Opinion
153821/2019
07-11-2019
Norma KNOPF and Michael Knopf, Petitioners, v. FELDMAN & ASSOCIATES PLLC, Edward Feldman, Esposito, PLLC dba Esposito Partners PLLC, and Frank Esposito, Respondents.
BerryLaw PLLC, New York City (Eric W. Berry of counsel), for petitioners. Feldman & Associates, PLLC (Edward S. Feldman of counsel), for respondents Feldman & Associates, PLLC, and Edward S. Feldman, Esq. Esposito Partners PLLC (Frank M. Esposito of counsel), for respondents Esposito Partners PLLC and Frank M. Esposito, Esq.
BerryLaw PLLC, New York City (Eric W. Berry of counsel), for petitioners.
Feldman & Associates, PLLC (Edward S. Feldman of counsel), for respondents Feldman & Associates, PLLC, and Edward S. Feldman, Esq.
Esposito Partners PLLC (Frank M. Esposito of counsel), for respondents Esposito Partners PLLC and Frank M. Esposito, Esq.
Gerald Lebovits, J.
This turnover proceeding arises out of lengthy and involved litigation between plaintiffs, Norma and Michael I. Knopf, and non-party Michael H. Sanford. The proceeding is related in particular to the Knopfs' efforts to enforce a money judgment this court entered on February 22, 2018, for $9,867,832.61 against Pursuit Holdings, LLC (Pursuit), Sanford's hedge fund. (See Knopf v. Sanford, 2018 NY Slip Op 30611 [U] [Sup Ct, NY County 2018].)
The dispute between the Knopfs and Sanford is discussed in much greater detail in this court's order deciding motion sequences 030, 032, and 033 in Knopf v. Sanford , Index No. 113227/2009, also issued today.
BACKGROUND
I. Pursuit's Sale of the PHC Without Escrowing the Proceeds
In 2006, the Knopfs made two multi-million-dollar loans to Pursuit to purchase several apartments in New York County, one of which is a penthouse condominium unit(or PHC). The Knopfs made these loans in exchange for Pursuit's commitment to execute mortgage liens on the property in the Knopfs' favor. Pursuit failed either to repay the loans or to execute the mortgage liens.
The Knopfs sued Pursuit and Sanford for breach of contract in Supreme Court, New York County. In December 2014, the Appellate Division, First Judicial Department, granted summary judgment in the Knopfs' favor on their breach-of-contract claim. The First Department left it to Supreme Court to determine the Knopfs' damages. (See Knopf v. Sanford , 123 AD3d 521, 521 [1st Dept 2014].)
In February 2016, while proceedings to determine damages were underway in Supreme Court, Sanford and Pursuit sold the PHC for $3 million.
First Department Justice John Sweeny, Jr., had ordered in October 2015 that any sale proceeds be put in escrow — and a full panel of the First Department issued an order in December 2015 denying Sanford's motion to vacate this escrow requirement. (See Index No. 113227/2019, NYSCEF No. 164, at Attachment C.) Sanford nonetheless did not put any of the $3 million into escrow when the sale closed in February 2016.
Sanford was represented in the PHC closing process by respondent, Edward S. Feldman, Esq., an experienced real-estate attorney. At closing, Feldman's firm (respondent Feldman & Associates) received into escrow $1,061,050.14 on Pursuit's behalf as the net proceeds over and above costs, liens, and taxes. In the two days after closing, Feldman & Associates transferred $985,999.84 to Pursuit and another Sanford company, leaving $75,050.30 of sale proceeds. (NYSCEF No. 1, at 4.)
On February 8, one week after the sale closed, a judicial hearing officer determined that Pursuit was liable to the Knopfs for $8,336,488 in damages. (See Index No. 113227/2009, NYSCEF No. 164, at 5 n 12.)
Three weeks after the sale closed, on February 25, 2016, now-retired First Department Justice Karla Moskowitz ordered that the "[m]oney remaining as of today at 3:45 pm" from the PHC sale "shall be placed in escrow as had been directed by Justice Sweeny in his 10/22/15 interim order, vacatur of which was denied by this Court's 12/29/2015 Order." (Index No. 113227/2009, NYSCEF No. 164, at 5 n 13 [quoting order].)
