Opinion
99 Civ. 10984 (JGK)
September 4, 2000.
Jeffrey Rubin, Esq., Valerie Amsterdam, Esq., Amsterdam Branden, New York, NY., Attorney[s] for Plaintiff[s].
John M. Hadlock, Esq., Whitman Breed Abbott Morgan, New York, NY., Attorney[s] for Defendant[s].
OPINION AND ORDER
Invoking the Court's diversity jurisdiction under 28 U.S.C. § 1332, the plaintiff, Israel Halpern ("Halpern"), has asserted four causes of action, each of which relates directly or indirectly to the conduct of defendant Leonard A. Wilf ("Wilf") as the court-appointed receiver of the plaintiff's interests in various partnerships. Mr. Wilf and the other defendants now move pursuant to Fed.R.Civ. p. 12(b) to dismiss the Complaint or, in the alternative, to stay the action. The defendants also move pursuant to Fed.R.Civ. p. 11 for the imposition of sanctions. For the reasons discussed below, the defendants' motion to dismiss is granted while the defendants' motion for sanctions is denied.
I.
On a motion to dismiss, the allegations in the complaint are accepted as true. See Cohen v. Koenig, 25 F.3d 1168, 1172-73 (2d Cir. 1994). In deciding a motion to dismiss, all reasonable inferences must be drawn in the plaintiff's favor. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir. 1995); Cosmas v. Hasset, 886 F.2d 8, 11 (2d Cir. 1989). The court's function on a motion to dismiss is "not to weigh the evidence that might be presented at trial but merely to determine whether the complaint itself is legally sufficient." Goldman v. Belden, 754 F.2d 1059, 1067 (2d Cir. 1985). Therefore, the defendant's motion should only be granted if it appears that the plaintiff can prove no set of facts in support of his claim that would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Valmonte v. Bane, 18 F.3d 992, 998 (2d Cir. 1994); see also Goldman, 754 F.2d at 1065.
Where, as here, the Court's jurisdiction is challenged, the Court must consider all available evidence that bears on the issue. See LeBlanc v. Cleveland, 198 F.3d 353, 356 (2d Cir. 1999) ("Where jurisdictional facts are placed in dispute, the court has the power and obligation to decide issues of fact by reference to evidence outside the pleadings, such as affidavits."); Antares Aircraft, L.P. v. Federal Republic of Nigeria, 948 F.2d 90, 96 (2d Cir. 1991), vacated on other grounds, 505 U.S. 1215 (1992).
II. A.
The present action has a long and involved history. Only so much of that history will be recounted as is necessary to decide the current motion. The plaintiff, Mr. Halpern, held a twenty-five percent interest in two partnerships: WHW Associates ("WHW") and J. Hill Associates ("J. Hill"). Mr. Halpern was also a partner in Walwilhal Associates ("Walwilhal"). On or about June 26, 1992, Mr. Wilf and others commenced an action (the "Prior Action") against Mr. Halpern in New York Supreme Court, New York County. The plaintiffs in that action, who are defendants here, obtained a default judgment against Mr. Halpern in the amount of $5,743,686.04. See Complaint ¶¶ 22, 24, 26, 27, 45, 47.
On or about August 28, 1996, Justice Beatrice Shainswit of the New York State Supreme Court entered an order in which (i) Mr. Halpern's interest in J. Hill was charged with the payment of the unsatisfied judgment in the Prior Action and (ii) Mr. Wilf was appointed receiver of Mr. Halpern's interest in J. Hill. See id. ¶ 49. On or about February 25, 1997, Mr. Wilf, acting as receiver, sold Mr. Halpern's partnership interest in J. Hill in an attempt to satisfy the judgment in the Prior Action. According to the allegations in the Complaint, made upon information and belief, Mr. Wilf personally purchased Mr. Halpern's interest in J. Hill for $1,000,000, an amount that Mr. Wilf allegedly knew to be less than the actual value of Mr. Halpern's interest. See id. ¶¶ 51-52.
