Opinion
Decided May 7, 2008.
Kleinberg, Kaplan, Wolff Cohen, P.C. New York, NY (David Parker, Marc R. Rosen) For Penthouse Media Group, Inc. Moses Singer LLP New York, NY (Scott E. Silberfein) For the Special Master: Robinson Brog Leinwand Greene Genovese Gluck P.C. Avenue of the Americas New York, NY (David M. Levy, Robert R. Leinwand), for Plaintiff.
In Motion Sequence No. 004, David M. Levy, Esq.,, the Special Master appointed by this court, seeks an order, pursuant to CPLR 5104, determining that Penthouse Media Group, Inc. (PMG) is in contempt of this court's order dated November 27, 2007 (the Order) and the amended order dated January 11, 2008 (the Amended Order), and punishing PMG for its contempt by (1) prohibiting PMG from issuing or transferring any shares of the common stock of PMG until it demonstrates that it has fully complied with the terms and conditions of the Order and the Amended Order; and (2) imposing a penalty against PMG in the amount of $10,000 per day, retroactive to February 1, 2008, for each day that PMG fails and refuses to comply with the Order and the Amended Order, which penalty shall be paid to the Special Master for the benefit of plaintiff CMI II LLC (CMI II). The Special Master also seeks an order awarding it all of the reasonable costs and expenses incurred in connection with the enforcement of the terms of the Order and the Amended Order, including reasonable attorney's fees incurred in connection with this motion.
In Motion Sequence No. 005, PMG seeks an order, pursuant to CPLR 5015 (a), vacating or granting it relief from the Order and the Amended Order, and an order, pursuant to CPLR 5240, protecting PMG from further enforcement proceedings.
For the reasons set forth below, the Special Master's motion for an order of contempt is granted, and PMG's motion to vacate the Order and the Amended Order is denied.
On November 27, 2007, I granted CMI II's motion for summary judgment with respect to its second and third causes of action in its complaint against defendant Newman and Newman, P.C. (Newman Newman). Previously, on August 2, 2007, an order and judgment was entered in a related action entitled CMI II, LLC v Interactive Brand Development, et al., Index No. 600589/05, awarding, inter alia, money damages in favor of CMI II and against (1) defendants Interactive Brand Development (IBD) Media Billing Company LLC (Media Billing) and Internet Billing Company, LLC (IBD) (collectively, the IBD defendants), jointly and severally in the amount of $7,315,215.45; (2) Media Billing and IBD, jointly and severally in the amount of $686,716.22 and (3) the IBD defendants, jointly and severally, in the amount of $940. As a result of the foregoing, CMI II holds judgments against the various defendants in excess of $8,000,000.
Newman and Newman was made a party to the litigation since it was the collateral agent in possession of a Stock Certificate B2 representing 92,304 shares of Series B Common Stock of PMG (the PMG Stock) which IBD had pledged to CMI II and Vescap International Limited Management (Vescap), pursuant to a Pledge Agreement dated September 29, 2004.
To enable the judgment creditors CMI II and Vescap to realize upon the value of the PMG Stock held by Newman Newman as collateral agent, I entered the Order providing for the re-issuance, re-certification and conversion on an expedited basis of the collateral stock into two separate Certificates one in the amount of 85,711 shares for the benefit of CMI II, and the other for 6,593 shares for the benefit of Vescap (the Stock Certificates). Pursuant to the same Order, I also directed the Special Master, upon receipt of the re-issued PMG Stock, to foreclose and to realize upon the value of the PMG Stock calculated to maximize CMI II's recovery pursuant to Section 10(b) of the Pledge Agreement. In the Amended Order, I appointed Mr. Levy, Esq., to serve as the Special Master in this action.
