that "the money is safe" (Kerin Aff. at ¶ 30). Kerin also affirms that he and his attorney have made extensive efforts to resolve this matter which have been unsuccessful. Kerin recently learned that it is Lively's position that Kerin, Lively and Hushion were to share all distributions of Premium Pursuit on an equal, one-third basis, irrespective of whether the distribution related to an account originated by Lively.
In his Affidavit in Opposition, Lively affirms as follows:
Lively and Plaintiff were partners in Premium Pursuit, and Plaintiff has mischaracterized Lively's position in that company. Lively provides copies of Premium Pursuit's 2007 and 2008 state and federal tax returns (Ex. A to Lively Aff.) which, he submits, support his position. Lively also submits that Plaintiff committed "tax fraud" against him (Lively Aff. at ¶ 4) by filing Premium Pursuit tax returns reflecting that Lively received $81,142.00 in 2008 which Lively never received, despite his demands for those returns.
Lively also alleges that counsel for Premium Pursuit ("Premium's Counsel") established, and represented, several companies after Premium Pursuit was formed which provided services that were essentially the same as those provided by Premium Pursuit. These separate companies are co-owned by Hushion and Kerin. Lively submits that, by participating in these other companies, Kerin stole a corporate opportunity from Premium Pursuit, thereby breaching his fiduciary duty to Premium Pursuit as its "self-proclaimed managing member" (Lively Aff. at ¶ 8). In support, Lively provides 1) an agreement dated November 13, 2008 between Premium Pursuit and a company called Putney Planning Group ("Putney") that was prepared by Premium's Counsel, and 2) a bill from Premium's Counsel for his work on Putney and other matters which, Lively submits, Premium Pursuit paid from one of its bank accounts that was controlled by Kerin ( See Exs. B and C to Lively Aff.). Lively also alleges that Kerin arranged for Millennium, a company owned by Kerin, to be paid a management fee of 20% for overseeing the affairs of Premium Pursuit.
Lively affirms that, although Premium Pursuit was profitable in 2007 and 2008, Kerin stopped communicating with him except to assure him that Premium Pursuit had made no money for the tax year 2007. Lively also avers that he was not informed that Premium Pursuit made money in 2008, despite tax returns which, he submits, demonstrate that Premium Pursuit did earn money in 2008.
Hushion, who allegedly "uncovered the embezzlement" and other improper conduct by Kerin, (Lively Aff. at ¶ 16), approached Lively and they decided to open the Account, without Kerin's knowledge, to preserve the capital of the company as well as its client base. Lively submits that it was necessary to exclude Kerin to prevent further theft or diversion of Premium Pursuit's assets. Lively submits that he and Hushion have been more forthright than Kerin, despite opening this Account without his knowledge, because the funds in the Account have not been used in connection with any company except Premium Pursuit.
Lively also disputes Kerin's assertion that Lively was counsel to Premium Pursuit. Lively provides a copy of an e-mail from Premium's Counsel to Hushion dated February 23, 2010 (Ex. C to Lively Aff.) in which Premium's Counsel refers to himself as "corporate counsel." Lively submits that Plaintiff has not demonstrated its right to injunctive relief.
In his Affidavit in Opposition, Hushion affirms as follows:
Hushion disputes many of Kerin's assertions and affirms, inter alia, that 1) at all times, the Individual Defendants owed a one-third interest in Premium Pursuit; 2) Lively did not act as counsel for Premium Pursuit; 3) the Individual Defendants never agreed that Lively would only receive money based on business that he procured; and 4) Kerin never tried to "reach out" (Hushion Aff. at ¶ 2(h)) to Hushion at any time after November of 2009.
Hushion avers that Lively first approached Hushion about creating a company after Hushion had successfully completed an audit for one of Lively's clients. Hushion broached the idea with Kerin who was associated with Millennium, a well known insurance agency. At that time, the Individual Defendants agreed to form Premium Pursuit as equal one-third partners. Hushion submits that Premium's tax returns support the one-third ownership scenario he has described.
