The opinion of the court was delivered by: LUONGO
Plaintiff Bennett Levin brought this action to recover compensatory and punitive damages from defendants for fraud, misrepresentation, and breach of fiduciary duty in connection with a series of complex real estate transactions in which the parties were involved from 1975 to 1977. The matter was tried in January, 1980, and on November 26, 1980, I entered judgment in Levin's favor against various defendants for $ 573,405, and for various unliquidated amounts. All parties filed appeals. Levin then pursued discovery in aid of execution under Rule 69(a), F.R.Civ.P. Defendants Fensterheim and Breger posted a supersedeas bond as provided in Rule 62(d), after which Levin discontinued further discovery against them. Defendant Howard Garfinkle did not post a bond, however, and discovery to determine the extent and location of his assets continued. Levin, contending that discovery has established that the Garfinkle interests are in the process of hiding and liquidating assets, moves to join as defendants the transferees of Garfinkle's assets, for the appointment of a receiver to conserve those assets pending execution, or in the alternative for a preliminary injunction halting further transfer or dissipation of assets.
Post-trial proceedings in this case have been complicated by the fact that the principal defendant, Howard Garfinkle, who was the mastermind of the scheme to defraud Levin, and whose financial affairs were conducted through an intricate network of shell corporations, died in December, 1980. Levin moved to substitute Garfinkle's personal representative under Rule 25(a), F.R.Civ.P., but his heirs have taken no steps to raise an estate, notwithstanding that Garfinkle appears to have left a will naming his wife Barbara and son Benjamin as executors. Moreover, as discussed below, Barbara and Benjamin Garfinkle continue to conduct the affairs of the various corporations formed by Howard Garfinkle, even though they have no apparent legal authority to do so.
In addressing the motions raised by Levin, an appropriate starting point is the observation that the voluminous evidence at trial,
and the post-trial discovery conducted by Levin, compel the conclusion that this is an unusual case warranting extraordinary relief. Garfinkle and, to a lesser degree, other of the defendants engaged in a systematic course of fraud against Levin over a period of three years. Garfinkle persuaded Levin to join him in a series of investments. Garfinkle routinely misrepresented to Levin crucial information about properties, such as rental receipts and expenses, and inserted strong-arm clauses in sales agreements and mortgages which allowed him to exploit Levin's precarious financial condition. Garfinkle maneuvered Levin into a condition of default on several large mortgages, and then renegotiated them on terms more favorable to himself. The Garfinkle operation even went so far as to maintain duplicate books on properties, one set accurately reflecting rental income and expenses, the other set reflecting bogus figures to impress prospective investors. Garfinkle conducted his business through a series of business entities such as HAW
Corporation and TAFU
Corporation, in which corporate formalities were disregarded, funds were commingled and diverted to Garfinkle's use without repayment, and in which assets, allegedly the property of the corporations, were pledged for Garfinkle's personal debts.
Although Howard Garfinkle is dead, his style of conducting business appears to have survived. As noted above, Barbara and Benjamin Garfinkle have not attempted to raise an estate.
Their lack of legal authority has not prevented them from selling assets of Garfinkle's various corporations, however, as Benjamin Garfinkle recently sold a mortgage, which he acknowledged to have a fair market value of over $ 350,000, for the sum of $ 200,000. Of the proceeds, certain amounts went to satisfy the obligations of other Garfinkle corporations, and still other funds went to the personal use of Benjamin and Barbara Garfinkle.
During post-judgment discovery, Benjamin and Barbara Garfinkle forbade Cyrus West, the nominal president of many of the shell corporations, to comply with an order of this court that he bring certain corporate records with him to his deposition. They continued to forbid West to produce the documents even after he was cited for contempt and faced the prospect of imprisonment. Benjamin Garfinkle testified to his belief that he had authority to conduct the affairs of the Garfinkle corporations both because he was a partial owner of them, and because he was either an officer or director of them. However, he could not demonstrate that any stock had ever been issued, and could not specify what positions he held with any of the corporations. The record is plain that although Cyrus West is nominally the president of most if not all of the Garfinkle corporations, both he and the Garfinkle family view his job as being to follow whatever orders are issued by the Garfinkles, regardless of the legal formalities for conducting corporate business.
In short, the record is replete with evidence of fraud, and since the entry of judgment the Garfinkle interests have not only done everything in their power to frustrate Levin's attempts lawfully to discover assets and to execute, they have also attempted to obstruct the orders of this court.
