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denying injunction where plaintiff failed to show that defendants were “insolvent or about to become so”
Summary of this case from Pamlab, L.L.C. v. Macoven Pharms., L.L.C.Opinion
04 Civ. 7395 (RWS).
November 20, 2006
BECKER MEISEL, Attorneys for Plaintiff, Eisenhower Plaza II, Livingston, NY, By: MARTIN L. BOROSKO, ESQ., JAMES M. McCARRICK, ESQ., MICHAEL E. HOLZAPFEL, ESQ., MICHAEL D'ARIES, ESQ., Of Counsel.
ALLAN H. CARLIN, ESQ., Attorney for Defendant Empire Programs Inc., New York, NY.
OPINION
Plaintiff Sea Carriers Corporation ("Sea Carriers") has moved by order to show cause for a preliminary injunction pursuant to Rule 65, Fed.R.Civ.P., seeking relief with respect to the disposition of compensatory distributions to defendants Empire Programs, Inc. ("Empire NJ") and Robert Allan Martin ("Martin") (collectively "the Defendants") resulting from the 2004 settlements between the New York Stock Exchange specialist firms and the Securities and Exchange Commission ("SEC"). For the reasons set forth below, Sea Carriers' motion for a preliminary injunction order is denied.
The Parties
Sea Carriers, a Delaware corporation, was founded by Per G. Barre ("Barre"). Sea Carriers has its principal place of business in Connecticut.
Empire NJ was incorporated in New Jersey in 2002. Empire NJ's principal place of business is located in New Jersey.
Martin, a citizen of the state of New Jersey, is owner and president of Empire NJ. Martin has also conducted business as Empire Programs, Inc. ("Empire DE"), an entity incorporated in Delaware in 1976 but dissolved prior to commencement of the underlying action or commencement of the relationship between Sea Carriers and Empire Programs, Inc.
Prior Proceedings
On September 16, 2004, Sea Carriers filed a complaint against Empire NJ, alleging six causes of action: (1) breach of contract under an alleged joint venture agreement; (2) breach of an implied covenant of good faith and fair dealing arising out of Empire's denial of the joint venture agreement; (3) breach of fiduciary duty; (4) declaratory relief entitling Sea Carriers to participate in any recoveries by Empire NJ; (5) imposition of a constructive trust; and (6) an accounting. The gravamen of the complaint is Sea Carriers' effort to establish an entitlement to share in any recoveries by Empire NJ arising out of enforcement actions against New York Stock Exchange specialist firms that were found to have engaged in trading abuses from at least 1999 through 2003 — specifically, the firm of Spear, Leeds Kellogg Specialists LLC.
On January 19, 2004, Sea Carriers filed a motion for expedited discovery and trial of the underlying action pursuant to Rule 26(d), Fed.R.Civ.P., and 28 U.S.C. § 1657. Sea Carriers simultaneously moved for a preliminary injunction pursuant to Rule 57, Fed.R.Civ.P., to enjoin the Administrator of a "Fair Fund" established under Section 308(a) of the Sarbanes-Oxley Act of 2002, 15 U.S.C.A § 7246 (West Supp. 2006), from distributing any funds to Empire NJ and to enjoin Empire NJ from accepting any such funds until Sea Carriers' right to share in such funds had been adjudicated. While the motion for expedited discovery for all parties was approved by an order of the Court on February 18, 2005, Sea Carriers' motion for a preliminary injunction was denied based on the absence of an immediate need for relief, but with leave to renew.
On November 4, 2005, Sea Carriers filed a motion for an order pursuant to Rule 11, Fed.R.Civ.P., for imposition of sanctions against defendant Empire NJ. The motion was denied by an order of the Court filed on September 27, 2006, with leave granted to renew the motion. In addition, on November 17, 2005, Sea Carriers filed a motion for partial summary judgment pursuant to Rule 56, Fed.R.Civ.P., which was denied on April 28, 2006. See Sea Carriers Corp. v. Empire Programs, Inc., No. 04 Civ. 7395 (RWS), 2006 WL 1148684 (S.D.N.Y. Apr. 28, 2006).
