-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PoDXs6Funo13+3BqAtS89IIkYeXEWtsw9Rxv9dXCzypoZDmDYTISAzTcaAvoHbrq OiP4I8rJSl/HcavaxNEuhw== 0001019687-01-500122.txt : 20010509 0001019687-01-500122.hdr.sgml : 20010509 ACCESSION NUMBER: 0001019687-01-500122 CONFORMED SUBMISSION TYPE: 10KSB/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010508 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IDM PARTICIPATING INCOME CO II CENTRAL INDEX KEY: 0000832475 STANDARD INDUSTRIAL CLASSIFICATION: FINANCE SERVICES [6199] IRS NUMBER: 330177934 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB/A SEC ACT: SEC FILE NUMBER: 000-16832 FILM NUMBER: 1625403 BUSINESS ADDRESS: STREET 1: 2424 SE BRISTOL STREET SUITE 333 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 BUSINESS PHONE: 2134980141 MAIL ADDRESS: STREET 1: 2424 SE BRISTOL STREET SUITE 333 CITY: NEWPORT BEACH STATE: CA ZIP: 92660 10KSB/A 1 idm_10ka.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission file number: 0-16832 IDM Participating Income Company-II (A CALIFORNIA LIMITED PARTNERSHIP) State of California 33-0177934 - ---------------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 19401 South Vermont, Suite K100 TORRANCE, CALIFORNIA 90502 - ---------------------------------------- -------------------------------------- (Address of principal executive offices) (Zip Code) (562) 590-1390 --------------------------------------------------- Registrant's telephone number, including area code: 2424 S.E. Bristol Street, Suite 333, Newport Beach, California 92660 --------------------------------------------------------------------- (Former name or former address, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- None None Securities registered pursuant to Section 12(g) of the Act: 200,000 LIMITED PARTNERSHIP UNITS --------------------------------- Title of class Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]. No [ ]. Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K, not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [X] State the aggregate market value of the limited partnership units held by non-affiliates computed by reference to the price at which the units were sold, or the average bid and asked prices of such units, as of a specified date within the past 60 days: $0. No broker or dealer currently makes a market in the units. PART I ITEM 1. BUSINESS IDM Participating Income Company-II, a California Limited Partnership (the "Partnership" or "Registrant"), is a California limited partnership formed in 1986 under the California Revised Limited Partnership Act to make participating loans to affiliates of the original general partner and to other parties ("Borrowers"). The general partner of the Registrant is NewPic GP Corporation ("NewPic"). See "CHANGE IN CONTROL" and "LEGAL PROCEEDINGS" below for a discussion of election of NewPic as the general partner and a discussion of legal action (the "Legal Action") filed against the former general partner by NewPic and the Registrant. All units of the Registrant's Limited Partnership Interests have been sold for cash resulting in proceeds of $20,000,000, all of which was invested in loans made to the Borrowers. The Partnership's stated objectives are to preserve the Partnership's investment capital, provide quarterly distributions, and provide additional participating profits upon the sale, refinancing or other disposition of the real estate that was to be used as collateral for the participating loans. The Partnership loaned its original funds as construction and/or permanent loans pursuant to standardized master loan agreement and participating note forms. Each participating loan was to be secured by a first or junior deed of trust and assignment of rents on the respective property, and was to be non-recourse against the Borrower upon completion of improvements to the real property. The participating loans were to have a term of the earliest of five years from the date the certificate of occupancy was issued or six years from the date of the loan. Interest income received on the loans was not to be re-lent, but was required to be distributed to the limited partners. Re-lending of principal is prohibited with only one limited exception for an early payoff of principal received within the first twelve months after the loan was made. Furthermore, principal repayments could only be re-lent once, and the maximum aggregate term on any loan, including any re-loaning of principal, shall not exceed 8 years. The general partner is prohibited from making loans unless the Partnership obtained an appraisal from an AIREA member dated within 90 days of the loan, is prohibited from making loans where the aggregate amount of the Partnership loan and the senior debt exceeds 85% of the appraised value of the property, and is required to use only the Partnership's standard master loan agreement and participating note forms. IDM Corporation ("IDM"), a California corporation, was the original sponsor for the Partnership. IDM, together with certain affiliates, which had borrowed money from the Partnership, reorganized under Chapter 11 of the United States Bankruptcy Code effective on March 22, 1993. As restructured in the bankruptcy of some of the debtors of the Registrant, collection of the original notes held by the Partnership was dependent upon both the value of the property securing the loans and the continuing credit of the applicable Borrowers. The original secured loans remaining after the IDM bankruptcy were non-recourse, and if there was a default on the loan, the Partnership would only have recourse against the respective property and not any Borrower. 2 PLAN OF REORGANIZATION The order confirming the Reorganization Plan of IDM and some of the Borrowers of the Registrant and certain other affiliates of IDM (the "Plan") was entered by the United States Bankruptcy Court for the Central District of California, Northern Division on March 10, 1993 and became effective on March 22, 1993. A copy of the Plan was filed as Exhibit 28 to the 1992 Form 10-K and is incorporated herein by reference. The Partnership received a total of 73,607 shares of IDM stock for its aggregate $6,418,355 of IDM under-secured debt which have been distributed to the partners of the Partnership. TAKEOVER OF IDM AND THE PARTNERSHIP In April 1996, IDM Corporation, entered into a Stock Purchase Agreement with S-P Properties, Inc. Under this agreement, S-P Properties, Inc. purchased 4,006,589 newly issued shares of IDM Corporation common stock, representing 47.5% of the issued and outstanding common stock of IDM Corporation. Under this transaction, S-P Properties, Inc. acquired a controlling interest in IDM Corporation, and its affiliates. One of IDM Corporation's wholly owned subsidiaries includes IDM Participating Income Corporation, the general partner of the former general partner (IDM Participating Income General Partners' Co. - II, a California limited partnership) of Registrant. S-P Properties, Inc. is controlled by William J. Carden, who is an officer, director and shareholder thereof. Mr. Carden is also the founder, President and a director of CGS Real Estate Company, Inc. Mr. Carden was a consultant to IDM beginning in 1994. CHANGE IN CONTROL NewPic gained control of the Partnership through a solicitation of proxy/consents which commenced in August, 2000. The proxy/consents granted authority to (1) remove and expel the former general partner of the Registrant, IDM Participating Income General Partners' Co. - II, and (2) elect NewPic as the replacement general partner. NewPic was formed in 1999 by four limited partners of the Partnership. NewPic obtained the proxy/consents of a majority of the limited partnership Units, and on September 29, 2000, notified the former general partner of the results of the voting. The former general partner disputed the results of the vote, refused to turn over Partnership records to NewPic, and refused to cease acting as general partner of the Registrant. As a result, NewPic filed legal action (the "Legal Action") in the name of the Partnership on October 25, 2000, and on February 2, 2001 the Partnership obtained a preliminary injunction that, among other things, restrained the former general partner and other defendants from acting or purporting to act as general partner of the Registrant, and further ordered the defendants to provide the Partnership's records to NewPic. See the detailed discussion of the Legal Action under "LEGAL PROCEEDINGS" below. On February 21, 2001, the former general partner began turning over Partnership records to NewPic. LOAN SUMMARIES The discussion below respecting loan summaries is based upon information provided in part by the former general partner. The Partnership has not and cannot vouch for the veracity or reliability of information and records provided by the former general partner. Furthermore, certain required documents, such as appraisals and deeds of trust, were missing from the records provided by the former general partner. As more fully discussed below, as of the date hereof the Partnership has only one loan outstanding, an unsecured note due from CGS Real Estate Company, Inc. in the face amount of $1,643,530. That note is in default and fully reserved at December 31, 2000. 3 HARBOR PLAZA LOAN. In October 1988, the Partnership funded a $1,380,000 loan to Harbor Plaza, Ltd. (an affiliate of the former general partner) to refinance an existing loan on the Harbor Plaza project located in Port Hueneme, California. The project is comprised of an operating single-story garden office building totaling approximately 14,000 square feet. The loan was secured by a first deed of trust. At December 31, 1995,a reserve of $565,000 was outstanding against this loan. At December 31, 1996, an additional provision of $400,000 was recorded for a total reserve of $965,000. During 1997, the former general partner wrote off $1,030,000 of the outstanding note balance and $24,000 of outstanding interest receivable. The remaining note balance of $350,000 was paid off in January 1998. The Registrant believes that the write off of the Harbor Plaza loan was done in breach of the former general partner's fiduciary duty, and the Partnership lost at least $700,000 due to the improper write off. The Registrant is seeking recovery of the Partnership's losses on this loan in the Legal Action. MEADOW WOOD VILLAGE LOAN. In March 1987, the Partnership funded a $2,100,000 loan to Meadow Wood Village, Ltd. (an affiliate of the former general partner) for a 206 unit apartment project in Long Beach, California, secured by a second trust deed on the property. In its fiscal year end 1997 Form 10-K, the former general partner stated it "sold" the note and deed of trust "effective September 1, 1996 for $100,000" and that an additional $150,000 was received "related to this note" in January 1997 from an unnamed affiliate. The former general partner then wrote off the balance of this note in 1996. The Registrant believes that the write off of the Meadow Wood Village loan was done in breach of the former general partner's fiduciary duty, and the Partnership lost at least $1,850,000 due to the improper write off. The Registrant is seeking recovery of the Partnership's losses on this loan in the Legal Action. VILLA REDONDO LOAN. In October 1989, the Partnership began funding a $12,000,000 loan ($7,100,000 at December 31, 1996) to IDM Apartments Corporation (an affiliate of the former general partner) for the Villa Redondo Apartments project located in Long Beach, California. The project is a 125 unit apartment complex. The loan was secured by a junior deed of trust. Under the Plan, the secured principal balance was reduced to $3,017,000. The remainder was converted to an unsecured non-interest-bearing note due December 31, 1997. IDM Apartments Corporation filed a second Chapter 11 bankruptcy in November 1994. This loan was fully reserved at December 31, 1996 by the former general partner. During 1997, the Partnership received a $300,000 principal payment. This payment was recorded as a reserved receivable recovery. In the first quarter of 1997, the remaining note receivable and interest receivable balances were written off by the former general partner. The Registrant believes that the write off of the Villa Redondo loan was done in breach of the former general partner's fiduciary duty, and the Partnership lost at least $3,272,000 due to the improper write off. The Registrant is seeking recovery of the Partnership's losses on this loan in the Legal Action. 4 BEACH & LAMPSON LOAN. In December 1991, the Partnership funded a $3,500,000 loan to IDM (an affiliate of the former general partner) on Pads A, E, and F of the Beach and Lampson retail center. The loan was secured by a first deed of trust. The borrower repaid $1,100,000 during 1992. Under the Plan, the secured principal balance was reduced to $1,333,000 and the remainder was converted to shares of IDM common stock and distributed to the limited partners of this Partnership. During 1996, IDM sold Pad F of the Beach and Lampson retail center for $525,000. The former general partner reported that the net sales proceeds received of $474,085 were repaid to the Partnership and applied as a principal reduction on this loan. During 1996, the remaining principal balance of $858,915 was reserved in its entirety by the former general partner. After the sale, the Partnership still held a first deed of trust on the remaining pads of the property and the balance of the loan to the Partnership was approximately $859,000. In August, 2000 the former general partner reconveyed the deed of trust covering the remaining pads. The Registrant believes that there was sufficient equity to allow for a substantial payoff on the Partnership note in August, 2000, but that the former general partner reconveyed the deed of trust for no consideraton resulting in damages to the Partnership of at least $859,000. The Registrant is seeking recovery of the Partnership's losses on this loan in the Legal Action. During the period from 1997 through 2000, the former general partner reported that the Partnership funded a number of new participating loans to its affiliates. These loans are described below. SIERRA PACIFIC PENSION INVESTORS '84 LOAN. The former general partner reported that on April 15, 1997 the Partnership funded a loan to Sierra Pacific Pension Investors '84, an affiliate of the former general partner, in the amount of $200,000. The loan was represented to be secured by a second trust deed on the Sierra Valencia property located in Tucson, Arizona. Monthly payments of $6,659, consisting of both interest and principal, were to commence on May 15, 1997 and continue until April 15, 2000, when the indebtedness was due in full. As of December 31, 1999, the loan balance was reported to be $32,000. The former general partner reported that this loan was repaid in approximately March, 2000. SORRENTO II LAND LOAN. The former general partner reported that the Partnership entered into a loan agreement with CGS Real Estate Company, Inc., an affiliate of the former general partner, on August 1, 1997. Under this loan the Partnership purportedly funded $165,000 to secure financing for a land acquisition in San Diego, California (the "Sorrento II Land"). The former general partner reported that in 1998 the Partnership funded an additional $585,000 to CGS Real Estate Company, Inc., and the note from CGS Real Estate Company, Inc. was amended to increase the loan amount to $750,110. The former general partner never obtained or recorded a deed of trust against the Sorrento II Land. The former general partner reported that during the first quarter of 2000 the Sorrento II Land was sold. No principal or interest payments were made to the Partnership on this loan during 2000. Sometime during the period from approximately April, 2000 to August, 2000, the former general partner caused CGS Real Estate Company, Inc. to issue a new promissory note to the Partnership in the sum of $1,643,530, purporting to collapse the Sorrento II Land loan (and the Bally Land loan and the EVA I Land loan discussed below), into one new promissory note. The former general partner back-dated the new note to January 3, 2000. No deed of trust was ever recorded to secure this $1,643,530 loan. Some partial payments of interest were made on this loan, but no principal payments have been made and it is in default. In late February, 2001, the Partnership made a demand on CGS Real Estate Company, Inc. to bring this loan current, but it has failed to make any further payments. Because there is no recorded security for the loan and the note is, by its terms, non-recourse against the borrower, the Partnership believes the note is uncollectible. The Registrant is seeking recovery of the Partnership's losses on this loan in the Legal Action. 