Supreme Court, Suffolk County, September 13, 2019

Boris Yankovich, Uniondale, for petitioner.

Weinberg, Gross & Pergament LLP, Garden City, for respondents.

Before the court is a special proceeding to enforce judgments^[FN1] previously entered against John Mensch, East End Bus Lines Inc., doing business as East End Bus Lines, Montauk Transport Service Inc., Moriches Auto Services, Riverhead/Calverton Park & Ride, Inc. and East End Bus Service, LLC (collectively debtors), against alleged debtors' successors, Orange County Transit, LLC and Orange County Transit Service LLC (collectively respondents).{**65 Misc 3d at 846}

The petitioner makes an application^[FN2] to this court for an order pursuant to CPLR 5225, 6220 and 7502 (c)^[FN3] and Debtor and Creditor Law §§ 273, 273-a, 276 and 276-a for the following: (1) amending the judgments and adding respondents; (2) a reverse veil-piercing to hold respondents liable; (3) enjoining respondents from transferring or otherwise conveying assets; (4) granting an attachment and turnover of respondents' assets; (5) ordering respondents to execute documents necessary to effect payments to petitioner; (6) awarding petitioner attorneys' fees; and (7) awarding punitive damages. The petitioner submits, inter alia, UCC-1 filings, the judgments of debtors and corporation searches from the New York Department of State website of respondents.

After the filing of the petition respondents filed a verified answer and opposition^[FN4] along with the bankruptcy court's interim order^[FN5] and the monthly operating report dated May 24, 2019. For the reasons below petitioner's application is denied.

Respondents and formerly debtors are bus companies for school districts throughout New York State. In May of 2018 debtors entered into three separate receivables purchase agreements with petitioner. Pursuant to the agreements debtors transferred all their rights, ownership and title to future receivables to the petitioner. Petitioner secured an interest in the debtors' assets and [*2]perfected its interest in the collateral by filing a UCC-1 financing statement with the Secretary of State{**65 Misc 3d at 847} in September of 2018. Respondent Mensch guaranteed performance by a personal guaranty. Debtors further confessed judgment in favor of petitioner for the amounts of the agreements plus attorneys' fees and disbursements.

In September of 2018 debtors breached the agreements with petitioner by failing to remit payment to the petitioner. Petitioner converted the affidavits of confession of judgment to judgments. The three judgments total $2,158,906.99.

The debtors filed a voluntary petition under chapter 11 of the Bankruptcy Code (11 USC) with the United States Bankruptcy Court for the Eastern District of New York. By that filing an automatic stay came into effect. Further, the debtors are debtors-in-possession in their respective bankruptcy cases.

Allegedly respondent corporations were formed by respondent Mensch in 2017 and 2018. Respondent corporations are being incorporated into the bankruptcy proceeding by way of proceeds from contracts debtors formerly operated but are now operated by respondents. The revenues and expenses of the respondent corporations are being treated as revenues and expenses of the debtors in their bankruptcy proceeding. Believing that debtors "fraudulently transfer[ed] [their] assets" to respondents, petitioner moved for this special proceeding to enforce debtors' judgments to the respondents.

A. Legal Standard

CPLR 5225 provides in pertinent part:

"Upon motion of the judgment creditor, upon notice to the judgment debtor, where it is shown that the judgment debtor is in possession or custody of money or other personal property in which he has an interest, the court shall order that the judgment debtor pay the money, or so much of it as is sufficient to satisfy the judgment, to the judgment creditor and, if the amount to be so paid is insufficient to satisfy the judgment, to deliver any other personal property, or so much of it as is of sufficient value to satisfy the judgment, to a designated sheriff. Notice of the motion shall be served on the judgment debtor in the same manner as a summons or by registered or certified mail, return receipt requested." (CPLR 5225 [a].)

The use of this enforcement device requires substantial investigation in advance, often including extensive use of the{**65 Misc 3d at 848} disclosure subpoenas of CPLR 5224. The primary burden of the judgment creditor under CPLR 5225 is one of proof. The court will not direct the judgment debtor to pay over money, for example, unless it has been clearly established that the judgment debtor has money to pay over. Nor will it compel the judgment debtor to deliver property that has not clearly been shown to be in the judgment debtor's possession or control. Useful though this device is, therefore, the judgment creditor must approach it armed with a convincing array of evidence.