The Special Master alleges that, shortly after receiving his appointment, he contacted Newman Newman to arrange for the delivery of the PMG Stock to enable him to implement the terms of the Order. Shortly after he received the PMG Stock on February 2, 2008, he contacted PMG's general counsel by e-mail (the Demand Letter), and requested that it re-issue the PMG Stock as required by the Order. On February 5, 2006, PMG confirmed that it was aware of the existence of both the litigation and the Order, and that PMG would cooperate by re-issuing the PMG Stock, but stated that it needed time to review the demand. PMG indicated that it would contact the Special Master no later than February 11th.
The Special Master asserts that, when PMG had not responded by February 15th, he became concerned that PMG was not willing to cooperate or comply with the terms of the Order. Consequently, he sent a letter to PMG's counsel reiterating the demand, and stating that if the Stock Certificates were not delivered by February 22, 2008, he would seek court intervention to compel their delivery.
In response, PMG advised the Special Master that since the time the PMG Stock was originally issued, PMG had been reincorporated in Nevada, and the Class B Common Stock had been split on a 100 to 1 basis. PMG insisted that, as a result, it needed additional time before the shares could be re-issued in accordance with the terms of the Order and the Amended Order.
When the Special Master had still not received a response by March 5, he again initiated contact with PMG. In response, PMG advised the Special Master that it had issued a press release announcing its intention to sell shares of its common stock in a firm commitment underwritten initial public offering sometime before the second quarter of 2008, and that there were potential securities implications in complying with the Order. On March 18, 2008, PMG unequivocally stated that it would not comply with the Order based on its concern that the Special Master's actions to liquidate the stock would constitute a violation of the federal securities laws, and that PMG might be held responsible for those acts. PMG insisted that it would not comply with the Order under any circumstances, and that it would not release the Stock Certificates until after PMG's public offering was complete. To date, PMG has not filed the required registration statement with the U.S. Securities and Exchange Commission.
On March 24, 2008, certified copies of the Order and the Amended Order were served upon PMG's general counsel, as required by CPLR 5104. The Special Master then filed this application to seek the imposition of contempt sanctions against PMG for its refusal to comply with the Order. Subsequently, PMG filed its motion for relief from the terms of the Order.
PMG's Motion to Vacate the Order and the Amended Order (Motion Sequence No. 005)
First, PMG argues that because the Order directs it, a nonparty, to perform certain tasks without notice or an opportunity to be heard, this court does not have personal jurisdiction. Accordingly, PMG contends, the Order must be vacated and PMG relieved of its obligations thereunder. However, PMG's motion must be denied, because PMG had actual notice of the proposed Order, and a full and meaningful opportunity to object to its terms, but failed to do so. CMI II presents evidence that, on October 19, 2007, it served and filed a Notice of Settlement of Order, along with copies of the summary judgment decision and the proposed Order, directly upon PMG ( see Aff. of Marc R. Rosen, Exh D). No objections to the proposed Order were ever filed or raised by PMG.
After I granted summary judgment in favor of CMI II in this action on its cause of action for specific performance to "foreclose and realize upon the Collateral," I directed CMI II to settle a proposed order with respect to the foregoing.
Thus, PMG's contention that it was "not on notice of nor was PMG afforded the opportunity to be heard in the Litigations" (Aff. of Scott E. Silberfein, ¶ 4) is squarely refuted by CMI II's service of the proposed Order and related documents upon PMG ( see Jamal Estates v Crockwell, 113 Misc 2d 548, 550 [App Term, 1st Dept 1982] ["[p]ersonal jurisdiction requires notice and the opportunity to be heard"]; In re Coates, 9 NY2d 242, 249 [requiring "reasonable notice and reasonable opportunity to be heard"]; see also Mullane v Central Hanover Bank Trust Co., 339 US 306, 314 [on appeal from New York Court of Appeals, U.S. Supreme Court held that "[a]n elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections," and "[t]he notice must be of such a nature as reasonably to convey the required information"]).
Accordingly, there is personal jurisdiction over PMG, for purposes of the Order, since PMG was afforded reasonable and actual notice of settlement of the proposed Order and a meaningful opportunity to be heard.
