The opinion of the court was delivered by: Robert B. Kugler United States Magistrate Judge
HONORABLE STANLEY S. BROTMAN
KUGLER, United States Magistrate Judge
This matter is before the Court pursuant to 28 U.S.C. § 636(c)(1), Fed. R. Civ. P. 73(b) and Rule 73.1 of the Local Civil Rules for the United States District Court for the District of New Jersey on the consent of the parties to have this matter decided by a United States Magistrate Judge. Presently before the Court is Plaintiff Geoffrey Steiert's motion for a preliminary injunction. This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1331. For the reasons discussed below, Plaintiff's motion is denied. Facts and Procedural History
This action arose from a series of loans made by Plaintiff Geoffrey Steiert to Defendant Mata Services, Inc., ("Mata Services") and its affiliates. See Declaration of Geoffrey Steiert submitted in support of Plaintiff's Motion for a Preliminary Injunction at ¶ 3. In his complaint, Plaintiff alleges that he was induced to make these loans by certain misrepresentations made by Defendant Mata Services and its agents. See id. at ¶ 4. Among the misrepresentations that Plaintiff alleges are i) that Mata Services was well-capitalized and had no debt; ii) that his loans were secured; iii) that his loans would be converted to stock upon Securities and Exchange Commission ("SEC") approval of Mata Services' stock offering; and iv) that Mata Services had enough cash to repay the loans on demand at any time before the SEC approval of Mata Services' offering. See id. Plaintiff alleges that when he demanded repayment of the loans in April and May of 1998, "Defendants claimed they were unable to pay [him] due to an ongoing SEC `audit' of [Defendants'] bank accounts." Id. at ¶ 7.
On or about June 19, 1998, the Attorney General of the State of New Jersey filed a civil action against Mata Services, Ki Digital, Inc. ("Ki Digital") and Charles McCormick seeking injunctive and monetary relief. See Brief of Mata Services, Inc., Ki Digital, Inc., Mata Services, LLC, Ki Digital, LLC, Iridium, LLC, Film East, LLC, Screenworks, LLC, and Ki Management, LLC, (collectively the "Corporate Defendants") filed in Opposition to Plaintiff's Motion for a Preliminary Injunction ("Corporate Defendants' Brief") at 1; see also Exhibit N to Exhibits to Plaintiff's Motion for a Temporary Restraining Order, Preliminary Injunctive Relief and Other Equitable Relief ("Plaintiff's Exhibits").
The complaint in the state court action alleges that Mata Services changed its name to Ki Digital in September, 1997 and operates through a number of subsidiaries including Mata Services, LLC, Ki Digital, LLC, Iridium, LLC, Film East, LLC, Screenworks, LLC, and Ki Management, LLC. See Plaintiff's Exhibit N at ¶ 2. The state court complaint also alleges that Mata Services and Ki Digital, through its officers, directors, employees and agents, including Defendant Charles McCormick, issued securities as defined by New Jersey law. See id. at ¶¶ 4-11. The state court complaint also alleges that the defendants' offering materials did not disclose or otherwise materially misstated i) "the intended uses for the invested funds"; ii) "the nature and extent of any risks associated with the investments"; iii) "Mata and Ki Digital's financial statements"; iv) "Mata and Ki Digital's financial condition, access to capital, operating results and outlook"; and v) "the ability of Mata and Ki Digital to repay the principal of and interest on the promissory notes." Id. at ¶ 12. The state court complaint further alleges that in or about June 1997, Mata Services and Ki Digital issued more than 500 promissory notes with a face value of more than $11,000,000.00. See id. at ¶ 13. Ki Digital and the New Jersey Bureau of Securities entered into a consent order on June 19, 1999. See Plaintiff's Exhibit O. The consent order enjoined Ki Digital, its successors, affiliates and agents from issuing securities in New Jersey. See id. at ¶ 1. The consent order further enjoined Ki Digital, its successors, affiliates and agents from disposing of assets except as approved by the court-appointed receiver. See id. at ¶ 3. By the consent order, the court appointed Robert G. Stevens, Esquire, as a receiver of Ki Digital and vested in him broad authority over Ki Digital, its successors and affiliates. See id. at ¶¶ 5-10.
