GTR Source, LLC, Plaintiff, v. Futurenet Group, Inc. d/b/a FUTURENET GROUP and PARIMAL D. MEHTA, Defendants.
The following papers numbered 1 to 10 were read on the motion of Basil Simon in his capacity as court-appointed receiver for Defendant judgment debtor FutureNet Group, Inc. for an order vacating a judgment by confession entered on February 14, 2018:
Notice of Motion - Affirmation / Exhibits - Affidavit / Exhibits - Memorandum 1-4
Affirmation in Opposition / Exhibits - Affidavit / Exhibits - Memorandum 5-7
Reply Memorandum 8
Upon the foregoing papers, it is ORDERED that the motion is disposed of as follows:
This case is before the Court for the second time. The underlying facts of the transaction at issue, stated in this Court's prior Decision and Order dated March 13, 2018, are as follows:
In November 2017, the parties entered into a "Merchant Agreement" (the "Agreement") pursuant to which plaintiff GTR Source, LLC ("GTR") purchased from defendant FutureNet Group, Inc. ("FutureNet") its future receivables in the amount of $291,800.00 for the total purchase price of $200,000.00. FutureNet's obligations under the Agreement were personally guaranteed by defendant Parimal D. Mehta ("Mehta"). FutureNet and Mehta are resident in the State of Michigan.
In conjunction with the Agreement Mehta executed an Affidavit of Confession of Judgment on behalf of FutureNet and himself. So far as pertains to the motion before this court, the Affidavit authorized the entry of judgment in favor of GTR and against FutureNet and Mehta in the Federal District Court for the Southern District of New York, and in the Supreme Court of the State of New York for the counties of Richmond, Orange, Westchester, Kings, Erie and Ontario.
In February 2018, FutureNet defaulted on its obligations under the Agreement, whereupon GTR, in reliance on the Affidavit of Confession of Judgment, entered Judgment in this Court on February 14, 2018 against FutureNet and Mehta in the amount of $95,849.00 (the amount confessed less the amount paid), plus attorney's fees pursuant to contract in the amount of 25% of the unpaid balance, plus interest and costs, totaling in all the sum of $120,154.42.
(Decision and Order dated March 13, 2018, pp. 1-2)
Defendants' Prior Motion To Vacate The Judgment By Confession
Defendants moved to vacate the Judgment on the purported ground that the Affidavit of Judgment by Confession did not comply with the requirements of CPLR § 3218. Defendants contended (1) that CPLR § 3218 requires an Affidavit for out-of-state residents to designate a single county in which a Judgment by Confession may be filed; (2) that the single-county requirement is jurisdictional; (3) that, inasmuch as the Affidavit at issue here designated six
New York counties wherein Judgment by Confession was authorized, it failed to comply with
the requirements of CPLR § 3218; and consequently, (4) that the Judgment herein must, upon motion by the Judgment Debtor, be declared void and vacated.
This Court ruled that:
(1) The alleged violation of CPLR § 3218 may render a judgment by confession
void and subject to vacatur upon motion by a bona fide creditor, but the debtor Defendants lacked standing to contest the terms of their Affidavit of Judgment by Confession unless entry of judgment pursuant thereto was so unfair as to violate Defendants' due process rights.
(2) Due process does not per se require the designation by affidavit of a single county, or prohibit the designation by affidavit of as many as six counties, for the potential entry of judgment by confession against a debtor, but inasmuch as Defendants had not raised the issue, the Court did not decide whether the particular circumstances of this case gave rise to a due process violation.
This Court accordingly held that the Judgment was not subject to vacatur at Defendants' behest on the grounds asserted, and denied their motion without prejudice to their seeking relief by way of a plenary action. (Decision and Order dated March 13, 2018, pp. 3-10).
In February of 2018, Plaintiff GTR Source, LLC served a Restraining Notice, Levy
and Demand on Comerica Bank, garnished funds sufficient to satisfy its Judgment against Defendants and filed a Satisfaction of Judgment on or about March 22, 2018. Thereafter, in
May 2018, Detroit Investment Fund, LP and Chase Invest Detroit Fund, LLC, secured creditors of Defendant judgment debtor FutureNet Group, Inc., moved in the Circuit Court for the County of Wayne, State of Michigan, for the appointment of Basil Simon as receiver for FutureNet Group, Inc. and FutureNet Security Solutions, LLC (the "Receivership Entities").
