Opinion
Docket No. M18-302, Judgment No. 931745
July 30, 2002
MEMORANDUM OPINION AND ORDER
After having obtained a default judgment against A. David Dodwell in the District of Maryland, petitioner Lee N. Koehler registered the judgment in the Southern District of New York pursuant to 28 U.S.C. § 1963 and brought this garnishment proceeding in order to obtain certain assets of A. David Dodwell held by respondent The Bank of Bermuda Limited ("Bank of Bermuda" or "Bank"). Koehler now moves pursuant to Rule 25(c) of the Federal Rules of Civil Procedure for an order substituting or joining the Bank of Bermuda as judgment debtor.
BACKGROUND
Between 1980 and 1992, Koehler and Dodwell worked together to acquire and manage resort properties, beginning with The Reefs Beach Club Limited in Bermuda ("The Reefs"). They secured financing for their operations from the Bank of Bermuda and its subsidiaries in New York and Luxembourg. Koehler and Dodwell defaulted on their debts to the Bank in 1991, and initial attempts to reach agreement on debt restructuring and corporate reorganization plans failed. Since then, Koehler, Dodwell, and the Bank have been embroiled in litigation in federal and state courts in Maryland, Arizona, and New York and in the courts of Bermuda. See generally Koehler v. Bank of Bermuda (New York) Ltd., 96 Civ. 7885, 1998 WL 67652, at *1-5 (S.D.N.Y. Feb. 19, 1998) (Keenan, J.) (providing detailed account of business transactions of Koehler and Dodwell with Bank of Bermuda and ensuing litigation).
The present garnishment proceeding arises from a suit brought in 1992 by Koehler against Dodwell in the United States District Court for the District of Maryland, alleging breach of fiduciary duty and negligent misrepresentation. Koehler obtained a default judgment in the amount of $2,096,343 on June 4, 1993. To collect on the judgment, Koehler hoped to garnish certain assets of Dodwell's which were in the possession of the Bank of Bermuda, particularly stock certificates of The Reefs. To that end, Koehler registered the judgment in the United States District Court for the Southern District of New York on July 23, 1993, in accordance with 28 U.S.C. § 1963, and served writs of execution on the Bank of Bermuda through its New York subsidiary on July 26 and August 10, 1993, in accordance with Rule 69 of the Federal Rules of Civil Procedure.
28 U.S.C. § 1963, entitled "Registration of judgments for enforcement in other districts," states in pertinent part:
A judgment in an action for the recovery of money or property entered in any . . . district court . . . may be registered by filing a certified copy of the judgment in any other district . . . when the judgment has become final by appeal or expiration of the time for appeal or when ordered by the court that entered the judgment for good cause shown. . . . A judgment so registered shall have the same effect as a judgment of the district court of the district where registered and may be enforced in like manner.
The Bank moved to dismiss for lack of personal jurisdiction, contending that the presence of its subsidiary in New York did not subject it to jurisdiction under N.Y. C.P.L.R. § 301. This Court held that Koehler had made a prima facie showing that the Bank's New York subsidiary was doing business in New York as the Bank's agent, thus rendering the Bank subject to personal jurisdiction in New York. Koehler v. The Bank of Bermuda Ltd., M 18-302, 1994 WL 48825 (Feb. 16, 1994) (denying motion to dismiss), 1994 WL 97553 (Mar. 21, 1994) (granting motion for reargument), 1995 WL 728467 (Dec. 8, 1995) (denying motion to dismiss after reargument). After granting leave to file an interlocutory appeal, the Court of Appeals remanded and directed this Court to conduct further proceedings in order to determine whether Koehler could establish personal jurisdiction over the Bank by a preponderance of the evidence. 101 F.3d 863 (2d Cir. 1996).
Following remand, the parties were directed to conduct discovery on the issue of personal jurisdiction under the supervision of Magistrate Judge Dolinger. Order dated Jan. 10, 1997. Completion of discovery was delayed due to the Bank's failure to respond to Koehler's requests, see 1997 WL 370791 (July 2, 1997) (Dolinger, M.J.), which prompted Koehler to file a motion to compel discovery on May 29, 1997, and a motion to compel discovery and impose sanctions on August 1, 1997. Then the proceeding was stayed from November 1997, when the District of Maryland vacated the underlying judgment for lack of subject matter jurisdiction, until August 1998, when the Fourth Circuit reinstated the judgment. Orders dated Nov. 5, 1997, and Aug. 28, 1998; see also Koehler v. Dodwell, 152 F.3d 304 (4th Cir. 1998). After the stay was lifted, the Bank continued to delay responding to Koehler's discovery requests, in violation of prior court orders. See Order dated Feb. 28, 2001 (Dolinger, M.J.); 2001 WL 327141 (Apr. 4, 2001) (Dolinger, M.J.). As of this date, the parties' discovery disputes have not been fully resolved, and the issue of personal jurisdiction awaits final determination.
