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Wells Fargo Bank NA v. Wyo Tech Investment Group LLC

United States District Court, D. Arizona

March 5, 2019

Wells Fargo Bank NA, Plaintiff,
Wyo Tech Investment Group LLC, et al., Defendants.


          Dominic W. Lanza, United Slates District Judge


         Pending before the Court is a discovery dispute concerning a subpoena served by interpleader defendants CWT Canada II Limited Partnership, Resource Recovery Corporation, and Jean Noelting (collectively, the “Judgment Creditors”) on third-party Wilenchik & Bartness, P.C. (“Wilenchik”), counsel for interpleader defendant Wyo Tech Investment Group LLC (“Wyo Tech”). (Doc. 101.)[1] The Court held a telephonic hearing on February 27, 2019. Although the Court initially hoped to rule on the discovery dispute promptly, the Court has concluded, after further consideration, that the issues presented by this dispute are intertwined with broader unresolved issues in the case. Accordingly, the Court will order the parties to file supplemental briefing.


         I. The Judgment Creditors Obtain A $7 Million Judgment Against Danzik, Then Utilize A “Restraining Notice” To Freeze Wyo Tech's Bank Account

         In 2016, the Judgment Creditors obtained a $7, 033, 491.13 judgment against Dennis Danzik and one of Danzik's companies, RDX Technologies Corporation (collectively, “Judgment Debtors”), in New York state court. During that litigation, the New York court also held Danzik in civil and criminal contempt, concluding that Danzik is the “epitome of a recalcitrant, contemptuous, and incorrigible litigant” who “lie[d], ” “deliberately did not disclose” relevant records, “coerced” a witness into “submitting false affidavits, ” and “perjured himself before a Canadian bankruptcy court.” (Doc. 89-3 at 9-10, 12, 13.)

         In October 2017, the Judgment Creditors' attorneys attempted to collect on the outstanding judgment by freezing a particular bank account at Wells Fargo bank. Notably, this account wasn't held in the name of either of the Judgment Debtors-it was held in the name of Wyo Tech, an LLC doing business in Arizona.

         To freeze this bank account, the Judgment Creditors' attorneys utilized a procedural tool known as a “restraining notice, ” which is governed by section 5222 of the New York Civil Practice Law and Rules (“CPLR”). That statute provides, in relevant part, that “[a] restraining notice may be issued by . . . the attorney for the judgment creditor as officer of the court” and that it is permissible to serve a restraining notice “upon a person other than the judgment debtor or obligor” so long as the issuing attorney “has stated in the notice that . . . the judgment debtor or obligor has an interest in specified property in the possession or custody of the person served.” Id. § 5222(a), (b). In other words, CPLR § 5222 allows a judgment creditor to freeze a bank account held by a third party based solely on an assertion by the judgment creditor's attorney that the judgment debtor holds an interest in the account-there is no requirement that the judgment creditor establish this interest to a judge before the restraining notice may issue. See generally Global Tech., Inc. v. Royal Bank of Canada, 2012 WL 89823, *12 n.9 (N.Y. Sup. Ct. 2012) (citation omitted) (“[A] party that seeks a restraining notice need only engage an attorney, who is authorized to issue a restraining notice as an officer of the court. The Court has no involvement with the issue of whether service of the restraining notice upon the garnishee comports with due process until the garnishee challenges the restraining notice, or until the judgment debtor seeks an order of contempt or a money judgment against the garnishee.”); Cruz v. TD Bank, N.A., 2 N.E.3d 61, 76 (N.Y. 2013) (quoting CPLR § 5222(a)) (“When a judgment creditor has properly imposed a restraint on a bank account, the bank has no choice but to freeze the assets. Whether issued by a court or an attorney acting as an officer of the court, a restraining notice is an injunction and ‘disobedience is punishable as a contempt of court.'”).

         After being served with the restraining notice, Wells Fargo froze Wyo Tech's account, which held $546, 282.55. When Wyo Tech learned its account had been frozen, it immediately complained to the Judgment Creditors and to Wells Fargo, disputed whether the Judgment Debtors held any interest in the account, and threatened to sue. In response, Wells Fargo filed an interpleader action in this Court.

         II. The Arguments and Rulings Concerning Whether the Judgment Creditors Should Be Allowed to Conduct Discovery in the Interpleader Action

         At the outset of this case, the Judgment Creditors and Wyo Tech presented sharply different views about how the litigation should proceed. In the parties' initial Rule 26(f) report, which was filed in July 2018, the Judgment Creditors argued they should be allowed to conduct “discovery . . . to determine who has an interest in the funds at issue, who owns Wyo Tech, how Wyo Tech gets its money, why it paid hundreds of thousands of dollars to Danzik's company, wife, daughter, and cronies, why Danzik's wife and daughter had control of Wyo Tech's funds, and why Wyo Tech has paid thousands of dollars of Danzik's legal fees, among other things.” (Doc. 62 at 11.) Wyo Tech, in contrast, argued that the Judgment Creditors shouldn't be allowed to conduct any discovery and that the Court should immediately decide who was entitled to the interpleaded funds. (Doc. 62 at 13 [“Wyo Tech . . . believes that discovery in this case should be deferred until such time as the Court rules on the motion for summary judgment Wyo Tech intends to file within 30 days after the . . . Scheduling Conference. ”].)

         On July 24, 2018, the Court held a Rule 16 scheduling conference. (Doc. 63.) During this conference, the Court noted Wyo Tech's preference to postpone discovery until the Court had decided certain motions but ordered the parties to provide proposed dates in a new filing.

         On August 16, 2018, Wyo Tech filed a motion entitled “Motion for Immediate Release of Wrongly Restrained Funds.” (Doc. 72.) In this motion, Wyo Tech argued, among other things, that “Wyo Tech anticipates that Judgment Creditors and their Counsel will attempt to delay a ruling on this Motion by claiming that they need to conduct ‘additional' discovery. Any such request should be denied . . . [because] Judgment Creditors and their Counsel[']s defense of their actions must be done based on the evidence they claim to have had in their possession at the time they issued the wrongful restraining notice . . . .” (Doc. 72 at 4 n.1, emphasis omitted.)

         On August 20, 2018, the parties filed a supplemental Rule 26(f) report. (Doc. 75.) It stated that the parties should have until August 9, 2019, to complete discovery and that dispositive motions ...

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