Opinion
98 Civ. 722 (FM)
April 15, 2002
MEMORANDUM DECISION
I. Introduction
This breach of contract action arises out of a licensing agreement pursuant to which plaintiff Palazzetti Import/Export, Inc. ("Palazzetti") licensed defendant Gregory P. Morson to use the "Palazzetti" name in connection with a furniture store in Boston, Massachusetts. On July 19, 2001, after a three-day trial and several hours of deliberations, the jury returned a verdict against the Defendants in the amount of $1,661,981, of which $92,147.96 was for goods sold and delivered and $1,569,833 was for lost profits. Palazzetti Imp./Exp., Inc. v. Morson, No. 98 Civ. 722, 2001 WL 1568317, at *1, *3-*4 (S.D.N.Y. Dec. 6, 2001). Following the verdict, the Defendants moved, pursuant to Fed.R.Civ.P. 50(b) and 59, for judgment as a matter of law or a new trial. Although I indicated that the issues presented by these motions were difficult, and the correct answer not entirely free from doubt, on December 6, 2001, both motions were denied. Id. at *11. The Court entered a Second Amended Judgment in the amount of $1,699,015.03 on December 17, 2001. Thereafter, on January 4, 2002, the Defendants filed a notice of appeal. The following month, the Defendants moved, pursuant to Fed.R.Civ.P. 62 (d) and (f) and 65(b), for a stay of the judgment and an order restraining any enforcement efforts while their appeal is pending. Palazzetti opposed both motions and has cross-moved for several forms of relief, including an order pursuant to Fed.R.Civ.P. 69(a) compelling the Defendants to comply immediately with certain discovery requests.
Mr. Morson and his co-defendant, The Morson Group, d/b/a The Morson Collection, are hereinafter referred to, collectively, as the "Defendants."
II. Discussion
As the parties impliedly acknowledged by filing their cross-motions, this Court has jurisdiction to entertain the issues presently before it despite pendency of the Defendants' notice of appeal. See Rakovich v. Wade, 834 F.2d 673, 674 (7th Cir. 1987) (per curiam); Teachers Ins. Annuity Assoc. of Am. v. Ormesa Geothermal, No. 87 Civ. 1259, 1991 WL 254573, at *1 (S.D.N.Y. Nov. 21, 1991) (Wood, J.). Accordingly, I will consider each of the motions in turn.
A. Stay Pursuant to Rule 62(f)
Fed.R.Civ.P. 62(f) provides:
Stay According to State Law. In any state in which a judgment is a lien upon the property of the judgment debtor and in which the judgment debtor is entitled to a stay of execution, a judgment debtor is entitled, in the district court held therein, to such stay as would be accorded the judgment debtor had the action been maintained in the courts of that state.
The purpose of this mandatory provision is to afford a federal judgment debtor the protections that would have been available to it had the suit been brought in state court. FDIC v. Ann-High Assocs., 39 Fed.R. Serv.3d 684 (2nd Cir. 1997) (per curiam). Although the Rule states that the forum state must be one in which the judgment would constitute a "lien" upon the judgment debtor's property, the Second Circuit actually applies "a more flexible . . . approach," looking to whether "a particular federal judgment can be adequately secured by a lien under the state's lien law." Id. Thus, to avoid the requirement of the supersedeas bond pursuant to Rule 62(f), a judgment debtor must demonstrate "not only (1) that state law entitles it to appeal without a bond, and (2) that a judgment can be made a lien against a judgment debtor's property under the state's lien law, but also (3) that the circumstances are such that the judgment creditor can readily establish a lien that will be adequate to secure the judgment." Id.