As part of his court-ordered duties, Mr. Stevens filed with the court a report titled "Report of Robert G. Stevens, Receiver, to the Honorable Harry A. Margolis," in which Mr. Stevens reported on the general financial condition of the Corporate Defendants. See Plaintiff's Exhibit T. In his report, Mr. Steven found, among other things, that certain promissory notes issued by the Corporate Defendants "were not registered [securities] nor were they exempt from registration and, with the other violations of the New Jersey Securities Law, resulted in the entering of the Consent Order." Id. at 8-9. Mr. Stevens further found that certain notes issued in connection with Mata Services' factoring transactions also violated New Jersey securities laws and ordered that Ki Digital issue no additional promissory notes of any kind. See id. at 9-10.
On April 8, 1999, Plaintiff filed an emergent application for a Temporary Restraining Order, Preliminary Injunction and Expedited Discovery in this Court. See Plaintiff's Motion for Temporary Restraining Order and Preliminary Injunction and Expedited Discovery ("Plaintiff's Motion") at 2. In his moving papers, Plaintiff alleges that "Defendants are still engaged in a fraudulent scheme to manipulate and disburse funds to the individual Defendants and various third parties, to the detriment of Plaintiff." Id. at ¶ 5. Plaintiff further alleges that he "was made privy to a telephone message left by Defendant Kathy Schroeder with Dennis Taylor wherein she specifically indicated that `funds' had cleared in Chuck McCormick's bank accounts and would shortly be disbursed." Id. Plaintiff further alleges that the defendants were engaged in a scheme to move "`millions' of funds throughout the United States." Id. Plaintiff claims that absent temporary restraints he would be irreparably harmed by the defendants' conduct because he would not be able to locate the defendants' corporate assets to enforce any judgment he might receive in this Court. See id.
Plaintiff sought through his application a temporary restraining order "freezing each and every account owned or controlled by any of the Defendants named herein (except to the extent controlled by the State Court receiver); freezing such accounts until further disposition of these proceedings by this Court, including a K.A.M. Enterprises, Inc. account located at Commerce Bank, Account No. 3679197; and further restricting the Defendants from disbursing to themselves or any third party any funds, and that the defendants notify all of their agents and brokers that their accounts have been frozen and that such agents should no longer distribute any further monies distributed to them by the Defendants until further order by this Court." Plaintiff's Motion at 4- 5. Plaintiff further sought expedited discovery through a court order requiring the defendants to appear for deposition and produce documents regarding the defendants' ongoing business activity and bank accounts. See id. at 5.
On April 8, 1999, the Court instructed Plaintiff's counsel, Thomas S. Harty, to inform all parties in this action by telephone that the Court will conduct a hearing on Plaintiff's application for a Temporary Restraining Order that same day at 3:00 p.m. Mr. Harty appeared at the hearing on behalf of Plaintiff and Kevin M. Hart, Esquire, appeared by telephone on behalf of the receiver and the corporate defendants. No other parties appeared for the hearing in person or by telephone.
After considering the papers submitted with Plaintiff's application and hearing the arguments of Mr. Harty and Mr. Hart, the Court denied Plaintiff's application for a Temporary Restraining Order because, among other things, Plaintiff had not demonstrated to the Court with sufficient particularity how he would suffer irreparable harm if the Court denied his application, Plaintiff failed to satisfy his obligation to post a bond pursuant to Fed. R. Civ. P. 65(c) before the Court issued temporary restraints, and Plaintiff had not demonstrated to the Court that the scope of the order was narrowly tailored to encumber those assets Plaintiff might recover after judgment. The Court further ordered the parties to appear for a hearing on Plaintiff's application for a Preliminary Injunction on April 13, 1999 at 2:00 p.m., and ordered Plaintiff's counsel to fax a copy of the Court's order to all counsel of record. The Court further ordered that any written opposition to Plaintiff's application must be received by the Court no later than April 12, 1999 at 5:00 p.m. Submissions of the Parties
Plaintiff's moving papers consisted of a document entitled "Motion for Temporary Restraining Order and Preliminary Injunction and Expedited Discovery," which appears to be in substance a short memorandum of law in support of Plaintiff's motion, a Declaration of Geoffrey L. Steiert, Esquire, a Declaration of Thomas Yarnall, a Declaration of Dennis Taylor, a Declaration of Thomas S. Harty, Esquire, and a bound volume of exhibits A through V. The exhibit volume contains, among other things, letters and newsletters from the defendants soliciting investors' money and purporting to inform investors of various business enterprises, see Exhibits A, C1, C2, C3, C4, D, F, H, I, L and U, promissory notes signed by certain defendants evidencing loans made to Plaintiff and other investors, see Exhibits B, E, G, J, K and M, the complaint filed by the Attorney General of New Jersey in the state court action, see Exhibit N, the consent order appointing the receiver, see Exhibit O, a report of an audit performed by an accounting firm at he behest of the receiver of Ki Digital and its subsidiaries' consolidated balance sheets, see Exhibit S, the Report of Robert G. Stevens, Receiver, to the Honorable Harry A. Margolis, see Exhibit T.