On or about November 13, 1997, Justice Shainswit entered an order in which (i) Mr. Halpern's interest in WHW was charged with the payment of the unsatisfied judgment in the Prior Action and (ii) Mr. Wilf was appointed receiver of Mr. Halpern's interest in WHW. See id. ¶ 28. On or about December 14, 1998, Mr. Wilf, acting as receiver, sold Mr. Halpern's partnership interest in WHW in an attempt to satisfy the judgment in the Prior Action. According to the allegations in the Complaint, made upon information and belief, Mr. Wilf personally purchased Mr. Halpern's interest in WHW for $2,500,000, an amount that Mr. Wilf allegedly knew to be less than the actual value of Mr. Halpern's interest. See id. ¶¶ 30-31.
The first and third causes of action allege that Mr. Wilf, as receiver of Mr. Halpern's partnership interests in WHW and J. Hill, "had an affirmative fiduciary duty to realize the largest possible amount of money" from the sale of those partnership interests. See id. ¶¶ 29, 50. The Complaint also alleges that Mr. Wilf, "in his capacity as receiver, deliberately, knowingly, negligently and fraudulently conducted the execution sale" of Mr. Halpern's partnership interests in WHW and J. Hill. See id. ¶¶ 38, 57. The first and third causes of action further allege that Mr. Wilf "breached his fiduciary, statutory and other common law duties as the receiver" of those interests. Id. ¶¶ 39, 58. The second and fourth causes of action allege that the defendants other than Mr. Wilf acting in his capacity as receiver "knowingly joined" with Mr. Wilf in the conduct complained of in the first and third causes of action. See id. ¶¶ 42, 61.
B.
In the course of the Prior Action, Justice Shainswit issued several opinions and orders that are relevant to the current motion.
In an order dated July 2, 1996, Justice Shainswit rejected a challenge by Mr. Halpern to Mr. Wilf's appointment as receiver of Mr. Halpern's partnership interest in J. Hill. Noting that N.Y.C.P.L.R. § 5228 "specifically allows the appointment of a judgment creditor as receiver of a judgment debtor's assets," Justice Shainswit held that Mr. Halpern had "not demonstrated any conflict of interest" and that the interests of all parties would be served by Mr. Wilf acting as receiver of Mr. Halpern's interest in J. Hill. Wilf v. Halpern, No. 17195/92, Order (N.Y.Sup.Ct. July 2, 1996), attached as Ex. 17 to Affirmation of John M. Hadlock, dated February 4, 2000 ("Hadlock Aff."). In an order dated August 26, 1996, Justice Shainswit appointed Mr. Wilf receiver of Mr. Halpern's partnership interest in J. Hill, empowered Mr. Wilf to "conduct one or more public or private execution sales" of that interest, and expressly provided that "the Judgment Creditors," whose ranks include Mr. Wilf, "may bid in all or a portion of the unsatisfied Judgment amount at any such sale or sales." Wilf v. Halpern, No. 17195/92, Order, at 3-4 (N.Y.Sup.Ct. Aug. 26, 1996), attached as Ex. 19 to Hadlock Aff. Then, in an opinion dated February 5, 1998, Justice Shainswit rejected Mr. Halpern's claim that the February 28, 1997 sale of his interest in J. Hill was conducted in an unfair or commercially unreasonable manner. Justice Shainswit held that Mr. Halpern had fallen "far short of the showing necessary" for the court to undo the sale. Wilf v. Halpern, No. 17195/92, Opinion, at 2 (N.Y.Sup.Ct. Feb. 5, 1998), attached as Ex. 34 to Hadlock Aff.
