Opinion
Case No. 05-14063-H7, (RS No. JJG-1).
February 7, 2006
MEMORANDUM DECISION
The U.S. Securities and Exchange Commission ("SEC") moves for relief from stay pursuant to 11 U.S.C. § 362(d) with respect to assets being held pursuant to the orders of the United States District Court for the Southern District of New York (the "district court") by Thomas J. Lennon, Inc., receiver (the "receiver"). The assets, a yacht (the "yacht") and funds in certain escrow accounts at Laurel Hill Escrow Services, Inc. ("Laurel Hill") in the amount of $46,795.30 (the "funds"), are located in California.
The chapter 7 trustee, Leslie Gladstone (the "trustee"), and the debtor objected. The matter was heard on December 15, 2005. After considering the pleadings and oral argument, the Court took the matter under submission.
The Court does not discuss debtor's objection because it seeks to collaterally attack the district court's judgment and its findings regarding his interest in the yacht and the funds.
At issue is whether SEC properly followed New York state law procedure for enforcing its money judgment against the debtor, thereby giving it a fully perfected security interest in the yacht and the funds, and priority over the trustee.
This Court has jurisdiction to determine this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(1) and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157 (b) (2) (A).
I. FACTS
On June 21, 2001, SEC obtained a money judgment against the debtor in the district court which required him to disgorge more than $12 million. Debtor failed to pay any portion of the judgment and SEC commenced supplementary proceedings to execute on its judgment.
On August 11, 2003, the district court entered an Order to Show Cause for Civil Contempt, With Ex Parte Freeze, Asset Seizure, Appointment of Receiver, Turnover Order, and Order for Expedited Discovery (the "August 11 Order"). The August 11 Order finds that SEC had made a prima facie showing that debtor was in contempt for failing to pay the disgorgement ordered by the judgment and that he was the legal or equitable owner of the yacht and the funds held in certain escrow accounts at Laurel Hill. The August 11 Order directed the United States Marshal for the Southern District of California to seize the yacht and then place it in the custody of the receiver. The August 11 Order also appointed the receiver and directed him to take custody of the yacht. On August 12, 2003, the Marshal seized the yacht, and turned it over to the receiver.
On September 10, 2003, the district court entered an order finding the debtor in contempt for his failure to pay the disgorgement ordered by the judgment.
On January 22, 2004, the district court extended the asset freeze of the September 10, 2003, order to additional escrow accounts at Laurel Hill. The receiver obtained the funds from the escrow accounts in February 2004.
On June 30, 2005, the district court found that the debtor is the owner of the yacht and ordered the yacht sold in partial satisfaction of debtor's disgorgement obligation.
On October 14, 2005, debtor filed his voluntary petition under chapter 7.
II. DISCUSSION
SEC argues, among other things, that it is entitled to relief from stay because it has the equivalent of a fully perfected security interest in the yacht and the funds and the debtor has no equity in either. SEC contends that the August 11 Order was the functional equivalent of a levy under New York law. SEC relies on Federal Rule Civil Procedure 69 (a) [hereinafter "Rule 69 (a)"] and 28 U.S.C. § 2413 which is the "long-arm" execution statute and provides a special rule for executions on judgments in favor of the United states.
SEC argues that the assets held by the receiver are held in constructive trust on behalf of the investors the debtor defrauded. The Court finds it unnecessary to discuss SEC's constructive trust theory because it finds that SEC has a fully perfected security interest in the assets. SEC also argues that it should get relief from stay because the debtor filed his chapter 7 case in bad faith, omitting assets from his schedules and filing incorrect Statement of Affairs. This aspect of SEC's motion was not dealt with at the hearing and would require at the very least an evidentiary hearing. The debtor did not appear at the hearing. Therefore, the Court does not make any findings with respect to the debtor's alleged bad faith.
The receiver obtained an appraisal of the yacht showing that the current value is $375,000. The value of the yacht and the funds is substantially below the amount of SEC's judgment. Therefore, the debtor does not have equity in either asset. The trustee does not dispute the lack of equity.
Rule 69 (a) provides that the procedure for enforcing federal court judgments "shall be made in accordance with the practice and procedure of the state in which the district court is held," in this case New York, "except that any statute of the United States governs to the extent that it is applicable." Postjudgment remedies to enforce a money judgment in New York are set forth in Article 52 of the New York Civil Practice Law and rules ("CPLR").
28 U.S.C. § 2413 provides: "A writ of execution on a judgment obtained for the use of the United States in any court thereof shall be issued from and made returnable to the court which rendered the judgment, but may be executed in any other State, in any Territory, or in the District of Columbia."
