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SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF SUFFOLK
xX
In the Matter of the Application of William F. Schofield,
Sr., holder of one-half of all shares,
Petitioner,
For the Judicial Dissolution of Robert & Williams, Inc.
pursuant to Article II of the Business Corporation Law
-against-
Robert S. Frankel,
Respondent.
xX
Index No.: 001059/2008
Justice Elizabeth Hazlitt Emerson
Commercial Division/Part 44
MEMORANDUM OF LAW OF WILLIAM F. SCHOFIELD, SR., IN OPPOSITION TO
MOTION OF ROBERT FRANKEL SEEKING (A) TO PENALIZE MR. SCHOFIELD
UNDER BCL SECTION 1208 WITH RESPECT TO TAX REFUNDS TURNED OVER
TO RECEIVER AND (B) TO AUTHORIZE RECEIVER TO COMMENCE
LITIGATION REGARDING SUCH PREVIOUSLY TURNED OVER TAX REFUNDS
VEDDER PRICE P.C.
1633 Broadway, 47th Floor
New York, New York 10019
NEWYORK/#204016.2
Telephone: (212) 407-7700
Facsimile: (212)407-7799
and
222 North LaSalle Street
Suite 2600
Chicago, Illinois 60601
Telephone: (312) 609-7500
Facsimile: (312) 609-5005
Attorneys for William F. Schofield, Sr.SUPREME COURT OF THE STATE OF NEW YORK Index No.: 001059/2008
COUNTY OF SUFFOLK
x Justice Elizabeth Hazlitt Emerson
In the Matter of the Application of William F. Schofield, Commercial Division/Part 44
holder of one-half of all shares,
Petitioner,
For the Judicial Dissolution of Robert & Williams, Inc.
pursuant to Article II of the Business Corporation Law
-against-
Robert S. Frankel,
Respondent.
xX
MEMORANDUM OF LAW OF WILLIAM F. SCHOFIELD, SR., IN OPPOSITION TO
MOTION OF ROBERT FRANKEL SEEKING (A) TO PENALIZE MR. SCHOFIELD
UNDER BCL SECTION 1208 WITH RESPECT TO TAX REFUNDS TURNED OVER
TO RECEIVER AND (B) TO AUTHORIZE RECEIVER TO COMMENCE
LITIGATION REGARDING SUCH PREVIOUSLY TURNED OVER TAX REFUNDS
Petitioner William F. Schofield, Sr. (“Mr. Schofield’), by and through his undersigned
counsel, submits this memorandum of law in opposition to the motion of Respondent Robert S.
Frankel (“Mr. Frankel” or “Respondent’), set forth in the affirmation of Jeffrey E. LaGueux,
dated November 13, 2008 (the “LaGueux Declaration”), and the affidavit of Robert S. Frankel,
sworn November 13, 2008 (the “Frankel Affidavit’, and along with the LaGueux Declaration,
the “Frankel Motion”), seeking to (a) impose the forfeiture penalty under Section 1208
(‘Section 1208”) of the New York Business Corporation Law (“BCL”) and (B) authorize the
Receiver to commence litigation against Mr. Schofield. In support thereof, the Mr. Schofield
states as follows:
NEWYORK/#204016.2PRELIMINARY STATEMENT
In the Frankel Motion, Mr. Frankel alleges that tax refunds that have previously been
tumed over by Mr. Schofield justify the imposition of a forfeiture penalty under BCL Section
1208 and the authorization of the Receiver to commence litigation against Mr. Schofield to
recover that penalty. Respondent Frankel, however, ignores the express provisions of the statute
in seeking to allege grounds supporting such a penalty. No basis exists for the assertion of the
statutory penalty provided under Section 1208 in this case.
As a statutory penalty provision, the terms of BCL Section 1208 are strictly construed
and all requirements of the statute must be satisfied in full before a penalty can be imposed
against Mr. Schofield. Section 1208 provides that a receiver may recover a penalty only when
property of the receivership estate is wrongfully withheld from the receiver after the date
specified in a publication notice for turning over that property to the receiver. Here, the Receiver
has not yet set such a date or made such a publication notice as required under BCL Sections
1207 and 1208.' That failure to publish notice of the property turn-over date precludes the
imposition of any penalty under Section 1208.
Further, Mr. Frankel has failed to show that Mr. Schofield “wrongfully withheld” any tax
refunds. Such an allegation lacks any basis where, as here, Mr. Schofield turned over the tax
refund amounts prior to any date required under BCL Section 1208 and prior to any request
being made by the Receiver to turn over the tax refund amounts. Further in light of the
substantial amounts that Mr. Schofield alleges are owed to him, which amounts are currently sub
' We are not alleging that the Receiver’s failure to provide such a notice is wrong; indeed, such a
failure may be justified while the Receiver is concluding the litigation regarding Mr. Schofield’s claim
and/or the investigation and future litigation against Respondent Frankel.
NEWYORK/#204016.2judice with this Court, the temporary delay in turning over the tax refunds does not satisfy the
“wrongful withholding” requirement of BCL Section 1208.
Finally, although Mr. Schofield has acknowledged that he deposited some of the tax
refunds in error in April 2007, Mr. Frankel cannot cite that error as being a basis to supplant the
statutory requirements for imposing a penalty upon Mr. Schofield. Indeed, Mr. Schofield’s
actions have conferred a substantial benefit upon the R&W estate. In contrast to Mr. Frankel’s
allegation, not only did Mr. Schofield’s actions not cause any injury to the R&W estate, Mr.
Schofield’s actions ensured that assets in excess of $40,000 that otherwise would have been lost
were recovered by R&W. Further, by turning over the tax refunds without the need for the
Receiver to incur any cost or expense, Mr. Schofield has conferred a material benefit upon the
R&W estate.
I. FACTUAL BACKGROUND
In addition to the facts summarized herein and set forth in the supporting affidavit of Mr.
Schofield, dated December 23, 2008 (the “Schofield Affidavit’), the background facts regarding
this case and the events leading up to the case are set forth in the post hearing brief filed by Mr.
Schofield on November 26, 2008, which is incorporated herein.
a. This Case and Appointment of Receiver
As set forth in the petition commencing this action, because Mr. Schofield was concerned
that Mr. Frankel would use incoming revenues to continue his practice of systematically
preferring one set of creditors over creditors he disfavored, on January 2, 2008 Mr. Schofield
filed a petition seeking the judicial dissolution of R&W pursuant to BCL Sections 1104(a) and
1104-a(a) of New York’s Business Corporation Law and the appointment of a receiver to
administer such dissolution due to the corporate deadlock between the two controlling parties.
NEWYORK/#204016.2See Docket No. 1, at 7-9. Pursuant to a stipulation reached between Messrs. Schofield and
Frankel, dated January 4, 2008, the parties agreed that a receiver should be appointed to
administer the dissolution of R&W. See Docket No. 8. William Andes, Jr. (the “Receiver’) was
appointed upon consent pursuant to that certain Stipulation and Order Concerning Rights,
Powers and Duties of Receiver and Related Matters, dated January 22, 2008. See Docket Nos.
29 & 30 (the “Appointment Order’).
Because the Receiver was appointed due to the corporate deadlock of the controlling
parties in accordance with the procedures of BCL Section 1113, the Receiver is a receiver
appointed under Chapter 11 of New York’s Business Corporation Law.
b. Pre-Receivership Tax Returns
Prior to the commencement of this case, R&W prepared and filed corporate tax returns.
Prior to June 2007, these tax returns were prepared by R&W’s accountant, Thomas Jordan,
C.P.A., and were signed by Respondent Frankel. Among the tax returns filed were the tax
returns due on or about February 14, 2005 for the fiscal year ending on November 30, 2004 (the
“New York Return for Period Ending November 30, 2004”).
After Associated Bank commenced taking enforcement actions in June 2007, Respondent
Frankel became unresponsive regarding all aspects of R&W’s business activities, including with
respect to reviewing and signing the corporate tax returns for R&W. Due to Respondent Frankel
becoming unresponsive regarding tax issues, from and after October 2007, R&W’s other 50%
officer, director and shareholder, Mr. Schofield, started to oversee the preparation of R&W’s
corporate tax returns to ensure that such returns were prepared and filed in a timely manner.
NEWYORK/#204016.2c. Filing of Tax Refund Claim on February 13, 2008
In early February 2008, Mr. Schofield had a discussion with Mr. Jordan, R&W’s tax
accountant, regarding the appointment and capacity of the Receiver. Prior to February 13, 2008,
Mr. Jordan had informed Mr. Schofield that he had sent several letters to the Receiver regarding
R&W’s corporate tax returns.
