Opinion
Case No. 98-43124(BRL), Adv. Pro. No. 01/03569.
November 29, 2007
MEMORANDUM DECISION DENYING IN PART MOTIONS TO AMEND COMPLAINT, STAY STATE ACTION AND INTERVENE
R. Peyton Gibson, in her capacity as the liquidating trustee (the "Trustee") of the chapter 11 estate of Lawrence Kassover moves for an order (i) pursuant to Rule 15(a) and (d) of the Federal Rules of Civil Procedure (the "Federal Rules"), made applicable herein by Rule 7015 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules") and section 105(a) of title 11 of the United States Code (the "Bankruptcy Code"), granting leave to file an amended and supplemental complaint, (ii) pursuant to Federal Rule 21, made applicable by Bankruptcy Rule 7021, adding a party defendant, and (iii) pursuant to Bankruptcy Rule 7065 and section 105(a) of the Bankruptcy Code, staying a related state action. The Garden City Company, Inc. ("Garden City") moves for an order (i) pursuant to Federal Rule 24, made applicable herein by Bankruptcy Rule 7024, and sections 105(a) and 1109(b) granting leave to intervene as a party plaintiff and to file its proposed complaint in intervention, and (ii) pursuant to Bankruptcy Rule 7065 and section 105(a) of the Bankruptcy Code, staying a related state action.
Ms. Gibson was initially appointed as the chapter 11 trustee and subsequently took on the role of trustee of the Liquidating Trust. The Liquidating Trust originally had a term of three years from the Effective Date of the Plan which was June 30, 2000 but has been extended several times.
Rosalie K. Erickson, in her capacity as Personal Representative of the Estate of Max Kassover (the "MK Estate") also moves pursuant to section 1109(b) of the Bankruptcy Code and Federal Rule 24 to intervene and file a complaint in intervention.
The Debtor was initially the personal representative of the MK Estate but based on various defalcations, was removed as the MK Estate's personal representative in June 1996 and was replaced by his daughter, Rosalie K. Erickson. The MK Estate was a vocal creditor of the Debtor's estate throughout the chapter 11 proceeding.
Discussion
On November 9, 2001, the Trustee initiated this adversary proceeding against both Philip J. Kassover ("Philip"), who controlled the day to day operations of Garden City, and Garden City seeking (a) preliminary and permanent injunctive relief prohibiting Philip from interfering with the Trustee's implementation of the confirmed Plan of Reorganization in the Lawrence Kassover chapter 11 proceeding by obstructing her efforts to market and dispose of Garden City, and (b) compensatory and punitive damages for Philip's wrongful actions (the "Adversary Proceeding"). This Court entered a preliminary injunction against Philip on November 30, 2001, and the Trustee subsequently found a merger partner for Garden City.
"Garden City had neither a chief executive officer nor formal job titles for any of its officers, and, notwithstanding appellant's less-than-majority shareholdings in Garden City, he apparently exercised operational control of the company's day-to-day operations. Appellant's authority was so complete that he has been mistaken in the past as Garden City's sole owner." See In re Kassover, 343 F.3d 91 (2d Cir. 2003). For a more complete vision of the seemingly never ending litigation propensities involving the Kassovers over the years see the many reported decisions: In re Kassover, 2004 WL 693410 (2nd Cir. Apr 2, 2004); Kassover v. Gibson, 2002 WL 337902 (2d Cir. Mar 04, 2002); In re Kassover 2002 WL 126172 (2d Cir. Jan 31, 2002); Kassover v. Gibson, 2003 WL 21222341, *2 (S.D.N.Y. 2003), In re Kassover, 2002 WL 100640, *2 (S.D.N.Y Jan. 24, 2002); In re Kassover, 268 B.R. 698 (S.D.N.Y. 2001); Kassover v. Prism Venture Partners, LLP (In re Kassover), 336 B.R. 74, 76 (Bankr. S.D.N.Y. 2006); In re Kassover, Memorandum Decision and Order Disqualifying Kaye, Scholer, Fierman, Hayes Handler, LLP, (Bankr. S.D.N.Y. Mar. 15, 2000) ECF #191; In re Kassover, Case No. 98-43124, Memorandum Decision re: Liquidating Trustee's Objection to Proof of Claim filed by Philip Kassover and Philip Kassover's Cross-Motion to Compel Arbitration (Bankr. S.D.N.Y. Dec. 19, 2000) ECF #306; Garden City Co. Inc. v. Kassover 251 A.D.2d 9 (N.Y.A.D. 1 Dept., 1998), leave to appeal dismissed, Garden City Co., Inc. v. Kassover, 93 N.Y.2d 848 (N.Y. 1999); Kassover v. Kassover, 312 N.J.Super. 96 (N.J.Super.A.D. 1998); Matter of Grusetz 248 A.D.2d 618 (N.Y.A.D. 2 Dept. 1998); Kassover v. Kassover, 162 A.D.2d 402 (N.Y.A.D. 1 Dept., 1990); Kassover v. Garden City Co., A-4-90T5, unreported opinion (N.J.Super.A.D June 11, 1991); Kassover v. Gordon Family Associates, Inc., 120 Misc.2d 196, 465 N.Y.S.2d 668 (N.Y.City Civ.Ct. Jul 15, 1983). See also, Kassover v. Vim Elec. Co., 19 A.D.2d 517 (N.Y.A.D. 1963).
