Levitt v. State of Maryland Deposit Insurance Fund Corp.

GILBERT, Chief Judge. Jeffrey A. and Karol Levitt have appealed to this Court from two separate but related orders of the Circuit Court for Baltimore City. The first case challenges the authority of the circuit court to issue a prejudgment injunction that conditionally impounds the Levitts’ property. The second ⁵²⁷ case attacks a contempt judgment against the Levitts for disobeying the injunction.

Because our decision in the first case, in part, controls the second case, we nostra sponte consolidated the appeals. Case No. 1 The narrow issues before us are: I. Did the circuit court have “jurisdiction to seize the Levitts’ assets and limit their personal expenses”?

II

Did the Levitts violate the consent order when, in response to discovery, they asserted their privilege against self-incrimination?

III

Was the court empowered to overrule the Levitts’ objection and modify the consent order of August 5, 1985? Before endeavoring to answer the issues posed to us by the Levitts, we recount briefly the facts leading to this appeal. The Sturm und Drang 1 that befell the depositors of Old Court Savings and Loan Association (Old Court) prompted the Circuit Court (Kaplan, J.) to appoint a conservator for Old Court. The Maryland Savings-Share Insurance Corporation (MSSIC) was originally appointed as conservator, but as a result of legislation enacted on May 18, 1985, at a special session of the Maryland General Assembly, MSSIC was absorbed by Maryland Deposit Insurance Fund Corporation (MDIF).

In the Circuit Court for Baltimore City, MDIF sued the Levitts and a number of other persons, partnerships, and legal entities. 2 The suit alleged, in pertinent part, that Jeffrey A. Levitt had “fraudulently misappropriated funds from Old Court and its subsidiaries and affiliates”; directed ⁵²⁸ the making of a “profit entry” in Old Court’s books, which was “false and fraudulent”; and fraudulently manipulated funds of Old Court. Additionally, the complaint charged that the actions of Jeffrey and Karol Levitt and others “constituted fraud on Old Court. The fraudulent actions of these Defendants included nondisclosure, where there was a duty to disclose, misrepresentation of existing material facts, and the acceptance of fees for services not performed or excessive fees for services. Additionally, [Jeffrey A.] Levitt’s fraudulent actions included the false inflation of property values and the fraudulent creation of appearances of equitable interests in property where none existed.

At the time of these fraudulent actions, the Defendants were aware that said actions were fraudulent and that Old Court would rely on said actions; and Old Court reasonably relied on these actions to its subsequent detriment. The actions, statements and intentional non-disclosures of Defendants to Old Court were made with the intent to deceive Old Court. Moreover, at the time of said actions, Old Court was controlled and dominated by directors and officers who participated in these fraudulent actions; and, therefore, Old Court was unable to take appropriate corrective action to prevent such fraudulent actions. As a proximate result of said fraudulent actions, Old Court has sustained compensatory damages in a substantial amount____” MDIF’s complaint, while grounded in law, sought equitable relief.

It asked, among other things, for an accounting, imposition of a constructive trust or an equitable lien, and restitution. Furthermore, MDIF requested the circuit court to issue an interlocutory injunction to prevent the Levitts from dissipating assets “pending ... [a] decision on the merits____” The Levitts opposed the injunction, asserting that the court lacked jurisdiction to provide that relief. Subsequent ⁵²⁹ ly, a “consent order” 3 was entered into between the parties. That order, dated August 5, 1985, provided, in pertinent part: “During the pendency of this litigation, Defendants, ... and each of them, [with] their consent are enjoined from removing, transferring, alienating, pledging, or otherwise impairing any assets in which Defendants have any direct or indirect interest, ... except upon application in writing to Plaintiff and the Court ... [,] provided, however, Defendants may transfer assets without notice to Plaintiff or the Court as follows: 1.

