Opinion
610854/2019
09-13-2019
RADIUM2 CAPITAL, LLC f/k/a Radium2 Capital, Inc., Petitioner, v. ORANGE COUNTY TRANSIT, LLC; Orange County Transit Service LLC ; and John Mensch, Respondents.
Boris Yankovich, Esq., 300 RXR Plaza, Uniondale, NY 11556, For plaintiff Weinberg Gross & Pergament LLP, 400 Garden City Plaza, Ste 403, Garden City, NY 11530, For defendant
Boris Yankovich, Esq., 300 RXR Plaza, Uniondale, NY 11556, For plaintiff
Weinberg Gross & Pergament LLP, 400 Garden City Plaza, Ste 403, Garden City, NY 11530, For defendant
Carmen Victoria St. George, J. Before the Court is a special proceeding to enforce judgments previously entered against John Mensch, East End Bus Lines Inc. d/b/a East End Bus Lines, Montauk Transport Service Inc., Moriches Auto Services, Riverhead/Calverton Park & Ride, Inc. and East End Bus Service, LLC (collectively "Debtors"), against alleged Debtors' successors, Orange County Transit, LLC, Orange County Transit Service LLC (collectively "Respondents"). The petitioner makes an application to this Court for an Order pursuant to CPLR §§ 5225, 6220, 7502(c) and NY Dr & Cr §§ 273, 273-a, 276 and 276-a for the following: 1) amending the judgment and adding Respondents; 2) a reverse veil-piercing to hold Respondents liable; 3) enjoin Respondents from transferring or otherwise conveying assets; 4) granting an attachment and turnover of Respondents assets; 5) ordering Respondents to execute documents necessary to effect payments to petitioner; 6) awarding petitioner attorney's fees; and 7) awarding punitive damages. The petitioner submits, inter alia ,
Petitioner had converted affidavits of confession of judgment related to receivable purchase agreements to three judgments identified as 1) Index No. 617936/2018 in the amount of $460,751.15; 2) Index No. 617933/2018 in the amount of $821,695.56; and 3) Index No. 617929/2018 in the amount of $876,460.28.
The notice of petition filed with this Court stated that the petitioner designated venue in Erie County, in the verified petition however, petitioner lays venue properly in Suffolk County. Additionally, in the verified petition, petitioner states "the transfer of assets from BK Debtors to New Elite Roofing must be set aside." The Respondents accept this as a typographical error as does the Court.
Petitioner cites CPLR 7502 (c) as a basis for its application in its notice of petition; however the petitioner's verified petition does not make such an application and therefore the court does not consider it in the determination of this decision.
After the filing of the petition Respondents filed a verified answer and opposition along with the Bankruptcy Court's Interim Order and the monthly operating report date May 24, 2019. For the reasons below petitioner's application is denied.
Respondents initially electronically filed a letter to the Court outlining their objections to the petition. Additionally, they filed a supplemental affirmation in opposition with exhibits a full month after the petition was marked fully submitted. Petitioner filed a notice of rejection as to the late filed supplemental affirmation in opposition. Neither the letter or the late filed supplemental affirmation in opposition were considered in the determination of this Court's Decision.
In Re East End Bus Lines, Inc., et al. , Case No. 8-18-76176-las (Bankr EDNY, Sacrcella, J.)
BACKGROUND
Respondents and formerly Debtors are bus companies for school districts throughout New York State. In May of 2018 Debtors entered into three separate receivables purchase agreements with petitioner. Pursuant to the agreements Debtors transferred all their rights, ownership and title to future receivables to the petitioner. Petitioner secured an interest in the Debtors assets and perfected its interest in the collateral by filing a UCC-1 financing statement with the secretary of state in September of 2018. Respondent Mensch guaranteed performance by a personal guaranty. Debtors further confessed judgment in favor of petitioner for the amounts of the agreements plus attorneys' fees and disbursements.
In September of 2018 Debtors breached the agreements with petitioner by failing to remit payment to the Petitioner. Petitioner converted the affidavits of confession of judgment to judgments. The three judgments total $2,158,906.99.
The Debtors filed a voluntary petition under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Eastern District of New York. By that filing an automatic stay came into effect. Further, the Debtors are Debtors-in-Possession in their respective bankruptcy cases.
Allegedly respondent corporations were formed by respondent Mensch in 2017 and 2018. Respondent corporations are being incorporated into the bankruptcy proceeding by way of proceeds from contracts Debtors formerly operated but are now operated by Respondents. The revenues and expenses of the Respondent corporations are being treated as revenues and expenses of the Debtors in their bankruptcy proceeding. Believing that Debtors "fraudulently transfer[ed] its assets" to Respondents, petitioner moved for this special proceeding to enforce Debtors judgments to the Respondents.
