Pappas v. FreundPappas v. Freund
OPINION OF THE COURT
These two proceedings involve the disposition of funds held by respondent/cross petitioner James C. Freund, Esq. (Freund), as escrow agent for James Pappas and T. Peter Pappas. Freund holds approximately $419,000 (the escrowed funds) in an interest-bearing account under the title "The T. Peter Pappas Family Trust, beneficiary Mary Louise Pappas” (the Trust). On December 16, 1996, David M. Robinson, the current trustee of the Trust, executed (on behalf of the Trust) an affidavit of confession of judgment in the sum of $450,000 in favor of Mary Louise Pappas (wife of T. Peter Pappas). On December 18, 1996, this judgment was entered in the office of the Clerk of New York County.
Petitioner, Mary Louise Pappas, commenced the initial proceeding herein (the Turnover Proceeding) for an order pursuant to
Shortly thereafter, Freund commenced the second proceeding (the
BACKGROUND
In August 1994, James A. Pappas and T. Peter Pappas retained Freund to act as a mediator to resolve certain longstanding business disputes between them. In connection with such mediation, in April 1995, approximately $400,000 was deposited with Freund as escrow agent. As of January 8, 1997, the value of the escrowed funds was $419,039.24.
Notwithstanding Ms. Pappas' initial requests that the escrowed funds be delivered to her and the commencement of the Turnover Proceeding, Freund asserts that other entities may have a claim to the escrowed funds and, consequently, commenced the
Significantly, the subpoenas contained notices pursuant to
While attempting to execute its New York judgment in the State of Connecticut, on June 26, 1996, Bankers Trust commenced a fraudulent conveyance action against Mary Louise Pappas and T. Peter Pappas in the United States District Court for the District Court of Connecticut (civil action No.
After commencement of the instant proceedings, in March 1997, John J. O’Neill, the bankruptcy trustee in T. Peter Pap-pas’ chapter 7 bankruptcy case, commenced an adversary proceeding in the Bankruptcy Court for the District of Connecticut (O’Neill v Robinson [In re Pappas], No. 97-2055 [Dist of Conn, Hartford Div]) against David M. Robinson, Freund and Ms. Pappas. In the complaint dated March 5, 1997, the trustee alleges, inter alia, that the escrowed funds are the property of the debtor, T. Peter Pappas, or the debtor’s estate because: (1) the Trust is the alter ego of the debtor in that "[t]he Debtor has used the Trust to secrete his assets and as a conduit for his business enterprises; he has used Trust assets to satisfy his debts; and he has exercised de facto control of the Trust”; (2) the transfer of assets from the debtor to the Trust was a sham; (3) "the transfer of assets to the Trust was made with the intent to defraud Debtor’s creditors or was made without consideration by the Debtor who was or was thereby rendered insolvent”; and (4) the debtor has caused various fraudulent conveyances to Ms. Pappas.
Consolidation
Preliminarily, with respect to Ms. Pappas’ Turnover Proceeding, Freund has counterclaimed for an order consolidating the Turnover Proceeding (index No. 122281/96) with his
The Automatic Stay
Prior to determining who is entitled to the escrowed funds being held by Freund, the court addresses whether T. Peter Pappas’ bankruptcy filing and the bankruptcy trustee’s adversarial proceeding stay the instant proceeding pursuant to the automatic stay provisions of
Bankers Trust, although not a party to the instant proceeding, has appeared and submitted papers herein (in response to Freund’s order to show cause and petition) contending that the automatic stay applies.
I.
The United States Bankruptcy Code (
"(1) the commencement or continuation * * * of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the [bankruptcy] case * * * or to recover a claim against the debtor that arose before the commencement of the case * * * [and]
"(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate”.
The stay is "a procedural rule, designed to provide for an orderly bankruptcy proceeding.” (In re Colonial Realty Co., 980 F2d 125, 137 [2d Cir 1992].) The stay is "so central * * * to an orderly bankruptcy process that ' " 'actions taken in violation of the stay are void and without effect.’ ” ’ ” (Supra, quoting In re 48th St. Steakhouse, 835 F2d 427, 431 [2d Cir 1987].)
Where a bankruptcy petition has been filed, a third-party fraudulent conveyance action commenced by creditors to recover claims against the debtor must be stayed pursuant to
Similarly, the provisions of
Notwithstanding the inapplicability of the automatic stay provisions of
It should be noted that
In contrast, there is authority supporting the proposition that where substantial but not complete identity exists between a State and Federal action with respect to parties and issues, a stay may be warranted. For example, in Goodridge v Fernandez, the Appellate Division, First Department, affirmed a stay of a State action on a guaranty pending the resolution of a Federal action on a promissory note where overlapping issues existed in both actions. (
In El Greco Inc. v Cohn, the Second Department held that a stay was justified where the State and Federal actions were
Significantly, this court finds that there is substantial identity between the instant proceeding and the adversarial proceeding commenced in Bankruptcy Court with respect to overlapping issues (including allegations of fraud), parties and the relief requested. Therefore, upon due consideration of issues of comity, orderly procedure, judicial economy and discretion (see, General Aniline & Film Corp. v Bayer Co., supra), the court directs a stay of the instant proceeding pursuant to
Accordingly, it is ordered that the special proceeding commenced by Ms. Pappas (index No. 122281/96) and the proceeding commenced by Mr. Freund (index No. 100483/97) will be tried jointly under the index number and caption of the Ms. Pappas’
Notes
. The entities named are Pappas Enterprises, Inc., Oak Ridge Development Corp. and Pappas Development Corp.
. Subsequently, Freund and Skadden appealed Justice Gammerman’s ruling. On April 3, 1997, the Appellate Division, First Department, affirmed Justice Gammerman’s order. (Bankers Trust Co. v Pappas Enters., — AD2d —,
. This information was brought to the court’s attention pursuant to an affidavit of Madeline F. Grossman, Esq. submitted in response to Freund’s order to show cause and petition. Ms. Grossman’s firm has served as counsel to Bankers Trust in connection with its efforts to execute its New York judgment and in its fraudulent conveyance action in the State of Connecticut. Also, on February 10, 1997, Ms. Grossman’s firm was appointed special counsel to the chapter 7 bankruptcy trustee, John J. O’Neill, Jr., in the T. Peter Pappas bankruptcy case.
. Id.
. Examples of such alleged transfers include: the transfer of an option to purchase a Bentley automobile for no consideration, which was in fact exercised by Ms. Pappas; the payment to Ms. Pappas of over $400,000 compensation in 1991-1992 from a company for whom debtor, but not Ms. Pappas, provided services; and the transfer of various works of art worth more than $250,000 to Ms. Pappas for no consideration.
. Bankers Trust has asked that it be given an opportunity to intervene in this proceeding to assert its allegedly superior interest to the escrowed funds if the court declines to find that the instant proceeding is automatically stayed.
. "[U]nder New York law, the trustee has standing to assert claims based upon piercing the corporate veil or alter ego liability, and creditors are precluded from pursuing those claims until they have been abandoned * * * Thus, alter ego claims, like fraudulent transfer claims, must be asserted by the trustee.” (In re Keene Corp., 164 Bankr 844, 852, supra [citations omitted].)
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