The Order Appointing Basil Simon Receiver
The Order Appointing Receiver, dated May 7, 2018, recited inter alia that the moving creditors hold a secured claim against the Receivership Entities exceeding two million dollars as of April 26, 2018; that the indebtedness is secured by a first-position lien on substantially all of the tangible and intangible assets of the Receivership Entities; and that unsecured creditors, including Plaintiff herein, had obtained sizeable judgments against the Receivership Entities, begun enforcement actions, and garnished bank accounts, thereby threatening the secured creditors' collateral.
The Order defined "Receivership Property" to include certain specified property "together with any other tangible or intangible assets of the Receivership Entities of any kind and nature whatsoever." The Order appointed Basil Simon as Receiver over the Receivership Property, and authorized him to exercise the powers specified in the Michigan receivership statute "for the purpose of maximizing the value of the Receivership Entities through an orderly wind-down of FutureNet Group and a going concern sale of the assets of FutureNet Security, if possible." More specifically, so far as is pertinent here, the Order authorized Mr. Simon "to defend and/or institute suits or summary proceedings on behalf of the Receivership Entities, including but not limited to instituting proceedings that may be necessary or advisable to collect receivables and/or challenge prior garnishments of funds from the Receivership Entities."
The Receiver's Motion To Vacate The Judgment By Confession
There are two primary bases for the Receiver's motion to vacate the February 14, 2018 Judgment by Confession. First, the Receiver contends that the Judgment by Confession must
be vacated because subject matter jurisdiction pursuant to Business Corporation Law § 1314 was lacking. Second, the Receiver reiterates Defendants' prior claim that Plaintiff's non-compliance with the purported "single county" requirement of CPLR § 3218 renders the Judgment void, and contends that the Receiver, unlike the judgment debtor, possesses standing to challenge this alleged defect by way of motion.
A.Subject Matter Jurisdiction
Plaintiff GTR is a New Jersey corporation which as of the time the Judgment by Confession was entered and enforced maintained a place of business in New York. Defendant judgment debtor FutureNet Group, Inc. is a Michigan corporation with its principal place of business in Michigan. Citing Business Corporation Law ("BCL") § 1314, the Receiver contends that subject matter jurisdiction was lacking here because "New York courts do not have subject matter jurisdiction over disputes between foreign corporations unless the limited exceptions of BCL § 1314(b) are met." For several reasons, his argument is not well taken.
BCL § 1314 provides in pertinent part:
(a) An action or special proceeding against a foreign corporation may be maintained by a resident of this state or by a domestic corporation of any type or kind for any cause of action.
(b) Except as otherwise provided in this article, an action or special proceeding against a foreign corporation may be maintained by another foreign corporation or any type or kind or by a non-resident in the following cases only:
. . .
(2) Where the subject matter of the litigation is situated within this state.
First, BCL § 1314 is concerned solely with "[a]n action or special proceeding against a foreign corporation...." See, BCL § 1314(a, b). However, "[a] judgment by confession may be entered, without an action, either for money due or to become due...upon an affidavit executed by the defendant." CPLR § 3218(a). See, Funding Metrics, LLC v. A & A Fabrication and Polishing Corporation, Westchester Co. Index No. 57737/2017 (Ruderman, J., Oct. 17, 2018). Moreover, the enforcement of judgments pursuant to Article 52 of the Civil Practice Law and Rules does not necessarily involve an action or special proceeding. CPLR § 5221 authorizes the commence- ment of special proceedings in connection with the enforcement of judgments, but special proceedings are employed only with some, not all, of the statutorily authorized enforcement mechanisms. See, CPLR §§ 5206(e), 5225(b), 5227, 5231(f), 5239. Plaintiff herein did not commence a special proceeding, but instead utilized Article 52 enforcement devices — including the restraining notice (CPLR § 5222) and the levy upon personal property (CPLR § 5232) — which involve neither an action nor a special proceeding. Since neither the entry nor the enforcement of Plaintiff's Judgment by Confession involved "action or special proceeding against a foreign corporation," BCL § 1314 is inapplicable.
