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United States District Court, E.D. New York

January 16, 2004.


The opinion of the court was delivered by: DAVID TRAGER, District Judge


Petitioner JK&E Partnership brought this action in 1995 as a turnover proceeding under a New York debt collection statute. The case was removed to federal court in May, 2003. The petitioner brought this motion to remand the case back to state court for lack of federal jurisdiction.


  Respondent Thessalonica Court Associates ("Thessalonica"), a limited partnership, owns a federally regulated and subsidized housing project located in Bronx, New York. (Gladston Decl. ¶ 6.) At its creation, respondent Glick Development Affiliates ("GDA") had a one percent general partnership interest, a ninety-eight percent limited partnership interest, and was the managing partner of Thessalonica. (Gladston Decl. ¶ 8.) Respondent San James Realty Corp. ("San James") had a one percent general partnership interest. (Gladston Decl. ¶ 7.) San James is wholly owned by James Sanchez. (Id.) JK&E Partnership ("JK&E") is a creditor of GDA. JK&E became a creditor of GDA by purchasing in 1990 the rights of Marine Midland Bank in a Page 2 pending action for recovery under a promissory note, and rights and remedies arising from agreements between Marine Midland Bank and GDA, the most relevant of which is a September 1989 Collateral Assignment of Partnership Interest from GDA to Marine Midland Bank relating to Thessalonica (the "Collateral Assignment"). (Ex. E.)*fn1

  JK&E obtained a State Court Judgment against GDA in the amount of $3,788,469.93 in March, 1992. (Ex. A.) Pursuant to this judgment, Thessalonica paid GDA's surplus cash distributions for 1992 and 1993 to JK&E. (Gladston Decl. ¶ 12.) This case began in the Supreme Court of the State of New York, County of Nassau, in 1995 as a turnover/enforcement proceeding pursuant to CPLR § 5255(b), a New York debt collection statute. (Ex. 1.) In the course of this litigation, Thessalonica has paid JK&E the surplus cash distributions due to GDA for the years 1994, 1995, 1996, and 1997. (Gladston Decl. ¶ 12, Ex. G, Ex. L.) The state court retained jurisdiction over the case, which the appellate division held was proper "[g]iven [Thessalonica and San James's] prior attempts to thwart payment." (Ex. T.)

  In 1999, JK&E sought a declaration that GDA was still the managing partner of Thessalonica, an injunction to stop San James from acting as managing partner, the appointment of a temporary receiver or in the alternative the right to exercise power of attorney to review Thessalonica's records and payments, as well as other relief. (Ex. O.) On the basis of this motion, the case was then removed to federal court by Thessalonica and San James. In February 1999, Judge Raggi held that if JK&E was willing to withdraw its claims regarding control of management Page 3 of Thessalonica, she would remand the case. (Ex. Q.) JK&E withdrew those requests for relief, and the case was remanded. (Ex. R.)

  Although Thessalonica's counsel represented to Judge Raggi that Thessalonica would pay JK&E the 1998 distribution due GDA (Ex. Q at 8), no such payment was ever made. (Ex. 2 at 8.) Instead, this payment was made to East Atlantic Realty, Inc. ("East Atlantic"), a company wholly owned by James Sanchez's daughter, Michol Sanchez. (Id.) East Atlantic had acquired another judgment against GDA, and then foreclosed upon its judgment. On August 13, 1999, the Sheriff of the City of New York conducted a foreclosure sale of GDA's right to income from Thessalonica (the "Sheriff's Sale"). (Ex. V.) In a letter dated August 13, 1999, counsel for Thessalonica and San James assured the New York City Housing Development Corp. that the Sheriff's Sale would not "involve a transfer of assets or ownership interests as governed by the regulatory agreement. . . . Rather it only conveys the right to receive income that would otherwise be distributed to the partner." (Ex. W.) Citing cases interpreting New York Partnership Law, Thessalonica's counsel asserted, "here the purchaser of GDA's partnership interest would receive only that surplus cash that GDA would have received in the absence of the sale." (Id.) East Atlantic bought the interest at the Sheriff's Sale (Ex. V), and shortly afterwards the 1998 distribution due GDA was paid to East Atlantic (see Ex. 2 at 8 n.9). East Atlantic has also received GDA's share of surplus cash distributions from Thessalonica for the years 1999 through 2002. (Ex. 2 ¶ 14.)

