Micro Signal Research, Inc. v. Otus

• Decision Date: 19 July 2005
• Docket Number: No. 04-2563.,04-2563.
• Citation: 417 F.3d 28
• Parties: MICRO SIGNAL RESEARCH, INC., Plaintiff, Appellee, v. Nuri OTUS and Maureen Cunningham, Defendants, Appellants. Cupertino National Bank & Trust, Trustee.
• Court: U.S. Court of Appeals — First Circuit

417 F.3d 28

MICRO SIGNAL RESEARCH, INC., Plaintiff, Appellee, v. Nuri OTUS and Maureen Cunningham, Defendants, Appellants.

Cupertino National Bank & Trust, Trustee.

No. 04-2563.

United States Court of Appeals, First Circuit.

Heard May 6, 2005.

Decided July 19, 2005.

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.

Before BOUDIN, Chief Judge, TORRUELLA, Circuit Judge, and BALDOCK,^* Senior Circuit Judge.

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 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 Cupertino in the federal district court in Massachusetts based on diversity jurisdiction.

Micro's complaint made claims against Otus 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 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 shown, 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 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); Elliott 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 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. NURIOTUS, No. 04-12300, 2004 WL 2778259 (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 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 partie...