R & R Capital, LLC v. Merritt

Decision Date20 April 2009
Docket NumberCivil Action No. 06-1554.
Citation632 F.Supp.2d 462
PartiesR & R CAPITAL, LLC v. Lyn MERRITT, et al.
CourtU.S. District Court — Eastern District of Pennsylvania

Lyn Merritt, Coatesville, PA, pro se.

Richard P. S. Hannum, Swartz Campbell LLC, West Chester, PA, for Lyn Merritt, et al.

MEMORANDUM

McLAUGHLIN, District Judge.

This case involves a dispute over the possession and ownership of three horses. Plaintiff R & R Capital ("R & R") is an investment company owned by Ira Russack and operated with the help of his brother Harvey Russack. R & R entered into a series of business ventures with defendant Lyn Merritt and her fiancé Leonard Pelullo. Some of these investments involved the purchase of horse farms in Chester County, Pennsylvania, and the purchase of horses.

As part of the reorganization of some of their business ventures, R & R agreed to purchase three "pinhooking" horses. The identity of the corporate entity from which R & R bought the horses is disputed. R & R contends it purchased the horses from defendant Merritt and her wholly-owned company, defendant Mer-Lyn Farms, LLC. Merritt contends R & R purchased the horses from Pandora Farms, LLC, one of the jointly-owned business ventures between Merritt and R & R. In any event, after R & R purchased the horses, the horses were left under Merritt's care and management.

Some months after the sale, the relationship between R & R and Merritt broke down. R & R filed suit against Merritt in New York state court, alleging that she and Pelullo had defrauded them and seeking an accounting of their jointly-owned businesses. R & R subsequently filed this action in this Court seeking, originally, to obtain possession of the three horses. R & R later amended its claims in this Court, continuing to seek possession of two of the horses but seeking to rescind its purchase of the third horse on the ground that Merritt had concealed the fact that the horse was suffering from laminitis at the time R & R purchased it. Merritt has asserted a counterclaim for her costs in training, caring, and feeding for the horses.

The Court held a bench trial on October 25 and 26, 2006, on R & R's claim and Merritt's counterclaim. In August 2008, R & R filed a motion for contempt alleging that Merritt had violated an order of this Court enjoining her from selling or otherwise disposing of the horses while in her possession. The motion alleges that Merritt has gelded and leased one of the horses which R & R sought to replevin. R & R filed a supplemental motion for contempt in January 2009 alleging Merritt may also have leased the other horse at issue in the replevin claim. In its motions, R & R states it no longer seeks replevin of the allegedly gelded horse and seeks sanctions awarding R & R the purchase price of both horses at issue in the replevin claims and the dismissal of Merritt's counterclaim for expenses related to them. In opposition to the motion, Merritt has suggested that this case may have been mooted by the New York litigation.

The Court will schedule a hearing on R & R's motions for contempt in a separate Order. In this Memorandum and its associated Order, the Court will address the issues raised in the bench trial. The Court will make its findings of fact and issue a verdict on R & R's claim for rescission for sale of the third horse, which is not at issue in R & R's motion for contempt. The Court will also make findings as to R & R's claim for replevin of the first two horses and Merritt's counterclaim for expenses, but will not render a verdict on those claims, pending the Court's decision on the contempt motions. To the extent Merritt wishes to argue that issues in this matter are moot, she may do so at the contempt hearing.

The Court finds for R & R on its claims for rescission of the contract of sale for the third horse. The Court finds that the party from whom R & R purchased this third horse was Merritt and that she must return the purchase price of $150,000 for this horse to R & R once R & R tenders to her ownership of the horse. On Merritt's counterclaim, the Court finds that Merritt has established that R & R is liable for $28,432.76 in expenses for the horses. On R & R's claim for replevin, the Court finds that R & R would be entitled to possession of the two horses at issue in this claim, upon satisfaction of Merritt's counterclaim.

I. Findings of Fact
A. Ira and Harvey Russack Meet Lyn Merritt and Leonard Pelullo and Decide to Invest Together

Ira and Harvey Russack are brothers. Both Russacks had been involved for many years in the retail apparel business in New York. In 2002, Ira Russack received several millions of dollars from an unexpected real estate deal, renting a property he owned in lower Manhattan to a company that had been displaced by the September 2001 attacks on the World Trade Center. 10/25/06 Tr. at 19-20, 162; 10/26/06 Tr. at 7, 10.

