Aaron v Krauss
Annotate this CaseDecided on April 10, 2009
Supreme Court, Nassau County
Brett D. Aaron, Plaintiff,
against
Jason Krauss a/k/a Michael Jason Krauss, Yellow Star Capital LLC and River Garden Parkview LLC, Defendants.
7943/08
TO:Blodnick & Baum, PC
Attorneys for Plaintiff
1205 Franklin Avenue, Suite 110
Garden City, NY 11530
Robert L. Laufer, Esq.
Attorney for Defendant Jason Krauss
200 East 78th Street, # 10G
New York, NY 10075
Rosenberg Calica & Birney LLP
Attorneys for Defendant River Garden Parkview LLC
100 Garden City Plaza, Suite 408
Garden City, NY 11530
William R. LaMarca, J.
Plaintiff, BRETT D. AARON, moves for an order disqualifying defendants' attorney, Robert L. Laufer, Esq., and appointing a temporary receiver of the corporate defendants, YELLOW STAR CAPITAL, LLC (hereinafter referred to as "YELLOW STAR") and RIVER GARDEN PARKVIEW, LLC (hereinafter referred to as "RIVER GARDEN"). Counsel for defendants, JASON KRAUSS a/k/a MICHAEL JASON KRAUSS (hereinafter referred to as "KRAUSS"), and for YELLOW STAR and RIVER GARDEN, opposes the motion, which is determined as follows:
Though couched in terms of fraud, waste and dissipation of corporate assets, this litigation essentially arises from the falling out of two (2) 50% partners in a real estate investment partnership formed in April 2004 when AARON and KRAUSS entered into an oral agreement and agreed to share expenses and profits equally and to make partnership decisions on the basis of unanimous consent. Counsel for plaintiff states that the general purpose of the partnership was to acquire, manage, operate, lease, develop and generally engage in the business of real estate, for their own account as well as for the account of others, through various types of partnerships, limited liability companies, corporations and other entities as the partners deemed advisable. Pursuant to the partnership, on September 9, 2005, AARON and KRAUSS caused YELLOW STAR to be formed in Delaware as a limited liability company, and said entity is an asset of the partnership. Additionally, in furtherance of the partnership, RIVER GARDEN was formed as a Delaware limited liability company and the partners raised the necessary capital for said investment [*2]vehicle by means of an offering called The River Garden Parkview LLC Confidential Presentation (the "Offering Plan"), whereby funds were raised and RIVER GARDEN acquired the Motorola River Garden Villas and the Motorola Parkview Apartments located in the People Republic of China. It is alleged that, as individual investors, AARON and KRAUSS each has a small limited membership interest directly in RIVER GARDEN 1.28% in the case of AARON, and 6.75% in the case of KRAUSS, according to the last filed tax return of RIVER GARDEN. Other small interests in RIVER GARDEN are held by its Chinese agent, Sean Wang (1.2%), and plaintiff's father, Phillip Aaron (1.38%). By far the largest membership interest in RIVER GARDEN, more than 90%, is held by the Mack Group, owned by the prominent MACK family who invested at least $20.5 million dollars in the investment vehicle. Counsel for plaintiff states that, according to the Operating Agreement of RIVER GARDEN, YELLOW STAR was nominated as manager, and was to receive a yearly management fee of $70,000.00, after the limited partners received a cumulative non-compounded return of 10% annually on their original investment, with any amounts remaining to be divided annually, 60% to the limited partners and 40% to YELLOW STAR, after payment to one of the limited partners of his capital contribution. Counsel for plaintiff states that the projected earnings of YELLOW STAR after five (5) years would be $3,505,551.00, of which AARON would be entitled to one-third, KRAUSS would be entitled to one-third, and Sean Wang, the Chinese agent and employee of YELLOW STAR, would be entitled to one-third, with each receiving $1,168,517.00.
