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BAKER v. LATHAM SPARROWBUSH ASSOCS.

March 23, 1992

GLORIA BAKER Plaintiff,
v.
LATHAM SPARROWBUSH ASSOCIATES and AARON KOZAK Defendants.


Motley


The opinion of the court was delivered by: CONSTANCE BAKER MOTLEY

Defendants' motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure on the grounds of res judicata, the statute of limitations, and failure to state a claim upon which relief may be granted is now before the Court. *fn1" For the purposes of this motion, the court must accept the facts alleged in the complaint as true and construe all allegations in the light most favorable to Plaintiff. See Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S. Ct. 1683, 1686, 40 L. Ed. 2d 90, 96 (1974); Jenkins v. McKeithen, 395 U.S. 411, 421-22, 89 S. Ct. 1843, 1848-49, 23 L. Ed. 2d 404, 416-17 (1969).

I. Background

 The underlying dispute in this litigation involves an apartment complex known as Sparrowbush Apartments ("Sparrowbush") owned by Defendant Latham Sparrowbush Associates ("LSA"). LSA is a limited partnership and Defendant Aaron Kozak is the general partner of LSA. On August 28, 1968, Shaker Estates, Inc., not a party to this litigation, leased Sparrowbush under a longterm blanket lease for a term of twenty-one years and three days, with an option to extend the lease an additional twenty years. On December 31, 1973, Cohoes Industrial Terminal ("CIT"), a New York corporation acting as nominee for Plaintiff, purchased Shaker's interest in the leasehold. The terms of the lease included a provision granting LSA, as landlord, the option to terminate the lease on sixty days notice with payment of a specified sum of money. On December 26, 1984, LSA notified CIT of its exercise of the option to terminate the lease. The next day, Plaintiff informed LSA that the option was invalid under New York's rule against perpetuities.

 LSA's exercise of the termination option resulted in a series of lawsuits involving CIT's rights to the leasehold. The present case is the fourth action involving the underlying dispute over the lessee's rights to Sparrowbush. The lengthy procedural history of the related litigation is central to the issues now before the Court.

 In January of 1985, Plaintiff first brought suit in Westchester Supreme Court to obtain declaratory relief stating that the termination clause in the lease violated New York's rule against perpetuities (the "Westchester action"). In a decision dated April 16, 1985, the court dismissed Plaintiff's first action for lack of standing. This decision was affirmed on appeal. Baker v. Latham Sparrowbush Assocs., 129 A.D.2d 667, 514 N.Y.S.2d 426 (2d Dept. 1987), app. denied, 70 N.Y.2d 606, 519 N.Y.S.2d 1030, 514 N.E.2d 388 (2d Dept. 1987).

 The complaint states that Defendants availed themselves of the method of service permitted by § 306 with the knowledge that CIT would not receive service of process because Defendants knew that the Secretary of State did not have the correct address for CIT on file. Defendants allegedly knew CIT's correct address and could have easily served CIT directly. Plaintiff also alleges that Defendants knew that Plaintiff claimed to own the leasehold and that CIT was only her nominee, but nevertheless failed to serve Plaintiff or to join her as a party. Plaintiff admits that CIT did receive actual notice of the Albany action before the time to defend against the action had expired. Plaintiff's Memorandum of Law at 22.

 CIT defaulted in the Albany action, and Supreme Court Justice Kahn, Albany County, entered an order on April 19, 1985, granting LSA's motion for a default judgment and directing CIT to deliver possession of the premises to LSA. Justice Kahn found that CIT had received actual notice in time to defend against the Albany action. CIT's motion to vacate the default was denied by Justice Kahn on May 21, 1985, on the grounds that the affidavit of merits was executed by Leon Baker, attorney for CIT, rather than by an officer of CIT. Justice Kahn did not reach the question of the validity of LSA's service of process on the Secretary of State.