By order dated July 29, 2002, this Court approved a merger transaction (the "Merger"), pursuant to a Settlement and Stock Purchase Agreement dated July 3, 2002 between the Trustee and a subsidiary of Prism Venture Partners, LLC ("Prism"), and a July 16, 2002 Agreement and Plan of Merger between Garden City and Prism. Following the consummation of the Merger, Garden City elected new directors who in turn elected officers to run Garden City. The Trustee dismissed her claims against Garden City in the Adversary Proceeding.
In October 2004, Garden City, under its new ownership and management, moved to intervene in this action to hold Philip accountable for the damages he allegedly caused Garden City to suffer by his breaches of fiduciary duty to Garden City and its shareholders, by his alleged waste and mismanagement of Garden City, and by his tortious interference with Garden City's contractual and prospective contractual relationships (the "2004 Motion"). The parties thereafter entered into mediation, and the 2004 Motion was never adjudicated. While the mediation proceeding was ongoing, Philip, together with his mother, Ruth Kassover, (together, the "Kassover Plaintiffs"), in her capacity as coexecutor of the decedent's estate of Philip's late father, Nathan Kassover (the "Nathan Estate") commenced an action against Garden City and others in the Supreme Court of the State of New York (the "State Action"), which challenged the manner in which the Merger was consummated and implemented and sought recovery of damages from Garden City and several other defendants (the "State Action Defendants") that were alleged to have been incurred by Philip and the Nathan Estate as a result of the implementation of the Merger.
The State Action
The Kassover Plaintiffs brought the State Action against R. Peyton Gibson in her capacity as Disbursing Agent (the "Disbursing Agent") under the Merger Agreement; Garden City; Prism; Holdingco; the principal and chief executive officer of Prism, Richard Sabella, in his individual capacity ("Sabella"); certain former directors of Garden City prior to the Merger (the "Board Defendants"); and certain prior shareholders of Garden City prior to the Merger (the "Shareholder Defendants," and together with the other defendants, the "State Action Defendants"). In the State Action, the Kassover Plaintiffs seek to recover unpaid Per Share Merger Consideration and Per Share Assignment Consideration, and an alleged amount of Merger consideration, characterized by the Defendants as "Additional Consideration." The complaint in the State Action asserted twelve causes of action against the State Action Defendants. The State Action was removed to this Court but remanded back to the state court on the grounds that the claims in the State Action were not asserted against the Debtor and the outcome of the claims would not have any effect on the Debtor's estate. See Kassover v. Prism Venture Partners LLC, 336 B.R. 74 (Bankr. S.D.N.Y. 2006) (the "Remand Decision").
Upon remand, the State Action Defendants moved to dismiss the State Action on procedural and substantive grounds, including the res judicata and collateral estoppel effect of orders of this Court. By a decision and order dated January 19, 2007 (the "Dismissal Decision"), the State Court dismissed the second through seventh and the ninth through twelfth causes of action in their entirety. The only causes of action that remain in the State Action are a portion of the first and eighth causes of action.
In the first cause of action, the Kassover Plaintiffs alleged that Defendants Prism, PVP, Garden City, Sabella and the Board Defendants violated section 501(c) of New York Business Corporation Law ("BCL) by "effectuating a merger and paying plaintiffs significantly less for their shares than other shareholders received." The State Court dismissed the first cause of action to the extent that the Kassover Plaintiffs were seeking payment of "Assignment Consideration" because they conceded that they "failed to timely submit the assignment that the Merger Agreement required as a condition precedent to receiving the Assignment Consideration." The State Court also dismissed the first cause of action alleging a violation of BCL section 501(c), to the extent that it seeks recovery from the Board Defendants because the alleged failure to pay occurred post-merger, when they were no longer members of the Board. The State Court also found that
The complaint adequately pleads that defendants' failure to pay full consideration for plaintiffs' shares violated the Merger Agreement, resulting in a de facto violation of section 501(c). . . . While defendants have established a valid contractual basis for disallowing the Assignment Consideration, a factual question still exists over the proper amount of the monetary obligations deducted and the validity of the $592 per share [Additional Consideration] payment allegedly received by other shareholders. That dispute cannot be resolved by reference to the complaint or underlying transactional documents.