PMG's request for an order vacating the Order must also be denied on the ground that the only provision pertaining to PMG is a ministerial provision. The Order, effectuating the foreclosure and authorizing the Special Master's seizure and sale of certain of IBD's property in partial satisfaction of CMI II's judgment, affects the rights and obligations of only CMI II and IBD not PMG. In the Order, CMI II neither sought nor obtained relief against PMG. The directive in the Order is merely ministerial and administrative; it simply directs PMG to "re-issue, re-certificate and convert" the pledged securities i.e., to issue and turn over stock certificates belonging to IBD ( see Matter of Moynihan, 80 NY2d 322, 325 [stock transfers are "ministerial' acts"]). Aside from the foregoing, PMG has nothing to do with this matter. Since no special rights or obligations of PMG are impacted by the Order, PMG is not entitled to be relieved from its terms ( see CPLR 5019 [a] ["A judgment or order shall not be stayed, impaired or affected by mistake, defect or irregularity in the papers or procedures in the action not affecting a substantial right of a party"]).
Finally, PMG argues that it should be relieved from complying with the Order on the ground that it believes that the Order will inevitably lead to violations of the securities laws. PMG argues that IBD, the owner of the pledged stock, is an affiliate of PMG, and "is prohibited under the securities laws from making any oral or written offers to sell PMGI stock during the period prior to the filing of PMGI's registration statement to sell shares of its common stock in an underwritten initial public offering," and that the Order requires the Special Master to "mak[e] such prohibited offers on behalf of IBD" (PMG's Mem. of Law, at 4, 7).
The Special Master is not prohibited under the federal securities laws from selling, or offering to sell, the pledged securities. Although PMG argues that, pursuant to the Securities Act of 1993, "an issuer, underwriter or dealer" is prohibited from selling a security unless a registration statement has been filed with respect to such security ( id. at 4, citing Securities Act, Section 5 [ 15 USC § 77e] and Section 4 [1] [ 15 USC § 77d (1)]), the Special Master is not an "issuer, underwriter, or dealer," and is not bound by the same prohibition. Likewise, contrary to PMG's assertion, IBD (PMG's "affiliate") is not offering the PMG Stock for sale pursuant to the Order, and the Special Master will not be selling the stock on behalf of IBD. The Order specifically requires that the Special Master, "on behalf of CMI II," foreclose on the PMG Stock for the purposing of "maximiz[ing] CMI II's recovery," and directs that the sale proceeds "be applied . . . to the satisfaction of [CMI II's] Judgment." PMG's suggestion that IBD is foreclosing upon its own property is incorrect.
In addition, the Special Master's sale of the PMG stock will not result in a violation of federal securities laws since he is not selling the stock as party of a "public offering" ( see Securities Act, § 4 [2] [ 15 USC § 77 d (2)] ["The provision of section 5 [ 15 USC § 77e] shall not apply to . . . transactions by an issuer not involving any public offering"]). Since the Special Master is not conducting a public offering, there can be no securities violation. Moreover, the Special Master alleges that, while he does intend to dispose of the PMG Stock which collateralizes CMI II's judgment, such disposition will be commercially reasonable under both the Order and the Amended Order and New York's Uniform Commercial Code (Levy Aff., ¶ 4), and that he intends to seek court approval of the terms and conditions of the disposition of the PMG Stock ( id., ¶ 6).
I also note that PMG created its own predicament. PMG did not announce its intention to conduct an initial public offering until March 5, 2008 ( see Silberfein Aff., ¶ 7). Since CMI II served a copy of the proposed Order on PMG on October 19, 2007, and the Special Master served a copy of the Order on PMG on February 1, 2008, PMG had a substantial amount of time to comply with the Order and turn over the stock. If PMG really believes that compliance with the Order will lead to violations of the securities laws, the solution is simple PMG should not proceed with the initial public offering.
Accordingly, PMG's motion, pursuant to CPLR 5015 and 5240, for an order to vacate and/or relieve it from the terms of the Order and Amended Order, is denied.
