Opinion
1:00-CV-0784.
August 30, 2001
BOIES, SCHILLER FLEXNER, LLP Jeffrey S. Shelly, Esq., of counsel, Michael Endler, Esq., of counsel, Albany, New York, Attorneys for Plaintiffs.
HOGAN HARTSON, LLP David J. Hensler, Esq., Washington, DC and ISEMAN, CUNNINGHAM, RIESTER HYDE, LLP Michael J. Cunningham, Esq., of counsel, Albany, New York.
Attorneys for Defendants, Robert J. Congel, Hunter, Schunck and Bucci, KING SPALDING, John Bray, Esq., of counsel, Anthony Fiotto, Esq., of counsel, N.W. Washington, D.C., Attorneys for Defendants Brvenik and Malfitano.
GOODWIN, PROCTER LAW FIRM Paul F. Ware, Jr., Esq., of counsel, Boston, MA, Attorneys for Defendant Tuozzolo.
NO APPEARANCE ON THE MOTION:
WINSTON STRAWN David Sharp, Esq., of counsel, Douglas Greenburg, Esq., of counsel, Washington, D.C. and DADD AND NELSON, Eric T. Dadd, Esq., of counsel, Attica, New York, Attorneys for Defendants Pyramid Company of Onondaga, Eklecco and Bontel Corp.
COSTELLO, COONEY FEARON, LLP Robert Smith, Esq., of counsel, Syracuse, New York, Attorneys for Defendants Scott R. Congel and SR Group, Inc.
JAECKLE FLEISCHMANN MUGEL, LLP Charles Swanekamp, Esq., of counsel, Buffalo, New York, Attorneys for Defendant DiMarco, Abiusi Pascarella, CPA, P.C.
MEMORANDUM-DECISION AND ORDER INTRODUCTION
On August 16, 2001, this Court signed an order directing defendants to show cause why an order should not be entered granting the following relief:
• enjoining defendants Congel and Tuozzolo from taking any action to diminish, limit, rescind, or purchase the ownership interests of plaintiffs J. Daniel Lugosch, III and John A. Bersani in the Berkshire Mall Group and the Independence Mall Group;
• declaring, for the duration of this matter, that plaintiffs Lugosch and Bersani are not in default under the Partnership Agreements of the aforementioned partnerships;
• appointing a receiver to oversee and manage the business and finances of the Berkshire Mall Group and the Independence Mall Group,
• to protect and preserve the interests of all partners in those partnerships, including plaintiffs, • to determine the necessity of Congel's previously announced capital calls under the respective Partnership Agreements, and • if the funds sought in the capital calls are actually needed, apply the funds in an appropriate and legal manner to the legitimate partnership debts and expenses.
When plaintiff's applied for the Order to Show Cause, the Court denied a temporary restraining order. The Order to Show Cause established a briefing schedule and set oral argument for August 24, 2001. Upon oral argument, the Court declined to grant a temporary restraining order and reserved decision on the motion. The Court now addresses the motion.
FACTS
The Court assumes familiarity with the underlying lawsuit and sets forth herein only the facts bearing on the instant motion.
Partnership Agreement
The pertinent sections of the partnership agreements for the two partnerships in issue, Berkshire Mall Group ("Berkshire") and Independence Mall Group ("Independence") read:
3. Partners and Partnership Capital 3.1 (a) The Partners agree that their respective initial Capital Contributions to the Partnership . . . shall be paid to the Partnership as specified by Notice to each Partner by the Executive Committee. (b)(i) . . . [T]he Partners agree to contribute as additional capital to the Partnership in the ratio of their partnership Percentages such amounts of money and other property on such dates as the Executive Committee shall determine and request in writing on ten (10) days' prior notice as required from time to time as capital of the Partnership. 3.2 In the event that a Partner shall default in duly making such Partner's contribution of additional capital as provided in paragraph 3.1, the following provisions shall apply: (a) The defaulting Partner shall be deemed to be in default as long as payment of such Partner's contribution ("the defaulted contribution") is not made after the date specified for payment in the Notice from the Executive Committee fixing the amount of such contribution . . . but such default may be cured by the payment of the defaulted contribution and interest thereon only prior to (but not after) the exercise by the Partnership of its right to purchase the defaulting Partner's Partnership Interest as provided below. . . . (c) So long as the default shall continue, the Partnership shall have the right (but not the obligation) to purchase the defaulting Partner's Partnership Interest at its Book Value . . . upon the following terms and conditions: (i) The Partnership may exercise its right to purchase by Notice from the Executive Committee to the defaulting Partner any time after default by the Partner but prior to the curing of such default by the defaulting partner (but not thereafter except for a subsequent default). . . . Upon request of the Executive Committee, the defaulting Partner agrees to execute any document (including an amended partnership certificate) evidencing and acknowledging the termination of such Partner's Partnership Interest and the withdrawal of the defaulting Partner from the Partnership. . . .
