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NESHEWAT v. SALEM

April 8, 2005.

MICHAEL NESHEWAT, Plaintiff,
v.
MAURICE J. SALEM f/k/a MAURICE J. NESHEWAT and CLODIA A. SALEM, Defendants.



The opinion of the court was delivered by: WILLIAM CONNER, Senior District Judge

OPINION AND ORDER

Plaintiff Michael Neshewat commenced this action against defendants Maurice J. Salem ("Salem" or the "defendant") and his wife Clodia Salem (collectively, the "defendants") seeking to set aside: (1) the conveyance by Salem (f/k/a Maurice J. Neshewat) of residential property at 7 Gellatly Drive in Wappingers Falls, New York to himself and Clodia Salem, on May 20, 1999; and (2) Salem's conveyance of a 1989 Model 300 Mercedes Benz to Clodia Salem.*fn1 In addition, plaintiff seeks attorney's fees pursuant to section 276-a of the New York State Debtor and Creditor Law. In the present motion, plaintiff moves for summary judgment pursuant to FED. R. CIV. P. 56 on the fraudulent conveyance claims and for dismissal of defendant's counterclaim*fn2 against plaintiff for failure to state a claim upon which relief may be granted and on the basis of res judicata, collateral estoppel and the statute of limitations. In addition, plaintiff seeks monetary sanctions for frivolous conduct and an injunction to prevent defendants from commencing any further actions against plaintiff or his counsel, Paul J. Goldstein and Goldstein & Metzger, LLP. Defendant cross-moves to amend his counterclaim to: (1) plead specific facts underlying the claim based on N.Y.C.P.L.R. § 5015(a)(3); (2) include a claim of common law fraud on the court; and (3) include opposing counsel, Paul J. Goldstein, as a third-party defendant pursuant to N.Y.C.P.L.R. § 1007.

  Additionally, the parties seek the Court's assistance with respect to: (1) plaintiff's service of a "Restraining Notice to Garnishee" on a temporary tenant of the subject house, seeking to prevent or suspend rental payments to the owners of the house;*fn3 and (2) the impending April 13, 2005 Sheriff's sale of the premises. Defendant maintains that, as a matter of law, plaintiff cannot restrain the tenant from paying rent under N.Y.C.P.L.R. § 5222(b) and moves for an order quashing the restraining notice. In addition, Paragon Associates of New York, Inc. ("Paragon"), a nonparty adverse claimant, moves, pursuant to FED. R. CIV. P. 24(a)(2) and N.Y.C.P.L.R. §§ 5239 and 5227, for an order allowing it to intervene in this proceeding to determine its rights to the property.*fn4

  For the reasons stated hereinafter, plaintiff's motion for summary judgment is granted with respect to setting aside the fraudulent conveyances, but denied with respect to the imposition of attorney's fees. Plaintiff's motion to dismiss defendant's counterclaim is also granted, and defendant's motion to amend the counterclaim is denied.

  Additionally, Paragon's motion to intervene is denied. Defendant's motion to quash plaintiff's "Restraining Notice to Garnishee" and plaintiff's cross-motion seeking an order that the rental payments generated from the 7 Gellatly Drive property be turned over to plaintiff are both granted in part and denied in part. In addition, defendant's motion seeking to maintain the status quo and stay the scheduled Sheriff's sale is denied. Lastly, plaintiff's motion for sanctions and injunctive relief is granted with respect to enjoining Salem from commencing further litigation in connection with the default judgment entered against him in New York State Supreme Court. BACKGROUND

  This lawsuit is one of many between the two brothers Salem and Neshewat. In 1996, Neshewat filed an action in New York State Court against Salem for malicious prosecution, abuse of process, defamation, libel and slander. (Pl. Mem. Supp. Summ. J. at 4.) A default judgment was entered against Salem. After a damages inquest, the state court awarded damages in the amount of $166,884.86 and a judgment was entered for that amount in the Dutchess County Clerk's Office on June 16, 1999. (Id.)