The judgment creditor may find it necessary to exploit CPLR 5223 and 5224, the disclosure provisions, in advance of an application under CPLR 5225, deposing the judgment debtor and others about the defendant's property, and/or using an information subpoena under CPLR 5224 (a) (3). This enables the creditor to gather up all possible data to convince the court that the judgment debtor has money or property applicable to the judgment. (Richard C. Reilly, Practice Commentaries, McKinney's Cons Laws of NY, Book 7B, CPLR C5225:1.)

Additionally, an evidentiary hearing may be required in certain cases in order to determine the amount of the payments to be made (see Lowy v Bobker, 383 F Supp 2d 606 [SD NY 2005]; Matter of Southern Tier Masonry v Browning, 194 AD2d 983 [3d Dept 1993]).

B. Jurisdiction

This court interprets portions of respondents' affirmation in opposition as challenging this court's subject matter jurisdiction to entertain this petition for a special proceeding.

Pursuant to CPLR 3211, an action or a proceeding may be dismissed by reason of the fact that the court does not have jurisdiction of the subject matter of the action. (CPLR 3211 [a] [2].) Subject matter jurisdiction cannot be conferred on the court, even if stipulated by the parties. An objection may be made at any time during the action, and parties are not foreclosed from raising it in the future if they had previously failed to do so. Furthermore, the court, on its own motion, may refuse to proceed further and dismiss the action if it lacks subject matter jurisdiction. (Robinson v Oceanic Steam Nav. Co., 112 NY 315, 324 [1889]; see also Henry v Green, 126 Misc 2d 360, 361 [Mount Vernon City Ct 1984] ["if the court itself notices a lack of such jurisdiction, it may dismiss on its own motion, regardless of the means whereby the objection to the jurisdiction comes to its attention and whether or not any motion has been made for dismissal"].)

{**65 Misc 3d at 849}"Subject matter jurisdiction has been defined as the 'power to adjudge concerning the general question involved, and is not dependent upon the state of facts which may appear in a particular case, arising, or which is claimed to have arisen, under that general question.' " (Thrasher v United States Liab. Ins. Co., 19 NY2d 159, 166 [1967], quoting Hunt v Hunt, 72 NY 217, 229 [1878].) As a "court of original, unlimited and unqualified jurisdiction" (Matter of Fry v Village of Tarrytown, 89 NY2d 714, 718 [1997], quoting Kagen v Kagen, 21 NY2d 532, 537 [1968]), the New York State Supreme Court is vested with general original jurisdiction and is competent to entertain almost all causes of action (see NY Const, art VI, § 7 [a]). Although general and limited are seen as antonyms in the doctrine of jurisdiction, general does not mean unlimited. In fact, there are two categories of original jurisdiction the New York State Supreme Court lacks: (1) cases in which the Federal Constitution or an act of Congress confers exclusive jurisdiction on the federal courts^[FN6] and (2) actions against the State of New York where jurisdiction is conferred exclusively on the Court of Claims^[FN7] (see Thrasher v United States Liab. Ins. Co., 19 NY2d at 166). Importantly, neither an act of our state legislature nor contractual terms between parties can divest the Supreme Court of its general original jurisdiction (see Pollicina v Misericordia Hosp. Med. Ctr., 82 NY2d 332 [1993]; Lischinskaya v Carnival Corp., 56 AD3d 116 [2d Dept 2008]).

[1] This court has exclusive jurisdiction over the payment or delivery of property of a judgment debtor (CPLR 5225). This court, therefore, can only be divested of its general, original subject matter jurisdiction over this declaratory judgment by competent [*4]constitutional provisions or acts of federal law. The court finds no such competent provision or law; thus, this matter is squarely within the court's competence.

