Allen Corporation of America, Inc. v. Zayas et al
Filing
9
MEMORANDUM OPINION. Signed by Judge Theodore D. Chuang on 12/4/2014. (aos, Deputy Clerk)
UNITED STATES DISTRICT COURT
DISTRICT OF MARYLAND
ALLEN CORPORA nON OF AMERICA,
INC.,
Plaintiff,
v.
Civil Action No. TDC.14-3719
REGINALD ZA YAS,
RSP PROFESSIONAL GROUP, L.L.c.,
and NIAMBI D. STEWART,
Defendants.
MEMORANDUM
OI'INION
This matter is before the Court on a Motion for Writ of Attachment Before Judgment and
Temporary Restraining Order, ECF NO.5, filed by Plaintiff Allen Corporation of America, Inc.
("Allen").
The Court has reviewed the Motion and supporting materials and held an ex parle
hearing on December 2, 2014. For the following reasons. the Motion is GRANTED.
BACKGROUND
The following facts are taken from affidavits submitted by Allen in support of its Motion.
Fed. R. Civ. P. 65(b)(I).
of Timothy S. Schimkus
Allen is a professional services company based in Virginia. Affidavit
4-5, ECF No. 5.1. Defendant Reginald Zayas ("Zayas") was hired as
Controller at Allen's Virginia headquarters in 2005. [d.
'lI
5. In his role, Zayas "was afforded
great trust by Allen" and had access to its bank accounts and financial information until he was
terminated in October 2014 as part ofa larger downsizing effort. [d.'
5-6. A review of Allen's
accounts after Zayas's termination revealed that Zayas had stolen more than $2.5 million from
Allen beginning in March 2012.
Specifically, Zayas authorized and effected transfers from
Allen's bank account to the Capital One Bank accounts of: (I) Defendant RSP Professional
Group, L.L.c. ("RSP") totaling $2,404,865 during the period between Mareh 30, 2012 thrnugh
August 27, 2014; (2) Defendant Niambi D. Stewart C"Stev'I'arC) totaling $74.250 during the
period between March 14,2013 through August 14,2014; and (3) non-party Tiffany J. Nance
C'Nance"') totaling $28.650 during the period between January 30, 2013 through August 21,
2014. /d.
'I~
9,11,13.16.
These payments were never authorized by Allen. and RSP. Stewart.
and Nance were never vendors to Allen.
Id.'~10. 12, 14-15. In fact. RSP is Zayas's own
limited liability company, xee Affidavit of Timothy £3.Hyland. Exs. B-C, ECF No. 5-2, Stewart
is knov..n to be a friend of Zayas who often visited him at Allen. Schimkus AlT. ~ 12, and Nance
is the mother of Zayas's child. to whom he owed child support.1 Hyland Aff. ~ 3(E) & Ex. E.
Allen filed suit alleging breach of duty of loyalty and fiduciary duty (Count I) and fmud
(Count II) against Zayas. and violation of Virginia Business Conspiracy Law (Count Ill). civil
conspiracy (Count IV). unjust enrichment (Count V). and constructive trust (Count VI) against
Zayas. RSP, and Stewart (collectively. "Defendants"').
Compl.
~'i
23-55.
In the present Motion.
Allen requests that the Court issue a writ of attachment before judgment and temporary
restraining order ("TRO"') without notice to freeze Defendants' Capital One Bank accounts and
to bar them from selling. disposing of. or transferring any assets. Mem. TRO Mot. at 13.
DISCUSSION
I. Lcg:alStandard
A TRO ""isintended to preserve the status quo only until a preliminary injunction hearing
can be held:'
Hoechsi Dia/i}il Co. v. Nan Ya l'Iasfics Corp., 174 F.3d 411, 422 (4th CiT. 1999).
Because Allen ackml\vledgcs that it is possible that Nance was unav.'are that the transferred
funds were fraudulently obtained, it has not named her as a defendant in this case and does seck
attachment of her bank account. Mem. TRQ Mot. at 2 & n.1. ECF No. 5-3.
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2
Under Federal Rule of Civil Procedure 65, the court may issue a TRO without notice to the
adverse party or its attorney only if "specific facts in an affidavit or a verified complaint clearly
show that immediate and irreparable injury, loss, or damage will result to the movant before the
adverse party can be heard in opposition" and the movant's attorney certifies in writing why
efforts to give notice should not be required. Fed. R. Civ. P. 65(b)(l).
Generally, the substantive
standard for granting a TRO is the same as for a preliminary injunction.
