REDACTED Management, Inc. et al - v. - REDACTED INDIVIDUAL

(NY Supreme Court, November 14, 2012)

We represented: Plaintiff



The two orders to show cause now before the Court were filed in two separate related matters and will be jointly disposed of herein. Both matters concern the ownership of and rights of individuals Plaintiff and Defendant regarding Entity 1 and other assorted entities, as well as a $200,000.00 withdrawal by Defendant from a Entity 1 bank account after his alleged firing from Entity 1. The crux of the issue at hand is that Defendant asserts that in return for his work, he was given a 20% share of all of Plaintiff's companies, but Plaintiff in turn asserts that at all times Defendant was only an employee with no rights of ownership and control.

In the motion filed under index number (REDACTED), plaintiffs Entity 1 and Globe sought an order preliminarily enjoining defendant Defendant from: (1) interfering, transacting or purporting to transact any business on behalf of Entity 1/Entity 2; (2) retaining $200,000.00 withdrawn from Entity 1's T.D. Bank ("TD") account ending in '5567 and all other property belonging to Entity 1/Entity 2; (3) receiving any funds from Entity 1/Entity 2's credit card processors and/or interfering in their relationship; and ( 4) soliciting or contacting current or prospective clients of Entity 1/Entity 2.

In the separate motion filed under index number (REDACTED), plaintiffs Defendant, Entity 3, and Entity 2 and derivatively on behalf of Entity 1 and Entity 4 (collectively, "Defendant") move for an order preliminarily enjoining defendants Entity 1, Entity 4, Entity 5, LLC, Entity 6, Entity 7; Entity 8, Entity 9 and Plaintiff from: (1) deleting and failing to restore Defendant's email account; (2) impersonating Defendant or otherwise contacting his credit card facilities; and (3) preventing Defendant from accessing the offices of Entity 4 and Entity 1 to retrieve his belongings.

Entity 1's complaint alleges that Plaintiff has at all times fully owned Entity 4 and Entity 2 and that Entity 1 is a wholly owned subsidiary of Entity 4. (Entity 1 compl. paras. 4-6). Entity 1 alleges that Defendant, an employee terminated on July 13, 2012, made an unauthorized withdrawal of $200,000.00 from a Entity 1 TD account ending in '5567, deposited it into a Entity 2 account ending in '800, then deposited $50,000.00 in a newly created Entity 2 account ending '617 and had a bank check drawn for the remaining $150,000. Plaintiff then transferred all remaining funds into a different account and filed a complaint with TO and the New York City Police Department, resulting in TD freezing the Entity 2 accounts ending in '800 and '617. (Entity 1 compl. paras. 19-21). TD then froze Entity 1's bank accounts allegedly in response to a lawyer claiming Defendant was a 20% owner of Entity 1. Entity 1 further alleges that Defendant is not a 20% owner of Entity 1 and that he improperly called two Entity 1 credit card processors, claiming account ownership and crippling Entity 1's business. (Entity 1 compl. paras. 24-27). Finally, Entity 1 relies on legal proceedings filed in this court in April 2012, wherein Defendant stated in a sworn affidavit that he was Entity 1's employee. (Entity 1 compl. para. 28; Ex. 7 to the Affidavit of Plaintiff dated July 31, 2012).