Second, BCL § 1314(a) provides that "[a]n action or special proceeding against a foreign corporation may be maintained by a resident of this state...for any cause of action." Since Plaintiff GTR maintained a place of business in New York and was a resident of this state at all times encompassing the period wherein its Judgment by Confession was entered and enforced,
its entry and enforcement of the Judgment against the non-resident judgment debtor, if deemed "an action or special proceeding," was authorized by BCL § 1314(a).
Third, BCL § 1314(b) provides that an action or special proceeding against a foreign corporation may be maintained by another foreign corporation "[w]here the subject matter of
the litigation is situated within this state." See, BCL § 1314(b)(2). CPLR § 3218 specifically authorizes the entry of judgment by confession against a non-resident defendant (see, CPLR
§ 3218[a, b] ), and the Defendant judgment debtors authorized the entry of judgment in New York. The locality of a judgment is the situs of the court where it is entered, not the abode of the debtor. See, Beers v. Shannon, 73 NY 292, 299 (1878); Byblos Bank Europe, S.A. v. Syrketi, 12 Misc 3d 792, 794-795 (Sup. Ct. NY Co. 2006), aff'd as modified 40 AD3d 497 (1st Dept. 2007), aff'd
10 NY3d 243 (2008). In Byblos Bank Europe, S.A. v. Syrketi, supra, the court wrote:
BCL 1314(2) permits an action by a foreign corporation to be maintained against another foreign corporation "[w]here the subject matter of the litigation is situated within this state."....[P]laintiff's CPLR 3213 motion has as its subject matter the judgment, not Byblos's underlying claim that Sekerbank failed to repay loans made to it by Byblos.
Moreover, as the locality of a judgment is the situs of the court where it is entered (see
Beers v. Shannon, 73 NY 292 ), upon recognition and conversion of the Belgian judgment to a New York judgment, the subject matter of the litigation will be located in New York State.
Id., 12 Misc 3d at 794-795. Here, similarly, the subject matter of this litigation is not the under-lying transaction between Plaintiff and Defendants, but the Judgment by Confession entered in this Court. Since the subject matter of this litigation is situated in New York, Plaintiff's entry and enforcement of the Judgment by Confession against the non-resident judgment debtor, if deemed "an action or special proceeding," was authorized by BCL § 1314(b)(2).
Therefore, the Receiver's motion to vacate the Judgment by Confession for lack of subject matter jurisdiction is denied.
B. Standing To Challenge The Alleged "Single County" Defect In
Plaintiff's CPLR § 3218 Affidavit Of Judgment By Confession
In its prior Decision and Order dated March 13, 2018, this Court addressed at length the question of standing to challenge Plaintiff's CPLR § 3218 Affidavit of Judgment by Confession on the ground that it designates six New York counties wherein judgment against the non-resident judgment debtor was authorized to be entered, in alleged violation of the purported requirement of Section 3218 that a single such county be designated in the Affidavit. Since a receiver's authority is derivative and dependent upon the rights of the entity whose representative he is (see generally, Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416 ; SEC v. Shiv, 379 F.Supp.2d 609, 617-618 [S.D.NY 2005]), the Court restates herein its prior analysis of the standing issue as a prelude to consideration of the Receiver's status herein (see, Decision and Order dated March 13, 2018, pp. 3-8).
As a general matter, a debtor seeking to vacate a judgment entered against him upon
the filing of an affidavit of confession of judgment may not proceed by way of motion, but must instead seek relief by commencing a separate plenary action. See, The Regency Club at Wallkill, LLC v. Bienish, 95 AD3d 879 (2d Dept. 2012); Rubino v. Csikortos, 258 AD2d 638 (2d Dept. 1999); L.R. Dean, Inc. v. International Energy Resources, Inc., 213 AD2d 455, 456 (2d Dept. 1995); City of Poughkeepsie v. Albano, 122 AD2d 14 (2d Dept. 198); Cash and Carry Filing Service, LLC v. Perveez, 149 AD3d 578 (1st Dept. 2017). See also, Siegel, New York Practice § 302 (6th ed.).