See Dismissal Decision at 7.
The State Court also sustained the eighth cause of action alleging breach of contract, seeking recovery of the full amount of the Per Share Merger Consideration claimed by the Defendants, from the Disbursing Agent under the Merger Agreement.
On February 9, 2007, the State Action Defendants interposed their Answer, Affirmative Defenses and Counterclaims in the State Action (the "State Action Answer"), alleging inter alia that prior to the Merger, the Kassover Plaintiffs engaged in a premeditated campaign to interfere with the disposition of Garden City, which was directly opposite to the explicit direction of the majority of the Board of Directors of Garden City who wished to dispose of Garden City. (State Action Answer at 71 17, Exhibit H). The State Action Answer asserted eleven affirmative defenses (the "State Action Affirmative Defenses") and three counterclaims (the "State Action Counterclaims").
The Tenth Affirmative Defense claims that the State Action claims are "barred by Plaintiffs' failure to satisfy a condition precedent in the agreement between the parties [the Merger Agreement]." In addition, two Counterclaims asserted in the State Action seek: (i) both compensatory and punitive damages of not less than $33 million for breach of fiduciary duties owed to Garden City by the Kassover Plaintiffs in respect of their wrongful acts, including Philip's obstruction and interference with the Plan and the marketing of Garden City; (ii) both compensatory and punitive damages of not less than $33 million for corporate waste and mismanagement by the Kassover Plaintiffs in respect of their wrongful acts, including Philip's obstruction and interference with the Plan and the marketing of Garden City; and (iii) declaratory relief that the damages caused to Garden City by the Kassover Plaintiffs are unpaid "monetary obligations" owed by them to Garden City, payment of which, pursuant to the Merger Agreement, is an unsatisfied condition precedent to the Kassover Plaintiffs' entitlement to recover their proportionate distribution of the Per Share Merger Consideration, so that the Kassover Plaintiffs have no entitlement to receive such Per Share Merger Consideration.
On September 25, 2007, the State Court issued a decision (the "Counterclaim Decision") granting the Kassover Plaintiffs' motion to dismiss the Counterclaims. The State Court found that the claims for breach of fiduciary duty and waste (i) against Philip could not survive the business judgment rule and (ii) against the Nathan Estate were barred because no specific conduct was attributed to the Nathan Estate and it was not alleged to have been an officer or director of Garden City. (See Counterclaim Decision at 6, 7). The State Court also ruled that the State Court Defendants' theory that those claims constitute "monetary obligations owed" under the Merger Agreement is "untenable." The State Court held that:
Defendants had not even asserted the claims until they submitted a proposed pleading to the bankruptcy court in 2004, so they were not existing debts that were "owed" at the time of the merger in 2002. None of them were or have been reduced to judgment, and only a strained interpretation of the Merger Agreement could those unliquidated liabilities be deemed "obligations" of any nature.
See Counterclaim Decision at 7, 8.
Approximately two weeks before the State Court issued the Counterclaim Decision, the Trustee filed the motion seeking leave to file an amended and supplemental complaint in this adversary proceeding, seeking to add the Nathan Estate as a party defendant and staying the State Court Action. Garden City also filed its motion seeking to intervene as a party plaintiff in this adversary proceeding and staying the State Court Action. The State Court's Counterclaim Decision was entered prior to argument on these motions and has been appealed by Garden City and the Disbursing Agent.
Garden City's motion seeks to intervene in the Trustee's Adversary Proceeding for the purpose of asserting its own claims against the Kassover Plaintiffs for damages arising out of their wrongful conduct, including those claims for breach of fiduciary duty which the Trustee asserted on behalf of Garden City but which she no longer has standing to pursue. Garden City also seeks a judgment of the Court declaring the Merger Agreement to provide that the liabilities in respect of Garden City's aforementioned claims for damages constitute monetary obligations which must be satisfied as a pre-condition of Garden City's obligation to pay to the Defendants any "Per Share Merger Consideration" pursuant to said Merger Agreement.
