Opinion
Index No. xxxxxx/2xxx
12-21-2022
N.F., Plaintiff, v. J.D., Defendant.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 138, 139, 140, 141, 142, 143, 144, 145, 146, 147, 148, 149, 150, 151, 152, 153, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 164, 165, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180, 181, 182, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 198, 199, 200, 201, 202, 203, 204, 205, 206, 207, 208, 209, 210, 211, 212, 213, 214, 215, 216, 217, 218, 219, 220, 221, 222, 223, 224, 225, 226, 227, 228, 229 were read on this motion to/for MISCELLANEOUS.
Upon the foregoing documents, the motion by Plaintiff N.F. ("wife"), for an order, pursuant to DRL § 234, directing dissolution of Pxxxx LLC ("the Company"), liquidating all of the Company's accounts and placing the proceeds into escrow; or, in the alternative, appointing a temporary receiver to manage the Company pending final determination of this divorce action, is granted in part.
This case involves an examination of the breadth, and the limits, of the Court's equitable power under DRL § 234 to issue preliminary injunctive relief to protect martial assets subject to equitable distribution. The power is not so broad as to permit this court to judicially dissolve a foreign limited liability company which is a marital asset. However, it is broad enough to allow the court to fashion a remedy to preserve the company where one party has improperly disposed of the other party's interest therein, refused to comply with court orders, and allegedly mismanaged the company such that it suffered substantial losses to its value.
Background
The controlling facts are either conceded, not seriously disputed, or clear on this record. Wife and J.D. ("husband"), who were married in May of 2010 and are each employed in the financial industry, jointly invested their marital assets in brokerage accounts during the marriage. As of July 2018, they had between approximately $2 and $3 million in three separate brokerage accounts held at Interactive Brokers ("IB").
The record is not entirely clear as to the precise value of the IB accounts in 2018, or whether and to what extent those accounts may be considered Husband's separate property, as he claims.
The Hedge Fund: May 2018 — October 2020
On May 14, 2018, the parties formed a hedge fund, the Company, under the laws of the State of Delaware, to hold and manage their marital investments. Under the original LLC formation documents, Husband was the sole member and manager of the Company.
However, on July 25, 2018, the parties executed a "Limited Liability Company Agreement" ("the 2018 LLC Agreement"), adding Wife as a member "of equal interest to" Husband; as of that date, each party was a 50% member of the Company (2018 LLC Agreement ¶6, ¶14). Ostensibly, the addition of Wife as a member of the Company was in recognition of the fact that it is a marital asset. As is here pertinent, the 2018 LLC Agreement also provides that:
3. Formation; Term; Existence. Husaband..... Together with Wife, the Members shall execute, deliver and file any amendments and/or restatements of the Certificate of Formation of the Company and any other certificates or other documents (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in any other jurisdiction in which the Company may wish to conduct business ...
10. Management. The management of the Company shall be vested solely in the Members, who shall have all powers to control and manage the business and affairs of the Company and may exercise all powers of the Company....
14. Additional Members. ... No additional persons may be admitted as members of the Company except upon an assignment by the Members of all or any part of its Interest or except upon the consent of the Members.
20. Amendment. This Agreement may be amended only in a writing signed by the Members.
At all times since 2018, the parties filed joint tax returns in which the Company was regarded for tax purposes as a single member LLC; the single member being Husband.
In July of 2018, simultaneously with the addition of Wife as a member of the Company, the parties’ merged their three separate IB accounts into one account with a balance of approximately $2 to $3 million and transferred the single IB account to the Company. In July of 2019, the parties opened a bank account for the Company in Capital One Bank and seeded it with marital funds.
The Company invests in emerging markets — specifically, China and Russia — that are highly volatile but allow for the potential of superior returns over the long term. The record reveals that the parties intended, ultimately, to raise third-party capital and have outside investors in the Company. In accordance with industry practice, the parties planned to pivot the Company to accept investors in or about 2021 so that it could show a three-year track record. According to Husband, the Company would have a "Master Feeder" structure with a Delaware onshore presence and an offshore domicile. Wife does not deny that this was the plan. Indeed, she attended meetings, prepared and/or edited investor presentations, and made some introductions to potential investors toward this intended goal.
