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CITADEL MANAGEMENT, INC. v. TELESIS TRUST

November 20, 2000

CITADEL MANAGEMENT INC., A BAHAMIAN CORPORATION, PLAINTIFF,
V.
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.

            OPINION

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.

The Parties

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 Delaware.

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 English Court.

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 case.

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, 2000.

Discussion

I. Default

A. Legal Standard

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).

B. Tyson

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.

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.

C. Telesis

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 it.

Therefore, because its answer was not timely filed, and because it has filed no opposition to the instant motion, good cause has not been shown, and Telesis is in default.

II. Motion to Dismiss

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 of process.

A. Proper Party

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 ...


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