5 BALLY LAND LOAN. The former general partner reported that on December 1, 1997, $316,500 was loaned to CGS Real Estate Company, Inc. to provide financing for a land acquisition in Long Beach, California (the "Bally Land"). The Partnership believes this loan was not secured by a trust deed. No interest or principal payments were made to the Partnership during 2000. Instead, the former general partner collapsed this obligation into the new $1,643,530 note from CGS Real Estate Company, Inc. in 2000, as more fully discussed above. EVA I LAND LOAN. The former general partner reported that on December 24, 1997, the Partnership funded a $372,500 loan to NO-SO, Inc., an affiliate of the former general partner, which the former general partner reported would be secured by vacant land in Phoenix, Arizona. It also reported that in 1999, CGS Real Estate Company, Inc. purchased the land from NO-SO, Inc. and assumed the loan. The former general partner never recorded a deed of trust securing this loan. During 2000, the former general partner made an advance of approximately $30,000 to CGS Real Estate Company, Inc. which the former general partner has debited to this loan. The former general partner collapsed this obligation into the new $1,643,530 note from CGS Real Estate Company, Inc. in 2000, as more fully discussed above. INDEMNIFICATION OF GENERAL PARTNER Section 16 of the Partnership Agreement provides for indemnification of the General Partner by the Partnership under certain circumstances. Generally, the General Partner may be indemnified out of Partnership assets for any loss or liability arising from its conduct whenever such course of conduct does not constitute fraud, gross negligence, or gross misconduct. Indemnification for securities laws violations may be allowed only in certain limited circumstances (see Section 16.2 of the Partnership Agreement). In the case of a liability arising from an alleged violation of the securities laws, the General Partner may obtain indemnification only if the General Partner is successful in defending the action and the court specifically approves the indemnification or, if the action is settled, the court specifically approves the settlement and the indemnification of such settlement. To the extent that any indemnification is paid, the assets of the Partnership will be depleted and the return to a limited partner on his investment may be impaired. As the result of this indemnification arrangement, purchasers of Partnership Units may have a more limited right of action than they would have absent the indemnification provisions in the Partnership Agreement. Furthermore, purchasers of Partnership Units should bear in mind that adequate legal remedies may not be available or affordable in the event they believe that fiduciary obligations have been breached. ITEM 2. PROPERTIES The Partnership owns no physical properties. 6 ITEM 3. LEGAL PROCEEDINGS The Partnership, along with NewPic, is the plaintiff in a legal action originally filed in the Los Angeles Superior Court on October 25, 2000 (the "Legal Action"). The Legal Action seeks, among other things, damages and injunctive relief based upon allegations of, among other things, breach of fiduciary duty, negligence and breach of the partnership agreement against the Partnership's former general partner (IDM Participating Income General Partners' Co. - II), the former general partner's general partner (IDM Participating Income Corporation), and the directors and former directors (William J. Carden, Morris Cohen and Steven Speier) of IDM Participating Income Corporation. Damages sought in the Legal Action include recovery of loan balances written off, forgiven, or re-lent by the former general partner. The Partnership estimates that these damages total in excess of $8,500,000. The Complaint alleges, among other things, that the defendants: improperly failed and refused to turn over Partnership records to NewPic; failed to comply with the requirements of the Partnership Agreement with respect to the maintenance of, preparation of, and dissemination of books, records, and financial statements and reports pertaining to the Partnership; failed to make distributions to the limited partners as required by the Partnership Agreement; misappropriated Partnership funds, assets and business opportunities to benefit themselves and their affiliates; re-loaned interest and principal in violation of the Partnership Agreement, including re-loaning principal more than once and for terms beyond the maximum aggregate term specified in the Partnership Agreement; made loans without using the Partnership's required Master Loan Agreement and Participating Note forms; made loans without obtaining appraisals from an AIREA member within 90 days of their loans; made loans where the aggregate amount of the Partnership loan and the senior debt exceeded 85% of the appraised value of the property; and did not collect participating profits on Partnership loans. The former general partner removed the Legal Action to the United States District Court, Central District of California. This removal was predicated upon a counterclaim filed by the former general partner against NewPic and its principals alleging a violation of federal Securities Laws in connection with their solicitation of the consent/proxies. On January 29, 2001, the District Court heard NewPic's application for a preliminary injunction, and on February 2, 2001 it issued a preliminary injunction that, among other things, restrained the defendants from acting or purporting to act as general partner of the Registrant, and further ordered the defendants to turn over Partnership records to NewPic. The District Court Order granting the preliminary injunction is attached as Exhibit 29 to this Form 10-K. The former general partner's requests to stay the preliminary injunction have been denied by the District Court and the Ninth Circuit Court of Appeals. An appeal of the grant of the preliminary injunction is currently pending before the Ninth Circuit. One of the issues in the Legal Action, aside from the Partnership's claim for damages in excess of $8,500,000, is the validity of the vote to remove the former general partner and elect NewPic as the replacement general partner. The possibility exists that this vote may not be upheld, that NewPic would be banned from continuing to act as general partner, that the Partnership would not prevail in its claim for damages, and/or that the Partnership would not be able to collect on a judgment it may receive in its favor. The Partnership believes that the only asset left in the Partnership is the Legal Action. Trial in the Legal Action is set for January 8, 2002. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS As of December 31, 2000, the number of record holders of the 200,000 limited partnership units is 1,645. These securities are all of the same class, namely, limited partnership interests (units) and were registered pursuant to a registration statement filed under the Securities Act of 1934. The total offering was 200,000 units at $100.00 per unit. No broker or dealer currently makes a market in the units of the Partnership. Accordingly, there are no published price or trading volume figures available for the units. The units have been transferred on an extremely limited extent from time-to-time since the inception of the Partnership; however, the market for the units is highly restricted and sporadic, especially in view of the investor suitability requirements imposed on new purchasers by the various state blue sky laws. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain selected historical financial data of the Partnership. The selected operating and financial position data as of and for each of the five years ended December 31, 2000 have been derived from the audited financial statements of the Partnership. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Financial Statements and Notes thereto. Statement of Operations Information (in thousands, except per unit amounts)
Years Ended December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- Interest income $ 200 $ 183 $ 159 $ 125 $ 254 Recovery of reserved receivables 0 0 0 300 250 General and administrative (54) (58) (73) (61) (64) Provision for possible losses (1,828) 0 0 (89) (1,099) --------- --------- --------- --------- --------- Net income (loss) $ (1,682) $ 125 $ 86 $ (275) $ (659) ========= ========= ========= ========= ========= Net income (loss) per limited partnership units outstanding $ (8.41) $ .62 $ .43 $ (1.37) $ (3.26) ========= ========= ========= ========= ========= Cash distributions per limited Partnership units outstanding $ 0 $ 0 $ 0 $ 0 $ 0 ========= ========= ========= ========= ========= 8 Balance Sheet Information (in thousands) December 31, -------------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- Cash/interest receivable (net of reserve) $ 1 $ 212 $ 9 $ 107 $ 633 Loans to affiliates (net of reserve) 0 1,471 1,542 1,370 415 Receivables from affiliate 0 0 0 1 150 Prepaid expenses 0 0 7 0 0 -------- -------- -------- -------- -------- Total Assets $ 1 $ 1,683 $ 1,558 $ 1,478 $ 1,198 ======== ======== ======== ======== ========
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations includes certain forward looking statements reflecting the Partnership's expectations in the near future; however, many factors which may affect the actual results, especially changing regulations, are difficult to predict. Accordingly, there is no assurance that the Partnership's expectations will be realized. Overview: The following discussion should be read in conjunction with the Selected Financial Data (Item 6. of this Form 10-K) and the Partnership's Financial Statements and Notes thereto beginning on page F-1 of this Form 10-K. The bankruptcy proceeding and the Plan, which is discussed in detail in Item 1.Business, has had, and will continue to have, a material and substantial impact on the Partnership's liquidity, capital resources and results of operations, which are discussed below. Results of Operations: COMPARISON OF YEAR ENDED DECEMBER 31, 2000 TO YEAR ENDED DECEMBER 31, 1999. Sometime during the period from approximately April 2000 to August 2000, the former general partner caused CGS Real Estate Company, Inc. to issue a new promissory note to the Partnership in the sum of $1,643,530, purporting to collapse the Sorrento II land loan, the Bally land loan, and the Eva I land loan discussed in Item I, page 5 above. The current general partner has fully reserved this loan because it is in default, it is unsecured as a result of never having been recorded against any specific property and the borrower has shown no intention of repaying it. COMPARISON OF YEAR ENDED DECEMBER 31, 1999 TO YEAR ENDED DECEMBER 31, 1998. Interest income increased by $24,000 principally as a result of a full year of interest recognized on the funding of an additional $585,000 in 1998 to an affiliate on an existing loan. General and administrative expenses decreased by $15,000, primarily due to a decrease in insurance and data processing costs. Further, lower accounting fees were incurred in 1999 when compared to the prior year. 9 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Index to Financial Statements on page F-1 of this Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE In March 2001, Arthur Andersen LLP ("AA") resigned as the Registrant's independent accountant. AA stated it had only been retained to conduct financial statement reviews in connection with Registrant's year 2000 first, second and third quarter SEC Form 10-Qs, and that in March 2001 IDM GP and its controlling persons requested that AA not provide further auditing or other services to the Registrant. AA reported that this request was based on the fact that Registrant and NewPic were engaged in litigation with IDM GP, and AA was still engaged by IDM GP's affiliates and controlling persons to perform auditing and other services in connection with their proposed consolidation of IDM GP's affiliates and controlling entities into a proposed real estate investment trust, American Spectrum Realty, Inc. AA had been engaged by the Registrant effective May 3, 2000. During the period from May 2000 through March 2001, there were no disagreements reported between the Registrant and AA on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures which disagreements, if not resolved to the satisfaction of AA, would have caused it to make reference to the subject matter of the disagreement in connection with its report. The Registrant is currently undertaking a review of services rendered by Registrant's prior auditors to ascertain the extent, if any, of errors, negligence or breach of standard accounting practice or procedures. In March 2001 Registrant appointed Cacciamatta Accountancy Corporation ("CAC") as independent auditor. The Registrant has not consulted CAC on items which (1) involved the application of accounting principles to a specified transaction, either completed or proposed, or involved the type of audit opinion that might be rendered on the Registrant's financial statements, (2) concerned the subject matter of a disagreement or a reportable event with Registrant's former accountants, or (3) relate to a review of services rendered by Registrant's prior auditors. 10 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The officers and directors of NewPic, the General Partner of Registrant, are:
