Consolidated appeals from two orders of the Southern District of New York, Sofaer, Judge (1) denying a motion to redetermine a magistrate's decision that a deed to real estate given pursuant to a court-approved settlement and order was an effective transfer of ownership and that a portion of a payment under the settlement was not an unenforceable penalty, and (2) adjudging appellant in civil contempt and ordering that he be incarcerated until he purged the contempt by withdrawing a sham Chapter XI petition in bankruptcy filed by his alter ego corporation. Both orders are affirmed. Judge Pratt concurs in part and dissents in part in a separate opinion.
Mansfield, Meskill, Circuit Judges, and Pratt,*fn* Circuit Judge. Pratt, Circuit Judge, concurring in part and dissenting in part.
Walter G. Cook has filed two consolidated appeals, one (Dkt. No. 82-7261) from an order of the Southern District of New York dated March 16, 1982, and the other (Dkt. No. 82-7351) from an order of the same court dated April 19, 1982. Both orders were made and entered by Judge Abraham D. Sofaer upon the recommended decisions of Magistrate Kent Sinclair, Jr., after hearings. The March 16, 1982, order denied Cook's motion for a determination de novo of Magistrate Sinclair's Recommended Decision dated March 8, 1982, to the effect that a deed transferring to plaintiffs pursuant to a court-ordered settlement dated October 2, 1981, certain real estate known as Whispering Pines, which was held by Cook in the name of a corporate alter ego named Larch-Tree Co., Inc. ("LTC"), was an effective transfer of ownership rather than a mortgage and that a conditional provision in the settlement for payment of $250,000 was not void or unenforceable as a penalty. The order dated April 19, 1982, (1) adjudged Cook in contempt for disobedience of the court's prior orders, (2) directed that if by April 22, 1982, Cook did not cause LTC to withdraw a sham Chapter XI petition in bankruptcy filed on March 17, 1982, in the Eastern District of New York (Dkt. No. 882-80654-18) he be taken into custody by the U.S. Marshal and confined until he had purged his contempt by withdrawing the bankruptcy petition and by applying to the court for an order fixing the amount of fines payable into court arising out of his 1980 and 1981 contempts, (3) ordered LTC to withdraw the bankruptcy petition by April 22, 1982, (4) ordered the defendants to pay plaintiffs' costs and fees in bringing the motion, and (5) declared the estate known as Whispering Pines to be the property of plaintiffs. Both orders of the district court are affirmed.
On July 17, 1979, the plaintiffs herein filed a complaint alleging that Cook and others had defrauded them by mismanaging and misappropriating funds invested in real estate limited partnerships. Cook did not respond to the complaint and did not appear at a deposition for which he had been subpoenaed. On plaintiffs' motion for entry of a default judgment Judge Sofaer, on September 20, 1979, ruled:
"Whereas it appears that defendant Cook has wilfully and intentionally refused to attend a scheduled deposition, and has with notice intentionally failed to respond to this order to show cause, and has repeatedly contacted attorneys without actually retaining one to represent him for the apparent purpose of creating confusion, delay and the appearance of an intention to comply, the motion to enter default judgment against Cook is hereby granted, on condition that the default become final 10 days after Cook is served with notice of its entry; and in addition the plaintiffs are granted the [sic] expenses, including attorney's fees, caused by Cook's failure. See F.R.Civ.P. 37(b)(2)(c) & (d)."
Cook finally responded, averting the entry of a default judgment.
On April 20, 1980, all parties entered into a settlement agreement pursuant to which all defendants, including Cook and certain of his alter ego corporations, agreed to make substantial payments to the plaintiffs. Cook, however, defaulted in performing his obligations under the agreement and judgment was entered on it by Judge Sofaer on June 18, 1980. In order to locate his assets and enforce the judgment the plaintiffs repeatedly sought to depose Cook and review documentary evidence showing that his corporations were merely alter egos. Cook ignored court orders to appear for depositions until July 12, 1980, when he finally appeared.
In August of 1980 the plaintiffs, in their continuing effort to enforce the judgment, subpoenaed corporate records from the alter ego corporations. Cook and his corporations ignored the subpoenas until after Judge Sofaer heard argument on a motion to hold the corporations in contempt. On November 12, 1980, they produced a small number of documents but failed to produce the bulk of the documents requested. On November 13, 1980, Judge Sofaer found the corporations in contempt and imposed fines which, beginning November 17, 1980, amounted to $1,000 a day. Cook and his corporations, however, continued to ignore the court's orders.