This rule is not without exception. "The theoretical basis for all judgments by confession is that a defendant may consent in advance to jurisdiction of a 'given court' (National Equipment Rental, Ltd. v. Szukhent, 375 U.S. 311...)." Atlas Credit Corp. v. Ezrine, 25 NY2d 219, 227 (1969). Accordingly, a judgment by confession may be vacated upon motion at the behest of the judgment debtor when it was "entered without authority." See, Ripoli v. Rodriguez, 53 AD2d 638 (2d Dept. 1976). The Ripoli Court wrote:
Confessions of judgment are always carefully scrutinized and, in judging them, a liberal attitude should be assumed in favor of judgment***. Confession of judgment entered without authority may be vacated on motion.
Ripoli v. Rodriguez, supra (quoting 4 Weinstein-Korn-Miller, N.Y.Civ.Prac., ¶3218.04 [emphasis added] ). Thus, in Irons v. Roberts, 206 AD2d 683 (3d Dept. 1994) , the Third Department held that the unauthorized entry of confessed judgment in a county other than one
to which the debtor had consented was void as to the debtor). Id., at 684-685. Similarly, "if the judgment has been entered in violation of the affidavit's terms, such as where it states a time that has not arrived or a contingency that has not occurred," it has been entered without authority and is subject to vacatur on motion by the debtor. See, Siegel, NY Prac. § 302 (6th ed.).
Defendants, however, did authorize the entry of the judgment by confession at issue
here: they consented to entry of this judgment in Orange County, and judgment was entered in accordance with the terms of their Affidavit of Confession of Judgment. They argue, instead, that a judgment by confession entry of which they authorized is nevertheless void as to them because the terms of the affidavit are defective, i.e., because those terms do not comply with the requirements of CPLR § 3218.
Under well established authority, the alleged violation of CPLR § 3218 may render the judgment by confession subject to vacatur at the behest of a bona fide creditor, but the debtor Defendants lack standing to contest the terms of their Affidavit of Confession of Judgment unless entry of judgment pursuant thereto was so unfair as to violate Defendants' due process rights.
As the First Department held in Cash and Carry Filing Service, LLC v. Perveez, supra:
[Debtors] lack standing to challenge the affidavit of confession of judgment. An affidavit of confession of judgment pursuant to CPLR 3218 "is intended to protect creditors of a [debtor]," not the [debtor] itself.
Id., 149 AD3d at 578. See also, The Regency Club at Wallkill, LLC v. Bienish, supra, 95 AD3d
at 879. Accordingly, David Siegel observes:
While a defect in the terms of the affidavit may therefore be exploited by another creditor — even though the underlying transaction is valid — it may not be exploited by the debtor. If the transaction is proper, the affidavit is irrelevant as far as the debtor is concerned.
Siegel, NY Prac. § 302 (6th ed.). This principle is eloquently illustrated by Steward v. Katcher, 283 A.D. 50 (1st Dept. 1953).
Steward v. Katcher involved the application of C.P.A. § 543, the predecessor statute to CPLR § 3218. Section 543(1) provided that a statement (i.e., affidavit) of confession of judgment "may be filed with the county clerk of the county of which the defendant was a resident at the time of making such statement." The debtor corporation maintained its principal offices in Queens County, but explicitly agreed to entry of the judgment in New York County. The debtor thereafter sought to cancel and set aside the New York County judgment, asserting that because
it was entered in a county other than its county of residence in violation of C.P.A. § 543, it was "jurisdictionally void." Id., 283 A.D. at 51-52.
The Steward Court crystallized the issue as follows:
This appeal poses the question as to whether a judgment entered upon a confession of judgment filed in a county other than the one in which the defendant resides is so jurisdictionally and fatally defective that it is a nullity; or whether it is voidable so that as between themselves, and if creditors' rights do not intervene, the parties may waive the filing requirements of Section 543.