- --------------------------------------------------------------------------------------------------------------- LIMITED PARTNERSHIP NEWPIC UNITS NAME (1) BACKGROUND INFORMATION POSITION OWNED - --------------------------------------------------------------------------------------------------------------- Richard Meehan Age 65. For the last five years he has practiced President 1,000 as a dentist specializing in endontics. Owns 5 Director apartment buildings (76 units) and 1 commercial building (2 tenants). Investor in numerous IDM partnerships. Member of IDM Bankruptcy Unsecured Creditors Committee. Active in IDM/Meadowood Village investors group that obtained favorable settlement for investors. - --------------------------------------------------------------------------------------------------------------- Wesley Groom Age 65. Retired since 1996. Prior to 1996 he Secretary 3,077.86 was an insurance claims adjuster - 28 years with Director Allstate Insurance & 5 years with independent adjusting firm. - --------------------------------------------------------------------------------------------------------------- Jack Stellato Age 72. For the last five years he has been a Treasurer 152.27 retired real estate investor. From 1954-1970 he Director was involved in buying, selling and managing real estate (single family homes, large apartment buildings, office buildings). Purchased numerous IDM investments from 1970-1991. Former director of IDM Corp. 1980-1989. - --------------------------------------------------------------------------------------------------------------- William Yetter Age 73. During the last five years he has been Director 118.73 retired. Aerospace Research Engineer 1951- 1984. Investor in numerous real estate limited partnerships. Licensed representative for IDM Securities 1984-1993. - ---------------------------------------------------------------------------------------------------------------
(1) The address for all persons listed is: 19401 South Vermont, Suite K100, Torrance, CA 90502 The principals of NewPic own an aggregate of 4348.86 units, approximately 2.17% of the outstanding limited partnership units of Registrant. In addition, NewPic controls 1% of the outstanding units by virtue of being the General Partner. There have been no events under any bankruptcy act, no criminal proceedings, and no judgments or injunctions material to the evaluation of the ability and integrity of any current director or officer during the past five years. The Partnership believes the issuance of the preliminary injunction in the Legal Action is material to an evaluation of the ability and integrity of the directors of the former general partner. ITEM 11. MANAGEMENT REMUNERATION The Registrant is a California Limited Partnership and has no officers or directors. No options to purchase securities of the Registrant have been granted to any person. 11 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See Item 10 above for the beneficial ownership of limited partnership units by officers and directors individually and by the General Partner. Management knows of no holders of 5% or more of the units outstanding. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS As described in Item 1. BUSINESS, and Item 3, LEGAL PROCEEDINGS, the Registrant has loaned funds to IDM, the parent of the former general partner and to other affiliates of the former general partner. All transactions undertaken by the former general partner with its affiliates are under investigation and subject to claims in the Legal Action. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. A. EXHIBITS: (3) The Amended and Restated Agreement of Limited Partnership previously filed as Exhibit 3 to the Registrant's Registration of Securities on Form 10 dated April 28, 1988 (Registration No. 0-16832) which is incorporated herein by reference. (10) Master Loan Agreement and Participating Notes previously filed as Exhibit 10 to the Registrant's Registration of Securities on Form 10 dated April 28, 1988 (Registration No. 0-16832) which is incorporated herein by reference. (28) The Disclosure Statement and Joint Plan of Reorganization of IDM Corporation and its Affiliated Debtors previously filed as Exhibit 28 to the Registrant's Form 10-K for the fiscal year ended December 31, 1992 filed on April 14, 1993 (Commission No. 0-16832) which is incorporated herein by reference. (99.1) District Court Order Granting Application For Preliminary Injunction filed January 29, 2001. B. FINANCIAL STATEMENT SCHEDULES All schedules are omitted as they either are not required or are not applicable, or the required information is set forth in the financial statements and notes thereto. C. REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the fourth quarter of fiscal 2000. 12 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. IDM PARTICIPATING INCOME CO. - II, A California Limited Partnership NewPic GP Corporation General Partner May 3, 2001 /S/ Richard Meehan ------------------------ Richard Meehan President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. May 3, 2001 /S/ Richard Meehan ------------------------ Richard Meehan Director NewPic GP Corporation May 3, 2001 /S/ Jack Stellato ------------------------ Jack Stellato Director NewPic GP Corporation 13 INDEX TO FINANCIAL STATEMENTS PAGE Independent Auditors' Report F-2 Balance Sheets - December 31, 2000 and 1999 F-3 Statements of Operations and Partners' Capital - for the years ended December 31, 2000, 1999, and 1998 F-4 Statements of Cash Flows - for the years ended December 31, 2000, 1999, and 1998 F-5 Notes to Financial Statements F-6 F-1 INDEPENDENT AUDITORS' REPORT To the Partners of IDM Participating Income Company - II: We have audited the accompanying balance sheets of IDM Participating Income Company - II, a California limited partnership, (the "Partnership") as of December 31, 2000 and the related statements of operations and partners' capital and cash flows for the year then ended. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such statements present fairly, in all material respects, the financial position of IDM Participating Income Company - II as of December 31, 2000 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /S/ CACCIAMATTA ACCOUNTANCY CORPORATION Irvine, California April 12, 2001 F-2 INDEPENDENT AUDITORS' REPORT Registrant's financial statements for fiscal 1999 and 1998 were audited by Deloitte & Touche LLP, Houston, Texas, whose report thereon dated February 25, 2000 was unqualified. The reader of these financial statements cannot rely on that report as Registrant has been unable to obtain Deloitte & Touche's updated auditors' report for inclusion in this Form 10-K in spite of attempts by Registrant to do so. F-2A IDM PARTICIPATING INCOME COMPANY-II A California Limited Partnership Balance Sheets December 31, 2000 and 1999 (in thousands, except unit amounts) ASSETS 2000 1999 (unaudited) ------ ------ Cash .............................................. $ 1 $ 37 Loans to affiliates Interest receivable, less allowance of $179 and $0 ............................... 0 175 Principal, less allowance of $2,502 and $859 ..................................... 0 1,471 Other, less allowance of $6 and $0 ........... 0 0 ------ ------ $ 1 $1,683 ====== ====== LIABILITIES AND PARTNERS' CAPITAL Commitments and contingencies - - General partner ................................... $ 0 $ 440 Limited partners 200,000 units authorized, issued and outstanding .. 1 1,243 ------ ------ Total partners' capital ........................... 1 1,683 ------ ------ Total liabilities and partners' capital ........... $ 1 $1,683 ====== ====== Limited partners' equity per unit ................. $ 0 $ 6.22 ====== ====== The accompanying notes are an integral part of these financial statements. F-3 IDM PARTICIPATING INCOME COMPANY-II A California Limited Partnership Statement of Operations and Partners' Capital For The Year Ended December 31, 2000 (in thousands, except unit and per unit amounts)
General Limited Partner Partners Total ---------- ---------- ---------- Interest income ............................ $ 2 $ 198 $ 200 Provision for possible losses .............. (441) (1,387) (1,828) General and administrative expenses ........ (1) (53) (54) ---------- ---------- ---------- Net loss .............................. (440) (1,242) (1,682) Partners' capital - beginning of year ...... 440 1,243 1,683 Distributions to partners .................. 0 0 0 ---------- ---------- ---------- Partners' capital - end of year ............ $ 0 $ 1 $ 1 ========== ========== ========== Net loss per limited partnership unit outstanding ...................... $ (6.21) ========== Number of limited partnership units outstanding ..................... 200,000 ==========
The accompanying notes are an integral part of these financial statements. F-4 IDM PARTICIPATING INCOME COMPANY-II A California Limited Partnership Statement of Operations and Partners' Capital For The Year Ended December 31, 1999 (Unaudited) (in thousands, except unit and per unit amounts)
General Limited Partner Partners Total ---------- ---------- ---------- Interest income (Note 2) ............. $ 2 $ 181 $ 183 General and administrative expenses (Note 3) ............... (1) (57) (58) ---------- ---------- ---------- Net income ...................... 1 124 125 Partners' capital - beginning of year ............................ 439 1,119 1,558 Distributions to partners ............ 0 0 0 ---------- ---------- ---------- Partners' capital - end of year ...... $ 440 $ 1,243 $ 1,683 ========== ========== ========== Net income per limited partnership unit outstanding .... $ .62 ========== Number of limited partnership units outstanding ............... 200,000 ==========
The accompanying notes are an integral part of these financial statements. F-4A IDM PARTICIPATING INCOME COMPANY-II A California Limited Partnership Statement of Operations and Partners' Capital For The Year Ended December 31, 1998 (Unaudited) (in thousands, except unit and per unit amounts)
General Limited Partner Partners Total ---------- ---------- ---------- Interest income (Note 2) ................... $ 2 $ 157 $ 159 General and administrative expenses (Note 3) (1) (72) (73) ---------- ---------- ---------- Net income ............................ 1 85 86 Partners' capital - beginning of year ...... 438 1,034 1,472 Distributions to partners .................. 0 0 0 ---------- ---------- ---------- Partners' capital - end of year ............ $ 439 $ 1,119 $ 1,558 ========== ========== ========== Net income per limited partnership unit outstanding ...................... $ .43 ========== Number of limited partnership units outstanding ..................... 200,000 ==========
The accompanying notes are an integral part of these financial statements. F-4B IDM PARTICIPATING INCOME COMPANY-II A California Limited Partnership Statements of Cash Flows For the Years Ended December 31, 2000, 1999, and 1998 (in thousands)
2000 1999 1998 (Unaudited)(Unaudited) -------- -------- -------- Cash flows from operating activities: Net income (loss) ............................. $(1,682) $ 125 $ 86 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Provision for possible losses ............ 1,828 0 0 (Increase) decrease in interest receivable (178) (174) 12 (Increase) decrease in due from affiliate. (6) 0 1 Decrease (increase) in prepaid expenses .. 0 7 (7) (Decrease) increase in accounts payable .. 0 0 (6) -------- -------- -------- Net cash (used in) provided by operating activities ............................ (38) (42) 86 -------- -------- -------- Cash flows from investing activities: Loans to affiliates ........................ (30) 0 (585) Collections from loans to affiliates ....... 32 71 413 -------- -------- -------- Net cash provided by (used in) investing activities .................. 2 71 (172) -------- -------- -------- Net increase (decrease) in cash ............... (36) 29 (86) Cash at beginning of year ................ 37 8 94 -------- -------- -------- Cash at end of year ...................... $ 1 $ 37 $ 8 ======== ======== ======== Supplemental schedule of non-cash investing and financing activities: Rollup of outstanding loans and interest receivable into a new loan .................. $ 174 $ 0 $ 0 ======== ======== ======== The accompanying notes are an integral part of these financial statements. F-5
IDM PARTICIPATING INCOME COMPANY-II A California Limited Partnership Notes to Financial Statements 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION IDM Participating Income Company-II, a California limited partnership (the "Partnership"), was formed in 1986 for the purpose of lending funds to various affiliated companies. The former general partner, IDM Participating Income General Partners' Co.-II, an affiliate of IDM Corporation ("IDM"), contributed an amount equal to one percent of the limited partners' contributed capital. All organizational, offering and operating expenses of the Partnership were borne by the former general partner or its affiliates. Profits, losses and distributions are allocated to the partners in accordance with their partnership interest until the partners have received a 12% cumulative annual return, at which time profits, losses and distributions will be allocated 85% among the limited partners and 15% to the General Partner. The new General Partner is NewPic GP Corporation (NewPic). See commitments and contingencies below for a discussion of the election of NewPic as the General Partner and the legal action filed against the former General Partner. REORGANIZATION IDM was impacted by an economic recession, especially the decline in real estate values, the state of disarray in the savings and loan industry and the limited availability of commercial real estate loans from domestic and international banks. On July 10, 1992, IDM, together with certain affiliates, filed for protection under Chapter 11 of the United States Bankruptcy Code. The Chapter 11 filing allowed IDM as debtor in possession to continue its business operations without interruption under the supervision of the bankruptcy court. On March 10, 1993, an order confirming the Reorganization Plan of IDM (the "Plan") was entered by the United States Bankruptcy Court for the Central District of California, Northern Division. The Plan became effective on March 22, 1993. BASIS OF FINANCIAL STATEMENTS The Partnership maintains its books and prepares its financial statements in accordance with generally accepted accounting principles. However, the Partnership prepares its tax return on the accrual basis of accounting as defined by the Internal Revenue Code with adjustments to reconcile book and taxable income (loss) for differences in the treatment of certain income and expense items. The accompanying financial statements do not reflect any provision for federal or state income taxes since such taxes are the obligation of the individual partners. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the loans to affiliates at December 31, 1999 cannot be determined due to the related party nature of these receivables. F-6 IDM Participating Income Company - II Notes to Financial Statements Page two LOANS TO AFFILIATES The reserve for possible losses is established by provisions charged to expense. The reserve is based on management's assessment of the loans outstanding, and on prevailing and anticipated economic conditions. The valuation of the loans outstanding depends on the valuation of the properties, if any, securing such loans. Future undiscounted cash flows of the properties securing such loans would normally be estimated and compared to the carrying amount of the loans to determine if impairment has occurred. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the loans, the Partnership shall recognize a reserve to reduce the carrying amount of the outstanding loan. Because the determination of fair value is based upon projection of future economic events, the amounts ultimately realized at disposition may differ materially from the net carrying value as of December 31, 2000. The cash flows used to determine fair value and net realizable value are based on good faith estimates and assumptions developed by management. Unanticipated events and circumstances may occur and some assumptions may not materialize; therefore, actual results may vary from the estimates and the variances may be material. REVENUE RECOGNITION Interest income is recognized as provided for under the Plan except for when, in the opinion of management, such amounts are uncollectible. All interest receivable at December 31, 2000 has been reserved. CALCULATION OF NET INCOME PER LIMITED PARTNERSHIP UNIT Net income per limited partnership unit is determined by dividing net income by the 200,000 limited partnership units outstanding presented. F-6A IDM Participating Income Company - II Notes to Financial Statements Page three 2. LOANS TO AFFILIATES The Partnership made loans to provide financing to IDM Corporation and its affiliated companies as follows (in thousands):