The motion that is the subject of this Opinion is made by Koehler pursuant to Rule 25(c) of the Federal Rules of Civil Procedure. Koehler claims that after the Bank was served with writs of execution in this proceeding, the Bank transferred over $4 million of Dodwell's assets, which the Bank had been holding in Dodwell's account, to itself and to The Reefs in satisfaction of debts that Dodwell allegedly owed. Koehler contends that these transfers lacked consideration and were intended to impede his effort to collect on his judgment against Dodwell; on this basis, he asks the Court to substitute or join the Bank as judgment debtor.
DISCUSSION
Rule 25 of the Federal Rules of Civil Procedure, entitled "Substitution of Parties," provides in pertinent part:
(c) Transfer of Interest. In case of any transfer of interest, the action may be continued by or against the original party, unless the court upon motion directs the person to whom the interest is transferred to be substituted in the action or joined with the original party. . . .
The person or entity to be substituted or joined under Rule 25(c) is known as a "successor in interest." See LiButti v. United States, 178 F.3d 114, 124 (2d Cir. 1999). When a transfer of interest has occurred and a motion for substitution or joinder is made, the district court may in its discretion grant the motion or deny it and allow the action to continue in the names of the original parties. State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1312 (2d Cir. 1996); see also 6 James Wm. Moore et al., Moore's Federal Practice § 25.30[4] (3d ed. 2001). A successor in interest is bound by a judgment against its predecessor even if substitution is not effected. LiButti, 178 F.3d at 124; see also 6 Moore's Federal Practice § 25.30[6].
Successor liability is a matter of state law. LiButti, 178 F.3d at 124. Generally, a successor in interest may be a person or entity who acquires the particular interest at stake in the litigation, such as a certain piece of property or a contractual right, or who acquires all the assets and liabilities of a party to the litigation. For example, assignees of a patent may be considered "successors in interest" in an infringement action. See Horphag Research Ltd. v. Consac Indus., Inc:, 116 F.3d 1450 (Fed. Cir. 1997) (reversing substitution because of timing of transfer of interest). A purchaser of real property may succeed to the prior owner's interest in litigation involving pollution on the property. See ELCA Eners., Inc. v. Sisco Equip. Rental Sales, Inc., 53 F.3d 186, 190-91 (8th Cir. 1995). A corporation that merges with another corporation is the latter's successor in interest for purposes of litigation. Luxliner P.L. Export, Co. v. RDI/Luxliner, Inc., 13 F.3d 69, 71 (3d Cir. 1993). On the other hand, a corporation that acquires all of another corporation's assets without undergoing a legal merger ordinarily is not liable for a judgment as a successor, see Horphag Research Ltd., 116 F.3d at 1454, unless it controlled the litigation that resulted in the judgment, see Explosives Corp. of Am. v. Garlam Enters. Corp., 817 F.2d 894, 904-07 (1st Cir. 1987), or if there is fraud, see LiButti, 178 F.3d at 124. A receiver or trustee in bankruptcy may be the successor in interest of the debtor. See Moore's Federal Practice § 25.30[1]; 82 N.Y. Jur.2d Parties §§ 232-33 (2002).
Koehler does not cite any state law regarding transfers of interest and the liability of a successor in interest for the debts of its predecessor. Rather, Koehler cites New York statutes dealing with fraudulent conveyance. In New York, a judgment creditor may bring suit against a person who receives a "fraudulent conveyance" from the judgment debtor and ask the court to set aside the conveyance. N.Y. Debt. Cred. Law § 278 (McKinney 2002). In arguing that the Bank's transfers of Dodwell's assets constituted fraudulent conveyances, Koehler relies in particular on Debtor Creditor Law § 273-a:
Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.
and § 276:
Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors.