In December of 2006, while still affiliated with Premium Pursuit, Hushion was offered a job with Millennium, to work on a salary/commission basis. Thereafter, Premium Pursuit earned income in 2007 and 2008 but no distributions were made to Lively, allegedly in violation of his rights. Kerin controlled the books and records of Premium Pursuit, and maintained those books and records on Millennium's computers. Kerin also selected Premium Pursuit's Counsel. Hushion alleges that Arthur Stewart ("Stewart"), the accountant for Premium Pursuit, was "complicit with Kerin in any decision to pay or not pay [Lively]" (Hushion Aff. at ¶ 12). Hushion also alleges, upon information and belief, that a K-1 Statement was issued to Lively that reflected distributions of approximately $80,000 in tax year 2008, but no payment was ever made.
In the summer of 2009, Hushion had concerns with Kerin's business practices, including his failure to reimburse Hushion for commission payments and business expenses. Hushion spoke to Lively about his concerns and the decision was made to open the Account in an effort to preserve the assets of Premium Pursuit. Hushion advised counsel for Kerin of the Account, and Lively advised Kerin of its existence. Hushion subsequently terminated his employment with Millennium and it was decided that Premium Pursuit should wind down its business. The parties were unable to resolve the matter and on May 17, 2010, Hushion filed a grievance against Premium's Counsel. Hushion suggests that the grievance precipitated the instant lawsuit. Hushion affirms that he has "no intention of distributing the funds of [Premium Pursuit] unless and until [Lively] is paid his fair distribution" (Hushion Aff. at ¶ 21).
In response to Defendants' Affidavits, Plaintiff provides an Affidavit in Support of Stewart, who affirms that he is a Certified Public Account who worked as the accountant for Premium Pursuit from 2007-2009. In that capacity, he prepared tax returns and Internal Revenue Service ("IRS") Schedule K-1 forms for 2007-2008 (Exs. A and B to Stewart Aff.). Stewart disputes Lively's claim that the 2008 tax returns reflect that Lively received $81,142.00 in distributions from Premium Pursuit in 2008 and submits that Lively's assertion reflects his lack of understanding of the Schedule K-1 form. In fact, the 2008 Schedule K-1 reflects that the amount of income attributable to Lively was Five ($5.00) Dollars, which is listed under the section titled "Ordinary Income." Moreover, the 2007 Schedule K-1 attributed no income to lively.
Stewart also characterizes as "false" (Stewart Aff. at ¶ 7) Lively's assertion that an entry on page 8 of the tax form, under the heading "Partner's New York Filing Fee Information" notified the IRS that Lively received $81,386 from Premium Pursuit. Rather, this sum represented one-third of all revenues received by Premium Pursuit, without regard to how distributions or profits were paid. The 2008 Schedule K-1 reflects that Lively received a total distribution of profits of $5.00 from Premium Pursuit, and this sum was added to his Capital Account. Lively received nothing for 2007.
Stewart spoke with Hushion and Kerin in connection with his preparation of Premium Pursuit's 2007 and 2008 tax returns. During those conversations, Hushion advised Stewart that, although all three partners owned Premium Pursuit, distributions from commissions brought into Premium Pursuit would be split 50-50 for the respective benefit of Kerin and Hushion. The only exception was that, for commissions from accounts generated by Lively, distributions would be split evenly among the three partners. Stewart prepared the tax returns consistent with this understanding. For tax purposes, an IRS Form 1099 was prepared for Hushion based on distributions made to him. Stewart did not prepare a Form 1099 for Lively because, as per Hushion and Kerin, no distribution was made to him. Stewart affirms that the fact that the Schedule K-1 reflected an equal ownership by the three partners did not necessarily mean that the payment of commissions earned would be equal. Stewart also dismisses Lively's assertion that Premium Pursuit committed tax fraud, or any impropriety, with respect to its tax returns.
In his Reply Affidavit, Kerin reiterates many of his initial affirmations regarding the opening of the Account and the initial refusal of the Individual Defendants to provide him with documentation regarding the Account. Kerin affirms that, subsequent to the filing of the instant Order to Show Cause, he received bank statements regarding the Account through June of 2010.
Kerin also disputes Lively's claim that Kerin's initial Affidavit was false, and submits that the tax returns support Kerin's position. Kerin's initial Affidavit did not address the ownership of Premium Pursuit, but rather the manner in which the profits were to be divided. Moreover, the tax returns do not reflect that Lively received a distribution of $81,142.00 in 2008; rather, as explained by Stewart, Lively's income was stated as $5.00. In addition, although Lively asserts that he never received the tax returns despite his demand, Kerin notes that Lively does not provide any documentation reflecting such a demand. Rather, Kerin provided a copy of the tax return to Hushion who, Kerin was advised, provided it to Lively.