Thereafter, on or about the afternoon of February 12, 2008 or the morning of February
13, 2008, Mr. Schofield received a call from Mr. Jordan, who informed Mr. Schofield that R&W
was entitled to a tax refund for the tax years ending November 30, 2004, November 30, 2005 and
November 30, 2006, which refunds totaled in excess of $85,000. In addition, Mr. Jordan stated
that he was forwarding the tax refund claims required to obtain such refunds to Mr. Schofield
and that it was imperative to immediately have the refund claims executed and filed with New
York because in excess of $40,000 of such refunds were at risk of being time barred unless they
were sent by overnight mail no later than February 13, 2008.
Section 1087 of New York’s Tax Statute provides that a corporation seeking a refund
from New York State must file a refund claim “within . . . three years from the time the [tax]
return was filed.” See N.Y. Tax Stat. § 1087.
R&W’s New York Return for Period Ending November 30, 2004 was due on February
15, 2005. In light of the impending three year statutory bar, Mr. Jordan asked Mr. Schofield to
immediately review and execute the tax refund claims in connection with such returns so that
they would be received by the State of New York prior to February 15, 2008. In other words,
absent Mr. Schofield immediately executing the refund claims, R&W was at risk of being time-
barred from asserting a tax refund claim for the tax year ending November 30, 2004 and in
excess of $40,000 may have been lost and abandoned by R&W. Accordingly, on February 13,
NEWYORK/#204016.22008, Mr. Schofield executed the tax refund claims to obtain the refund for the tax year ending
on November 30, 2004. He also concurrently executed the tax papers necessary for R&W to
obtain refunds from New York for the following two years. Consistent with pre-receivership
practices (due to Mr. Frankel having become completely unresponsive after Associated Bank
began taking remedial action), Mr. Schofield’s address in Florida was listed on R&W’s tax
retums as the location to which the refund checks should be sent.
Mr. Schofield executed these tax forms at the request of R& W’s accountant, who was in
communication with the Receiver. At the time that Mr. Schofield executed these tax forms, he
did not know that the Receiver allegedly had not authorized these filings. Mr. Schofield did not
know what discussions, if any, R&W’s accountant had with the Receiver regarding such
extensions. Rather, Mr. Schofield took instructions from R&W’s accountant who informed him
that a material asset ($40,858.64 of New York tax refunds) was at risk if Mr. Schofield did not
immediately execute the forms.
(d) — Receiver Sends February 13, 2008 Letter to Accountant
Apparently, on the same day that Mr. Schofield executed the tax refund applications, the
Receiver sent a letter to Mr. Jordan that instructed Mr. Jordan to execute tax extensions for the
2007 fiscal year. The letter also stated that it attached a copy of the Appointment Order. The
letter also provided that “t]he [Appointment] Order only allows my office to make decisions on
behalf of the corporation. Schofield and Frankel do not have authority to make decisions,
including the giving of approvals to your office or signing any documents.”
Although the Receiver apparently sent that letter to Mr. Jordan on February 13", he did
not send a copy of such letter to Mr. Schofield or his counsel until the end of February. See
Exhibit A to the Schofield Affidavit.
NEWYORK/#204016.2,After February 13, 2008, Mr. Schofield was neither asked to execute any documents by
Mr. Jordan with respect to R&W’s corporate tax returns, nor did Mr. Schofield execute any such
documents.
(e) Although Mr. Schofield Has Repeatedly Requested That Receiver
Establish Notice and Claims Procedures, No Publication or Claims
Procedures Have Been Established under BCL Section 1207
From early on in this case, Mr. Schofield has requested that the Receiver establish a
notice and claims procedure so R&W can be dissolved and creditors holding valid claims can
receive payments. In this regard, on April 2, 2008 Mr. Schofield’s counsel requested that the
Receiver establish claims procedures. Specifically, the Receiver was requested to “seek Court
approval to (i) notify all creditors of the last day to file claims against R&W; and (ii) implement
procedures to reconcile such claims, including the right of the Receiver and Messrs. Schofield
and Frankel to file objections to such claims; .. . .”
As of this date, no such claims procedures have been established. In this regard, the
Receiver has confirmed that he did not publish the publication notice as contemplated under
BCL Sections 1007 or 1207.
@) Rather than Making a Request for Return of Funds, Facts Regarding Tax
Refunds Were Concealed by Mr. Frankel for Use as A Litigation Tactic
The issues regarding the tax refunds first came to light in connection with the request
from this Court that the parties cooperate to form a join appendix of trial exhibits for a hearing
before this Court on October 27, 2008. After initially refusing to provide to Mr. Schofield copies
of all of their exhibits for the hearing on October 22, 2008, counsel for Mr. Schofield responded
that the Court had requested that the parties compile a joint appendix of exhibits. Only then did
Mr. Frankel’s counsel divulge its surprise exhibits regarding the tax refund issues. It was not
until 4:27 p.m. on October 22, 2008 that Mr. Frankel’s counsel sent to Mr. Schofield’s counsel
NEWYORK/#204016.2for the first time additional exhibits regarding tax refund matters. See Exhibit 1 (e-mail
exchanges regarding appendix for October 27th hearing) (exhibits omitted). Given the time of
day, these exhibits were not reviewed until evening.
Mr. Frankel apparently was more concerned regarding having a litigation surprise rather
than ascertaining the facts regarding R&W’s tax refunds. Mr. Frankel’s counsel never called
representatives of Mr. Schofield to ask about the tax refunds or request the turn over of such
funds.
(g) As Admitted By Mr. Schofield, He Erroneously Deposited Certain
of the New York Tax Refund Checks, But Neither Deposited Nor
Received Possession of June Tax Refund Checks
Mr. Frankel’s new exhibits set forth that in March 2008, the State of New York sent tax
refund checks to Mr. Schofield’s office totaling $45,486.15, comprised of (a) a check for fiscal
year 2005 in the amount of $9,812.53, (b) a check for fiscal year 2005 in the amount of
$2,273.00, (c) a check for fiscal year 2006 in the amount of $26,997.28, and (d) a check for fiscal
year 2006 in the amount of $6,403.34.
As admitted by Mr. Schofield, these checks, which were issued in March 2008, were
deposited in error by Mr. Schofield into Mr. Schofield’s account.
New York State apparently also issued another check to R&W for the fiscal year ending
on November 30, 2004 in the amount of $40,858.64 (the “June Check’). Mr. Schofield,
however, did not receive the June Check himself at that time. Neither did he discover the
existence of the June Check, nor that the June Check had been sent to his business address by the
State of New York, until October 23, 2008. This check was found on October 23rd only after the
tax refund issues came to light.
NEWYORK/#204016.2The June Check was found in the desk of a former employee of W. Schofield & Co.
This employee was fired for cause in August 2008 on matters unrelated to R&W’s tax refund
matters (or related to R&W). After learning of the existence of the June Check, William
Schofield, Jr. searched the office for the June Check and found it in the desk of the former
employee. Neither Mr. Schofield nor William Schofield, Jr. knew of the existence of the June
Check prior to finding that check on October 23, 2008. That same day, the June Check was
forwarded to the Receiver by overnight delivery. The Receiver acknowledged receiving the June
Check on October 24, 2008.
h. Mr. Schofield Immediately Remits Tax Refunds to Receiver
By midday on October 23rd, Mr. Schofield had (a) acknowledged that he made an error
in depositing some of the tax refund checks, (b) obtained certified checks payable to the Receiver
in the amounts erroneously deposited into his account, and (c) sent such certified check and the
recently discovered June 2008 check to the Receiver by overnight courier. Mr. Schofield also
instructed his counsel to immediately call the Receiver to inform him that the certified check and
the recently discovered undeposited amounts were being sent to him by overnight courier for
delivery on October 24th. In Chambers on October 27, 2008, the receiver acknowledging
receiving these checks on October 24, 2008.
All of these actions were taken before the Receiver had even requested that the tax
refunds be turned over to him or taking any actions (or preparing any correspondence to Mr.
Schofield) with respect to the tax refunds.
NEWYORK/#204016.2(i) Mr. Schofield Has Turned Over All Tax Refunds to Receiver
With the turnover of the tax refunds to the Receiver on October 23rd, Mr. Schofield has
turned over all tax refunds that Mr. Schofield has received with respect to R&W. Mr. Schofield
also is aware of no other tax refunds relating to R&W that are outstanding.