See, e.g., Maages
Auditorium v. Prince George's Cnty, Md., 4 F. Supp. 3d 752, 760 n.1 (D. Md. 2014). Thus, to
obtain a temporary restraining order or a preliminary injunction, the plaintiiTmust establish that
(1) it is likely to succeed on the merits; (2) it is likely to suffer irreparable harm in the absence of
preliminary relief; (3) the balance of equities tips in its favor; and (4) an injunction is in the
public ioterest. Winter v. Natural Res. De! Council, Inc., 555 U.S. 7, 20 (2008).
II. Authority to Attach Assets
Allen seeks a TRO to obtain prejudgment attachment of Defendants'
bank accounts at
Capital One Bank and to enjoin Defendants from dissipating their assets. Federal Rule of Civil
Procedure 64 provides that "every remedy is available that, under the law of the state where the
court is located, provides for seizing a person or property to secure satisfaction of the potential
judgment,"
including attachment.
Fed. R. Civ. P. 64(a)-(b).
Maryland law provides for
prejudgment attachment under certain conditions, including where a debtor is a corporation with
no resident agent in Maryland and the action involves claims to property in Maryland. Md. Code
Ann., Cts. & Jud. Proc. ~ 3-303(b)(2) (Wcst 2014). RSP is a Delaware limited liability company
that had reported a registered agent in Maryland, but that "forfeited" its status in 2005, Hyland
Afr.
3(0) & Ex. D, meaning that it no longer has a valid "legal existence" in Maryland, see
Maryland State Department of Assessments & Taxation, What Does It Mean That My Business
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Entity is "Not in Good Standing" or "Forfeited" 1 (2012), available at http://www.dat.state.
md.usfsdatweb/entitystatus.pdf.
Therefore, it currently has no valid resident agent. Thus, RSP is
subject to prejudgment attachment under
9 3-303(b)(2).
With regard to all three Defendants, the same statute also provides that a court may order
attachment before judgment where the debtor "fraudulently contracted the debt or incurred the
obligation which is the subject of the pending action."
303(e)(2).
Generally, attachment under
liquidated damages. Id 93-304(b).
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Md. Code Ann., Cts. & Jud. Prec. ~ 3-
3-303(e) is limited to actions based on a contract for
However, in Levill v. State ofMd
Deposit Ins. Fund Corp.,
505 A.2d 140 (Md. Ct. Spec. App. 1986), the Court of Special Appeals of Maryland made an
exception, explaining that although "neither equity nor fundamental fairness will allow the
prejudgment attachment of an alleged debtor's assets merely because a complaint asserts that the
debtor has perpetuated a fraud," there are "extrdordinary situations not covered by Cts. & Jud.
Proc. Art. ~ 3-303 in which precisely that kind of precautionary action is not only desirable, but
necessary."
Id. at 146. The court therefore held that "when fraud is alleged and the facts as
pleaded indicate a substantial likelihood of fraud, as well as the probability that the defendants
will, before judgment, dispose of assets fraudulently acquired, a court has jurisdiction to enjoin
the defendants' dissipation of assets." Id. at 147.
In Teferi v. Dupont Plaza Associates, 551 A.2d 477 (Md. Ct. Spec. App. 1989), where an
employer hotel alleged that its former employee had embezzled funds while serving as the
hotel's controller, the Court of Special Appeals held that, under Levitt, the trial court had
jurisdiction to enjoin the defendant from dissipating his assets. Id. at 481-83. See also United
States ex reI. Rahman v. OncologyAssocs.,
198 F.3d 489, 499-501 (4th Cir. 1999) (citing Levill
and Teferi with approval to explain that the district court had authority under Maryland law, as
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incorporated by Federal Rule of Civil Procedure 64, to enter a preliminary injunction freezing
the defendants' assets in a fraud case). As discussed in greater detail in the nexl section, in this
case. Allen likewise allegcs fraud. the facts indicate a substantial likelihood of fraud. and there is
a probability Defendants will dissipate the assets.
Thus, this case meets the requirement of
Levill. and this Court may ordcr an attachment before judgment and enjoin Defendants from
dissipating their assels.
III. Temporal')' n.estrainin~ Order
I laving received and reviewed the affidavits and attorney statcment2 required by Federal
Rule of Civil Proccdure 65(b)( I), the Court concludes. provisionally and pending input from
Defendants at a future preliminal)' injunction hearing, that the requirements for a TRO have been
satisfied, and that Allen has sutliciently sho\\TI that Defendants arc likely to attempt to transfer or
dissipate the funds to justify granting of the TRQ without nutice.
A.
Likelihood ofSueecss on the :\Ierits
To meet the first requirement for a TRQ, Allen must demonstrate that it is likely to
succeed
()fl
the merits.
In this case. in order to obtain a ruling to freeze assets under Teferi and
Levill, Allen must show that it is likely to succeed on its fraud claim against 7....ayas
and its
conspiracy to commit fraud claim against the Defendants.