Kerin also disputes Lively's claim that Millennium was a company owned by Kerin and affirms that he had, at most, a 10% interest in Millennium. Kerin also denies making a unilateral decision with respect to Millennium's management fee, and affirms that he made all decisions after consulting with Hushion. Kerin also denies that he diverted corporate opportunities from Premium Pursuit by opening other companies, and affirms that those other companies did not generate any revenue. Kerin suggests that Lively is attempting to take advantage of his failure to draft an Operating Agreement to "cast doubt over the clear understanding of the parties" (Kerin Reply Aff. at ¶ 18).
C. The Parties' Positions
Plaintiff submits that it has provided facts warranting the appointment of a receiver by establishing that Hushion and Lively surreptitiously opened the Account, directed Fees into that Account and denied Kerin access to that Account or those Fees.
Plaintiff also contends that it has demonstrated its right to injunctive relief. First, Plaintiff argues that it has demonstrated a likelihood of success on the merits by establishing that 1) Kerin owns a 50% interest in Premium Pursuit and Hushion owns the remaining interest; 2) there is a fiduciary relationship among Kerin and the Individual Defendants; 3) the Individual Defendants have excluded Kerin from Premium Pursuit's business and exerted complete control over the company and its assets; 4) Kerin is entitled to an accounting of Premium Pursuit's expenditures and profits to determine his interest in those profits; and 5) the Individual Defendants have diverted assets and business opportunities of Premium Pursuit to the exclusion of Kerin.
Plaintiff submits, further, that Kerin would be irreparably injured without injunctive relief because the Individual Defendants would continue to exercise complete control over Premium Pursuit's assets, and divert those assets, to the detriment of Kerin. Finally, Plaintiff contends that a balancing of the equities favors Kerin because he is not seeking to prevent Premium Pursuit from operating but rather is attempting to preserve its assets pending the ultimate resolution of this action.
Defendants oppose Plaintiff's application for a temporary receiver, submitting that the appointment of a receiver is justified only under the most extreme circumstances, which are not present here. Plaintiff has not demonstrated that the property of Premium Pursuit is in danger of being removed or destroyed and, therefore, the appointment of a temporary receiver is inappropriate.
Defendants also submit that Plaintiff has not demonstrated its right to injunctive relief. First, Defendants contend that Plaintiff has not established a likelihood of success on the merits in light of the conflicting affidavits and documentation regarding the ownership interests of the Individual Defendants, as well as the issue of whether Lively acted as counsel for Premium Pursuit. Next, Defendants argue that Plaintiffs have failed to establish that they will suffer irreparable injury without injunctive relief, as any injury to Plaintiff is compensable by money damages. Finally, Plaintiff has not demonstrated that a balancing of the equities is in its favor, in light of Lively's allegations regarding the propriety of the Premium Pursuit tax returns, Kerin's operation of competing businesses and the legal representation of Premium Pursuit by Premium's Counsel, not Lively.
RULING OF THE COURT
A. Standards for Preliminary Injunction
A preliminary injunction is a drastic remedy and will only be granted if the movant establishes a clear right to it under the law and upon the relevant facts set forth in the moving papers. William M. Blake Agency, Inc. v. Leon, 283 A.D.2d 423, 424 (2d Dept. 2001); Peterson v. Corbin, 275 A.D.2d 35, 36 (2d Dept. 2000). Injunctive relief will lie where a movant demonstrates a likelihood of success on the merits, a danger of irreparable harm unless the injunction is granted and a balance of the equities in his or her favor. Aetna Ins. Co. v. Capasso, 75 N.Y.2d 860 (1990); W.T. Grant Co. v. Srogi, 52 N.Y.2d 496, 517 (1981); Merscorp, Inc. v. Romaine, 295 A.D.2d 431 (2d Dept. 2002); Neos v. Lacey, 291 A.D.2d 434 (2d Dept. 2002). The decision whether to grant a preliminary injunction rests in the sound discretion of the Supreme Court. Doe v. Axelrod, 73 N.Y.2d 748, 750 (1988); Automated Waste Disposal, Inc. v. Mid-Hudson Waste, Inc., 50 A.D.3d 1073 (2d Dept. 2008); City of Long Beach v. Sterling American Capital, LLC, 40 A.D.3d 902, 903 (2d Dept. 2007); Ruiz v. Meloney, 26 A.D.3d 485 (2d Dept. 2006).