By delivering the checks so promptly, Mr. Schofield sought to correct his errors as soon
as they were brought to his attention. Also, upon information and belief, by immediately
remitting such checks to the Receiver, the Receiver did not incur any unnecessary cost or
expense relating to these matters.
(j) The Frankel Motion
Although all of the amounts relating to the tax refunds were turned over to the Receiver,
and the Receiver did not make any further requests with respect to the tax refunds from Mr.
Schofield, on November 14, 2008 Mr. Frankel filed the instant motion.
Ol. ARGUMENT
A. AS STATUTE IMPOSING PENALTY, BCL SECTION 1208 OF NEW YORK’S
BUSINESS CORPORATION LAW MUST BE STRICTLY CONSTRUED
Respondent Frankel’s attempt to impose a forfeiture penalty upon Mr. Schofield is an
impermissible attempt to misconstrue BCL Section 1208. BCL Section 1208 is an express
statutory penalty provision. As set forth in its very title, BCL Section 1208 (“Penalty for
concealing property from receiver”) is penal in nature.
Under New York law, statutes that are penal in nature are to be strictly construed. See
N.Y. Stat. Law § 271(a). As a statute that imposes a liability as a penalty and not based upon
compensatory damages, BCL Section 1208 must be strictly and narrowly construed. See, e.g.
Minturn v. The New York Central Railroad Company, 220 A.D. 222, 231 (4th Dep’t 1927) (in
addition to compensatory damages, statute imposes penalty of $50 upon railroad payable to
10
NEWYORK/#204016.2passenger through negligent employment of person who causes damages); Michaels v. Flach,
114 Misc. 225, 230, 186 N.Y.S. 899, 902 (Sup. Ct. Kings Co.), aff’d, 197 A.D. 478, 189 N.Y.S.
908 (2d Dep't 1921) (statute mandating certain claims procedures in surrogate proceedings that
bars adjudication in court is a penal provision that requires strict compliance with statutory
requirements).
In construing such penalty statutes, courts may impose the penalty only where the
statutory requirements are fully satisfied and all matters in doubt must be resolved in favor of the
accused party. See Steiner v. Bonhamer, 146 Misc.2d 10, 13, 549 N.Y.S.2d 340 (Sup. Ct.
Allegany Co. 1989) ("the 'frivolous sanction’ rules, like any statutory or regulational penalty
provision, must be strictly and narrowly construed", and that "[a] corollary of this principle is
that a statute or rule which is punitive in nature 'may not be extended to doubtful situations’ and
that 'every reasonable doubt . . . should be resolved in favor of [the accused party]""); see also
City of New York v. Verizon New York, Inc., 4 N.Y .3d 255, 259; 827 N.E.2d 276, 278; 794
N.Y.S.2d 293, 295 (2005) (same); N.Y. Stat. § 273(e) (“Penal statutes are not extended to
doubtful situations”); McKinney's Cons. Law of N.Y., Book 1, Statutes § 271(e) at 438 (1971);.
As recently reaffirmed by the Court of Appeals: “This Court has long held that ‘[a] statute
awarding a penalty is to be strictly construed, and before a recovery can be had, a case must be
brought clearly within its terms." City of New York v. Verizon New York, Inc., 4 N.Y.3d at 259;
827 N.E.2d at 278; 794 N.Y.S.2d at 295 (N.Y. 2005) (quoting Osborne v International Ry. Co.,
226 N.Y. 421, 426 (1919).
Accordingly, the penalty provisions of BCL Section 1208 must be strictly construed and
all statutory requirements must be satisfied for a penalty to be imposed under this penal
provision. As set forth below, however, the enumerated statutory requirements have not been
11
NEWYORK/#204016.2satisfied and Mr. Frankel’s request to impose penalty sanctions under BCL Section 1208 should
be denied.
B. STATUTORY PREDICATES FOR PENALTY UNDER BCL SECTION
1208 DAMAGES HAVE NOT BEEN ESTABLISHED BY MR. FRANKEL
Section 1208 permits a Receiver to recover as a penalty double the amounts at
issue where a “person having possession of property belonging to the corporation”
“wrongfully withholds property from the receiver” after “after the day specified in the
notice given under section 1207”. Section 1208 provides
Any persons having possession of property belonging to the
corporation, who shall wrongfully withhold such property from the
receiver after the day specified in the notice given under section 1207
(Duties of receiver upon appointment), shall forfeit to the receiver
double the value of such property, and the same may be recovered in an
action by the receiver.
BCL Section 1208. As set forth in the statute itself, there are three basic requirements before a
penalty forfeiture is permitted under Section 1208:
(a) “a person must have possession of property belonging to the corporation”;
(b) that person “wrongfully withholds property from the receiver”; and
(c) that wrongful withholding must occur after the day specified in the notice
given under BCL Section 1207.
Id.
There is no dispute that Mr. Schofield possessed property of R&W in the form of checks
issued by the State of New York in March or about 2008. From and after the date that he
received those checks (whether in March or April 2008), Mr. Schofield possessed property of
R&W. Mr. Schofield, however, denies that he was in possession of the June Check other than
the momentary possession he had between the time he found the June Check on October 23rd
and the time that he forwarded the check to the Receiver on that same date.
12
NEWYORK/#204016.2With respect to all of the tax refunds, however, the other statutory requirements for
imposing a penalty under Section 1208 have not been satisfied.
qd Receiver Has Neither Published Notice, Nor Published Dates
for Turnover of Assets or Filing of Claims, Which Are
Predicates for Penalty Damages under BCL Section 1208
The penalty under Section 1208 may only be imposed for amounts withheld “after the
day specified in the notice given under section 1207 (Duties of receiver upon appointment).” See
BCL § 1208. Accordingly, penalties under Section 1208 accrue only after the date specified in a
notice provided under Section 1207 of the BCL.
Section 1207 of the BCL specifies the duties imposed upon a receiver after his
appointment. Among the duties imposed upon a receiver appointed under the BCL is that the
receiver is required to “give immediate notice of his appointment by publication once a week
for two successive weeks in two newspapers of general circulation in the county where the
office of the corporation is located.” See BCL § 1207(a)(1) (such notice, the “Publication
Notice”). The Publication Notice is required to specify that
(A) _ All persons indebted to the corporation to render an account of
all debts owing by them to the corporation and to pay the same to
the receiver at a specified place and by a specified day (such notice
of the date and place for payment of accounts payable, the
“Accounts Payable Notice’), see BCL § 1207(a)(1)(A); and
(B) All persons having in their possession any property of the
corporation to deliver the same to the receiver at the specified
place and by the specified day; (such notice of the date and place
for turn over of property, the “Property Delivery Notice”). See
BCL § 1207(a)(1)(B.
In addition, because this receivership is associated with a judicial dissolution under Chapter 11
of the BCL, the Receiver is also required to specify the date and place with respect to a claims
13
NEWYORK/#204016.2resolution procedure in accordance with the requirements of BCL Section 1007.2 See BCL §
1207(a)(1)(C). Each of these matters are required to be set forth in Publication Notice, which, as
set forth above, is required to be set forth on a publication of general circulation.
In this regard, reading Section 1207 and 1208 together, the requirement of BCL Section
1208 that a penalty arises for property wrongfully withheld after the “date specified in Section
1207” must refer to the date specified in the Publication Notice for turning over property to the
Receiver. In accordance with of BCL Section 1207(a)(1)(A), any accounts payable property
would be subject to the date specified in the Accounts Payable Notice portion of the Publication
Notice, whereas all other property would be subject to the Property Delivery Notice of BCL
Section 1207(a)(1)(B). Accordingly, a penalty under Section 1208 only accrues after a party
wrongfully fails to deliver property to the Receiver after the date specified by the Receiver in a
Publication Notice.
However, the Receiver has not given any Publication Notice? The reason for this failure
may be that the Receiver first wants to address claim issues involving Mr. Schofield and/or Mr.
Frankel — which delay in arranging for the Publication Notice may be justified. However, the
failure of the Receiver to issue a Publication Notice specifying the date for the turn over of all of
R&W’s property precludes the imposition of any forfeiture penalty under BCL Section 1208.
2 With respect to the establishment of a claims resolution procedure, Mr. Schofield has repeatedly
requested that the Receiver establish such a procedure (which is to be governed by Section 1007 of the
BCL). The Receiver, however, has as of yet not established such a procedure.
3 The Receiver has confirmed to counsel to Mr. Schofield that he has not yet provided the
publication notice required under BCL Section 1207.