DISCUSSION
A. Legal Standard
CPLR § 5225 provides in pertinent part:
Upon motion of the judgment creditor, upon notice to the judgment debtor, where it is shown that the judgment debtor is in possession or custody of money or other personal property in which he has an interest, the court shall order that the judgment debtor pay the money, or so much of it as is sufficient to satisfy the judgment, to the judgment creditor and, if the amount to be so paid is insufficient to satisfy the judgment, to deliver any other personal property, or so much of it as is of sufficient value to satisfy the judgment, to a designated sheriff. Notice of the motion shall be served on the judgment debtor in the same manner as a summons or by registered or certified mail, return receipt requested.
( CPLR § 5225[a] ).
The use of this enforcement device requires substantial investigation in advance, often including extensive use of the disclosure subpoenas of CPLR § 5224. The judgment creditor who would make use of CPLR § 5225 must come into court with an impressive array of evidence to convince the court that the judgment debtor ‘is receiving or will receive’ money from some source, preferably a regular source, and it helps to show circumstances suggesting that other Article 52 devices are not effectual to get at the money (Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C5225 ).
Additionally, an evidentiary hearing may be required in certain cases in order to determine the amount of the payments to be made (see
Lowy v. Bobker , 383 F.Supp.2d 606 [S.D.N.Y. 2005] ; Matter of Southern Tier Masonry, Inc. v. Browning , 194 A.D.2d 983, 599 N.Y.S.2d 173 [3d Dept. 1993] ).
B. Jurisdiction
This Court interprets portions of Respondents affirmation in opposition as challenging this Court's subject matter jurisdiction to entertain this petition for a special proceeding.
Pursuant to CPLR § 3211, an action or a proceeding may be dismissed by reason of the fact that the court does not have jurisdiction of the subject matter of the action. ( CPLR § 3211 [a][2] ). Subject matter jurisdiction cannot be conferred on the court, even if stipulated by the parties. An objection may be made at any time during the action, and parties are not foreclosed from raising it in the future if they had previously failed to do so. Furthermore, the court, on its own motion may refuse to proceed further and dismiss the action if it lacks subject matter jurisdiction. ( Robinson v. Oceanic Steam Nav. Co. , 112 N.Y. 315, 324, 19 N.E. 625 [1889] ; see also Henry v. Green , 126 Misc.2d 360, 481 N.Y.S.2d 940, 941 [Mt. Vernon City Ct. 1984] )("if the [c]ourt itself notices a lack of such jurisdiction, it may dismiss on its own motion, regardless of the means whereby the objection to the jurisdiction comes to its attention and whether or not any motion has been made for dismissal" ). "Subject matter jurisdiction has been defined as the power to adjudge concerning the general question involved and is not dependent upon the state of facts which may appear in a particular case, arising, or which is claimed to have arisen, under the general question." ( Thrasher v. United States Liab. Ins. Co. , 19 N.Y.2d 159, 166, 278 N.Y.S.2d 793, 225 N.E.2d 503 [1967] , quoting Hunt v. Hunt , 72 N.Y. 217, 229 [1878] ). As a "court of original, unlimited and unqualified jurisdiction" ( Matter of Fry v. Village of Tarrytown , 89 N.Y.2d 714, 718, 658 N.Y.S.2d 205, 680 N.E.2d 578 [1997] , quoting Kagen v. Kagen , 21 N.Y.2d 532, 537, 289 N.Y.S.2d 195, 236 N.E.2d 475 [1968] ), the New York State Supreme Court is vested with general original jurisdiction and is competent to entertain almost all causes of action. ( see NY Const. Art. 6 § 7 [a] ). Although general and limited are seen as antonyms in the doctrine of jurisdiction, general does not mean unlimited. In fact, there are two categories of original jurisdiction the New York State Supreme Court lacks; 1) cases in which the federal constitution or an act of Congress confers exclusive jurisdiction on the federal courts and 2) actions against the State of New York where jurisdiction is conferred exclusively on the Court of Claims. (see Thrasher v. United States Liab. Ins. Co. , 19 N.Y.2d at 159, 278 N.Y.S.2d 793, 225 N.E.2d 503, supra ). Importantly, neither an act of our state legislature nor contractual terms between parties can divest the Supreme Court of its general original jurisdiction. ( see Pollicina v. Misericordia Hosp. Ctr. , 82 N.Y.2d 332, 604 N.Y.S.2d 879, 624 N.E.2d 974 [1993] ; Lischinskaya v. Carnival Corp. , 56 A.D.3d 116, 865 N.Y.S.2d 334 [2d Dept. 2008] ).
US Const. art. VI (Supremacy Clause); 28 U.S.C. § 1334 (exclusive federal jurisdiction over bankruptcy); 28 U.S.C. § 1338 (a) (exclusive federal jurisdiction over patents).
Ct. of Claims Act § 8,9 (waiver of sovereignty conditioned on Court of Claims' exclusive jurisdiction over such matters).
This Court has exclusive jurisdiction over the payment or delivery of property of judgment debtor ( CPLR § 5225 ). This Court, therefore, can only be divested of its general, original subject matter jurisdiction over this declaratory judgment by competent constitutional provisions or acts of federal law. The Court finds no such competent provision or law; thus, this matter is squarely within the Court's competence.