Being satisfied that Levin is entitled to extraordinary relief, the far more difficult question is what form it should take. First, as to Levin's motion under Rule 25(c) to substitute as defendants the various shell corporations on the ground that they are the transferees of Garfinkle's interests, I agree as a general matter that Rule 25 can be employed after entry of judgment to substitute parties to whom a defendant's assets have been transferred for the purpose of avoiding execution. Panther Pumps & Equipment, Inc. v. Hydrocraft, 566 F.2d 8 (7th Cir. 1977). I do not agree that Rule 25(c) is applicable in this case. A motion under Rule 25(c) is grounded on the theory that there has been a transfer in ownership of assets. Here, Levin's theory throughout has been that the various corporate entities in question are the alter ego of Howard Garfinkle, and that this court should consider any action by them to be an action by Howard Garfinkle. It is anomalous for Levin now to contend that these entities are anything other than a manifestation of Howard Garfinkle himself. Accordingly, Levin's motion for substitution under Rule 25(c) will be denied.
As to Levin's request that I appoint a receiver, it is well-settled that appointment of a receiver is within the inherent equitable powers of any federal court. Tanzer v. Huffines, 408 F.2d 42 (3d Cir. 1969). Federal district courts have not hesitated to appoint receivers in cases where there is evidence of fraud which could lead to the dissipation of assets. E. g., Bookout v. Atlas Financial Corp., 395 F. Supp. 1338 (D.Ga.1974), aff'd, 514 F.2d 757 (5th Cir. 1975); Haase v. Chapman, 308 F. Supp. 399 (W.D.Mo.1969).
Defendants oppose the appointment of a receiver on several grounds. First, they contend that I lack jurisdiction over the various corporations which are the subject of Levin's motion. In technical legal terms there is some merit to this argument. Although the corporations have been properly served, there is no evidence that they, as independent legal entities, are present in the Commonwealth of Pennsylvania. Accordingly, it would appear that this court has no basis for asserting jurisdiction over them. To accept this argument however would require me to overlook what is painfully obvious on the face of this record that these corporations have no independent legal existence, but are in every respect the alter ego of Howard Garfinkle. Cyrus West, president of the corporations which are the subject of Levin's motion, concedes that all actions taken by these corporations were taken at Garfinkle's direction; that West has no knowledge of who the shareholders are; that the assets and funds of the corporations were distributed solely at the direction of Howard Garfinkle and for his use; and that whatever decision Garfinkle made was final. Deposition of Cyrus West, February 18, 1981, pp. 3-20. At this point, the affairs of these corporations should be controlled by Garfinkle's personal representative, whom Levin has moved to substitute as a defendant in this action. But a personal representative is not before this court because the Garfinkle interests have deliberately failed to qualify a representative in what appears to be an attempt to liquidate Garfinkle's assets without judicial scrutiny. In effect, therefore, the defendants' position is that this court, in exercising its equitable powers, should adhere to a rigid concept of jurisdiction which gives them the benefit of the corporate formalities which they themselves have blatantly ignored. Quite clearly the Garfinkle interests are not entitled to have it both ways, and their argument that the corporations have a separate identity is rejected.
Rejection of defendants' jurisdictional arguments does not offend principles of due process. Plainly both the corporations, such as they are, and the principals who in reality control those corporations had notice of these proceedings and the opportunity to be heard. The corporations are not traditional businesses rooted in a geographical area, but paper creations which operated wherever Howard Garfinkle happened to be. Subjecting them to the jurisdiction of this court in no way differs from subjecting whomever ultimately appears as the personal representative of the late Howard Garfinkle.
Defendants further argue that Levin has failed to show that each of the corporations he wishes placed in receivership is merely an alter ego of Howard Garfinkle. I find this position puzzling, inasmuch as Cyrus West, who is purportedly president of all of the corporations in question, has conceded that the corporations had no existence apart from Howard Garfinkle, and that he now takes orders from the Garfinkle family, orders which he follows even when faced with the threat of imprisonment. Moreover, defendants have not produced a shred of evidence to the contrary; there are no stock certificates, no minutes, and no general corporate records. The only record apparently kept is one of cash disbursements, and it reflects that corporate formalities are ignored, funds are commingled, and the proceeds of sales are diverted to personal use. I fail to see what further proof Levin should be required to produce.
The defendants next argue that the proceeds from sales to date have been properly accounted for because the cash disbursement record reflects where the funds went. As noted above, what the records reflect is that the funds have been spent on a variety of things other than corporate business, including personal bills of the Garfinkles. To suggest that this is an acceptable use of funds which are purported to be corporate funds is absurd.
Defendants further contend that in seeking the aid of this court, Levin is attempting to circumvent available state court procedures for execution and protection of a judgment. Levin has once already sought to have local New York officials take control of Garfinkle's estate, but failed. Defendants contend that Levin's recourse is to bring suit in New York seeking a declaration that the various corporate entities ...