2000 1999 (Unaudited) ------------------------------ ------------------------------ Balance Reserve Net Balance Reserve Net -------- -------- -------- -------- -------- -------- IDM Corporation: Beach & Lampson Stanton, CA (past due December 1997) ........... $ 859 $ (859) $ 0 $ 859 $ (859) $ 0 Other affiliated companies: Sierra Pacific Pension Investors '84 Sierra Valencia, Tucson, AZ (due April 2000) ................... 0 0 0 32 0 32 CGS Real Estate Company, Inc. Sorrento II Land, San Diego, CA (due December 2003) ................ 0 0 0 750 0 750 CGS Real Estate Company, Inc. Bally Land, Long Beach, CA (due December 2002) ................ 0 0 0 316 0 316 CGS Real Estate Company, Inc. Land Development, Phoenix, AZ (due January 2005) ................. 1,643 (1,643) 0 373 0 373 -------- -------- -------- -------- -------- -------- $ 2,502 $(2,502) $ 0 $ 2,330 $ (859) $ 1,471 ======== ======== ======== ======== ======== ========
The loan activity for 2000, 1999 and 1998 follows (in thousands): 2000 1999 1998 (Unaudited) (Unaudited) ------------ ------------ ------------ Balance at beginning of year $ 1,471 $ 1,542 $ 1,370 Additions: Increase in loan balances 204 0 585 Deductions: Collections of principal (32) (71) (413) Provisions for possible losses (1,643) 0 0 ------------ ------------ ------------ Balance at close of year $ 0 $ 1,471 $ 1,542 ============ ============ ============ F-6B IDM Participating Income Company - II Notes to Financial Statements Page four The Beach & Lampson loan was reserved in its entirety during 1996 resulting in a net book value of $0. To the extent that cash flow was available, the Partnership was to receive all of its allowed Secured Debt of this loan with interest at 8% per year through December 31, 1997. No interest has been accrued on this loan since the bankruptcy filing. During 1996, IDM Corporation sold Pad F of the Beach and Lampson retail center for $525,000. The net sales proceeds received of $474,085 were repaid to the Partnership and applied as a principal reduction on this loan. In 1997, the Partnership funded four new participating loans to affiliates. Each loan was to be secured by real property and bear interest at a variable rate determined by the Federal Reserve of San Francisco's discount rate plus a 3% premium with a minimum of 12.12% and a maximum of 15.15%. The interest rate was to be adjusted the last day of March, June, September and December of each year until note agreement is fulfilled. The current interest rate is 12.12%. Each loan was to have a term of five years and is more fully described below. On April 15, 1997, the Partnership funded a loan to Sierra Pacific Pension Investors '84, an affiliate of the former general partner, in the amount of $200,000. The loan was to be secured by a second trust deed on the Sierra Valencia property located in Tucson, Arizona. Monthly payments of $6,659, consisting of both interest and principal, commenced on May 15, 1997 and were to continue until April 15, 2000, when the indebtedness was due in full. For the years ended December 31, 2000, 1999, and 1998, the Partnership recognized interest income of $1,000, $8,000, and $16,000, respectively, related to this loan. The December 31, 1999 balance of $32,000 was repaid in March 2000. The Partnership entered into two loan agreements with CGS Real Estate Company, Inc., an affiliate of the former general partner. On August 1, 1997, the Partnership funded $165,000 to finance a land acquisition in San Diego, California (Sorrento II Land). On December 1, 1997, an additional $316,500 was funded to provide financing for a land acquisition in Long Beach, California (Bally Land). Both loans were to be secured by second trust deeds and have a term of five years. Interest only payments were due monthly in arrears. In 1998, the Partnership funded an additional $585,000 to CGS Real Estate Company, Inc. The existing loan made in August 1997 was amended, increasing the loan amount to $750,110. The loan term was extended to December 31, 2003. For the years ended December 31, 2000, 1999, and 1998, the Partnership recognized interest income of $0, $130,000, and $97,000, respectively, related to these loans. No interest or principal payments were received on these loans in 2000. Rather, the principal and accrued interest were collapsed into the Eva I loan discussed below. On December 24, 1997, the Partnership funded a $372,500 loan to NO-SO, Inc., an affiliate of the former general partner, to provide financing for a land development in Phoenix, Arizona (Eva I). In 1999, CGS Real Estate Company, Inc. purchased the land from NO-SO, Inc. and reportedly assumed the loan. The loan was to be secured by a second deed of trust and has a term of five years. Interest only payments are due monthly in arrears. For the years ended December 31, 2000, 1999, and 1998, the Partnership recognized interest income of $199,000, $45,000, and $45,000, respectively, related to this loan. As of January 3, 2000 this loan was re-written for an additional five years in the principal amount of $1,643,530. No deed of trust was recorded. Only partial payments totaling $21,000 of interest income were actually received on this loan and the loan is in default. All principal and accrued interest have been reserved. F-6C IDM Participating Income Company - II Notes to Financial Statements Page five 3. RELATED PARTY TRANSACTIONS As described in Note 2, the Partnership has loaned funds to IDM Corporation, the parent of the former general partner and to other affiliated entities of IDM Corporation. Affiliates of the general partner are reimbursed for accounting, legal and data processing services provided to the Partnership. In 2000, 1999, and 1998, CGS Real Estate Company, Inc. and its subsidiaries received $3,000, $7,000, and $9,000 respectively, for such services. 4. COMMITMENTS AND CONTINGENCIES Section 16 of the Partnership Agreement provides for indemnification of the General Partner by the Partnership under certain circumstances. Generally, the General Partner may be indemnified out of Partnership assets for any loss or liability arising from its conduct whenever such course of conduct does not constitute fraud, gross negligence, or gross misconduct. Indemnification for securities laws violations may be allowed only in certain limited circumstances (see Section 16.2 of the Partnership Agreement). In the case of liability arising from an alleged violation of the securities laws, the General Partner may obtain indemnification only if the General Partner is successful in defending the action and the court specifically approves the indemnification or, if the action is settled, the court specifically approves the settlement and the indemnification of such settlement. To the extent that any indemnification is paid, the assets of the Partnership will be depleted and the return to a limited partner on his investment may be impaired. As the result of this indemnification arrangement, purchasers of Partnership Units may have a more limited right of action than they would have absent the indemnification provisions in the Partnership Agreement. Furthermore, purchasers of Partnership Units should bear in mind that adequate legal remedies may not be available or affordable in the event they believe that fiduciary obligations have been breached. LEGAL PROCEEDINGS - ----------------- The Partnership, along with NewPic, is the plaintiff in a legal action originally filed in the Los Angeles Superior Court on October 25, 2000 (the "Legal Action"). The Legal Action seeks, among other things, damages and injunctive relief based upon allegations of, among other things, breach of fiduciary duty, negligence and breach of the partnership agreement against the Partnership's former general partner (IDM Participating Income General Partners' Co. - II), the former general partner's general partner (IDM Participating Income Corporation), and the directors and former directors (William J. Carden, Morris Cohen and Steven Speier) of IDM Participating Income Corporation. Damages sought in the Legal Action include recovery of loan balances written off, forgiven, or re-lent by the former general partner. The Partnership estimates that these damages total in excess of $8,500,000. The Complaint alleges, among other things, that the defendants: improperly failed and refused to turn over Partnership records to NewPic; failed to comply with the requirements of the Partnership Agreement with respect to the maintenance of, preparation of, and dissemination of books, records, and financial statements and reports pertaining to the Partnership; failed to make distributions to the limited partners as required by the Partnership Agreement; misappropriated Partnership funds, assets and business opportunities to benefit themselves and their affiliates; re-loaned interest and principal in violation of the Partnership Agreement, including re-loaning principal more than once and for terms beyond the maximum aggregate term specified in the Partnership Agreement; made loans without using the Partnership's required Master Loan Agreement and Participating Note forms; made loans without obtaining appraisals from an AIREA member within 90 days of their loans; made loans where the aggregate amount of the Partnership loan and the senior debt exceeded 85% of the appraised value of the property; and did not collect participating profits on Partnership loans. The former general partner removed the Legal Action to the United States District Court, Central District of California. This removal was predicated upon a counterclaim filed by the former general partner against NewPic and its principals alleging a violation of federal Securities Laws in connection with their solicitation of the consent/proxies. On January 29, 2001, the District Court heard NewPic's application for a preliminary injunction, and on February 2, 2001 it issued a preliminary injunction that, among other things, restrained the defendants from acting or purporting to act as general partner of the Registrant, and further ordered the defendants to turn over Partnership records to NewPic. The former general partner's requests to stay the preliminary F-6D IDM Participating Income Company - II Notes to Financial Statements Page six injunction have been denied by the District Court and the Ninth Circuit Court of Appeals. An appeal of the grant of the preliminary injunction is currently pending before the Ninth Circuit. One of the issues in the Legal Action, aside from the Partnership's claim for damages in excess of $8,500,000, is the validity of the vote to remove the former general partner and elect NewPic as the replacement general partner. The possibility exists that this vote may not be upheld, that NewPic would be banned from continuing to act as general partner, that the Partnership would not prevail in its claim for damages, and/or that the Partnership would not be able to collect on a judgment it may receive in its favor. The Partnership believes that the only asset left in the Partnership is the Legal Action. Trial in the Legal Action is set for January 8, 2002. F-6E EX-99.1 2 idm_ex-29.txt EXHIBIT 99.1 THIS CONSTITUTES NOTICE OF ENTRY FILED AS REQUIRED BY FRCP, RULE 77(d). JAN 29 2001 CLERK, U.S. DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA BY DEPUTY UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
IDM PARTICIPATING INCOME COMPANY-II, a CASE NO.:CV 00-12368-DT (MANx) California Limited Partnership, and NEWPIC GP CORPORATION, a California corporation, ORDER GRANTING PLAINTIFFS IDM PARTICIPATING Plaintiffs, INCOME COMPANY-II AND NEWPIC GP CORPORATION'S REQUESTS FOR JUDICIAL NOTICE vs. ORDER GRANTING DEFENDANT IDMGP'S REQUEST FOR IDM PARTICIPATING INCOME GENERAL PARTNERS' JUDICIAL NOTICE CO.-II, a California Limited Partnership; IDM PARTICIPATING INCOME CORPORATION, a ORDER GRANTING PLAINTIFFS IDM PARTICIPATING California corporation; WILLIAM J. CARDEN, INCOME COMPANY-II AND NEWPIC GP an individual; STEVEN M. SPEIER, an CORPORATION'S APPLICATION FOR PRELIMINARY individual; MORRIS COHEN, an individual INJUNCTION AND DENYING APPOINTMENT OF A RECEIVER Defendants. - --------------------------------------------- IDM PARTICIPATING INCOME GENERAL PARTNERS' ENTERED CO.-II, a California Limited Partnership, CLERK, U.S. DISTRICT COURT JAN 30 2001 Counter-Claimant, CENTRAL DISTRICT OF CALIFORNIA vs. BY DEPUTY NEWPIC GP CORPORATION, a California corporation; RICHARD MEEHAN, an individual; [X] Docketed WESLEY GROOM, an individual; JACK STELLATO, [X] Copies / NTC Sent an individual; WILLIAM YETTER, an [NO] JS-5 / JS-6 individual; and DOES 51-100, inclusive, [ ] JS-2 / JS-3 [ ] CLSD Counter-Claim Defendants. - ---------------------------------------------