On January 24, 2006, this Court signed an order granting permission for lead plaintiffs in the consolidated class action In re New York Stock Exchange Specialists Securities Litigation, No. 03 Civ. 8264(RWS), to file an amended complaint adding Martin as a party plaintiff. An amended complaint was filed on February 2, 2006. On March 3, 2006, Sea Carriers also moved to decertify Empire NJ as co-lead plaintiff in that consolidated class action. Sea Carriers filed a revised motion on March 7, 2006, to have Sea Carriers added as a named plaintiff and certified as a co-lead plaintiff in place of Empire NJ. That motion is currently pending before this Court, as is the motion filed by Martin on August 14, 2006, to have Martin appointed as co-lead plaintiff to the extent that Empire Programs, Inc. does not continue as co-lead plaintiff.
By an order to show cause filed on March 23, 2006, Sea Carriers again moved for a preliminary injunction order to enjoin the Fair Fund Administrator from distributing any funds to defendants Empire NJ and Martin and to enjoin Empire NJ and Martin from accepting any such funds until Sea Carriers' right to share in such funds had been adjudicated. The hearing was adjourned to April 26, 2006, on which date the motion was marked fully submitted.
Subsequent to the submission of this motion, an amended complaint was filed on May 16, 2006, which, inter alia, added Martin as a defendant in the pending action. Permission for filing the amended complaint was granted in an order dated April 11, 2006.
The Facts
The facts as set forth below are taken from the parties' submissions and do not constitute findings of the Court.
The relationship between Sea Carriers and Empire Programs, Inc. began in 1998, when discussions were held between Martin, holding himself out as president of Empire Programs, Inc. and Barre, the principal of Sea Carriers. An agreement was reached which governed the relationship between Sea Carriers and Empire Programs, Inc. from the fall of 1998 through December 2002 when the relationship is alleged to have been terminated by the consent of the parties. (Am. Compl., ¶ 14).
In June 1998, Martin opened an account at Spear, Leeds Kellogg ("the SLK Account") under the name Empire Programs, Inc. (McCarrick Decl. Ex. C, Mar. 21, 2006.) Trading of the account was conducted using Sea Carriers' proprietary investment trading strategies. (Am. Compl., ¶ 11.)
Martin used the term "our joint venture" in connection with this trading activity. According to Sea Carriers, the arrangement was a joint venture entitling Sea Carriers to fifty percent of any moneys received by Empire Programs, Inc. as a consequence of the activity in the SLK Account. (Am. Compl., ¶ 12.) According to defendant Empire NJ, under the arrangement, Barre was a trading advisor to Empire Programs, Inc. and was to receive fifty percent of the profits arising out of the SLK Account.
The contribution of each party to the enterprise, the intent of the parties in entering into the arrangement, control over the arrangement, and the allocation of losses, are all matters in dispute.
In March and July 2004, the SEC entered into settlements with seven New York Stock Exchange specialist firms found to have engaged in violative trading practices during the period from at least 1999 to 2003. It was with one of these seven firms — namely, Spear, Leeds Kellogg ("SLK") — that Empire Programs, Inc. had its account on which Sea Carriers was operating its trading program.
The SEC Settlement Orders provided, among other things, that the Specialist Firms, including SLK, pay disgorgement and civil penalties totaling $247 million. These funds were to be placed in Fair Funds and distributed to injured customers pursuant to a Distribution Plan developed by an SEC-appointed Fund Administrator and approved by the SEC after opportunity for public comment.
According to the Distribution Plan approved by the SEC on May 17, 2006 ("the Plan"), the initial phase of the Plan involves identification of those injured customers eligible for Fair Funds compensatory distributions. See Securities Exchange Act Release No. 53823, at 2 (May 17, 2006) ("SEC Order"); Securities Exchange Act Release No. 53025, at 4-5 (Dec. 29, 2005) ("SEC Notice of Proposed Order"). Under the Plan, the class of injured customers eligible for such distributions is limited to those customers injured by the violative trades already identified by the SEC and the New York Stock Exchange. See SEC Order, at 2; SEC Notice of Proposed Order, at 4-5. Furthermore, pursuant to the Plan, all injured customer information will be obtained by the Fund Administrator from Clearing Member firms; no claim form must be sent or filed by an injured customer in order to receive compensation from the Fair Funds and no notice to potential claimants is required to be given. See SEC Order, at 2; SEC Notice of Proposed Order, at 5.