Berkshire Mall Group
The various interests in Berkshire, which owns the Berkshire Mall in Lanesboro, Massachusetts, are: Lugosch — 27.5%; Bersani — 5%; Woodchuck Hill Associates ("Woodchuck Hill"), a partnership indirectly owned and controlled by Congel — 54%; Congel individually — 0.5%; Tuozzolo — 5%. Lugosch, Congel and Tuozzolo constitute the three-person Executive Committee.
On June 20, 2001, Congel sent a letter to each Berkshire partner, stating in full:
As you will recall in the partnership financial reporting of May 4, 2001, the 2001 forecasted cash flow from operations reflected a shortfall of approximately $3 million. This shortfall is made up of predominantly two items. The Baker Hill Road Bond debt service and secondly the tenant escrow reserve payments required under the forbearance agreement with Prudential. The 2001 Road Bond debt service is approximately $1.3 million. This is paid in two installments the first being due this month in the amount of $829,045. The cash flow from the property is not available to service this obligation under the forbearance agreement. As you are aware, each of the partners of Berkshire Mall Group delivered to Prudential Insurance Company of America a joint and several guarantee for the payment of amounts due for the Road Bond. A partner call is required at this time to service this obligation and to evidence compliance by each of the partners with their direct obligation to Prudential.
Please remit your portion of the $829,045 capital call made payable to Berkshire Mall Group directly to Mike Mammolito of Pyramid Management Group, Inc.
By letter on July 19, 2001, Lugosch, on behalf of himself and Bersani, replied:
More than two years ago, we began writing to you and others at Pyramid concerning the grave situation you caused to unfold at Berkshire. John and I sent more than ten (10) letters to you warning of the impending financial hardship which you were about to impose upon the partnership, objecting to your ongoing management of the property, and disagreeing with your initial failure to respond to Prudential and your belated, heavy-handed and imprudent dealings with Prudential. . . . [W]e have repeatedly and consistently maintained our position that we would hold you, Woodchuck Hill Associates and Pyramid Management Group, Inc. responsible for defending, indemnifying and holding us harmless from and against any and all costs, expenses and liabilities resulting from your breaches of fiduciary responsibility, breaches of the Berkshire Mall Group partnership agreement, and mismanagement of the Berkshire Mall, including any costs, expenses and liabilities that arise in connection with the Prudential loan. We have further repeatedly and consistently maintained our position that we would not participate in any partnership cash calls going forward, which are the result of your actions or inaction, and, as such, are your sole and exclusive responsibility. . . .
Accordingly, neither John nor I will contribute any portion of this recent $830,000 capital call. . . . Furthermore, because this "capital call" is not a legitimate partnership obligation, but is entirely the responsibility of you, Woodchuck and PMG, no portion of this amount can be categorized/carried as a "loan," either to the Berkshire Mall Group partnership or to any individual partners. (Emphasis added.)
On July 27, 2001, Congel sent the following memorandum to Lugosch and Tuozzolo:
I wish to call a meeting of the Executive Committee on Tuesday, August 7, 2001 at 10:00 a.m. for the purpose of discussing the remedies available to the Executive Committee for failure of partners to make capital contributions. Pursuant to the Berkshire Mall Group Partnership Agreement, those members of the Executive Committee eligible to vote shall be entitled to take action at this meeting.
Dan [Lugosch], if you are unavailable to attend this meeting in person, you are free to participate by telephone. . . ."