It is also industry practice that investors rely upon the audited track record of a hedge fund manager to determine whether to invest in the fund. Husband covered emerging market assets throughout his career and, thus, has an audited track record as a fund manager. Wife, who works in investor relations, does not have such a record.
Between 2018 and the commencement of this action in October 2020, Husband actively managed the Company and kept Wife generally informed about its investments. Husband traded on margin (i.e., used assets as collateral to borrow money to purchase additional securities) and highly leveraged the Company's accounts. However, because of the heightened risk of loss that comes with highly leveraged accounts, the parties had agreed to, and were, de-levering the Company's accounts regularly. They had a running event to de-lever in their monthly calendar.
During the Company's first two years in operation, it suffered some serious losses due to macro/geopolitical issues effecting trading between the United States and China. However, the Company recovered from the loss and made substantial gains.
At the commencement of this action in October 2020, the Company had a net value of approximately $5.7 million ($6,740,108 in assets minus a $1 million loan).
The Hedge Fund: October 2020 - Present
Just prior to commencement of this action and into 2021, Husband — without the knowledge or consent of Wife — hired new counsel for the Company, changed its operating agreements and took other actions, such as moving its assets offshore, allegedly in preparation for the Company's anticipated "three-year pivot."
In September of 2020, Husband opened an "off-shore" trading/brokerage account with Pictet into which he transferred the Company's assets (cash and securities) from the IB account. He claims the move was anticipated as part of the pivot and necessary because the IB platform was growing "unstable." Husband did not seek Wife's consent to the transfers. It appears in the record that she knew, at some point, that he had opened accounts in Pictet, but she did not know what was going on in/with those accounts.
In March, June, and September of 2021, each time without notifying Wife or obtaining her consent as required under the 2018 LLC Agreement, Husband executed restated and amended Operating Agreements for the Company (collectively, "the 2021 LLC Agreements"). Each of the LLC Agreements, necessarily, recognize that the Company is a Delaware LLC and governed by the Delaware Limited Liability Company Act ("the Act"). The Agreements also note that the securities offered by the Company are subject to federal securities laws, rules, and regulations and oversight by the Securities and Exchange Commission ("the SEC").
The record does not contain a March 2021 Operating Agreement; it contains a May 2021 Operating Agreement. However, the March 2021 Agreement is specifically referenced in the June 1, 2021 First Amended and Restated Operating Agreement, which is in the record. The terms of the June 1, 2021 First Amended and Restated Operating Agreement are virtually identical to those of the September 10, 2021 Second Amended and Restated Operating Agreement ("the September 2021 LLC Agreement"), which, of course is the most recent in time. The Court's analysis will be based on the September 2021 LLC Agreement unless otherwise specifically noted.
The end result of the 2021 LLC Agreements is simply this: Husband disposed of Wife's membership interest in the Company and took complete ownership and control of the Company and its assets for himself.
Pursuant to Section 3.01 and Article IV of the September 2021 LLC Agreement, the Company's "Manager and sole Managing Member" is Pxxx Management, LLC ("Management"), a New York limited liability company. Husband is the sole member and manager of Management, which he formed under the laws of the State of New York on September 9, 2021. The sole purpose of Management is to manage the Company; it engages in no other business.
Under the September 2021 LLC Agreement, the Company is managed "exclusively" by the Manager (hereinafter, Management, the New York LLC), which has "sole and absolute discretion and authority to select Investments" and may exercise each of the other powers enumerated in Article II and in the other provisions of the LLC Agreement. In addition, only Management may remove itself by voluntarily withdrawing or resigning "upon no less than 30 days prior written notice to all Non-Managing Members" or otherwise "upon unanimous consent of the Managing Member [i.e., Management]" (September 2021 LLC Agreement, Section 2.12). Management is divested of its powers and has no authority to act on behalf of the Company only in the event of its Involuntary Withdrawal, which is defined as a dissolution of Management itself, or the filing of a voluntary or involuntary Bankruptcy petition by or against Management, or where Management makes an assignment for the benefit of creditors (Id. ).