In an order dated November 10, 1997, Justice Shainswit appointed Mr. Wilf receiver of Mr. Halpern's partnership interest in WHW and Walwilhal, empowered Mr. Wilf to "conduct one or more public or private execution sales" of those interests upon request of the judgment creditors, and specifically provided that "the Judgment Creditors may bid in all or a portion of the unsatisfied Judgment amount at any such sale or sales." Wilf v. Halpern, No. 17195/92, Order, at 3-4 (N.Y.Sup.Ct. Nov. 10, 1997), attached as Ex. 31 to Hadlock Aff. In an opinion dated May 17, 1999, Justice Shainswit, noting that she had on two separate occasions already held Mr. Wilf to be an appropriate receiver of Mr. Halpern's various partnership interests "although [Mr. Wilf] is the judgment holder," refused to set aside the December 14, 1998 sale of Mr. Halpern's partnership interest in WHW. Wilf v. Halpern, No. 17195/92, Order, at 3 (N.Y.Sup.Ct. May 17, 1999), attached as Ex. 62 to Hadlock Aff. Justice Sahinswit held that Mr. Wilf had "duly advertised the sale."Id., at 2. Justice Shainswit further held that "Halpern's allegations of Wilf's illegality, inequity, injustice and self-dealing in connection with WHW Associates' finances are unsubstantiated by any objective, credible evidence." Id., at 4.
III. A.
The defendants move to dismiss the complaint pursuant to Fed.R.Civ. p. 12(b)(1) for lack of subject matter jurisdiction. The burden of proving jurisdiction is on the party asserting it. See Makarova v. United States, 201 F.3d 110, 113 (2d Cir. 2000). See also Malik v. Meissner, 82 F.3d 560, 562 (2d Cir. 1996). Here, the defendants initially argued that the plaintiff had failed to establish this Court's diversity jurisdiction inasmuch as the plaintiff had not demonstrated that he is a citizen of a foreign state. In response, the plaintiff submitted an affidavit swearing that he resides in Tel Aviv, Israel and that he is a citizen of Austria. See Affidavit of Israel Halpern, sworn to March 14, 2000. He has also submitted a a copy of his Austrian passport. See Affirmation of James M. Branden, dated March 17, 2000, Ex. C. It thus appears on the evidence before the Court that diversity jurisdiction exists. The defendants have abandoned the argument in their reply brief.
B.
Under the Rooker-Feldman doctrine, a federal district court does not have subject matter jurisdiction over a case that seeks review of a state court decision. Federal review of a state court decision may only be obtained in the United States Supreme Court. See District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 476 (1983); Rooker v. Fidelity Trust Co., 263 U.S. 413, 416 (1923); Hachamovitch v. DuBuono, 159 F.3d 687, 693 (2d Cir. 1998). A federal district court lacks subject matter jurisdiction over claims that are "inextricably intertwined" with a state court's determinations. See Moccio v. New York State Office of Court Admin., 95 F.3d 195, 198 (2d Cir. 1996). A "federal claim is inextricably intertwined with the state-court judgment if the federal claim succeeds only to the extent that the state court wrongly decided the issues before it." Pennzoil Co. v. Texaco, Inc., 481 U.S. 1, 25 (1987) (Marshall, J., concurring).