A. STANDARDS FOR RELIEF FROM STAY
Bankruptcy Code § 362(d) permits this Court to grant relief from the stay upon a request of a party in interest under the following circumstances:
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or
(2) with respect to a stay of an act against property if —
(a) the debtor does not have an equity in such property; and
(b) such property is not necessary to an effective reorganization.
The party requesting relief from the stay has the burden of proof on the issue of the debtor's equity in the property while the party opposing such relief has the burden on all other issues. 11 U.S.C. § 362(g) (1) (2).
One court noted that a "lift stay motion is an inappropriate vehicle for declaring the extent of an interest in property. An adversary proceeding is required." In re Pandeff, 201 B.R. 865, 870 (Bankr. S.D.N.Y. 1996) (citation omitted). The court went on to explain that the burden of proof in an adversary proceeding would be on the creditor claiming an interest in the debtor's property to prove the validity of its lien." Therefore, the burden is on SEC to prove the validity of its lien in the yacht and the funds.
B. SEC'S PRIORITY IN OR "LIEN" IN THE YACHT AND THE FUNDS UNDER NEW YORK LAW
1. CPLR 5202 (a): Execution
CPLR 5202(a) governs when a judgment creditor proceeds by way of execution. That section states that when a judgment creditor has delivered an execution to a sheriff, the judgment creditor's rights "in an interest of the judgment debtor in personal property, . . . are superior to the extent of the execution to the rights of any transferee of the property," with two exceptions, neither of which is applicable here. Although SECtion does not specifically use the word "lien," numerous cases have held that the judgment creditor acquires a lien on personal property of the debtor when the execution is delivered to the sheriff. Balaber-Strauss v. Marine Midland Bank, N.A. (In re Marceca), 129 B.R. 369, 370 (Bankr. S.D.N.Y. 1991) (citations omitted).
The first exception is for a "transferee who acquired the . . . property for fair consideration, before it was levied upon. CPLR 5202 (a) (1) . SECond exception applies to a transferee who acquired a debt or personal property not capable of delivery for fair consideration after it was levied upon without knowledge of the levy. CPLR 5202 (a) (2). Neither exception applies because there was no transferee who acquired the yacht before the Marshall seized it in August 2003, and because the yacht is "capable of delivery."
The trustee contends that the August 11 Order is not the equivalent of a writ of execution because under New York law there are certain requirements that must be met for a piece of paper to become a writ of execution. According to the trustee it "has to say it's a writ of execution." [Transcript Dated December 15, 2005 6:18-19]. "It must include the last known address of the judgment debtor." Id. at 6:20. "The execution must be returned within sixty days of its issuance." Id. at 7:2-3. According to the trustee, none of these requirements are met. The trustee further maintains that there must be language stating that the Marshall is to "seize and sell" and "you can't have a writ of execution without a requirement or direction to sell." Id. 11:9-10.
The Court examined the August 11 Order for its content to determine whether it substantially complies with the requirements under CPLR 5230. That section governs the "form" for personal property execution, a paper delivered to the sheriff. That section states:
(a) Form. An execution shall specify the date that the judgment or order was entered, the court in which it was entered, the amount of the judgment or order and the amount due thereon and it shall specify the names of the parties in whose favor and against whom the judgment or order was entered. An execution shall direct that only the property in which a named judgment debtor or obligor who is not deceased has an interest, or the debts owed to the named judgment debtor or obligor, be levied upon or sold thereunder and shall specify the last known address of that judgment debtor or obligor. Where the judgment or order was entered in a court other than the supreme, county or a family court, the execution shall also specify the date on which a transcript of the judgment or order was filed with the clerk of the county in which the judgment was entered. Where jurisdiction in the action was based upon a levy upon property or debt pursuant to an order of attachment, the execution shall also state that fact, describe all property and debts levied upon, and direct that only such property and debts be sold thereunder. Where the judgment or order was recovered for all or part of a mortgage debt, the execution shall also describe the mortgaged property, specify the book and page where the mortgage is recorded, and direct that no part of the mortgaged property be levied upon or sold thereunder.
The mechanics of the sheriff's activity on the execution are set forth in CPLR 5232 which authorizes a levy by seizure which was done here, and 5233 which sets forth the requirements for a sale, which is pending on the outcome of this motion.
The Court agrees with SEC and finds that the August 11 Order is the equivalent of a writ of execution. The August 11 Order substantially complies with the "form" required under CPLR 5230. Specifically, it specifies the date that the judgment was entered, the amount of the judgment, and the names of the parties in whose favor and against whom the judgment was entered. The order further makes a finding that the debtor is the equitable owner of the yacht and provides for the levy on the yacht.
