Opinion
No. 96 Civ. 5567 (RPP).
December 5, 2000.
Wolf Popper LLP, 845 Third Avenue, New York, N.Y. 10022-6689 By: Robert C. Finkel, Tel. 212-759-4600, Fax: 212-486-2093. Millberg Weiss Bershad Hynes Lerach LLP, One Pennsylvania Plaza, New York, N.Y. 10119-0165, By: Deborah Clark-Weintraub, Tel: 212-594-5300 Fax: 212-868-1229, Counsel for Plaintiffs.
Proskauer Rose LLP, 1585 Broadway, New York, N.Y. 10036-8299, By: Bart Schectman, Esq., Tel: 212-969-3000, Fax: 212-969-2900, Counsel for Judgment Creditor.
Sheldon Eisenberger, Esq., 30 Broad Street, New York, N.Y. 10004, Tel: 212-411-3843, Fax: 212-422-3844, Counsel for Jack Banks and Larry Weltman.
McLaughlin Stern, LLP, 260 Madison Avenue, 18th Fl., New York, N.Y. 10016. By: Peter S. Herman, Esq. Tel:212-448-1100, Fax: 212-448-6274 Counsel for G.Cash Limited.
OPINION AND ORDER
Proskauer Rose, LLP ("Proskauer") renews its application for (1) an order pursuant to Federal Rule of Civil Procedure ("FED. R Civ. P") 69(a) and New York Civil Practice Law and Rules ("CPLR") §§ 5201, 5222, 5225, 5227, and 5240, restraining G. Cash Limited ("G. Cash"), as cashier of judgment debtor GalaxiWorld.com Limited ("Galaxi World"), from making or suffering any sale, assignment or transfer, or any interference with, any property in which Galaxi World has an interest, or paying over or otherwise disposing of any debt owed to GalaxiWorld, to any person other than Proskaner, pending satisfaction of its judgment against GalaxiWorld; and (2) an order pursuant to FED. R. Civ. P 69(a) and CPLR §§ 5201, 5225, 5227 and 5240, requiring G. Cash to turn over and pay to Proskauer any property in which GalaxiWorld has an interest and any debt owed to GalaxiWorld, including but not limited to all monies due or coming due to Galaxi World pursuant to any contract or agreement between G. Cash and GalaxiWorld, and any "advance float" or deposit of monies held by G. Cash pursuant to any such contract or agreement, pending satisfaction of Proskauers judgment against GalaxiWorld. G. Cash cross-moves to vacate the restraint and for a protective order.
Although this is a renewed application, it should be pointed out that Proskauer's original application, filed by order to show cause on February 10, 2000, was for a restraining order on a bank account belonging to G. Cash at HSBC Bank, USA. In its reply papers in that motion filed on February 23, 2000, Proskauer broadened its request to include a general restraint on and turn over of funds by G. Cash. In its decision denying the motion, the Court did not rule on that broadened request since it was not part of the original application and G. Cash had not responded to it. In its March 13, 2000, motion for reconsideration Proskauer included its broadened request for a general restraint and turn over of funds by G. Cash. The Court in its decision of May 30, 2000, treated the motion as only for reconsideration of the original application and determined to restrain the funds held in G. Cash's account at HSBC pending a showing of Proskauer's right to a turn over order.
For the following reasons, an evidentiary hearing will be held to determine (1) whether HSBC should turn over the funds held in the G. Cash account to Proskauer and (2) whether G. Cash has sufficient "minimum contacts" with New York to support in personam jurisdiction such that the Court can issue a general restraint and a turn over order upon G. Cash with respect to any property in which GalaxiWorld would have an interest.
BACKGROUND
A. The Relationship Between G. Cash and GalaxiWorid
GalaxiWorld requires its customers who wish to gamble on its website to purchase G. Cash (electronic gambling currency) to do so (Certification of Levy Benaim on Behalf of G. Cash Limited, In Opposition to Order to Show Cause ("Benaim Cert.") dated February 16, 2000. ¶ 9.) Customers may purchase G. Cash either by credit card or by wire transfer into G. Cash's bank account at HSBC Bank USA ("HSBC"). (Affirmation of Bruce E. Boyden ("Boyden Aff"). dated February 9, 2000, ¶ 8.) G. Cash must pay those players who win and distribute to GalaxiWorld its portion of the proceeds (Benaim Cert. ¶ 12.) G. Cash pays some refunds of gambling winnings and unused gambling currency from the HSBC bank account in cases where the customer paid by wire transfer or if a refund cannot be made to the customer's credit card (Id. ¶ 10.)