As conceded by both the Trustee and Garden City, these claims "overlap and are intertwined with the issues which are before this Court in the Adversary Proceeding." In that regard, the Trustee argued that "there is a danger of inconsistent verdicts if the State Action proceeds before a determination is made on the issues before this Court in this Adversary Proceeding." There is no danger of inconsistent verdicts however. These claims were brought before the State Court as counterclaims, were considered by that Court and dismissed. They cannot be resurrected before this Court. See Kline v. Burke Const. Co., 260 U.S. 226, 233 (1922) (where litigant pursues parallel actions, "the federal court's adjudication would be made futile because before it is rendered the controversy will have become res adjudicata by the adjudication of the state court"). See also SEC v. First Jersey Secs., Inc., 101 F.3d 1450, 1464 (2d Cir. 1996) ("the doctrine of res judicata provides that when a final judgment has been entered on the merits of a case, it is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose."); O `Brien v. City of Syracuse, 429 N.E.2d 1158, 1160 (N.Y. 1981) (barring claims on res judicata grounds where alternative theories are available to recover essentially the same relief for harm out of the same or related facts); Melnitzsky v. HSBC Bank USA, 823 N.Y.S.2d 128, 129 (1st Dept. 2006) (claim asserting new legal theory premised on facts alleged in prior action barred under principles of res judicata). The appropriate avenue for relief with respect to those claims is the one that the Disbursing Agent and Garden City have already pursued, an appeal of the State Court order — before the Appellate Division of the New York State Supreme Court — not this Court.
The claims that do remain before this Court are the Trustee's claims that were not at issue in the State Action where the Trustee is not a party. Thus the remaining claims to be adjudicated before this Court are Counts I and II of the Trustee's Amended Complaint which seek damages incurred by the Debtor's estate as a result of Philips' interference with the sale of the estate's 5.666% interest in Garden City and the implementation of the Confirmation Order. It should be noted that this chapter 11 case is almost ten years old, the Debtor is deceased and the Plan was confirmed over seven years ago.
As I noted in the Remand Decision,
"A review of the Trustee's motion to amend her pre-existing Adversary Proceeding complaint . . . reveals that, with the exception of the tortious interference cause of action for damages asserted against Philip, the amended requests for additional relief can be characterized as essentially responses to the Plaintiffs' removed complaint in the State Court Action and are assertable as defenses in that Action. Accordingly, it would appear that the Trustee should be authorized to amend her complaint only to the extent that the amended complaint amplifies the pending tortious interference claims asserted against Philip on behalf of the Debtor's estate." 336 BR at 80, n. 12.
The merger consideration dispute with Philip has nothing to do with the Debtor's estate or the Trustee in her capacity as Liquidating Trustee. The case has been lingering in part because the Chapter 11 Trustee took on the additional roles of Liquidating Trustee and then Disbursing Agent. Her role as Disbursing Agent is separate and apart from her duties as Trustee of this Chapter 11 estate and should no longer delay the prompt resolution of this chapter 11 case.
With respect to the Trustee's motion to amend the complaint to add the Nathan Estate as defendant, the Trustee has set forth no grounds for such relief (see Counterclaim Decision at 7 ("no specific conduct is attributed to [the Nathan Estate]")) and accordingly, that request is denied.
With respect to the Trustee's proposed new claim for a declaration concerning damages claimed by Garden City and monetary obligations allegedly owed to Garden City, not the Liquidating Trust, that request is denied. The relief requested could have significance for Garden City and for the Disbursing Agent, but it has no relevance to the Liquidating Trust or the Debtor's estate. See Remand Order, 336 B.R. at 80. Similarly, Garden City's motion to intervene in this Adversary Proceeding to assert claims that have already been asserted in the State Court and have no relevance or effect on the Debtor's estate, is denied.
With respect to the motion to intervene by the MK Estate, for the reasons set forth on the record of the hearing on November 29, 2007, that motion is granted. See 11 U.S.C. § 1109(b); Term Loan Holder Comm. v. Ozer Group, LLC. (In re Caldor Corp.), 303 F.3d 161 (2d Cir. 2002).
Conclusion
In sum, the Trustee's motion to amend the complaint to omit certain claims for injunctive and declaratory relief that have since become moot and to re-state and re-assert the claims for tortious interference and contempt that were contained in the original complaint and to set forth additional relevant events that are material to those claims that occurred after the filing of the original complaint is granted. The Trustee's motion to amend the complaint to add the Nathan Estate as a defendant, to stay the State Action and to add additional claims for declaratory relief interpreting the Merger Agreement to provide that the liabilities in respect of the aforementioned claims for damages constitute monetary obligations under the Merger Agreement is denied. Garden City's motion to intervene and for a stay of the State Action is denied. The motion to intervene by the MK Estate is granted.
SUBMIT AN ORDER CONSISTENT WITH THIS DECISION.