The Company may not be managed by a receiver. The appointment of a receiver for the Company is only permitted in the event of its liquidation upon dissolution (Id. Section 11.02).
The Company's dissolution is governed by the Act and the LLC Agreement which, essentially, track the provisions of Sections 18-801 and 18-802 of the Act. Briefly, the Company shall be dissolved upon the occurrence of any of the following: (1) withdrawal, resignation or Involuntary Withdrawal of Management, unless the Non-Member Managers agree to continue the Company with a new and qualified substitute Manager; (2) Management's election to dissolve the Company, upon 30 days prior written notice to the Non-Managing Members; or (3) entry of decree of judicial dissolution under Section 18-802 of the Act. In the event the Company is dissolved, Management shall, inter alia , cancel the Company's certificate of formation with the State of Delaware, "liquidate (or distribute)" the Company's assets, pay off its known liabilities, establish a reserve for "contingent liabilities and expenses of liquidation," and distribute the balance of the proceeds of liquidation in accordance with Capital Account balances of the members (Id. Sections 11.01, 11.02, 11.04.).
In the Spring of 2021, Husband also executed an offering memorandum and new subscription documents; increased the Company's ownership units from 100 to 120; and gave 14 ownership units to new investors/members. As a result, by June 30, 2021 the Company had received $690,000 in new money from investors. By March 2022, the Company took in another $434,211 in investor capital.
The September 2021 LLC Agreement limits the ability of the Managing Member (i.e., Husband) to withdraw any of its Capital Contributions during the "Lock-Up Period" which runs from June 1, 2021 to June 1, 2023. The Managing Member also may not withdraw any amounts from its Capital Account "so long as the Net Asset Value of the Company as of the end of any calendar quarter is below the High Water Mark," which is defined as the highest net asset value on any Non-Managing Member's Capital Account at the end of the prior fiscal year (Id. Sections 8.02, 8.03)
Husband did not notify Wife of any of the changes to the 2018 LLC Agreement, or seek her consent thereto, or provide her with copies of the new offering memorandum and subscription documents. Rather, Wife has been kept, essentially, in the dark about the Company since the commencement of this action. She first learned about the new LLC Agreements and other corporate documents during discovery in the fall of 2021. Husband produced these documents in a heavily redacted state and only after Wife signed a confidentiality agreement.
In addition, Husband has increased trading on margin and leveraging the Company's accounts. The Company's September 2021 offering documents indicate an intention, ostensibly on the part of Husband as the Company's Manager, "to use leverage or portfolio margin to the maximum ratio allowed." He has also opened two new credit lines using the Company assets as collateral. As for his investment strategies, Husband increased the Company's investment in Chinese and Russian stocks despite his express advice to his mother-in-law to liquidate those same stocks, and even after some of them crashed and continued to decline. At present, approximately 25% of the Company is invested in Russian stocks, all of which are locked up and may be lost forever.
Consequently, the Company's value decreased from $6.7 million to $1.6 million, a loss of approximately $5.1 million. Wife first learned of the loss during the parties’ June 2022 settlement discussions.
Wife's Motion for Dissolution of, or the Appointment of Receiver for, the Company
Upon learning of the $5.1 loss in the Company's value, Wife immediately moved, pursuant to DRL § 234, for an order dissolving the Company, liquidating and distributing its assets, or, in the alternative, appointing a temporary receiver to manage it during this litigation; she also sought emergency interim relief. On July 1, 2022, following brief on-the-record oral argument, this Court granted Wife's emergency application to the extent of ordering that she be provided with "real time, read only, online access to all [of] the Company Brokerage Accounts." As of November 14, 2022, the date of the last appearance on this motion, Wife had not been provided online access to the Company's Pictet accounts.
Wife urges that Court intervention is necessary to preserve what is left of the Company, a marital asset. She argues that Husband has improperly wrested complete control over the Company to her exclusion and his mismanagement has decimated its value. She claims that the Company must be dissolved and liquidated and its proceeds distributed in order to ensure that there are adequate funds to take care of the parties’ 2.5 year-old son, L., who has special needs.