Id., at 51. The Court recognized that if the requirements of C.P.A. § 543 were jurisdictional in nature, they could not be waived and the judgment was a nullity. However, observing that
(1) the Legislature never indicated that a judgment entered in violation of Section 543 was void and unenforceable (id., at 52), (2) "[t]he legislative regulation of methods of obtaining judgments by confession has always been directed toward the protection of creditors of the defendant" (id., at 53), and (3) the salutary purpose thereof is "substantially accomplished when the improperly filed judgment may be voided by such a creditor" (id.), the Court stated:
We cannot conclude, therefore, that the Legislature intended, inexorably and under all circumstances, to deprive such plaintiffs of the opportunity to enforce substantial rights because of procedural error, whether knowing or unknowing. To reach any other construction would require a conclusion that the Legislature intended a pointless, prejudicial and unreasonable discrimination. "A bad result suggests a wrong construction, for the legislature is presumed to have intended to do justice, unless its language compels the opposite conclusion" [cit.om.]. If valid as to any person, the judgment is not an absolute nullity. [cit.om.].
Steward v. Katcher, supra, 283 A.D. at 53-54.
Accordingly, the Steward Court concurred in the holding of Williams v. Mittlemann, 259 AD 697 (2d Dept. 1940) that a judgment by confession filed in a county other than that prescribed by C.P.A. § 543 was void as to a bona fide intervening judgment-creditor, but held
that the judgment before it was not void as to the judgment debtor, and accordingly denied the debtor's motion to cancel and set aside the confessed judgment. Id., 283 A.D. at 54.
In opposition to the foregoing authority, Defendants cite Yellowstone Capital, LLC v. Sun Knowledge Inc., Orange County Index No. EF001023-2017 (Onofry, J., April 21, 2017). While Yellowstone involves CPLR § 3218, the successor statute to C.P.A § 543, the case is not otherwise meaningfully distinguishable from Steward v. Katcher, supra, but reaches a contrary result without taking account of Steward or the principles underlying that decision.
In support of its holding that a judgment by confession filed in a county other than that prescribed by CPLR § 3218 is subject to vacatur on motion by the judgment debtor, the Yellowstone court cited Cole-Hatchard v. Nicholson, 73 AD3d 834 (2d Dept. 2010). In that case, the debtor, the perpetrator of a Ponzi scheme, confessed judgment in favor of two of his many victims. A non-party receiver moved to vacate the judgment on behalf inter alia of other victims of the Ponzi scheme (i.e., of other creditors or potential creditors) on the ground that the affidavit of confession of judgment did not comply with the requirements of CPLR § 3218(a)(2). Based on an array of caselaw involving the standing of other creditors to move to vacate a judgment by confession, the Second Department in Cole-Hatchard held that the receiver had standing to move to vacate based on non-compliance with CPLR § 3218. See, id., 73 AD3d at 835-836.
Cole-Hatchard v. Nicholson has subsequently been cited, correctly, for the proposition that a judgment by confession filed upon an affidavit which does not comply with CPLR § 3218 is void as to, and subject to vacatur upon motion by, a bona fide intervening judgment creditor. See, Rubashkin v. Rubashkin, 98 AD3d 1018 (2d Dept. 2012); Massey Knakal Realty of Brooklyn LLC v. W.J.R. Associates, 41 Misc 3d 1239(A) (Sup. Ct. Kings Co. 2013). Indeed, the Massey court correctly applied the principle upheld by Steward v. Katcher, supra: it ruled that while affidavits which failed to comply with CPLR § 3218(a)(2) rendered judgments by confession "void to the extent the judgments affect the interests of third parties" (citing Cole-Hatchard), "the defects in the affidavits do not affect the validity of the judgments of confession as against [the debtor]." Massey Knakal Realty of Brooklyn LLC, supra, at *6 (emphasis added).
Inasmuch as the Yellowstone opinion reflects no consideration of this critical distinction between the standing of other creditors and the lack of standing of the judgment debtor to move to vacate a judgment by confession for non-compliance with CPLR § 3218, this court declines to follow Yellowstone Capital, LLC v. Sun Knowledge Inc., supra. Assuming without deciding that the Affidavit of Confession of Judgment herein was non-compliant with CPLR § 3218 and hence defective because Defendants consented therein to the entry of judgment in more than one county, the court holds that (1) the debtor Defendants lack standing to challenge the terms of their Affidavit, (2) the resulting Judgment by Confession is not void as to them, and (3) thus,
the Judgment is not subject to vacatur on the grounds asserted in their motion.