On February 3, 1981, the plaintiffs moved for an order that Cook, the controlling force behind the corporations, be held responsible for their contemptuous conduct and that he be found in contempt. Judge Sofaer referred the motion to Magistrate Sinclair. In March and April 1981, Magistrate Sinclair held evidentiary hearings at which evidence of Cook's foregoing repeated contumacious conduct was introduced. It was established that one of Cook's corporate alter egos, LTC, held in its name for Cook title to an estate called "Whispering Pines." It was further established that the corporations, including LTC, were mere shells and were alter egos of Cook. Acting on detailed recommended findings and conclusions of Magistrate Sinclair, Judge Sofaer on July 15, 1981, signed an order adjudging Cook in civil contempt and directing that he be incarcerated until he purged himself by causing the subpoenaed corporations to comply with the court's earlier orders. Cook then went into hiding but in September, 1981, was arrested as he tried to cross the New York-Canadian border and was jailed.
The parties then, under the supervision of Magistrate Sinclair, negotiated in open court a settlement under which Cook executed a confession of judgment in the sum of $630,000 in satisfaction of all of plaintiffs' claims, including those for unpaid balances, legal fees, interest, costs, and compensatory fines that had been imposed for contempt. To assure plaintiffs of payment Cook also executed a deed transferring to plaintiffs title to Whispering Pines, subject to pre-existing mortgages. The parties further agreed that if Cook paid $380,000 in installments to plaintiffs according to a specified timetable the $630,000 would be discounted by $250,000, but that if Cook defaulted in making the time payments he would continue to be obligated to pay the $630,000 judgment. All parties stated in the court's presence that the payment of $250,000 was not intended to be a penalty. The parties further agreed that the deed was to be placed in escrow to be delivered to plaintiffs in case of default and that in the event of default plaintiffs could, 45 days after the default, transfer title to Whispering Pines to the highest bidder, retaining $630,000 less amounts paid on prior mortgages and amounts already paid to them by Cook. Any balance was then to be paid to Cook. Cook also agreed to vacate Whispering Pines, and if he failed to do so, to waive any legal right to stay eviction and to be evicted by a U.S. Marshal.
By order dated October 2, 1981, Judge Sofaer expressly "approved and made binding" the terms of the settlement but continued to hold Cook in contempt for failure to produce documents and pay fines already imposed. However, his order provisionally released Cook from custody on condition that if Cook complied with the terms of the settlement agreement he would purge himself of those aspects of his contempt arising from his failure to produce documents and to pay the compensatory portions of the fines that had been imposed. The order further provided that Cook should be rearrested if he failed, within 175 days of fully carrying out the settlement agreement, to apply to the court for an order fixing the amount and scheduling payment of the fines payable into court.
On February 2, 1982, Cook defaulted, failing to pay $185,000 due under the October 2, 1981, settlement and order. On February 18, 1982, he moved to modify the settlement agreement, claiming that $250,000 of the $630,000 settlement figure was a "penalty" and that the deed to Whispering Pines was a mortgage, requiring that foreclosure and sale be conducted in accordance with New York statutory procedure. After hearing the parties Magistrate Sinclair found, in a recommended decision dated March 8, 1982, that the October 2, 1981, settlement and order was the result of extended court-administered bargaining between parties represented by competent counsel, that the provision for payment of $250,000 in addition to $380,000 was not a penalty, and that the terms of the settlement and order, which required transfer of the real estate to plaintiffs, were enforceable, notwithstanding the provisions of N. Y. Real Property Law § 320, in view of the circumstances, including the intent of the parties and court that the deed would not be challenged as a mortgage. Moreover he concluded that the defendants were estopped by reason of their representations, upon which plaintiffs had relied, from denying the effectiveness of the deed of transfer.
On March 16, 1982, Judge Sofaer adopted Magistrate Sinclair's recommended decision and denied defendants' motion for a de novo determination of the issues presented to Magistrate Sinclair, made after defendants had filed objections thereto, and for modification of the October 2, 1981, agreement and order.
On March 17, 1982, LTC, Cook's alter ego in whose name the title to Whispering Pines Co., Inc. property had been held prior to his execution of the deed transferring it to plaintiffs, filed a voluntary Chapter XI petition in bankruptcy in the Eastern District of New York, claiming ownership of Whispering Pines and no other assets. On March 18, 1982, Judge Sofaer, in accordance with his denial on March 16, 1982, of defendants' motion, signed an order enjoining the defendants from taking any action to interfere with the sale of Whispering Pines by plaintiffs or the eviction of Cook from the premises. On March 19, 1982, Cook and LTC, ...