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Correspondent Services Corporation v. JVW Investment

September 29, 2004


The opinion of the court was delivered by: Sweet, D.J.


Cross-claim defendant Suisse Security Bank and Trust, Ltd. ("SSBT") has renewed its motion to dismiss Count Three of the amended complaint of interpleader plaintiff Correspondent Services Corporation ("CSC") pursuant to Rule 12(h)(3) of the Federal Rules of Civil Procedure, to vacate this Court's previous orders of attachment, and for an award of its costs and attorney's fees incurred in this action pursuant to CPLR 6212(e). J.V.W. Investments Ltd. ("JVW") and J. Virgil Waggoner ("Waggoner") (collectively, the"Waggoner Parties") have opposed SSBT's motion and moved for leave to file a surreply memorandum of law in further opposition to SSBT's motion. For the reasons set forth below, both motions are granted and this action is dismissed.

Prior Proceedings and Background

This interpleader action, commenced on August 16, 1999, by CSC, has been the subject of six prior opinions issued by this Court, familiarity with which is assumed. See Correspondent Services Corp. v. J.V.W. Investments Ltd., No. 99 Civ. 8934 (RWS), 2003 WL 221746 (S.D.N.Y. Jan. 31, 2003) ("JVW VI"); Correspondent Services Corp. v. J.V.W. Investments Ltd., 205 F. Supp. 2d 191 (S.D.N.Y. 2002) ("JVW V"), vacated and remanded sub nom. Correspondent Services Corp. v. First Equities Corp. of Florida, 338 F.3d 119 (2d Cir. 2003); Correspondent Services Corp. v. J.V.W. Investments Ltd., 173 F. Supp. 2d 171 (S.D.N.Y. 2001) ("JVW IV"); Correspondent Services Corp. v. J.V.W. Investments Ltd., 204 F.R.D. 47 (S.D.N.Y. 2001) ("JVW III"); Correspondent Services Corp. v. J.V.W. Investments Ltd., 120 F. Supp. 2d 401 (S.D.N.Y. 2000) ("JVW II"); Correspondent Services Corp. v. J.V.W. Investments Ltd., No. 99 Civ. 8934 (RWS), 2000 WL 1174980 (S.D.N.Y. Aug. 18, 2000) ("JVW I"). Although the course of this litigation and the underlying dispute have already been amply charted, certain events relevant to the instant motions warrant repetition.

In 1998, Donal Kelleher ("Kelleher"), a citizen of Great Britain, undertook to invest $10 million belonging to Waggoner. Kelleher and Waggoner established JVW, a Commonwealth of Dominica International Business Company, with Waggoner as the sole shareholder and Kelleher as the director. Through JVW, Kelleher entered into an agreement with British Trade and Commerce Bank ("BTCB"), organized under the laws of Dominica, to invest Waggoner's $10 million in a Certificate of Deposit. On June 26, 1998, BTCB issued a Certificate of Time Deposit ("CTD") to JVW for the face value of"TEN MILLION DOLLARS." JVW V, 205 F. Supp. 2d at 194 (internal quotation marks omitted).

At the time the CTD was issued to JVW, JVW had made no deposits with BTCB, although Waggoner had wired $10 million to JVW's account at SSBT on June 18, 1998, and Kelleher had represented to BTCB that the $10 million was available for immediate investment. JVW instructed BTCB to deliver the CTD to SSBT in the Bahamas, where the CTD would be held in JVW's account with SSBT. JVW thereafter requested that SSBT transfer the CTD to First Equity Corporation of Florida ("First Equity"), a Florida subsidiary of BTCB, which in turn placed the unfunded CD into the custody of CSC, which company provided custodial services for First Equity. CSC is a citizen of New York and Delaware.

In September and October of 1998, after several unsuccessful attempts to transfer Waggoner's $10 million from JVW's SSBT account into BTCB's SSBT account and thus to fund the CD, approximately $7.7 million was transferred to BTCB/First Equity, leaving approximately $2.3 million of the original $10 million unaccounted for. BTCB then issued a Certificate of Deposit ("CD") as a substitute for the CTD issued earlier. The CD, like the CTD which it had replaced, was due to mature on June 25, 1999 and set forth as a term that"[d]eposits made in any form shall not be considered good until the same have been cleared." JVW V, 205 F. Supp. 2d at 195 (internal quotation marks omitted). The CD was identical to the original CTD except for its title and for the fact that it was issued to"Bearer" rather than to JVW. From July 1998 through May 1999, the CTD and thereafter its replacement, the CD, were reflected on JVW's account statements from First Equity, which clears through CSC, as having a face value of $10 million. Even after the CD was funded, CSC was only in possession of the physical CD document and never controlled any of the funds received by BTCB/First Equity.