In support of the instant motion, counsel for the plaintiff asserts that, as alleged in the complaint, commencing in about November 2007, KRAUSS commenced a course of action calculated to prevent and prohibit AARON from obtaining the books and records and participating in decision making and management of the partnership, YELLOW STAR, RIVER GARDEN and Gahood, an after acquired property of RIVER GARDEN, allegedly acquired when KRAUSS used the assets of the defendants to bid on property known as Gahood Villas, (hereinafter referred to as "GAHOOD"), and that plaintiff has been excluded from any interest in the management and profits of GAHOOD which would flow to YELLOW STAR through this new acquisition. It is the plaintiff's position that he has been "Locked Out" of participation in the partnership and the limited liability companies in which he has an interest and that KRAUSS has breached material provisions of the partnership agreement and has failed his fiduciary obligation under the agreement. He claims that, if this is allowed to occur, plaintiff will be left with no hope of recovering"its" (sic) money, as the "defendant corporations are service corporations which, by the nature of its operations, have insufficient assets to satisfy plaintiff's just claims". He asserts that the appointment of a receiver is necessary to oversee the management of the defendant "corporations" and that KRAUSS should be enjoined from using "corporate" property as the "corporations'" assets are being diverted and wasted and he will suffer irreparable loss. Counsel for plaintiff contends that counsel for KRAUSS, Robert L. Laufer, Esq., has also appeared for YELLOW STAR and RIVER GARDEN, and should be disqualified because the interests of KRAUSS "and the two corporate defendants" are diverse and conflicted, and because the "corporate defendants" have the right to assert counter-claims and cross-claims, and "there is a clear potential conflict between the interests of the corporations and those of the individual member defendant". It appears to the Court that counsel for plaintiff has inadvertently referred to defendants as "corporations" when we are [*3]dealing with limited liability companies (LLC).
In opposition to the motion, counsel for KRAUSS, attorney Laufer, formerly a partner of Paul, Weiss, Rifkind, Wharton & Garrison, LLP and now retired and "Of Counsel" to the firm, states that he is presently appearing for Mr. KRAUSS as an individual attorney, from his own address, and that his utilization of a Paul Weiss legal back was simply provided as a courtesy to him and does not indicate that Paul Weiss has appeared in the instant litigation. That, aside, Laufer claims that there is no basis or reason to disqualify him as counsel for either of the LLC entities and even less reason for the appointment of a receiver herein.
Counsel for KRAUSS relates that, until their recent "falling out", the management duties of YELLOW STAR were carried out jointly by AARON and KRAUSS, with the assistance of their Chinese partner, Wang, who acts on behalf of Garston Industrial & Commercial Development Consultant (Shanghai) Co., Ltd. (hereinafter referred to as "GARSTON"), which holds title to the villas and apartments located in China, through which RIVER GARDEN, as the holding company, operates in China. Laufer states that, due to the inactivity of AARON, the affairs of YELLOW STAR and RIVER GARDEN, and the ongoing management of those entities has been, of necessity, carried out by KRAUSS and Wang. Laufer alleges that, in late 2007 issues regarding the partners respective roles as co-members of YELLOW STAR, and thus co-managers of RIVER GARDEN, came to a head and the partners met in mid January 2008 in the hope of reaching an amicable resolution of their differences with the buyout by KRAUSS of the plaintiff's and his father's interests in the LLC'S. Counsel states that, unfortunately, by the end of March 2008, no agreement on the price of the buyout was reached, and AARON and his father each commenced various actions, including the instant action, to compel the buyout of their interest at an inflated price. Laufer states that this action is, in essence, a dispute between the partners over their respective rights and benefits in connection with the LLC entities, and is not a dispute that either partner is having with either of the LLC's. Counsel states that the two (2) LLC's are, in effect, the objects of the dispute, not the protagonists in it. Indeed, counsel points out that, in none of the seven (7) causes of actions in which they are named is either of the LLC entities accused of any wrongdoing and, in fact, they have been included only for the purpose of carrying out the relief that plaintiff seeks from the Court.