The thrust of Plaintiff's argument in support of his application for a preliminary injunction is that the defendants are secreting away or otherwise transferring assets that are in various defendants' control and which will be subject to execution if Plaintiff prevails on his claims. See Plaintiff's Motion at ¶ 5. As factual support for his allegations, Plaintiff submits to the Court the declaration of Plaintiff himself, as well as the declarations of two non-parties, Thomas Yarnall and Dennis Taylor.
Plaintiff's declaration recounts the allegedly fraudulent investment scheme and the circumstances surrounding his discovery that he had been defrauded. See Steiert Declaration at ¶¶ 1-54. Plaintiff then discusses in his declaration second-hand accounts he has received about the defendants alleged movement of funds from various bank accounts that are outside the reach of the court-appointed receiver. See id. at ¶¶ 57-63. Many of the allegations contained in Plaintiff's declaration are first and second level hearsay that is offered for the truth of the matter asserted. For example Plaintiff states "Dennis Taylor told me this past week that he has been told by Chuck McCormick and Bill and Kathy Schroeder, that Chuck McCormick is in the process of closing some of the bank accounts he controls, and moving funds into new accounts, for the express purpose of evading discovery of the accounts and monies." Id. at ¶ 62. Finally, Plaintiff alleges that on April 6, 1999 he listened to a message left on Dennis Taylor's answering machine by Kathy Schroeder on which Ms. Schroeder stated that funds would be moved out of a McCormick bank account on either April 8 or April 9. See id. at 63.
The Declaration of Thomas Yarnall, a non-party, also recounts his involvement in the allegedly fraudulent investment scheme conducted by the defendants, and then discusses his discovery of the movement of funds from various bank accounts. Specifically, Mr. Yarnall alleges that "[a]s recently as this past November or December, Bill Schroeder told me that he had just received a check in the approximate amount of $200,000.00, which had been written on a non-Ki Digital account controlled by Chuck McCormick." Yarnall Declaration at ¶ 28. Additionally, Mr. Yarnall alleges that "[m]ore recently, Bill Schroeder told me that Chuck McCormick has been moving millions of dollars through an account not on the books of Ki Digital or its divisions, and that he [Bill Schroeder] is anticipating receiving payment of millions of dollars any day now, either from Chuck McCormick or Kevin McCormick." See id. at ¶ 29.
The declaration of Dennis Taylor, another non-party, similarly recounts his involvement in the defendants' fraudulent investment scheme. The most relevant portion of Mr. Taylor's declaration alleges that he received a payment on a loan he made to Ki Digital from Kevin McCormick, Charles McCormick's brother, in the form of checks drawn on a Commerce Bank account in the name of K.A.M. Enterprises, Inc. See Taylor Declaration at ¶ 29-31. Additionally, Mr. Taylor alleges that McCormick and the Schroeders told him within the past two months "that millions of dollars received in connection with the sale of computer equipment are being cleared by Chuck McCormick through his bank accounts -- one of which is the `K.M.A. Enterprises, Inc.' account." Id. at ¶ 33. *fn1 Mr. Taylor further alleges that "Chuck McCormick and Bill Schroeder have also told [him] that Chuck McCormick is in the process of closing accounts and moving funds to new bank accounts, of concern that the accounts might be discovered." Id. at 34. Curiously, there is no mention in Taylor's declaration of the phone message that Kathy Schroeder left on his answering machine that Plaintiff claims to have listened to on April 6, although Taylor did testify at the April 13 hearing about at least one, and possibly more, phone messages left by Ms. Schroeder.
