At the Airport v Isata, LLC

[*1] At the Airport v Isata, LLC 2007 NY Slip Op 52440(U) [18 Misc 3d 1106(A)] Decided on December 7, 2007 Supreme Court, Nassau County Austin, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 7, 2007
Supreme Court, Nassau County

At the Airport, a New York Limited Liability Company, Plaintiff,

against

Isata, LLC, International Shoppes, Inc., International Shoppes, LLC, Michael Halpern, Individually and as Manager of Isata, LLC, and Steven R. Greenbaum, individually and as manager of Isata, LLC, State of New York, John "Doe", unknown creditor of Isata, LLC for claims in dissolution, "ABC" Corporation, unknown creditor or Isata, LLC for claims in dissolution, Defendants.



15617/06



Counsel for Plaintiff

Lynn & Gartner, LLP

330 Old Country Road, Suite 103

Mineola, New York 11501

Counsel for Defendant

Bracken & Margolin, LLP

One Suffolk Square - Suite 300

1601 Veterans Memorial Highway

Islandia, New York 11749

Leonard B. Austin, J.

A.General Background and Prior Proceedings

In early 1996, ATA and Defendant, International Shoppes, LLC ("Shoppes"), obtained the right to operate a duty free shop in the International Arrivals Building at John F. Kennedy International Airport in Queens, New York ("JFK").

Isata is a limited liability company formed by ATA and Shoppes to operate the duty free shops at JFK.

At some time thereafter, Isata obtained the right to operate a duty free shop at Philadelphia International Airport, Philadelphia, Pennsylvania.

ATA is a limited liability company formed by Anthony Petrucci ("Petrucci"). It owns a 20% interest in Isata. Petrucci is the sole member of ATA.

Shoppes is a limited liability company formed by Defendants, Michael Halpern ("Michael") and Steven Greenbaum ("Steven"), which owns an 80% interest in Isata.

Michael and Steven are also principals in Defendant, International Shoppes, Inc. ("ISI"). ISI is in the business of operating duty free shops at airports.

In order to operate a duty free shop, Isata needed to obtain a customs bond and approvals from the United States Customs Service ("Customs") and the Bureau of Alcohol, Tobacco and Firearms ("ATF"). Since Isata was obligated to pay rent effective March 1996, it was necessary to open the airport shops as soon as possible.

Michael and Steven advised Petrucci that the approvals and bonds issued to ISI could be expanded to cover Isata. Once Isata was covered by those bonds and approvals, it could begin operation.

On February 28, 1996, Isata entered into a written agreement with ISI, pursuant to which ISI would operate Isata's duty free shop at Kennedy Airport as Isata's agent. ("February 1996 Agreement"). The February 1996 Agreement provided that ISI would operate the duty free shop at JFK in accordance with Petrucci's employment agreement, the Expense Reimbursement Agreement and the Isata operating agreement.[FN1] ISI was also to create a separate accounting system for Isata, appoint an escrow agent to hold and disburse funds generated by Isata's operation; and enter into leases, contracts or agreements on behalf of Isata. Once Isata obtained the required approvals from Customs and ATF, ISI would prepare and sign all documents reasonably necessary to assign such leases, contract or agreements to Isata.

ISI also agreed to promptly deliver the accounting system to Isata and instruct the escrow agent to deliver any and all net profits to Isata upon its obtaining the anticipated Customs and [*2]ATF approval.

ATA alleges that ISI never complied with the February 1996 Agreement or the Expense Reimbursement Agreement in that it never set up a separate accounting system for Isata's operation and failed and refused to appoint an escrow agent to hold and disburse the money generated by Isata's operation.

Even though Isata obtained its Customs and ATF approvals in 2000, ISI continues to operate Isata's shops. ISI has allegedly failed and refused to assign to Isata the leases and other business related contracts. According to ATA, ISI also breached other provisions of the February 1996 Agreement and Expense Reimbursement Agreement.

ATA seeks damages resulting from Defendants' breach of the February 1996 Agreement and Expense Reimbursement Agreement and Steven and Michael's breach of fiduciary duty. ATA also petitions for the judicial dissolution of Isata.

ATA seeks the appointment of a temporary receiver for Isata during the pendency of this action.

ATA has previously moved for the appointment of a receiver. By order dated June 6, 2007, this Court denied Plaintiff's application for an appointment of a receiver holding that the Plaintiff had failed to establish a legal or factual predicate for the

appointment of a receiver pursuant to CPLR Article 64 or Limited Liability Company Law §703.