  On May 7, 2003, JK&E filed a motion in the continuing enforcement proceeding seeking a judgment of at least $368,044, plus interest. (Ex. 2.) In an affidavit attached to this motion, Mr. Feiring, a partner of JK&E, noted that "GDA's indebtedness to JK&E is secured by a 1989 duly Page 4 perfected collateral assignment of certain of GDA's partnership interests in Thessalonica, including GDA's 99% share of the maximum yearly surplus cash distribution from Thessalonica. . . ." (Id. ¶ 8.) The affidavit explained the $368,044 represented the partnership distributions due GDA for 1998 through 2001, and also asserted that JK&E was owed GDA's distributions for 2002. (Id. ¶ 3.)

  On May 21, 2003, Thessalonica and San James filed a Notice of Removal. In August, 2003, JK&E filed the present motion to remand.


 A. Timeliness

  Both JK&E and Thessalonica characterize JK&E's 1995 petition which commenced the turnover action as raising no federal questions. (See Mem. of Law in Supp. of Mot. to Remand at 8; Mem. of Law in Opp. of Mot. to Remand at 23). When the initial pleading is not removable, removal must be filed within thirty days from the defendant's receipt of "a copy of an amended pleading, motion, order or other paper from which it may first be ascertained that the case is one which is or has become removable."28 U.S.C. § 1446(b). San James and Thessalonica filed the Notice of Removal only 14 days after receiving JK&E's motion dated May 7, 2003. Therefore, the only issue is whether that May 7 motion has made the case removable.

 B. Federal Question Jurisdiction

  The Supreme Court recently articulated the standard for determining if a case is removable:

  A civil action filed in a state court may be removed to federal court if the claim is one `arising under' federal law. § 1441(b). To determine whether the claim arises under federal law, we examine the `well pleaded' allegations of the complaint and ignore potential defenses. . . . Thus, a defense that relies on . . . the pre-emptive effect Page 5 of a federal statute, Franchise Tax Bd. of Cal. v. Construction Laborers Vacation Trust for Southern Cal., 463 U.S. 1 (1983), will not provide a basis for removal. As a general rule, absent diversity jurisdiction, a case will not be removable if the complaint does not affirmatively allege a federal claim.

 Beneficial National Bank v. Anderson, 123 S.Ct. 2058, 2062 (2003).

  The only two exceptions to that general rule are "when Congress expressly so provides, such as in the Price-Anderson Act, or when a federal statute wholly displaces the state-law cause of action through complete pre-emption." Id. at 2063 (citations omitted). A federal statute completely preempts a state claim when it provides "the exclusive cause of action for the claim asserted." Id. Congress must have intended the federal cause of action to be exclusive. Id. at 2064. Although Congressional intent is the "ultimate touchstone" of complete preemption analysis, Spielman v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 332 F.3d 116, 124 n.5 (2d Cir. 2003), to determine this intent, the courts look to whether the federal statutes "set forth procedures and remedies governing that cause of action," Beneficial Nat'l Bank, 123 S.Ct. at 2063.

  Thessalonica and San James fail to cite any federal statute or regulation which provides JK&E with a cause of action for payment of distributions due GDA. No federal statute provides a secured creditor of a partner in a federally regulated housing project with a cause of action for recovering the partner's share of the profits. Congress cannot be said to have provided an exclusive federal remedy where, as here, they have provided no remedy whatsoever. Thus there is no complete preemption of JK&E's claim.*fn2 Furthermore, no federal law provides express Page 6 preemption of JK&E's state law claim. (See Mem. of Law in Opp. of Mot. to Remand at 17.) So removal is only proper here if JK&E's May 2003 motion affirmatively alleged a federal claim.