The martial estate includes, in addition to the Company, two Manhattan apartments in the same building, one is the former marital home, the other is an investment rental property; some bank and retirement accounts. Wife also owns an investment property in Colorado.
In support of her request that the Company be dissolved or a temporary receiver appointed therefor, Wife raises two main arguments. First, Wife claims that Husband violated the Automatic Orders by: (1) changing the Company's LLC Agreements without her knowledge or consent, thereby disposing of her membership in the Company, a martial asset, and transferring exclusive ownership, management, and control of the Company to himself through a New York LLC; (2) concealing the changes to the Company's corporate structure; (3) transferring the Company's assets from IB to Pictet; (4) encumbering and assigning the Company's assets without her consent; (5) withdrawing money from the Company's accounts; and (6) "locking-up" her share of the Company at least until June 2023, if not longer. Second, she asserts that Husband's reckless and irresponsible investment strategies and management of the Company have caused it to lose over $5 million in value and amount to wasteful dissipation of martial assets.
Husband denies any violation of the Automatic Orders. He argues that the changes he made to the Company's corporate documents and structure do not constitute an improper transfer of marital assets to the prejudice of Wife. Husband does not deny that the 2018 LLC Agreement gave Wife an equal 50% interest in the Company. He does not claim that his signature on the 2018 LLC Agreement is a forgery or that said Agreement is void or voidable. Rather, he purports to disavow the 2018 LLC Agreement by asserting that Wife did not have, because she could not have, a membership interest as she has no "track record" and therefore no one would invest if her name was on the Company documents. Christopher Rogers, Esq., the Company's Delaware attorney, does not dispute the existence of the 2018 LLC Agreement and states only that Wife's single share of the Company is not recorded in its books and records.
Similarly, Husband does not deny that he failed to notify Wife of the 2021 amendments to the Company's corporate documents or obtain her written consent thereto, as required by paragraph 20 of the 2018 LLC Agreement. Instead, he defends his actions by arguing, in effect, that Wife's written consent was not required because she knew that the Company would pivot into an investor company and that its corporate structure and documents would be revised accordingly.
Husband claims that the additional ownership interests he created in the Company in 2021 do not constitute an assignment or transfer of the parties’ martial interest therein; he states that he simply raised money from investors. He otherwise defends, as usual and customary for a hedge fund, the Lock-Up Period and High Water Mark provisions in the 2021 LLC Agreements. Mr. Rogers agrees and states that these provisions are typical for a hedge fund like the Company as they are meant to prevent loss and damage caused by panic withdrawals in the event of market downturn, and do not give rise to an inference of malfeasance or misfeasance on the part of Husband.
As to the transfer of the Company's assets from IB to Pictet, Husband points out that Wife knew about it — the Pictet accounts appear on her Statement of Net Worth. He shows that the Company's assets were transferred from one Company account, IB, to another, Pictet, and that cash was used to buy securities, all of which are still owned by the Company. Husband also claims that all payments or withdrawals from any Company account were made in the ordinary course of business; and/or per the LLC Agreement; and/or for attorney's fees and payments to Wife pursuant to Court order in this litigation; and/or for his living expenses as he is unemployed. He concedes, however, that Wife has no direct access to the Pictet accounts; thus, she (and this Court) cannot independently confirm his accounting.
In defense of his investment strategies, Husband asserts that the Company always traded on margin, had leverage, and credit debt. He did not address why he stopped the parties’ pre-commencement practice of de-levering the Company's accounts.
Husband attributes the Company's $5 million loss in value to the volatility of the emerging markets in which it invests. By way of example, the Company was down 70% in 2018, then up 100% in 2019, and up again 81% in 2020, which is how its value increased to $5.7 million as of October 2020. Husband argues that Wife assumed this very risk of extreme gain and loss when she agreed to invest their marital assets in emerging markets. Both Husband and his financial expert Daniel Marx claim that the Company's recent losses have been caused solely by market forces, unprecedented and unanticipated world events (such as pandemic, epidemic, wars and embargos), and not mismanagement or waste. According to Mr. Marx, the decline in the Company's value is in line with indices for China based companies and similar emerging markets. However, Husband did not adequately explain why he continued to purchase the very stocks he told his mother-in-law to liquidate even after their value had crashed and continued to decline.
