The opinion of the court was delivered by: VINCENT L. BRODERICK
VINCENT L. BRODERICK, U.S.D.J.
On May 27, 1993, I directed entry of a default judgment against third party defendant Larry Rush ("Rush") on the third party complaint of the Village of North Tarrytown (the "Village") in this case involving foreclosure by the Federal Home Loan Mortgage Corporation ("FHLMC") against Spark Tarrytown, Inc. ("Spark Tarrytown") and potentially competing lienholders. FHLMC v. Spark Tarrytown, 822 F. Supp.137 (SDNY 1993).
The third party complaint alleged that Rush, as a principal in Spark Tarrytown, (1) abused the Bankruptcy Code by the filing of and manner of proceeding under an improper and subsequently vacated petition pursuant to Chapter 11 of that Code, (2) appropriated property and rents of Spark Tarrytown, (3) refused to provide necessary documents and (4) failed to pay water rents. The third party complaint states that a $ 25,000 fine was imposed on Spark Tarrytown and Rush for building violations and that $ 10,000 in engineering fees incurred by the Village to investigate infractions on Spark Tarrytown's property.
While captioned as a third party complaint, the Village's claims against Rush in this litigation do not relate to sums which the Village may owe to the plaintiff FHLMC, which would bring them within the scope of Fed.R.Civ.P. 14. They may, however, be treated as claims ancillary to the foreclosure suit within the jurisdiction set forth in 28 USC 1367, which authorizes "claims that involve the joinder or intervention of additional parties" so long as the same case or controversy under Article III of the Constitution is involved. That requirement is fulfilled in this foreclosure action under federal law where claims affecting sums due to or by Spark Tarrytown and priorities among them. See H Rep 734, 101st Cong, 2d Sess 28, reprinted in 1990 US Code Cong & Admin News 6860, 6874; In re Masters, Mates et al. (Kovnat v. Schnader), 150 F.R.D. 74, 1993 WL 306649, 1993 U.S. Dist. LEXIS 11305 (SDNY 1993). The function required is closely analogous to that exercised in administering a bankrupt estate pursuant to 28 USC 157.
On August 10, 1993 United States Magistrate Judge Mark D. Fox filed his Report and Recommendation in response to my reference of this matter to him for an inquest to ascertain the Village's damages. Judge Fox found that Rush had converted in excess of $ 40,000 of Spark Tarrytown's money (Report at 5). He recommends that judgment be entered against Rush for $ 8,402.46 consisting of water and legal bills.
The Village has objected to the Magistrate Judge's report, seeking payment of the $ 25,000 fine and the $ 40,000 found to have been converted by Rush. Rush, although served with both the Report and Recommendation and the Village's objections, has filed no submissions.
I adopt the Report and Recommendation of Judge Fox, direct that judgment be entered in favor of the Village against Rush for $ 8,402.46 and find that the Village retains its remedies with respect to the fine and engineering fees unaffected by events in this litigation.
Amounts diverted by Rush from Spark Tarrytown, estimated by the Magistrate Judge at $ 40,000 are in the first instance, at least, assets of Spark Tarrytown. The Village cannot claim these funds initially alleged to be due from Spark Tarrytown in its third party complaint, without having asserted claims against Spark Tarrytown in this litigation, whether or not based in part on a prior Village court determination. The Village, in other words, cannot ask that the corporate veil be pierced until it obtains a ruling in this court based on prior litigation or otherwise that Spark Tarrytown owes the sums involved to the Village.
Funds obtained by Spark Tarrytown are subject to an initial claim by Spark Tarrytown's receiver for use in paying its immediate obligations for maintenance of the premises involved. Any remaining funds are subject to claims of FHLMC if necessary to pay any unpaid portion of its loan after the sale of Spark Tarrytown's property.
The Magistrate Judge's Report and Recommendation which I have adopted does not rule that Spark Tarrytown cannot recover any funds wrongfully obtained by Rush or others which belong to it. The only ruling made is that the Village cannot obtain such funds from Rush based on the present third party complaint. Spark Tarrytown's receiver may wish to consider filing a claim against Rush for any funds belonging to ...