Federal courts exercising diversity jurisdiction over state law claims apply the choice of
law rules of the forum state. ITCD Corp. \'. ,Hichelin Tire Corp., 722 F.2d 42, 49 n.11 (4th Cif.
1983) (citing Klaxon Co. v. Slemor Elec. Mfg. Co., 313 U.S. 487. 491 (1941)). Under Maryland
law. the tort doctrine of lex loci delicti provides that the substantive law to be applied to tort
Allen's counsel satisfied this requirement \vith Pan IV.C of the memorandum in support of the
Motion. which he signed and explicitly identified as having been offered to meet this
requirement. Mem. TRO Mot. pI. C. at 12
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claims is that of the state in which the "Tong occurred, in this case, Virginia. Philip .Horris v.
Angeleni, 752 A.2d 200, 230 (Md. 2000). Virginia law defines fraud as a false representation of
a material fact. made intentionally and knowingly. \vith intent to mislead. whieh was relied upon
by and resulted in damages to the misled party. Sales \'. Kecoughum Hous. Co., 690 S.E.2d 91.
94 (Va. 2010).
The misrepresentation
may take the form of silence or failure to speak.
Nationwide Mul. Ins. Co. v. Hargrm'es, 405 S.E.2d 848, 851 (Va. 1991).
Civil conspiracy
consists of I\vo or more persons combined to accomplish, by some concerted action, some
criminal or unlawful purpose.
the Country Vintner, Inc. v. LOllis Latour, Inc., 634 S.E.2d 745,
751 (Va. 2006) (internal citation and quotation marks omitted).
In this case, Allen has submitted a sworn affidavit by its Chief Financial Oflicer, Timothy
S. Schimkus, stating that Zayas was Allen's long-time Controller and had access to its bank
accounts, receipts, deposits, and financial information at all times. Schirnkus AlT.. 6. Schimkus
states that since 2007, Zayas "reported and rcpresented to lShimkus) and to Allen Corp., at all
times. , . that Allen Corp.'s receipts and disbursements were properly and accurately accounted
for" and "did not disclose any material shortfalls in Allen Corp.'s accounts."
further states that he and Allen "believed Zayas' reports ofrcpresentations
Id. ~ 7. Schimkus
regarding its reccipts,
disburscments and accounting" and relied upon them. Id. A review of Allen's accounts aftcr
Zayas's termination. however, revealed that Zayas had "authorizcd and cffected" unauthorized
funds transfers from AlIcn's accounts in the amounts 01'$2,404.865 to RSP, $74.250 to Stewart,
and $28,650 to Nance. none of whom was ever a vendor to Allen. /d.
tH~
9, II. 13-14. Bascd on
these facts, thc Court provisionally concludes that thcre is a substantial likelihood that Zaya'\
engaged in fraud and that RSP, a limited liability corporation registered by Zayas to his home
address, see Hyland AfT.. Exs. B-C. and Stcwart, Zayas's friend who often visited him at work
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and who had no other legitimate reason to receive direct wire transfers from Allen, Schimkus
AfT.'
B.
12, 14, were acting in concert with Zayas to obtain the funds through fraud.
Irreparable Harm
Allen must also establish that it is likely to be irreparably hanned absent a preliminary
injunction. The United States Court of Appeals for the Fourth Circuit has recognized that even if
a loss can be compensated by money damages at judgment, "extraordinary circumstances may
give rise to the irreparable harm required for a preliminary injunction" in those instances "where
the harm suffered by the plaintiff from denying the injunction is especially high in comparison to
the harm suffered by the defendant from granting it." Hughes Network Sys., Inc. v. InterDigital
Commc'ns Corp., 17 F.3d 691, 694 (4th Cir. 1994). As an example of such a situation, the
Fourth Circuit cited the Seventh Circuit's
view that irreparable
harm may exist where
"{d]amages may be unobtainable from the defendant because he may become insolvent before a
final judgment can be entered and collected."
Id. (quoting Roland Mach. Co. v. Dresser Indus.,
Inc., 749 F.2d 380,386 (7th Cir. 1984)).
In this case. Defendants are alleged to have embezzled over $2.5 million from Allen
through fraudulent means, conduct which arguably constitutes criminal activity. Zayas has been
terminated from Allen, and RSP is no longer authorized to conduct business in Maryland.
Under
these circumstances, there is a strong likelihood that, in the absence of attachment, Zayas may
move or dissipate the allegedly stolen funds, and that Zayas, who may also face criminal
prosecution
for this conduct, will be unable through legitimate means to generate income
sufficient to pay a judgment that could potentially reach $2.5 million. See United States ex rei.