Although, as of November 14, 2022, no investors have redeemed their investments in the Company, it has not recovered from the loss and remains in a significant loss position. Therefore, once the Lock-Up Period expires on June 1, 2023, the parties will not be able to withdraw any funds from their Capital Account until the Company makes up all prior losses. At present, the Company's value would need to increase 500% before marital assets can be removed.
Husband points out that a New York State Court is without the power to dissolve the Company, a Delaware LLC, or to appoint a temporary receiver therefor. He urges that, even if this Court could take such actions, it should not do so as liquidation or receivership of the Company would have catastrophic consequences. The Russian securities held by the Company cannot presently be liquidated; those securities may indeed be lost completely. Husband and Mr. Rogers predict other massive losses to the Company's value as a result of liquidation: return of only 30 to 40 cents on the dollar to investors; potential lawsuits that would exceed any recovery on the parties’ investment; and potential SEC and regulatory investigations. In addition, dissolution of the Company, which is under Husband's exclusive control, will negatively impact his ability to obtain future employment in finance and, thus, his ability to pay child support and other expenses. He was terminated from his position as a hedge fund analyst in March 2021 and has had no other employment except management of the Company since that time. Husband relies solely on income from the Company, to the extent he can take distributions, to pay marital and other expenses.
Discussion
The solution to the parties’ somewhat tragic financial situation is simple, but not easy. Simple because the law provides a remedy. Not easy because the legal remedy, although meant to protect the marital asset from further dissipation, may have other harmful and lasting consequences for this family.
The Company is a marital asset; of this there is no dispute. The parties formed the Company during the marriage with marital assets and for the purpose of investing and growing those assets (see DRL § 236 B [1][c] ["marital property shall mean all property acquired by either or both spouses during the marriage ... and before the commencement of a matrimonial action, regardless of the form in which title is held"]). Husband has the burden of proof at trial to establish what part if any, of the Company is his separate property ( Saasto v Saasto , 211 AD2d 708, 709 [2d Dept 1995] ["A court is not bound by a party's own account of his or her finances, and where a party fails to trace the sources of money claimed to be separate property, the court is justified in treating it as marital property."]).
As marital property, the Company and its assets are subject to, and the parties are bound by, the automatic orders under DRL § 236 B (2)(b) and 22 NYCRR § 202.16-a. These orders provide that the parties shall not
... sell, transfer, encumber, conceal, assign, remove or in any way dispose of, without the consent of the other party in writing, or by order of the court, any property (including, but not limited to, real estate, personal property, cash accounts, stocks, mutual funds, bank accounts, cars and boats) individually or jointly held by the parties, except in the usual course of business, for customary and usual household expenses or for reasonable attorney's fees in connection with this action.
[or] ... incur unreasonable debts hereafter, including, but not limited to ... further encumbrancing any assets ... except in the usual course of business or for customary or usual household expenses, or for reasonable attorney's fees in connection with this action.
This Court has broad equitable power, under DRL § 234, to issue orders concerning the possession of marital assets to prevent their disposition or dissipation during the pendency of a matrimonial action. In this regard, the Court may enjoin a party's conduct with respect to an asset (i.e., prohibit disposition), or direct a party to take an affirmative action with respect to an asset (i.e., order payment or refinance of a mortgage) (see Leibowits v Leibowits , 93 AD2d 535, 535 [2d Dept 1983] [order restraining wife from disposing of marital property affirmed; " Section 234 of the Domestic Relations Law provides the authority for the issuance of an order restraining disposition of marital assets during the pendency of a divorce action"]; Nederlander v Nederlander , 102 AD3d 416 [1st Dept 2013] [court properly directed husband to pay 50% of balances of mortgages on martial residence if he could not refinance or obtain extensions of notes "to ensure that the martial home would not be lost to foreclosure, prior to trial and a final judgment of divorce"]; see also Weinstock v Weinstock , 8 Misc 3d 221, 223 [Sup Ct Nassau County 2005] [order directing wife to execute documents for mortgage refinance on marital home as refusal to do so "is causing dissipation of marital assets. Therefore, it is no less necessary to the enforcement of the equitable distribution statute that the court have the power to direct an affirmative act as it is that the court have the power to restrain."]).
