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CITADEL MANAGEMENT, INC. v. TELESIS TRUST
November 20, 2000
CITADEL MANAGEMENT INC., A BAHAMIAN CORPORATION, PLAINTIFF,
TELESIS TRUST, INC., A DELAWARE CORPORATION, BRITE BUSINESS S.A., A BRITISH VIRGIN ISLAND CORPORATION, MENSANA CORPORATION, A BAHAMIAN CORPORATION, CHARLES W. SULLIVAN, MARJORIE HERTZOG, A/K/A MARJORIE S. TYSON, A/K/A MARJORIE SUZAN TYSON, AND JOHAN HERTZOG, A/K/A JOHAN CHRISTIAAN HERTZOG, A/K/A JOHAN TYSONHERTZOG, DEFENDANTS.
The opinion of the court was delivered by: Sweet, District Judge.
Defendants Charles W. Sullivan ("Sullivan") and Mensana
Corporation ("Mensana") have moved to dismiss the Amended
Complaint in its entirety pursuant to Rules 9(b), 12(b)(2), (4)
and (6), Fed.R.Civ.P., for failure to state a claim upon which
relief may be granted, failing to plead fraud with particularity,
lack of jurisdiction and insufficiency of service of process.
Plaintiff Citadel Management, Inc. ("Citadel") has cross-moved
for leave to refile. Also before the Court are Citadel's motions
pursuant to Rule 55, Fed.R.Civ.P., for default against defendants
Marjorie Hertzog, a/k/a Marjorie S. Tyson, a/k/a Marjorie Susan
Tyson ("Tyson") and Telesis Trust, Inc. ("Telesis"). For the
reasons discussed below, the default motion is denied in part and
granted in part, the motion to dismiss is granted, and plaintiff
is granted leave to refile in accordance with this opinion.
Citadel is incorporated under the laws of the Bahamas.
Defendant Telesis is a Delaware corporation. At all times
relevant to the complaint, defendant Johan Hertzog, a/k/a Johan
Christiaan Hertzog, a/k/a Johan Tyson Hertzog ("Hertzog") was the
President and CEO of Telesis.
Defendant Brite Business, S.A. ("Brite") is a business
incorporated under the laws of the British Virgin Islands of
which Hertzog is an officer.
Defendant Mensana is a business incorporated under the laws of
Defendant Sullivan is a New York resident.
Defendant Marjorie Hertzog, a/k/a Marjorie S. Tyson, a/k/a
Marjorie Susan Tyson ("Tyson") is a resident of California.
Defendant Hertzog is a resident of California.
Background and Prior Proceedings
This action essentially seeks the return of funds that were the
subject of judgments entered against defendants Hertzog and
Telesis, among others not named here (the "English defendants"),
by the High Court of Justice for England and Wales in 1998. The
judgments arose out of the English defendants' failure to honor
an $11 million investment contract between Citadel and Equal
Limited ("Equal"), a British corporation of which Hertzog was a
director. Rather than investing Citadel's funds as per the
contract, Equal and others disbursed the funds almost immediately
after the contract was signed on April 14, 1998. The disbursals
included a $5 million transfer by Hertzog to defendant Mensana,
who then transferred the funds through a bank in Lebanon to a
third party; an approximately $5,250,000 transfer to accounts at
Chase Manhattan Bank in New York held by Telesis and Hertzog;
and additional miscellaneous payments for the benefit of the
defendants in this action.
The English Court issued two "Mareva Injunctions," requiring
the English defendants, which included Hertzog, to disclose the
whereabouts of the funds and restraining them from disposing of
any assets they held worldwide until trial. No disclosures were
made, but, based upon discovery provided regarding the transfer
to Chase Manhattan Bank, the court allowed Citadel to add Telesis
as a defendant. When no defense was timely served, the English
court awarded Citadel a judgment against Hertzog for
$40,100,000.00 plus 8% interest from August 5, 1998, and on
October 14, 1998 issued a judgment against Telesis in the amount
of $5 million plus damages and interest.
On May 24, 1999, Citadel sought to enforce the English
judgments against Hertzog and Telesis in the Supreme Court of New
York, Queens County. At the same time, Citadel sought orders of
attachment and was granted a temporary order restraining both
defendants and Chase Manhattan Bank from disposing of any assets
held in New York. The New York Supreme Court granted Citadel's
motion for summary judgment against Hertzog and issued an order
of attachment to enforce the English judgment for $40,100,000
plus 8% interest. In the same decision, summary judgment was
granted against Citadel and for Telesis, on the grounds that the
English court had never obtained personal jurisdiction over
Telesis under any grounds recognized in the relevant New York
statute, C.P.L.R. § 5305(a).
