Plaintiff Fails to Provide Evidence of Fraudulent Intent in Bid to Obtain Prejudgment Order of Attachment

• Posted on: Jun 3 2020

It has been a long time since this Blog examined a request for a pre-judgment order of attachment. (See here.) Today, we take another look at this provisional remedy.

[Ed. Note: For our reader’s convenience, we are reprinting a portion of the legal discussion (with some changes) from our earlier article.]

What is Prejudgment Attachment? 

Prejudgment attachment is a provisional remedy that provides a plaintiff with a statutory mechanism by which he/she can secure a defendant’s assets during the pendency of a lawsuit. In effect, an order of attachment is a lien against the defendant’s property. As such, a prejudgment order of attachment increases the likelihood of recovery on a later-obtained judgment in the action.

The Law in New York

Article 62 of the Civil Practice Law & Rules (“CPLR”) governs prejudgment attachment orders. Sections 6201(1) through 6201(5) provide the grounds upon which a plaintiff can obtain such relief. Under these sections, a plaintiff can obtain a prejudgment order of attachment when: the defendant is a foreign corporation not qualified to do business in New York (CPLR § 6201(1)); the defendant resides in New York but cannot be served with process despite diligent efforts to do so (CPLR § 6201(2)); the defendant with intent to defraud creditors or frustrate enforcement of a judgment that might be rendered in the plaintiff’s favor, has assigned, disposed of, encumbered or secreted property, or removed property from the state or is about to do so (CPLR § 6201(3)); the action is brought by a crime victim and is brought against the person or legal representative of the person convicted of the crime and seeks to recover damages sustained as a result of crime (CPLR § 6201(4)); or the cause of action is based on a judgment, decree or order of a court of the United States or of any other court that is entitled to full faith and credit in New York state, or on a judgment that qualifies for recognition in New York (CPLR § 6201(5)).

Prejudgment attachment is a drastic remedy. For this reason, the plaintiff must establish that there is a cause of action against the defendant, that it is probable the plaintiff will succeed on the merits (which requires more than the allegations required for a complaint), that one or more statutory grounds for attachment are met, and that the amount demanded exceeds all known counterclaims. CPLR § 6212(a).  Notably, the plaintiff’s moving papers must contain evidentiary facts — as opposed to conclusions — proving the basis upon which the attachment remedy is sought.  Societe Generale Alsacienne De Banque, Zurich v. Flemingdon Dev. Corp., 118 A.D.2d 769, 773 (2d Dept. 1986). The evidence must be established by an affidavit made by a person with actual knowledge. Rosenthal v. Rochester Button Co., Inc., 148 A.D.2d 375 (1st Dept. 1989). Applications supported solely by an affidavit of an attorney who lacks personal knowledge of the facts surrounding the transaction giving rise to the action are insufficient. 

Where fraud is alleged, under CPLR § 6201(3), “the plaintiff must demonstrate that the defendant has concealed or is about to conceal property in one or more of several enumerated ways, and has acted or will act with the intent to defraud creditors or to frustrate the enforcement of a judgment that might be rendered in favor of the plaintiff’.” VNB NY, LLC v. Rapaport, 2016 N.Y. Slip. Op. 50099 (Sup. Ct., Kings County Jan. 29, 2016) (citations omitted). “[M]ere removal, assignment or other disposition of property is not grounds for attachment.” Computer Strategies v. Commodore Bus. Machs., 105 A.D.2d 167, 173 (2d Dept. 1984). “The moving papers must contain evidentiary facts, as opposed to conclusions, proving the fraud.” Id.  Thus, it is not sufficient to merely raise a suspicion of an intent to defraud. Skycom SRL v. FA & Partners, Inc., 2016 N.Y. Slip Op. 32405 (Sup. Ct., N.Y. County Dec. 7, 2016). Rather, “it must appear that such fraudulent intent really existed in the mind of the defendants, and not merely in the ingenuity of the plaintiffs.” Id. (citation and internal quotation marks omitted).