Waggoner and Kelleher subsequently had a disagreement, and Waggoner dissolved the Joint Participation Agreement underlying their venture, removed Kelleher as director of JVW, and appointed himself as JVW's sole director. In June of 1999, Kelleher commenced a letter-writing campaign to UBS PaineWebber, CSC's parent company, and other entities in which he purported to be the sole director of JVW and made demands with respect to JVW's brokerage account at First Equity and his entitlement to the CD.

On June 25, 1999, the CD matured and pursuant to its terms reverted to a savings account at BTCB. At the same time, JVW liquidated its bank account at BTCB and transferred the funds contained therein (approximately $7.7 million) to another account in the name of a different corporation, the Wagonwheel Trust. The monthly statements for JVW's brokerage account at First Equity thereafter reflected a"zero" value for the CD.

On August 16, 1999, CSC commenced the instant action seeking to resolve what it regarded as competing claims to the CD in its possession. The complaint named but did not otherwise assert causes of action against interpleader defendants JVW, First Equity, Waggoner and Kelleher, and alleged jurisdiction under 28 U.S.C. § 1335. The Waggoner Parties jointly answered and asserted a variety of claims against Kelleher, who, in turn, asserted claims against Waggoner for breach of fiduciary duty and breach of contract.

On September 28, 2000, the Waggoner Parties moved by order to show cause to assert claims against SSBT for conversion, aiding and abetting a conversion, breach of contract, and unjust enrichment, and sought to attach $3 million of funds belonging to SSBT. This Court confirmed the attachment by order of November 13, 2000, and a second amended order of attachment was entered on April 18, 2001, after which SSBT's funds were turned over to the United States Marshal. Thereafter, Kelleher asserted claims against SSBT for interference with economic advantage and indemnification. SSBT answered the claims asserted against it, and counterclaimed against Kelleher and the Waggoner Parties for contribution and indemnity.

On July 3, 2001, SSBT, by letter to the Court, raised the question whether the Court had subject matter jurisdiction. CSC was granted leave to file an amended complaint, which CSC did on August 20, 2001. In addition to reiterating the interpleader claim under 28 U.S.C. § 1335 first posed in its initial complaint, CSC added two additional counts: an interpleader claim under CPLR 1006(f) (Count Two) and a declaratory judgment claim under 28 U.S.C. § 2201 (Count Three). In Count Three, CSC repeats and reiterates its preceding allegations with respect to the first two counts, and further alleges:

37. There is an actual controversy pending as to the ownership of the CD which CSC has deposited into Court. Among other things, CSC has been threatened with claims by Kelleher in excess of ten million dollars ($10,000,000) in the event it transferred the CD to anyone but Kelleher or his designees.

38. CSC seeks a declaration pursuant to 28 U.S.C. § 2201 that CSC has no liability to Kelleher and that CSC, having acted in accordance with the terms of the CD and/or having deposited the CD with the Clerk of the Court, has no further liability to any party in connection with the CD or its role as custodian of the CD, that it is discharged from liability, and awarding CSC its costs and attorney's fees.

(Am. Compl. at 10-11.) In light of the allegations, CSC sought the following relief with regard to Count Three:

[A]n Order and Judgment of this Court pursuant to 28 U.S.C. § 2201 permitting and directing to [sic] CSC to deposit the subject CD with the Clerk of the Court; enjoining defendants from taking any action as against CSC; discharging CSC with prejudice; and reimbursing CSC for its costs and attorney's fees.

(Id. at 11.)

Two days later, on August 22, 2001, SSBT moved to dismiss CSC's original complaint on the grounds that subject matter jurisdiction was lacking because the CD had no value after its expiration on June 25, 1999 and, thus, had no value at the time CSC commenced this action on August 16, 1999. Thereafter, on or about October 21, 2001, CSC submitted a"Notice of Voluntary Dismissal of Amended Complaint," asserting that because CSC had received a complete release of all claims from Kelleher, it no longer faced competing claims to the CD and had no desire to continue with litigation.

