Teferi v. Dupont Plaza Associates

⁵⁶⁸ KARWACKI, Judge. On March 2, 1988, appellee, Dupont Plaza Associates (DPA), filed suit in the Circuit Court for Montgomery County against Abraham Teferi, appellant, seeking compensatory and punitive damages. DPA’s three count complaint, alleging conversion, fraud, and breach of fiduciary duty, related that Teferi had embezzled over $50,000 from DPA while employed by it. DPA also moved for an ex parte injunction and interlocutory injunction enjoining Teferi from transferring or otherwise disposing of his assets under certain conditions prior to final judgment in the action.

On the day the complaint was filed, Judge James S. McAuliffe, Jr. issued the requested ex parte injunction which complied with Rule BB72(b). 1 A hearing on the motion for interlocutory injunction was scheduled before Judge William C. Miller for March 14, 1988. At the beginning of the hearing before Judge Miller, appellant moved to dissolve the ex parte injunction. Judge Miller declined to rule on that motion and directed appellant to Judge McAuliffe who, in a memorandum dated March 14, 1988, denied appellant’s motion. After one and one-half days of testimony and the introduction of numerous exhibits, Judge Miller issued an interlocutory injunction.

It is from these two orders that appellant now appeals. He raises two issues for our review: I. The circuit court (Miller, J.) erred in issuing an extraordinary prejudgment attachment-type injunction because ⁵⁶⁹ it failed to apply the standard for such relief set forth in Levitt v. State of Maryland Deposit Insurance Fund Corporation, 66 Md.App. 524 , 505 A.2d 140 (1986).

II

The circuit court (McAuliffe, J.) erred in not dissolving the ex parte injunction upon the defendant’s uncontroverted evidence that the plaintiff intentionally failed to give notice to opposing counsel with whom it was negotiating. We shall affirm the judgment that the interlocutory injunction should issue. We decline to address the second issue because of its mootness. FACTS DPA is a limited partnership which owns and operates the Dupont Plaza Hotel (Hotel) in Washington, D.C. Appellant was employed by DPA as the controller for the hotel on October 24, 1983.

He continued in that capacity until February 17, 1988, when he was suspended from his position without pay. As the controller, appellant was responsible for maintaining the hotel’s books and records, transacting the hotel’s banking business, including bank deposits and withdrawals, and supervising the payment of the hotel’s employees. In January of 1988, David Thomas, an operations analyst assigned to the hotel’s accounting department, discovered that a check payable to the hotel for $1,305.25 from the Barclay Hotel had been received by the hotel but was not listed on the list which routinely recorded all checks received by the hotel on a given day. Mr. Thomas also noted a similar irregularity concerning another check for $1,243.55 payable to the hotel from the Center for Defense Information.

Mr. Thomas reported these discrepancies to his superiors and an investigation was initiated. That investigation implicated Teferi in the discrepancies, and on February 17, 1988, Scott Murdoch, the hotel’s general manager, suspended appellant from employment by DPA. ⁵⁷⁰ Immediately after Mr. Murdoch advised appellant of the suspension, he escorted Teferi to the controller’s office so that he could collect his personal belongings before leaving the hotel. Mr. Murdoch briefly left appellant’s office to make a telephone call. At that moment appellant attempted to destroy various documents contained in his office including cash control work sheets, journal vouchers, and financial statements.

After appellant left the hotel, his office was secured. The mutilated documents were subsequently turned over to Randy Weaver, a certified public accountant in private practice, who was retained by the hotel to investigate the nature and extent of the suspected embezzlement. At the hearing on the interlocutory injunction motion, Mr. Weaver was qualified as an expert witness and testified in detail as to the nature and extent of his analysis and as to his conclusions regarding the misappropriation of the hotel’s funds by Teferi. In Weaver’s opinion, Teferi had employed two principal methods to accomplish the embezzlement, both of which involved the hotel’s “payroll exchange.” In order to fulfill a requirement of its union contract the hotel cashed the paychecks of certain employees each weekly payday.

To do so, each payday a “payroll exchange fund” was withdrawn from the hotel’s operating account. This fund was utilized to cash payroll checks endorsed by employees to the hotel. After all paychecks had been cashed, the remaining cash left from the fund plus the endorsed checks were customarily returned to the controller’s safe for redeposit to the hotel’s operating account. The combination of the remaining cash and checks should have equaled the total amount withdrawn from the payroll exchange fund.

Testimony from other witnesses at the hearing indicated that appellant was the only one who knew the combination to the safe which was located in his office. First, Mr. Weaver testified that on three occasions the payroll exchange fund of cash and endorsed checks was never redeposited into the hotel’s operating fund. Nevertheless, in each instance the hotel’s books, for which Mr. ⁵⁷¹ Teferi was responsible, reflected that a $15,000 deposit to the operating account had been made. In order to cover the failure to redeposit these funds, monies were transferred from the hotel’s savings account to the operating account.