-1- Background - ---------- A. Introduction -- ------------ This action is brought by Plaintiff IDM Participating Income Company-II ("IDM PIC-II") and NewPic GP Corporation ("NewPic"), against Defendants IDM Participating Income General Partners' Co.-II ("IDMGP"), a California Limited Partnership, IDM Participating Income Corporation ("IDM PIC"), a California Corporation, William J. Carden ("Carden"), Steven M. Speier ("Speier") and Morris Cohen ("Cohen") for (1) Breach of Written Contract; (2) Violation of Statutory Duties; (3) Breach of Fiduciary Duty; (4) Conversion; (5) Negligence; (6) Fraud; (7) Unjust Enrichment; (8) Conspiracy; (9) An Accounting; and, (10) Declaratory Relief. The current motion before the Court is Plaintiffs IDM PIC-II and NewPic's Application for Preliminary Injunction and/or Appointment of a Receiver. B. Plaintiff's Factual Allegations -- ------------------------------- The following facts are alleged in the First Amended Complaint (the "FAC"): 1. The Parties -- ----------- Plaintiff IDM Participating Income Company-II (the "Partnership" or "IDM PIC-II") is a California Limited Partnership formed in 1986 pursuant to the laws of the State of California. The Limited Partners of the Partnership (the "Limited Partners") invested over $20 million in the Partnership. See, FAC at P. 1. -2- There are currently over 1,600 Limited Partners in the Partnership. In bringing the claims alleged in this Complaint, the Partnership is suing in its representative capacity on behalf of the Limited Partners. See, Id. at P. 2. Plaintiff NewPic GP Corporation ("NewPic") is a corporation organized and existing under the laws of the State of California. NewPic is the duly acting and elected General Partner of the Partnership. See, Id. at P. 3. Defendant IDM Participating Income General Partners' Co.-II ("IDMGP") is a California Limited Partnership that was organized in June, 1986. IDMGP was the original General Partner of the Partnership and was removed as General Partner as of October 15, 2000. See, Id. at P. 4. Defendant IDM Participating Income Corporation, a California corporation ("IDM PIC"), was formed on or about February 25, 1985 for the purpose of acting as the General Partner of IDMGP. See, Id. at P. 5. Defendant William J. Carden ("Carden") is an individual residing in Orange County, California. Carden was a director and officer of IDM PIC. See, Id. at P. 6. -3- Defendant Steven M. Speier ("Speier") is an individual residing in Orange County, California. Speier was a director and officer of IDM PIC. See, Id. at P. 7. Defendant Morris Cohen ("Cohen") is an individual residing in Los Angeles County, California, and was a director and officer of IDM PIC. See, Id. at P. 8. 2. The Partnership Agreement and Changes in Control -- ------------------------------------------------ Pursuant to an Offering Circular dated August 21, 1986 and supplemented October 1, 1986 (the "Offering Circular"), investment capital was solicited for the Partnership beginning in 1986. The Offering Circular explains and interprets key provisions regarding the operation of the Partnership and the Partnership Agreement. See, Id. at P. 10. In approximately April of 1996, Defendants Carden, Speier and Cohen effected a takeover of IDM Corporation, and through control of that entity, effected control of IDM PIC, IDMGP, and the Partnership. See, Id. atP. 11. Section 3.1 of the Partnership Agreement provides that the Partnership was formed for the purpose of making certain loans secured by trust deeds on real property. The Partnership's stated objectives and purpose are to preserve the Partnership's investment capital, provide quarterly distributions, and provide distributions of Limited Partners upon the sale, refinancing or other disposition of the real estate used as collateral for the participating loans made by the Partnership. See, Id. at P. 12. -4- Sections 12.2 and 13.1 of the Partnership Agreement provide that, among other things, "upon a Majority Vote" the General Partner of the Partnership may be expelled and removed and a new General Partner elected. "Majority Vote" is defined in Section 2.24 of the Partnership Agreement as the vote of Limited Partners holding more than fifty percent of the Outstanding Units. As set forth in Section 17.9 of the Partnership Agreement, the Partnership Agreement is to be construed under California Law, including California's Revised Limited Partnership Act (the "Act"), California Corporations Code. Section 15611, et seq. The Act provides that limited partners "shall have" the right to vote (and to prepare and solicit written consents) on the removal of a general Partner. Corp. Code ss.ss. 15636(f)(2); 15637(i). See, Id. at P. 13. In approximately July, 2000, NewPic and the IDM PIC-II Investors Committee caused a Consent and Proxy Statement, and related documents, to be prepared and submitted to the United States Securities & Exchange Commission. On August 10, 2000, said Consent and Proxy Statement was mailed to the Partners of the Partnership, including IDMGP. Solicitation of consents and proxies was made in compliance with Section 14 of the Securities & Exchange Act of 1934 and the rules and regulations promulgated thereunder. Through these procedures NewPic and an investors committee of the Partnership sought removal of the former General Partner, Defendant IDMGP, because of dissatisfaction with the Partnership's financial performance and absence of recent distributions to Limited Partners. See, Id. at P. 14. -5- As of September 29, 2000, over 56% of the outstanding units of the Partnership, the "Outstanding Units" had issued and delivered written consents requiring that IDMGP be removed and expelled as the General Partner and electing NewPic as the replacement General Partner. Pursuant to the terms of the consents and California Law, removal of IDMGP was effective immediately upon receipt of votes or consents from at least 50% of Outstanding Units. On September 29, 2000, notice of removal of IDMGP and election of NewPic as the replacement General Partner, along with copies of all documents relevant thereto, were served on IDMGP and counsel for IDMGP. See, Id. at P. 15, Exh. 2. Section 11.7 of the Partnership Agreement states that the General Partner has a fiduciary responsibility regarding the safekeeping and use of all Partnership assets and may not use such assets in any manner except for the exclusive benefit of the Partnership. Section 17.7 of the Partnership Agreement requires the General Partner to perform all acts necessary to achieve the purposes of the Partnership. See, Id. at P. 17. -6- The Partnership Agreement further provides that the general partner may re-loan principal only once, the maximum aggregate term on any loan, including any re-loaning of principal, shall not exceed eight years, and interest payments received by the Partnership shall be disbursed only to partners and shall not be reinvested. See, Id. at P. 18. The Partnership Agreement and Offering Circular prohibit re-lending of principal payments received by the Partnership (with only one very limited exception for an early payoff of principal received within the first twelve months after the loan was made) and making loans secured by non-California real estate. See, Id. at P. 19. Pursuant to sections 10.1 and 17.7 of the Partnership Agreement and Section 15615 of the California Corporations Code, IDMGP was obligated to permit and allow the new General Partner, NewPic, to pick up all original documents, records, and financial statements of and relating to the Partnership, and any copies thereof, including those items enumerated in Section 10.1 through 10.6 of the Partnership Agreement and Section 15615 of the Corporations Code. On September 29, 2000, NewPic demanded, through the Exhibit B notice, all such documents and records, and the balance of Partnership funds. See, Id. at P. 20. -7- Prior to August, 2000, and within four years prior to filing of this Complaint, Limited Partners and their representatives had requested, orally and in writing, that Defendants provide certain of the information specified in Section 11.2 of the Partnership Agreement. See, Id. atP. 21. 2. Alleged Breaches of the Partnership Agreement -- --------------------------------------------- VILLA REDONDO LOAN. The Partnership owned a loan secured by a second trust deed on the "Villa Redondo" apartment project in Long Beach, California. This project was owned by an affiliate of Defendants, Villa Redondo LLC, which they controlled. In 1997, the secured portion of the Partnership loan was worth at least $3,572,000. On behalf of the Partnership, the Defendants received in 1997 a $300,000 principal payment on the Villa Redondo loan, and then they "wrote off" the balance of the note and reconveyed the Partnership deed of trust. Plaintiffs allege that there was sufficient equity to allow for a full payoff on the Partnership note but that Defendants improperly accepted a short pay resulting in a loss of at least $3,272,000 to the Partnership. The benefit of this short pay accrued directly to Defendants' affiliate, Villa Redondo, LLC. See, Id. at P. 22. -8- MEADOW WOOD VILLAGE LOAN. The Partnership owned a loan secured by a second deed of trust on the "Meadow Wood Village" apartment project in Long Beach, California. This project was owned by an affiliate of Defendants, Meadow Wood Village, Ltd., which they controlled. Plaintiffs allege that the principal amount owned on this loan was approximately $2,100,000. The Partnership has reported that it "sold" the note and deed of trust "effective September 1, 1996 for $100,000" and that an additional $150,000 was received "related to this note" in January 1997 from another affiliate. Plaintiffs allege that there was sufficient equity to allow for a full payoff on the Partnership note but that Defendants improperly accepted a short pay resulting in a loss of at least $1,850,000 to the Partnership. The benefit of this short pay accrued to Defendants' affiliate, Meadow Wood Village, Ltd. See, Id. at P. 23. HARBOR PLAZA LOAN. The Partnership owned a loan in the amount of $1,054,000 secured by a first trust deed on the "Harbor Plaza" office building property in Port Hueneme, California. The Defendants "wrote off" all but $350,000 of the principal and interest due on the loan during 1997, and reported that "the remaining note balance of $350,000 was paid off in January 1998." Plaintiffs allege that there was sufficient equity to allow for a full payoff on the Partnership note but that Defendants improperly accepted a short pay resulting in a loss of at least $704,000 to the Partnership. See, Id. at P. 24. -9- Defendants allegedly have breached the Partnership Agreement by, among other things, the following acts or omissions within the last four years: (1) Failing and refusing to turn over to NewPic, and failing and refusing to permit and allow NewPic to pick up all original documents, records, and financial statements of and relating to the Partnership, and any copies thereof, including those items enumerated in Section 10.1 through 10.6 of the Partnership Agreement and Section 15615 of the Corporations Code, and failing and refusing to turn over Partnership funds to Plaintiffs after IDMGP was expelled; (2) Failing to comply with the requirements of the Partnership Agreement with respect to the maintenance of, preparation of, and dissemination of books, records, and financial statements and reports pertaining to the Partnership, including failing to maintain or provide access to Partnership documents at its principal office in California; refusing requests by Limited Partners to inspect or obtain copies of Partnership documents; failing to distribute the financial statements required under the Partnership Agreement; and failing to distribute on a timely basis Partnership tax information and forms to the Limited Partners; -10- (3) Failing to make distributions to the Limited Partners as required by the Partnership Agreement, and using and misappropriating Partnership funds for their own purposes and benefit, and, or for the benefit of entities they control and/or which are affiliated with the defendants, the specifics of which Plaintiffs do not yet know due to Defendants' active concealment of the facts relating to their wrongdoing; (4) Breaching the implied covenant of good faith and fair dealing by otherwise operating the Partnership to the disadvantage and financial detriment of the Limited Partners. (5) Re-loaning and otherwise disbursing interest income to affiliates of the Defendants, re-loaning principal more than once and for terms beyond the maximum aggregate terms specified in the Partnership Agreement, and making loans secured by non-California real estate. See, Id. atP. 25. Plaintiffs claim they have performed all duties, promises, and obligations required of them under the Partnership Agreement. See, Id. atP. 26. As a direct, proximate, and substantial result of Defendants' breaches of the Partnership Agreement, Plaintiffs allege that they have and will continue to suffer damages totaling at least $6,000,000. See, Id. atP. 27. -11- Plaintiffs request temporary, preliminary, and permanent injunctive relief against Defendants' continuing breaches of the Agreement, including an order: (1) prohibiting Defendants from interfering with the operation and management of the Partnership by NewPic; (2) prohibiting Defendants from denying NewPic access to the books, records, bank accounts, and funds of the Partnership; and, (3) prohibiting Defendants from acting or purporting to act as the General Partner or on behalf of the Partnership, including by transferring, conveying, liquidating, encumbering, impairing, pledging, or compromising or attempting to transfer, convey, liquidate, encumber, impair, pledge, compromise, disburse or withdraw any assets of claim belonging to the Partnership. See, Id. atP. 28. Plaintiffs also request the Appointment of a Receiver to take and keep possession of Partnership property and do all things allowed by Code of Civil Procedure Section 568. See, Id. atP. 29. Plaintiffs finally request an order that Defendants and/or entities they own and/or control hold, appoint a constructive trustee for the Partnership, proceeds, profits, monies, and real property that rightfully should have gone to or stayed with the Partnership, pursuant to Civil Code Section 2224. See, Id. atP. 30. -12- C. Procedural Summary -- ------------------ On October 25, 2000 Plaintiffs filed the original Complaint in the Superior Court of the State of California for the County of Los Angeles in Case No. NC 028816. On or around October 25, 2000,(1) Defendant and Cross-Complainant IDMGP filed a Cross-Complaint and Counter-Claims of IDMGP for Violation of Section 14(a) of the Securities Exchange Act of 1934 and Declaratory Judgment. On October 30, 2000, Plaintiffs IDM PIC II and NewPic filed an Ex Parte Application for Temporary Restraining Order and Order to Show Cause Re Preliminary Injunction and/or for Appointment of a Receiver in The Superior Court of the State of California for the County of Los Angeles. Also on October 30, 2000, Defendant IDMGP filed its Opposition to Plaintiffs' Ex Parte Application for Temporary Restraining Order and/or Appointment of Receiver in The Superior Court of the State of California for the County of Los Angeles. On that same date, The Superior Court of the State of California for the County of Los Angeles (the "state court") filed an Order to Show Cause Re Preliminary Injunction and/or for Appointment of Receiver to show cause why the Proposed Order Appointing Receiver and Preliminary Injunction should not be entered. The state court denied the TRO. - ---------- (1) Defendant IDMGP's Cross-Complaint and Counter-Claims are dated October 25, 2000 and are attached to Defendant IDMGP's November 21, 1000 Notice of Removal. -13- On or around October 31, 2000, Defendant IDMGP filed in the state court their Request for Judicial Notice in Support of Opposition to Application for Preliminary Injunction and for Appointment of Receiver. On October 31, 2000, Plaintiffs filed their Supplemental Memorandum of Points and Authorities Re Amount of Proposed Injunction and Receivership Bonds in the state court. On that same date, Plaintiffs filed their Request for Judicial Notice in Support of Application for Preliminary Injunction and for Appointment of Receiver in the state court. On November 9, 2000, Defendant IDMGP filed its Memorandum of Points and Authorities in opposition to Plaintiffs' Application for Preliminary Injunction and/or Appointment of a Receiver in the state court. On November 16, 2000, Plaintiffs filed a Further Request for Judicial Notice for Support of Application for Preliminary Injunction and for Appointment of Receiver in the state court. Also On November 16, 2000, Plaintiffs filed their Reply Memorandum of Points and Authorities Re Appointment of Receiver in the state court. On that same date, Plaintiffs IDM PIC and NewPic filed their Evidentiary Objections to the Declarations of R. Marshall Tanner and Randall J. Clement Filed in Opposition to Plaintiffs' Application for Preliminary Injunction and/or Appointment of a Receiver in the state court. -14- On November 21, 2000, Defendant IDMGP filed a Notice of Removal of Action Under 28 U.S.C. ss. 1441(b) and Demand for Jury Trial. The within matter was removed to this calendar of this Court. On November 27, 2000, Defendant IDMGP filed a Notice of Lodging Pleadings and Orders of Removed State Court Action Pursuant to 28 U.S.C. ss.1446(a), which include 13 (thirteen) documents pertaining to the present Motion for Preliminary Injunction which were originally filed in the Superior Court of the State of California for the County of Los Angeles and are presently before this Court. On November 28, 2000, Plaintiffs and Counter-Claim Defendants IDM PIC II and NewPic filed an Ex Parte Application for Order to Set a December 11, 2000 Hearing Date Re Plaintiffs' Applications for Preliminary Injunction and/or Appointment of a Receiver. On November 29, 2000, Defendant IDM filed a Participating Income Corporation's Joinder in Notice of Removal of Action. On December 1, 2000, this Court filed an Order Denying Without Prejudice Plaintiffs Ex Parte Application for Order to Set a December 11, 2000 Hearing Date Re Plaintiffs' Applications for Preliminary Injunction and/or for Appointment of a Receiver. -15- Also on December 1, 2000, this Court filed an order to Show Cause Why This Action Should Not Be Remanded to the Superior Court of the State of California for the County of Los Angeles for Lack of Subject Matter Jurisdiction. On December 20, 2000, this Court received from Plaintiffs and Counter-Claim Defendants a Reply Memorandum Re Order to Show Cause Re Remand. On December 26, 2000, this Court withdrew the Order to Show Cause why this Action should not be Remanded to State Court issued on December 1, 2000. On December 28, 2000, Plaintiffs filed an Ex Parte Application for Order to Set Aside a Hearing Date Re Plaintiffs' Applications for Preliminary Injunction of a Receiver, which this Court granted on December 29, 2000, and ordered that the hearings on Plaintiffs' applications for a Preliminary Injunction and/or Appointment of a Receiver shall be set for January 29, 2001. On January 12, 2001, Defendants Carden, Speier, and Cohen filed a Joinder in Defendant IDMGP's Opposition to Plaintiffs' [Ex Parte] Application for Preliminary Injunction and/or Appointment of a Receiver. -16- On January 22, 2001, Plaintiffs filed their Objections to Defendants' Joinder.