Each individual Defendant may transfer assets for ordinary and necessary personal living expenses not to exceed the level of expenses required to maintain Defendant’s standard of living as of May 13, 1985; 2. Each Defendant may transfer assets in the ordinary course of business and to meet ordinary and necessary business expenses; and 3. Each defendant may use his, her, or its assets to compensate attorneys for legal expenses at their normal hourly rates, plus disbursements. In the event any Defendant wishes to make transfers other than transfers authorized by paragraphs 1 through 3 above, such Defendant shall give prior notice in writing of such proposed transfer to Plaintiff and the Court.

Plaintiff shall respond in writing to Defendant and to the Court promptly upon receipt of Defendant’s notice. If Plaintiff does not oppose the proposed transfer, the transfer may be made without further Order of this Court. If Plaintiff opposes the proposed transfer, the Court shall promptly schedule a hearing to rule upon the matter.” The trial judge explained in open court immediately pre- ceding the signing of the consent order: ⁵³⁰ “I will allow ... [MDIF] to make in discovery, and ... [the Levitts] will be required to answer in discovery, inquiries concerning the standard of living and what expenses they have paid or what transfers they have made of their assets and property, and so you will have that ability, and if they except to a question on interrogatories, object to a question on interrogatories because you are inquiring into their transfers or inquiring into their standard of living, then I will overrule that objection, and the same thing holds true — I’m not going to get into the criminal matters now, but if a question legitimately inquires into what transfers they have made since the signing of the order and basically what they have spent money on since the signing of the order, they will answer the question.” When interrogatories and request for production of documents were served upon the Levitts, they declined to answer on the bases of a lack of relevancy, hardship, and Fifth Amendment provisions against self-incrimination. 4 The Levitts’ declination to answer discovery questions caused MDIF to seek a modification of the August 5, 1985, consent order. The conservator proposed that the Levitts be “restrained from expending in excess of $1,000 per week, exclusive of reasonable attorney’s fees and disbursements, for their personal living expenses.” Not surprisingly, the Levitts resisted the proposed amendment.

Judge Kaplan, however, granted MDIF’s motion. He directed: “Jeffrey A. Levitt and Karol Levitt ... are restrained from expending in excess of $1,000 per week, exclusive of educational expenses (i.e., tuition, room, board, books and laboratory fees) for their two sons and reasonable attorneys’ fees and disbursements, the limitation of $1,000 per ⁵³¹ week being applicable on a combined basis and not for each individual Defendant____” Counsel for the Levitts contended that the court “should grant four thousand dollars a week for expenses because that would include what has to be provided for.” In response, Judge Kaplan said: “I told you yesterday [and] I tell you again today ... that ... until Mr. Levitt through you presents me with a list of their fixed monthly expenses, which they’re obligated to pay in order to survive without foreclosures or without food and utilities I will leave my order in the form that I have dictated it into the record. When you can establish to me that there is some error in the amount set forth in that order because of his need, his fixed needs, I will consider it as a motion to modify the limitation of that order.” This appeal ensued. I The Jurisdictional Issue The Levitts aver that the circuit court was without jurisdiction to issue the injunction, notwithstanding their consent.

They ground their argument on four cases: Kinsey v. Drury, 141 Md. 684, 689-690 , 119 A. 646, 648-649 (1922); Frederick County Nat’l Bank v. Shafer, 87 Md. 54, 59 , 39 A. 320, 321 (1898); Balls v. Balls, 69 Md. 388, 389 , 16 A. 18, 19 (1888); Morton v. Grafflin, 68 Md. 545, 562 , 13 A. 341 , 346, motion overruled, 68 Md. 567 , 15 A. 298 (1888), and on Maryland Courts and Judicial Proceedings Code Ann. § 3-301 et. seq. In each of the above cases, a creditor endeavored to secure a prejudgment injunction to prevent an alleged debt- or’s disposition of property pending civil litigation. The Court of Appeals turned aside the creditor’s attempts. The Levitts assert that under the holdings of the quartet of Kinsey, Frederick County Nat’l Bank, Balls, and Morton, MDIF’s exclusive remedy was statutory.