A plaintiff has not suffered irreparable harm warranting injunctive relief where its alleged injuries are compensable by money damages. See White Bay Enterprises v. Newsday, 258 A.D.2d 520 (2d Dept. 1999) (lower court's order granting preliminary injunction reversed where record demonstrated that alleged injuries compensable by money damages); Schrager v. Klein, 267 A.D.2d 296 (2d Dept. 1999) (lower court's order granting preliminary injunction reversed where record failed to demonstrate likelihood of success on merits or that injuries were not compensable by money damages).
B. Appointment of Temporary Receiver
The appointment of a temporary receiver is an extreme remedy resulting in the taking and withholding of possession of property from a party without an adjudication on the merits. Vardaris Tech., Inc. v. Paleros Inc., 49 A.D.3d 631, 632 (2d Dept. 2008), quoting Schachner v. Silkowitz, 94 A.D.2d 709 (2d Dept. 1983). A motion seeking such an appointment should be granted only where the moving party has made a clear evidentiary showing of the necessity for the conservation of the property at issue and the need to protect the moving party's interests. Vardaris, supra, at 632, quoting Lee v. 183 Port Richmond Ave. Realty, 303 A.D.2d 379, 380 (2d Dept. 2003).
C. Application of these Principles to the Instant Action
Preliminarily, the Court is concerned, both with the ad hominem attacks on Plaintiff by Defendants, and by the unilateral decision of the Individual Defendants to open the Account without Kerin's knowledge. Notwithstanding these concerns, the Court is constrained to conclude that it cannot award the requested injunctive relief based on its conclusion that, in light of the conflicting affidavits, Plaintiff has not demonstrated its likelihood of success on the merits. The Court is somewhat persuaded by the Affidavit of Stewart, a certified professional accountant who has disputed Defendants' interpretation of the Premium Pursuit tax returns and affirmed that Kerin's description of the arrangement among the Individual Defendants is correct. Given, however, that Stewart has performed work for Premium Pursuit that is apparently in dispute in this litigation, the Court cannot conclude that he is entirely disinterested.
The Court also concludes that the extreme remedy of the appointment of a temporary receiver is not warranted under the facts of this case.
The Court concludes, however, that some relief is appropriate pursuant to New York Limited Liability Company Law §§ 1102(a)(2) and (b), which provide as follows:
(a) Each domestic limited liability company shall maintain the following records, which may, but need not, be maintained in this state:
(2) a current list of the full name set forth in alphabetical order and last known mailing address of each member together with the contribution and the share of profits and losses of each member or information from which such share can be readily derived;
(b) Any member may, subject to reasonable standards as may be set forth in, or pursuant to, the operating agreement, inspect and copy at his or her own expense, for any purpose reasonably related to the member's interest as a member, the records referred to in subdivision (a) of this section, any financial statements maintained by the [LLC] for the three most recent fiscal years and other information regarding the affairs of the [LLC] as is just and reasonable.See Sachs v. Adeli, 26 A.D.3d 52 (1st Dept. 2005) (First Department reversed trial court's order denying motion by member to compel company to disclose subsidiary's sales tax records that were necessary and otherwise unavailable).
In light of the affirmations of Hushion and Lively that the funds in the Account relate solely to Premium Pursuit, the Court concludes that Kerin has the right to inspect, and copy at his expense, all documentation relating to that Account. Accordingly, the Court directs Defendants, on or before January 7, 2011, to make available to Kerin and his counsel for inspection, and copying at Kerin's expense, all records relating to the Account from the day that it was opened through the date of inspection, including but not limited to account statements, checks, signatory cards and correspondence.
Accordingly, the Court denies Plaintiff's Order to Show Cause and vacates the Temporary Restraining Order. The Court, however, directs Defendants, on or before January 7, 2011, to make available to Kerin and his counsel for inspection, and copying at Kerin's expense, all records relating to the Account from the day that it was opened through the date of inspection, including but not limited to account statements, checks, signatory cards and correspondence. Based on the Court's determination that this directive does not constitute injunctive relief, the Court will not require the posting of a bond.
All matters not decided herein are hereby denied.
This constitutes the decision and order of the Court.
The Court directs counsel for the parties to appear before the Court for a conference on January 26, 2011 at 9:30 a.m.