  On April 12, 1999, defendant commenced an action in the United States District Court for the Southern District of New York, against plaintiff Michael Neshewat; his attorney, Paul J. Goldstein; Judge Pagones, who conducted the inquest; and various other officials. (Id. at 5.) Defendant's lawsuit, inter alia, challenged Judge Pagones's authority to enter the default judgment against defendant, alleging that the judgment was entered based on false and fraudulent statements made to Judge Bernhard. (Id.) In a previous decision by this Court, that action was dismissed and the dismissal was affirmed by the Second Circuit. Salem v. Paroli, 260 B.R. 246 (S.D.N.Y. 2001) (Conner, J.); Salem v. Paroli, 79 Fed. Appx. 455 (2d Cir. 2003).

  Salem filed for bankruptcy in 2000 and later that year Neshewat commenced an adversary proceeding in bankruptcy court seeking a determination that the judgment against Salem was a non-dischargeable debt. (Id. at 6.) The bankruptcy court conducted a trial and found that Neshewat had proven by a preponderance of the evidence that Salem caused willful and malicious injury to him, and therefore concluded that the debt was non-dischargeable. See In re Salem, 290 B.R. 479 (S.D.N.Y. 2003) (Conner, J.). Salem then appealed to this Court, which had jurisdiction pursuant to 28 U.S.C. § 158. In an Opinion and Order dated March 5, 2003, we affirmed the bankruptcy court's determination that Salem's debt was non-dischargeable. Id. This decision was affirmed by the Second Circuit Court of Appeals. In re Salem, 94 Fed. Appx. 24 (2d Cir. 2004).

  With the intention of enforcing his right as a judgment creditor, plaintiff commenced the instant action in the Supreme Court of the State of New York, County of Dutchess, on November 20, 2002, seeking to set aside two conveyances made by Salem. (Pl. Mem. Supp. Summ. J. at 1.) Plaintiff alleges that defendant fraudulently conveyed his interest in the real property at 7 Gellatly Drive to himself and his wife on May 20, 1999 and fraudulently conveyed a 1989 Model 300 Mercedes Benz, which was in his name alone, to his wife on July 23, 1999. (Id. at 7.) According to plaintiff, the conveyance of the real property "was done immediately after Justice Pagones had rendered his decision and order on May 7, 1999, granting judgment in the sum of $131,622.91, and before the actual judgment, which with costs, disbursements and interest, totaled $166,884.86, was entered on June 16, 1999, in the Dutchess County Clerk's Office." (Id.) Plaintiff seeks to "set aside the conveyances to Salem's wife and return them to their pre-conveyance status; that is, ownership in Salem's name, so that the judgment can be enforced directly against him." (Id. at 8.)

  Defendants removed this action to federal court on December 12, 2002 and also served a Verified Answer and counterclaim. (Id. at 2.) The counterclaim seeks to set aside the $166,884.86 default judgment entered against defendant, which is the judgment plaintiff is now seeking to enforce in the present fraudulent conveyance action. Defendant maintains that the default judgment entered on November 6, 1996 by Judge George G. Bernhard, Acting Justice of the Supreme Court, County of Dutchess, was entered because of false and fraudulent statements made by plaintiff and plaintiff's counsel. (Id.)

  This action was placed on the suspense calendar by this Court on November 24, 2003 because each defendant, individually, had filed bankruptcy petitions in Illinois. (Id.) The bankruptcy matters having been resolved, this Court reinstated the action and removed it from the suspense docket on December 15, 2004. Shortly thereafter, the present motions were filed.

  DISCUSSION

  I. Motion to Dismiss Counterclaim

  We will address the issues surrounding defendant's counterclaim first because our determination with respect to the counterclaim has a direct bearing on the analysis of plaintiff's claims and requests for relief from the Court.