The Special Master's Motion for an Order of Contempt (Motion Sequence No. 004)
CPLR 5104 provides that:
Any interlocutory or final judgment or order, or any part thereof, not enforceable under either article fifty-two or section 5102 may be enforced by serving a certified copy of the judgment or order upon the party or other person required thereby or by law to obey it and if he refuses or willfully neglects to obey it, by punishing him for a contempt of the court.
The authority of a court to enforce its orders through the imposition of contempt sanctions is well-established. The power under Section 5104 to punish a party or other person who refuses to comply with an order applies principally to orders granting equitable relief (such as orders awarding specific performance), rather than orders awarding money judgments which are enforceable under Article 52 of the CPLR ( see Quick v ABS Realty Corp. , 13 AD3d 1021 [3d Dept 2004]).
To establish civil contempt based on an alleged violation of a court order, the movant must establish that a lawful order of the court clearly expressing an unequivocal mandate was in effect, and that the order was disobeyed to a reasonable certainty ( see Matter of Department of Envtl. Protection of City of NY v Department of Envtl. Conservation of State of NY, 70 NY2d 233; McCormick v Axelrod, 59 NY2d 574, amended 60 NY2d 652; Vujovic v Vujovic , 16 AD3d 490 [2d Dept 2005]). The party to be held in contempt must be shown to have had knowledge of the order, and the disobedience must have prejudiced the right of another party ( see McCain v Dinkins, 84 NY2d 216, McCormick v Axelrod, supra; Garcia v Great Atl. Pac. Tea Co., 231 AD2d 401 [1st Dept 1996]).
Here, the Special Master has met his burden of proving to a reasonable degree of certainty that PMG violated a lawful and unequivocal court order of which it had knowledge and, in doing so, prejudiced the Special Master's rights ( see Kelly v Curcio, 198 AD2d 353 [2d Dept 1993]; Bergin v Peplowski, 173 AD2d 1012 [3d Dept 1991]).
First, there is no dispute that PMG was aware during all relevant times of the existence of the orders. Copies of the Order and the Amended Order were served on its general counsel along with the Demand Letter. Further, as required by CPLR 5104, certified copies of the Order and the Amended Order were served upon PMG and its counsel. Moreover, although PMG had actual notice of the Order and its requirements since late last year, it has not sought to have the Order vacated or modified, and has not made any application to this court to stay or otherwise affect the obligations imposed under the terms hereof.
The Order is also unequivocal as to the requirements imposed on PMG. The Order provides that:
The Special Referee promptly shall (i) request in writing that PMG, (x) re-issue, re-certificate, and convert on an expedited Basis the Collateral Stock into 2 separate stock certificates-one for 85,711 shares of Series B Common Stock of PMG issued in the name of [Interactive Brand Development, Inc. ("IBD")] IBD and representing the collateral attributable to CMI, II ("CMI Collateral Stock") and one for 6,593 shares of Series B Common Stock of PMG issued in the name of iBD and representing the collateral attributable to Vescap International Management Ltd. (the Vescap Collateral Stock), (y) record CMI Collateral Stock and the Vescap Collateral Stock in the books and records of PMG, and (z) deliver the original certificate for the CMI Collateral Stock to the Special Referee and the original Vescap Collateral Stock to Newman Newman; and (ii) take all other steps necessary to effectuate the foregoing re-issuance, re-certification, recordation and delivery of the CMI Collateral Stock and the Vescap Collateral Stock, Including, without limitation, the preparation, execution and delivery of any necessary requested documentation, agreements, consents, certificates or endorsements.
Order at 4. Thus, PMG was required, on an expedited basis, to (i) re-issue the PMG Stock certificate into two Stock Certificates; (ii) record the new certificates on its books and records, and (iii) deliver the newly issued certificates to the Special Master and Newman Newman.
The Special Master alleges that he has strictly complied with the requirements of the Order and served the Demand Letter on PMG on February 1, 2008. He expressly requested the re-issuance, re-certification and conversion of the Class B shares on an expedited basis. However, PMG has flatly refused to re-issue the PMG Stock.