DRL § 234 also empowers the Court to appoint a temporary receiver for marital assets where property subject to equitable distribution is in danger of being lost, damaged, or destroyed (see Gucci v Gucci , 213 AD2d 356, 357 [1st Dept 1995] ["receivership orders were all properly made in view of the demonstrated waste and mismanagement of the Westchester County horse ventures"]; Rosenshein v Rosenshein , 211 AD2d 456, 456 [1st Dept 1995] [record contains "sufficient evidence to support the appointment of the receiver to preserve the marital assets and avoid their dissipation"]).
This broad power is not without limit. It is constrained by other equally well-settled principles and authorities, one of which applies herein. This Court cannot itself dissolve the Company, a foreign LLC, as Wife requests (see Raharney Cap., LLC v Cap. Stack LLC , 138 AD3d 83, 84 [1st Dept 2016] ["courts of this state do not have subject matter jurisdiction to judicially dissolve a foreign business entity. Instead, the decision as to whether dissolution is appropriate lies with the courts of the state in which the entity was created."]). Nor can it appoint a receiver to manage the Company under the September 2021 LLC Agreement, which provides that Management shall exclusively manage the Company and that a receiver may be appointed only in the event of liquidation upon the Company's dissolution. These provisions are consistent with and supported by Section 18-802 of the Act (manager of LLC to be chosen in manner provided by LLC agreement) and Section 18-405 of the Act (appointment of receiver only for specific purpose of dissolving or liquidating LLC).
Notwithstanding the inability of a New York Court to dissolve the Company or appoint a receiver therefor, this Court is not without power to grant preliminary injunctive relief in this case and the record requires that relief be granted. Under DRL § 234, the Court may direct Husband, in his capacity as the sole member-manager of Management, a New York LLC, over whom and over which it has jurisdiction, to dissolve the Company. Only Management can dissolve the Company under the September 2021 LLC Agreement, and only Husband can act on behalf of Management. A direction that Husband take certain actions as sole member/manager of Management does not run afoul of the September 2021 LLC Agreement or the Act, as Management would remain the sole and exclusive manager of the Company.
The Court may also appoint a temporary receiver for Management in place and instead of Husband, which person will assume the duties and obligations of Management during this litigation in order to protect and preserve the Company's assets. The appointment of a temporary receiver for Management also does not violate the LLC Agreement or the Act, as Management would still be the Company's manager. Nor does the appointment of a temporary receiver for Management trigger its Involuntary Withdrawal under Section 2.12 of the September 2021 LLC Agreement, as same is not a dissolution of Management, or a bankruptcy filing or the assignment for the benefit of its creditors.
An order addressed to Management is both permissible and warranted. Permissible because, although Management is a third-party LLC created post-commencement, it is a captive entity of Husband (see generally Silva v Silva , 27 Misc 3d 526, 532 [Sup Ct Nassau County 2010] [noting that injunctive relief under DRL 234 against a third party may be available in cases where the third party is a captive entity of one of the parties]). In addition, Wife has some right in and to Management as it was created with martial funds (to wit: income or distributions taken from the Company by Husband) for the specific and sole purpose of managing a martial asset, the Company (Id. [temporary restraining order against separate property inappropriate "unless the plaintiff can show some right in the property"]). The very reason for Management's existence is to manage the Company; it has no other business. Further, Management may be bound by this Court's injunction because it does not operate independently of Husband, its sole member/manager, and, thus, will be on notice of the injunction (see generally Ricatto v Ricatto , 4 AD3d 514, 516 [2d Dept 2004] ["Even though the LLCs are not parties to the matrimonial action, nonparties ‘may be bound by an injunction if they have knowledge of it, provided they are servants or agents of the defendants, or act in collusion or combination with them.’ "]).