Hertzog moved the English Court to set aside the judgment on
December 16, 1999. Four days later, Citadel moved the English
Court to hold Hertzog in contempt and send him to prison for
violating that court's previously issued injunctions.
The New York Supreme Court notified the parties on January 4,
2000 that it would settle the order of attachment as set forth in
its summary judgment decision but would stay enforcement pending
the resolution of the set-aside and contempt motions in the
Proceedings in the English Court were adjourned to April 3,
2000, and Citadel agreed not to pursue enforcement of any claims
against Hertzog until the English Court resolved the pending
Citadel filed the instant complaint on March 28, 2000, and
later amended it (the "Amended Complaint") to claim the
following: fraud against Telesis and Hertzog (1) arising out of
allegedly false statements made by Hertzog regarding why the
Telesis Chase Bank accounts were frozen; and (2) arising out of
the written statement Hertzog provided on June 26, 1998 and later
forwarded by his attorney to the English Court, to the effect
that "I have not traded any of the Plaintiff's investment or
funds . . ."; (3) conversion against Telesis and Hertzog for
transferring the funds without Citadel's authority; (4) against
Tyson as a later beneficiary of the converted funds; (5) against
Mensana and Sullivan as the beneficiaries of $4 million Hertzog
improperly appropriated from Citadel and later wired to a bank in
Lebanon; (6) against Brite "in the event that any of Citadel's
funds were transferred to Brite;" (7) civil theft under Florida
law against Hertzog for $250,000; (8) against Tyson for over
$260,000; (9) against Telesis for over $5 million; (10) against
Brite for $400,000; and treble damages for state and federal RICO
violations against Telesis, Hertzog, Mensana, Sullivan, Brite and
Tyson in Counts 11-18.
Meanwhile, the English Court held Hertzog in contempt of court
on April 5, 2000 for disposing of his assets in violation of the
Mareva Injunctions and denied his motion to set aside the default
judgment. On June 7, 2000, the English Court granted Citadel
leave to commence new proceedings against Hertzog based upon
information received in the English proceedings. Citadel amended
the complaint in this action to add Hertzog as a defendant on
June 13, 2000.
Citadel initially filed default motions pursuant to Rule 55(c),
Fed.R.Civ.P., on July 12, 2000. Due to technical errors in
filing, Citadel filed an amended default motion against both
Telesis and Tyson on July 17, 2000. On August 24, 2000, Citadel
filed yet another motion for a default judgment against Tyson,
seeking expenses related to filing and service. Tyson filed an
affidavit in opposition to the default motion on September 1,
2000. Citadel filed a reply declaration on September 6, 2000, the
date oral argument was heard. Tyson filed a second affidavit on
September 15, 2000, whereupon the motion was deemed fully
submitted. Telesis filed no opposition.
On July 13, 2000, defendants Sullivan and Mensana moved to
dismiss the claims against them for failure to state a claim upon
which relief may be granted, failing to plead fraud with
particularity, lack of jurisdiction and insufficiency of service
of process, pursuant to Rules 9(b), 12(b)(2), (4) and (6),
Fed.R.Civ.P. Citadel responded and filed a cross-motion for leave
to amend the complaint on August 7, 2000. Reply memoranda from
each side were received through August 29, 2000, and the motion
was deemed fully submitted after oral argument on September 6,
Citadel moves for default judgments against Tyson and Telesis
pursuant to Rule 55 on the grounds that these defendants failed
to plead or otherwise defend within the time allotted by the
Federal Rules of Procedure.
Where entry of a default judgment is opposed, the standard for
granting such a judgment under Rule 55 is governed by the same
principles that apply to a motion to set aside entry of a
default. See Commercial Bank of Kuwait v. Rafidain Bank,
15 F.3d 238, 243 (2d Cir. 1994); Meehan v. Snow, 652 F.2d 274, 276
(2d Cir. 1981). The standard for setting aside entry of a default
is whether there is "good cause," see Rule 55(c), which
requires consideration of "whether [defendant's] default was
willful, whether setting the default aside would prejudice
[plaintiff] and whether [defendant] presented a meritorious
defense." Sony Corp. v. Elm State Elecs., Inc., 800 F.2d 317,
320 (2d Cir. 1986). In assessing whether good cause exists, the
Court must consider "whether the default was willful, whether
setting it aside [or declining to enter it] would prejudice the
adversary, and whether a meritorious defense is presented."
Rafidain, 15 F.3d at 243 (quoting Meehan, 652 F.2d at 276).
This test should be applied in the context of the general
preference "that litigation disputes be resolved on the merits,
not on default." Cody v. Mello, 59 F.3d 13, 15 (2d Cir. 1995).
Doubts should be resolved in the non-movant's favor to increase
the likelihood that the case may be resolved on the merits. See
Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95-96 (2d Cir. 1993).