While there is no question that the SLK Account is under the name Empire Programs, Inc., whether or not Empire NJ and Martin are successors in interest with respect to any claims to the Fair Fund distributions associated with the SLK Account remains in dispute, as does the existence of any derivative interest of Sea Carriers arising from the alleged joint venture between the parties. Although the amended complaint in this action has alleged (Am. Compl. ¶ 2) and the answer has admitted (Answer ¶ 2) that defendant Empire was incorporated in New Jersey, Defendants now admit that "all transactions which are the subject matter of this action were conducted between plaintiff and Robert A. Martin doing business as Empire Programs, Inc., which had been incorporated in Delaware. . . ." (Def.'s Br. 2.)
Discussion
Sea Carriers has moved for a preliminary injunction order granting the following relief: (1) preliminarily enjoining defendants Empire NJ and Martin from receiving or accepting any compensatory distributions for transactions executed through the SLK Account between August 18, 1998, and December 31, 2002; (2) compelling defendants Empire NJ and Martin to deposit and cause the deposit of any such distributions with the Clerk of the Court; (3) enjoining the Fair Fund Administrator and Citizens Bank to continue to hold any monies identified for segregation as such compensatory distributions payable for the benefit of Empire Programs, Inc. and to not turn over such monies to Empire NJ, Martin, or anyone presenting themselves as acting on their behalf; and (4) compelling defendants Empire NJ and Martin to personally serve upon their affiliates, agents, correspondents, officers, employees, servants and attorneys a copy of any order issued by the Court granting preliminary injunctive relief such that said noticed agents would be bound by the terms of any such order to the extent they were acting for the Defendants with respect to any such compensatory distributions.
A preliminary injunction is an "extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion." Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (quoting 11A Charles Alan Wright et al., Federal Practice and Procedure § 2948, at 129-130 (2d ed. 1995)). A party moving for a preliminary injunction in the Second Circuit must demonstrate (1) a showing of irreparable injury and (2) either (a) a likelihood of success on the merits or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and the balance of hardships tipping in favor of the movant. MONY Group, Inc. v. Highfields Capital Mgmt., L.P., 368 F.3d 138, 143 (2d Cir. 2004) (quoting Forest City Daly Hous., Inc. v. Town of N. Hempstead, 175 F.3d 144, 149 (2d Cir. 1999)); Blum v. Schlegel, 18 F.3d 1005, 1010 (2d Cir. 1994); Laureyssens v. Idea Group, Inc., 964 F.2d 131, 135-36 (2d Cir. 1992); SEC v. Unifund SAL, 910 F.2d 1028, 1038 n. 7 (2d Cir. 1990); Goldblatt v. Englender Commc'n, L.L.C., 431 F. Supp. 2d 420, 424 (S.D.N.Y. 2006).
The showing of irreparable injury is "the most important prerequisite for the issuance of a preliminary injunction." NAACP v. Town of East Haven, 70 F.3d 219, 224 (2d Cir. 1995) (citing Reuters Ltd. v. United Press Int'l, Inc., 903 F.2d 904, 907 (2d Cir. 1990)); accord Citibank, N.A. v. Citytrust, 756 F.2d 273, 275 (2d Cir. 1985). The law in this circuit requires a showing that an irreparable injury is "`neither remote nor speculative, but actual and imminent.'" Freedom Holdings, Inc. v. Spitzer, 408 F.3d 112, 114 (2d Cir. 2005) (quoting Rodriguez v. DeBuono, 175 F.3d 227, 234-35 (2d Cir. 1999) (per curiam)); accord Town of East Haven, 70 F.3d at 224; JSG Trading Corp. v. Tray-Wrap, Inc., 917 F.2d 75, 79 (2d Cir. 1990); Jackson Dairy, Inc. v. H.P. Hood Sons, Inc., 596 F.2d 70, 72 (2d Cir. 1979).
An irreparable injury is also one that cannot be redressed through a monetary award. See, e.g., Wisdom Import Sales Co., L.L.C. v. Labatt Brewing Co., Ltd., 339 F.3d 101, 113-14 (2d Cir. 2003); Kamerling v. Massanari, 295 F.3d 206, 214 (2d Cir. 2002); Brenntag Int'l Chem., Inc. v. Bank of India, 175 F.3d 245, 249 (2d Cir. 1999); Town of East Haven, 70 F.3d at 224; Reuters, 903 F.2d at 907. Where monetary damages are adequate compensation, a preliminary injunction generally will not issue. See, e.g., Wisdom Import Sales Co., L.L.C., 339 F.3d at 113-14; JSG Trading Corp., 917 F.2d at 79. Monetary loss therefore will not suffice unless the movant shows damage that cannot be rectified by financial compensation, such as bankruptcy. See Tucker Anthony Realty Corp. v. Schlesinger, 888 F.2d 969, 975 (2d Cir. 1989).
