Wells Fargo Bank v. Wyo Tech Investment Group LLC

          ORDER

          Dominic W. Lanza United Slates District Judge

         INTRODUCTION

         Pending before the Court are (1) Wyo Tech Investment Group LLC's (“Wyo Tech”) “Motion To Dismiss/Motion For Judgment On The Pleadings” (Doc. 95); (2) Wyo Tech's “Emergency Motion To Enjoin CWT Parties From Attempts To Utilize New York Restraining Notices To Restrain Funds Of Nondebtors And Nondebtor Assets Located Outside Of New York And Motion To Amend Complaint” (Doc. 98); and (3) a discovery dispute concerning a subpoena issued by 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 Wyo Tech (Doc. 101).

         The Court held a telephonic hearing on the discovery dispute on February 27, 2019 (Doc. 103) and then requested supplemental briefing on three issues (Doc. 109), which the parties have provided (Docs. 113, 114). Afterward, on April 8, 2019, the Court held another round of oral argument.

         As explained below, the Court has now reached conclusions as to the three legal issues addressed in the supplemental briefing. Specifically, the Court concludes that (1) the Judgment Creditors complied with New York law when they issued the restraining notice to Wells Fargo, (2) the validity of the restraining notice is irrelevant now that the restrained funds have been interpleaded, and (3) the Judgment Creditors are entitled to conduct discovery in this interpleader action. Based on these conclusions, the Court will deny Wyo Tech's two pending motions and order Wilenchik and Beus Gilbert PLLC (“Beus Gilbert”) to comply with the subpoenas.

         BACKGROUND

         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) (“[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.”) (citation omitted); Cruz v. TD Bank, N.A., 2 N.E.3d 221, 230 (N.Y. 2013) (“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.'”) (quoting CPLR § 5222(a)).

         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 discovery 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 shouldn't be due until September 6, 2019. (Id. at 2-3.)

         On August 27, 2018, the Court issued its Rule 16 scheduling order. (Doc. 79.) In it, the Court approved the approach set forth in the parties' supplemental Rule 26(f) report, adopting the parties' proposed dates. (Id. at 2-4.)

         On October 9, 2018, the Judgment Creditors filed an opposition to Wyo Tech's motion for immediate release of funds. (Doc. 88.) Among other things, the Judgment Creditors argued that (1) they “are entitled to take discovery, pursuant to the Court's scheduling order, before the funds are summarily released” and (2) Wyo Tech's request for an immediate ruling was inconsistent with “its counsel['s] previous[] stipulat[ion] to an extensive discovery schedule.” (Doc. 88 at 13-15 & n.3.)

         On October 31, 2018, this case was reassigned to the currently-assigned judge. (Doc. 93.)

         On December 19, 2018, the Court issued an order resolving several pending matters, including Wyo Tech's motion for immediate release of funds. (Doc. 94.) The Court concluded the motion was “premature, because the discovery deadline is over eight months away, ” and thus held that “Wyo Tech may refile a summary judgment motion in compliance with the Local Rules after the parties have had the opportunity to conduct discovery.” (Doc. 94 at 12-13.)

         ANALYSIS

         I. Issues from Supplemental Briefs

         A. Did The Judgment Creditors Comply With CPLR § 5222(b) When They Issued The Restraining Notice To Wells Fargo In October 2017?

         According to Wyo Tech, the restraining notice is invalid because there is a “clear rule of law” establishing “that a court must have previously determined that an entity is the ‘alter ego' of [a] judgment debtor prior to a restraining notice being validly issued.” (Doc. 113 at 3.) However, Wyo Tech cites only one case-JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. & Trade Servs., Inc., 295 F.Supp.2d 366 (S.D.N.Y. 2003)-in support of its position.

         The Judgment Creditors, on the other hand, dispute that a prior finding of alter ego status is required before a restraining notice may be issued and cite several cases in support of their position. (Doc. 114 at 1-5.)

         In JSC, a court in the Southern District of New York held that third parties' “assets may not be restrained pursuant to § 5222 until their alleged alter ego status has been adjudicated and their liability for the previous judgment determined.” 295 F.Supp.2d at 393. The court held that New York state cases “support the proposition that a judgment creditor may restrain the assets of a judgment debtor wherever those assets may be” but “do not support the proposition that the assets of third parties may be restrained in ...