Micro Signal Research, Inc. v. Otus

United States Court of Appeals
For the First Circuit
No. 04-2563
MICRO SIGNAL RESEARCH, INC.,
Plaintiff, Appellee,
v.
NURI OTUS and MAUREEN CUNNINGHAM,
Defendants, Appellants.
__________
CUPERTINO NATIONAL BANK & TRUST,
Trustee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Edward F. Harrington, U.S. Senior District Judge]
Before
Boudin, Chief Judge,
Torruella, Circuit Judge,
and Baldock,* Senior Circuit Judge.
Michael C. Fee with whom Sabrina K. Lanz and Fee, Rosse &
Lanz, P.C. were on brief for appellants.
Timothy J. Perry with whom Perry, Krumsiek & Wayland LLP was
on brief for appellee.
July 19, 2005
*
Of the Tenth Circuit, sitting by designation.
BOUDIN, Chief Judge. Nuri Otus and Maureen Cunningham,
defendants in the district court, seek review of three
interlocutory orders entered by the district court at the behest of
the plaintiff, Micro Signal Research, Inc. ("Micro"). The purpose
of the orders was to provide security to satisfy the money judgment
that Micro is seeking against the defendants.
The facts, drawn from the initial filings in the district
court, appear as follows. Otus and Cunningham are married to each
other and work together in business ventures. One of their
ventures involved a business entity called AuctioNet. AuctioNet
ran a website (auctionet.com) and specialized in buying and selling
used technology equipment.
The exact relationship of Otus and Cunningham to
AuctioNet is cloudy. From 1999 to 2001, AuctioNet was affiliated
with a California corporation called AuctioNet.com, Inc.; in July
2001 it merged into Realm Connect Corporation (“Realm”), which
apparently continued the AuctioNet business. Otus and Cunningham
together owned 44 percent of the equity in Realm. Otus was Realm’s
president and CEO and one of its three directors; Cunningham was
present for at least one board meeting and, according to Micro's
later affidavit, held herself out to be AuctioNet’s CFO and vice
president.
During October 2003, Otus discussed with Daniel Epstein,
President of Micro, a joint venture to buy certain electronic
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equipment that Otus said was available and some of which the pair
viewed together. By e-mail exchanges during October and November,
the two men agreed that Micro would provide $210,000 for a half
share in the acquisition venture. On November 10, 2003, Otus e-
mailed Epstein to wire the money to Cupertino National Bank &
Trust, as the destination bank, payable to AuctioNet.com. Epstein
wired the money.
Thereafter, Otus advised by e-mail that he had contracted
to buy the equipment and described deals allegedly being set up so
the equipment could be resold at a profit. In April 2004, after
delays by Otus in providing further information, Epstein discovered
that Otus had never purchased the equipment, which had been sold in
November 2003 to someone else. When Epstein sought the return of
his $210,000, Otus over several months claimed that he would repay
the money, eventually saying that he and Cunningham were on the
verge of refinancing their house to pay Micro back.
No repayment ever occurred. Instead, in August 2004,
Realm went out of business, unable to pay its creditors. By
October 2004, Otus and Cunningham were engaged in the same business
through a new company called Asset Management Associates Group,
Ltd. (“AMA”)--Cunningham as a shareholder and Otus allegedly as an
independent contractor serving as an “auctioneer.” On October 28,
2004, Micro filed the present action against Otus, Cunningham and
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Cupertino in the federal district court in Massachusetts based on
diversity jurisdiction.
Micro’s complaint made claims against Otis and Cunningham
for inter alia conversion, fraud, breach of contract, and under
Mass. Gen. Laws ch. 93A (2002), which provides for multiple damages
and attorneys' fees for egregious misconduct. Micro also sought as
interim relief a preliminary injunction requiring Otus and his wife
to pay to Micro or into the registry of the district court “all
funds” up to $210,000 “that they are presently earning from the[ir]
new business entity”; trustee process attachment of all funds up to
the same amount held at Cupertino in the couples’ name; and
attachment of real property (also up to $210,000) held by the
couple in Massachusetts or California.1
On November 4, 2004, after a hearing the district court
granted all three requests for interim relief, requiring by the
preliminary injunction that the $210,000 from present earnings be
paid into court rather than Micro. The grant followed submission
of motion papers, an opposition and affidavits. The district court
1
Fed. R. Civ. P. 64 allows for the grant of prejudgment
security "in the manner provided by the law of the state in which
the district court is held." Massachusetts allows attachment of
property "upon a writ of attachment in any action in which the debt
or damages are recoverable . . . ." Mass. Gen. Laws ch. 223 § 42
(2002); Mass. R. Civ. P. 4.1. A trustee process attachment is a
different Massachusetts device to freeze interests held by a third
party but belonging to the defendant. See Xerox Fin. Servs. Life
Ins. Co. v. High Plains Ltd. P’ship, 44 F.3d 1033, 1036-37 (1st
Cir. 1995); Mass. R. Civ. P. 4.2.