On March 21, 2016, a full panel of the First Department ordered that pending a hearing in Supreme Court, Pursuit was "prohibited from transferring, or further diminishing, impairing or encumbering" any "proceeds derived from the sale" of real estate properties including the PHC "prior to the date of this order." ( Knopf v. Sanford , 137 AD3d 662, 663 [1st Dept 2016].)
On February 22, 2018, the Knopfs obtained a judgment against Pursuit in the Knopf v. Sanford action for nearly $10 million. The Knopfs have since collected only $500,000 or so of that judgment. (NYSCEF No. 1, at 2.)
II. The Knopfs' Settlement with Pursuit's Bankruptcy Trustee
In the fall of 2018, Pursuit entered bankruptcy proceedings. Deborah J. Piazza, Esq., was appointed the bankruptcy Trustee. (NYSCEF No. 1, at 2.)
In March 2019, the Knopfs and Pursuit's Trustee entered into an agreement to settle the Knopfs' claims against Pursuit's bankruptcy estate (the Bankruptcy Settlement). (See NYSCEF No. 3 [copy of agreement].)
The Bankruptcy Settlement contains several terms relevant here. The Knopfs and the Trustee (on behalf of Pursuit and its bankruptcy estate) agreed to release each other from, among other things, "any and all known and unknown claims, debts ... obligations, sums of money due," and "judgments." (NYSCEF No. 3, at ¶ 7 [a] [Trustee releasing claims against the Knopfs], ¶ 8 [a] [the Knopfs releasing claims against the Trustee, Pursuit, and the bankruptcy estate].) The Knopfs agreed to waive "any and all claims to any further distributions from [Pursuit's] bankruptcy estate" beyond certain transactions contemplated under the Settlement. (See id. at ¶ 4.)
The Bankruptcy Settlement also provided that the Knopfs' release of claims against Pursuit and the bankruptcy estate shall not "be deemed to release any third-party (i.e. , any entity other than [Pursuit] and its estate] from any claim by the Knopfs ... that such third-party is jointly liable or liable as an accessory for the damages underlying" the Knopfs' judgment against Pursuit. (Id. at ¶ 8 [c].) The Settlement further provided that if any action against such a third party "results in the return of any real or personal property to [Pursuit's] estate, the Knopfs' legal and equitable rights to submit a claim for the distribution of all or a portion of such returned property" shall not be impaired by the Settlement. (Id. at ¶ 8 [a].)
The Bankruptcy Settlement emphasized that "[o]nly the claims between the Knopfs, on the one hand, and [Pursuit] and its estate, on the other, are resolved by this settlement." (Id. at ¶ 4.) The Settlement explained that it would bind and "inure to the benefit of each of [Pursuit], [Pursuit's] bankruptcy estate, the Knopfs, and their respective heirs, legal representatives, successors, and assigns." (Id. at ¶ 18.)
On March 12, 2019, United States Bankruptcy Judge Martin Glenn issued an order approving the Bankruptcy Settlement. (See Matter of Pursuit Holdings (NY), LLC , 2019 WL 1220928, 2019 Bankr LEXIS 785 [Bankr SD NY Mar. 12, 2019, No. 18-12738].)
III. The Knopfs' Turnover Proceeding Against Feldman and Esposito
The Knopfs have now brought this turnover proceeding under CPLR 5225 (b) against third-parties Feldman, Feldman & Associates, Frank M. Esposito, Esq., and Esposito's law firm, Esposito Partners PLLC.
The Knopfs allege that the $75,000 in undistributed sale proceeds described above remains unaccounted-for. (See NYSCEF No. 1, at 4-5.) They seek a declaration recognizing that their claim to the $75,000 is superior to that of Esposito or his firm (or any other potential claimant of the money). (Id. at 7-10). They also seek an order under CPLR 5225 (b) directing respondents to turn over the $75,000 to the extent that it is in their possession (id. at 11); or, alternatively, directing respondents to provide the Knopfs with information about where the $75,000 might have gone (id. at 11-14).
The Knopfs do not, however, seek turnover of the $75,000 from respondents directly to them. Pursuit's Trustee has filed an affirmation in this proceeding supporting the Knopfs' petition. In that affirmation, she contends that to the extent this court directs respondents to turn over the $75,000 at issue, the funds should be delivered to the Trustee under the Bankruptcy Settlement. (See Affirmation of Deborah J. Piazza, NYSCEF No. 54.) The Knopfs agree that delivery to the Trustee would be the proper disposition of any funds directed to be turned over. (See Affirmation of Eric W. Berry, NYSCEF No. 56, at 1.)