By letter dated August 8, 2001, Lugosch wrote to Congel as follows:
I returned to my office from vacation today and read your July 27, 2001 memorandum calling a meeting of the Executive Committee of Berkshire Mall Group for yesterday, Tuesday, August 7, 2001 at 10:00 a.m. I regret that my schedule prevented me from participating.
. . . For all the reasons outlined in our prior correspondence to you over the past several years, including your breaches of the partnership agreement and management agreement and your past and continuing breaches of fiduciary responsibility, neither John Bersani nor I have any obligation to participate in your calls for capital contributions. . . . Accordingly, our refusal to make the recently requested capital contribution is wholly justified.
Under these circumstances, there are no remedies available to the Executive Committee in connection with our refusal to make capital contributions. . . . (Emphasis added.)
On August 7, 2001, Congel and Tuozzolo wrote to Lugosch, stating:
Berkshire Mall Group has taken action by and through the Executive Committee at a meeting duly called and held on August 7, 2001 at the principal office of the Partnership.
A notice dated June 20, 2001 was sent to all Partners of a request for a Capital contribution in the amount of $829,045. Your share of this Capital Contribution is $227,987 which remains outstanding and unpaid. . . . By action of the Executive Committee today Berkshire Mall Group hereby elects to purchase your Partnership Interest at its Book value in accordance with section 3.2 of the Partnership Agreement for zero dollars ($0.00). . . .
Berkshire sent a similar letter to Bersani. The minutes of the Berkshire Executive Committee meeting held on August 7, 2001, summarize the above events and state that Congel moved on behalf of Berkshire to purchase Lugosch's and Bersani's interests, that Tuozzolo seconded the motion, and that all members of the Executive Committee entitled to vote (i.e., Congel and Tuozzolo) voted "Yes."
Independence Mall Group
The sequence of events concerning the partnership Independence Mall Group ("Independence") is virtually identical, except for dates and monetary amounts. The various interests in Independence, which owns the Independence Mall in Kingston, Massachusetts, are: Lugosch, both individually and through JDL Associates ("JDL") — 26.5%; Bersani — 5%; plaintiff John Charters — 1%; Congel, both individually and through Riesling Associates, the family partnership he controls — 47.5%; Tuozzolo — 5%; and defendant Marc Malfitano — 2%. Lugosch, Congel and Tuozzolo constitute its Executive Committee.
On July 16, 2001, Congel sent to the partners of Independence a capital call letter similar to the Berkshire capital call letter of June 20, 2001. Lugosch's share is $48,447; JDL's is $149,069; Bersani's is $37,267. On July 20, 2001, Lugosch, on behalf of himself, JDL and Bersani, responded that they would not participate in the capital call.
On August 10, 2001, Congel sent a memorandum to Tuozzolo and Lugosch calling for a meeting of the Independence Executive Committee. The memorandum, which is identical to the July 27, 2001, notice of Berkshire's Executive Committee meeting, scheduled the meeting for August 17, 2001. On August 16, 2001, plaintiffs applied to this Court for the Order to Show Cause and a temporary restraining order. The Court did not grant a temporary restraining order. After receiving the Order to Show Cause, however, Congel and Tuozzolo adjourned the Independence Executive Committee meeting until September 5, 2001.
DISCUSSION
Preliminary injunction
The standard for issuing a preliminary injunction is well settled in this circuit. "The party seeking the injunction must demonstrate (1) irreparable harm should the injunction not be granted, and (2) either (a) a likelihood of success on the merits, or (b) sufficiently serious questions going to the merits and a balance of hardships tipping decidedly toward the party seeking injunctive relief." Resolution Trust Corp. v. Elman, 949 F.2d 624, 626 (2d Cir. 1991).
In support of their application for a preliminary injunction, plaintiffs advance two principal arguments: first, that the Executive Committees' capital calls and purchase of Lugosch's and Bersani's interests were invalid on various procedural grounds, and, second, that due to Congel's bad acts, Lugosch and Bersani were not obligated to pay the capital calls and thus should be protected from the buy-outs.
With respect to the alleged procedural violations in connection with the capital calls, plaintiffs complain that the notices were sent by regular mail instead of by personal delivery, registered mail or certified mail as required by the partnership agreements. They further complain that the notices did not establish dates on which the payments were due and that, with respect to Berkshire, the notice of the August 7 Executive Committee meeting stated only that it was called "for the purposes of discussing the remedies available to the Executive Committee for failure of partners to make capital contributions" (emphasis added), without giving notice that a purchase of any partner's interest would occur.