The trustee cited no authority that stands for the proposition that a federal court must strictly follow the state law procedure for enforcing judgments, probably because the law is to the contrary. "Substantial compliance with the procedural provisions of the state statutes is sufficient." 12 Wright Miller, Fed. Prac. Proc., Civ. 2d § 3012 at n. 29 (2005) (citing numerous cases); see also Thomas, Head and Greisen Employees Trust v. Buster, 95 F.3d 1449, 1452 (9th Cir. 1996) (citations omitted). In Thomas, Head, the Ninth Circuit noted that "Federal Rule 69(a) is in substance a choice-of-law provision not 'meant to put the judge into a procedural straitjacket, whether of state or federal origin. . . .'"
Thomas, Head commenced a supplementary proceeding, alleging that the defendant, Buster, had fraudulently conveyed his assets to third parties in violation of Alaska law. Buster and the third parties asserted that under Rule 69(a) and the Alaska procedure it incorporates, a judgment creditor must bring an independent action in state court to set aside the postjudgment fraudulent conveyances of a judgment debtor. The Ninth Circuit noted that although Alaska law did not expressly authorize postjudgment fraudulent transfer actions, it did permit the use of a postjudgment order to prevent fraudulent transfers. Therefore, the Ninth Circuit found that the "procedure followed here . . . accord[ed] with the spirit of the Rules and . . . was a sufficiently close adherence to state procedures." Id. at 1452.
a. LONG-ARM EXECUTION
The trustee also argues that a New York court does not have the right to say there's a lien on California property. [see Trustee's Brief in Opp. at p. 6, n. 4]. The Trustee filed a supplemental brief regarding this issue on December 29, 2005, which cites Butner v. United States, 440 U.S. 48, 55 (1979) for the proposition that the creation of a security interest is a matter of state law and not federal law. The trustee further argues that this Court should not interpret 28 U.S.C. § 2413 in a manner to allow laws from other states to create security interests within the State of California. According to the trustee, there would be uncertainty as to whether liens in California property were in fact created by a judgment in favor of the United States in another jurisdiction.
The Court finds the trustee's citation and argument unpersuasive. The Court cannot ignore the plain language of a federal statute that authorizes the United States government to execute on its judgments beyond the territorial limits of the state in which the court issuing the judgment sits. A writ obtained for the use of the United States may be executed in any state. "Longarm execution" under 28 U.S.C. § 2413 is reserved for judgments for use of the United States. United States v. Palmer, 609 F.Supp. 544, 547 (E.D. Tenn. 1985). This statute allows the government to bypass the local registration requirements and execute a federal judgment in any district in which the debtor owns property simply by delivering the writ of execution to the local U.S. Marshal. "Under § 2413, the law of the state in which the court of judgment sits controls execution proceedings, even if the execution is actually made in another state." Id. Therefore, SEC's execution lien on the yacht arose at the time the August 11 Order was delivered to the Marshall in San Diego. Marceca, 129 B.R. at 370.
Additionally, CPLR 5234 (b) provides that the first execution delivered to the sheriff (here the Marshall) has priority over any execution subsequently delivered to an enforcement officer. Thus, at the time of the seizure, the interest of SEC as a judgment creditor was superior to the interest any other person could obtain in and to the yacht.
2. CPLR 5202(b): Appointment of Receiver and Delivery of Property
"[O]ne of the things that will give a judgment creditor a lien on personal property of the judgment debtor is an order appointing a receiver of that property." CPLR 5228.5
The Court finds that SEC also has a lien on both the yacht and the funds pursuant to CPLR 5202 (b) which provides:
Where a judgment creditor has obtained an order for delivery of, payment of, or appointment of a receiver of, a debt owned to the judgment debtor or an interest of the judgment debtor in personal property, the judgment creditor's rights in the debt or property are superior to the rights of any transferee of the debt or property, except a transferee who acquired the debt or property for fair consideration and without notice of such order.
New York law allows for the appointment of a receiver to aid in the enforcement of a money judgment. CPLR 5228 states that "[t]he order of appointment shall specify the property to be received, the duties of the receiver and the manner in which they are to be performed." It further states that "[i]f a receiver has been appointed, a court making an order directing payment, or delivery, of property shall direct that payment, or delivery, be made to the receiver rather than to the sheriff." CPLR 5228(a).