B.Renewal

ATA asserts that, subsequent to the making of its prior motion for the appointment of a receiver, it discovered facts which, had they been known and presented to the Court in connection with the prior motion, would have resulted in the Court granting its motion for the appointment of a temporary receiver. ATA asserts these facts were in existence but were not known to it when the prior motion was made. ATA claims that it did not discover some of these facts until after the prior motion had been fully submitted.

Prior to the commencement of this action, ATA had commenced an action in the United States District Court for the Eastern District of New York alleging a federal civil RICO claim and state common law causes of action ("federal action"). The federal action was dismissed.

Plaintiff was not represented by its present attorney in the federal action. Counsel who had represented Plaintiff in the federal action had retained a forensic accountant to review Isata's financial records. The accountant was, with much difficulty

and resistance, able to review some of Isata's records. The forensic accountant had provided information and an affidavit regarding its findings to Plaintiffs' prior attorneys.

After the federal action was dismissed, a fee dispute arose between ATA and its prior attorney. As a result, ATA's prior attorneys asserted a charging lien on the file and refused to deliver the file, including the forensic accountant's information, to Plaintiff's present counsel.

This action is one of three related actions pending between Petrucci and Petrucci related entities and Michael and Steven and their related entities addressing the operation of the duty free shops at the airports. Petrucci commenced a separate action against Isata, Michael and Steven alleging a breach of Petrucci's employment agreement. Additionally, Daja, LLC ("Daja"), another Petrucci related entity, has commenced an action against Isata alleging a breach of a consulting agreement. These three actions are pending before this Court. The Court has directed jpint discovery in these actions. As a result of an order entered in the Daja v. Isata action, the forensic accounting firm retained by ATA's attorney in the federal action was directed [*3]to produce its files relating to its review of Isata's books.

The records of the forensic accountant establish that it encountered extreme difficulty in obtaining access to Isata's records. This difficulty was encountered even though Paragraph 4.13 of Isata's Operating Agreement grants a member the right, upon

written request, to have a representative review Isata's business books and records four times a year.

The forensic accountant's review also raised several serious issues regarding Isata's operation. Even though the February 1996 Agreement and the Expense Reimbursement Agreement provided for ISI to create a separate accounting system for Isata segregated from ISI's accounting system, ISI never did so.

This creates concern with regard to sales for which payment is made in foreign currency. All foreign currency received for sales is delivered to Travelex America, Inc. The currency is converted and deposited into Isata's operating account. An employee of ISI allocates the money between ISI and Isata and makes an entry in Isata's intercompany account indicating the amount Isata owes to ISI. There does not appear to be any back-up documentation or records supporting the allocation between ISI and Isata with regard to foreign currency sales. This would never had occurred had ISI established separate accounting systems as required by the aforementioned agreements.

Issues exist regarding the transfer of funds from Isata to ISI. The Expense Reimbursement Agreement requires Isata to reimburse ISI for its pro rata share of common expenses quarterly and subject to substantiation. This does not appear to have been done. For example, in November 2003, significant amounts of money were transferred from Isata to ISI without substantiation.

Common expenses have not been allocated in accordance with the formula contained in the Expense Reimbursement Agreement. This agreement provides a formula for allocating expenses taking into account revenues generated by the operation of ISI and Isata. Salaries paid to employees of Duty Free, Hol Inn and Delta Retail were allocated solely to Isata even though the Expense Reimbursement Agreement provides for allocation of expenses between Isata and ISI. Many of the

employees whose salaries were allocated to Isata worked full time for these other companies.

Members of Michael and Steven's family worked for companies other than ISI or Isata. Their entire salary was allocated to ISI and Isata. Issues also exist regarding whether the salaries and raises paid to these people were unreasonably excessive.

Items were allocated to Isata that should have been allocated to other companies or only partially allocated to Isata. The full expense of preparing a personnel manual was charged to Isata even though the manual was used by other companies. This expense should have been allocated. Legal expenses which should have been allocated were not.

The salaries of beauty advisors who work in Isata's shops were partially reimbursed by the vendors. It does not appear that Isata was not given proper credit for these reimbursed expenses.

ISI treated money advanced to pay for merchandise and operating expenses as loans to Isata on which it was charging Isata interest at the rate of prime plus 1%. The Expense Reimbursement Agreement does not provide for these advances to be treated as loans or for the payment of interest on the amounts advanced. [*4]

The Expense Reimbursement Agreement provides for Isata to be charged ISI's cost for the merchandise. Isata was to pay for the merchandise promptly upon presentation of a receipt. For some products, Isata was being charged the gross price even though ISI was receiving a discount off of the gross price.

In the Philadelphia location, a portion of the premises is was rented to Sports America, an entity wholly owned by the Halpern family. Isata does not have an expense reimbursement agreement with Sports America. Rent and salaries are allocated to Sports America as a percentage the total sales at the location. Isata paid 100% of Sports America's payroll and received a credit for the percentage of sales at this location allocable to Sports America.