  A. Motion to Dismiss Standard

  On a motion to dismiss pursuant to Rule 12(b)(6), the issue is "whether the claimant is entitled to offer evidence to support the claims." See Scheuer v. Rhodes, 416 U.S. 232, 236 (1974), overruled on other grounds; Davis v. Scherer, 468 U.S. 183 (1984). A counterclaim should not be dismissed for failure to state a claim "unless it appears beyond doubt that the [claimant] can prove no set of facts in support of his claim which would entitle him to relief." Padavan v. United States, 82 F.3d 23, 26 (2d Cir. 1996) (quoting Hughes v. Rowe, 449 U.S. 5, 10 (1980)). All well-pleaded factual allegations will be accepted as true and all reasonable inferences must be drawn in favor of the claimant. See Wright v. Ernst & Young LLP, 152 F.3d 169 (2d Cir. 1998); In re AES Corp. Secs. Litig., 825 F. Supp. 578, 583 (S.D.N.Y. 1993). However, "[c]onclusory allegations or legal conclusions masquerading as factual conclusions will not suffice to prevent a motion to dismiss." 2 JAMES WM. MOORE ET AL., MOORE'S FEDERAL PRACTICE § 12.34[1][b] (3d ed. 1997); see also Hirsch v. Arthur Anderson & Co., 72 F.3d 1085, 1088 (2d Cir. 1995). Allegations that are so conclusory that they fail to give notice of the basic events and circumstances on which plaintiff relies, are insufficient as a matter of law. See Martin v. New York State Dep't of Mental Hygiene, 588 F.2d 371, 372 (2d Cir. 1978).

  B. Defendant's Counterclaim

  Defendant filed a counterclaim in the instant action pursuant to N.Y.C.P.L.R. § 5015(a)(3) & (d) seeking vacatur of the default judgment entered against him in New York State Supreme Court and restitution. (Defs. Affm. #2 ¶ 2.) The counterclaim alleges that the default judgment was obtained by fraud and other misconduct on the part of plaintiff. (Id.) In addition, defendant moves to amend his counterclaim to: (1) plead specific facts supporting the claim under C.P.L.R § 5015(a)(3); (2) include a claim of common law fraud on the court; and (3) add opposing counsel, Paul J. Goldstein, as a third-party defendant pursuant to C.P.L.R. § 1007. (Id.)

  1. Motion to Amend Counterclaim

  Where, as here, a responsive pleading has been filed, Rule 15(a) allows a party to amend its pleading "only by leave of court or by written consent of the adverse party." However the rule mandates that "leave shall be freely given when justice so requires." FED. R. CIV. P. 15(a). Accordingly, the Supreme Court has ruled that "[i]n the absence of any apparent or declared reason — such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by virtue of allowance of the amendment, futility of amendment, etc. — the leave sought should . . . be freely given." Foman v. Davis, 371 U.S. 178, 182 (1962).

  The Second Circuit and this Court have interpreted the Foman standard to allow amendments, even if there was substantial delay in seeking the same, unless the movant has acted in bad faith, the amendment will prejudice the nonmovant, or the amendment is futile. See Richardson Greenshields Sec., Inc. v. Lau, 825 F.2d 647, 653 n. 6 (2d Cir. 1987) (noting that a motion to amend should be denied only for undue delay, bad faith, futility or prejudice to opposing party; mere delay alone, absent a showing of bad faith or prejudice, is not grounds for denial of leave to amend) (citations omitted); Posadas de Mexico, S.A. de C.V. v. Dukes, 757 F. Supp. 297, 300 (S.D.N.Y. 1991) (Conner, J.) (recognizing that leave to amend should be given unless the motion for leave is the product of bad faith or dilatory motive, or amendment will prejudice adversary or be futile). "In this Circuit, an amendment is considered futile if the amended pleading fails to state a claim, or would be subject to a motion to dismiss on some other basis." Tri-State Judicial Servs., Inc., v. Markowitz, 624 F. Supp. 925, 926 (E.D.N.Y. 1985) (internal citations omitted). In evaluating futility, all well-pleaded allegations are accepted as true, and all inferences are drawn in favor of the pleader. See Savitsky v. Mazzella, No. 98 Civ. 9051, 2004 WL 2454120, at *3 (S.D.N.Y. Nov. 1, 2004) (citing Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir. 1993)). The decision of whether to grant leave to amend is within the sound discretion of the district court. Foman, 371 U.S. at 182.

  In the present case, we deny defendant's motion for leave to amend the counterclaim because the proposed amendments would be futile. See Ellis v. Chao, 336 F.3d 114, 126 (2d Cir. 2003) ("[I]t is well established that leave to amend a complaint need not be granted when amendment would be futile."). Even if we were to grant leave, defendant's proposed amendments would be dismissed for the same reasons as the counterclaim, as discussed infra. Furthermore, the proposed amendments would not alter this Court's conclusion that the counterclaim is barred by the doctrine of res judicata.