If the judgment in this case had been entered in the Massachusetts state courts, the Defendants plainly would have been entitled to a stay because Massachusetts law prohibits the enforcement of a judgment while an appeal is pending. See Mass. Gen. Laws Ann. Ch. 231, § 115. Nevertheless, the Defendants have failed to meet the other two elements of the showing required by Ann-High for a Rule 62(f) stay. First, with respect to the requirement that the judgment can be made a "lien" against the debtor's property, Massachusetts law does not transmute a judgment into an automatic lien. See Elias Bros. Rests., Inc. v. Acorn Enters., Inc., 931 F. Supp. 930, 939 (D.Mass. 1996) (under Massachusetts law, a judgment alone is not "a lien upon the property of the property of the judgment debtor") (quoting Smith Barney Harris Upham Co. v. Connolly, 887 F. Supp. 337, 345 (D.Mass. 1994). In fact, Massachusetts law requires that the judgment creditor obtain "a judgment plus an attachment" to secure such a lien. Id. (citing L. Rudolph Elec. Co., Inc. v. Gibbs Oil Co., 16 Mass. App. Ct. 995, 995-96, 454 N.E.2d 1288, 1288-89 (1989)). Because more than "ministerial steps" would be necessary to convert Palazzetti's judgment into a lien in Massachusetts, the Defendants have not met the second element of the showing required by Ann-High.
Moreover, even if the judgment in this case could easily be converted into a lien against the Defendants' Massachusetts property, the Defendants obviously have not shown that they have sufficient assets located in that state — or elsewhere — to satisfy such a judgment in the event of an affirmance on appeal. The Defendants therefore are unable to meet the third element required to secure a stay under Fed.R.Civ.P. 62(f).
B. Stay Pursuant to Rule 62(d)
Fed.R.Civ.P. 62(d) provides:
Stay Upon Appeal. When an appeal is taken the appellant by giving a supersedeas bond may obtain a stay subject to the expectations contained in subdivision (a) of this rule. The bond may be given at or after the time of filing the notice of appeal or of procuring the order allowing the appeal, as the case may be. The stay is effective when the supersedeas bond is approved by the court.
To determine whether to grant a stay of judgment under this Rule, "a court must consider (1) whether the petitioner is likely to prevail on the merits of his appeal, (2) whether, without a stay, the petitioner will be irreparably injured, (3) whether issuance of a stay will substantially harm other parties interested in the proceedings, and (4) wherein lies the public interest." Morgan Guar. Trust Co. v. Republic of Palau, 702 F. Supp. 60, 65 (S.D.N.Y. 1988), vacated on other grounds, 924 F.2d 1237 (2d Cir. 1991). The weight accorded to each of these factors should be "flexible" to ensure a just result "according to the unique circumstances of each case." Id. Indeed, notwithstanding the language of the Rule, in an appropriate case the district court may grant a stay of judgment without requiring the posting of a supersedeas bond or conditioned on only a partial bond. See Texaco v. Pennzoil Co., 784 F.2d 1133, 1154 (2d Cir. 1986), rev'd on other grounds, 481 U.S. 1, 107 S.Ct. 1519, 95 L.Ed.2d 1 (1987) (inflexible requirement that bond be posted may, in some circumstances, amount to "a confiscation of the judgment debtor's property without due process").
A supersedeas bond protects an appellee from the risks associated with delaying the enforcement of the judgment during the pendency of an appeal. Accordingly, a party seeking a stay without a bond has the burden of setting forth specific reasons why the court should "depart from the usual requirement of a full security supersedeas bond to suspend the operation of an unconditional money judgment." Teachers Ins., 1991 WL 254573, at *3 (S.D.N.Y. Nov. 21, 1991) (Wood, J.) (quoting Poplar Grove Planting Refining Co. v. Bache Halsey Stuart, Inc., 600 F.2d 1189, 1191 (5th Cir. 1979)). The bond requirement should be eliminated or reduced only when doing so "does not unduly endanger the judgment creditor's interest in ultimate recovery." Morgan Guar., 702 F. Supp. at 65.
In this case, as my prior opinion indicates, there is a serious question whether the Defendants in fact had a duty to exploit for a minimum of ten years the license that gives rise to most of the damages that Palazzetti was awarded by the jury. In the absence of such a duty, Palazzetti's nearly $1.7 million verdict will be reduced to less than $100,000. In such circumstances, it is appropriate to stay the enforcement of the judgment until the Second Circuit has had an opportunity to consider whether the Defendant's post-trial motion for judgment as a matter of law should have been granted. See Washington Metro. Transit Comm'n v. Holiday Tours, Inc., 559 F.2d 841, 844-45 (D.C. Cir. 1977), quoted in Morgan Guar., 705 F. Supp at 66 ("[T]ribunals may properly stay their own orders when they have ruled on an admittedly difficult legal question and when the equities of the case suggest that the status quo should be maintained.").