Warranted because Husband clearly undermined Wife's expectancy in the Company and violated the automatic orders when, without Wife's written consent as required by the 2018 LLC Agreement, he rewrote the Company's LLC Agreements in 2021 effectively disposing of her membership interest therein. He also failed to obtain her consent to the other amendments to the LLC Agreements, including but not limited to the addition of ownership interests which may (or may not) constitute a transfer or assignment of marital property. Husband concealed all of his actions in this regard until the fall of 2021 when, for the first time, he produced highly redacted copies of the LLC Agreements and other newly created corporate documents. Only then did Wife learn that she was no longer a member of the Company and that Husband had full and complete ownership and control thereof.
Wife's knowledge of the Company's anticipated three-year pivot did not obviate Husband's obligation to secure Wife's written consent to the amended LLC Agreements and other changes to the Company's corporate structure. Her awareness of the Pictet accounts did not excuse his failure to provide her information about those accounts or his management of the Company's assets, especially during a time when the Company's value was in apparent free-fall. Husband continues, through the pendency of this motion, to withhold information from Wife and shut her out of access to the Company's accounts. He did not fully demonstrate on this record that all of his expenditures and withdrawals from the Company have been made in the usual course of business, or for customary and usual household expenses, or reasonable attorney's fees herein, as permitted by the Automatic Orders ( DRL § 236 B (2)(b); 22 NYCRR § 202.16-a ). As of November 14, 2022, Wife still did not have online read-only access to the Company's accounts.
The automatic orders have the force and effect of court orders (see P.S. v R.O. , 31 Misc 3d 373, 376 [Sup Ct New York County 2011] ), the violation of which warrants injunctive relief (see Calicchia v Calicchia , 204 AD2d 506 [2d Dept 1994] [appointment of wife as temporary custodian of bank accounts proper where husband failed to comply with court directive that he restore funds he withdrew from accounts just prior to commencement of action]).
Moreover, the Company, a marital asset, is in danger of being further dissipated under the control of Husband. The Court recognizes that some part of the $5.1 loss in the Company's value is attributable to market forces outside of Husband's control; of this there can be no dispute. In addition, Wife consented to the investment of the Company's assets in emerging markets and therefore assumed the risk of the extreme highs and lows attendant thereto.
However, Wife did not assume the risk of Husband's post-commencement actions, including his investments that resulted in significant losses, because she had no knowledge of what they were. As noted above, Husband surreptitiously took complete control of the Company and concealed the revised LLC Agreements from Wife. She had no access to the Company's Pictet accounts. Moreover, he did not adequately explain why, against his own advice, he continued to invest in stocks that had crashed. He did not deny that over-leveraging the Company's accounts, particularly in this market, will cause additional losses.
Taken together, Husband's violation of the automatic orders, concealment of the revised LLC Agreements, failure to provide information as to the Company's assets, refusal to abide by this Court's order, and alleged irresponsible investment decisions which caused substantial losses, mandates preliminary injunctive relief to protect and preserve Wife's expectancy in the Company and prevent its further dissipation. The Court could direct Husband, as sole member/manager of Management, to dissolve the Company pursuant to Article XI of the September 2021 LLC Agreement (see Nederlander , 102 AD3d 416 [husband's conduct, whether "by design or neglect" jeopardized marital property; court directed husband to take certain actions "to ensure that the marital home would not be lost"]; Weinstock , 8 Misc 3d 221 ). However, it declines to do so as the record does not establish that dissolution is absolutely necessary or appropriate at this time. The party and expert affidavits, standing alone, do not compel this result. Indeed, dissolution may net the parties a mere fraction of their initial investment, if anything, as well as subject them to additional liabilities. At present, the Company's net value is approximately less than $600,000, not including liquidation costs and payouts due to the other investors. While it is clear that further dissipation of the Company must be avoided, the negative consequences of a dissolution mandate further evaluation by a financial professional with the requisite knowledge and experience to do so. Dissolution may also negatively impact Husband's employment opportunities and, thus, his ability to pay child support and his other expenses. Moreover, it is reasonable to conclude, given Husband's vigorous objection to dissolution, that additional litigation to enforce such an order will ensue; a cost this family cannot afford to incur.