Feldman and his law firm oppose the petition in its entirety. (See NYSCEF Nos. 37, 39, 81.)
Esposito and his law firm oppose the petition and have also cross-moved to dismiss. (See NYSCEF Nos. 42, 43, 44, 71.) Esposito concedes that Sanford paid him $50,000 in early February 2016. But Esposito's motion papers argue among other things that ordering him to turn over that sum would be inappropriate because no funds in his possession came from Pursuit . In particular, Esposito quotes emphatic statements by Sanford that " Pursuit did not pay Esposito " and that any suggestion that Pursuit (rather than Sanford) paid Esposito's firm in 2016 was "factually false ." (NYSCEF No. 71, at 9-10 [Esposito's bolding and underlining] ). At oral argument before this court, Esposito stated that his only information on the source of that $50,000 payment was "what I have been told by Mr. Sanford," and that he understood Sanford to be "saying he paid [Esposito] from his personal funds." (Oral Argument Transcript, NYSCEF No. 102, at 28.)
Esposito does not himself represent in his motion papers that the payment he received came from funds of Sanford rather than Pursuit — merely that "no Pursuit ... checks or wires appear on statements I received from the bank." (NYSCEF No. 71, at 10 [emphases removed].) But Esposito does quote, bold, and underline Sanford's representation that Pursuit did not make a payment to Esposito. (See id. at 9-10.)
DISCUSSION
Two developments since oral argument on the motion to dismiss have simplified to a degree the issues involved in this proceeding.
First , the Knopfs notified this court, by letter dated May 31, 2019, that they had determined that $25,050.30 of the $75,050.30 at issue was paid out from Feldman & Associates' escrow account to a title company for legitimate closing-related expenses related to payment of property taxes. The Knopfs therefore modified their request for relief to seek determinations from this court only as to the remaining $50,000. (See NYSCEF No. 88.)
Second , the Knopfs again wrote to this court on June 5, 2019, providing evidence (obtained through a subpoena to Esposito's bank) that the remaining $50,000 from the PHC sale proceeds had been distributed to Esposito. (See NYSCEF No. 96). The payment was by check, drawn on Feldman & Associates' escrow account, made out to Esposito Partners, and deposited in the firm's bank account. (See NYSCEF No. 97, at 7-8.)
Esposito asserts that the Knopfs improperly obtained this information and filed it in the turnover proceeding before this court in violation of a protective order. (See NYSCEF No. 103, at 1.) But that order, issued by Justice Denise L. Sher of Supreme Court, Nassau County, in an action before her, required plaintiff's counsel in that action to obtain leave of court before issuing further subpoenas for Esposito's financial information. Counsel for plaintiff here obtained the documents in question through a subpoena issued in a different action, in Supreme Court, New York County. Esposito does not offer authority for the proposition that the force of Justice Sher's protective order extends beyond the particular action — and indeed the particular court — in which the order was issued.
Feldman has represented, in a letter to this court dated June 6, 2019, that he wrote the check at Sanford's direction and gave the check to Sanford. Feldman's letter states that Sanford appears then to have deposited the check in a bank account of Esposito Partners. (See NYSCEF No. 101.)
Given this new information, it is clear that Feldman does not have the $50,000 at issue and has no additional information to provide about that sum's whereabouts. The Knopfs' claims for turnover or discovery are therefore dismissed as to Feldman and Feldman & Associates.
The question now before this court, therefore, is whether, under CPLR 5225 (b), to order Esposito to turn over to the Trustee the $50,000 at issue.
On its face, this question would appear to be comparatively straightforward. It is undisputed that before the PHC sale the Knopfs had obtained summary judgment against Sanford on their breach-of-contract claims and were merely awaiting the determination of damages in Supreme Court. Justice Sweeny's October 2015 escrow order — had it been followed — would have preserved Pursuit assets to pay the Knopfs' impending damages award.
It is undisputed that Sanford argued in November 2015 that the escrow order should be vacated because the Knopfs could not establish a basis to impose a pre-judgment restraint on Pursuit's assets — and that the First Department denied Sanford's vacatur request.