Plaintiffs make no showing of damage or prejudice from these alleged procedural violations. In their correspondence, Lugosch and Bersani "repeatedly and consistently maintained [their] . . . position that [they] . . . would not participate in any partnership cash calls." And after the August 7 Berkshire meeting they stated that their "refusal to make the recently requested capital contribution is wholly justified." Lugosch and Bersani do not suggest that, had the notices of capital call been delivered personally or by registered or certified mail, they would have acted differently. Nor do they suggest that they would have paid the capital calls if they had been given firm due dates or clearer notification of the purpose of the scheduled Executive Committee meetings.
Plaintiffs further contend that under the partnership agreement the right to purchase a partner's interest belongs to the partnership, not the Executive Committee. Section 3.2 provides that so long as a partner's default on a capital call continues, "the Partnership shall have the right (but not the obligation) to purchase the defaulting Partner's Partnership Interest. . . . The Partnership may exercise its right to purchase by Notice from the Executive Committee to the defaulting Partner. . . ." The powers of the Executive Committee, set forth in the partnership agreements, include "the exclusive right to manage the business of the partnership" (section 5.1). Assuming that the vote to buy out a defaulting partner's interest should have been taken by the full partnership, plaintiffs do not claim that, had the matter been placed before the full partnership, the outcome would have been different. The Court notes that Woodchuck Hill, an entity controlled by Congel, has a 54% interest in Berkshire and presumably would have voted in favor of the buy-out. Similarly, the combined interests of Riesling Associates, Congel and Tuozzolo in Independence total 52.5%. Nor do Lugosch and Bersani suggest that if a partnership meeting had been called, they would have paid the capital call or otherwise acted differently.
Under the agreement, such a decision requires a 51% majority.
At the heart of the motion is plaintiffs' conviction that Congel has acted in bad faith, both in orchestrating the buy-outs and, on a larger scale, in controlling and managing the various partnerships which are the subject of the lawsuit. Plaintiffs contend that Congel arranged the buy-outs both as retribution against Lugosch and Bersani for bringing this lawsuit and as a means of obtaining the 70% interest required to continue the management arrangement with Pyramid Management Group. Plaintiffs assert:
Section 5.2(b)(1) provides that the Executive Committee has no authority to enter into a contract with an Affiliated Person except with the prior consent of partners possessing no less than 70% interest.
By plundering these malls and illegally diverting funds to Congel's other interests, Defendants have placed these partnerships in a negative cash position, allowing Defendants to "purchase" Plaintiffs' interests at a defined "Book Value" of zero dollars, and acquiring the votes of the partners needed to continue PMG's management of these malls. Other than the relief that this Court can provide, the only way for Plaintiffs to avoid this result is to pay nearly one-half million dollars on the demand of a person that Plaintiffs allege to have already stolen millions of dollars from them. Plaintiffs should not have to give in to such extortion.
Thus, in essence plaintiffs argue that as a result of Congel's allegedly improper conduct, the Court should intervene and alter the parties' obligations under the partnership agreement, on the theory that Lugosch and Bersani should not be expected to "throw good money after bad."
Plaintiffs have not demonstrated a likelihood of success on this issue. First, it has not been clearly established that Congel and other defendants have engaged in improper conduct. Second, as a general proposition, minority partners cannot reasonably be permitted to "opt out" of compliance with certain terms of a partnership agreement on the ground that they disagree with decisions of the majority partners. And third, even assuming the truth of their allegations against defendants, Lugosch and Bersani have remedies available: if they no longer wish to participate in the partnerships, they may allow the buy-outs to occur and seek money damages for any resulting losses; if they wish to continue their involvement, they may comply with the partnership agreements and seek money damages for any resulting losses. What they wish to do, however, is continue as partners for some purposes and not for others. Even if plaintiffs are ultimately victorious in this lawsuit, it is highly unlikely that such relief would be warranted.
