Opinion
CV-04-2178 (CPS).
December 9, 2004
MEMORANDUM AND ORDER
On May 25, 2004, Phoenician Trading Partners, LP, ("Phoenician") brought this petition against Jonathan D. Iseson pursuant to Federal Rule of Civil Procedure 69, New York Civil Procedure Law sections 5225(b) and 5227, and New York Debtor and Creditor Law § 273-a to set aside a fraudulent conveyance and collect an unsatisfied judgment obtained against Blue Water Partners I, LP; Blue Water Partners II, LP; Blue Water Fund, Ltd.; Blue Water Master Fund, LP; and Blue Water Partners, LLC (collectively "Blue Water Funds"). Iseson is alleged to be a partner in the Blue Water Funds. Iseson has failed to answer or otherwise respond. The Clerk of the Court has noted his default. Phoenician now moves for entry of default judgment pursuant to Federal Rule of Civil Procedure 55.
For the reasons that follow, Phoenician's motion for entry of default judgment against Iseson for $365,238.97 is granted.
Background
The following facts are taken from Phoenician's submissions in support of its motion for default judgment.On June 6, 2000, a group of investors that did not include Phoenician, filed an action as individuals and as shareholders in the Blue Water Funds, Tremont International Insurance Ltd. v. Blue Water Fund, Ltd., CV-00-3768 (CPS) (E.D.N.Y.) (the "Tremont Action"), alleging that the Funds and their managers fraudulently induced the shareholders to invest in the Funds. On December 7, 2000, a Memorandum and Order was issued approving the Tremont stipulation. The Tremont stipulation provided in part that "defendants shall pay all redemption requests received by the Funds on or before December 31, 2000, utilizing the assets of the Funds."
On December 29, 2000, Phoenician, also a shareholder in the Funds, filed an action against the Blue Water Funds; JDI Management Corp.; Tuna Capital, L.L.C.; Tuna Group, L.L.C.; Arne R. Rovell; Alexander L. Shogren; and Jonathan D. Iseson for violations of Sections 10(b), 20(a), and Rule 10b-5 of the Securities and Exchange Act of 1934. Phoenician Trading Partners, L.P. v. Blue Water Partners I, L.P., et alia, CV-01-3549 (E.D.N.Y.). On March 22, 2002, Phoenician was given leave to supplement its complaint to include an additional claim for relief for breach of the Tremont stipulation.
Phoenician filed its supplemental complaint on April 18, 2002, naming the Blue Water Funds and Jonathan Iseson as defendants. On August 20, 2002, the Court granted summary judgment for Phoenician against the Blue Water Funds on the claim for relief pled in the supplemental complaint, and entered final judgment pursuant to Federal Rule of Civil Procedure 54. Phoenician did not seek and was not granted summary judgment against Iseson. The judgment entered on September 12, 2002, granted damages to Phoenician in the sum of $396,541.51 plus interest accrued at a rate of 9% per annum from March 31, 2001, until the date of final judgment.
On May 25, 2004, Phoenician commenced the present action. In the petition, Phoenician alleges that the Blue Water Funds has satisfied $82,448.24 of the judgment, but remains liable for $365,238.97. Phoenician further alleges that the Blue Water Funds do not have sufficient assets to satisfy the remainder of the judgment.
According to the petition, Blue Water Partners I, LP, redeemed Iseson's interest in that partnership pursuant to the Tremont stipulation. Phoenician alleges that in redeeming Iseson's interest, Blue Water Partners I, LP, overpaid Iseson by $436,518. In its petition, Phoenician seeks recovery of $365,238.97 of this money from Iseson as a fraudulent conveyance pursuant to New York Civil Procedure Laws and Rules sections 5225 and 5227, and New York Debtor and Creditor Law § 273-a.
Although Iseson responded to the Tremont Action, he has failed to appear or otherwise respond to the petition in this action. The Clerk noted the default pursuant to Federal Rule of Civil Procedure 55(a) on August 25, 2004.
Discussion
Jurisdiction
This action is within the Court's ancillary jurisdiction to enforce its judgment. Epperson v. Entertainment Express, Inc., 242 F.3d 100 (2d Cir. 2000); Empire Lighting Fixture Co. v. Practical Lighting Fixture Co., 20 F.2d 295 (2d Cir. 1927). An action to enforce a judgment by setting aside a fraudulent conveyance to a third party is properly within the ancillary jurisdiction of a district court even in the absence of a federal claim for relief or diversity. Epperson, 242 F.3d at 106-07.
Diversity jurisdiction pursuant to 28 U.S.C. § 1332 is also properly alleged. The petition alleges that Iseson is a domiciliary of New York and Phoenician is a Wyoming partnership. The amount in controversy is $365,238.97.
Phoenician's Claim Against Iseson
Federal Rule of Civil Procedure 69 provides:
Process to enforce a judgment for the payment of money shall be a writ of execution, unless the court directs otherwise. 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. . . .
This provision makes applicable in federal courts state laws for enforcing judgments. United Int'l Holdings, Inc. v. The Wharf (Holdings), 210 F.3d 1207 (10th Cir. 2000).
New York Civil Procedure Law section 5225(b) provides in relevant part:
Upon a special proceeding commenced by the judgment creditor, against a person in possession or custody of money . . . in which the judgment creditor has an interest, or against a person who is a transferee of money . . . from the judgment debtor, where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor's rights to the property are superior to those of the transferee, the court shall require the person to pay the money or so much of it as sufficient to satisfy the judgment, to the judgment creditor. . . . Notice of the proceeding shall also be served upon the judgment debtor in the same manner as a summons or by registered or certified mail.