The forensic accountant also found other discrepancies between the Expense Reimbursement Agreement and the manner in which the business was being operated. He found that the accounting practices and procedures were changed from year to year. These errors, changes, lack of supporting documentation and lack of control resulted in Isata being overcharged for merchandise and expenses.

ISI bills vendors for advertising placed in the stores. ISI does not actually receive payment for the advertising. Instead, ISI directs the advertiser to give it a credit on its bill for merchandise. However, that advertising credit was not applied to ATA's obligation to pay for merchandise.

Isata operates the duty free shop at JFK pursuant to the terms of a Concession Agreement with Terminal One. Pursuant to the Concession Agreement, the rent paid is based in part upon gross sales. A dispute arose between Terminal One and Isata regarding gross revenues. That dispute was resolved with Isata paying a substantial sum to Terminal One. ATA did not know the terms of this agreement when its prior motion for the appointment of a receiver was made. ATA asserts that the Terminal One settlement is further evidence that Isata understated the revenue generated by its operation of the JFK location.

DISCUSSION

CPLR 2221(e) provides that a motion to renew shall be designated as such, shall be based upon new facts not presented to the court in connection with the prior motion that would change the court's prior determination or shall demonstrate that there has been a change in the law which would change the prior decision and shall provide a reasonable justification for the failure to present the new facts on the prior motion.

The court must find that the party presenting the new facts has a reasonable excuse for failing to present those facts on the prior motion. Kaufman v. Kunis, 14 AD3d 542 (2nd Dept. 2005); and Yarde v. New York City Transit Auth., 4 AD3d 352 (2nd Dept. 2004). A party establishes a reasonable excuse when the facts existed but were not known to the party when the prior motion was made. Johnson v. Marquez, 2 AD3d 786 (2nd Dept. 2003); and Riccio v. Deperalta, 274 AD2d 384 (2nd Dept.), app. dism., 95 NY2d 957 (2000).

Isata asserts that the information contained in the forensic accountant's affidavit is not "new evidence" for the purposes of a motion to renew since ATA obtained this information prior to the submission of the prior motion. Defendants assert the information which resulted in the dispute between Terminal One and Isata regarding the gross revenues at the JFK shop was a result of Terminal One obtaining confidential information plead by ATA in the federal court action. They further assert that the information regarding the settlement payments were reflected in Isata's financial statements that were prepared and available to ATA prior to the time the initial motion for the appointment of a receiver was made. [*5]

The motion for the appointment of a temporary receiver was brought on by order to show cause dated September 27, 2006. The motion was initially returnable on October 20, 2006. For various reasons, the motion was adjourned several times. It was eventually submitted on February 27, 2007.

A motion is deemed made by order to show cause when the order to show cause is served. CPLR 2211. ATA obtained the information from the forensic accountant in January 2007 which is after Defendants served their opposition but before Plaintiff had served its reply. Under these circumstances, the forensic accountant's affidavit is "new evidence" for the purposes of this motion to renew. It contains information that was not available to ATA when the original motion was made.

The purpose of reply papers is to give the movant the opportunity to address the arguments made in the opposition. Matter of Harleyville Ins. Co. v. Rosario, 17 AD3d 677 (2nd Dept. 2005); Matter of TIG Ins. Co. v. Pellegrini, 258 AD2d 658 (2nd Dept. 1999); and Dannasch v. Bifulco, 184 AD2d 415 (1st Dept. 1992). Reply papers are not to be used by movant to make new arguments or to advance different grounds as to why the requested relief should be granted. Id. ATA properly did not submit the forensic accountant's affidavit in its earlier reply.

While a more prudent procedure would have been for Plaintiff to request that its prior motion be withdrawn without prejudice and to file a new motion including the arguments made and papers being considered in connection with this motion, this procedure was not used. However, it would be unfair to deny Plaintiff the use of this information.

The settlement agreement between Terminal One and Isata and the affidavit of Jeanette Barton were not received by ATA's attorney until after the motion had been fully submitted. Thus, these items truly are "new evidence" properly submitted in support a motion to renew.

Since the material Plaintiff seeks to place before the Court in connection with its motion to renew existed but was not available to it when the prior motion was made, renewal is appropriate.

The question is whether the Court, in considering these new facts, should appoint a temporary receiver.

Even taking the new evidence into account, the Court cannot, as a matter of law, appoint a temporary receiver, although it would seem appropriate.