The position ⁵³² of the Levitts is that unless a statute specifically permits an attachment on original process — a prejudgment attachment — a court lacks authority to impound assets. The statute that sanctions prejudgment attachments is found in Maryland Courts & Judicial Proceedings Code Ann. § 3-303. There it is provided: “An attachment before judgment may issue in any of the instances in this section. (b) If the debtor is a nonresident individual, or a corporation which has no resident agent in this State, and: (1) The debtor is a person over whom the court could exercise personal jurisdiction pursuant to §§ 6-102, 6-103 and 6-104 of this article; or (2) The action involves claims to property in this State which property is to be attached; or (3) The action is any other in which the attachment is constitutionally permitted.

(c) If a resident individual defendant or an agent authorized to accept process for a corporation has acted to evade service. (d) If the debtor has absconded or is about to abscond from the State; or if an individual has removed, or is about to remove, from his place of abode in the State with intent to defraud his creditors. (e) (1) If the debtor is about to assign, dispose of, conceal, or remove his property or a portion of it from the State with intent to defraud his creditors; or (2) If the debtor has done any of these acts, fraudulently contracted the debt or incurred the obligation which is subject of the pending action. (f) If the debtor is deceased and an adult nonresident is entitled by descent or devise from the debtor to any land or interest in land in the State, an attachment may issue against that land or interest held by descent or devise from the person indebted.

(g) If any person who is required to be but is not licensed and bonded under the provisions of Article 56, ⁵³³ § 257 of the Code, in an action against that person arising out of a home improvement transaction.” The only one of the five instances of permitted prejudgment attachments that arguably applies to the instant case is subsection 3-303(e). That subsection, however, is governed by Cts. & Jud.Proc.Art. § 3-304(b), which mandates that an attachment for fraud, § 3-303(e) “may issue only in an action based on contract for liquidated damages.” The allegations in MDIF’s complaint are a mixture of tort and contract; in any event, the damages are unliquidated and the statute does not, therefore, apply. Because the relief sought by MDIF does not fit within any of the five statutorily authorized prejudgment attachments, the Levitts maintain that the trial court was without jurisdiction to issue the injunction. Furthermore, the Levitts argue that it is immaterial that they consented to the injunction of August 5, 1985, since it is axiomatic that parties may not by consent confer subject matter jurisdiction upon a court.

Attorney Griev. Comm’n. v. Hyatt, 302 Md. 683, 690 , 490 A.2d 1224, 1227 (1985); Kawamura v. State, 299 Md. 276, 282 , 473 A.2d 438, 441 (1984); Anthony Plumbing of Md. v. Atty. Gen., 298 Md. 11, 15-16 , 467 A.2d 504, 506 (1983); Highfield Water Co. v. Wash. Co. San., 295 Md. 410, 414 , 456 A.2d 371, 373 (1983); Smuck v. Anne Arundel County, 55 Md.App. 163, 166 , 461 A.2d 42, 43 (1983).

Their consent to the order of the circuit court is meaningless, the Levitts declare, and the entire proceeding in the trial court was and is a nullity. We turn now to the foundation upon which the Levitts have built their argument. Balls and Morton appear to support their position. In the Balls case, the Court said: “Except where changed by statute, it is an invariable rule that the holder of a debt cognizable at law cannot obtain relief in equity, until he has shown that his legal remedies are inadequate.

If he seeks to subject real estate to the payment of his debt, he must obtain a judgment creating a lien upon it; if he is pursuing person ⁵³⁴ al estate, he must obtain a lien by an execution on his judgment. When he has by these means acquired an interest in his debtor’s property, he will be in a condition to ask the aid of a Court of Equity; if, in other respects, he can show a case within its jurisdiction. Wiggins v. Armstrong, 2 John.Ch. 144; Brinkerhoff v. Brown, 4 John.Ch. 671; Birely v. Staley, 5 G. & J. 432 ; Griffith v. Bank, 6 G. & J. 424 . The Act of 1835, ch. 380, sec. 2, dispensed with the necessity of a judgment in all cases of proceedings in equity ‘to vacate any conveyance or contract or other act as fraudulent against creditors.’ This Act clearly has no application where the thing complained of has not been executed, but rests merely in contemplation or intention.” 69 Md. at 389 , 16 A. at 19 .

