As many judges and lawyers know, Superstorm Sandy has been used in litigation over the years as an excuse for things ranging from the seriously bad, like destroyed evidence, to the more mundane, like blown court deadlines. In Cardino v Peek-A-Boo, Inc., 2017 NY Slip Op 31657(U) [Sup Ct, Suffolk County July 28, 2017], a litigant did his best to try to persuade Suffolk County Supreme Court Justice James Hudson that Sandy made it “impossible” for him to comply with a post-dissolution order to turn over all merchandise of an adult bookstore, appropriately named “Peek-A-Boo, Inc.,” to a court-appointed receiver. Cardino provides some guidance on a rarely litigated issue – the potential consequences of violating a post-dissolution receivership order.
The Dissolution Decision
As recounted in an earlier decision, Peek-A-Boo was a New York corporation formed by a father and son, the Lombardos, to own and operate an adult shop. The petitioner, Cardino, sued the Lombardos to dissolve Peek-A-Boo under Section 1104-a of the Business Corporation Law, claiming he was “shut out” of the business. Suffolk County Supreme Court Justice Jeffrey Arlen Spinner held that the Lombardos oppressed Cardino and dissolved the corporation.
The Receivership and the Missing Merchandise
After dissolving Peek-A-Boo, the court appointed a permanent receiver “of all of the assets and property of Peek-A-Boo, Inc.” with the power to “collect and receive the debts, demands and other property of Peek-A-Boo, Inc.”
After the court appointed the receiver, however, the merchandise of the store, the primary asset of the corporation, “disappeared” while in the Lombardos’ custody. Cardino moved to have the Lombardos held in contempt for violating the court’s receivership order.
Justice Hudson held a hearing on Cardino’s motion for contempt and heard the following testimony.
Cardino testified that about eight months before Superstorm Sandy, he went to Peek-A-Boo’s store and saw it full of merchandise. A month later, Cardino went back and the store was totally empty. All the merchandise was gone. No one ever told him the merchandise was being moved.
Lombardo Sr. testified that Peek-A-Boo’s inventory was “moved into a 15’ by 15’ shed on his property in Massapequa. According to Lombardo Sr., “It was at that location on October 29, 2012 when Superstorm Sandy struck and the inventory was lost to the rising waters of the Great South Bay.” Lombardo Sr. told the court that he “filed a claim with an insurance company (whose name he couldn’t recall),” but the carrier denied the claim. He admitted that he did not inform Cardino about his relocation of the corporation’s inventory “for the ostensible reason that attorneys and the receiver were involved at that stage.”
Lombardo Sr.’s daughter testified that she worked for her father at Peek-A-Boo’s store until 2011, when the Town of Huntington (the “Town”) “shut down” the store. The court also admitted testimony that Lombardo Sr.’s daughter gave in a prior landlord-tenant proceeding involving Peek-A-Boo, in which she testified that she helped her father “empty out the store and that it took about a week to move the inventory.”
The receiver testified that despite the language of the Final Order of Dissolution, appointing him “permanent receiver of all of the assets and property of Peek-A-Boo, Inc.,” he never received any of the business’s inventory, or an accounting of its assets, and that when he visited the store, all of the inventory was gone.
Lastly, an employee of the Town testified that it shut down Peek-A-Boo’s store for failure to obtain a Certificate of Occupancy as an adult business.
After “observing the demeanor of Mr. Lombardo on the witness stand,” Justice Hudson “found him to be less than credible as compared to the testimony of Mr. Cardino.” The court found his daughter’s testimony to be “of limited utility,” and which seemed “quite understandably” to be “colored by the natural affection any child would feel for their father.” The court found that both the receiver and Town employee “testified truthfully and accurately.”
The court held that it was “readily apparent that the Respondents” – including Lombardo Jr. – about which there seemed to be little testimony – “seized the assets of the company and took them into their keeping.” The court held that the act of taking possession of the store’s inventory “created a bailment,” which the court held “imposed a burden on the Respondents, as bailee, to not only safeguard the inventory, but also to account for it.” The court held that the Respondents failed in both their duty to safeguard and their duty to account.
Justice Hudson then found the Lombardos liable for transgressing “another, more severe, obligation,” the “duty of a litigant to obey the lawful order of a tribunal,” which is punishable as contempt of court.
As noted above, Lombardo Sr.’s principal defense was that it was “impossible” for him to comply with the court’s order to turn over the store’s inventory to the receiver because Superstorm Sandy washed it all away. But, as the hearing testimony established, the Town shut down Peek-A-Boo’s store several months before the storm, and Lombardo Sr. did not explain why he failed to notify the receiver of the store’s closure, or why he chose to take the store’s inventory into his own possession. Thus, the court found Lombardo Sr. to be in civil contempt of court. The court then found Lombardo Jr. to be in civil contempt, as well, because the receivership order “applied equally to both Mr. Lombardo Sr. and Mr. Lombardo Jr.”
Based on Cardino’s 33% ownership of Peek-A-Boo, the court ruled that Cardino was entitled to the value of one third of the lost inventory. During the hearing, the court admitted into evidence corporate tax returns showing an inventory cash value of $84,000. As a result, the court held that its “finding of civil contempt may be purged” by the Lombardos “paying a fine” to Cardino in the amount of $28,000 within 30 days.
It goes without saying that disobeying a court order is a big deal. Fortunately, clear cases of contempt are relatively rare in business litigation. In those rare cases, where a litigant can show that his or her rights have been “defeated, impaired, impeded, or prejudiced” by another’s disobedience of a court order, New York’s civil contempt rules, codified in Sections 753 and 773 of the Judiciary Law, provide no less than four potential remedies of varying degrees of severity, including one or all of the following:
- where actual monetary damage or loss cannot be shown as a result of the contumacious conduct, imposition of a token fine;
- where actual damage or loss can be shown, imposition of a fine “sufficient to indemnify the aggrieved party” for its “actual loss or injury”;
- an award of “costs and expenses,” including attorneys’ fees; and
- imprisonment of the offender to coerce compliance.
In Cardino, the court opted to impose a fine to compensate Cardino for the loss of his beneficial one-third interest in Peek-A-Boo’s inventory — expressing no opinion as to other potential remedies such as an award of Cardino’s legal fees incurred in making his contempt motion and the subsequent hearing (likely a significant expense).
The court’s imposition of a fine was a boon to Cardino in a couple of ways. The likely equivalent remedy for Cardino’s loss would have been to bring a derivative claim for conversion of the inventory, which, if successful, would result in a money judgment in the company’s favor for the value of the inventory, a long and expensive procedural route. Moreover, if Peek-A-Boo had any outstanding liabilities to third parties, then the award of a fine directly to Cardino may have had the effect of making Cardino better off than he otherwise would have been at the end of the dissolution proceeding by, in effect, giving him a priority for the value of his equity.
Cardino is a reminder that, as always, one ought to obey court orders generally, and receivership orders in particular.