Defendant's complaint alleges that in 2005 Plaintiff hired Defendant to deal with various local code, tax compliance and merchant banking issues, and that in return Defendant received a 20% interest in Entity 4/Entity 1 sometime in 2007. (Defendant compl. paras. 15- I 8). Defendant alleges that his 20% interest remained in Plaintiff's name while pre-existing liabilities were being resolved, but that he was to receive profits equal to 20% annually. (Defendant compl. para. 19). He alleges that upon receipt of his interest he personally guaranteed debts and lent his credit, through Odd Realty and Entity 2, to Entity 4/Entity 1, to secure essential credit card facilities. He further alleges his credit was needed because Plaintiff had a problematic history with the credit facilities and had pled guilty to felony sales tax evasion, and that without him, Entity 4 and Entity 1 would have ceased to operate. (Defendant compl. paras. 20-23). Defendant claims that the instant dispute arose when Plaintiff resisted terminating the illegal short-term rental division of Entity 4/Entity 1 and Defendant learned both that Plaintiff's personal tax returns were divergent from the monies he was taking from Entity 4/Entity 1 and that Plaintiff was listed as the 100% owner on Entity 4/Entity 1's tax returns. (Defendant compl. paras. 25-27). Defendant alleges that in July 2012, upon his advising Plaintiff that he wanted to terminate the relationship, Plaintiff terminated him in retaliation and threatened to issue mass refunds to tenants who paid with credit cards, which would trigger Defendant's personal guarantee and create large account deficits. (Defendant compl. paras. 29-30). Defendant contends that he withdrew $200,000.00 as a reserve to cover these deficits and told his credit card facility to stop processing Entity 4/Entity 1's credit card transactions. (Defendant compl. para. 31). Defendant alleges that Plaintiff impersonated Defendant to TD, locked him out of Entity 1's offices, refused to allow him to retrieve his belongings, blocked and threatened to delete his emails, filed a false criminal complaint against him, sent defamatory and threatening emails to his family, friends and business associates, filed a false lien on his property, stated that he was going to intentionally stop paying rent on leases that Defendant personally guaranteed and misappropriated corporate funds. (Defendant compl. paras. 32-41 ).

Order to Show Cause 1: Index Number (redacted) ("Entity 1's Motion")

Entity 1 argues that Defendant's withdrawal of $200,000.00 and the consequential damage to vendor relationships demonstrates a likelihood of success on claims for tortious interference with contract, unjust enrichment, restitution, and conversion/civil theft. Entity 1 argues that irreparable harm will result from Defendant's continuing to try to destroy it and from its bank accounts remaining frozen. It also alleges that the equities are in its favor, as Defendant will suffer no harm by accounting for the $200,000.00 or by being barred from communicating with its vendors and clients. On August 2nd, 2012, the Court issued a temporary restraining order freezing TD accounts ending in '800 and '617 and enjoining Defendant from entering Entity 1's and Entity 2's offices or from holding himself out as a representative of Entity 1 and Entity 2.

In opposition, Defendant contends that Entity 2 is an improper plaintiff, as he owns Entity 2 and personally guarantees payments processed by Entity 2. (Ex. A-C, E to the Affidavit of Defendant sworn to August 6, 2012). Defendant further claims that he owns a 20% interest in Plaintiff's corporate entities and that his 20% ownership interest allows him to act on Entity 1's behalf, thereby making it impossible for Entity 1 to succeed on the merits. He also contends that the $200,000.00 reserve is customary and that Entity 1 has an adequate remedy at law. Defendant claims that he will suffer irreparable harm by not being able to run Entity 2 and that the equities favor him, as he will lose both his 20% interest in Entity 1 and his ownership of Entity 2 if the preliminary injunction is granted.

Order to Show Cause 2: Index Number (redacted) (Defendant's Motion)

Defendant argues that he must have access to his email and office in order to run his credit card company and to obtain critical evidence establishing his ownership interest to support his claims of breach of fiduciary duty, breach of contract and implied covenant of good faith and fair dealing, misappropriation of business opportunities, imposition of a constructive trust, unjust enrichment, declaratory judgment, equitable accounting and derivative causes of action on behalf of the corporate entities. He also asserts that Plaintiff's alleged impersonation was illegal and irreparably damaged his business reputation. In opposition, defendant Plaintiff contends that as a terminated employee, Defendant has no interest in company property, and thus has no likelihood of success on the merits of his claims and will not suffer irreparable injury. Plaintiff also asserts that the equities favor him as Defendant has used Entity 1's $200,000.00 to pay his lawyers, not to cover potential charge-backs.