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made no findings in the order granting relief, beyond saying that
the defendants admitted their debt to Micro. Otus and Cunningham
now appeal, contesting all three grants of interim relief.
Cupertino has never entered an appearance.
The grant of a preliminary injunction is immediately
appealable, 28 U.S.C. § 1292(a)(1) (2000); Charlesbank Equity Fund
II v. Blinds To Go, Inc., 370 F.3d 151, 155-56 (1st Cir. 2004), and
must be justified under the familiar four-part test: likelihood of
success on the merits, irreparable injury absent relief, harm to
the defendant if relief is granted, and any public interest
considerations. Ross-Simons of Warwick, Inc. v. Baccarat, Inc.,
102 F.3d 12, 15 (1st Cir. 1996). Review, except on issues of
abstract law, is deferential. Id.In attacking the preliminary injunction, defendants' main
arguments are that the joint venture was between Micro and Realm,
that Otus was acting on its behalf rather than in a personal
capacity, that facts necessary to “pierce the corporate veil” have
not been show, and that neither husband nor wife is liable for
Realm’s debts. Thus, they say, Micro has not shown a likelihood of
success on the merits which, with rare exceptions, is an
independent precondition for a preliminary injunction.
As to Otus, the argument is hopeless. The facts set
forth above, based on the evidence thus far, strongly suggest fraud
on Otus's part. Even if AuctioNet or Realm was a legitimate
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business venture and Otus was merely acting on its behalf, fraud by
a corporate officer normally makes him independently liable without
any need to pierce the corporate veil.2 Otus may offer a
countervailing version of events when the merits are tried but, on
this record, a likelihood of success on the fraud claim against him
personally is made out.
The defendants also deny that irreparable injury has been
established. The possibility that a defendant may not have assets
on the day of judgment may not automatically make out a showing of
irreparable injury, GA Enters., Inc. v. Leisure Living Cmtys.,
Inc., 355 F. Supp. 947, 948 (D. Mass. 1973), but the story is quite
different where there is a strong indication that the defendant may
dissipate or conceal assets. See, e.g., Conn. Gen. Life Ins. Co.
v. New Images of Beverly Hills, 321 F.3d 878, 881 (9th Cir. 2003);
Elliot v. Kiesewetter, 98 F.3d 47, 58 (3d Cir. 1996). Otus's
probable fraud, his prevarications about repayment, and the switch
of the business from Realm to AMA are ample indication of the need
for relief against Otus.
The preliminary injunction against Cunningham is a
different story, since her involvement in the fraud is less clear.
In explaining the basis for the injunction, the district court’s
2
See Bond Leather Co. v. Q.T. Shoe Mfg. Co., 764 F.2d 928, 938
(1st Cir. 1985); Townsends, Inc. v. Beaupre, 716 N.E.2d 160, 164
(Mass. App. Ct. 1999); Wyatt v. Union Mortgage Co., 598 P.2d 45, 52
(Cal. 1979); A-1 Check Cashing Serv., Inc. v. Goodman, 538 N.Y.S.2d
830, 831 (App. Div. 1989).
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order merely said--before specifying the relief granted--that
“defendants do not contest the existence of the [$210,000] debt
owed to plaintiff, and they have repeatedly acknowledged their
obligation to repay same.” Micro Signal Research, Inc. v. Otus,
No. 04-12300 (D. Mass. Nov. 4, 2004).
The lack of detail does not preclude us from affirming if
the record demonstrates that Cunningham has admitted her own
liability. Although Fed. R. Civ. P. 52(a) requires fact-findings
in support of a preliminary injunction, appellate courts are not
overly demanding where the evidence makes clear what the court has
implicitly found. In all events, an admission in court of personal
liability would not need further explanation.
Whether Cunningham admitted liability could be disputed.
The only pertinent portion of the transcript furnished to us
reveals defense counsel saying to the district judge: "[T]hey [the
defendants] acknowledge the existence of the debt, and they have
made attempts to try and work out arrangements whereby --" [counsel
is then cut off by the judge]. There is also evidence in the
correspondence of supposed efforts to refinance the family home,
which is probably the effort to which counsel is referring. This
is about all in the record.
In Micro’s brief, plaintiff’s counsel asserts that when
Micro threatened to take the matter to the police,
[a]ppellants . . . promised to personally
repay the debt. They did so repeatedly both
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orally and in writing through their counsel
for a period of approximately six months.
Appellants went so far as to state that they
would refinance their own home to repay the
debt and, indeed, provided supposed refinance
documents from their bank to reassure [Micro].