  C. Dismissal of Counterclaim — Res Judicata

  The doctrine of res judicata, or claim preclusion, "prevents a party from suing on a claim which has been previously litigated to a final judgment by that party . . . and precludes the assertion by such parties of any legal theory, cause of action, or defense which could have been asserted in that action." MOORE'S FEDERAL PRACTICE § 131.10[1][a] (3d ed. 2003); see also Waldman v. Vill. of Kiryas Joel, 207 F.3d 105, 108 (2d Cir. 2000). The doctrine was created to address the fundamental need of any judicial system for finality; "a claim . . . which parties had a full and fair opportunity to litigate should, after judgment, forever be put to rest as between those parties." MOORE'S FEDERAL PRACTICE § 131.12[1] (citing Montana v. United States, 440 U.S. 147, 153 (1979)). Whether the prior judgment was decided correctly is not relevant when determining whether the doctrine of res judicata bars the suit. See Nemaizer v. Baker, 793 F.2d 58, 64-66 (2d Cir. 1986); Lacy v. Principi, 317 F. Supp. 2d 444, 448 (S.D.N.Y. 2004) (Conner, J.).

  Under New York law, a final judgment on the merits must be recognized as res judicata to prevent a party from asserting claims that have been, or could have been, litigated in a prior action based upon the same facts. See Smith v. Russell Sage College, 54 N.Y.2d 185, 192-93, 429 N.E.2d 746, 445 N.Y.S.2d 68 (1981). New York applies a "transactional approach" and the doctrine of res judicata bars all claims based on the same facts notwithstanding variance of legal theory or requested relief. Id. Courts consider whether the party seeking dismissal has shown that: "(1) the previous action involved an adjudication on the merits; (2) the previous action involved the plaintiffs [or claimants] or those in privity with them; [and] (3) the claims asserted in the subsequent action were, or could have been, raised in the prior action." See Monahan v. N.Y. City Dep't of Corr., 214 F.3d 275, 285 (2d Cir. 2000).

  It is clear that defendant's counterclaim is barred by res judicata. Defendant previously brought an action against plaintiff, Salem v. Paroli Jr., Pagones, Goldstein & Neshewat., No. 99 Civ. 2620 (WCC), No. 00 Civ. 5974 (WCC). In that case, defendant asked the Court to overturn the state court $166,884.86 default judgment entered against him. See Salem, 260 B.R. at 254.*fn5 This is exactly the relief defendant is seeking in the present case, based on the same set of facts. Changing the legal theory upon which the request for relief is based does not bar the applicability of res judicata. Furthermore, the previous action involved an adjudication on the merits, involved both parties involved in the present action, and the claims asserted in this action were or could have been asserted in the prior action.

  In addition, although defendant maintains that res judicata is not applicable in an action based on fraud, defendant offers no authority to support this proposition and we are aware of none. (Defs. Mem. Opp. Summ. J. at 4.) Defendant does, however, correctly point out that "under the doctrine of res judicata, an existing final judgment rendered on the merits, without fraud or collusion, by a court of competent jurisdiction, is conclusive of the causes of action litigated and all which could have been litigated." (Id. (emphasis in original).) However, defendant fails to recognize that his counterclaim is not barred by res judicata based on the default judgment that he alleges was obtained through fraud, but rather on the basis of the lawsuit he had previously brought seeking vacatur of the default judgment, Salem v. Paroli, 260 B.R. 246 (S.D.N.Y. 2001), aff'd, 79 Fed. Appx. 455 (2d Cir. 2003). In that prior lawsuit between the same parties, defendant sought vacatur of the default judgment entered against him in New York State Supreme Court on the ground of fraud. This Court entered a judgment dismissing that action and the judgment was affirmed by the Second Circuit. In the present counterclaim, defendant seeks identical relief on identical grounds, however differently he has attempted to frame the issue. Consequently, defendant's counterclaim is dismissed on the basis that it is barred by res judicata.