Taxpayers Against Fraud v. Singer Co., 889 F.2d 1327, 1330-32 (4th Cir. 1989) (upholding a
district court's finding of irreparable harm where the principal defendant was "insolvent" and its
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assets were "in danger of dissolution and depletion"); Buffalo Wings Factory, Inc. v. Mohd, No.
1:07cv612 (JeC), 2008 WL 4699803, at '4 (E.D. Va. 2008) (finding irreparable harm where,
without a TRO, the plaintiff would have had "little to no opportunity to collect the money it
[was] owed" because the defendants were shown to either have sparse personal assets or be
empty shell corporations).
The Court therefore finds adequate evidence of irreparable harm in
this case.
C.
Balance of Equities
The Court also concludes that the balancc of equities weighs in favor of Allen.
For the
rcasons explained in the previous section, there is a strong likelihood that, absent a temporary
restraining
order and attachment
of Defendants'
assets, the funds will be dissipated
or
transferred, and that Zayas in particular may become insolvent before Allen is able to obtain a
final judgment and collect the allegedly stolen funds from Allen. On the other hand, particularly
because the TRQ is limited to 14 days and is subject to a motion to dissolve, any burden that may
result if it is later revealed that this TRO was improperly granted and Defendants' assets should
not have been frozen would constitute a limited, temporary hardship.
D.
Public Interest
Finally, the Court agrees that the public interest weighs in favor of Allen. Allen alleges
that Defendants fraudulently obtained over $2.5 million from Allen and has shown, at this early
stage, a likelihood of success on the merits of their claims. It is in the public interest to prevent
the dissipation of illegally.obtained assets, particularly of such a substantial sum.
E.
TRO \Vithout Notice
Based on the foregoing analysis, the Court finds that the requirements for a TRQ are
satisfied. Given the nature of the activity at issue in this case, embezzlement of over $2.5 million
that arguably constitutes criminal activity, and the risk of dissipation of assets, see supra part
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111.8., the Court accepts Allen's assertion that providing notice to Defendants could pose a
substantial risk that Defendants could transfer or otherwise dissipate their assets before entry of a
preliminary injunction.
Thus, issuance of an ex parte TRO, though ordinarily disfavored, is
warranted in this instance.
The potential harm to Defendants from such an order can be
addressed by the procedures under Rule 65. which initially limit the TRO to 14 days and require
a hearing on a motion to dissolve the TRO on two days' notice and an expedited hearing on a
preliminary injunction.
Fed. R. Civ. P. 65(b).
IV. Ilond
Under Federal Rule of Civil Procedure 65, a court may issue a temporary restraining
order "only if the movant gives security in an amount that the court considers proper to pay the
costs and damages sustained by any party found to have been wrongfully enjoined or restrained."
Fed. R. Civ. P. 65(c). In order to ensure that there are funds to compensate Defendants should
they successfully
establish that the TRO should not have issued and that they wrongfully
sustained damages as a result of the IRO, the Court requires Allen to post a bond 0[$100,000.
CONCLUSION
For the foregoing reasons, it is hereby ORDERED that:
1. The Motion for Writ of Attachment Before Judgment and Temporary Restraining
Order, ECF No.5, is GRANTED;
2. All funds held in any and all bank accounts at Capital One Bank, owned or controlled
in whole or in part by Reginald Zayas, are hereby frozen, and no payments or
disbursements from any such accounts shall be made until further order of this Court
or until vacation or expiration of this Order;
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3.
All funds held in any and all bank accounts at Capital One Bank, owned or
controlled in whole or in part by RSP Professional Group, LLC, are hereby frozen,
and no payments or disbursements from any such accounts shall be made until further
order of this Court or until vacation or expiration of this Order;
4. All funds held in any and all bank accounts at Capital One Hank, owned or controlled
in whole or in part by Niambi D. Stewart, are hereby frozen, and no payments or
disbursements from any such accounts shall be made until further order of this Court
or until vacation or expiration of this Order;
5. Reginald Zayas and RSP Professional Group, LtC shall not sell, transfer, or dispose
of any assets until further order of this Court or until vacation or expiration of this
Order;
6. Niambi D. Stewart shall not sell, transfer, or dispose of any assets received, directly
or indirectly,
from Capital
One Bank commercial
checking
account
number
5004322945. held by Allen Corporation of America, Inc.;
7. The Court's Order will take effect upon posting of a bond in the amount of $1 00,000;
and
8. This Order shall expire on Thursday, December 18, 2014, at 9:00 a.m., unless
extended by further order.
A separate Order follows.
Date: December 4, 2014, 9:00 a.m.
THEODORE D. CI
United States Distric
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