The opinion of the court was delivered by: Richard J. Holwell, District Judge
OPINION AND ORDER MEMORANDUM
Angelo Haligiannis was convicted of engineering a Ponzi scheme that defrauded investors of millions of dollars. Before sentencing, Haligiannis fled the country, leaving behind nothing but his house. In this parallel civil enforcement action, the Court directed JPMorgan Chase Bank to foreclose Haligiannis's house and deposit the surplus from the sale with the Court. Having given all interested parties an opportunity to present evidence and argument, this opinion resolves the claims to the surplus generated in the foreclosure sale. For the reasons set forth below, the Court finds that West End Equities, LLC, Marina District Development LLC, and Anthony Devito are entitled to be paid out of the foreclosure proceeds. A lien held by EMB Construction Corp., however, reflects a fraudulent transfer and will be avoided. Finally, liens held by the SEC take priority over a lien held by the remaining non-party claimant, the Internal Revenue Service.
A. The SEC's Civil Action Against Haligiannis
The facts of this case are set out at length elsewhere. See SEC v. Haligiannis, 470 F. Supp. 2d 373, 377-80 (S.D.N.Y. 2007); Drenis v. Haligiannis, 452 F. Supp. 2d 418, 422-24 (S.D.N.Y. 2006); see also Robert Kolker, Take the Hedge-Fund Money and Run, N.Y. Mag., Oct. 23, 2006, at 38.
Briefly, the case began when the Securities and Exchange Commission on August 11, 2004 filed a civil complaint against Angelo Haligiannis, Sterling Watters Group LP, Sterling Watters Capital Advisors, LLC, and Sterling Watters Capital Management, Inc. (collectively, "Sterling Watters"). (See Compl. (Aug. 11, 2004) ("SEC Compl.").) The SEC alleged that Haligiannis had convinced a number of individuals to invest at least $27 million in Sterling Watters, a hedge fund, by grossly misrepresenting the fund's performance. (Id. ¶ 1.) While Sterling Watters' books reflected tens of millions of dollars in equity, the fund was in fact penniless. (Id. ¶ 1.) The SEC sought (i) temporary and permanent injunctions freezing Haligiannis's assets; (ii) a judgment ordering Haligiannis to disgorge his ill-gotten gains; and (iii) civil penalties under § 20 of the Securities Act of 1933, 15 U.S.C. § 77a (2006) (the "Securities Act"), § 21(d)(3) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a (2006) (the "Exchange Act"), and § 209 of Investment Advisers Act of 1940, 15 U.S.C. § 80a-1 (2006) (the "Advisors Act"). (Id. at 16-17.)
Two weeks after the SEC filed its complaint, the Court entered a temporary injunction (the "asset freeze") freezing Haligiannis's assets. (See Prelim. Inj. and Order Freezing Assets and Granting Other Relief (Aug. 25, 2004).) The fourth section of the asset freeze prohibited anyone acting "in active concert or participation" with Haligiannis or Sterling Watters from dissipating or encumbering Haligiannis's assets:
"[P]ending a final disposition of this matter, each of the Defendants, and each of their financial and brokerage institutions, officers, agents, servants, employees, attorneys-in-fact, and those persons in active concert or participation with them who receive actual notice of such Order...
[shall] hold and retain within their control, and otherwise prevent, any withdrawal, transfer, pledge, encumbrance, assignment, dissipation, concealment or other disposal of any assets, funds, or other property.... (Id. § IV.)
The asset freeze's tenth section provided that "no creditor or claimant against any of the Defendants, or any person acting on behalf of such creditor or claimant, shall take any action to interfere with the taking control, possession, or management of the assets." (Id., § X.) Consistent with Federal Rule of Civil Procedure 65(d)(2), the asset freeze only applied to persons who "receive[d] actual notice of it by personal service or otherwise." It bound (i) the parties (i.e., Haligiannis and various Sterling Watters entities); (ii) their "officers, agents, servants, employees, and attorneys;" and (iii) "other persons who are in active concert or participation" with the parties, their officers, agents, servants, employees, and attorneys. Fed. R. Civ. P. 65(d)(2)(A)-(C). See New York v. Operation Rescue Int'l, 80 F.3d 64, 70 (2d Cir. 1996) ("Rule 65(d) codifies the well-established principle that, in exercising its equitable powers, a court 'cannot lawfully enjoin the world at large.'" (interpreting 1987 version of Rule 65).*fn1
Haligiannis was scheduled to be sentenced for securities fraud in a related criminal case on January 11, 2006. Instead of appearing, he fled the country. According to press reports, Haligiannis is now incarcerated in Greece, where he was discovered vacationing with his ex-wife, Liz Batalias. (See, e.g., Associated Press, Former Head of Hedge Fund Wanted in U.S. Arrested for 2nd Time in Greece, Sept. 20, 2007; Brad Hamilton, Hedge Fugitive Freed -- Feds Facing Herculean Extradition Task, N.Y. Post, Aug. 26, 2007, at 30; Sam Gustin & Paul Tharp, Trader on Lam -- Convicted Hedge Fund Fraudster Skips Bail, N.Y. Post, Jan. 14, 2006, at 23.)
A photograph that purportedly shows Angelo
Haligiannis, with ex-wife Liz Batalias, moments before he was arrested by Greek police. Source: nypost.com On January 16, 2007, the Court granted summary judgment to the SEC in its civil action, finding that all the defendants had violated §§ 10(b) and 17(a) of the Exchange Act (Haligiannis, 470 F.Supp.2d at 381), and that Haligiannis, Sterling Capital, and Sterling Advisors had violated §§ 206(1) and 206(2) of the Advisors Act (id. at 383). The Court permanently enjoined Haligiannis from committing future violations of the Exchange and Advisors Acts (see id. at 384); ordered Haligiannis to disgorge $15,635,862, plus interest calculated at the IRS underpayment rate (id. at 385); and imposed a civil penalty of $15,000,000 on Haligiannis (id. at 386). A final judgment was docketed on January 22, 2007. On March 5, 2007, the SEC recorded liens against Haligiannis's property in New York and Nassau counties. (See Exs. A & B to Decl. of Scott L. Black in Supp. of Pl.'s Mem. of Law with Respect to Disposition of Funds Held in Court Registry (Jan. 18, 2008).)
B. Proceedings Related to the Sale of Haligiannis's House
Shortly before granting summary judgment, the Court modified the asset freeze to allow JPMorgan Chase Bank ("Chase") to foreclose on Haligiannis's house, located at 166 Bayview Road, Manhasset, New York. (See Order Modifying Asset Freeze (Dec. 1, 2006).) As amended, the order directed that the proceeds from the sale be used to pay (i) a lien arising from the primary mortgage on Haligiannis's house, (ii) a lien arising from a home equity line of credit obtained by Haligiannis, and (iii) the fees, costs, and expenses of the state foreclosure proceeding. (See Order Modifying Order Dated Nov. 15, 2006 (Feb. 13, 2007).) The remaining surplus was to be paid to the Clerk of the United States District Court for the Southern District of New York. Chase did this on February 27, 2007.
By letter dated April 13, 2007, the SEC informed the Court that it had been contacted by a number of persons who claimed to be entitled to the surplus generated in the foreclosure sale. (See Letter from Scott Black to Hon. Richard J. Holwell, at 1 (Apr. 13, 2007).) In a subsequent report, the SEC informed the Court that a title search on ...