 CIT appealed Justice Kahn's denial of the motion to vacate the default. On October 10, 1985, the Appellate Division, Third Department, held that the affidavit of merits was properly executed because Leon Baker had personal knowledge of the facts alleged. Latham Sparrowbush Assocs. v. Cohoes Indus. Term., Inc., 114 A.D.2d 584, 494 N.Y.S.2d 195 (3d Dept. 1985), app. dism'd, 67 N.Y.S.2d 736, 500 N.Y.S.2d 100, 490 N.E.2d 1226 (1986). The court nevertheless affirmed the denial on the grounds that CIT's failure to keep a current address on file with the Secretary of State was not excusable neglect under CPLR § 5015(a), permitting courts to vacate a default where there is excusable default or lack of jurisdiction. The court also found that because CIT had actual notice of the default in time to defend, no basis to vacate the default existed under CPLR § 317, permitting a party to defend against a default within one year of the date the default was entered if that party did not have actual notice of the action. On February 13, 1986, the New York Court of Appeals denied CIT's appeal from the order denying leave to appeal on the ground that an order refusing to open a default is not final. Latham Sparrowbush Assocs. v. Cohoes Industrial Terminal, Inc., 67 N.Y.2d 736, 500 N.Y.S.2d 100, 490 N.E.2d 1226 (1986).

 CIT then brought a motion in the Appellate Division to certify to the New York Court of Appeals the question of whether the failure to keep a current address on file with the Secretary of State is excusable neglect. Defendant brought a cross-motion for an injunction to prevent Plaintiff from bringing further proceedings to vacate the default judgment without first obtaining the consent of the Appellate Division. The Appellate Division denied both motions without opinion.

 Justice Kahn appointed a post-judgment receiver on March 27, 1986, at Defendants' request, to take possession of Sparrowbush from CIT. On July 1, 1986, Justice Kahn, also at Defendants' request, ordered the receiver to deliver possession of Sparrowbush to LSA. Sparrowbush has since been in the possession of Defendants.

 CIT appealed to United States District Court, Southern District of New York, and Chief Judge Brieant affirmed the Bankruptcy Court's decision on February 18, 1987. In re Cohoes Industrial Terminal, Inc., 70 Bankr. 214 (S.D.N.Y. 1987). Judge Brieant specifically affirmed the Bankruptcy Judge's ruling that the state court proceedings barred CIT from collaterally attacking the Albany default in the Bankruptcy action. The Second Circuit affirmed in an unpublished summary order. In re Cohoes Industrial Terminal, Inc., Docket No. 87-5004(R) (2d Cir. September 18, 1987). The Second Circuit stated that the leasehold was no longer the property of the estate at the time of filing for purposes of the automatic stay because CIT's property interest in the leasehold had terminated prior to the filing in bankruptcy. The court based its decision on the plain language of the lease, which provided that CIT's interest in Sparrowbush expired on February 25, 1985, sixty days after LSA had given notice of its exercise of the option to terminate the lease. The court did not specifically address CIT's ability to collaterally attack the default in the Bankruptcy action.

 LSA then moved for sanctions against CIT, which the Bankruptcy Judge granted. In re Matter of Cohoes Industrial Terminal, Inc., 103 Bankr. 480 (Bankr. S.D.N.Y. 1989). Judge Broderick, United States District Judge, Southern District of New York, affirmed the Bankruptcy Court's order granting sanctions against CIT. CIT appealed to the Second Circuit, which reversed the imposition of sanctions on the grounds that CIT's collateral attack of the default in U.S. Bankruptcy Court was not frivolous or sanctionable conduct. In the Matter of Cohoes Industrial Terminal, Inc., 931 F.2d 222 (2d Cir. 1991). The court stated that collateral attack was open to CIT because the New York courts had based their denial of the motion to vacate the default on procedural grounds. The Second Circuit also stated that the default judgment was subject to collateral attack in Bankruptcy court as a violation of CIT's due process rights under the Fourteenth Amendment, even though CIT had actual notice in time to defend against the Albany action. Id. at 228.

 CIT assigned all of its rights with respect to Sparrowbush to Plaintiff on July 27, 1991. Plaintiff commenced the present lawsuit in October of 1991. Plaintiff alleges that Defendants acted unlawfully in obtaining possession of Sparrowbush through the Albany default because § 306, as applied and used by Defendants, was not reasonably calculated to provide CIT with actual notice of the Albany action. Plaintiff challenges the constitutionality of the default judgment and sues for damages and to recover possession of Sparrowbush under 42 U.S.C. 1983 and New York state law.

 II. Discussion

 A. Res Judicata and Collateral ...


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