“Put It Back” — Trial Court’s Preliminary Injunction Requiring Restoration of Disputed Sale Proceeds Upheld on Appeal
Real estate investment ventures often disintegrate into infighting and litigation. For examples, look no further than our companion blog The LLC Jungle.
In litigation, a court will sometimes issue a preliminary injunction order aimed at preserving (or restoring) the pre-litigation “status quo.” The court’s ability to issue such relief was on display in a case recently filed by California’s Second Appellate District — Kapoor v. Halaby. While the opinion is unpublished and therefore not binding precedent, it still provides a useful guidepost.
Facts: parties invest in real estate together with sloppy documentation and messy transactions
Kenny Kapoor, Zalfa Halaby, and Charles Elkins entered into a real estate venture together. They formed South Shore, LLC for that purpose.
Their arrangement was not documented well. Two different versions of South Shore’s articles of organization were filed with the Secretary of State — one stated that the LLC had a single (unidentified) manager, but another stated that both Kapoor and Halaby were managers. The initial operating agreement stated that Kapoor owned 100%, but another version stated Kapoor owned 50% and Halaby and Elkins each owned 25%. Tax documents supported the existence of Halaby’s and Elkins’ interests. A later amended operating agreement put the ownership at Kapoor 50% and Halaby 50%.
South Shore acquired real estate in Texas and California, including property in Valencia where Halaby and Elkins resided. The parties disputed the source of funds used for the down payment. The parties also obtained a mortgage loan for the remainder of the purchase price.
The relationship between the parties broke down. Halaby claimed that the parties agreed to dissolve South Shore and divide its real estate portfolio with the Valencia property going to her and Elkins, which was documented by a resale agreement.
An odd series of transactions followed: Halaby attempted to transfer the Valencia property from South Shore to a different LLC owned by her and Elkins, but they put the wrong LLC name on the grant deed belonging to an unrelated suspended entity. Later, an individual named Clifford Sullivan purported to step into the shoes of the suspended entity and deeded the property back to South Shore for no consideration, and then purchased the property from South Shore.
Meanwhile, South Shore was significantly behind on the mortgage for the Valencia property. Halaby and Elkins negotiated with the loan servicer, Fay Servicing, LLC (Fay), and agreed on a note payoff. Halaby and Elkins wired $350,000 to Fay in May 2021 and were due to pay the balance in June 2021. The $350,000 that Halaby and Elkins paid to Fay was credited to South Shore in its purported sale of the property to Sullivan. The final settlement statement for that transaction showed that South Shore ultimately received $341,970.98.
Trial court: preliminary injunction granted requiring restoration of sale proceeds
The litigation kicked off with multiple claims and cross-claims.
Kapoor alleged that she had put up several hundred thousand dollars toward the venture, that the documents reflecting Halaby’s and Elkins’ ownership interests were falsified, and that Halaby and Elkins converted funds.
Halaby and Elkins alleged that Kapoor violated their agreement that Kapoor would front money for real estate that Halaby and Elkins would rehabilitate and manage, with the two sides having an equal interest in the venture’s assets and income, and asserted a right to the $350,000 they had paid to the loan servicer Fay. Halaby and Elkins also asserted claims against Sullivan based on ownership of the Valencia property.
During a deposition, Kapoor confirmed that South Shore received $341,970.98 upon closing the sale of the Valencia property to Sullivan, and those funds were in South Shore’s bank account. Kapoor’s attorney stipulated on the record that the money would remain in that account during the litigation.
However, the money did not remain in the account. It was depleted to less than $10,000, with most of the withdrawals going directly to Kapoor and some to her attorney and expert witness.
Halaby and Elkins filed a motion for a preliminary injunction compelling Kapoor and South Shore to return the withdrawn funds to the account.
The trial court granted the motion. Kapoor appealed.
Court of Appeal: affirmed; trial court acted within its discretion and did not err
The Court of Appeal affirmed.
The court first addressed Kapoor’s argument that her attorney’s stipulation to preserve the funds in the bank account was not binding on her under Code of Civil Procedure section 283. The court held this issue was “largely irrelevant” because the injunction order depended on the traditional factors of likelihood of success on the merits and the balance of harms. On those factors, the court held the record supported the trial court’s ruling.
As to likelihood of success on the merits of Halaby’s and Elkins’ claim to the $350,000 paid to Fay, the trial court’s findings in favor of Halaby and Elkins were justified by the record. Halaby and Elkins demonstrated that Kapoor was, at least, a joint venturer who owed them fiduciary duties, and that Kapoor breached those duties by “selling the Valencia property and taking the proceeds for herself.” The court also noted there was “no genuine dispute these proceeds included Halaby and Elkins’ personal funds held by Fay.”
The court also agreed with the trial court that the balance of harms strongly favored Halaby and Elkins, noting they presented credible evidence that if they obtained a favorable judgment regarding the $350,000 and ownership of the Valencia property, “they will need the money immediately to pay off the note. Foreclosure would cause irreparable harm.”
The court also rejected Kapoor’s argument that the trial court exceeded its authority by going beyond ordering preservation of funds in an account and instead ordering the return of funds that had already been withdrawn. Based on the evidence in the record — e.g., Kapoor’s withdrawal provided no benefit whatsoever to Halaby, Elkins, or the property; Kapoor never contended that she lacked the funds necessary to comply with the injunction; and Kapoor’s attorney’s stipulation had provided assurances to Halaby and Elkins that the funds would remain intact — the trial court’s order was proper.
Lesson
The trial court has broad discretion in ruling on a motion for preliminary injunction. In addition to freezing disputed assets in place, the court can also require the restoration of assets that have been taken by one party.