14
NEWYORK/#204016.2(2) Respondent Frankel Has Not Shown that Mr. Schofield Wrongfully
Withheld Property from Receiver under BCL Section 1208
Respondent Frankel also has failed to make any showing that the tax refunds were
“wrongfully withheld” from the Receiver. As set forth above, the Receiver never set a date that
property was required to be turned over to the Receiver as required under the statutory scheme
provided under BCL Section 1207. Such a date was required to be set in the Publication Notice
under Section 1207. Further, Mr. Schofield turned over all of the tax refund property before the
receiver even made a request for such amounts to be turned over. Accordingly, as Mr. Schofield
tured over the tax refund property before the date specified in the statute and even before the
Receiver made any request for such property, these facts demonstrates that the tax refund
property was not “wrongfully withheld” under BCL Section 1208.
Further, the concept of “wrongfully withheld” should also be construed in the light of the
statutory framework for receiverships. Under Section 151 of New York’s Debtor and Creditor
Law, entities are allowed to assert rights of setoff. Pending a determination regarding the
amounts due to and from Mr. Schofield and R&W, and given the applicability of the receivership
setoff statute, amounts temporarily withheld by Mr. Schofield cannot constitute a “wrongful
withholding” within the meaning of BCL Section 1208. Further, in light of the fact that the tax
refund amounts were immediately turned over to the Receiver after Mr. Frankel provided
documents regarding to the tax refunds to Mr. Schofield’s counsel, no basis exists to allege that
these facts cause a violation of BCL Section 1208.
Finally, in light of the fact that Mr. Schofield neither knew of the existence of the June
Check, nor deposited such check, there can be no basis to allege that Mr. Schofield wrongfully
withheld the June Check from the Receiver. Rather, as soon as that check was discovered, it was
turned over to the Receiver.
15
NEWYORK/#204016.2Cc. RATHER THAN CAUSING ANY INJURY, MR. SCHOFIELD’S
ACTIONS BENEFITED ESTATE BY COLLECTING $86,344.79
OF TAX REFUND INCOME THAT COULD HAVE BEEN
LOST ABSENT MR. SCHOFIELD’S ACTIONS
Mr. Frankel also cannot claim that Mr. Schofield has caused any injury here. Mr.
Schofield’s actions caused the R&W estate to obtain the benefit of substantial tax refunds.
Indeed, absent Mr. Schofield’s actions, the tax refund could have been time barred and lost if Mr.
Schofield failed to complete the tax refund claim for the tax period ending on November 30,
2004. Further, because Mr. Schofield immediately turned over the funds after Mr. Frankel
delivered the exhibits relating to the tax refunds to Mr. Schofield’s counsel, the Receiver
incurred no liability or expense in obtaining the benefit of the tax refunds. In sum, Mr. Schofield
conferred a material benefit upon the R&W estate without any cost to R&W. Accordingly, Mr.
Frankel’s allegations that the R&W estate suffered some nebulous injury or damage lacks any
basis.
16
NEWYORK/#204016.2WHEREFORE, for all of the foregoing reasons, Mr. Schofield respectfully requests that
this Court enter an Order (a) denying the relief requested in the Frankel Motion, (b) determining
that no penalties are owed by Mr. Schofield under BCL Section 1208 and (c) determining that no
basis exists to authorize the Receiver to commence litigation against Mr. Schofield based upon
the previously turned over tax refunds; and (d) granting such other and further relief as this Court
deems just and proper.
Dated: December 23, 2008
VEDDER PRICE P.C.
By:
Michael J. Edelman
Michael G. Davies
Vedder Price P.C.
1633 Broadway
47th Floor
New York, New York 10019
(212) 407-7700
Michael M. Eidelman
Vedder Price P.C.
222 North LaSalle Street, Suite 2600
Chicago, Illinois 60601
Phone: (312) 609-7500
Attorneys for William F. Schofield, Sr.
17
NEWYORK/#204016.2EXHIBIT 1
October 22, 2008 E-Mail Exchanges Regarding Appendix of Exhibits
NEWYORK/#204016.2From: “Parekh, Niraj (x2641)"
To: "MICHAEL J. EDELMAN" , "LaGueux, Jeffrey E. (x26
84)"
cc: “Jr. William Andes" , "MICHAEL DAVIES" , "Tony Hernandez”
Date: 10/22/2008 4:27 PM
Subject: RE: R&W / Trial Exhibit Index for October 27, 2008 Hearing
Attachments: Exhibit 8.pdf; Exhibit 9.pdf; Exhibit 10.pdf
Please add the attached documents to the exhibit list and include copies
in the binder:
Exhibit 8, described as: New York State Department of Taxation and
Finance Taxpayer Account Reconciliation Report.
Exhibit 9, described as: Demonstrative Chart Prepared by Accountant Re:
R&W Corporate Tax Return Amendments.
Exhibit 10, described as: Business Email re: R&W Corporate Tax Refunds.
Thank you,
Niraj Parekh
-----Original Message-----
From: MICHAEL J. EDELMAN [mailto:mjedelman@vedderprice.com]
Sent: Wednesday, October 22, 2008 3:10 PM
To: LaGueux, Jeffrey E. (x2684); Parekh, Niraj (x2641)
Ce: Jr. William Andes; MICHAEL DAVIES; Tony Hernandez
Subject: RE: R&W / Trial Exhibit Index for October 27, 2008 Hearing
Importance: High
* High Priority **
We have revised the exhibit chart and will include the Exhibits A - G
attached to Frankel's Verified Response in the trial exhibit binder.
Attached is the revised table of trial exhibits. The only changes from
the prior draft sent to you are the inclusion of references to your
exhibits and the opening paragraph. Please let us know asap (by 4:30
p.m.) if you have any comments.
The deadline is one of practicality only -- we are trying to make the
FedEx deadline. As Jeff knows from our conversations with the court, it
takes a few days for FedEx packages to be delivered to chambers.
Accordingly, we need to have the trial exhibits sent out by FedEx today
to hopefully have them delivered in time for the hearing.
Michael
Michael J. Edelman
Vedder Price P.C.
1633 Broadway
47th FloorNew York, NY 10019
Work Tel.: (212) 407-6970
Work Fax: (212) 407-7799
Cell No.: (917) 478-6543
e-mail: MJEdelman@VedderPrice.com
>>> "Parekh, Niraj (x2641)" 10/22/2008 2:25 PM >>>
Michael,
We will include as Respondents’ exhibits, Exhibits A - G attached to our
Verified Response, copies of which are already in your possession.
Please include copies of those exhibits in the exhibit binder and
include them the exhibit chart.
However, we do not agree with your self-imposed deadline that we must
provide you with any exhibits by 2:00 p.m. today. Accordingly, we
reserve our rights to supplement the trial exhibit list and to provide
any additional exhibits to the Court by the close of business on Friday
(in advance of the hearing). To the extent you are not already in
possession of any additional exhibits, we will also provide you with a
copy at the same time. Otherwise, we will notify as to the description
of such documents.
Thank you,
Niraj Parekh
-----Original Message-----
From: MICHAEL J. EDELMAN [mailto:mjedelman@vedderprice.com]
Sent: Wednesday, October 22, 2008 2:03 PM
To: LaGueux, Jeffrey E. (x2684); Parekh, Niraj (x2641)
Cc: William Andes, Jr.; MICHAEL DAVIES
Subject: Fwd: R&W / Trial Exhibit Index for October 27, 2008 Hearing
Importance: High
** High Priority **
Jeff and Niraj:
We did not receive any exhibits that you intend to submit to the Court
for Monday's hearing. Please let us know immediately by return email if
you intend to submit exhibits in addition to the ones set forth in the
attached list that we prepared. As set forth in yesterday's email, we
intend to submit a binder of trial exhibits (as requested by the Court
during our telephonic status conference) to the Court today by overnight
courier.
Your prompt response would be appreciated.
Michael
Michael J. Edelman
Vedder Price P.C.
1633 Broadway
47th FloorNew York, NY 10019
Work Tel.: (212) 407-6970
Work Fax: (212) 407-7799
Cell No.: (917) 478-6543
e-mail: MJEdelman@VedderPrice.com
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cannot be relied upon, by any person for the purpose of (i) avoiding
penalties that may be imposed under the Internal Revenue Code or (ii)
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Treasury regulations governing tax practitioners.)