The aim of the post-judgment receivership of CPLR 5228 (sic) is to effectuate the judgment. The CPLR 5228 receivership, addressed to the money judgment, is designed to get at any property of the judgment debtor so as to sell it and pay the judgment out of the proceeds, or to make it produce income with the like aim of applying it to pay the judgment. CPLR 5228.4.
CPLR 5234 determines liens and priorities in personal property among judgment creditors, and one of the things that will give a judgment creditor a lien on personal property of the judgment debtor is an order appointing a receiver of that property. . . . Recognizing this, the judgment creditor should assure that the order specifies the personal property being received. It is the filing of the receivership order that brings about the lien, or, more accurately, the moment of priority for the judgment creditor. CPLR 5228.5.
The August 11 Order appointed the receiver to aid SEC in the enforcement of its money judgment against the debtor. It specifically mentions the yacht and the funds and gives the receiver specific directions with respect to the yacht. Subsequent orders from the district court maintained the August 11 Order's asset freeze on the funds and eventually the funds were turned over to the receiver in February 2004. The Court finds that the August 11 Order therefore created a lien on the yacht under CPLR 5202(b). In addition, the August 11 Order appointing the receiver, and subsequent orders regarding the asset freeze on the escrow accounts and the turnover of the funds to the receiver also create a lien on the funds under CPLR 5202(b). Again, SEC was able to use the longarm execution statute to obtain its lien on the yacht and the funds located in California.
A judgment creditor who obtains the appointment of a receiver is entitled to priority over other judgment creditors. CPLR 5234(c).
C. SEC'S LIEN IS PERFECTED AND NOT AVOIDABLE
In the event the Court finds SEC does have liens on the yacht and the funds, the trustee argues that she may avoid the liens pursuant to 11 U.S.C. § 545(c) (1) (C) and 545(2) which provides that a trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien —
1) first becomes effective against the debtor —
(C) when a custodian is appointed or authorized to take possession;
2) is not perfected or enforceable at the time of the commencement of the case against a bona fide purchaser that purchases such property at the time of the commencement of the case, whether or not such a purchaser exists.
The trustee does not rely on her avoidance powers under § 544. Nonetheless, SEC addressed the trustee's inability to use her avoidance powers under § 544(a) in its initial motion and its reply. In considering the trustee's avoidance powers under § 544(a) in conjunction with CPLR 5202 and 5234, one court noted that "it is well settled that the trustee does not have the rights of a bona fide purchaser of personalty." Barr v. Nat'l Aircraft Serv. (In re Cosmopolitan Aviation Corp.), 34 B.R. 592, 595 (Bankr. E.D.N.Y. 1983). Accord Marceca, 129 B.R. at 370 ("In view of the fact that 11 U.S.C. section 544(a) does not empower a trustee in bankruptcy to assert the rights of a hypothetical bona fide purchaser of personal property, it follows that the [SEC's] [sic] lien rights as a transferee of the debtor's personal property pursuant to § 5202 of the New York Civil Practice Law and Rules are superior to the rights of the trustee in bankruptcy. . . .").
Bankruptcy Code § 545 addresses statutory liens. The definition of a statutory lien under § 101(53) specifically excludes a judicial lien and further provides that a judicial lien remains as such even if it is "provided by," "dependant on," or "made fully effective by" a statute (such as the provisions of the New York CPLR). A judicial lien is defined as a lien "obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding." 11 U.S.C. § 101(36).
SEC's lien is not a statutory lien, but a judicial lien that arose after its judgment was enforced through the judicial process by writ of execution. See In re Pandeff, 201 B.R. 865, 874 (Bankr. S.D.N.Y. 1996) (" [I]n order to create a judgment lien on personalty, the judgment creditor must either 'execute' on the judgment or obtain an enforcement order.") (applying New York law) (citations omitted). Therefore, the trustee is unable to avoid SEC's liens on the yacht or the funds pursuant to Code § 545.
Because the Court finds that SEC's liens on the yacht and the funds are fully perfected and cannot be avoided by the trustee, and that no equity exists for the benefit of this estate in either asset, the Court grants SEC's motion.
III. CONCLUSION
The Court finds that SEC has a fully perfected lien on both the yacht and the funds. The trustee is unable to avoid those liens. Since SEC's judgment far exceeds the value of the yacht and the funds, there is no equity in either asset. Therefore, the Court finds cause exists to lift the stay and grants SEC's motion.
This Memorandum Decision constitutes findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052. Counsel for SEC is directed to file with this Court an order in conformance with this Memorandum Decision within ten (10) days from the date of entry hereof.