On April 12, 1999, the Corporate Defendants submitted an opposition brief to the Court through their counsel, Kevin M. Hart and Scott I. Unger. The Corporate Defendants also submitted to the Court a Certification of Robert G. Stevens, Esquire. The Corporate Defendants argue in opposition first that the Court does not have subject matter jurisdiction over this matter because the promissory notes between Plaintiff and certain defendants are not "securities" as defined by federal law. See Brief in Opposition to Plaintiff's Motion for Temporary Restraining Order, Preliminary Injunction and Expedited Discovery ("Opposition Brief") at 4-10. The Corporate Defendants further argue that the Court should not grant Plaintiff's application for preliminary injunctive relief because Plaintiff cannot satisfy the four-pronged analysis that would entitle him to the relief he seeks. See id. at 4-15. Finally, the Corporate Defendants argue that the affidavits Plaintiff submitted in support of his motion violate Rule 7.2(a) of the Local Civil Rules of the United States District Court for the District of New Jersey ("Local Rules") and Fed R. Civ. P. 56(e). See id. at 15-16. The Corporate Defendants claim that Plaintiff's affidavits contain facts outside the personal knowledge of the affaint as well as impermissible factual and legal argument. See id.
Charles McCormick submitted a letter to the Court through his counsel Christopher Porrino, Esquire, in opposition to Plaintiff's application. See Letter from Christopher Porrino, Esquire, to the Court dated April 12, 1999 ("Porrino Letter"). In that letter McCormick states that he joins in the opposition arguments made in the Corporate Defendants' Brief. See id. at 1. McCormick also asserts an objection to the subpoena Plaintiff's counsel served on him requiring him to appear at the April 13 hearing and to produce documents. See id. at 1- 2. McCormick seeks in this letter to quash the subpoena pursuant to Fed. R. Civ. P. 45(c)(3)(A) on the grounds that the subpoena did not allow a reasonable amount of time to comply and that the subpoena subjected McCormick to an undue burden. Notwithstanding McCormick's objections to Plaintiff's subpoena, McCormick appeared at the April 13 hearing through his counsel. At the April 13, 1999 hearing, McCormick, through his attorney, Christopher Porrino, invoked his Fifth Amendment right to remain silent and refused to testify.
On April 12, 1999, William Schroeder, Kathleen Schroeder and Macrophage, Inc., (collectively the "Schroeders") submitted a letter in opposition to Plaintiff's application, and an Affidavit of Defendants William Schroeder, Kathleen Schroeder and Macrophage, Inc. ("Schroeder Affidavit"). In their opposition letter, the Schroeders also join in the Corporate Defendants' opposition brief. See Letter from William N. Levy, Esquire, to the Court dated April 12, 1999 ("Levy Letter") at 2. The Schroeders also object to Plaintiff's subpoena pursuant to Fed. R. Civ. P. 45(c) on the grounds that the subpoena did not provide them with a reasonable amount of time to respond and is unduly burdensome. See Schroeder Affidavit at ¶ 2. Additionally, the Schroeders state in their opposition that they will not attend the April 13 hearing or produce any responsive documents on April 13 because they have planned a trip to Jamaica and will be departing on the morning of April 13. See id. at ¶ 3; Levy Letter at 1-2.
The Schroeders refused to appear at the April 13, 1999 hearing because of their pre-planned vacation in Jamaica, but were represented at the hearing by their attorney William Levy, Esquire. The Court ordered the Schroeders to appear before it for a hearing on April 19, 1999 at 1:30.
On April 13, hours before the hearing scheduled for 2:00 p.m., Plaintiff submitted a written reply to the defendants' opposition. See Letter from Thomas S. Harty, Esquire, to the Court dated April 13, 1999 ("Plaintiff's Reply"). In his reply papers, Plaintiff points out that the defendants' opposition is devoid of any facts that rebut Plaintiff's claims that the Schroeders and Charles McCormick are moving funds in and out of various bank accounts. See id. at 2. The remainder of Plaintiff's reply addresses the substance of the defendants' legal argument that Plaintiff is not likely to succeed on the merits in this matter.
On April 19, 1999, Plaintiff submitted to the Court a Supplemental Declaration of Geoffrey L. Steiert. Plaintiff's supplemental declaration explains a transaction he entered into in 1998 that permitted him to convert his IRA into a Roth IRA, and further sets forth the amount of damages he claims. The April 13, 1999 Hearing
The Court convened the hearing on April 13, 1999. In attendance at the hearing were Plaintiff's counsel, Thomas Harty, Plaintiff Geoffrey Steiert, counsel for Charles McCormick, Christopher Porrino, counsel for the Schroeders, William Levy, counsel for the Corporate Defendants and the court-appointed receiver, Kevin Hart, the court-appointed receiver, Robert Stevens, and John Eastlack, counsel for ...