  Moreover, defendant seeks relief pursuant to N.Y.C.P.L.R. § 5015; however, the statute explicitly provides that "[t]he court which rendered a judgment or order may relieve a party from it upon such terms as may be just, on motion of any interested person with such notice as the court may direct, upon the ground of: . . . (3) fraud, misrepresentation, or other misconduct of an adverse party; or (4) lack of jurisdiction to render the judgment or order. . . ." N.Y.C.P.L.R. § 5015 (emphasis added). This Court is not the court which rendered the judgment defendant now seeks to have vacated. We cannot vacate the default judgment entered against defendant in New York State Court on the basis of N.Y.C.P.L.R. § 5015; such relief may be granted only by the court that entered the judgment. See Brenner v. Arterial Plaza Inc., 29 A.D.2d 815, 287 N.Y.S.2d 308 (3d Dep't 1968); Voccola v. Shilling, 88 Misc. 2d 103, 388 N.Y.S.2d 71 (N.Y. Sup. Ct. 1976); Lintern v. Lintern, 58 Misc. 2d 335, 296 N.Y.S.2d 5 (N.Y. Co. Ct. 1968).

  Because defendant's counterclaim is dismissed in its entirety on the basis of res judicata, we need not address plaintiff's other arguments for dismissal of the counterclaim. II. Summary Judgment

  A. Summary Judgment Standard

  Under FED. R. CIV. P. 56, summary judgment may be granted where there are no genuine issues of material fact and the movant is entitled to judgment as a matter of law. See FED. R. CIV. P. 56(c); Anderson v. Liberty Lobby, 477 U.S. 242, 247-50 (1986). A fact is material only if, based on that fact, a reasonable jury could find in favor of the non-moving party. Anderson, 477 U.S. at 248. The burden rests on the movant to demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). In deciding whether summary judgment is appropriate, the court resolves all ambiguities and draws all permissible factual inferences against the movant. See Anderson, 477 U.S. at 255. To defeat summary judgment, the nonmovant must go beyond the pleadings and "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). The court's role at this stage of the litigation is not to decide issues of material fact, but to discern whether any exist. See Gallo v. Prudential Residential Servs., L.P., 22 F.3d 1219, 1224 (2d Cir. 1994).

  B. Fraudulent Conveyances

  Plaintiff moves for summary judgment with respect to his claim that defendant Salem fraudulently conveyed: (1) his house at 7 Gellatly Drive to himself and his wife; and (2) a 1989 Mercedes to his wife, to prevent collection of the default judgment entered against him in New York State Supreme Court and on his request for voiding of those conveyances pursuant to N.Y. DEBT. & CRED. LAW § 273-a. Plaintiff contends that there are no genuine issues as to any material fact so that summary judgment is appropriate. (Pl. Mem. Supp. Summ. J. at 15.) Defendant, however, contends that plaintiff's fraudulent conveyance claim is "moot" as it was decided in the Chapter 7 bankruptcy proceeding in Illinois and also that plaintiff's claim is not "ripe" because defendant never opposed any efforts to enforce the default judgment on the grounds that the property was in his name and his wife's name.*fn6 (Defs. Mem. Opp. Summ. J. at 8-10.) In the alternative, defendants maintain that there are genuine issues of material fact as to whether defendant Salem committed fraud by conveying the assets. (Id. at 10.)

  Section 273-a of the New York Debtor and Creditor Law provides:
Every conveyance made without fair consideration when the person making it is a defendant in an action for money damages or a judgment in such an action has been docketed against him, is fraudulent as to the plaintiff in that action without regard to the actual intent of the defendant if, after final judgment for the plaintiff, the defendant fails to satisfy the judgment.
"The purpose of 273-a is to provide a remedy for a creditor who has brought an action for money damages against a party who, after being named a defendant in that action, conveys assets to a third party for less than fair consideration leaving the ultimate judgment unpaid." Cadle Co. v. Newhouse, No. 01 Civ. 1777, 2002 WL 1888716, at *8 (S.D.N.Y. Aug. 16, 2002) (quoting Sklaroff v. Rosenberg, 125 F. Supp. 2d 67, 74 (S.D.N.Y. 2000)). To prevail on a § 273-a fraudulent conveyance claim, plaintiff must establish three elements: (1) the conveyance was made without fair consideration; (2) at the time of transfer, the transferor was a defendant in an action for money damages or a judgment in such action had been ...

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