Finally, PMG's willful refusal to release the shares to the Special Master pursuant to the terms of the Order constitutes an unmistakable act of contempt, which defeats and frustrates his ability to discharge his obligations under the Order, and interferes with CMI II's ability to realize on the collateral and collect on their judgment
In opposition to the motion, PMG contends that contempt is unwarranted because if it complies with the Order and allows the Special Master to liquidate the PMG Stock, this will lead to violations of the securities laws. PMG also argues that there is no lawful judicial order in effect that was disobeyed because, since it is not a party to this action, I do not have personal jurisdiction over it. As previously discussed, both of these arguments completely lack merit.
Accordingly, the Special Master's allegations, coupled with his documentary evidence, clearly set forth a prima facie showing that PMG is in civil contempt of the Order ( see Muhl v Trabucchi, 250 AD2d 404 [1st Dept 1998]; Pace Advertising Agency, Inc. v Manhattan Pacific Management Co., Inc., 237 AD2d 131 [1st Dept 1997]). Thus, the only remaining issue is the determination of the punishment to be imposed to compel PMG's compliance with the Order.
The aim of civil contempt is vindication of a private party to litigation; any sanctions imposed upon the contemnor are designed not to punish, but to compensate the injured private party for loss or of interference with the benefits of the court's mandate ( McCain v Dinkins, 84 NY2d 216, supra). I find that the appropriate sanction for PMG's conduct is to prohibit it from issuing or transferring the PMG Stock to any other party, until it first complies with the terms of the Order and re-issues the PMG Stock, and delivers the Stock Certificates pursuant to the terms of the Order.
Although the Special Master also requests that I impose a penalty of $10,000 a day for each day that PMG fails to comply with the Order, this request is denied, as counsel for the Special Master conceded at oral argument that the above prohibition is sufficient punishment for PMG's conduct ( see Transcript of 4/21/08 Oral Argument, at 13). Moreover, where, as here, the complainant has demonstrated that its rights have been prejudiced, but fails to demonstrate any actual loss or injury, the fine available is limited to $250, plus the complainant's costs and attorney's fees in seeking the contempt order (Judiciary Law § 773; see State of New York v Unique Ideas, Inc., 44 NY2d 345; Denaro v Rosalia, ___ AD3d ___, 2008 WL 963046 [2d Dept 2008]). The Special Master and his counsel are directed to submit affidavits regarding the amount of such costs and attorney's fees within ten days of service of a copy of this decision and order.
I have considered the remaining claims, and I find them to be without merit.
Accordingly, it is
ORDERED the motion of Special Master David M. Levy, Esq., for an order of contempt (Motion Sequence No. 004) is granted; and it is further
ORDERED that the refusal and neglect of Penthouse Media Group, Inc. to abide by this court's orders dated November 27, 2007 and January 11, 2008 was calculated to and did defeat, impede, impair and prejudice the rights and remedies of both plaintiff and David M. Levy, Esq.,, the Special Master herein, and constitutes a civil contempt of this court; and it is further
ORDERED that Penthouse Media Group, Inc. is prohibited from issuing or transferring any shares of the common stock of Penthouse Media Group, Inc. until it demonstrates that it has fully complied with the terms and conditions of the above orders; and it is further
ORDERED that a fine of $250 is imposed upon Penthouse Media Group, Inc., and is to be paid to the Clerk of the Court within ten (10) days of service of a copy of this order; and it is further
ORDERED that David M. Levy, Esq.,, the Special Master, and his counsel are directed to submit detailed affidavits regarding the amount of their costs and attorney's fees incurred in seeking the contempt order within ten (10) days of service of a copy of this order; and it is further
ORDERED that Penthouse Media Group Inc.'s motion for an order vacating or granting it relief from this court's orders dated November 27, 2007 and January 11, 2008 (Motion Sequence No. 005) is denied.