CPLR 6401 permits the appointment of a temporary receiver to preserve specific identifiable property that is the subject of the action. Siegel, New York Practice 4th §332. A temporary receiver will not be appointed if the relief being sought is money damages. Brody v. Mills, 278 App.Div. 771 (2nd Dept. 1951); and Mack v. Stanley, 74 App.Div. 145 (1st Dept. 1902)

The court may appoint a temporary receiver only if specific property which requires protection is the subject of the action. 91 NY Jur2d Receivers §§8, 11. A temporary receiver may be appointed in an action for money damages if the subject of the action is a specific fund of money. Meurer v. Meurer, 21 AD2d 778 (1st Dept. 1964).

The party seeking a temporary receiver must establish that funds or the property are in danger of being materially injured or destroyed. Secured Capital Corp. of NY v. Dansker, 263 AD2d 503 (2nd Dept. 1999).

Receiverships are generally statutory in nature and are only available in those types of cases specified by statute. 91 NY Jur2d Receivers §2. [*6]

A limited liability company is a statutory creation. A limited liability company could not be organized in New York prior to the effective date of the statute authorizing same. See, 16 NY Jur2d Business Relationships §§ 1996, 1997. The court may appoint a receiver for a limited liability company only in connection with the winding up of its affairs. Limited Liability Company Law §703(a). This should be compared with Business Corporation Law §1113 which grants the court authority to appoint a receiver at any stage of a corporate dissolution. Since the Limited Liability Company Law does not provide the court with authority to appoint a receiver for a limited liability company under the circumstances presented herein, one cannot be appointed. See, gen'lly, Hoffman v. Unterberg, 9 AD3d 386 (2nd Dept. 2004), which holds that the court cannot

provide relief to a member of a limited liability company in the absence of statutory authority.

Paragraph 4.13 of the Isata Operating Agreement and Limited Liability Company Law §1102(b) establish ATA's contractual and statutory right to inspect Isata's books and records. If Isata is denying ATA access to its records, ATA should bring an appropriate application to enforce these rights.

Paragraph 9.1(a)(iii) of Isata's Operating Agreement provides Isata will be dissolved upon the expulsion or dissolution of a member. While significant issues exist regarding Isata's operation and finances, those issues may never be reached if Isata is not dissolved. See, Hoffman v. Unterberg, supra. See also, Caprer v. Nussbaum, 36 AD3d 176 (2nd Dept. 2006).

ATA is not seeking the appointment of a receiver to take possession of Isata's property during the pendency of the action or to wind up its affairs after dissolution. It is seeking the appointment of a receiver to manage its financial affairs during the pendency of this action. The statute permitting the creation of limited liability companies does not provide for this.

Finally, it is claimed that the appointment of a receiver might destroy Isata's business. The agreement between Terminal One and Isata provides that the appointment of a receiver, which is not vacated within 30 days, constitutes a default under the lease. One of Isata's most valuable assets is its lease at JFK. If Isata loses its lease, its value is significantly diminished.

This action was commenced seeking the judicial dissolution of Isata pursuant to Limited Liability Company Law §702, Most of the discovery relating to this action has focused on Isata's finances and financial operation. However, the Court may never reach these issues if it does not decree the judicial dissolution of Isata.

Even though the Court has significant concerns regarding Isata's operations, neither the CPLR nor the Limited Liability Corporation Law authorize the Court to appoint a receiver to monitor or supervise Isata's financial operations in the absence of a judicial dissolution. Limited Liability Company Law §703(b).

Limited Liability Company Law §702 permits a court to decree the judicial dissolution of a limited liability company when it is not reasonably practicable to carry on its business in conformity with the articles of organization or operating agreement. Isata was formed in 1996 to operate duty free shops at JFK and other airports. More than 11 years after its formation and nearly 7 years after Isata obtained the required approvals to operate those shops, ISI has failed to deliver the day-to-day operation of these shops to Isata. ISI continues to operate these shops even though the February 1996 Agreement provides for ISI to turn over operation of these shops to Isata as soon as it received the necessary approvals.

Under such circumstances, the Court believes the issues relating to Isata's dissolution [*7]should be resolved as soon as possible.

Accordingly, it is,

ORDERED, that Plaintiff's motion for renewal is granted and, upon reconsideration, ATA's application for the appointment of a temporary receiver is denied.

This constitutes the decision and Order of the Court.

Dated: Mineola, NY_____________________________

December 7, 2007Hon. Leonard B. Austin, J.S.C. Footnotes

Footnote 1:The Expense Reimbursement Agreement addressed ISI's providing Isata with purchasing, merchandising and administrative services as well as merchandise at ISI's cost. This agreement required Isata to pay for the merchandise promptly upon presentation of a receipt therefor. Isata was also to pay ISI for its pro rata share of common expenses incurred by ISI including salaries and benefits of ISI employees, excluding executive salaries, rent, professional fees and other business expenses.