G. Cash retains five percent of the credit card transactions and one percent of other transactions such as wire transfers as its compensation, pursuant to the Customer Merchant Agreement (hereinafter, "the contract") between G. Cash and GalaxiWorld (Id. ¶ 8, see Benaim Cert., Exh. 4 for the Customer Merchant Agreement.) After making payments to its customers, G. Cash then pays the balance of the transactions to GalaxiWorld. (Id.) In December 1999 and January 2000, which are the only months for which data has been provided, credit card sales exceeded $1.1 million per month (Id. ¶ 12.) G. Cash generally owes money to GalaxiWorld at the end of the month because "the house" (GalaxiWorld) usually wins (Id. ¶ 12).
B. Procedural Background
This is a "turnover proceeding" seeking payment of property of a judgment debtor allegedly in the possession of a third party. On January 26, 2000, Proskauer was awarded a judgment of $569,536.48 for legal fees in connection with its representation of GalaxiWorld. (See Order and Judgment, dated January 26, 2000.) That judgment was later amended on March 6, 2000, to increase Proskauer's award of fees owed to $654,412.58. (See Amended Judgment, dated March 6, 2000, at 2.) On February 2, 2000, Proskauer served a restraining notice pursuant to CPLR § 5222(b) upon G. Cash's account at HSBC. On February 10, 2000, by order to show cause returnable February 15, 2000, Proskaner sought an order directing HSBC to turn over funds held in an account in the name of G. Cash Limited, which Proskauer alleged was an alias and/or a d/b/a of GalaxiWorld. Proskauer also sought an order restraining HSBC from disbursing or transferring any funds or other assets held in the name of G. Cash until Proskaner's judgment against Galaxi World was fully satisfied. On February 16, 2000, G. Cash responded to the order to show cause, arguing that it was a separate entity from GalaxiWorld, that G. Cash was not GalaxiWorld's agent, and denying Proskauer's allegation that G. Cash was a fraudulent transferee of funds from GalaxiWorld. On February 22, 2000, Proskauer in its reply papers and without further service to G. Cash expanded its requested relief, asking that G. Cash "turn over to Proskauer all property in which judgment debtor GalaxiWorld.com Limited has an interest and pay to Proskauer any debt due or coming due to GalaxiWorld.com Limited." On February 23, 2000, G. Cash filed a memorandum of law in further opposition to Proskaner's order to show cause
On February 24, 2000, this Court denied Proskauers application for a turn over order and vacated the restraints and executions on the G. Cash account at HSBC, based on Mr. Benaim's affidavit and the Court's analysis of the outstanding checks which showed that there was no balance in the HSBC account in which GalaxiWorld could have had an interest. See In Re Gaming Lottery Securities Litigation, No. 96 Civ. 5567 (RPP), 2000 WL 222860 (S.D.N Y February 25, 2000).
On March 13, 2000, Proskauer moved for reconsideration of the February 24, 2000. Opinion and Order, arguing that (1) the Court overlooked controlling law, (2) the Court overlooked controlling facts, (3) the order was a product of mistake, and (4) Proskaner's request for a turn over order compelling G. Cash to turn over to Proskauer GalaxiWorld's other assets, beyond the HSBC account, was overlooked. On March 28, 2000, G. Cash responded, arguing that: (1) the motion was untimely, (2) no mistake had been made as to material facts or controlling principles of law, and (3) "Proskaner only acquired ancillary jurisdiction over the bank account, based on Proskauer's assertion that the account belonged to its judgment-debtor, GalaxiWorld." (Certification of Peter S. Herman In Opposition to Proskaner's Motion for Reconsideration, dated March 28, 2000, ¶ 17.) G. Cash further responded that "Proskauer never acquired personal jurisdiction over G. Cash, which is a Gibraltar corporation with no office or place of business in the State of New York." Id. On May 30, 2000, the Court found upon reconsideration that there had been a positive account balance in G. Cash's account at HSBC in which GalaxiWorld could have had an interest at the time of the restraining order and that Proskaner was entitled to a hearing to determine whether HSBC must turn over to Proskaner the funds in G. Cash's account. See In re Gaming Lottery Securities Litigation, No. 96 Civ. 5567 (RPP), 2000 WL 702978 (S.D.N.Y. May 31, 2000). The Court did not rule on Proskauer's request for a general restraint and turn over order on G. Cash's assets in which GalaxiWorld would have an interest, but limited its opinion to reconsideration of the relief which was the object of the original order to show cause. See id. Proskauer took an appeal and the hearing has not been held to date.