CIRCULAR 230 NOTICE:
Treasury Department Circular 230 requires that we inform you that any
discussion of U.S. federal tax issues contained herein and in any
accompanying materials is not intended or written to be relied upon, and
cannot be relied upon, by any person for the purpose of (i) avoiding
penalties that may be imposed under the Internal Revenue Code or (ii)
promoting, marketing or recommending to another party any transaction or
matter addressed herein or therein.
Privileged/Confidential Information may be contained in this message. If you are not
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Preview
SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF SUFFOLK xX In the Matter of the Application of William F. Schofield, Sr., holder of one-half of all shares, Petitioner, For the Judicial Dissolution of Robert & Williams, Inc. pursuant to Article II of the Business Corporation Law -against- Robert S. Frankel, Respondent. xX Index No.: 001059/2008 Justice Elizabeth Hazlitt Emerson Commercial Division/Part 44 MEMORANDUM OF LAW OF WILLIAM F. SCHOFIELD, SR., IN OPPOSITION TO MOTION OF ROBERT FRANKEL SEEKING (A) TO PENALIZE MR. SCHOFIELD UNDER BCL SECTION 1208 WITH RESPECT TO TAX REFUNDS TURNED OVER TO RECEIVER AND (B) TO AUTHORIZE RECEIVER TO COMMENCE LITIGATION REGARDING SUCH PREVIOUSLY TURNED OVER TAX REFUNDS VEDDER PRICE P.C. 1633 Broadway, 47th Floor New York, New York 10019 NEWYORK/#204016.2 Telephone: (212) 407-7700 Facsimile: (212)407-7799 and 222 North LaSalle Street Suite 2600 Chicago, Illinois 60601 Telephone: (312) 609-7500 Facsimile: (312) 609-5005 Attorneys for William F. Schofield, Sr.SUPREME COURT OF THE STATE OF NEW YORK Index No.: 001059/2008 COUNTY OF SUFFOLK x Justice Elizabeth Hazlitt Emerson In the Matter of the Application of William F. Schofield, Commercial Division/Part 44 holder of one-half of all shares, Petitioner, For the Judicial Dissolution of Robert & Williams, Inc. pursuant to Article II of the Business Corporation Law -against- Robert S. Frankel, Respondent. xX MEMORANDUM OF LAW OF WILLIAM F. SCHOFIELD, SR., IN OPPOSITION TO MOTION OF ROBERT FRANKEL SEEKING (A) TO PENALIZE MR. SCHOFIELD UNDER BCL SECTION 1208 WITH RESPECT TO TAX REFUNDS TURNED OVER TO RECEIVER AND (B) TO AUTHORIZE RECEIVER TO COMMENCE LITIGATION REGARDING SUCH PREVIOUSLY TURNED OVER TAX REFUNDS Petitioner William F. Schofield, Sr. (“Mr. Schofield’), by and through his undersigned counsel, submits this memorandum of law in opposition to the motion of Respondent Robert S. Frankel (“Mr. Frankel” or “Respondent’), set forth in the affirmation of Jeffrey E. LaGueux, dated November 13, 2008 (the “LaGueux Declaration”), and the affidavit of Robert S. Frankel, sworn November 13, 2008 (the “Frankel Affidavit’, and along with the LaGueux Declaration, the “Frankel Motion”), seeking to (a) impose the forfeiture penalty under Section 1208 (‘Section 1208”) of the New York Business Corporation Law (“BCL”) and (B) authorize the Receiver to commence litigation against Mr. Schofield. In support thereof, the Mr. Schofield states as follows: NEWYORK/#204016.2PRELIMINARY STATEMENT In the Frankel Motion, Mr. Frankel alleges that tax refunds that have previously been tumed over by Mr. Schofield justify the imposition of a forfeiture penalty under BCL Section 1208 and the authorization of the Receiver to commence litigation against Mr. Schofield to recover that penalty. Respondent Frankel, however, ignores the express provisions of the statute in seeking to allege grounds supporting such a penalty. No basis exists for the assertion of the statutory penalty provided under Section 1208 in this case. As a statutory penalty provision, the terms of BCL Section 1208 are strictly construed and all requirements of the statute must be satisfied in full before a penalty can be imposed against Mr. Schofield. Section 1208 provides that a receiver may recover a penalty only when property of the receivership estate is wrongfully withheld from the receiver after the date specified in a publication notice for turning over that property to the receiver. Here, the Receiver has not yet set such a date or made such a publication notice as required under BCL Sections 1207 and 1208.' That failure to publish notice of the property turn-over date precludes the imposition of any penalty under Section 1208. Further, Mr. Frankel has failed to show that Mr. Schofield “wrongfully withheld” any tax refunds. Such an allegation lacks any basis where, as here, Mr. Schofield turned over the tax refund amounts prior to any date required under BCL Section 1208 and prior to any request being made by the Receiver to turn over the tax refund amounts. Further in light of the substantial amounts that Mr. Schofield alleges are owed to him, which amounts are currently sub ' We are not alleging that the Receiver’s failure to provide such a notice is wrong; indeed, such a failure may be justified while the Receiver is concluding the litigation regarding Mr. Schofield’s claim and/or the investigation and future litigation against Respondent Frankel. NEWYORK/#204016.2judice with this Court, the temporary delay in turning over the tax refunds does not satisfy the “wrongful withholding” requirement of BCL Section 1208. Finally, although Mr. Schofield has acknowledged that he deposited some of the tax refunds in error in April 2007, Mr. Frankel cannot cite that error as being a basis to supplant the statutory requirements for imposing a penalty upon Mr. Schofield. Indeed, Mr. Schofield’s actions have conferred a substantial benefit upon the R&W estate. In contrast to Mr. Frankel’s allegation, not only did Mr. Schofield’s actions not cause any injury to the R&W estate, Mr. Schofield’s actions ensured that assets in excess of $40,000 that otherwise would have been lost were recovered by R&W. Further, by turning over the tax refunds without the need for the Receiver to incur any cost or expense, Mr. Schofield has conferred a material benefit upon the R&W estate. I. FACTUAL BACKGROUND In addition to the facts summarized herein and set forth in the supporting affidavit of Mr. Schofield, dated December 23, 2008 (the “Schofield Affidavit’), the background facts regarding this case and the events leading up to the case are set forth in the post hearing brief filed by Mr. Schofield on November 26, 2008, which is incorporated herein. a. This Case and Appointment of Receiver As set forth in the petition commencing this action, because Mr. Schofield was concerned that Mr. Frankel would use incoming revenues to continue his practice of systematically preferring one set of creditors over creditors he disfavored, on January 2, 2008 Mr. Schofield filed a petition seeking the judicial dissolution of R&W pursuant to BCL Sections 1104(a) and 1104-a(a) of New York’s Business Corporation Law and the appointment of a receiver to administer such dissolution due to the corporate deadlock between the two controlling parties. NEWYORK/#204016.2See Docket No. 1, at 7-9. Pursuant to a stipulation reached between Messrs. Schofield and Frankel, dated January 4, 2008, the parties agreed that a receiver should be appointed to administer the dissolution of R&W. See Docket No. 8. William Andes, Jr. (the “Receiver’) was appointed upon consent pursuant to that certain Stipulation and Order Concerning Rights, Powers and Duties of Receiver and Related Matters, dated January 22, 2008. See Docket Nos. 29 & 30 (the “Appointment Order’). Because the Receiver was appointed due to the corporate deadlock of the controlling parties in accordance with the procedures of BCL Section 1113, the Receiver is a receiver appointed under Chapter 11 of New York’s Business Corporation Law. b. Pre-Receivership Tax Returns Prior to the commencement of this case, R&W prepared and filed corporate tax returns. Prior to June 2007, these tax returns were prepared by R&W’s accountant, Thomas Jordan, C.P.A., and were signed by Respondent Frankel. Among the tax returns filed were the tax returns due on or about February 14, 2005 for the fiscal year ending on November 30, 2004 (the “New York Return for Period Ending November 30, 2004”). After Associated Bank commenced taking enforcement actions in June 2007, Respondent Frankel became unresponsive regarding all aspects of R&W’s business activities, including with respect to reviewing and signing the corporate tax returns for R&W. Due to Respondent Frankel becoming unresponsive regarding tax issues, from and after October 2007, R&W’s other 50% officer, director and shareholder, Mr. Schofield, started to oversee the preparation of R&W’s corporate tax returns to ensure that such returns were prepared and filed in a timely manner. NEWYORK/#204016.2c. Filing of Tax Refund Claim on February 13, 2008 In early February 2008, Mr. Schofield had a discussion with Mr. Jordan, R&W’s tax accountant, regarding the appointment and capacity of the Receiver. Prior to February 13, 2008, Mr. Jordan had informed Mr. Schofield that he had sent several letters to the Receiver regarding R&W’s corporate tax returns. Thereafter, on or about the afternoon of February 12, 2008 or the morning of February 13, 2008, Mr. Schofield received a call from Mr. Jordan, who informed Mr. Schofield