In this case, the first cause of action alleges that Mr. Wilf "breached his fiduciary, statutory and other common law duties" as receiver of Mr. Halpern's partnership interest in WHW. In support of this allegation, the Complaint relies on allegations that Mr. Wilf gave improper notice of the sale of Mr. Halpern's interest, improperly conducted the sale of Mr. Halpern's interest, and purchased Mr. Halpern's interest for less than it was worth. These allegations are "inextricably intertwined" with determinations made by Justice Shainswit in connection with the Prior Action. By order dated November 10, 1997, Justice Shainswit appointed Mr. Wilf receiver of Mr. Halpern's interest in WHW and expressly permitted judgment creditors, such as Mr. Wilf, to bid on that interest.See Wilf v. Halpern, No. 17195/92, Order, at 3-4 (N.Y.Sup.Ct. Nov. 10, 1997). In an opinion dated May 17, 1999 and issued more than five months after the sale of Mr. Halpern's interest in WHW, Justice Shainswit expressly held that Mr. Wilf had "duly advertised" the sale of Mr. Halpern's interest in WHW and that Mr. Halpern's allegations of self-dealing were "unsubstantiated by any objective, credible evidence."Wilf v. Halpern, No. 17195/92, Order, at 2-4 (N.Y.Sup.Ct. May 17, 1999). Justice Shainswit declined to set aside the sale. See id. The first cause of action seeks damages for doing what Justice Shainswit authorized and then declined to set aside. Given Justice Shainswit's rulings, the first cause of action "is inextricably intertwined" with the state court determinations, see Moccio, 95 F.3d at 198, and must therefore be dismissed for lack of subject matter jurisdiction under the Rooker-Feldman doctrine. See Levitin v. Homburger, 932 F. Supp. 508, 514-15 (S.D.N.Y. 1996) (dismissing action under Rooker-Feldman doctrine where monetary damages sought by plaintiff as a result of receiver's sale of plaintiff's partnership interest would "[i]n essence . . . undo what . . . happened to [plaintiff] in state court and restore to him the alleged value of his partnership interest"), aff'd without opinion, 107 F.3d 3 (2d Cir. 1997).
The defendants point out that Mr. Wilf as receiver did not, as the plaintiff alleges, personally purchase Mr. Halpern's interest in WHW. Rather, at the December 14, 1998 sale, Carl D. Silverman, who held a power of attorney from the judgment creditors of Mr. Halpern, including Leonard Wilf, on their behalf bid $2.5 million of their judgment against Mr. Halpern to acquire Mr. Halpern's interest in WHW Associates. (See Reply Affirmation of John M. Hadlock ("Hadlock Reply Aff.") dated to April 4, 2000 at ¶ 2(b) Ex. 65.) This is what Justice Shainswit had permitted. Similar procedures were used at the February 28, 1997 sale of the plaintiff's partnership interest in J. Hill and the November 16, 1998 sale of the plaintiff's partnership interest in Walwilhal. (See Hadlock Reply Aff. ¶¶ 2(a), (c), and Exs. 64, 66.)
The third cause of action alleges that Mr. Wilf "breached his fiduciary, statutory and other common law duties" as receiver of Mr. Halpern's partnership interest in J. Hill. In support of the third cause of action, the Complaint alleges that Mr. Wilf gave improper notice of the sale of Mr. Halpern's interest, improperly conducted the sale of Mr. Halpern's interest, and purchased Mr. Halpern's interest for less than it was worth. These allegations are also "inextricably intertwined" with determinations made by Justice Shainswit in connection with the Prior Action. In an order dated July 2, 1996, Justice Shainswit rejected a challenge by Mr. Halpern to Mr. Wilf's appointment as receiver of Mr. Halpern's interest in J. Hill, holding that Mr. Halpern had "not demonstrated any conflict of interest." Wilf v. Halpern, No. 17195/92, Order (N.Y.Sup.Ct. July 2, 1996). In an order dated August 26, 1996, Justice Shainswit appointed Mr. Wilf receiver of Mr. Halpern's interest in J. Hill and expressly permitted judgment creditors, such as Mr. Wilf, to bid on that interest. See Wilf v. Halpern, No. 17195/92, Order, at 3-4 (N.Y.Sup.Ct. Aug. 26, 1996). Then, in an opinion dated February 5, 1998, Justice Shainswit rejected Mr. Halpern's claim that the February 28, 1997 sale of his interest in J. Hill was conducted in an unfair or commercially unreasonable manner. See Wilf v. Halpern, No. 17195/92, Opinion, at 2 (N.Y.Sup.Ct. Feb. 5, 1998). Therefore, because the third cause of action "succeeds only to the extent that the state court wrongly decided the issues before it," Pennzoil, 481 U.S. at 25, the third cause of action must be dismissed for lack of subject matter jurisdiction. See Levitin, 932 F. Supp. at 514-15.