C. Bankruptcy Stay Extended to Non-Debtors

This case requires this court to determine if the automatic bankruptcy stay triggered by the bankruptcy petition applies to petitioner's application (see 11 USC § 362 [a]). The automatic bankruptcy stay is generally not extended to non-debtors (see Milliken & Co. v Stewart, 182 AD2d 385, 386 [1st Dept 1992],{**65 Misc 3d at 850} citing Credit Alliance Corp. v Williams, 851 F2d 119 [4th Cir 1988]). The automatic stay applies to non-debtors only when a claim against a non-debtor will have an "immediate adverse economic consequence for the debtor's estate" (Queenie, Ltd. v Nygard Intl., 321 F3d 282, 287 [2d Cir 2003]).

[2] This court determines that the entire case must be stayed in order to effectuate the bankruptcy stay against the debtors, since petitioner's claims against the respondents are entirely derivative of its claims against the debtors. Such is the case because any adjudication of the respondents under the agreement and judgment would necessarily affect the debtors' estate. The stay must be extended to the respondents since any adjudication against such party would diminish debtors' estate in bankruptcy.

An extension of the automatic stay protection to non-debtors is reserved for cases where the court finds special or unusual circumstances (In re North Star Contr. Corp., 125 BR 368, 370 [SD NY 1991]). "Special or unusual circumstances" always involve "an immediate adverse consequence for the debtor's estate." (Queenie, 321 F3d at 287.) Examples include an obligation of which the debtor is a guarantor (McCartney v Integra Natl. Bank N., 106 F3d 506, 510-511 [3d Cir 1997]); a claim against the debtor's insurer (In re Johns-Manville Corp., 26 BR 420, 435-436 [SD NY 1983]); an obligation of the debtor to provide indemnification (In re Lomas Fin. Corp., 117 BR 64 [SD NY 1990]); a claim that would reduce the debtor's limited insurance proceeds (A.H. Robins Co., Inc. v Piccinin, 788 F2d 994 [4th Cir 1986], cert denied 479 US 876 [1986]); or "when an identity of interest exists between the debtor and third party non-debtor to the extent that the debtor is the real party defendant and that a judgment against the third party non-debtor will affect directly the debtor" (In re North Star Contr. Corp. at 370-371).

In Queenie (321 F3d at 287), the court found that "[t]he automatic stay can apply to non-debtors, but normally does so only when a claim against the non-debtor will have an immediate adverse economic consequence for the debtor's estate." In extending the automatic stay to the non-debtor corporation, the Queenie court reasoned that since such corporation was related to the debtor, the adjudication of any claim against it would have an immediate adverse consequence for the estate of such debtor.

The motion papers before the court in this case likewise demonstrate such "special or unusual circumstances." The allegations {**65 Misc 3d at 851}of the petitioner's pleading in this action are that the respondents are wholly owned by debtors. Such circumstance, i.e., that respondents [*5]were transferred assets that now contribute to the bankruptcy estate of debtors, is sufficient to establish an impact on debtors' estate. These allegations are substantiated by respondents' monthly operating report and the interim order of the bankruptcy court. The entry of a judgment against the respondents would have an immediate adverse impact on the debtors' bankruptcy estate, since such judgment would trigger respondents' liability to pay the obligation of the judgment debtor corporations.

In a statutory scheme as complex as the Bankruptcy Code the court must take the interplay between statutes into consideration when viewing the effect of the Code on the action before it. While the applicability of section 362 (a) is limited, 11 USC § 105 (a) vests bankruptcy courts with broad powers to "fashion such orders as are necessary to further the purposes of the substantive provisions of the Bankruptcy Code" (United States v Sutton, 786 F2d 1305, 1307 [5th Cir 1986]). Respondents assert that further litigation here would hamper respondents' efforts to assist in debtors' bankruptcy estate. On this score, we note that injunctions under section 105 (a) have been granted by bankruptcy courts in circumstances where "the creditor's action would prevent the non-debtor from contributing funds to the reorganization, or would consume time and energy of the non-debtor that would otherwise be devoted to a reorganization effort" (see e.g. In re United Health Care Org., 210 BR 228, 232 [SD NY 1997], appeal dismissed 147 F3d 179 [2d Cir 1998]). Accordingly, any relief should be sought in bankruptcy court.

Accordingly, judgment for the petitioner would disrupt the automatic stay, which only applies to non-debtors when a claim against a non-debtor will have an immediate adverse economic consequence for the debtor's estate. Judgment for the petitioner would undoubtedly have such an effect. As such, petitioner's application is denied.