(2) January 23, 2001, the parties, including Plaintiffs and Counter-Claim Defendants IDM PIC II, New Pic, Meehan, Groom, Stellato, Yetter, Defendant and Cross-Complainant IDMGP and Defendant IDM PIC, Defendant Carden, Speier, and Cohen filed a Stipulation Re Amendment to Complaint, which stipulated to the filing of Plaintiffs' First Amended Complaint. Accordingly, the First Amended Complaint is deemed served and entered on January 23, 2001, and is the operative complaint for purposes of this Motion. II. Discussion - --- ---------- A. Standard -- -------- 1. Request for Judicial Notice -- --------------------------- "A judicially noticed fact must be one not subject to reasonable dispute in that it is either (1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." FRE 201(b). A court must take judicial notice if a party requests it and supplies the court with the requisite information. FRE 201(d). - ---------- (2) On December 29, 2000, this Court ordered "that no further or new briefings shall be filed by the parties in connection with the applications" set forth for hearing on January 29, 2001. Defendants Carden, Speier, and Cohen filed their Joinder on January 12, 2001 in violation of this Court's Order. As such, the Court will not consider any new evidence submitted by the parties in accordance with this Order will allow Defendants Carden, Speier, and Cohen to join in the present Motion. -17- A court must take judicial notice if supplied with the requisite information. See, Papai v. Harbor Tug and Barge Co., 67 F.3d 203, 207, n.5 (9th Cir. 1995) (judicial notice of orders and decisions made by other courts is proper); United States ex rel. Robinson Rancheria v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992) (judicial notice of "proceedings in other courts, both within and without the federal judicial system, if those proceedings have a direct relation to matters at issue" is proper); Kelly v. Johnston, 111 F.2d 613, 615 (a district court may take judicial notice of its own records); MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986) (courts may take judicial notice of matters of public record outside the pleadings). 2. Motion for Preliminary Injunction -- --------------------------------- To prevail on a motion for preliminary injunction, the moving party is required to show either a combination of probable success on the merits and the possibility of irreparable injury if relief is not granted, or the existence of serious questions regarding the merits and that the balance of hardships tips sharply in its favor. Chalk v. U.S. District Court, 840 F.2d 701, 704 (9th Cir. 1987); California Cooler, Inc. v. Loretto Winery, Ltd., 774 F.2d 1451, 1455 (9th -18- Cir. 1985). A showing of a reasonable likelihood of success on the merits raises a presumption of irreparable harm. Apple Computer, Inc. v. Formula International Inc., 725 F.2d 521, 525 (9th Cir. 1984) (Citing Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1254 (3d Cir. 1983), cert. dismissed, 464 U.S. 1033 (1984)). A showing of harm varies inversely with the required showing of meritoriousness. Rodeo Collection, Ltd. v. West Seventh, 812 F.2d 1215, 1217 (9th Cir. 1987). A preliminary injunction is not a preliminary adjudication on the merits but rather a device for preserving the status quo and preventing the irreparable loss of rights before judgment. Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1422 (9th Cir. 1984). It is an equitable device for preserving rights pending final resolution of the dispute. Id. at 1423. "The district court is not required to make any binding findings of fact; it need only find probabilities that the necessary facts can be proved." Id. The Court must balance the equities in the exercise of its discretion. International Jensen, Inc. v. Metrosound, U.S.A., Inc., 4 F.3d 819, 822 (9th Cir. 1993). -19- B. Evidentiary objections -- ---------------------- This Court notes that Plaintiffs have submitted evidentiary objections to various portions of the Declarations of R. Marshall Tanner and Randall J. Clement, submitted by Defendants in Opposition to Plaintiffs' Application for Preliminary Injunction and/or Appointment of a Receiver. This Court grants in part and denies in part Plaintiffs' evidentiary objections on various grounds. The following evidence is deemed inadmissible on the following grounds: 1. Declaration of R. Marshall Tanner -- --------------------------------- a. Paragraph 3, lines 19-20: speculative, lacking in proper foundation, and assumes facts not in evidence; b. Paragraph 3, lines 21-22: irrelevant, immaterial, improper argument, and assumes facts not in evidence; c. Paragraph 10: violates the Best Evidence Rule; d. Paragraph 11: violates the Best Evidence Rule; e. Paragraph 11: lines 19-22: speculative and lacking foundation; f. Paragraph 14: improper legal argument. 2. Declaration of Randall J. Clement -- --------------------------------- a. Paragraph 3, lines 12-16: speculative, lacking in foundation; -20- b. Paragraphs 7-10: hearsay. With respect to the remaining evidence, this Court has reviewed the objections and overrules said objections. C. Plaintiffs and Defendants' Requests for Judicial Notice are -- ----------------------------------------------------------- Granted. -------- Plaintiffs request the Court take Judicial Notice pursuant to F.R.E. 201(d)(3) of the following documents which constitute filings made with the Securities and Exchange Commission by Defendant IDMGP pertaining to its operations of IDM PIC: (1) Form 10Q Quarterly Report for the quarter ending June 30, 2000 (Exhibit 1); (2) Form 10Q Quarterly Report for the quarter ending March 31, 2000 (Exhibit 2); (3) Form 10K Annual Report for the Fiscal Year ending December 31, 1999 (Exhibit 3); The above-listed documents are public documents readily accessible through the Commission's EDGAR database located at its website. Plaintiffs further request Judicial Notice of the following documents, pursuant to Evidence Code: - ---------- (3) Plaintiffs have provided California Evidence Code Sections which were relevant to this action at the time it was originally filed in State court and prior to Removal to the Federal Court. Accordingly, the Court in its Order has replaced the State court provisions with the corresponding Federal Rules of Evidence. -21- (4) Form 10K Annual Report for the Fiscal Year ending December 31, 1996 filed with the Securities and Exchange Commission for the Partnership (Exhibit 15); (5) IDM Disclosure Statement and Joint Plan of Reorganization (Exhibit 16); (6) Form 10K Annual Report for the Fiscal Year ending December 31, 1997 filed with the Securities and Exchange Commission for the Partnership (Exhibit 18); (7) IDM Corporation and Subsidiaries Consolidated Financial Statements (Exhibit 19); (8) Villa Redondo Grant Deed (#98-2216398) (Exhibit 20); (9) Villa Redondo Deed of Trust (#98-2331241) (Exhibit 21); (10) Harbor Plaza Deeds of Trust (#98-11237 and #9811238) (Exhibit 22); (11) Meadow Wood Village Deed of Trust (#96-1959414) (Exhibit 23); (12) In re Harbor Plaza, Ltd., et al, Memorandum of Decision (Case No. 93-1233) (Exhibit 24); (13) Form 10K Annual Report for the Fiscal Year ending December 31, 1998 filed with the Securities and Exchange Commission for the Partnership (Exhibit 25); (14) Harbor Plaza Deed of Trust (#99-126103) (Exhibit 26); -22- (15) Notice of Entry of Final Judgment and of Order Granting Summary Judgment, in One Tracenter Corporation v. Commercial Developments International/West, Inc. (Case No. BC 181491) (Exhibit 29). Defendants request Judicial Notice of the following document: (1) Form 10Q Quarterly Report for the quarter ending June 30, 1998 (Exhibit A). All of Plaintiffs and Defendants' above-listed items are public documents or documents whose veracity can be readily ascertained by resort to sources whose accuracy cannot reasonably be questioned. FRE 201(b). In addition, a court must take judicial notice if a party requests it and supplies the court with the requisite information. FRE 201(d). Both Plaintiffs and Defendants have provided the Court with the documents that are either public (i.e. filed with the SEC), or decisions by other Courts that are directly related to this case. As such, the court must take judicial notice, since it has been supplied with the requisite information. See, Papai v. Harbor Tug and Barge Co., 67 F.3d 203, 207, n.5 (9th Cir. 1995) (judicial notice of orders and decisions made by other courts is proper); United States ex rel. Robinson Rancheria v. Borneo, Inc., 971 F.2d 244, 248 (9th Cir. 1992) (judicial notice of "proceedings in other courts, both within and without the federal -23- judicial system, if those proceedings have a direct relation to matters at issue" is proper); Kelly v. Johnston, 111 F.2d 613, 615 (a district court may take judicial notice of its own records); MGIC Indem. Corp. v. Weisman, 803 F.2d 500, 504 (9th Cir. 1986) (courts may take judicial notice of matters of public record outside the pleadings). Accordingly, the Court grants Plaintiffs' and Defendants' Requests for Judicial Notice. D. Plaintiffs' Application for a Preliminary Injunction is -- ------------------------------------------------------- Granted. -------- Injunctive relief is an extraordinary equitable remedy, which can be granted only in limited circumstances and which should not be granted in a doubtful case. A preliminary injunction is not a preliminary adjudication on the merits but rather a device for preserving the status quo and preventing the irreparable loss of rights before judgment. Sierra On-Line, Inc. v. Phoenix Software, Inc., 739 F.2d 1415, 1422 (9th Cir. 1984). It is an equitable device for preserving rights pending final resolution of the dispute. Id. at 1423. "The district court is not required to make any binding findings of fact; it need only find probabilities that the necessary facts can be proved." Id. -24- In this instance, Plaintiff IDM Participating Income Company-II is a California Limited Partnership (the "Partnership") with over 1,600 limited partners. Plaintiff NewPic GP Corporation ("NewPic") was allegedly elected as replacement General Partner as of September 29, 2000 by a majority vote of the Limited Partners. See, Olsen Decl., P. 16; Exh. 11; Holloway Decl. Of Voting Results at P. 2. The former General Partner IDMGP has allegedly failed and refused to relinquish control of the Partnership, has refused to allow NewPic to obtain possession of the Partnership books and records, and has refused to deliver the same to NewPic. By this Application, Plaintiffs seek a Preliminary Injunction preventing the former General Partner, and its affiliates and principals, from continuing to block the takeover by NewPic and request the Appointment of a Receiver. 1. Likelihood of Success on the Merits -- ----------------------------------- Although Plaintiffs do not explicitly state which cause of action they rely upon, the Breach of Contract, Breach of Fiduciary Duty, Fraud and Accounting claims seem to be the underlying causes of action that Plaintiffs primarily assert for likelihood of success on the merits. For purposes of simplicity, this Court will conduct its analysis based on Plaintiffs' assertions that Defendants were in Breach of the Partnership Agreement in failing to remove themselves as General Partner once the vote had been conducted and, allegedly -25- won by NewPic's 56% margin. Plaintiffs' likelihood of success then turns on whether the Proxies were tabulated correctly. If the votes were correctly tabulated, Defendant General Partner IDMGP would have been required to immediately turn over control of the Partnership to NewPic. Since IDMGP has allegedly failed to do so, IDMGP is in breach of the Partnership Agreement. Defendants allege that California Civil Procedure Code Sections 526(a)(4) and (5), and Civil Code Section 3423, provide that an injunction cannot be granted to prevent the breach of contract from which pecuniary compensation would afford adequate relief and would not be extremely difficult to ascertain. Defendants contend that this injunction is prohibited because pecuniary compensation would provide the Plaintiffs adequate relief and would not be extremely difficult to ascertain. Defendants' reliance on California procedural law is misplaced. The standard for granting Application for Preliminary Injunction is procedural.