  JK&E's May 2003 motion seeks to collect from Thessalonica the surplus cash distributions due to GDA for the years 1998 through 2002. Thessalonica and San James contend that since these distributions have already been paid to East Atlantic, any payments to JK&E would violate the HUD Regulatory Agreement (Ex. D), and thus be a violation of federal law. (Mem. of Law in Opp. of Mot. to Remand at 9.) The May 2003 motion was the first to challenge the validity of the payments to East Atlantic, arguing that East Atlantic could not "purchase GDA's partnership interest free and clear of the Collateral Assignment," (Ex. 2 ¶ 11-12) and that paying "GDA's distributions to East Atlantic [gives] JK&E the basis for claims against Thessalonica for conversion and unlawful impairment of a security interest." (Ex. 2 ¶ 14). Back in 1998, the state courts had held that JK&E was entitled to GDA's surplus cash distribution for 1995 and 1996 (Ex. M), even though Thessalonica had already distributed that money to San James (Gladston Decl. at 10 n.24). The state court judgment was paid by Chase from Thessalonica's operating account (Gladston Decl. ¶ 19), and Thessalonica was never reimbursed by San James (id. at 10 n.24). Thus the issue of whether Thessalonica can be ordered to turn over money from its operating accounts after the surplus cash distributions have already been paid out was raised in this action years ago. The only component of this issue that was raised for the first time in May 2003 is whether or not the payments to East Atlantic were proper.

  Thessalonica and San James claim that the Collateral Assignment is void under federal law. (Mem. of Law in Opp. of Mot. to Remand at 12.) The Collateral Assignment purports to give JK&E the right to "transfer into its name . . . the Assigned Interest, and . . . participate in the affairs of Page 7 the Partnership to the same extent as [GDA] would have been entitled to participate but for the effect of this Assignment" provided "an Event of Default is continuing." (Ex. E ¶ 3.) The Collateral Assignment also grants JK&E a security interest in "all of [GDA's] right, title and interest in, to and under the Partnership Agreement . . . including, without limitation, its right to receive supervisory fees, development fees, brokerage fees, management fees, and distributions of every kind and nature. . . ." (Ex. E at 2.) The invalidity of JK&E's security interest in surplus cash distributions due to GDA could be a defense to JK&E's demand for payment, if the Sheriff's Sale is found to have extinguished JK&E's rights as a judgment creditor. But a case may not be removed to federal court on the basis of a federal defense "even if the defense is anticipated in the plaintiff's complaint." Caterpillar Inc. v. Williams, 482 U.S. 386, 393 (1987).

  "[A] complaint which appears to be grounded solely in state law actually may be federal in nature, and thus removable, if its true nature has been disguised by the plaintiff's artful pleading." In re "Agent Orange" Prod. Liab. Litig., 996 F.2d 1425, 1430 (2d Cir. 1993). JK&E's claim in its May 2003 petition does not engage in artful pleading, nor does it omit any necessary federal questions. Mr. Feiring's affidavit merely anticipates respondents' federal defense by arguing the validity of the Collateral Assignment.

  Thessalonica cites D'Alessio v. New York Stock Exchange, Inc. for the proposition that removal is proper when the "cause of action poses a substantial federal question." (Mem. of Law in Opp. of Mot. to Remand at 7, quoting D'Alessio, 258 F.3d 93 (2d Cir. 2001).) In D'Alessio, the Second Circuit found the "gravamen of [the plaintiff's] state law claims is that the [defendants] conspired to violate the federal securities laws . . . and failed to perform its statutory duty, created under federal law. . . ." Id. at 101. Here, however, the gravamen of JK&E's May 2003 motion is Page 8 not that the respondents' actions violate federal law and HUD regulations,*fn3 but rather that under New York state law, the Sheriff's Sale did not extinguish its right to collect the distribution due to GDA. Federal statutes and regulations which control the release of funds from the operating accounts of federally regulated housing projects and those which control encumbrances on ownership interests in such housing projects can only provide a defense against JK&E's demand for payment. JK&E does not rely on these federal statutes and regulations for its cause of action. In other words, if there were no federal laws proscribing Thessalonica and its partners' actions, JK&E would still have a claim under state law.*fn4