For the same reasons, the Court finds that plaintiffs have not established sufficiently serious questions going to the merits. In considering the balance of hardships, the Court notes that disrupting the fundamental capitalization structures of the partnerships is likely to impose substantial hardship on other partners. Particularly because, as noted, Lugosch and Bersani have available to them the options of continuing to participate as partners (at least with respect to Independence) or allowing the buy-out and seeking money damages, the balance of hardships does not tip decidedly in their favor.
The Court further finds that plaintiffs have failed to demonstrate irreparable harm. A showing of irreparable harm is "the most important prerequisite for the issuance of a preliminary injunction," NAACP, Inc. v. Town of East Haven, 70 F.3d 219, 224 (2d Cir. 1995). "A moving party must show that the injury it will suffer is likely and imminent, not remote or speculative, and that such injury is not capable of being fully remedied by money damages." Id. As the Second Circuit has explained:
As a general matter, because monetary injury can be estimated and compensated, the likelihood of such injury usually does not constitute irreparable harm. However, a perhaps more accurate description of the circumstances that constitute irreparable harm is that where, but for the grant of equitable relief, there is a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied. For this reason, courts have excepted from the general rule regarding monetary injury situations involving obligations owed by insolvents.Brenntag Intern. Chems., Inc. v. Bank of India, 175 F.3d 245, 249-50 (2d Cir. 1999) (citations omitted).
Plaintiffs rely on the language in Brenntag that injunctive relief should be granted where "there is a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied." Id. at 249. Plaintiffs urge:
[If the buy-outs occur], there can be no doubt that Plaintiffs could not be returned to their present position with respect to these partnerships. These partnerships will be irreversibly altered. For example, the loss of Plaintiffs' oversight and voting power will insure Defendants of their ability to (1) continue PMG as the manager of these partnerships, (2) expand or demolish existing structures, (3) achieve 100% control of the Executive Committee and exercise all of its powers, and (4) sell the partnership properties.
Again, Lugosch and Bersani may maintain their "present position" by performing their partnership obligations. If they do so, they will sustain only monetary damages, if any. There is no showing that monetary damages would not ultimately be recoverable. Compare id. (affirming injunctive relief against insolvent defendant); Rockwell Int'l Sys., Inc. v. Citibank, N.A., 719 F.2d 583, 586-88 (2d Cir. 1983) (affirming injunction prohibiting Iranian bank from making demands against American bank under two letters of credit in light of effect of Iranian revolution on availability of subsequent legal remedies); see also Carter-Wallace, Inc. v. Davis-Edwards Pharm. Corp., 443 F.2d 867, 874, 884 (2d Cir. 1971) (holding that insolvency does not warrant injunction where claim would receive priority in bankruptcy proceeding and adequate security can be provided); Hayes v. Ridge, 946 F. Supp. 354, 367 (E.D.Pa. 1996), aff'd 216 F.3d 1076 (3d Cir. 2000) (refusing to enjoin Pennsylvania from suspending doctors' licenses for refusing to pay allegedly illegal surcharge; doctors could avoid losing licenses by paying contested surcharge). Accordingly, the Court finds that plaintiffs have not established their entitlement to preliminary injunctive relief.
RECEIVER
"[T]he appointment of a receiver is an extraordinary remedy, which should be employed with the utmost caution and granted only in cases of clear necessity to protect plaintiff's interests in the property." Republic of the Philippines v. New York Land Co., 852 F.2d 33, 36 (2d Cir. 1988) (citation and internal quotation marks omitted). Plaintiffs have made no showing warranting the appointment of a receiver. As noted, Lugosch and Bersani have the choice of complying with the Independence partnership agreement and retaining a degree of control in that partnership, or relinquishing their partnership interests and seeking money damages. With respect to Berkshire, they have already made that choice, and there is no basis for appointment of a receiver to protect their ability to collect money damages should they prevail in the lawsuit. Indeed, removing the control of these unique and complex businesses from the hands of the people who created them and have operated them for years, and placing it in the hands of even the most qualified receiver, does not seem likely to benefit plaintiffs or anyone else. The application for appointment of a receiver is denied.
CONCLUSION
It is therefore
ORDERED that plaintiffs' motion for a temporary restraining order, preliminary injunction, and appointment of a receiver is denied in its entirety.
IT IS SO ORDERED.