On September 19, 2000, Proskauer withdrew its appeal. On September 27, 2000, at Proskauer's application, the Court reinstated the restraint on G. Cash's account at HSBC. On September 28, 2000, Proskauer moved by order to show cause, returnable October 6, 2000, pursuant to Fed.R.Civ.P. 26(b) and 69(a) and CPLR §§ 408 and 5223 for discovery against GalaxiWorld, G. Cash, HSBC, and defendants Jack Banks and Larry Weltman (See Order to Show Cause, Sept. 28, 2000.) Defendants GalaxiWorld, Banks and Weltman opposed Proskauer's discovery motion. (See Memorandum In Opposition to Proskauer Rose LLP's Motion to Compel, dated October 4, 2000.)
On October 6, 2000, a hearing was held on Proskaner's discovery motion. Proskauer agreed to participate in the post-judgment discovery of GalaxiWorld, Banks and Weltman to be conducted by class counsel in In re Gaming Lottery Securities Litigation and further agreed that Proskauer would serve discovery requests upon G. Cash in accordance with the Federal Rules of Civil Procedure and the CPLR. (October 6, 2000, Transcript ("Tr") at 17, 55.)
At that hearing, Proskauer also renewed its request for a general restraint and turn over order against G. Cash as to any present or future property in which GalaxiWorld has or will have an interest (Tr. at 45.) G. Cash objected that the Court did not have jurisdiction over G. Cash to impose a general restraint or turn over order Id. The Court ordered the parties to brief the issue Id.
DISCUSSION
Judgment creditor Proskaner contends that (1) G. Cash's accounts at HSBC are property subject to restraint and execution and that GalaxiWorld has a substantial interest in those accounts because of the Customer Merchant Agreement (hereinafter "the contract") (see Benaim Cert. Exh. 4) between G. Cash and GalaxiWorld, (2) the Court should restrain G. Cash from transferring any money due or coming due to GalaxiWorld pursuant to the contract between G. Cash and GalaxiWorld, whether it is a present or a future right or interest, and (3) because G. Cash regularly makes payments to GalaxiWorld, the Court should direct G. Cash to turn any future payments over to Proskauer in satisfaction of its judgment (See Memorandum of Petitioner-Judgment Creditor Proskauer Rose LLP in Further Support of its Renewed Application for a General Restraint on Judgment Debtor's Cashier, Respondent G. Cash ("Proskauer Mem."), dated Oct. 12, 2000, at 1-2.)
In response, G. Cash contends that (1) the Court has only quasi in rem jurisdiction over G. Cash and that G. Cash has made a limited appearance only to defend the HSBC account and has not consented to in personam jurisdiction (2) G. Cash's contacts with New York are insufficient to support in personam jurisdiction, (3) the account at HSBC is a debt owed to G. Cash in which GalaxiWorld does not have a cognizable interest, and (4) any future debt that G. Cash may owe to GalaxiWorld is too contingent to be the basis of a restraint or turn over order. (See Memorandum of Respondent G. Cash, Limited in Opposition to Renewed Application of Proskauer Rose LLP, ("G. Cash Mem") at 2.)
In its May 30, 2000, Opinion, the Court ordered an evidentialy hearing to determine whether there were funds in G. Cash's HSBC account in which GalaxiWorld might have an interest. See May 30, 2000, Opinion and Order at 3. The Court further specified that the issue of "whether or not Proskauer is entitled to an order restraining any of G. Cash's funds other than those in the account at HSBC" could also be addressed at that hearing Id. at 3 n. 3. The Court then stated that "[t]his Court has the authority to issue such an order, upon the requisite factual showing by Proskauer, because the Court has personal jurisdiction over G. Cash." Id.
The word "because" was a mistake. It should have read "that".
G. Cash argues that the Court's conclusion that it possessed personal jurisdiction over G. Cash was both factually and legally erroneous in that (1) this proceeding is based on quast in rem jurisdiction over an account that belongs to G. Cash, and (2) G. Cash's contacts with New York are insufficient to support in personam jurisdiction, which is required for a general restraint on G. Cash. See G. Cash Mem, at 3.
Federal Rule of Civil Procedure 69 provides that the procedure to enforce a judgment "shall be in accordance with the practice and procedure of the state in which the district court is held, existing at the time the remedy is sought, except that any statute of the United States governs to the extent that it is applicable." FED. R. Civ. P. 69(a).