  Furthermore, the federal questions in this case are not substantial. Indeed, the parties seem to agree on the only federal issues raised in this matter. JK&E contends that it is a secured creditor pursuant to the September 1989 assignment (the "Collateral Assignment") and that the Sheriff's Sale on August 13, 1999 is void. These contentions do implicate the interpretation of some HUD Page 9 regulations and HUD regulatory agreements. But both JK&E and San James contend that GDA had the power to encumber its right to receive payments from surplus cash of Thessalonica, and both argue that any attempt of GDA to assign or sell more of its rights under the partnership than its right to receive profits would require the approval of HUD and San James. Both parties rely on the March 27, 2002 letter from John Cahill at HUD. (Ex. X.) Mr. Cahill articulates a distinction between assignments altering who receives the profits from Thessalonica, which do not require HUD approval, and those assignments altering who controls the operations of Thessalonica, which do require HUD approval. (Id.) Although JK&E argues that the Collateral Assignment is valid and the Sheriff's Sale is void, and San James argues the Collateral Assignment is void and the Sheriff's Sale is valid, their disagreements are over the proper interpretations of the Collateral Assignment and the Sheriff's Sale, not over the proper interpretation of HUD requirements as applied to them. Assuming, arguendo, that any right to participate in the affairs of the Partnership ostensibly given to the Assignor under paragraph 3 of the Collateral Assignment is void without HUD approval, the relevant issue in this case is whether that invalidates the Collateral Assignment in its entirety. The Collateral Assignment clearly specifies that it will be governed, construed, and enforced in accordance with the laws of the State of New York. (Ex. E ¶ 14.) Thus JK&E's contention that it has a perfected security interest in GDA's share of Thessalonica's cash surplus hinges on state law considerations.

  As for the validity of the Sheriff's Sale, federal law plays only a small part in such a determination. In his affidavit in support of the May 2003 motion, Mr. Feiring claims that the sale is "a nullity because it was in violation of State Law, the Partnership Agreement, the HUD Regulatory Agreement and HUD regulations." (Ex. 2 ¶ 15.) JK&E's claim for the partnership Page 10 distributions due to GDA for 1998 through 2002 is not "federal in nature" just because HUD regulations constitute one of many considerations for determining what rights, if any, East Atlantic purchased at the Sheriff's Sale. Page 11

 C. Costs and Attorneys' Fees

  Petitioner seeks costs and reasonable attorneys' fees pursuant to 28 U.S.C. § 1447(c), which provides that "[a]n order remanding the case may require payment of just costs and any actual expenses, including attorney fees, incurred as a result of the removal." The award of costs and fees under § 1447(c) is largely discretionary. The Court need not find that the removal was in bad faith. Morgan Guar. Trust v. Republic of Palau, 971 F.2d 917, 924 (2d Cir. 1992). In exercising their discretion, many courts have looked to "whether the grounds for removal were substantial or presented a close question." Eastern States Health & Welfare Fund v. Philip Morris, Inc., 11 F. Supp.2d 384, (SDNY 1998). Here, as in Eastern States, "the arguments for federal jurisdiction were indeed substantial, although ultimately unpersuasive." Id. Therefore the Court declines to award costs and attorneys' fees.


  Petitioner JK&E's May 2003 motion does not make this case removable to federal court. Accordingly, the motion for remand is granted. The Clerk of the Court is directed to remand this case to the Supreme Court of the State of New York, Nassau County, and to close this case.


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