On November 8, 2001, the Waggoner Parties commenced an action against SSBT in the Supreme Court of the State of New York, New York County (the"State Court Action"), and moved for an attachment over the same monies already attached in this action. On May 9, 2002, the Honorable Ira Gammerman granted the Waggoner Parties' motion for an order of attachment, setting forth that the attachment in the State Court Action constituted a continuation of the attachment in the action in this Court.

In May of 2002, this Court issued JVW V, dismissing CSC's interpleader action upon a grant of CSC's Rule 41(a)(2), Fed. R. Civ. P., motion for voluntary dismissal, determining that subject matter jurisdiction over CSC's interpleader claim was otherwise lacking as a result of the CD's"zero" value, declining to exercise supplemental jurisdiction over the remaining cross-claims among the Waggoner Parties, Kelleher and SSBT, vacating the attachment of SSBT's assets, and awarding attorney's fees to SSBT. See JVW V, 205 F. Supp. 2d at 205. The Waggoner Parties appealed, and on July 16, 2003, the Court of Appeals for the Second Circuit vacated JVW V, reasoning that in order to reach its ruling this Court appeared to have"implicitly determined that it had subject matter jurisdiction over the amended complaint at least as of the time of SSBT's motions" but concluding that the failure to articulate the basis for such jurisdiction or to determine whether the amended complaint related back to the original filing date required vacatur and remand. See Correspondent Services, 338 F.3d at 123.

Although the Court of Appeals determined that the failure to address subject matter jurisdiction under the amended complaint required vacatur of JVW V, it nonetheless expressed approval for various of the rulings reached therein. Specifically, the Court of Appeals noted its agreement with the conclusion reached in JVW V that statutory interpleader premised on 28 U.S.C. § 1335 provides no basis for jurisdiction. See Correspondent Services, 338 F.3d at 124. Explaining that"it is undisputed that CSC possessed only the physical CD, which had no value when CSC brought suit," the Court of Appeals observed that"statutory interpleader did not provide a basis for jurisdiction over this action." Id. The Court of Appeals also stated that interpleader under Rule 22, Fed. R. Civ. P., provides no basis for jurisdiction, as"CSC owned nothing of value to be interpleaded" and, accordingly, the action failed to meet the $75,000 amount-in-controversy requirement for diversity jurisdiction pursuant to 28 U.S.C. § 1332. Id. Further, the Court of Appeals rejected the Waggoner Parties' contentions that diversity jurisdiction existed on the basis of the state-law cross claims asserted by and between the Waggoner Parties and Kelleher. See id. at 124-25.

Vacatur of the decision below was required, according to the Court of Appeals, because in dismissing CSC's action in JVW V this Court did not address the Waggoner Parties' argument that jurisdiction is proper in this case under 28 U.S.C. § 1332 on the basis of the allegations in the declaratory judgment claim, Count Three of the amended complaint. See id. at 125. Noting that this Court"did not explicitly determine" whether CSC's declaratory judgment claim pursuant to 28 U.S.C. § 2201"supports diversity jurisdiction," the Second Circuit explained that"if both the assertion of jurisdiction under § 1332 and the declaratory judgment claim relate back to the commencement of the action, the amended complaint cures the jurisdictional defect, assuming for the moment that the amended complaint satisfies the requirements of § 1332." Id. Accordingly, the Second Circuit vacated CSC's dismissal and remanded for a determination of these issues.

The Court of Appeals also vacated the determination reached in JVW V that supplemental jurisdiction would not be exercised, and remanded for possible reconsideration in light of the fact that"the district court did not weigh the prejudice that JVW and Waggoner would suffer if they lost their attachment of SSBT's assets.... [as] the loss of [the Waggoner Parties'] pre bankruptcy attachment of SSBT's assets would destroy [their] preferential claim to a portion of SSBT's bankruptcy estate." Id. at 126-27. The Court of Appeals directed that,

If the district court determines that subject matter jurisdiction is proper over CSC's amended complaint and relates back to the commencement of the action, the district court should evaluate the extent to which losing the attachment prejudices JVW and Waggoner, and weigh this prejudice in its determination whether CSC's voluntary dismissal and the exercise of supplement jurisdiction are appropriate.

Id. at 127. Thus, in sum, as the Court of Appeals explained,

We vacate the dismissal and remand to the district court for the following proceedings: first, to clarify whether jurisdiction existed under CSC's amended complaint and, if it did, whether the allegations establishing jurisdiction related back to the original complaint; and second, if the allegations sufficient to establish jurisdiction relate back to the original complaint, to consider whether the prejudice to appellants flowing from the vacating of the attachment precludes ...

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