It is undisputed that the week the PHC sale closed in February 2016, Sanford paid the $50,000 to Esposito out of sale proceeds.
In a June 9, 2019, letter to the court, Esposito asserted, seemingly for the first time, that Sanford paid him the $50,000 as a fee for services rendered under their engagement agreement. (See NYSCEF No. 103, at 1.) As discussed in more detail in this court's order in Index No. 113227/2009, that assertion contradicts prior deposition testimony that Esposito (and Sanford) gave in a related federal action.(See Index No. 113227/2009, NYSCEF No. 436, at Subsection I.D.2.)
It is undisputed that three weeks later, on Thursday, February 25, 2016, Justice Moskowitz issued an order directing all remaining sale proceeds to be put into escrow by Monday, February 29. This order noted that Justice Sweeny had previously directed any sale proceeds to be put in escrow. The order also emphasized that the First Department had denied vacatur of Justice Sweeny's escrow order. Justice Moskowitz's order thus reflected her opinion that the escrow requirement had remained in place throughout and that Sanford's failure to comply with the requirement needed to be rectified (to the extent possible) immediately.
It is undisputed that Sanford had transferred other sums from the sale proceeds to Esposito (assertedly to be invested by Esposito on Sanford's behalf); that upon the issuance of Justice Moskowitz's order Sanford directed Esposito to return those sums so that they could be put in escrow; and that Esposito complied that day — from vacation — with Sanford's instruction. (See Index No. 113227/2009, NYSCEF No. 436, at Subsection I.D.2.)
And it is undisputed that unlike the other funds Sanford transferred to Esposito, Esposito retained rather than return the $50,000.
The record does not establish whether Esposito (i) knew that the $50,000 represented PHC sale proceeds subject to Justice Moskowitz's escrow order yet kept the money anyway; (ii) did not know one way or the other, because he had chosen not to look into the source of the $50,000; or (iii) did look into the matter but was nonetheless deceived by Sanford. Esposito's statements at argument suggest that he relied on representations by Sanford. (See NYSCEF No. 102, at 28, 30-31.) If that suggestion is correct, Esposito lacked an adequate basis to rely on those representations. Sanford's deposition testimony indicates that he had told Esposito that he had lacked sufficient liquidity to pay his attorneys unless Pursuit was able to sell the PHC. If so, Esposito would have been aware that a $50,000 payment from Sanford at the time of the PHC sale likely came from the sale proceeds. At a minimum, once Justice Moskowitz issued her February 25, 2016, escrow order — and certainly once the Knopfs commenced this turnover proceeding — Esposito should have attempted to ascertain for himself the source of the $50,000 rather than assertedly taking Sanford's word for it.
This court has considered whether to sanction Esposito under Rule 130-1.1 for opposing turnover despite having knowingly failed to comply with Justice Moskowitz's escrow order or having been willfully blind to his obligation to comply. This court has ultimately decided against imposing sanctions at this time because not all of Esposito's arguments in opposing turnover are frivolous under Rule 130-1.1 and because the Knopfs did not move for civil contempt. (See Matter of Wimbledon Fin. Master Fund, Ltd. v. Bergstein , 2019 WL 2344511 [1st Dept June 4, 2019] [affirming award of attorney fees as contempt sanction against attorney for willfully neglecting his obligation to comply with restraining notices].) This court's decision not to impose sanctions should not, however, be understood as indicating that the court approves of Esposito's conduct in this matter.
Had Sanford not transferred this $50,000 to Esposito notwithstanding the denial of Sanford's motion to vacate Justice Sweeny's escrow order — and had Esposito not retained that sum in the face of Justice Moskowitz's escrow order — the money would have been available potentially to satisfy the Knopfs' judgment, or at a minimum would have been part of Pursuit's bankruptcy estate.
Thus, for purposes of CPLR 5225 (b), Esposito is a transferee of the judgment debtor (i.e. , Pursuit). The Knopfs and Pursuit each have a superior claim to the money than does Esposito.
Esposito nonetheless argues that the petition must be denied, relying on the Bankruptcy Settlement provision that releases the Knopfs' claims and judgment against Pursuit. He argues that this release forecloses the Knopfs from seeking turnover from him under CPLR 5225 (b). (See NYSCEF No. 43, at 14-15.)