that R&W was entitled to a tax refund for the tax years ending November 30, 2004, November 30, 2005 and November 30, 2006, which refunds totaled in excess of $85,000. In addition, Mr. Jordan stated that he was forwarding the tax refund claims required to obtain such refunds to Mr. Schofield and that it was imperative to immediately have the refund claims executed and filed with New York because in excess of $40,000 of such refunds were at risk of being time barred unless they were sent by overnight mail no later than February 13, 2008. Section 1087 of New York’s Tax Statute provides that a corporation seeking a refund from New York State must file a refund claim “within . . . three years from the time the [tax] return was filed.” See N.Y. Tax Stat. § 1087. R&W’s New York Return for Period Ending November 30, 2004 was due on February 15, 2005. In light of the impending three year statutory bar, Mr. Jordan asked Mr. Schofield to immediately review and execute the tax refund claims in connection with such returns so that they would be received by the State of New York prior to February 15, 2008. In other words, absent Mr. Schofield immediately executing the refund claims, R&W was at risk of being time- barred from asserting a tax refund claim for the tax year ending November 30, 2004 and in excess of $40,000 may have been lost and abandoned by R&W. Accordingly, on February 13, NEWYORK/#204016.22008, Mr. Schofield executed the tax refund claims to obtain the refund for the tax year ending on November 30, 2004. He also concurrently executed the tax papers necessary for R&W to obtain refunds from New York for the following two years. Consistent with pre-receivership practices (due to Mr. Frankel having become completely unresponsive after Associated Bank began taking remedial action), Mr. Schofield’s address in Florida was listed on R&W’s tax retums as the location to which the refund checks should be sent. Mr. Schofield executed these tax forms at the request of R& W’s accountant, who was in communication with the Receiver. At the time that Mr. Schofield executed these tax forms, he did not know that the Receiver allegedly had not authorized these filings. Mr. Schofield did not know what discussions, if any, R&W’s accountant had with the Receiver regarding such extensions. Rather, Mr. Schofield took instructions from R&W’s accountant who informed him that a material asset ($40,858.64 of New York tax refunds) was at risk if Mr. Schofield did not immediately execute the forms. (d) — Receiver Sends February 13, 2008 Letter to Accountant Apparently, on the same day that Mr. Schofield executed the tax refund applications, the Receiver sent a letter to Mr. Jordan that instructed Mr. Jordan to execute tax extensions for the 2007 fiscal year. The letter also stated that it attached a copy of the Appointment Order. The letter also provided that “t]he [Appointment] Order only allows my office to make decisions on behalf of the corporation. Schofield and Frankel do not have authority to make decisions, including the giving of approvals to your office or signing any documents.” Although the Receiver apparently sent that letter to Mr. Jordan on February 13", he did not send a copy of such letter to Mr. Schofield or his counsel until the end of February. See Exhibit A to the Schofield Affidavit. NEWYORK/#204016.2,After February 13, 2008, Mr. Schofield was neither asked to execute any documents by Mr. Jordan with respect to R&W’s corporate tax returns, nor did Mr. Schofield execute any such documents. (e) Although Mr. Schofield Has Repeatedly Requested That Receiver Establish Notice and Claims Procedures, No Publication or Claims Procedures Have Been Established under BCL Section 1207 From early on in this case, Mr. Schofield has requested that the Receiver establish a notice and claims procedure so R&W can be dissolved and creditors holding valid claims can receive payments. In this regard, on April 2, 2008 Mr. Schofield’s counsel requested that the Receiver establish claims procedures. Specifically, the Receiver was requested to “seek Court approval to (i) notify all creditors of the last day to file claims against R&W; and (ii) implement procedures to reconcile such claims, including the right of the Receiver and Messrs. Schofield and Frankel to file objections to such claims; .. . .” As of this date, no such claims procedures have been established. In this regard, the Receiver has confirmed that he did not publish the publication notice as contemplated under BCL Sections 1007 or 1207. @) Rather than Making a Request for Return of Funds, Facts Regarding Tax Refunds Were Concealed by Mr. Frankel for Use as A Litigation Tactic The issues regarding the tax refunds first came to light in connection with the request from this Court that the parties cooperate to form a join appendix of trial exhibits for a hearing before this Court on October 27, 2008. After initially refusing to provide to Mr. Schofield copies of all of their exhibits for the hearing on October 22, 2008, counsel for Mr. Schofield responded that the Court had requested that the parties compile a joint appendix of exhibits. Only then did Mr. Frankel’s counsel divulge its surprise exhibits regarding the tax refund issues. It was not until 4:27 p.m. on October 22, 2008 that Mr. Frankel’s counsel sent to Mr. Schofield’s counsel NEWYORK/#204016.2for the first time additional exhibits regarding tax refund matters. See Exhibit 1 (e-mail exchanges regarding appendix for October 27th hearing) (exhibits omitted). Given the time of day, these exhibits were not reviewed until evening. Mr. Frankel apparently was more concerned regarding having a litigation surprise rather than ascertaining the facts regarding R&W’s tax refunds. Mr. Frankel’s counsel never called representatives of Mr. Schofield to ask about the tax refunds or request the turn over of such funds. (g) As Admitted By Mr. Schofield, He Erroneously Deposited Certain of the New York Tax Refund Checks, But Neither Deposited Nor Received Possession of June Tax Refund Checks Mr. Frankel’s new exhibits set forth that in March 2008, the State of New York sent tax refund checks to Mr. Schofield’s office totaling $45,486.15, comprised of (a) a check for fiscal year 2005 in the amount of $9,812.53, (b) a check for fiscal year 2005 in the amount of $2,273.00, (c) a check for fiscal year 2006 in the amount of $26,997.28, and (d) a check for fiscal year 2006 in the amount of $6,403.34. As admitted by Mr. Schofield, these checks, which were issued in March 2008, were deposited in error by Mr. Schofield into Mr. Schofield’s account. New York State apparently also issued another check to R&W for the fiscal year ending on November 30, 2004 in the amount of $40,858.64 (the “June Check’). Mr. Schofield, however, did not receive the June Check himself at that time. Neither did he discover the existence of the June Check, nor that the June Check had been sent to his business address by the State of New York, until October 23, 2008. This check was found on October 23rd only after the tax refund issues came to light. NEWYORK/#204016.2The June Check was found in the desk of a former employee of W. Schofield & Co. This employee was fired for cause in August 2008 on matters unrelated to R&W’s tax refund matters (or related to R&W). After learning of the existence of the June Check, William Schofield, Jr. searched the office for the June Check and found it in the desk of the former employee. Neither Mr. Schofield nor William Schofield, Jr. knew of the existence of the June Check prior to finding that check on October 23, 2008. That same day, the June Check was forwarded to the Receiver by overnight delivery. The Receiver acknowledged receiving the June Check on October 24, 2008. h. Mr. Schofield Immediately Remits Tax Refunds to Receiver By midday on October 23rd, Mr. Schofield had (a) acknowledged that he made an error in depositing some of the tax refund checks, (b) obtained certified checks payable to the Receiver in the amounts erroneously deposited into his account, and (c) sent such certified check and the recently discovered June 2008 check to the Receiver by overnight courier. Mr. Schofield also instructed his counsel to immediately call the Receiver to inform him that the certified check and the recently discovered undeposited amounts were being sent to him by overnight courier for delivery on October 24th. In Chambers on October 27, 2008, the receiver acknowledging receiving these checks on October 24, 2008. All of these actions were taken before the Receiver had even requested that the tax refunds be turned over to him or taking any actions (or preparing any correspondence to Mr. Schofield) with respect to the tax refunds. NEWYORK/#204016.2(i) Mr. Schofield Has Turned Over All Tax Refunds to Receiver With the turnover of the tax refunds to the Receiver on October 23rd, Mr. Schofield has turned over all tax refunds that Mr. Schofield has received with respect to R&W. Mr. Schofield also is aware of no other tax refunds relating to R&W that are outstanding. By delivering the checks so promptly, Mr. Schofield sought to correct his errors as soon as they were brought to his attention. Also, upon