This provision provides a means of obtaining a judgment against the recipient of a fraudulent conveyance. F.D.I.C. v. Conte, 204 A.D.2d 845, 846 (N.Y.App.Div. 1994).
New York Civil Procedure Law section 5227 similarly provides:
Upon a special proceeding commenced by the judgment creditor, against any person who it is shown is or will become indebted to the judgment debtor, the court may require such person to pay to the judgment creditor the debt upon maturity . . . or it may direct that a judgment be entered against such person in favor of the judgment creditor. . . . Notice of the proceeding shall also be served upon the judgment debtor in the same manner as a summons or by registered or certified mail, return receipt requested.
Sections 5225 and 5227 have been described as "essentially interchangeable." Mendel v. Chervanyou, 559 N.Y.S.2d 616, 617 (N.Y. City Civ. Ct. 1990).
Liability for purposes of a § 5225 or § 5227 proceeding can be established through default. Ford Motor Credit Co. v. Astoria Federal, 733 N.Y.S.2d 583, 585 (N.Y. Dist. Ct. 2001). But before a default judgment can be entered, the Court must satisfy itself that the facts alleged are sufficient to state a claim for relief. Garden City Boxing Club, Inc., v. Giambra, 02-CV-839S, 2004 WL 1698633, at *1 (W.D.N.Y. July 27, 2004).
The Second Circuit has held that § 5225(b) requires a two-step analysis when determining when money or property in possession of a third party must be turned over to a judgment creditor. Beauvais v. Allegiance Sec. Inc., 942 F.2d 838, 840 (2d Cir. 1991). First, the creditor must be shown to have an interest in the money or property. Id. Second, the creditor must be shown to be entitled to possession or have superior right to the property. Id. In addition, both § 5225 and § 5227 require that the judgment creditor provide notice of the proceedings to the judgment debtor. Citibank (South Dakota), N.A. v. Island Fed. Credit Union, 740 N.Y.S.2d 546, 547 (N.Y.App.Div. 2001).
Phoenician's Interest and Superior Right
Phoenician's petition does not specify precisely what source of law establishes that it has a right to the money in Iseson's possession or that its interest is superior to his. In determining whether these elements are satisfied in § 5225 proceedings, courts commonly refer to the fraudulent conveyance provisions of New York's Debtor and Creditor Laws. Gelbard v. Esses, 96 A.D.2d 573, 576 (N.Y.App.Div. 1983).
New York Debtor and Creditor Law § 273-a provides:
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.
The elements of a claim of fraudulent conveyance are that the transfer was made without fair consideration and that the property remaining after the conveyance is insufficient to pay the debtor's probable liabilities. Fromer v. Vogel, 50 F. Supp. 2d 227, 246-47 (S.D.N.Y. 1999). Where a conveyance is fraudulent as to a creditor, the creditor may have the conveyance set aside to the extent necessary to satisfy his claim. N.Y. DEBT. CRED. LAW § 278.
Phoenician alleges that the transfer to Iseson was in excess of the debt owed to him and that the property remaining in the Fund was insufficient to satisfy the debt owed to Phoenician for the breach of the Tremont stipulation. The petition therefore alleges that Phoenician has an interest and superior right to the money. Service Upon the Judgment Debtor
To be entitled to judgment pursuant to § 5225 or § 5227, phoenician must also have served Blue Water Partners I, LP — the judgment debtor — with notice of the proceeding. Notice permits the judgment debtor to request permission to intervene in the proceeding and assert defenses such as payment. McGillicuddy v. Laidlaw, Adams Peck, 88 CIV. 4928, 1995 WL 1081307, at *12 n. 19 (S.D.N.Y. Aug. 14, 1995); Vanderbilt Credit Corp. v. Chase Manhattan Bank, NA, 100 A.D.2d 544, 545 (N.Y.App.Div. 1984). Because the proceeding divests the judgment debtor of any rights to the property in possession of the third party, due process requires proper notice of the turnover proceeding. McCahey v. L.P. Investors, 593 F. Supp. 319, 328 (E.D.N.Y. 1984); Bergdorf Goodman, Inc. v. Marine Midland Bank, 411 N.Y.S.2d 490, 491 (N.Y. Civ. Ct. 1978). Failure to serve the judgment debtor renders the proceeding jurisdictionally defective. Oil City Petroleum Co., Inc. v. Fabac Realty Corp., 70 A.D.2d 859, 859 (N.Y.App.Div. 1979).
The petition alleges that Iseson is a partner in Blue Water Partners I, LP. Under New York law, service upon one partner constitutes service upon the partnership. N.Y. CPLR 310(a). Blue Water Partners I, LP, has not moved to intervene in this proceeding.
Sum Certain
The Court's previous judgment on Phoenician's claim for breach of the Tremont stipulation granted Phoenician damages equal to $396,541.51, plus interest calculated at the rate of 9% per annum from March 30, 2001, until the date of judgment. Judgment was entered on September 12, 2002. Phoenician's petition states that thus far $82,448.24 of the judgment has been satisfied.
Because the damages to which Phoenician is entitled can be established through calculation, the claim is for a "sum certain," and no evidentiary hearing to determine damages need be held. See FED. R. Civ. PRO. 55 (b).
Conclusion
For the foregoing reasons Phoenician's motion for entry of default judgment against Iseson for $365,238.97 is granted.
The Clerk is directed to enter judgment in favor of plaintiff and against defendant in the total amount of $365,238.97 plus the costs of this action, and to furnish a filed copy of the within to all parties and to the magistrate judge.
SO ORDERED.