In support of his claim of fraudulent conveyance, Koehler alleges that approximately three months after Koehler first served the Bank's New York subsidiary with a writ of execution, over $4 million of Dodwell's assets were transferred out of his account at the Bank. Dodwell's account at the Bank contained for the most part shares of common stock in The Reefs. The Bank claimed to hold these shares as collateral for Dodwell's debts to the Bank. On October 20, 1993, The Reefs underwent a recapitalization. At that time, the Bank exercised 84% voting control of The Reefs as pledgee of Koehler and Dodwell's voting stock. Under the recapitalization, Dodwell's common stock received newly created preferred shares as dividends. The Bank then transferred some of these newly created shares from Dodwell's account to itself in satisfaction of Dodwell's alleged debts to the Bank on two loans (referred to as the "New York Loan" and the "Personal Loan"), and some shares were redeemed by The Reefs in satisfaction of Dodwell's alleged debt on a shareholder loan. Koehler asserts that the Bank did not have a valid legal claim against Dodwell for the deficiency and interest on the New York Loan, which amounted to $1,276,635.22, and questions the validity of the debt on the shareholder loan, which amounted to $861,306.00. In the alternative, Koehler asserts that these debts were subordinate to Dodwell's debt to Koehler for the judgment in this case. Koehler contends that the Bank's transfers from Dodwell's account in satisfaction of these alleged liabilities were intended to frustrate his efforts to collect on the judgment.
Koehler also states that the Bank continues to hold in Dodwell's account, or has turned over to Dodwell, $74,141.03 in cash and common stock in The Reefs worth $3,362,886.30. Koehler contends that these assets were the subject of the writs of execution in this proceeding and should have been confessed to this Court. The Bank is not presently obligated to surrender Dodwell's assets to the Court, because personal jurisdiction over the Bank has yet to be finally established, and Koehler does not provide any support for his bald assertion that the Bank may have permitted Dodwell to withdraw those assets.
Koehler apparently assumes that "fraudulent conveyance" is synonymous with "transfer of interest" under Rule 25(c). That assumption is false. As explained in more detail above, a "transfer of interest" under Rule 25 (c) generally occurs when a litigant transfers its particular interest in the litigation or transfers all of its assets and liabilities. On the other hand, "fraudulent conveyance" generally occurs when a debtor transfers some of its assets in avoidance of its debts. In certain circumstances, both terms may describe the same event, but that is not the situation here. Koehler's claims against Dodwell in the District of Maryland case were for breach of fiduciary duty and negligent misrepresentation; the Bank has not assumed Dodwell's liability for such claims. Furthermore, the alleged transfers from Dodwell's account at the Bank clearly did not amount to a transfer of all of Dodwell's assets and liabilities akin to that which takes place in the context of bankruptcy or corporate merger. In other words, even assuming that Dodwell did fraudulently transfer some of his assets to the Bank of Bermuda, the Bank is not a successor in interest to Dodwell. By making a motion under Rule 25(c) to join or substitute the Bank as judgment debtor, Koehler tries in vain to fit a square peg into a round hole. Koehler cannot obtain the relief he seeks by way of a Rule 25(c) motion, and therefore I deny the motion.
Even if Koehler had made a potentially meritorious motion under Rule 25(c), it is not clear that this Court would have the authority to modify the judgment, which was entered in the District of Maryland and registered in this district pursuant to 28 U.S.C. § 1963. The Second Circuit has commented with respect to 28 U.S.C. § 1963 that "the role of the enforcing court is unclear." Covington Indus., Inc. v. Resintex A. G., 629 F.2d 730, 732 n. 2 (2d Cir. 1980). In Covington, the Second Circuit held that a district court in which a judgment is registered may consider a motion for relief from the judgment for lack of personal jurisdiction or may decline to consider such a motion in deference to the court that issued the judgment. Id. at 732-34. The Second Circuit "express[ed] no opinion" on whether a registering court has the power to consider a motion "for relief from the judgment on the grounds of mistake, newly discovered evidence, fraud, satisfaction, or any other justifying reason." Id. at 733 n. 3. The Second Circuit has not addressed directly the power of a registering court to entertain a motion under Rule 25(c), although in one case the Second Circuit affirmed a district court order granting such a motion. Arnold Graphics Indus., Inc. v. Indep. Agent Center, Inc., 775 F.2d 38 (2d Cir. 1985), aff'g No. M-18-302, 1985 WL 211 (S.D.N.Y. Jan. 23, 1985) (Haight, J.).