C. The Receiver's Standing
As noted above, a receiver's authority is derivative and dependent upon the rights of the entity or entities whose representative he is. See, Caplin v. Marine Midland Grace Trust Co., supra; SEC v. Shiv, supra.
1. Neither The Receivership Entities Nor The Creditors Who Secured The Receiver's Appointment Have Standing To Challenge Via Motion The Terms Of The Affidavit Of Judgment By Confession
As a preliminary matter, it appears that none of the parties whom receiver Basil Simon represents or may conceivably represent has standing to challenge on motion the validity of Plaintiff's Affidavit of Judgment by Confession.
As this Court explicitly held in its prior Decision and Order of March 13, 2018, judgment debtor FutureNet Group — the only relevant Receivership Entity — lacks standing to challenge the terms of its Affidavit of Judgment by Confession.
As for the standing of FutureNet Group's creditors, Detroit Investment Fund, LP and Chase Invest Detroit Fund, LLC (the "Funds"):
There is no caselaw dealing with a creditor's standing to challenge an affidavit
of confession of judgment which authorizes entry of judgment in multiple counties, in contravention of the purported "single county" requirement of CPLR § 3218. All of the cases concern the CPLR § 3218(a)(2) requirement that the affidavit "stat[e] concisely the facts out of which the debt arose and showing that the sum confessed is justly due or to become due."
In those cases, the courts have repeatedly held that Section 3218(a)(2) "is designed for the protection of third persons who might be prejudiced in the event that a collusively confessed judgment is entered." See, The Regency Club at Wallkill, LLC v. Bienish, supra, 95 AD3d at 879 (emphasis added); Eurofactors International, Inc. v. Jacobowitz, 21 AD3d 443, 445 (2d Dept. 2005); Burtner v. Burtner, 144 AD2d 417, 418 (2d Dept. 1988); County National Bank v. Vogt, 28 AD2d 793 (3d Dept. 1967), aff'd 21 NY2d 800 (1968). Consistent with this rationale, only creditors potentially prejudiced by the entry of a collusively confessed judgment possess standing to object via motion to the form of the affidavit. As the Third Department, quoting Weinstein-Korn-Miller, explained in County National Bank v. Vogt, supra:
"The courts have made it plain that the requirement that the affidavit state the facts underlying the obligation is designed for the protection of third persons who might be prejudiced in the event that a collusively confessed judgment is entered, rather than for the protection of the defendant."
"The formal objection to the statement should be distinguished from the question whether the transaction was bona fide. A junior judgment creditor, mortgagee or purchaser for value without knowledge of the judgment may vacate the confessed judgment if the affidavit is formally insufficient, whether or not the transaction was in fact bona fide."(4 Weinstein-Korn-Miller, New York Civil Practice, § 3218.03.)
Id., 28 AD2d at 794 (emphasis added). In like vein, the Second Department has held that "only
a third-party judgment creditor has standing to question on motion the validity of a judgment by confession." See, Estate of Zelman v. Scibelli, 157 AD2d 705, 706 (2d Dept. 1990) (emphasis added); City of Poughkeepsie v. Albano, 122 AD2d 14 (2d Dept. 1986) (same); Williams v. Mittlemann, supra, 259 AD 697, 699 (2d Dept. 1940) (junior judgment creditor accorded standing).
Assuming arguendo that parallel considerations apply to a creditor's standing to challenge an affidavit contravening Section 3218's purported "single county" requirement, it
is plain that the Funds on the facts of record lack standing to challenge Plaintiff's Affidavit Judgment by Confession on the grounds asserted by the Receiver here. The Funds are not
"junior judgment creditor[s], mortgagee[s] or purchaser[s] for value without knowledge of the judgment" prejudiced by the very entry of Plaintiff's judgment (e.g., by virtue of that judgment's priority or its existence as a cloud on title). The Funds are, rather, secured creditors with a first-position lien who are in no wise aggrieved by the entry of Plaintiff's Judgment, but solely by its enforcement against assets upon which they claim a lien. Under the foregoing authority, they lack standing to question on motion the terms of the judgment debtor's Affidavit of Judgment by Confession. Like the debtor, the Funds are relegated to a plenary action addressed to the validity of the underlying transaction.