Examination of the pleadings reveals the following: in the complaint, the first cause of action against all three (3) defendants, seeks a declaratory judgment regarding plaintiff's interest, rights and financial benefits in the LLC entities; the second cause of action against KRAUSS and YELLOW STAR seeks an equal share of the management fee admittedly owing by RIVER GARDEN to YELLOW STAR; the third cause of action against KRAUSS alone seeks money damages for breach of fiduciary duty; the fourth cause of action against KRAUSS and YELLOW STAR seeks production of the books and records of YELLOW STAR; the fifth cause of action against KRAUSS and RIVER GARDEN seeks the production of the books and records of RIVER GARDEN; the sixth cause of action against KRAUSS and non-defendant GAHOOD seeks the books and records of GAHOOD; and the seventh cause of action KRAUSS and RIVER GARDEN and RIVER GARDEN [*4](probably YELLOW STAR), seeks the appointment of a receiver to preserve and manage the assets of RIVER GARDEN, YELLOW STAR and GAHOOD.
The answer served on behalf of KRAUSS, denies the material allegations of the seven (7) causes of action, sets forth a number of affirmative defenses and requests dismissal of the complaint. Laufer states that, in order to avoid a default on the part of the LLC's, he was instructed by KRAUSS, one of the co-managers, to interpose a pro-forma answer on the part of the LLC'S which took no position on either plaintiff's allegations or KRAUSS' defenses. The answers of both LLC's allege that each "is a necessary party only for purposes of the relief sought by plaintiff" in the causes of action in which they are named. It is counsel's position that they are truly "passive litigants" and that no purpose will be served by disqualifying present counsel and forcing the LLC's to get independent counsel. He states that KRAUSS, as the current active manager of YELLOW STAR, and thus RIVER GARDEN, is in a position to insure that the LLC entities comply with any order of the Court that requires action by the LLC entities, in the event that the plaintiff prevails.
As to the appointment of a receiver, Laufer argues that there is no basis and no factual evidence presented that there is danger that any property will be removed from the state, or lost or materially injured or destroyed, and that appointment of a receiver is unwarranted. Counsel for defendant states that none of the extreme circumstances needed to merit the appointment of a receiver exists herein, as KRAUSS and Wang continue to manage the companies for the benefit of plaintiff as well as the other limited members in RIVER GARDEN, and that plaintiff's interests are aligned with the interests of all the investors in making the China project a success. Moreover, Laufer points out that given the Mack Group's stake in the entity, no receiver should be appointed without giving the parties most interested in the business and operations of the LLC an opportunity to be heard.
In further opposition to the motion, Ronald J. Rosenberg, Esq., states that he has been retained by Richard Mack, RS Realty LLC and WRS Advisors III LLC, who collectively own 95.8% of RIVER GARDEN. A Notice of Appearance on behalf of RIVER GARDEN and a Consent to Change Attorney Form is annexed to the opposition papers as Exhibits "A" and "B", respectively. Counsel Rosenberg points out that plaintiff and his father own less that 1.2% of RIVER GARDEN, and are improperly and in bad faith attempting to block the continued and orderly operations of RIVER GARDEN by filing baseless actions in an attempt to force a favorable buy out of their minimal membership interests. By affidavit, Richard Mack, states that said entity has been managed by SILVER STAR pursuant to an unsigned Operating Agreement, dated September 9, 2005, and because of the ongoing deadlock of AARON and KRAUSS, and to protect the Mack's $18.5 million investment in RIVER GARDEN, over 98% of its members recently decided to formalize, amend and update RIVER GARDEN's draft Operating Agreement. In that regard, RIVER GARDEN decided to be managed by its members, and not by a manager, thereby eliminating YELLOW STAR's role in the management of RIVER GARDEN, which allows RIVER GARDEN to retain counsel to defend itself in the action and moots plaintiff's request for a receiver, as a matter of law. Rosenberg also claims that this moots plaintiff's request to disqualify Laufer as counsel for KRAUSS, in that he is not representing RIVER GARDEN and SILVER STAR has been removed as manager. Moreover, Rosenberg argues that plaintiff has utterly failed to show any basis for the drastic relief of a receiver and urges that [*5]plaintiff's motion for a temporary receiver be denied, as a matter of law.