C. Bankruptcy Stay Extended to Non-Debtors
This case requires this Court to determine if the automatic bankruptcy stay triggered by the bankruptcy petition applies to petitioner's application ( see 11 USC § 362 [a] ). The automatic bankruptcy stay is generally not extended to non-debtors ( see Milliken & Co. v. Stewart , 182 A.D.2d 385, 386, 582 N.Y.S.2d 127 [1st Dept. 1992] ; citing Credit Alliance Corp. v. Williams , 851 F.2d 119 [4th Cir. 1988] ). The automatic stay applies to non-debtors only when a claim against a non-debtor will have an "immediate adverse economic consequence for the debtor's estate" ( Queenie, Ltd. v. Nygard Intl. , 321 F3d 282, 287 [2d Cir. 2003] ).
This court determines that the entire case must be stayed in order to effectuate the bankruptcy stay against the Debtors, since petitioner's claims against the Respondents are entirely derivative of its claims against the Debtors. Such is the case because any adjudication of the Respondent's under the agreement and judgment would necessarily affect the Debtors' estate. The stay must be extended to the Respondents since any adjudication against such party would diminish Debtors' estate in bankruptcy.
"An extension of the automatic stay protection to non-debtors is reserved for cases where the court finds "special or unusual circumstances" ( In re North Star Contracting Corp., 125 B.R. 368, 370 [S.D.N.Y. 1991] ). "Special or unusual circumstances" always involve "an immediate adverse consequence for the debtor's estate." ( Id. ) Examples include an obligation of which the debtor is a guarantor, ( McCartney v. Integra National Bank North, 106 F.3d 506, 510–511 [3d Cir. 1997] ); a claim against the debtor's insurer, ( Johns—Manville Corp. v. Asbestos Litigation Group, 26 B.R. 420, 435–436 [Bankr. S.D.N.Y. 1983] ); an obligation of the debtor to provide indemnification, ( In re Lomas Financial Corp., 117 B.R. 64 [S.D.N.Y. 1990] ); a claim that would reduce the debtor's limited insurance proceeds, ( A.H. Robins Co. v. Piccinin, 788 F.2d 994 [4th Cir.], cert. denied, 479 U.S. 876, 107 S.Ct. 251, 93 L.Ed.2d 177 [1986] ); or "when an identity of interest between the debtor and third party non-debtor to the extent that the debtor is the real party defendant and a judgment against the third party non-debtor will affect directly the debtor", ( In re North Star Contracting Corporation at 370–371, supra ).
In Queenie, 321 F.3d 282, supra , the court found that "[t]he automatic stay can apply to non-debtors, but normally does so only when a claim against the non-debtor will have an immediate adverse consequence for the debtor's estate." In extending the automatic stay to the non-debtor corporation, the Queenie court reasoned that since such corporation was related to the debtor, the adjudication of any claim against it would have an immediate adverse consequence for the estate of such debtor.
The motion papers before the Court in this case likewise demonstrate such "special or unusual circumstances." The allegations of the petitioner's pleading in this action, are that the Respondent is wholly owned by defendant. Such circumstance, i.e. that Respondents were transferred assets that now contribute to the bankruptcy estate of Debtors', is sufficient to establish an impact on Debtors' estate. These allegations are substantiated by Respondents' monthly operating report and Interim Order of the bankruptcy court. The entry of a judgment against the Respondents would have an immediate adverse impact on individual Debtors' bankruptcy estate, since such judgment would trigger Respondents' liability to pay the obligation of the judgment debtor corporation.
In a statutory scheme as complex as the Bankruptcy Code the Court must take the interplay between statutes into consideration when viewing the effect of the Code on the action before it. While the applicability of § 362(a) is limited, 11 USC § 105(a) vests bankruptcy courts with broad powers to "fashion such orders as are necessary to further the purposes of the substantive provisions of the Bankruptcy Code" ( United States v. Sutton, 786 F.2d 1305, 1307 [5th Cir. 1986] ). Defendants assert that further litigation here would hamper Respondents' efforts to assist in Debtors' bankruptcy estate. On this score, we note that injunctions under § 105(a) have been granted by bankruptcy courts in circumstances where "the creditor's action would prevent the non-debtor from contributing funds to the reorganization, or would consume time and energy of the non-debtor that would otherwise be devoted to a reorganization effort" ( see e.g., In re United Health Care Org., 210 B.R. 228, 232 [S.D.N.Y. 1997], appeal dismissed 147 F.3d 179 [2d Cir. 1998] ). Accordingly, any relief should be sought in bankruptcy court.
CONCLUSION
Accordingly, judgment for the petitioner would disrupt the automatic stay, which only applies to non-debtors when a claim against a non-debtor will have an immediate adverse economic consequence for the debtor's estate. Judgment for the petitioner would undoubtedly have such an effect. As such, petitioner's application is denied.
The foregoing constitutes the Order of this Court.