To invest his money, Ira Russack formed R & R Capital. R & R is entirely owned by Ira Russack, but is managed by Harvey Russack. Harvey Russack holds the position of managing director of R & R and takes care of day-to-day bookkeeping and other managerial responsibilities. Ira Russack signed off on all investments made by R & R. 10/25/06 Tr. at 164; 10/26/06 Tr. at 21.

In 2003, the Russacks were introduced by their cousin, Michael Blumenthal, to Lyn Merritt and Leonard Pelullo. Pelullo was a real estate developer. Blumenthal described Pelullo to the Russacks as a "real estate genius" who could provide them with "good investment opportunities" in real estate. Pelullo refers to Merritt as his fiancée; Merritt refers to Pelullo as her boyfriend. Merritt owned a litigation support business, which did document management and organization for law firms in Florida, Pennsylvania, and New York. She also, beginning in 2002, owned land in Chester County, Pennsylvania, where she lived with Pelullo and raised horses. 10/25/06 Tr. at 8-11, 14, 157, 162-63. 10/26/06 Tr. at 7; 8/11/06 Pelullo Dep. at 8-10, 14.

The first meeting between the Russacks, Merritt, and Pelullo took place in Michael Blumenthal's office in New York. Soon afterwards, the Russacks met with Pelullo and Merritt in Chester County, Pennsylvania, to discuss forming a partnership to invest in real estate. During that visit, the Russacks were introduced to the area's horse culture. After this meeting the Russacks agreed to go into business with Pelullo and Merritt. 10/25/06 Tr. at 163; 10/26/06 Tr. at 8-9, 21-22.

When Pelullo first met the Russacks in 2003, he had a criminal record. The evidence presented to the Court as to the specifics of Pelullo's convictions is confused. By his own account, at the time he was deposed in August 2006, Pelullo had been convicted of federal charges in at least two separate criminal proceedings, one in Philadelphia, Pennsylvania, and one in Newark, New Jersey. Pelullo testified that the charges for which he was convicted included criminal racketeering. Merritt testified that these charges included embezzlement and money laundering. 10/25/06 Tr. at 14-16; Pelullo 8/11/06 Dep at 10-12.

Pelullo was out of prison from January 2002 through June 2005. When Pelullo and Merritt first met the Russacks in 2003, Pelullo had been released from prison because his then-pending conviction had been set aside on habeas review and this habeas decision was itself on appeal. In 2005, the appellate court reversed the habeas decision releasing him, and Pelullo returned to prison and is expected to be released in 2016. Pelullo has consistently maintained that he is innocent of all charges against him. 10/25/06 Tr. at 16-17; 8/11/06 Pelullo Dep. at 10-12, 84.

Both Michael Blumenthal and Pelullo disclosed Pelullo's criminal record to the Russacks before they decided to go into business together. In disclosing his record, Pelullo maintained his innocence. Despite knowing of Pelullo's criminal history, Ira Russack decided to go into business with him, believing that he was innocent and trusting the judgment of his cousin, Michael Blumenthal. Ira Russack made this decision together with his brother Harvey. 10/25/06 Tr. at 104-05, 156-57; 10/26/06 Tr. at 8, 10, 22-23; 8/11/06 Pelullo Dep. at 14.

B. The Business Arrangements between R & R and Lyn Merritt

In late 2003, R & R began investing in real estate with Merritt and Pelullo. All told, R & R invested in six properties in Chester County and three properties in Philadelphia. In early 2004, R & R began investing in horses with Merritt and Pelullo. This investment in horses began after R & R invested in a 145 acre property in Brandywine, Pennsylvania. Pelullo and Merritt told the Russacks that in order to challenge an existing easement on the property and to obtain advantageous tax credits, they needed to have professional horses living on the property. 10/25/06 Tr. at 163-65; 10/26/06 Tr. at 9; 8/11/06 Pelullo Dep. at 20-21.

R & R, Merritt, and Pelullo put six horses on this property in early 2004. For the Russacks, owning horses introduced them into the horse culture of Southeastern Pennsylvania, which in addition to enjoying for its own sake, they believed offered them access to real estate opportunities. By the fourth quarter of 2004, R & R, Merritt and Pelullo had between sixty and seventy horses on several farms, including broodmares, foals, race horses, and pleasure horses. Most of the horses were jointly-owned by R & R and Merritt; a few were owned by Merritt personally. As the number of horses grew, the purchase prices for them grew more expensive, as did the associated training, transportation, and other costs. 10/25/06 Tr. at 17-18, 119-20, 207-08; 10/26/06 Tr. at 67-68.

As vehicles for their investments in horses and real estate, R & R and Merritt created a number of jointly-owned limited liability companies ("LLCs"). All of these LLCs...

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