Because the second and fourth causes of action are entirely dependent upon the first and third causes of action respectively, and are therefore "inextricably intertwined" with the prior state-court determinations, they too must be dismissed for lack of subject matter jurisdiction.
IV.
Even if this Court had subject matter jurisdiction over the first and third causes of action, which it does not, the first and third causes of action should nevertheless be dismissed. Under New York law, a plaintiff, before commencing an action against a court-appointed receiver, should obtain permission to do so from the appointing court.See Copeland v. Salomon, 436 N.E.2d 1284, 1288 (N.Y. 1982); Independence Sav. Bank v. Triz Realty Corp., 473 N.Y.S.2d 568, 569-70 (App.Div. 198 4). Failure to obtain such permission does not deprive the Court in which such action is filed of jurisdiction to hear the case, but the Court may in its discretion: (1) permit the action to continue subject to a later order of the appointing court; (2) stay the action pending an application to the appointing court for leave nunc pro tunc; or, (3) dismiss the action without prejudice to recommencement after such leave had been obtained. See Copeland, 436 N.E.2d at 1289; Independence Sav. Bank, 473 N YS.2d at 570.
In this case, dismissal of the first and third causes of action is appropriate. "The rule that leave of the appointing court be obtained before suing such a receiver was devised," among other reasons, "to protect the receiver and the estate against the harassment and expense of possibly unnecessary litigation." Copeland, 436 N.E.2d at 1288. Here, Mr. Halpern has fought a protracted battle with Mr. Wilf, the court-appointed receiver of Mr. Halpern's various partnership interests. At the very least, the current action raises the specter of unnecessary expense. It would therefore be inappropriate to proceed with the causes of action against Mr. Wilf as receiver until such time as Mr. Halpern obtained leave to proceed from the state court which appointed Mr. Wilf.
The propriety of this course is underscored by Justice Shainswit's decision of April 2, 1998. That decision concerned the sale of Mr. Halpern's partnership interest in Walwilhal. Mr. Wilf, in connection with the Prior Action, had been appointed receiver of Mr. Halpern's interest in Walwilhal. On March 17, 1998, Mr. Halpern brought an order to show cause seeking to stay Mr. Wilf's sale of that interest. In her April 2, 1998 decision, Justice Shainswit noted that the order to show cause "represents the third time this court has been asked to examine virtually the same meritless arguments on the very eve of a sale this court ordered." Wilf v. Halpern, No. 17195/92, Opinion, at 4 (N Y Sup.Ct. April 2, 1998), attached as Ex. 47 to Hadlock Aff. Justice Shainswit was "sorely tempted to impose sanctions," but declined to do so "in the exercise of judicial grace." Id., at 4-5. Although the Walwilhal sale is not directly at issue in this case, the decision illustrates Mr. Halpern's apparent efforts to obstruct Mr. Wilf in the discharge of his duties as receiver.
V.
Pursuant to Fed.R.Civ.P. 11 the defendants move for sanctions on the grounds that the current action "can serve no purpose but to further harass the defendants." Def. Mem., at 5. The decision of whether to award sanctions under Rule 11 lies within the Court's discretion. See Simon DeBartolo Group, L.P. v. Richard E. Jacobs Group, Inc., 186 F.3d 157, 166 (2d Cir. 1999); Laramee v. Jewish Guild for the Blind, 72 F. Supp.2d 357, 362 (S.D.N.Y. 1999).Here, although the Court concludes that the action must be dismissed, the arguments are not so obvious as to warrant the imposition of sanctions. Moreover, despite the evident enmity between Mr. Halpern and Mr. Wilf, it cannot be said that the current action was necessarily brought for an improper purpose. Therefore, the Court declines to award sanctions under Rule 11.
CONCLUSION
For all of the foregoing reasons, the defendants' motion to dismiss is granted and the defendants' motion for sanctions is denied. The Clerk of the Court is directed to enter judgment dismissing the action and closing the case.
All of the arguments presented to the Court have been considered and any argument not expressly addressed above is either moot or without merit.
SO ORDERED.