information and belief, by immediately remitting such checks to the Receiver, the Receiver did not incur any unnecessary cost or expense relating to these matters. (j) The Frankel Motion Although all of the amounts relating to the tax refunds were turned over to the Receiver, and the Receiver did not make any further requests with respect to the tax refunds from Mr. Schofield, on November 14, 2008 Mr. Frankel filed the instant motion. Ol. ARGUMENT A. AS STATUTE IMPOSING PENALTY, BCL SECTION 1208 OF NEW YORK’S BUSINESS CORPORATION LAW MUST BE STRICTLY CONSTRUED Respondent Frankel’s attempt to impose a forfeiture penalty upon Mr. Schofield is an impermissible attempt to misconstrue BCL Section 1208. BCL Section 1208 is an express statutory penalty provision. As set forth in its very title, BCL Section 1208 (“Penalty for concealing property from receiver”) is penal in nature. Under New York law, statutes that are penal in nature are to be strictly construed. See N.Y. Stat. Law § 271(a). As a statute that imposes a liability as a penalty and not based upon compensatory damages, BCL Section 1208 must be strictly and narrowly construed. See, e.g. Minturn v. The New York Central Railroad Company, 220 A.D. 222, 231 (4th Dep’t 1927) (in addition to compensatory damages, statute imposes penalty of $50 upon railroad payable to 10 NEWYORK/#204016.2passenger through negligent employment of person who causes damages); Michaels v. Flach, 114 Misc. 225, 230, 186 N.Y.S. 899, 902 (Sup. Ct. Kings Co.), aff’d, 197 A.D. 478, 189 N.Y.S. 908 (2d Dep't 1921) (statute mandating certain claims procedures in surrogate proceedings that bars adjudication in court is a penal provision that requires strict compliance with statutory requirements). In construing such penalty statutes, courts may impose the penalty only where the statutory requirements are fully satisfied and all matters in doubt must be resolved in favor of the accused party. See Steiner v. Bonhamer, 146 Misc.2d 10, 13, 549 N.Y.S.2d 340 (Sup. Ct. Allegany Co. 1989) ("the 'frivolous sanction’ rules, like any statutory or regulational penalty provision, must be strictly and narrowly construed", and that "[a] corollary of this principle is that a statute or rule which is punitive in nature 'may not be extended to doubtful situations’ and that 'every reasonable doubt . . . should be resolved in favor of [the accused party]""); see also City of New York v. Verizon New York, Inc., 4 N.Y .3d 255, 259; 827 N.E.2d 276, 278; 794 N.Y.S.2d 293, 295 (2005) (same); N.Y. Stat. § 273(e) (“Penal statutes are not extended to doubtful situations”); McKinney's Cons. Law of N.Y., Book 1, Statutes § 271(e) at 438 (1971);. As recently reaffirmed by the Court of Appeals: “This Court has long held that ‘[a] statute awarding a penalty is to be strictly construed, and before a recovery can be had, a case must be brought clearly within its terms." City of New York v. Verizon New York, Inc., 4 N.Y.3d at 259; 827 N.E.2d at 278; 794 N.Y.S.2d at 295 (N.Y. 2005) (quoting Osborne v International Ry. Co., 226 N.Y. 421, 426 (1919). Accordingly, the penalty provisions of BCL Section 1208 must be strictly construed and all statutory requirements must be satisfied for a penalty to be imposed under this penal provision. As set forth below, however, the enumerated statutory requirements have not been 11 NEWYORK/#204016.2satisfied and Mr. Frankel’s request to impose penalty sanctions under BCL Section 1208 should be denied. B. STATUTORY PREDICATES FOR PENALTY UNDER BCL SECTION 1208 DAMAGES HAVE NOT BEEN ESTABLISHED BY MR. FRANKEL Section 1208 permits a Receiver to recover as a penalty double the amounts at issue where a “person having possession of property belonging to the corporation” “wrongfully withholds property from the receiver” after “after the day specified in the notice given under section 1207”. Section 1208 provides Any persons having possession of property belonging to the corporation, who shall wrongfully withhold such property from the receiver after the day specified in the notice given under section 1207 (Duties of receiver upon appointment), shall forfeit to the receiver double the value of such property, and the same may be recovered in an action by the receiver. BCL Section 1208. As set forth in the statute itself, there are three basic requirements before a penalty forfeiture is permitted under Section 1208: (a) “a person must have possession of property belonging to the corporation”; (b) that person “wrongfully withholds property from the receiver”; and (c) that wrongful withholding must occur after the day specified in the notice given under BCL Section 1207. Id. There is no dispute that Mr. Schofield possessed property of R&W in the form of checks issued by the State of New York in March or about 2008. From and after the date that he received those checks (whether in March or April 2008), Mr. Schofield possessed property of R&W. Mr. Schofield, however, denies that he was in possession of the June Check other than the momentary possession he had between the time he found the June Check on October 23rd and the time that he forwarded the check to the Receiver on that same date. 12 NEWYORK/#204016.2With respect to all of the tax refunds, however, the other statutory requirements for imposing a penalty under Section 1208 have not been satisfied. qd Receiver Has Neither Published Notice, Nor Published Dates for Turnover of Assets or Filing of Claims, Which Are Predicates for Penalty Damages under BCL Section 1208 The penalty under Section 1208 may only be imposed for amounts withheld “after the day specified in the notice given under section 1207 (Duties of receiver upon appointment).” See BCL § 1208. Accordingly, penalties under Section 1208 accrue only after the date specified in a notice provided under Section 1207 of the BCL. Section 1207 of the BCL specifies the duties imposed upon a receiver after his appointment. Among the duties imposed upon a receiver appointed under the BCL is that the receiver is required to “give immediate notice of his appointment by publication once a week for two successive weeks in two newspapers of general circulation in the county where the office of the corporation is located.” See BCL § 1207(a)(1) (such notice, the “Publication Notice”). The Publication Notice is required to specify that (A) _ All persons indebted to the corporation to render an account of all debts owing by them to the corporation and to pay the same to the receiver at a specified place and by a specified day (such notice of the date and place for payment of accounts payable, the “Accounts Payable Notice’), see BCL § 1207(a)(1)(A); and (B) All persons having in their possession any property of the corporation to deliver the same to the receiver at the specified place and by the specified day; (such notice of the date and place for turn over of property, the “Property Delivery Notice”). See BCL § 1207(a)(1)(B. In addition, because this receivership is associated with a judicial dissolution under Chapter 11 of the BCL, the Receiver is also required to specify the date and place with respect to a claims 13 NEWYORK/#204016.2resolution procedure in accordance with the requirements of BCL Section 1007.2 See BCL § 1207(a)(1)(C). Each of these matters are required to be set forth in Publication Notice, which, as set forth above, is required to be set forth on a publication of general circulation. In this regard, reading Section 1207 and 1208 together, the requirement of BCL Section 1208 that a penalty arises for property wrongfully withheld after the “date specified in Section 1207” must refer to the date specified in the Publication Notice for turning over property to the Receiver. In accordance with of BCL Section 1207(a)(1)(A), any accounts payable property would be subject to the date specified in the Accounts Payable Notice portion of the Publication Notice, whereas all other property would be subject to the Property Delivery Notice of BCL Section 1207(a)(1)(B). Accordingly, a penalty under Section 1208 only accrues after a party wrongfully fails to deliver property to the Receiver after the date specified by the Receiver in a Publication Notice. However, the Receiver has not given any Publication Notice? The reason for this failure may be that the Receiver first wants to address claim issues involving Mr. Schofield and/or Mr. Frankel — which delay in arranging for the Publication Notice may be justified. However, the failure of the Receiver to issue a Publication Notice specifying the date for the turn over of all of R&W’s property precludes the imposition of any forfeiture penalty under BCL Section 1208. 2 With respect to the establishment of a claims resolution procedure, Mr. Schofield has repeatedly requested that the Receiver establish such a procedure (which is to be governed by Section 1007 of the BCL). The Receiver, however, has as of yet not established such a procedure. 3 The Receiver has confirmed to counsel to Mr. Schofield that he has not yet provided the publication notice required under BCL Section 1207. 