(4) Thus, the Federal standard applies in this instance. See, In re Ferdinand Marcos, Human Rights Litigation, 25 F.3d 1467, 1480 (9th Cir. 1994) (The Ninth Circuit on the issue of granting - ---------- (4) Since this action was first filed in state court, the law that Plaintiffs rely upon is naturally state (procedural and substantive) law. Taking this fact into consideration, the Court will conduct its analysis using Federal procedural standards and state substantive law, in accordance with Erie Railroad Co. v. Tomkins, 304 U.S. 64 (1938). -26- injunctive relief in a breach of contract action: "We join the majority of circuits in concluding that a district court has authority to issue a preliminary injunction where the plaintiffs can establish that money damages will be an inadequate remedy due to impending insolvency of the defendant or that defendant has engaged in a pattern of secreting or dissipating assets to avoid judgment.") a. Breach of the Partnership Agreement Provides the Basis for Likelihood of Success on the Merits Sections 12.2 and 13.1 of the Agreement of the Partnership Agreement provide that, "upon a Majority Vote," the General Partner of the Partnership may be expelled and removed and a new General Partner elected. See, Olson Decl., Exh. 15; Complaint, Exh. A. "Majority Vote" is defined in Section 2.24 of the Partnership Agreement as the vote of Limited Partners holding more than fifty percent of the Outstanding Units. As set forth in Section 17.9 of the Partnership Agreement, the Partnership Agreement is to be construed under California law, including California's Revised Limited Partnership Act, California Corporations Code, Section 15611, which provides that limited partners "shall have" the right to vote on the removal of a general partner, and that removal shall be effective immediately upon written notice to the general partner. Cal. Corp. Codess.ss.15636(f)(2); 15637(i). -27- Plaintiffs claim they have demonstrated that the Limited Partners solicited and obtained consents and proxies from 56% of the limited partners to replace IDMGP with NewPic. Plaintiffs also claim that IDMGP has failed to produce any evidence that would invalidate this process or vote. This Court agrees.(5) In support of their position, Plaintiffs allege that the evidence submitted by Defendants is inadmissible, particularly Defendants' Attorney Clement's Declaration that states that he is informed and believes that "many, if not most" of the units are held in trust or have been transferred and that Mr. Holloway did not "validate" signatures on the consents (Clement Decl. At P. P. 3, 8). While this Court held Defendants' statement to be inadmissible for lack of foundation, the October 13, 2000 Letter to Mr. Olson,(6) the source for - ---------- (5) While Defendants will most probably contend that the January 12, 2001 Joinder provides evidence of error in the tabulation of Proxies by demonstrating the discrepancy in the name in Plaintiffs' spreadsheet and the current status, Defendants' arguments are to no avail. Even though the Court has declined to consider any further briefing on this Motion, the Court will address Defendants' arguments for the sole purpose of pointing out that the list provided by "Joining Defendants" Carden, Speier, and Cohen, as "present records" as of January 9, 2001 (the date of Bowman's Declaration) in their January 12, 2001 Joinder is irrelevant to the solicitation of Proxies that occurred in August and September of 2000. Specifically, the Declaration and "investigation" as to the status of the account-holders is irrelevant to the solicitation in that it occurred approximately four or five months earlier. (6) Specifically, the procedural shortfalls claimed by Defendants in Mr. Tanner's October 13, 2000 letter to Mr. Olson include the following: -28- the allegations, is clearly admissible. The October 13, 2000 Letter details Defendants' grievances with Plaintiffs' handling of the Proxy solicitations and the Votes. See, note 6 below. Those "procedural shortfalls" are outlined in Defendants' Opposition. Specifically, in their Opposition, Defendants claim that they have "uncovered several procedural shortfalls which . . . make invalid - ---------- 1. The Proxy Statement and Request for Written Consent to remove and replace IDMGP as general partner were missing material information that should have been disclosed to the limited partners. Defendants contend that if those items had been disclosed, the outcome of the vote would have been much different. For example, it was apparent from the fact of the proxy materials that officers of a company known as CDI West were involved in the solicitation. Evidence of this is the fact that the Declaration of Vote Results and Affidavit of Mailing were both signed by Stephen Holloway, the Chief Financial Officer of CDI West. CDI West was involved in several ongoing lawsuits with IDMGP or related entities and CDI West had its own agenda unrelated to IDM PIC-II. This hidden agenda should have been disclosed to the limited partners as part of the proxy materials but was omitted. In addition, several senior officers of CDI West are former officers of IDMGP and were involved in directing the investment activities of IDM PIC-II until they were terminated. The limited partners should have been informed that the very people who created the financial problems now being experienced by IDM PIC-II now wished to regain control. 2. Second, there are "very real questions" whether all limited partners were provided with a copy of the proxy solicitation. IDMGP was aware of at least one limited partner that did not receive a proxy solicitation. If there were selective mailings of the proxy materials, then the validity of the entire proxy solicitation process is in question. 3. Third, even assuming that the proxy statement was not materially defective and that the vote of the limited partners was not obtained by fraud, and assuming further that the vote was otherwise conducted in compliance with the law, it would still be necessary to confirm that the outcome of the vote was as represented. This would require a review of the voluminous proxy materials sent to IDMGP by Mr. Olson. Since the Partnership Agreement does not allow assignees of limited partners to vote, the review would need to confirm that all of the proxies were signed by limited partners and not by assignees. 4. Fourth, Section 13.3 of the Partnership Agreement requires, among other things that the general partner be paid certain amounts as a condition to the effectiveness of any removal vote, which would have to be paid, as a condition of removal. 5. Fifth, California Corporations Code Section 15637(i) provides, among other things, that where a proposal is made to take action by written consent, the general partner is entitled to request a meeting of limited partners to consider the matter before the action becomes effective. See, Opposition, Exh. A. -29- many, if not most of the votes cast by the limited partners." See, Opposition at 5. Defendants claim that the procedural shortfalls include: (1) complete failure to cross-reference any signatures to ensure valid voting status; (2) counting of improper votes cast by individuals, not trustee, on accounts held in trust; (3) multiple counting of a single Proxy and Consent Form; (4) counting of improper votes of non-verified beneficiaries of deceased limited partners; (5) counting of improper votes cast by individuals who previously sold their interest in IDM PIC-II; (6) counting of improper votes cast by only one of two joint tenants; and, (7) counting of improper votes cast by those with ownership interest in IDM PIC-II but who are not entitled to vote under Section 12.2 of the Partnership Agreement. In analyzing the parties' arguments regarding the issue of "procedural shortfalls" in conducting the Vote, the Court turns its attention to the strongest piece of evidence Defendants proffer in support of their argument that the proxy votes were tabulated in error - namely, the Deposition of Mr. Holloway who conducted the tabulation of the Proxy votes. In support of their allegations, Defendants have provided the relevant and admissible November 8, 2000 Deposition of Mr. Holloway, which provides first-hand knowledge into the tabulation process. In his Deposition, Mr. Holloway acknowledges that when the -30- units were in the name of a trust, he did not validate whether the signatories of the accounts were indeed trustees of the trust. See, Holloway Depo. at 59:15-19. If Mr. Holloway was not verifying the names of signatories as to the type of account - whether held in trust, in joint tenancy, or under power of attorney - and NewPic won the vote, then errors equaling 5% of approximately 814 votes, could tip the scale on the 56% victory (which would be less than a majority or 50%). However, Mr. Holloway also states that "[i]f they [the individual] had it [the units or account] in the name of a nominee, the name on the list would be different." See, Holloway Depo. at 59: 1-19 (emphasis added). Thus, even if it were true that units have been transferred or held in trust, (which would require the signatory to be the transferee or the trustee), Defendants have provided no evidence that the signatories on the Proxies were incorrect.(7) While the Court considers Defendants' arguments regarding potential error, Defendants have provided no tangible evidence of actual error, which would render the Proxy vote invalid. As such, this Court finds that Plaintiffs have demonstrated the requisite likelihood of success to tip the scale in their favor. - ---------- (7) IDMGP is the very one who provided the updated list of limited partners to Plaintiffs after repeated requests between October, 1999 and June, 2000 that it now claims is inaccurate. IDMGP is thus estopped from complaining about any purported "procedural irregularities" relating to mailing of the consent/proxy materials or the listings of the limited partners. -31- 2. Danger of Irreparable Injury -- ---------------------------- A showing of a reasonable likelihood of success on the merits raises a presumption of irreparable harm. Apple Computer, Inc. v. Formula International Inc., 725 F.2d 521, 525 (9th Cir. 1984) (citing Apple Computer, Inc. v. Franklin Computer Corp., 714 F.2d 1240, 1254 (3d Cir. 1983), cert. dismissed, 464 U.S. 1033 (1984)). A showing of harm varies inversely with the required showing of meritoriousness. Rodeo Collection, Ltd. V. West Seventh, 812 F.2d 1215, 1217 (9th Cir. 1987). a. Defendants have Allegedly Engaged in Self-Dealing of at least $6,000,000 of Partnership Assets. Plaintiffs contend that Defendant Carden, through his affiliated companies, accomplished a takeover of IDM Corporation and its affiliates, including Defendants IDMGP, IDM PIC and the Partnership in 1996. See, Exh. 15 at 4, 10, & 11. IDM Corporation is the parent company and owner of 100% of the shares of Defendant IDM PIC. Id. Apparently, IDM had just come out of bankruptcy reorganization. Id. -32- An examination of the IDM Bankruptcy Disclosure Statement and Plan of Reorganization (Exh. 16), and a Report prepared by the accounting firm of Price Waterhouse for the Unsecured Creditors Committee (Exh. 17) in the Bankruptcy, reveals appraised values for Partnership loan outstanding as of 1992. At least three of those loans have been compromised by Defendants and inured to their benefit, and to the detriment of the Partnership and its Limited Partners. Those loans were all secured by properties allegedly owned by affiliates of the Defendants. (1) THE VILLA REDONDO LOAN. The Villa Redondo property consists of a 125 unit apartment project in Long Beach which was appraised in 1992 at $12,086,000. Exh. 16 at 61 & 62. Exh. 16, Schedule D at 1 & 2.(8) The Partnership held a loan secured by a second trust deed on this property. The balance owing on the first trust deed on Villa Redondo was $7,955,000, and the secured portion of the Partnership loan (and second trust deed) was valued in 1992 at $3,572,000. Exh. 17 at 2-48. In 1997, the Partnership received a $300,000 principal payment on the Villa Redondo loan, and then inexplicably Defendants wrote off the balance of the note thereby eliminating the Partnership deed of trust. Exh. 18 at 7. Plaintiffs contend that the necessary implication of this writeoff is that the property was worth only $8,255,000 (the sum of the $7,955,000 senior loan plus the $300,000 paid to the Partnership.) - ---------- (8) Plaintiffs present evidence that the "liquidation" value of the property was pegged at $11,527,000 per the Creditors Committee Report, Exh. 17 at 2-4, 2-48, 2-49. IDM Corporation's audited 12/31/95 Financial Statement shows this value as $11,100,000. Exh. 19, Notes at 3. -33- Plaintiffs claim that the values attributed by Defendants to the Villa Redondo loan and the underlying real estate are fraudulent. Public filings apparently show that the Villa Redondo property was conveyed to an affiliate of Defendants on December 7, 1998. Exh. 20. Then Defendants caused a new loan of $9,500,000 to be recorded against the property on December 24, 1998. Exh. 21. Assuming a conservative and standard loan-to-value ratio for this type of property of 70%, based upon the amount of the new loan the fair market value of the property is actually $13,571,429. Thus, Plaintiffs conclude there was sufficient equity to allow for a full payoff on the Partnership note. Plaintiffs claim that the net loss to the Partnership on this transaction alone was at least $3,272,000.(9) (2) MEADOW WOOD VILLAGE LOAN. Meadow Wood Village is a 206 unit apartment project in Long Beach which was appraised in 1992 at $16,572,951. Exh. 16 at 64 & Schedule D at 1 & 2.(10) The Partnership had a loan, which was valued at 100% of its face amount of $2,100,000, secured by a second deed of trust on the property. Exh. 16 at 2-4, 2-48, 2-49. The balance due on the first trust deed was $11,500,000. Id. - ---------- (9) The net loss is the difference between the secured amount due on the loan ($3,352,000) and the amount received ($300,000). The benefit on the write down of this loan went to Defendants' affiliate, Villa Redondo LLC. Exh. 20. (10) The liquidation value was pegged at $15,640,000 by the Creditors Committee Appraisal. Exh. 17 at 2-49. -34- In its fiscal year end 1997 Form 10-K, the Partnership stated it "sold" the note and deed of trust "effective September 1, 1996 for $100,000" and that an additional $150,000 was received "related to this note" in January 1997 from an unnamed affiliate. Exh. 18 at 3. Plaintiffs posit that the necessary implication of this transaction is that the property was worth only $11,750,000 (the sum of the $11,500,000 senior loan plus the $250,000 paid to the Partnership). Plaintiffs allege that the values attributed by Defendants to the Meadow Wood Village loan and the underlying real estate are fraudulent. Public records indicate that Defendants' affiliate refinanced the property during the middle of these events and borrowed the sum of $11,300,000 against the property. Exh. 23. Assuming a conservative loan-to-value ratio of 70%, the fair market value was actually $16,142,857. Thus, there was more than sufficient equity to pay the Partnership note in full. The net loss to the Partnership is at least $1,850,000.(11) - ---------- (11) Assuming a loan-to-value ratio of 70%, the fair market value would be approximately $714,286. Since these loans were from affiliates of Defendants and could be tainted by self-dealing, this valuation for the property is unreliable. -35- (3) HARBOR PLAZA LOAN. Harbor Plaza is a two single-story office building property in Port Hueneme, California which was appraised in 1992 at $1,235,377. Exh. 16 at 70 & Schedule D at 1 & 2.(12) The Partnership had a loan, which was valued at $915,000, secured by a first trust deed on the property. Exh. 16 at 2-4, 2-48, 2-49; Exh. 25 at 5. The Defendants "wrote off" all but $350,000 of the principal and interest due on the loan (which had grown to $1,054,000) "during 1997," and reported that "the remaining note balance of $350,000 was paid off in January 1998." Exh. 25 at 5. Since this note was secured by a first trust deed on the property, Plaintiffs contend that the necessary implication of this transaction was that the property was worth only $350,000 (the sum accepted by the Defendants). Plaintiffs also aver that the values attributed to the Harbor Plaza loan and underlying real estate by Defendants are fraudulent. Public records indicate that Defendants' affiliate refinanced the property during January 1998 with $500,000 in loans (which were from another affiliate) with deeds of trust recorded against the real estate. See, Exh. 22.