Preliminary Injunction Standards

The purpose of a preliminary injunction is to preserve the status quo until the case can be fully adjudicated on the merits. (See Uniformed Firefighters Ass'n of Greater New York v. City of New York, 79 NY2d 236, 239 [1992]). A party seeking a preliminary injunction must demonstrate, by clear and convincing evidence ( 1) a likelihood of success on the merits, (2) irreparable injury absent the granting of the preliminary injunction, and (3) a balancing of the equities in the movant's favor. (See CPLR § 6301; Nobu Next Door, LLC v Fine Arts House, Inc., 4 NY3d 839, 840 (2005]). To establish a likelihood of success on the merits, the movant must show that its right to a preliminary injunction is plain on the facts of the case. (Peterson v Corbin, 275 AD2d 35, 37 [2nd Dept 2000]). Conclusory allegations are insufficient (Neos v Lacey, 291 AD2d 434, 435 [2'd Dept 2002]), as proof establishing the necessary elements must be supported by affidavit and other competent proof buttressed by evidentiary detail. (Winters Bros. Recycling Corp. v Jet Sanitation Service Corp., 23 Misc3d 1115[A] *2 [Sup Ct, Nassau County 2009], citing CPLR § 6312[ c ]). The existence of a factual dispute does not, standing alone, preclude the court from finding the requisite likelihood of success (CPLR § 6312[ c ]), but the prospect of winning on the merits decreases with the seriousness and centrality of the factual dispute. (See Advanced Digital Security Solutions, Inc v Samsung Techwin Co., 53 AD3d 612, 613 [2'd Dept 2008]).

Entity 1's Motion

Preliminarily, ownership of Entity 2 is subject to a credible factual dispute. Both Plaintiff and Defendant claim sole ownership of Entity 2 and both have provided substantiating documentation. Despite the fact that ownership of Entity 2 is central to Entity 1's claims that Defendant has tortuously interfered with the contracts and prospective relations of Entity 2, Entity 1 has not established the requisite likelihood of success on the merits necessary for a preliminary injunction to prevent Defendant from acting on behalf of Entity 2. (ld.). Nor has Entity 1 established likelihood of success on the merits on its underlying claims for tortious interference with contract and prospective contractual relations. For a claim of tortious interference with contract to succeed, Entity 1 must establish that a valid contract existed, that Defendant knew of it, and that he intentionally and without economic justification procured the breach of the contract, resulting in damage to Entity 1. (Bradbury v. Cope-Schwartz, 20 AD 3d 657, 659 (3rd Dept 2005]).

Entity 1 has pled that Defendant interfered in Entity 1's business by contacting its credit card companies and causing its TO accounts to be frozen. Entity 1 also relies on the allegations that Defendant improperly claimed ownership of Entity 1 to both TO and the credit card processing companies, but fails to specify the instances of breach flowing from Defendant's actions. Without establishing this required element, Entity 1 has not shown a likelihood of success on the merits. (Global Merchants, Inc. v. Lombard & Co., 234 AD2d 98,99 (1st Dept 1996]). Further, it is also significant that it was Defendant who entered into the credit card processing agreements, both on behalf of Entity 2 and personally as a guarantor, because that supports a defense of Defendant's self-interest or economic justification for his alleged actions. (See e.g., Wilmington Trust Co. v Burger King Corp., 34 AD 3d 401, 402 [1st Dept 2006][ franchisor had an economic interest justifying interference with franchisees' loan agreements]). Another significant dent in the viability of this claim is that Defendant, as a party to the credit card processing agreements, cannot be charged with tortiously inducing their breach, unless he commits an independent tort. (See Angelino v Freedus, 69 AD3d 1203, 1205 [3rd Dept 2005] [principal of a professional corporation cannot be held liable for interfering with lease between professional corporation and landlord]).

Similarly, Entity 1 has not established the likelihood of success on the merits on its cause of action for tortious interference with prospective economic relations. Entity 1's argument that irreparable harm will result from Defendant's past and continuing actions to destroy Entity 1 are unavailing, as no evidence suggests that monetary damages would not suffice as compensation for business losses. (See James v. Gottlieb, 85 AD2d 572 [ 1st Dept 1981]). Finally, the equities do not tip in favor of either party, as Entity 1's business interests could be damaged by Defendant's alleged interference, while issuance of the requested injunction will damage Defendant's alleged ownership interest.