Despite the redressability of an injury through a monetary award, a preliminary injunction may issue where "there is a substantial chance that upon final resolution of the action the parties cannot be returned to the positions they previously occupied." Brenntag Int'l Chem., Inc., 175 F.3d at 249-250. One such exception is where the party to be enjoined is shown to be insolvent or imminently insolvent. See id. ("[C]ourts have excepted from the general rule regarding monetary injury situations involving obligations owed by insolvents."); Mitsubishi Power Sys., Inc. v. Shaw Group, Inc., No. 04 Civ. 1251, 2004 WL 527047, *2, *4 (S.D.N.Y. Mar. 16, 2004) (citing cases exemplifying level of financial distress of party to be enjoined necessary to establish irreparable harm).
The second exception is a showing of intent to frustrate any judgment on the merits. See Republic of Phillipines v. Marcos, 806 F.2d 344, 356 (2d Cir. 1986) (preventing transfer or encumbrance of properties that would place them beyond reach or prevent their reconveyance); In re Feit Drexler, Inc., 760 F.2d 406, 416 (2d Cir. 1985) (enjoining party found to have engaged in "numerous" and "substantial efforts to hide and secrete assets"); Signal Capital Corp. v. Frank, 895 F. Supp. 62, 64 (S.D.N.Y. 1995) (denying preliminary injunction due to lack of evidence that defendants had transferred, were about to transfer, or threatened to transfer assets with the intent of frustrating a judgment); Seide v. Crest Color, Inc., 835 F. Supp. 732, 735 (S.D.N.Y. 1993) (issuing injunction where several prior judgments were uncollectible and there was no demonstration of plans or means to satisfy any future obligations); Gelfand v. Stone, 727 F. Supp. 98, 102 (S.D.N.Y. 1989) (". . . the clear appearance that defendant has made efforts to conceal assets or otherwise place them out of reach of his creditors, combine with his prior conviction to meet the standard set out for finding the strong possibility of irreparable harm."). However, this exception has not been applied where efforts to render a defendant judgment-proof may be remedied by enforcing the judgment against other companies and officers through corporate veil-piercing and other mechanisms. See, e.g., Great Earth Int'l Franchising Corp. v. Milks Dev., Inc., 302 F. Supp. 2d 248, 254 (S.D.N.Y. 2004); Pac. Elec. Wire Cable Co., Ltd. v. Set Top Int'l Inc., No. 03 Civ. 9623, 2003 U.S. Dist. LEXIS 23270, *18 (S.D.N.Y. Dec. 29, 2003).
Here, Sea Carriers has not met its burden of demonstrating irreparable harm. First, the injury from which Sea Carriers is seeking interim relief is one that may clearly be addressed by a monetary award. Sea Carriers is seeking a preliminary injunction to restrict Empire NJ and Martin "from directly or indirectly converting, misappropriating or otherwise committing fraudulent conveyances of rights to" Fair Fund compensatory distributions. (Pl.'s Br. 10, Mar. 22, 2006.) Such actions are financial in nature, the impact of which could readily be calculated and remedied through a monetary award.
Second, Sea Carriers has not shown there to be a "substantial chance" that a judgment against the defendants Empire NJ and Martin would otherwise be uncollectible. Sea Carriers has not made a claim that the parties to be enjoined, Empire NJ and Martin, are insolvent or about to become so. Nor has Defendants' intent to frustrate any judgment been established.
Martin has recently declared that as of March 31, 2006, Empire NJ, of which Martin declares he is the owner and president, has assets with an approximate value of $2.5 million, free and clear of any debts. Martin has also declared that he personally owns other assets with a value in excess of $2.5 million, also free and clear of any significant debts. (Martin Decl. 1, Mar. 31, 2006.)
It follows that Sea Carriers has failed to make an adequate showing of irreparable harm. Accordingly, there is no need to reach the second part of the preliminary injunction analysis, see Rodriguez, 175 F.3d at 234; Jayaraj v. Scappini, 66 F.3d 36, 38-39 (2d Cir. 1995), and the motion for a preliminary injunction is denied.
Conclusion
For the reasons set forth above, Sea Carriers' motion by order to show cause for a preliminary injunction is denied.
It is so ordered.