14 NEWYORK/#204016.2(2) Respondent Frankel Has Not Shown that Mr. Schofield Wrongfully Withheld Property from Receiver under BCL Section 1208 Respondent Frankel also has failed to make any showing that the tax refunds were “wrongfully withheld” from the Receiver. As set forth above, the Receiver never set a date that property was required to be turned over to the Receiver as required under the statutory scheme provided under BCL Section 1207. Such a date was required to be set in the Publication Notice under Section 1207. Further, Mr. Schofield turned over all of the tax refund property before the receiver even made a request for such amounts to be turned over. Accordingly, as Mr. Schofield tured over the tax refund property before the date specified in the statute and even before the Receiver made any request for such property, these facts demonstrates that the tax refund property was not “wrongfully withheld” under BCL Section 1208. Further, the concept of “wrongfully withheld” should also be construed in the light of the statutory framework for receiverships. Under Section 151 of New York’s Debtor and Creditor Law, entities are allowed to assert rights of setoff. Pending a determination regarding the amounts due to and from Mr. Schofield and R&W, and given the applicability of the receivership setoff statute, amounts temporarily withheld by Mr. Schofield cannot constitute a “wrongful withholding” within the meaning of BCL Section 1208. Further, in light of the fact that the tax refund amounts were immediately turned over to the Receiver after Mr. Frankel provided documents regarding to the tax refunds to Mr. Schofield’s counsel, no basis exists to allege that these facts cause a violation of BCL Section 1208. Finally, in light of the fact that Mr. Schofield neither knew of the existence of the June Check, nor deposited such check, there can be no basis to allege that Mr. Schofield wrongfully withheld the June Check from the Receiver. Rather, as soon as that check was discovered, it was turned over to the Receiver. 15 NEWYORK/#204016.2Cc. RATHER THAN CAUSING ANY INJURY, MR. SCHOFIELD’S ACTIONS BENEFITED ESTATE BY COLLECTING $86,344.79 OF TAX REFUND INCOME THAT COULD HAVE BEEN LOST ABSENT MR. SCHOFIELD’S ACTIONS Mr. Frankel also cannot claim that Mr. Schofield has caused any injury here. Mr. Schofield’s actions caused the R&W estate to obtain the benefit of substantial tax refunds. Indeed, absent Mr. Schofield’s actions, the tax refund could have been time barred and lost if Mr. Schofield failed to complete the tax refund claim for the tax period ending on November 30, 2004. Further, because Mr. Schofield immediately turned over the funds after Mr. Frankel delivered the exhibits relating to the tax refunds to Mr. Schofield’s counsel, the Receiver incurred no liability or expense in obtaining the benefit of the tax refunds. In sum, Mr. Schofield conferred a material benefit upon the R&W estate without any cost to R&W. Accordingly, Mr. Frankel’s allegations that the R&W estate suffered some nebulous injury or damage lacks any basis. 16 NEWYORK/#204016.2WHEREFORE, for all of the foregoing reasons, Mr. Schofield respectfully requests that this Court enter an Order (a) denying the relief requested in the Frankel Motion, (b) determining that no penalties are owed by Mr. Schofield under BCL Section 1208 and (c) determining that no basis exists to authorize the Receiver to commence litigation against Mr. Schofield based upon the previously turned over tax refunds; and (d) granting such other and further relief as this Court deems just and proper. Dated: December 23, 2008 VEDDER PRICE P.C. By: Michael J. Edelman Michael G. Davies Vedder Price P.C. 1633 Broadway 47th Floor New York, New York 10019 (212) 407-7700 Michael M. Eidelman Vedder Price P.C. 222 North LaSalle Street, Suite 2600 Chicago, Illinois 60601 Phone: (312) 609-7500 Attorneys for William F. Schofield, Sr. 17 NEWYORK/#204016.2EXHIBIT 1 October 22, 2008 E-Mail Exchanges Regarding Appendix of Exhibits NEWYORK/#204016.2From: “Parekh, Niraj (x2641)" To: "MICHAEL J. EDELMAN" , "LaGueux, Jeffrey E. (x26 84)" cc: “Jr. William Andes" , "MICHAEL DAVIES" , "Tony Hernandez” Date: 10/22/2008 4:27 PM Subject: RE: R&W / Trial Exhibit Index for October 27, 2008 Hearing Attachments: Exhibit 8.pdf; Exhibit 9.pdf; Exhibit 10.pdf Please add the attached documents to the exhibit list and include copies in the binder: Exhibit 8, described as: New York State Department of Taxation and Finance Taxpayer Account Reconciliation Report. Exhibit 9, described as: Demonstrative Chart Prepared by Accountant Re: R&W Corporate Tax Return Amendments. Exhibit 10, described as: Business Email re: R&W Corporate Tax Refunds. Thank you, Niraj Parekh -----Original Message----- From: MICHAEL J. EDELMAN [mailto:mjedelman@vedderprice.com] Sent: Wednesday, October 22, 2008 3:10 PM To: LaGueux, Jeffrey E. (x2684); Parekh, Niraj (x2641) Ce: Jr. William Andes; MICHAEL DAVIES; Tony Hernandez Subject: RE: R&W / Trial Exhibit Index for October 27, 2008 Hearing Importance: High * High Priority ** We have revised the exhibit chart and will include the Exhibits A - G attached to Frankel's Verified Response in the trial exhibit binder. Attached is the revised table of trial exhibits. The only changes from the prior draft sent to you are the inclusion of references to your exhibits and the opening paragraph. Please let us know asap (by 4:30 p.m.) if you have any comments. The deadline is one of practicality only -- we are trying to make the FedEx deadline. As Jeff knows from our conversations with the court, it takes a few days for FedEx packages to be delivered to chambers. Accordingly, we need to have the trial exhibits sent out by FedEx today to hopefully have them delivered in time for the hearing. Michael Michael J. Edelman Vedder Price P.C. 1633 Broadway 47th FloorNew York, NY 10019 Work Tel.: (212) 407-6970 Work Fax: (212) 407-7799 Cell No.: (917) 478-6543 e-mail: MJEdelman@VedderPrice.com >>> "Parekh, Niraj (x2641)" 10/22/2008 2:25 PM >>> Michael, We will include as Respondents’ exhibits, Exhibits A - G attached to our Verified Response, copies of which are already in your possession. Please include copies of those exhibits in the exhibit binder and include them the exhibit chart. However, we do not agree with your self-imposed deadline that we must provide you with any exhibits by 2:00 p.m. today. Accordingly, we reserve our rights to supplement the trial exhibit list and to provide any additional exhibits to the Court by the close of business on Friday (in advance of the hearing). To the extent you are not already in possession of any additional exhibits, we will also provide you with a copy at the same time. Otherwise, we will notify as to the description of such documents. Thank you, Niraj Parekh -----Original Message----- From: MICHAEL J. EDELMAN [mailto:mjedelman@vedderprice.com] Sent: Wednesday, October 22, 2008 2:03 PM To: LaGueux, Jeffrey E. (x2684); Parekh, Niraj (x2641) Cc: William Andes, Jr.; MICHAEL DAVIES Subject: Fwd: R&W / Trial Exhibit Index for October 27, 2008 Hearing Importance: High ** High Priority ** Jeff and Niraj: We did not receive any exhibits that you intend to submit to the Court for Monday's hearing. Please let us know immediately by return email if you intend to submit exhibits in addition to the ones set forth in the attached list that we prepared. As set forth in yesterday's email, we intend to submit a binder of trial exhibits (as requested by the Court during our telephonic status conference) to the Court today by overnight courier. Your prompt response would be appreciated. Michael Michael J. Edelman Vedder Price P.C. 1633 Broadway 47th FloorNew York, NY 10019 Work Tel.: (212) 407-6970 Work Fax: (212) 407-7799 Cell No.: (917) 478-6543 e-mail: MJEdelman@VedderPrice.com CIRCULAR 230 NOTICE: Treasury Department Circular 230 requires that we inform you that any discussion of U.S. federal tax issues contained herein and in any accompanying materials is not intended or written to be relied upon, and cannot be relied upon, by any person for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein or therein. Priviteged/Confidential Information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy or deliver this message to anyone. In such case, you should destroy this message and kindly notify the sender by reply email. Please advise immediately if you or your employer do not consent to Internet email for messages of this kind. IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or enclosures) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant to U.S. Treasury regulations governing tax practitioners.) CIRCULAR 230 NOTICE: Treasury Department Circular 230 requires that we inform you that any discussion of U.S. federal tax issues contained herein and in any accompanying materials is not intended or written to be relied upon, and cannot be relied upon, by any person for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein or therein. Privileged/Confidential Information may be contained in this message. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy or deliver this message to anyone. In such case, you should destroy this message and kindly notify the sender by reply email. Please advise immediately if you or your employer do not consent to Internet email for messages of this