CPLR §6401 provides that, upon motion of a person having an apparent interest in property which is the subject of the action, a temporary receiver may be appointed "where there is danger that the property will be removed from the state, or lost, materially injured or destroyed". The law is well-settled that appointment of a receiver is a drastic remedy. Secured Capital Corp. of NY v Dansker, 263 AD2d 503, 694 NYS2d 409 (2nd Dept. 1999). There must be a clear and convincing showing that the property in question is in danger of being lost. Secured Capital Corp. of NY v Dansker, supra . In the absence of showing that properties and assets are in danger of dissipation, there is no basis to appoint a receiver. Cf., Hahn v Garay, 54 AD2d 629, 387 NYS2d 430 (1st Dept. 1976). The remedy can only be invoked where the moving party has made a "clear evidentiary showing of the necessity for conservation of the property and protection of the interests of the movant". DaSilva v DaSilva, 225 AD2d 513, 638 NYS2d 771 (2nd Dept. 1996); Lee v 183 Port Richmond Ave. Realty Inc., 303 AD2d 379, 755 NYS2d 664 (2nd Dept 2003). In the case at bar, plaintiff only submits the affirmation of counsel, with no personal knowledge of the facts, that contains no allegations of any "irreparable loss" or "material injury" to the properties owned by RIVER GARDEN, much less proof by clear and convincing evidence. There are no allegations that expenses are not being paid or that the properties are in jeopardy. In essence, plaintiff complains that the defendants are continuing to do business and that he is being denied information and participation in the decision making process, but his conclusory statements that the assets are being "diverted and wasted" has not been demonstrated to the Court. Indeed, plaintiff acknowledges that RIVER GARDEN is merely a "service corporation" which does not have significant assets of its own, and it appears to the Court that the claimed need for a receiver in an entity of which he has approximately a 1% interest is unwarranted. As to YELLOW STAR, its only business was to manage RIVER GARDEN and, now that it is being managed by members, there is no need to appoint a receiver for YELLOW STAR.
With respect to disqualification of counsel, the Court finds that the LLCs named herein are merely "passive litigants" in the actions involving the rights and obligations of competing factions, and that disqualification of counsel is not required. Cf., Schmidt v Magenetic Head Corp., 97 AD2d 151, 468 NYS2d 649 (2nd Dept. 1983). However, now that counsel for RIVER GARDEN has appeared, the Court authorizes JASON KRAUSS, as 50% owner of YELLOW STAR, to retain separate counsel for said entity for the purpose of defending it in the action herein, and to take whatever steps that may be necessary with respect to its being relieved as manager of RIVER GARDEN, thereby replacing Robert Laufer, Esq., who appeared for the limited purpose of avoiding a default.
Based on the foregoing, it is hereby
ORDERED, that plaintiff's motion for an order appointing a temporary receiver herein is denied; and it is further
ORDERED, that plaintiff's motion for an order disqualifying Robert L. Laufer Esq., is denied; and it is further
ORDERED, that defendant KRAUSS, as 50% partner of YELLOW STAR, is authorized to retain separate counsel for said LLC; and it is further
ORDERED, that the parties shall appear for a Preliminary Conference on May 26, [*6]2009, at 9:30 A.M. in Differentiated Case Management Part (DCM) at 100 Supreme Court Drive, Mineola, New York, to schedule all discovery proceedings. A copy of this order shall be served on all parties and on DCM Case Coordinator Richard Kotowski. There will be no adjournments, except by formal application pursuant to 22 NYCRR §125; and it is further
ORDERED, that plaintiff's counsel, within thirty (30) days from the date of this order, is directed to amend its pleadings to state a cause of action for dissolution of the partnership between AARON and KRAUSS, and for distribution of its assets and for an accounting , which appears to be the actual relief that will benefit the plaintiff, pursuant to New York Partnership Law Article 6.
All further requested relief not specifically granted is denied.
This constitutes the decision and order of the Court.
Dated:April 10, 2009
_________________________
WILLIAM R. LaMARCA, J.S.C.
aaron-krauss,yellowstar & rivergarden,#
1/disqualify
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