A judgment creditor may make a fraudulent conveyance claim in order to set aside a transfer of the judgment debtor's assets by way of a plenary action brought against the recipient of the assets. See 54 N.Y. Jur.2d Enforcement and Execution of Judgments § 257 ("Issue of Fraudulent Conveyance"), citing N.Y. C.P.L.R. § 5225(b) and McKinney's Practice Commentary [C5225:7]. Koehler did initiate a lawsuit in this district in which he stated a claim against the Bank for fraudulent conveyance. Judge Keenan dismissed that claim without prejudice for lack of subject matter jurisdiction, Koehler v. Bank of Bermuda (NY) Ltd., No. 96 Civ. 7885, 1998 WL 557595 (Sept. 2, 1998), motion for reconsideration denied, 1998 WL 790931 (Nov. 12, 1998), and the dismissal was affirmed on appeal, 209 F.3d 130, amended by 229 F.3d 424, reh'g en banc denied, 229 F.3d 187 (2d Cir. 2000). Recently, the case that served as controlling precedent for the Second Circuit's decision on the issue of subject matter jurisdiction, Matimak Trading Co. v. Khalily, 118 F.3d 76 (2d Cir. 1997), has been overturned by the Supreme Court, JP Morgan Chase Bank v. Traffic Stream (BVI) Infrastructure Ltd, 536 U.S. ___, 122 S.Ct. 2054 (June 10, 2002). By the time of the Supreme Court's decision, however, Koehler's case before Judge Keenan was already closed.
The Bank recently made a motion to dismiss for lack of subject matter jurisdiction in the present proceeding, relying on Matimak Trading. That motion was denied subsequent to the issuance of the Supreme Court's decision in JP Morgan. Order dated June 12, 2002.
Koehler may also be able to make his fraudulent conveyance claim in the course of the present proceeding to collect on the judgment he obtained against Dodwell. Rule 69 of the Federal Rules of Procedure states:
The procedure on execution, in proceedings supplementary to and in aid of a judgment, and in proceedings on and in aid of execution 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.
Thus, New York law governing the execution of judgments applies in the present proceeding. New York law permits a claim of fraudulent conveyance to be made in a special proceeding to collect upon a judgment brought against a person in possession of the judgment debtor's assets, a person owing debts to the judgment debtor, or a person who is a transferee of the judgment debtor's assets. See N.Y. C.P.L.R. §§ 5225(b), 5227; 54 N.Y. Jur.2d Enforcement and Execution of Judgments §§ 256 ("Issues Determinable in Special Proceeding"), 257 ("Issue of Fraudulent Conveyance") ("Whereas formerly, when trying to set aside a fraudulent transfer, a plenary action was required, a special proceeding under the turnover provision [N.Y. C.P.L.R. § 5225(b)] obviates that necessity. . . .") (footnote omitted).
Bank deposits are typically treated as debts owed by the bank to the depositor. 54 N.Y. Jur.2d Enforcement and Execution of Judgments § 270.
Before this Court may consider the issues of what property held by the Bank is subject to the writs of execution served by Koehler and whether the transfers of funds from Dodwell's account at the Bank may be set aside, however, the Court must first resolve the preliminary matter of personal jurisdiction. Koehler argues that even if personal jurisdiction is lacking over the Bank for purposes of the garnishment proceeding, the Bank is nevertheless subject to personal jurisdiction on Koehler's fraudulent conveyance claim. Koehler first cites New York debtor creditor law § 270-81 and C.P.L.R. § 5225(b). These statutes provide a cause of action for fraudulent conveyance, either by way of a plenary proceeding or by way of a special proceeding upon the judgment, but they say nothing of personal jurisdiction. Koehler also asserts that personal jurisdiction exists under C.P.L.R. § 302(a), because the Bank's fraudulent transfers constituted tortious acts causing injury to property within New York. If personal jurisdiction is lacking over the Bank for purposes of this garnishment proceeding, however, then any fraudulent transfer executed by the Bank would not affect Koehler's rights to collect on the judgment in New York, because Koehler would have no such right. The Court must therefore determine whether personal jurisdiction exists over the Bank of Bermuda for purposes of the garnishment proceeding before passing on to the substantive matters that Koehler raises.
I do not fail to note that Koehler also argues that personal jurisdiction exists under N.Y. C.P.L.R. § 303, which provides that a person who brings suit in New York is subject to personal jurisdiction in any related action commenced during the pendency of the suit. This asserted basis for personal jurisdiction relates to the garnishment proceeding as a whole, rather than just Koehler's Rule 25(c) motion and fraudulent conveyance claim. I will therefore consider C.P.L.R. § 303 in addition to § 301 when the issue of personal jurisdiction is presented to the Court for final determination.
CONCLUSION
Koehler's motion for an order substituting or joining the Bank of Bermuda as judgment debtor pursuant to Rule 25(c) of the Federal Rules of Civil Procedure is denied for the reasons explained above.The parties are directed to appear at a conference on September 25, 2002, at 2:00 p.m., in Room 17C of the U.S. Courthouse, 500 Pearl Street. At this conference, the Court will set a schedule for the further progress of the case, particularly with regard to resolution of the issues of personal jurisdiction and fraudulent conveyance.
It is SO ORDERED.