For example, Mr. Weaver determined that in November of 1987, $90,000 was transferred from the savings account to the operating account, while only a $75,000 transfer was recorded on the hotel’s books. It was alleged that the appellant was the only person in the accounting department authorized to initiate transfers between these accounts. Second, Mr. Weaver asserted that appellant cashed checks payable to the hotel with cash from the “payroll exchange fund” and then made false journal entries on the hotel’s books to cover for the missing checks. For example, Weaver discovered that the $1,243.55 Center for Defense Information check had been cashed by Teferi through the “payroll exchange fund.” Appellant did not testify at the hearing because at that time criminal charges, arising out of the alleged embezzlement, were pending against him.

Nevertheless, he vigorously cross-examined all witnesses presented by DPA and called four witnesses on his own behalf. Appellant asserted, based on the testimony of two co-workers, that he was not responsible for the deposit slips and journal entries in question. His counsel argued, without any supporting evidence, that appellant was suspended for reporting bookkeeping irregularities that his superiors were directing him to commit in order to “cook the books” so the hotel could acquire a 12.5 million dollar loan. I. Interlocutory Injunction A. Jurisdiction The case sub judice is the first instance since our decision in Levitt v. Maryland Deposit Insurance Fund, 66 Md.App. 524 , 505 A.2d 140 (1986), where we are asked to review a trial court’s grant of a prejudgment injunction that conditionally impounds the appellant’s assets.

In its motion ⁵⁷² for an interlocutory injunction, appellee asked the court to enjoin “defendant Abraham Teferi from removing, transferring, alienating, pledging or otherwise impairing any assets in which he has a direct or indirect interest ... pending a final adjudication in this case.” 2 Conceding that it could not proceed under the Maryland statute that authorizes prejudgment attachments in cases of fraud, Cts. & Jud. Proc.Code Ann. (1984 Repl.Vol., 1988 Supp.), § 3-303(e), 3 because that subsection is governed by § 3-304(b) which mandates that an attachment for fraud “may issue only in an action based on contract for liquidated damages,” appellee argues that Levitt is controlling. ⁵⁷³ In Levitt , the appellants, Jeffrey and Karol Levitt, argued that the Circuit Court for Baltimore City was without subject matter jurisdiction to issue a prejudgment injunction impounding their assets. 4 The Levitts further maintained that even though they consented to the imposition of the injunction, the court was without jurisdiction to issue it because one cannot, by consent, confer jurisdiction upon a court. (Citing Attorney Grievance Commission v. Hyatt, 302 Md. 683, 690 , 490 A.2d 1224 (1985)). Acknowledging that “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,” Levitt, supra, 66 Md.App. at 535 , 505 A.2d 140 , we held that the trial court did have jurisdiction to order such an injunction under the facts in Levitt Speaking for the Court, Chief Judge Gilbert stated: 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.

Id. at 537 , 505 A.2d 140 . Appellant argues that Levitt carved out a very specific exception to the general rule against prejudgment attachment type injunctions as established in Balls v. Balls, 69 Md. 388 , 16 A. 18 (1888). In Balls the Court of Appeals held that a court of equity could not, at the instance of a holder of a promissory note, enjoin the maker of the note from conveying his property on the ground that the object of such conveyance was to delay and hinder the creditor in collecting his debt, since the holder had not first obtained a judgment at law. The Court stated: ⁵⁷⁴ 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 personal 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 Johns. Ch., 144; Brinkerhoff v. Brown, 4 Johns.

Ch., 671 ; Birely v. Staley, 5 Gill & J., 432; Griffith v. Frederick Co. Bank, 6 Gill & J., 424. The Act of 1835, ch. 380, section 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 389-90 , 16 A. 18 . Balls, Morton v. Grafflin, 68 Md. 545, 562 , 13 A. 341 , 15 A. 298 (1888); Frederick County National Bank v. Shafer, 87 Md. 54, 59 , 39 A. 320 (1898); and Kinsey v. Drury, 141 Md. 684, 689-90 , 119 A. 646 (1922), all stand for the proposition that a court of equity does not have jurisdiction to enjoin a debtor from disposing of his property unless a court of law first enters judgment against him. “It would be practically equivalent to an attachment in equity, which is purely a creation of statute, and does not exist in this State.” Frederick County Nat’l Bank, supra, 87 Md. at 59 , 39 A. 320 . Without statutory authority, fraud or other grounds of equity jurisdiction, a court of equity has no such power.

Harper v. Clayton, 84 Md. 346, 354 , 35 A. 1083 (1896). “A Court of Equity, however broad and far reaching its powers are, cannot create new rights, not before existing at law, and then take jurisdiction to pass upon and enforce them because the law affords no remedy.” Id. at ⁵⁷⁵ 352, 35 A. 1083 . In none of these aforementioned cases was fraud alleged. In Levitt , we distinguished these venerable cases and explained: ... 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.