But the settlement agreement on which Esposito relies here is a contract — to which he is not a party. (See Kayner v. Geller , 49 AD3d 281, 281 [1st Dept 2008].) Esposito may therefore seek to enforce the agreement's terms, including the provision releasing the Knopfs' judgment against Pursuit, only if it is "clear from the language of the contract that there was an intent to permit enforcement" by himself as a third-party beneficiary. ( Dormitory Auth. of the State of NY v. Samson Construction Co. , 30 NY3d 704, 710 [2018] [quotation marks omitted].)
The language of the Bankruptcy Settlement does not evince any such intent. To the contrary, the agreement specifically provides that it is intended to benefit two sets of parties: (i) the Knopfs (and their heirs, assigns, etc.); and (ii) Pursuit and its bankruptcy estate (and their heirs, assigns, etc.). (See NYSCEF No. 3, at ¶ 18.) Esposito is neither.
Several other provisions of the Bankruptcy Settlement underscore that it was entitled only to benefit the parties, rather than third parties like Esposito. As discussed above, ¶ 4 of the settlement provides expressly that "for avoidance of doubt," the agreement does not involve any parties other than the Knopfs and Pursuit; it resolves only their claims against each other. Paragraph 8 (c) of the settlement provides that the release upon which Esposito relies does not release a third party from claims by the Knopfs that the third party is liable as an accessory to the damages underlying the Knopfs' judgment against Pursuit. If the Knopfs do prevail on such a claim against a third party and thereby bring new assets into the bankruptcy estate, ¶ 8 (a) preserves the Knopfs' right to assert a claim in the bankruptcy proceeding for an appropriate share of that returned property.
The Bankruptcy Settlement thus makes clear that Esposito is not an intended third-party beneficiary of the agreement — quite the opposite. And absent third-party beneficiary status, Esposito cannot here enforce the Knopfs' release clause in the agreement.
This court also is unpersuaded by Esposito's arguments (NYSCEF No. 43, at 15-22) that the Knopfs' petition should be denied because other courts have putatively denied their claims about the funds at issue. The record in this case, including evidence uncovered only within the last month, establishes that Esposito is now in possession of $50,000 that should instead be in the bankruptcy estate because — knowingly or not — he and Sanford each failed to comply with court orders that on their face required that $50,000 to be put in escrow. This court sees no basis to permit Esposito to continue to retain that sum.
This court notes that Esposito's obligation to turn over $50,000 to the Trustee would persist even if Esposito had already spent the particular $50,000 that Sanford had paid to him out of the PHC sale proceeds. (See Fed. Deposit Ins. Corp. v. Heilbrun , 167 AD2d 294, 294 [1st Dept 1990].)
The court also concludes, in its discretion, that in addition to turning over the principal sum of $50,000, Esposito must pay over to the Trustee interest on that sum at the statutory rate, running from the date of Justice Moskowitz's escrow order (February 25, 2016) until 30 days from issuance of this order (or until the date of turnover if that occurs prior to 30 days from issuance). (See CPLR 5001 [a] [providing that "in an action of an equitable nature, interest and the rate and date from which it shall be computed shall be in the court's discretion]; Adelaide Prods., Inc. v. BKN Intl. AG , 39 AD3d 254, 256 [1st Dept 2007] [noting that a turnover proceeding under CPLR 5225 is equitable in nature].)
This court may not award attorney fees in a turnover proceeding under CPLR 5225 (b). (See Bienstock v. Greycroft Partners, L.P. , 128 AD3d 459, 459 [1st Dept 2015].)
Accordingly, it is
ORDERED that the Knopfs' claims are dismissed in their entirety as to Feldman and Feldman & Associates; and it is further
ADJUDGED AND DECLARED that the Knopfs' claim to the $50,000 paid to Esposito by check dated February 1, 2016, and drawn on the escrow account of Feldman & Associates, is superior to that of Esposito and Esposito Partners; and it is further
ORDERED that Esposito turn over $50,000 (plus appropriate interest, as described above, as calculated by Esposito) to Deborah J. Piazza, Esq., Bankruptcy Trustee for Pursuit within 30 days of service of a copy of this order with notice of entry; and it is further
ORDERED that the Knopfs' request for an order directing Esposito to produce documents sufficient to disclose to the Knopfs the disposition of the $50,000 is denied as academic; and it is further
ORDERED that the Knopfs serve a copy of this order with notice of entry on all parties.