Citadel alleges that Tyson has defaulted because she was timely
served with the original complaint, RICO statement and summons
June 5, 2000 at her Florida address, and that she failed to file
an answer by June 25, 2000, within 20 days as required by Rule
12(a)(1)(A). Tyson disputes that she was ever served.
Citadel filed the Amended Complaint on June 14, 2000, before
Tyson's time to respond had run, which started the default clock
anew. Citadel alleges that Tyson was timely served with the
Amended Complaint on June 19, 2000 at her California address, and
she failed to file an answer by June 29, 2000.*fn1 The process
server's affidavit alleges that Tyson was served in
person in Los Angeles at 6:45 pm on June 5, 2000, and describes
the person he served as a 5'7" tall, thin, white woman with blond
hair who was 38 years old. Travis Reply Dec. Ex. A. Citadel
provides copies of billing statements from the process server,
who it claims "staked out" Tyson and, after eight hours, followed
her from the parking lot into her gated apartment building and
served her outside her apartment door. Unrecognizable copies of
photographs of a person behind a gate have been submitted in
support of this allegation. If Tyson was in fact served in this
manner, service was proper. See Fed. R.Civ.P. 4(e)(1) (service
is proper if made in accordance with the law of the state in
which service is effected); Cal. Stat. § 415.10 (personal
delivery of summons and complaint).
In addition, Citadel claims that Tyson was served with papers a
second time, the next day, at her home in Miami, Florida. A
return of service affidavit indicates that the server personally
served a woman "who would not identify herself but who was 5'8",
125-135 pounds, 25-35 years of age, long blonde hair for whom
[the server] previously had seen a copy of her California drivers
license and who matched the picture." Travis Reply Dec. Ex. C. If
Tyson was the person served, service was proper. See
Fed.R.Civ.P. 4(e)(1); Fla. Stat. § 48.301(1)(a) (personal service
of summons and complaint).
Counsel for Citadel states that she attempted to effect service
on Tyson a third time at both the Florida and California
addresses by sending the documents by Federal Express priority
overnight delivery, which, after numerous delivery attempts, were
refused and returned.
Tyson contends that she was never served with papers. Although
she admits that she resides at the California address at which
the second process server states he served her on June 5, 2000,
she insists that she never received service of process. She
denies ever opening the gate to the Los Angeles apartment
building to let in the process server or being served there.
Moreover, Tyson states that she does not live or work in Florida,
was not there on June 6, 2000, and has not visited the state for
many months. Nonetheless, Tyson requests leave to file an answer
to the complaint, and attached her proposed answer as an exhibit
to her second affidavit in opposition to default.
Although Citadel blames Tyson for committing "deliberate
evasions" in an attempt to avoid becoming involved in the
lawsuit, the fact that Tyson has submitted a proposed answer to
the complaint suggests that, in fact, she does wish to contest
this suit. Applying the good cause standard generously in order
to see this litigation resolved on the merits, see Enron Oil,
10 F.3d at 96, I find that Tyson is not in default. Citadel's
motion for a default judgment and expenses against Tyson is
denied, and Exhibit A to Tyson's second affidavit in opposition
to default is deemed to be her answer. Tyson shall be served and
shall file an original answer forthwith.
With regard to Telesis, Citadel alleges that it served Telesis
with the Complaint, summons and RICO statement on May 26, 2000,
and that Telesis is in default for failing to serve a response by
June 15, 2000. However, the Amended Complaint was filed on June
14, 2000, before Telesis's time to respond had finished, and
started the clock anew. Citadel argues that Telesis is
nonetheless in default because it failed to file a response to
the Amended Complaint within the appropriate period after it was
served on May 26, 2000. However, by memo-endorsement of July 27,
2000, I enlarged the time for answering and ordered that the
answer was due on August 15, 2000. Nonetheless, Telesis did not
file its answer until August 29, 2000. As stated above, Telesis
has filed no opposition to the entry of default judgment against
Also pending is the motion by Mensana and Sullivan to dismiss
the Amended Complaint in its entirety pursuant to Rules 9(b),
12(b)(2), (4) and (6), Fed.R.Civ.P., for failure to state a claim
upon which relief may be granted, failing to plead fraud with
particularity, lack of jurisdiction and insufficiency of service
Mensana first notes that the complaint incorrectly names it as
a Bahamian Corporation, whereas in fact, Mensana is a Delaware
Corporation. Mensana Corporation Limited ("Mensana Ltd.") is a
Bahamian corporation, whereas Mensana (Delaware) was the entity
that conducted the wire transfer to Lebanon that is the issue of
this complaint. Sullivan, the president and sole shareholder of
Mensana, as well as an officer and director of Mensana Ltd., has
submitted a sworn affidavit attesting to these facts. Citadel
acknowledges its ...