Since the Receiver's authority is entirely derivative and dependent upon the rights of the entity or entities whose representative he is, and since neither the Receivership Entities nor the secured creditors who secured his appointment possess standing to attack by motion the terms
of the Affidavit of Judgment by Confession, the Receiver perforce lacks standing to move to vacate the Judgment herein on the grounds of Plaintiff's non-compliance with the purported "single county" requirement of CPLR § 3218.
2. The Receiver Stands Only In The Shoes Of The Judgment Debtor And Lacks Standing To Assert The Claims Of Its Secured Creditors
Regardless of whether the Funds would possess standing to challenge the Affidavit of Judgment by Confession, the record here incontrovertibly demonstrates that the Receiver stands only in the shoes of judgment debtor FutureNet Group, not in the shoes of the Funds; he can assert only those claims which FutureNet Group could have asserted, and not the claims of the Funds; and thus, he lacks standing to challenge on motion the validity of Plaintiff's Affidavit of Judgment by Confession.
In Eberhard v. Marcu, 530 F.3d 122 (2d Cir. 2008), the Second Circuit observed:
[T]he authority of a receiver is defined by the entity or entities in the receivership.
"[T]he plaintiff is his capacity of receiver has no greater rights or powers than the corporation itself would have." Fleming v. Lind-Waldock & Co., 922 F.2d 20, 25 (1st Cir. 1990)... A receiver may commence lawsuits, but "stands in the shoes of the corporation and can assert only those claims which the corporation could have asserted." Lank v. NY Stock Exch., 548 F.2d 61, 67 (2d Cir. 1977).
Id., 530 F.2d at 132. See also, McIntire v. China MediaExpress Holdings, Inc., 252 F.Supp.3d 328, 330 (S.D.NY 2017); Cobalt Multifamily Investors I, LLC v. Arden, 46 F.Supp.3d 357, 360-361 (S.D.NY 2014); 65 Am.Jur.2d Receivers § 116; 75 C.J.S. Receivers § 392. Having quoted Eberhard, supra, the Cobalt Court went on to hold that "[e]ven though the Receiver brings its Section 12 claim with the admirable goal of obtaining money to compensate defrauded investors, the Receiver cannot assert claims belonging to those outside the receivership entities (i.e., investors) simply because he was appointed 'for [their] benefit.' " Cobalt Multifamily Investors I, LLC v. Arden, 46 F.Supp.3d at 361 (emphasis added).
In Eberhard v. Marcu, the Second Circuit took pains to distinguish between a receiver's authority to sue on behalf of the receivership entity, and his lack of authority to sue on behalf of creditors (or defrauded victims) of the receivership entity, by adverting to two decisions of the Seventh Circuit Court of Appeals — Scholes v. Lehmann, 56 AD3d 750 (7th Cir. 1995) and Troelstrup v. Index Futures Group, Inc., 130 F.3d 1274 (7th Cir. 1997). In Troelstrup v. Index Futures Group, Inc., a commodities trader (Tobin) defrauded investors. The Court held that a receiver appointed for Tobin had no power to sue on behalf of the investors, the victims of the fraud, "because he was not their receiver." Id., 130 F.3d at 1277. In Scholes v. Lehmann, investors were victimized by an individual who improperly siphoned off corporate funds as part of a Ponzi scheme. A receiver was appointed for the individual and for the corporation. In those circumstances, the Court held that the receiver, having removed the corporation from the malign influence of the individual, was empowered to assert the corporation's claim to the improperly diverted funds for the benefit of the defrauded investors. Id., 56 AD3d at 753-755.
The Second Circuit concurred in the Seventh Circuit's analysis, and its holding in Eberhard v. Macru, though in the context of a fraudulent conveyance, not a confession of judgment, is equally applicable here:
Tobin's receiver lacked standing because he was "suing a third party on behalf of Tobin's creditors to enforce a personal right of theirs, not a right of Tobin's in which they have an interest by virtue of being his creditors." [Troelstrup, supra, 130 F.3d at 1277]. We agree with the Seventh Circuit's analysis and hold that a receiver's standing to bring a fraudulent conveyance claim will turn on whether he represents the transferor only or also represents a creditor of the transferor.