On this record, the appropriate preliminary relief is the appointment of a temporary receiver for Management who will replace Husband as its sole member/manager. In this regard, the temporary receiver shall assume all of Management's managerial duties for the Company under the September 2021 LLC Agreement, including but not limited to assessment of the Company's assets and liabilities, and the risks and benefits attendant to dissolution, should that action be necessary. As noted above, the appointment of a temporary receiver for Management does not trigger its Involuntary Withdrawal under the Company's September 2021 LLC Agreement, or otherwise run afoul of said Agreement or the Act; Management will still be the Company's sole and exclusive manager. The Court does not grant this drastic relief lightly; it does so only after full and careful consideration of the facts and circumstances herein, as outlined in detail above and below, and finds that the relief is necessary (see Gucci , 213 AD2d 356 [temporary receiver appointed due to wasteful dissipation of business]; Rosenshein , 211 AD2d 456 [same]; Calicchia , 204 AD2d 506 [temporary custodian appointed where husband violated automatic orders]; Peters v Peters , 127 AD2d 575, 575 [2d Dept 1987] [appointment of temporary receiver proper where wife claimed "substantial interest" in corporations owned by husband and husband refused to comply with court orders]; Papson v Papson , 1998 WL 1177948, *3 [NY Sup Ct July 31, 1998] ["Where one spouse has exercised sole control over the marital assets, has demonstrated a refusal to comply with court-ordered support, and has admitted past transfers and conversions of marital property, the appointment of a receiver is necessary."]).
The Court recognizes and has carefully considered the impact that the appointment of a temporary receiver for Management may have on the Company's investors. Although the Court cannot speculate as to what actions, if any, the investors may take, the September 2021 LLC Agreement is clear as to the limitations on investor actions (including withdrawals), and the benefit of temporary receiver for Management outweighs the risk of any investor action. In addition, Husband may still be entitled to distributions or withdrawals from the Company as permitted by the September 2021 LLC Agreement for use to pay his expenses and he may continue to look for other employment.
Wife conceded, during argument, that she is not qualified to assume the role of temporary receiver for Management so as to undertake all management responsibilities for the Company. Neither she, nor Husband, provided the Court with a list of persons who would be qualified to assume the role. Such person(s) must have credentials and experience to manage a hedge fund and be compliant with all applicable federal and state rules and regulations governing such investment companies, including but not limited to SEC rules and regulations. Consequently, as set forth below, the parties are each directed to separately submit to this Court the names of two proposed temporary receivers to be appointed for Management with appropriate qualifications.
The resolution of the issues on the instant motion are without prejudice to the parties’ respective claims as to separation property credits, date of valuation of the Company, or other facts and circumstances this Court may consider in rendering its equitable distribution award at trial.
The Court has considered the parties remaining requests and arguments and to the extent they have not been specifically addressed, they are denied.
Accordingly, it is hereby
ORDERED that Wife's motion preliminary injunctive relief under DRL § 234 is granted to the extent that a temporary receiver is appointed for Management, a New York limited liability company; such temporary receiver shall assume all duties and responsibilities of Management as the "Manager and sole Managing Member" of the Company, a Delaware limited liability company; and it is further
ORDERED that within forty-five (45) days of this Decision and Order, the parties shall each separately submit to this Court the names of two proposed temporary receivers to be appointed for Management; such persons shall have credentials and experience to manage a hedge fund and be compliant with all applicable federal and state rules and regulations governing such investment companies, including but not limited to SEC rules and regulations. The Court shall pick one of the proposed names and issue a supplemental order appointing such person as temporary receiver of Management; and it is further
ORDERED that Javier Di Fiori shall deliver possession of Management and the Company, including but not limited to the companies’ respective books and records, to the temporary receiver within ten (10) days of the temporary receiver's appointment by supplemental order; and it is further
ORDERED that within ten (10) days of the temporary receiver's appointment by supplemental order, the temporary receiver shall take possession of and operate Management, and by extension, the Company, and to hold the same until further order of this Court; and it is further
ORDERED that the parties and counsel appear before this Court for a Status Conference on March 7, 2023 at 2:30 p.m.