But there is no citation in support of the prior oral admissions,
and the pertinent correspondence in the record from California
counsel appears to be written primarily on behalf of Otus. Nothing
in Epstein’s affidavit in the district court describes any oral
admission by Cunningham.
The proof at trial might implicate Cunningham in the
fraud or provide a basis for finding that the contractual agreement
was with her and Otus personally or ultimately prove that Realm was
a shell and she and Otus were the real parties in interest. But all
this is unclear and the district judge made no findings on the
point. Nor, as with Otus, can we say that the admission is
irrelevant because of the patent evidence of personal liability
(contained, as to Otus, in the Epstein affidavit).
Nevertheless, defense counsel’s above quoted statement in
court looks like an admission of liability--although not of fraud--
as to both defendants. If there were some doubt about its meaning
(e.g., that counsel was only intending to admit that Otus was
liable), we could expect counsel to have said so in his reply
brief, since Micro’s answering brief (like the district judge)
relies so squarely on defense counsel’s admission as binding both
defendants. Nothing of the kind is claimed.
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Instead, the reply brief attempts to assert that any
admissions that defendants may have made earlier in attempting to
settle the case were “offers of compromise” or “gratuitous”
promises that are not enforceable. Not a word is said to suggest
that defense counsel’s statement in open court has been
misinterpreted. Whatever the status of out-of-court offers to
compromise or pay, an admission by counsel of his clients’ personal
liability in open court is ample basis for determining that the
other side is likely to prevail on the merits.
For all we know, the admission, seemingly on behalf of
both defendants, might have led Micro to withhold evidence or
arguments that might otherwise have been presented, or dissuaded
the district judge from seeking more evidence and making more
detailed findings. If counsel meant to concede only the liability
of Otus and to deny it as to Cunningham, it would have been easy
enough to say so. Whatever the significance of the admission in
further proceedings, it is enough to support the preliminary
injunction.
This disposes of the claims made on appeal pertaining to
the preliminary injunction.3 There remain claims by defendants
3
Appellants might have argued that injunctive relief in these
circumstances is beyond the historic role of equity, see Grupo
Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S.
308, 332-33 (1999), but that case involved only federal equity
power and a claimed breach of contract. In this diversity case,
state law might arguably govern, see R.G. v. Hall, 640 N.E.2d 492,
492 & n.3 (Mass. App. Ct. 1994) (upholding such relief), but in any
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that the district court had no authority to issue its attachment
order as to defendants' real property located in California, and
that it lacked jurisdiction to order trustee process attachment
directed at Cupertino, a bank apparently located only in
California. Compare Mass. Gen. Laws ch. 246 § 1 (2002).
But unlike preliminary injunctions, which are immediately
appealable by statute, no such exception to the normal final
judgment rule exists as to attachments. See Charlesbank, 370 F.3d
at 156; Teradyne, Inc. v. Mostek Corp., 797 F.2d 43, 45-46 (1st
Cir. 1986). Nor have defendants made any effort to show that, in
their particular circumstances, the collateral order exception to
the final judgment rule applies to their case. See Rhode Island v.
U.S. Envtl. Prot. Agency, 378 F.3d 19, 25 (1st Cir. 2004); see also
Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546-47 (1949).
Defendants do argue that the attachment of their property
and the trustee process attachment are in substance preliminary
injunctions. Admittedly, substance, and not the name given in the
order, controls as to whether relief amounts to an injunction.
Charlesbank, 370 F.3d at 156; Teradyne, 797 F.2d at 46-47. But in
both those cases, the orders involved directives that the
defendants there act or refrain from acting--the substance of a
classic injunction. E.g., Teradyne, 797 F.2d at 44-45 (order
event the Grupo objection was not made an appeal and so is
forfeited.
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enjoining defendant from disposing of $4 million and requiring the
money to be put aside in an account).
By contrast, the attachment of appellants’ real property
merely imposes a lien and does not compel them to do or refrain
from doing anything. The trustee process is a closer case because,
although it does not compel the defendants to do or refrain from
doing anything, it effectively prevents the trustee from turning
over the property to them. On the merits, trustee process may be
barred here if Cupertino has no connection with Massachusetts.
Mass. Gen. Laws ch. 246 § 1 (2002). See also Wyshak v. Anaconda
Copper Mining Co., 103 N.E.2d 230, 232 (Mass. 1952).
However, defendants argue in support of our jurisdiction
only that the two attachments were part of the same request as the
preliminary injunction. That argument proves nothing. See FDIC v.
Elio, 39 F.3d 1239, 1249 (1st Cir. 1994). Part of a single
judgment may be appealable and another part not. It is up to
defendants to show that we have jurisdiction over their appeal of
the attachments; whether or not a stronger case for jurisdiction
could have been made, it has not been provided here.
The preliminary injunction is affirmed. Insofar as the
appeal is from the attachments, the appeal is dismissed.
It is so ordered.
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