(13) Then, on July 1, 1999, a new - ---------- (12) The liquidation value was pegged at $915,000 by the Creditors Committee appraisal. Exh. 17 at 2-49. (13) Assuming a loan-to-value ratio of 70%, the fair market value would be approximately $714,286. Since these loans were from affiliates of Defendants and could be tainted by self-dealing, Plaintiffs claim that this valuation of the property is unreliable. -36- loan was made against the property from a third party lender, Alliance Bank, in the sum of $710,000. See, Exh. 26. Assuming a loan-to-value ratio of 70%, the value of the property is established at $1,014,286. Thus, there was sufficient equity in the property to pay the Partnership loan off in full. Plaintiff posits that the net loss to the Partnership in this instance is at least $704,000.(14) (4) Beach & Lampson Loan. This asset consisted of a note and first trust deed recorded against a three pad retail shopping center. Exh. 25 at 5 & 6. The secured principal balance of the note was set at $1,333,000. Id. Defendants apparently have sold one of the pads, paid the net proceeds (represented as $474,085) to the Partnership, but have "reserved" the remaining principal balance of the loan "in its entirely." Id. Based upon Defendants past conduct with the afore-mentioned loans, Plaintiffs expect that this loan will soon be written off for less than fair value. Though this has not occurred as of yet, this Court finds Plaintiffs concerns regarding Defendants' treatment of Partnership property to be well-founded. - ---------- (14) Plaintiff alleges that the net loss is the difference between the secured amount due on the loan ($1,054,000) and the amount received ($350,000). The benefit on the writedown of this loan allegedly went to Defendants' affiliate, IMC Asset Management Co. Exh. 22 & 26. -37- b. There is a Substantial Danger Partnership Assets are in Peril of Becoming Worthless due to Defendants' Alleged Systematic Fraud, which would Render Inadequate a Remedy at Law. Plaintiffs cite IDM's prior history as evidence of the fact that the Partnership assets are in danger of becoming worthless if the Court does not grant the Preliminary Injunction. For example, Plaintiffs contend that in 1998, a $4,950,000 judgment was entered against IDM Corporation in a Bankruptcy Court adversary proceeding in the Northern District of California. In the Memorandum of Opinion issued by United States Bankruptcy Judge John J. Klobucher, the Court stated "IDM defrauded the limited partners and, ultimately, this Court, when it orchestrated a consensual plan by virtue of an agreement on which it later reneged." Exh. 24 at 6. As stated in the attached Declaration of Richard Meehan and as recited in the Court's Opinion (Exh. 24 at 13), the Court and parties have been unable to trace funds defrauded from them and they have no effective -38- remedy to recover on their judgment.(15) Given this history, a money judgment against Defendants will most likely be worthless. As such, Plaintiffs argue that an injunction is needed to immediately take control of the Partnership assets. Defendants counter that Plaintiffs cannot show the required likelihood of irreparable injury because where the threatened injury consists primarily of monetary damages, and the Defendant IDMGP is solvent, irreparable injury is not shown. Nonetheless, Plaintiffs counter that Defendants' acts may render any judgment ineffectual as it is necessary for NewPic to assume control of the Partnership if Defendants are to be held accountable for their actions. c. Plaintiffs Allege that Defendants have Failed to Make Distributions, Re-Loaned Defendants' Distributions to Affiliates, and Failed to Provide Access to Financial Records to Cover their Traces. Plaintiffs further aver that Defendants have blatantly disregarded the contractual requirements for handling the Partnership funds under the Partnership Agreement. By way of example, the Partnership Agreement requires that interest payments received by the Partnership shall be disbursed only to - ---------- (15) Plaintiffs state that Defendants allude to another judgment rendered against their affiliate, One Tracenter Corporation, in the amount of $31,000,000. Exh. 29. That judgment also is uncollectible and remains unsatisfied. -39- partners and may not be reinvested. Exh. 14,P. 11.4Y ("Neither the General Partner nor any Affiliate shall have the authority to . . . [r]einvest cash funds provided from interest income.") Exh. 28 at 2, 4, & 25. Prior to the Carden takeover, regular distributions were made to the partners. See, Meehan Decl.P. 5, Exh. 15 & 25. However, after Defendants' takeover, these distributions apparently have stopped. Id. Plaintiffs allege that Defendants have admitted they have received interest income, as evidenced in the December 31, 1997 and 1998 Form 10-K's. Exh. 18 & 25. Plaintiffs point to evidence that they have been re-lending this income to their affiliates in violation of the Partnership Agreement. Id. The Partnership Agreement and Offering Memorandum prohibit re-lending of principal with only one limited exception for an early payoff of principal received within the first 12 months after the loan was made. Exh. 28 at 3 & 21; Exh. 14P. 11.1A. Furthermore, the general partner is restricted to re-loaning principal only once. Id. The maximum aggregate term on any loan, including any -40- re-loaning of principal, shall not exceed eight years. Id. Assuming for the sake of argument that the last original loan was made in 1991,(16) all loans should have been paid in full no later than 1999. However, Defendants have disregarded these prohibitions and have been re-loaning principal to their affiliates. Exh. 25 at 6 (in 1997 alone, over $1,000,000 was re-lent to affiliates). Plaintiffs contend that the operative Partnership documents also prohibit loans on properties outside the State of California. Exh. 28 at 19; Exh. 27. Defendants have violated this provision by making at least one loan of $372,500 for a Phoenix, Arizona land development deal to their affiliate in Arizona. Exh. 25 at 6. Plaintiffs assert that Defendants' motive is to stonewall the limited partners, conclude their looting of the Partnership and hide any trace of their alleged fraud. Plaintiffs contend that in order to hide their tracks, Defendants have failed and refused to provide financial and other records to partners (including regular quarterly and annual reports, and information requested by partners in specific instances (i.e. Exh. 9 & 10) in spite of the clear requirements of the Partnership Agreement and the Corporations Code. See, Groom, Olson & Meehan Decl.'s. Plaintiffs urge that only by acting quickly through appointment of a receiver or enjoining Defendants, will the limited partners obtain the best chance of tracing and recovering a significant portion of the over $6,000,000 allegedly looted by Defendants. - ---------- (16) Defendants' Form 10-K state loans were made from 1986 through 1991. Exh. 25 at 5. -41- Plaintiffs claim that they will be irreparably harmed absent relief. Plaintiffs contend that damages may not afford adequate compensation for Defendants' continued interference with the management of the Partnership. Accordingly, damages as a result of these wrongful acts may be difficult to ascertain. Defendants, in their Opposition, claim that Plaintiffs have not established irreparable injury because the "relationship of the parties .. . . has remained constant throughout this year, if not many years." Opposition at 8. Plaintiffs correctly respond that this relationship changed with the Removal Vote on September 25, 2000. Moreover, it was not until October 13, 2000 that IDMGP advised that it would not cooperate in the transition, which triggered the lawsuit and the present motion for injunctive relief. As such, this Court finds that Plaintiffs have established the element of irreparable injury to warrant enjoining Defendants. 3. The Balance of Hardships Tips in Plaintiffs' Favor. -- --------------------------------------------------- The Ninth Circuit in Los Angeles Memorial Comm'n v. Nat'l Football League, 634 F.2d 1197, 1200 (9th Cir. 1980), held that the basic function of a preliminary injunction is to preserve the status quo pending a determination of -42- the action on the merits. The moving party may meet its burden by demonstrating either (1) a combination of probable success on the merits and the possibility of irreparable injury, or (2) that serious questions are raised and the balance of hardships tips sharply in its favor. Id. at 1201. "These are not separate tests, but the outer reaches `of a single continuum.'" See, Id. In this instance, Defendants claim that the injunction would be mandatory (commanding performance of acts), which requires application of stricter standards and the balance of hardships tips in its favor. See, Meghrig v. KFC Western, Inc., 516 U.S. 479, 485, 116 S.Ct. 1251, 1254 (1996) (mandatory injunction orders a party to "take action" and prohibitory injunction "restrains" a party from further action). Plaintiffs counter that the injunction is prohibitory, because it requires Defendants to refrain from staying in control of the Partnership. This Court agrees with Plaintiffs. Defendants contend that there will be no harm to Plaintiffs if the status quo is maintained, since Plaintiffs have delayed in taking action. Defendants also aver that issuance of an injunction will cause ministerial problems and confusion among the Limited Partners. Plaintiffs counter that the status quo stands as of the recent proxy votes and IDMGP's removal from power. Based on the foregoing, this Court finds that the balance of hardships tips heavily in favor of Plaintiffs. -43- E. Plaintiffs' Application for a Receiver is Denied. -- ------------------------------------------------- Since this Court has determined that NewPic should be allowed to act as General Partner during the pendency of this action, the appointment of a receiver pursuant to Federal Rule of Civil Procedure 66, is unnecessary to oversee the affairs of the Partnership. As such, the Application for Appointment of a Receiver is denied without prejudice. III. Conclusion - ---- ---------- Based on the foregoing, the Court GRANTS both Plaintiffs' and Defendants' Requests for Judicial Notice. In addition, Plaintiffs have demonstrated that they are likely to prevail on the merits of their many claims and will suffer irreparable injury if the Preliminary Injunction is not granted. Accordingly, this Court GRANTS Plaintiffs' Application for Preliminary Injunction and DENIES Plaintiffs' Application for Appointment of a Receiver.(17) Federal Rule of Civil Procedure 65(d) requires the Court to "describe in reasonable detail . . . the act or acts sought to be restrained." As such, this Court ORDERS as follows: - ---------- (17) This Court again notes that a preliminary injunction is not a preliminary adjudication on the merits but rather a device for preserving the status quo and preventing the irreparable loss of rights before judgment. -44- 1. IDM PARTICIPATING INCOME GENERAL PARTNERS' CO.-II, IDM PARTICIPATING INCOME CORPORATION, WILLIAM J. CARDEN, STEVEN M. SPEIER, and MORRIS COHEN (collectively "Defendants"), and their respective parent, subsidiary, and affiliate corporations, and all of their representatives, partners, agents, principals, officers, directors, attorneys, servants, and employees, and all those acting in concert or participation with them, or any of them, be hereby restrained and enjoined from engaging in, either directly or indirectly, by any means, method, or device whatsoever, any and all of the following acts: A. Interfering with the operation and management of Plaintiff IDM Participating Income Company-II, a California Limited Partnership (the "Partnership"), by the duly elected General Partner of the Partnership, NewPic GP Corporation, a California corporation ("NewPic"); B. Denying NewPic access to the books, documents, records, and bank accounts of the Partnership, including but not limited to: bank statements, checkbooks and savings books; check registers; federal and state tax returns and related worksheets and working papers; financial statements, including balance sheets, income statements, and statements of cash flow; general and accounting ledgers; the files on each and every loan and transaction made by the Partnership; lists of the partners and their capital contribution; and all correspondence relating to the foregoing and Partnership business and activities; and, -45- C. Acting or purporting to act as the General Partner or on behalf of the Partnership, including by: transferring, conveying, liquidating, encumbering, impairing, pledging, or compromising or attempting to transfer, convey, liquidate, encumber, impair, pledge, or compromise any asset or claim belonging to the Partnership; disbursing or attempting to disburse to anyone any funds or monies belonging to the Partnership; withdrawing for any purpose or attempting to withdraw for any purpose any Partnership funds or monies; forgiving or attempting to forgive or reconvey any debt owed or security pledged to the Partnership. 2. Said Defendants shall forthwith turn over to Plaintiffs, and direct employees, agents or other third parties in possession or control thereof to turn over, the following: A. All assets, property, monies and funds pertaining to the Partnership and the Business; and, B. All books, original documents, records, and bank accounts of the Partnership, and any copies thereof, including but not limited to: all bank statements, checkbooks and savings books; check registers; federal and state tax returns and related worksheets and working papers; financial statements, including but not limited to balance sheets, income statements, and -46- statements of cash flow; general and other accounting ledgers and supporting journals; the files on each and every loan and transaction made by the Partnership; original and copies of promissory notes and deeds of trust involving the Business or the Partnership; lists of the partners and their capital contributions; and all correspondence relating to the foregoing subjects, the Partnership, and the Business. 3. The Defendants shall immediately advise the Plaintiffs of all federal Taxpayer Identification Number(s) used in connection with the Partnership and the Business. Plaintiffs suggest a bond in the amount of $10,000 be posted as adequate security. This Court is of the opinion that an amount of $50,000 is more realistic, pursuant to Federal Rule of Civil Procedure 65(c), which states that no preliminary injunction shall issue except upon the giving of security by the applicant. This security is "in such sum as the court deems proper, for the payment of such costs and damages as may be incurred or suffered by any party -47- who is found to have been wrongfully enjoined or restrained." Fed. R. Civ. P. 65(c). As such, Plaintiffs are ordered to post a bond in the amount of $50,000 within three (3) days of the entry of this Order. Counsel for Plaintiffs are ordered to prepare and submit a Proposed Preliminary Injunction in accordance with this Order within three (3) days of the date of this Order. IT IS SO ORDERED. DATED: 1/29/2001 DICKRAN TEVRIZIAN --------------------------- Dickran Tevrizian, Judge United States District Court -48- -----END PRIVACY-ENHANCED MESSAGE-----