Because he does not represent any creditor of Todd Eberhard, we conclude that the Receiver lacks standing to set aside the purported conveyance of Borderline NS under NY Debtor & Creditor Law § 276. As in Troelstrup, the Receiver here stands only inthe shoes of Todd Eberhard. He can press only those claims that Eberhard himself could assert, see Lank, 548 F.2d at 67, and Eberhard, as transferor, may not bring an action to set aside his own fraudulent conveyance [cit.om.]. A receiver "acquires no right...to the property fraudulently transferred for the reason that the transfer is valid against the debtor and cannot be set aside by the receiver as the debtor's successor. The transfer is good against every one except the creditors of the [transferor]." [cit.om.]
Eberhard v. Macru, 530 F.3d at 133 (emphasis added).
Here, the Michigan Court's order appointing Basil Simon as Receiver makes it perfectly clear that he is the Receiver for the Receivership Entities (including judgment debtor FutureNet Group) and not for the creditors who secured his appointment. Furthermore, the only part of the Receivership Property, as defined in the Order Appointing Receiver, that is at issue here is an "intangible asset[ ] of the Receivership Entities" — to wit, judgment debtor FutureNet Group's purported claim that the Judgment by Confession was invalid. Finally, the Receiver is authorized by the Order to sue on behalf of the Receivership Entities only — so far as is pertinent here, "to defend and/or institute suits or summary proceedings on behalf of the Receivership Entities [to] challenge prior garnishments of funds from the Receivership Entities."
Therefore, the Receiver can press only those claims that the judgment debtor FutureNet Group itself could assert. For reasons shown at length above, FutureNet Group is barred from challenging the Affidavit of Judgment by Confession as the Receiver does here. As succinctly stated by David Siegel, "[A] defect in the terms of the affidavit...may not be exploited by the debtor. If the transaction is proper, the affidavit is irrelevant as far as the debtor is concerned."
Siegel, NY Prac. § 302 (6th ed.). Paraphrasing Eberhard v. Macru, supra, "the [affidavit] is valid against the debtor and cannot be set aside by the receiver as the debtor's successor."
Id., 530 F.3d at 133. Consequently, the Receiver, who stands only in the shoes of Defendant judgment debtor FutureNet Group, and can assert only those claims which FutureNet Group could have asserted, lacks standing to challenge on motion the validity of Plaintiff's Affidavit of Judgment by Confession.
This Court acknowledges that the Second Department in Cole-Hatchard v. Nicholson,
supra, held that a receiver possessed standing to seek vacatur by motion of a judgment by confession on the ground that the affidavit did not comply with the specificity requirements of CPLR § 3218(a)(2). Id., 73 AD3d at 835-836. However, the meaning and scope of the Court's holding is unclear, as neither the extent of the receiver's authority to press the claims of the victims of the Ponzi scheme in Cole-Hatchard nor the rationale for the decision therein can be determined from the face of the opinion. Since the application of the law of receivership to the detailed factual record in the case at bar compels the conclusion that Receiver Basil Simon herein lacks standing to move on the grounds asserted to vacate Plaintiff's Judgment, this Court will not rule to the contrary based solely on the uncertain authority of Cole-Hatchard v. Nicholson.
Since the Receiver has failed to establish that the February 14, 2018 Judgment by Confession is subject to vacatur for lack of subject matter jurisdiction, or that he has standing to move for vacatur on the ground that Plaintiff's non-compliance with the purported "single county" requirement of CPLR § 3218 renders the Judgment void, the Receiver's motion must be denied. Under the circumstances, the Court need not reach the remaining issues briefed by the parties.
It is therefore
ORDERED, that the motion of Basil Simon in his capacity as court-appointed receiver for judgment debtor FutureNet Group, Inc. for an order vacating the February 14, 2018 Judgment by Confession is denied.
The foregoing constitutes the decision and order of this Court.
Dated:November ____ , 2018
E N T E R
Goshen, New York
HON. Catherine M. Bartlett, A.J.S.C.
Catherine M. Bartlett, J.