United States District Court, D. Arizona
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 ...