Under New York CPLR § 320(c)(1), an "appearance," which includes the filing of an answer, "is not equivalent to personal service upon the defendant . . . if jurisdiction is based solely upon a levy on defendant's property within the state pursuant to an order of attachment." CPLR § 320(c)(1), see Cargill. Inc. v. Sabine Trading Shipping Co., Inc., 756 F.2d 224, 227-28 (2d Cir. 1985) (holding that New York law permitting a limited appearance applies in a federal court diversity action) Under New York law, when jurisdiction over a non-resident is based on attachment of property within the state, the defendant's appearance is "limited" to defending the attached property. See Gager v. White, 53 N.Y.2d 475, 488-89 n. 10, 442 N.Y. So.2d 463 468-69 n 10 (1981). Thus the defendant may protect his interest in attached property without submitting to full in personam jurisdiction.Id.
The New York Court of Appeals has explained that "[h]istorically, where the initial jurisdiction was in rem or quasi in rem, an appearance, followed by a defense upon the merits, automatically transformed the jurisdictional basis to one that was in personam Later, this practice was replaced by CPLR 320 (subd. [c]), which provides that when jurisdiction is quasi in rem, the appearance remains a limited one. Under these circumstances, the defendant is now permitted to defend without submitting to in personam jurisdiction" Gager v. White, 53 N.Y.2d 488 n. 10, 442 N.Y.S.2d 463, 469 n. 10 (1981) (internal citations omitted).
G. Cash contends that it has made a limited appearance only and thereby is not exposed to personal jurisdiction or a restraint on its assets beyond the HSBC bank account which is currently subject to restraint Proskanjer's initial February 10, 2000, order to show cause was for a restraint on G. Cash's bank account at HSBC G. Cash responded on the merits to that order to show cause, thereby submitting to quasi in rem jurisdiction. In its reply however, Proskauer sought a general restraint on G. Cash's assets beyond the HSBC account. The expanded relief was not properly noticed in the February proceeding, and G. Cash submitted to only quasi in rem jurisdiction by responding on the merits to the order to show cause.
In its March 13, 2000, motion for reconsideration Proskaur requested a general restraint on G. Cash's assets beyond the HSBC bank account. In its March 29, 2000, reply, G. Cash objected, arguing that the court did not have in personam jurisdiction over G. Cash.
Where state or federal substantive law provides a basis for an objection to jurisdiction, that objection must be made pursuant to the procedural requirements of Fed.R.Civ.P. 12 or it is waived. See e.g.Harris Corp. v. Nat'l Iranian Radio Television, 691 F.2d 1344, 1351 (11th Cir. 1982); Rauch v. Day Night Mfg. Corp., 576 F.2d 697, 701 (6th Cir. 1978) ("[W]here defendant files a pre-answer motion to dismiss or an answer, without raising the defense of a lack of in personam jurisdiction, he waives any objection to that defect."); see also SEC v. Broadwall Sec., Inc., 514 F. Supp. 488, 492 (S.D.N.Y. 1981). Here, G. Cash properly raised its objection to in personam jurisdiction in its March 29, 2000, answer to Proskauer's March 13, 2000, motion for reconsideration. In its current motion papers, G. Cash continues to argue that the Court does not have in personam jurisdiction over G Cash. Thus G. Cash has not waived its objection to in personam jurisdiction. Accordingly, until it is determined that G. Cash is subject to personal jurisdiction, it will be treated as having made a limited appearance
Federal law controls the exercise of personal jurisdiction and requires that any such exercise of jurisdiction must meet the "minimum contacts" standards set forth in Int'l Shoe Co. v. Washington, 326 U.S. 310 (1945), and its progeny. Since G. Cash objected to jurisdiction in its answer to Proskauer's motion for reconsideration filed in March 2000, a "minimum contacts" evidentiary hearing will be held to determine whether the Court has personal jurisdiction over G. Cash as well as to determine whether G. Cash holds assets in which GalaxiWorld has an interest sufficient to allow the Court to order a turnover of funds to Proskauer. Pending a determination of whether G. Cash has sufficient minimum contacts with New York to support personal jurisdiction, judgment is reserved on Proskauer's request for a general restraint on G. Cash and on G. Cash's motion to vacate the restraint on its account at HSBC.
Federal law similarly controls whether the exercise of quasi in rem jurisdiction over a defendant violates the due process clause of the United States Constitution. See Shaffer v. Heitner, 433 U.S. 186, 212 (1977).
CONCLUSION
For the foregoing reasons, an evidentiary hearing will be held to determine (1) whether HSBC should turn over the funds held in the G. Cash account to Proskauer and (2) whether G. Cash has sufficient "minimum contacts" with New York to support in personam jurisdiction such that the Court can issue a general restraint and a turn over order upon G. Cash with respect to any property in which GalaxiWorld would have an interest.
IT IS SO ORDERED.