The Morton Court declared that before a creditor has standing in an equity court, he must first obtain a judgment against the debtor. An exception, however, is permitted by Morton in those particular instances where a debtor has “fraudulently conveyed away” property. Morton, 68 Md. at 562 , 13 A. at 346. The key words, “fraudulently conveyed,” we observe, are in the past tense, and Morton makes clear that the fraudulent conveyance must have previously transpired and not simply be contemplated, expected or anticipated by the creditor.

In short, the conveyance must be a fait accompli and not merely a notion. We do not read Kinsey and Frederick County Nat’l. Bank to be entirely supportive of the Levitts’ position. Those two cases appear to have narrowed the broad holdings of Balls and Morton.

Kinsey comments that there was nothing “to be found in the record [of that case] to support the charge of fraud” and that “[a] mere charge of fraud unsupported by the facts upon which it is based sufficient to justify the inference is entitled to no consideration in a case such as this. ” 141 Md. at 691 , 119 A. at 649 (emphasis supplied). Frederick County Nat’l. Bank ⁵³⁵ contains the observation that, “[T]he claim of the plaintiff is purely a legal one, and it is simply a general creditor without a judgment to establish the indebtedness of the defendant or the amount due. There is no suggestion of fraud on the part of the defendants, or any of them.” 87 Md. at 55 , 39 A. at 320 (emphasis supplied).

As we have previously observed, the complaint in the instant case was brought at law, but MDIF sought equitable relief. Indubitably, law courts are empowered to issue injunctions and require accountings. 5 Historically, courts of equity have enjoined fraud, provided the charge is supported by sufficient facts. Harper v. Clayton, 84 Md. 346 , 35 A. 1083 (1896); Barron v. White-side, 89 Md. 448, 457-458 , 43 A. 825, 826 (1899); Conner v. Groh, 90 Md. 674 , 45 A. 1024 (1900); Carozza v. Federal Finance & Credit Co., 149 Md. 223, 238 , 131 A. 332, 338 (1925); Rabinowich v. Eliasberg, 159 Md. 655, 663 , 152 A. 437, 440 (1930). Maryland courts have not heretofore held that a court, based on an allegation of fraud, may enjoin a debtor from dissipating or disposing of assets pending a potential judgment.

A number of other jurisdictions, however, have so ruled. Those courts ground their decisions on the reasonable necessity, in the interest of justice, of provisionally impounding the property of the debtor. See 116 A.L.R. 311 . See also Davenport v. Bartlett & Waring, 9 Ala. 179 (1846); Pearson v. Tucson Farms Co., 204 Ill.App. 276 , (1917). ⁵³⁶ Those out-of-State decisions conflict with Balls, 69 Md. 388 , 16 A. 18 , and Morton, 68 Md. 545 , 13 A. 341 , but the conflict is of no concern because Balls and Morton, while still viable, are readily distinguished from the matter before us.

In neither Balls nor Morton was fraud alleged; in neither Balls nor Morton did the defendants consent to the issuance of the injunction. We regard those differences as significant. The significance of an allegation of fraud was recognized by the Court of Appeals in Kinsey and Frederick County Nat’l. Bank in which the Court skillfully carved an exception from the Balls and Morton holdings and applied the principle that “where fraud exists, equity is equal to the occasion.” Crocker v. Pitti, 179 Md. 52, 58 , 16 A.2d 875, 877 (1940).

Patently, except as provided by statute, 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 perpetrated a fraud. If that were the law, one can foresee that virtually every complaint would assert fraud, if for no other reason than to create a more advantageous position for the claimant by permitting him a measure of control over a defendant’s assets. From that command position, a claimant could conceivably dictate a defendant’s unconditional surrender. Hence, the use of prejudgment injunctions to freeze assets of a debtor must be cautiously scrutinized.