As to the portion of a preliminary injunction requiring the return of Entity 1's $200,000.00, "it is well-settled that an action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question." (Manufacturers Hanover Trust Co. v. Chemical Bank, 160 AD2d 113, 124 (1st Dept 1990]). Entity 1/Entity 2 alleges that defendant Defendant converted $200,000.00 of Entity 1's funds from TD account ending in '5567 after having been terminated from his employment with Entity 1. (Ex. 6 Plaintiff Aff. para. 7). Defendant admits that he took the funds from Entity 1, but contends that he did so as a reserve for credit card transactions. (Defendant Aff. para. 33). Regardless of whether Defendant has an ownership interest in Entity 1 or was simply a terminated employee, he intentionally, and without authority, assumed control over corporate property belonging to Entity 1 and has provided no evidence that the money was or is being used for corporate purposes. Rather, at oral argument his counsel conceded that it was possible that the funds have instead been used to pay Defendant's legal fees and not used as a reserve for Entity 1's charge-backs. Further, injunctive relief is appropriate to remedy the conversion of identifiable proceeds as sought in the underlying action. (Crocker Commercial Servs. v Davan Enters., 88 AD2d 877, 877 (I 51 Dept 1982]). As the $200,000.00 is specifically identifiable as having been withdrawn from Entity 1's TD account, injunctive relief is appropriate. (ld; see also Amity Loans, Inc. v. Sterling National Bank Trust Co., 177 AD2d 277, 279 [ 151 Dept 1991 ]).

It is also likely that irreparable harm will result if a preliminary injunction is not granted, as it was alleged at oral argument that the whereabouts of the remaining $150,000.00 are unknown and could be used to pay attorney's fees. (Record page 12 lines 14-17, pg 15 lines 9-23). Because the $150,000.00 is a specifically identifiable fund which is the subject of this action and in which Entity 1 has a pre-existing interest by virtue of its status as a corporate asset, its loss qualifies as irreparable harm. (Dinner Club Corp. v. Hamlet on Olde Oyster Bay Homeowners Ass'n, 21 AD3d 777, 778 (1 51 Dept 2005]; 13 Misc3d 1212A *5 [Sup Ct, New York County 2006]; Amity Loans, Inc., 177 AD2d at 279). The equities also balance in favor of Entity 1, because no harm can come to Defendant from accounting for the $200,000.00, whereas Entity 1's $200,000.00 could be unrecoverable in the absence of injunctive relief. Based on the foregoing, a preliminary injunction is granted to the extent of requiring that the $150,000.00 in defendant Defendant's possession and the $50,000.00 in TD Bank account ending in '617 be deposited into the court pending final resolution, and is otherwise denied.

Defendant 's Motion

Defendant's underlying claims arise out of Plaintiff's alleged misuse of corporate assets in contravention of Defendant's 20% ownership interest. Defendant's motion for a preliminary injunction must be denied for the same reason as Plaintiff's: the existence of a factual dispute as to ownership rights in the subject companies. Having supplied only his own affidavit and a TD Bank corporate certificate of resolution to support his claim for a 20% interest in the companies, Defendant has failed to establish a likelihood of success on the merits. (Winters Bros. Recycling Corp. v. Jet Sanitation Service Corp., 23 Misc 3d 1115 [Sup Ct. Nassau County, March 13, 2009] citing CPLR § 6312[ c ]). Further, Defendant has not sufficiently alleged that he will be irreparably harmed by not being allowed access to his emails, as these documents will be part of discovery. However, Defendant has sufficiently alleged irreparable harm were his emails to be deleted, as his ability to prove his ownership interest could be negated. In weighing the equities in this matter, Plaintiff would not be unfairly prejudiced in any way by being restrained from deleting Defendant's company emails, whereas Defendant would suffer extreme prejudice to his case. As Plaintiff consented to an order prohibiting him from impersonating Defendant, the Court will grant such relief and deny the balance of the relief sought.