The other relevant considerations also augur in favor of a stay. First, the Defendants have shown that enforcement of the judgment could force the Morson Collection, a business which apparently has only limited assets, into bankruptcy. (See Affidavit of Caroline Morson, sworn to February 8, 2000 ("Morson Aff."), ¶¶ 1, 3, 7). Although Palazzetti has stated that it is willing to take its place among other creditors in a bankruptcy proceeding, this plainly does not justify the imposition of a potentially crippling bond requirement. See Teachers Ins., 1991 WL 254573, at *3 ("the threat of insolvency has been deemed a sufficient threat of irreparable harm to preclude the full supersedeas requirement"). Furthermore, the Morsons' tax returns reflect that they made just over $100,000 last year, and Mrs. Morson has affirmed that her husband, who recently suffered a brain aneurysm, does not have sufficient assets of his own to satisfy the full amount of the judgment. (Morson Aff. ¶ 8).
The Defendants also have been informed that their bank is unwilling to issue the Defendants the letter of credit necessary to obtain a supersedeas bond. (Id. ¶ 6). Thus, the only way to maintain the status quo would be to dispense with the requirement that the judgment be fully bonded.
Finally, to the extent that there is a public interest in this case, it surely would be to keep the Morson Collection operational until the Second Circuit can review my decision not to set aside the verdict.
C. Cross Motion
Palazzetti argues that the Defendants should be required to post a supersedeas bond or, at a minimum, to provide discovery in aid of enforcement because they allegedly have taken measures to secret their assets. In particular, Palazzetti points to a statement allegedly made at an earlier time by the Defendants' counsel, Dan L. Johnston, Esq., to the effect that the Morsons had contacted "asset protection counsel" and would not need to post a bond because their assets were not at risk. (Affidavit of Lawrence A. Steckman, Esq., sworn to Feb. 27, 2002, ¶¶ 3, 4). Palazzetti also alleges, on information and belief, that many of the Defendants' bank accounts have been recently closed in furtherance of their efforts to render themselves judgment proof. (See Affidavit of Mr. Steckman, sworn to on Mar. 8, 2002, ¶ 8). Palazzetti's suggestion that the Defendants are in the process of hiding their assets is, of course, a serious one. Moreover, it raises the spectre that a stay until the appeal of this action is fully resolved might render Palazzetti's recovery, if any, a Pyrrhic victory. In such circumstances, courts which have granted a stay without requiring the posting of security for the entire judgment have resorted to a variety of devices to protect the appellant, including a partial bond or restrictions on the manner in which the appellee may conduct its business. See Teachers Ins., 1991 WL 254573, at *4-5 (conditioning stay on requirement that judgment debtor transfer its assets only in ordinary course of business and sequester any profits in a separate, interest-bearing account); Morgan Guar., 702 F. Supp. at 65-66 (requiring judgment debtor to secure only the overdue interest on a $45 million loan).
In this case, to maintain the status quo and yet afford Palazzetti a reasonable degree of protection, the Court is willing to grant a stay of enforcement, subject to the following terms and conditions:
(1) the Defendants shall make no transfers except in the ordinary course of business and for fair value;
(2) any profits derived from the operation of The Morson Collection shall be placed in a special interest-bearing account which shall be applied against the judgment in the event that Palazzetti prevails on appeal;
(3) Palazzetti's counsel shall have the right to audit the Defendants' books and records to ensure that the foregoing conditions are being honored;
(4) the Defendants shall post a supersedeas bond for 20 percent of the judgment amount; and
(5) the Defendants shall cooperate fully with Palazzetti's efforts to undertake asset discovery, including, but not limited to, depositions of Carolyn and Gregory Morson and the production of relevant documents.
Counsel are directed to confer within the next five days in an attempt to settle an order incorporating these terms and conditions. In the event the parties are unable to agree on suitable language, the Court will hold a conference in Courtroom 11C on April 24, 2002 at 10:00 a.m. to resolve any remaining disputes.
SO ORDERED.