Nevertheless, there are extraordinary situations not covered by Cts. & Jud.Proc. Art. § 3-303 in which precisely that kind of precautionary action is not only desirable, but necessary. We recognize that this precise issue has not been decided in Maryland heretofore, but equitable principles are broad, and a court of equity is not deprived of jurisdiction merely because the subject before it is new. Wells v. Price, 183 Md. 443, 452 , 37 A.2d 888, 893 (1944); Doe v. Commander, Wheaton Police Department, 273 Md. 262, 273-74 , 329 ⁵³⁷ A.2d 35, 42 (1974); see also C.C. Brown, The Law/Equity Dichotomy in Maryland, 39 Md.L.Rev. 427, 436 (1980).

The Court of Appeals has recognized that equity attaches in “all cases of fraud where ... [equitable] intervention will result in avoiding the consequences of the fraud ... [except where] there is a full, adequate, and complete remedy at law.” Anderson v. Watson, 141 Md. 217, 231 , 118 A. 569, 574 (1922); see also Baltimore Sugar Ref. Co. v. Campbell & Zell Co., 83 Md. 36, 40 , 34 A. 369, 372 (1896). There is, as we have seen, no adequate remedy at law in the case at bar. It has been said that a court is empowered to “look beyond the ability of damages to make a party whole and also consider the adverse party’s financial ability to fulfill the legal remedy.” The Law/Equity Dichotomy in Maryland, supra, at 434.

To that end a court, of necessity, must be permitted to enjoin dissipation of assets from which recovery is to be made, particularly when the defendants consent. Applying general equitable principles to the instant case, we hold 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. The injunctive relief is extraordinary, but the matter before us requires an extraordinary remedy. Accepting, arguendo, that the averments of the complaint are true, the fraud perpetrated is colossal.

Millions of dollars of time deposits have allegedly been converted, diverted or perverted from Old Court depositors into the pockets of the defendants. The fraud case, however, has yet to be adjudicated on its merits, and the charges may prove unfounded. That issue is to be decided by another court at another time in another place. ⁵³⁸ II Consent Order Violation The consent order of August 5, 1985, 6 provided in pertinent part: “During the pendency of this litigation, Defendants, ... and each of them with their consent are enjoined from removing, transferring alienating, pledging or otherwise impairing any assets in which Defendants have any direct or indirect interest, ... except upon application in writing to Plaintiff and the Court ... provided, however, Defendants may transfer assets without notice to Plaintiff or the Court as follows: 1. Each individual Defendant may transfer assets for ordinary and necessary personal living expenses not to exceed the level of expenses required to maintain Defendant’s standard of living as of May 13, 1985; 2.

Each Defendant may transfer assets in the ordinary course of business and to meet ordinary and necessary business expenses; and 3. Each Defendant may use his, her, or its assets to compensate attorneys for legal expenses at their normal hourly rates, plus disbursements.” 7 The transcript of the proceedings concerning the agreement to the consent order includes the following significant passages: “I expect discovery to proceed in the ordinary course with cooperation by all counsel, and I have been assured by all counsel that they will cooperate to the extent they can cooperate. There is, of course, a criminal investigation which involves some of the defendants, and obviously there are constitutional rights that have to be abided by ⁵³⁹ in any civil matter which is pending during the time that the criminal investigation is pending. When I say ordinary, discovery will proceed ..., I mean as far as a timetable is concerned, no motion will delay discovery except a motion that concerns a particular item of discovery.

For example, if an interrogatory is inappropriate, ... there will be a hearing on the question of whether it is an appropriate interrogatory; but other than that which concerns the particular item of discovery, there will be no delays____ I am going to ask each of the counsel for the defendants ... if they agree to my statement concerning what the consent decree will be all about and to the discovery procedure. Let me start with Mr. Sandler. [8] MR. SANDLER: ... Your Honor