Even when the plaintiff satisfies the statutory grounds for an order of attachment, he/she still “must demonstrate an identifiable risk that the defendant will not be able to satisfy the judgment.” Mascis Inv. P’ship v. SG Cap. Corp., 2017 N.Y. Slip Op. 30813 (Sup. Ct., N.Y. County Apr. 21, 2017) (quoting VisionChina Media Inc. v. Shareholder Representative Servs., LLC, 109 A.D.3d 49, 60 (1st Dept. 2013)).  The risk “should be real.” VisionChina, 109 A.D.3d at 60 (citation and internal quotation marks omitted). In this regard, the court may consider the defendant’s financial position (i.e., whether the defendant is in “serious financial distress” (Elton Leather Corp. v. First Gen. Resources Co., 138 A.D.2d 132, 134 (1st Dept. 1988)) or past and present conduct, including the defendant’s history of paying creditors and any statements or action evincing an intent to dispose of assets. VisionChina, 109 A.D.3d at 60.

In addition, the plaintiff must post a bond, in an amount not less than $500 as fixed by the court, for the purpose of making the defendant whole for all costs and damages, including reasonable attorneys’ fees, which may be sustained by the reason of the attachment if the defendant recovers judgment or it is finally decided that the plaintiff was not entitled to an attachment order. CPLR § 6212(b). Typically, courts require the undertaking to be in an amount equal to or greater than the amount of the attachment. E.g., Von Bock v Metropolitan Life Ins. Co., 223 A.D.2d 700 (2d Dept. 1996).

Erensel v. Abitbol

On May 29, 2020, in Erensel v. Abitbol, 2020 N.Y. Slip Op. 31587(U) (here), Justice Arlene P. Bluth of the New York Supreme Court, New York County, considered the foregoing principles and declined to grant the plaintiff’s motion for a prejudgment attachment order under CPLR § 6201(3) due to a lack of evidence of fraudulent intent.

Background

Erensel concerned the business relationship between plaintiff, Brent Erensel, and defendants, Yair Abitbol (“Abitbol”) and Zurich Funding NA Inc. (“Zurich”).

Plaintiff alleged that Abitbol ran a fraudulent scheme to induce plaintiff into investing $75,000 in Zurich – an initial deposit of $25,000 and an additional investment of $50,000 – to acquire an ownership interest in the company. Plaintiff contended that Zurich was a fraudulent company and that Abitbol deliberately chose the name and the company logo to mimic the well-known Zurich Insurance Company. Plaintiff asserted that Zurich had few assets and that the address provided for the business was fake.

Plaintiff successfully obtained an order preliminarily restraining defendants from transferring any assets to the extent of the amount claimed by plaintiff, including a specific bank account at TD Bank and any other bank account in either defendants’ name at TD Bank.

Plaintiff moved for a prejudgment order of attachment.

Defendants opposed the motion, claiming the dispute between the parties was merely a disagreement over plaintiff’s desire to leave the partnership. Defendants denied that there was any fraud, noting that there could be no fraud since plaintiff received payments from Zurich – between November 2017 through May 2018, plaintiff received a little over $16,000 from his partnership interest in Zurich. 

The Court’s Decision

The Court denied the motion and vacated the order restraining defendants from transferring any assets.

The Court held that plaintiff failed to meet his burden for a prejudgment order of attachment. In particular, the Court found no proof of fraud: “Critically, plaintiff admits that he received monthly payments from Zurich from November 2017 through May 2018 before the payments ceased. While these payments do not prove the absence of fraud, they severely undercut the high burden a plaintiff must meet in order to get an attachment.” Slip Op. at *3 (orig’l emphasis). 

The Court also held that plaintiff failed to prove that defendants concealed or were about to conceal assets in order to evade the recovery of a judgment. Id. This was especially so since the parties disputed the events in question. Id. (noting, “defendants have appeared and offer a very different account of what took place”). 

Put another way, an attachment is not appropriate where two parties disagree over the terms of an investor’s departure from a partnership. It may be that plaintiff is in fact entitled to the over $70,000 he seeks. But plaintiff’s eventual recovery is not a reason to grant the provisional remedy sought here, where plaintiff has made no showing that defendants have taken any steps to be “judgment proof.” This Court declines to grant an attachment under these circumstances

Id. at *3-*4.

In short, explained the Court, “[t]his is not a situation where plaintiff has proof that defendants transferred money from its accounts, attempted to shut down the business or have disappeared.” Id. at *3.

Takeaway

The purpose of a prejudgment order of attachment “is not merely to ensure a plaintiff can recover the amount sought if he or she prevails in a case.” Slip Op. at *3. “Otherwise,” as Justice Bluth observed, “a plaintiff would be entitled to an attachment in nearly every case.” Id. The remedy is reserved for a specific set of circumstances. Proof of those circumstances is required.

Since New York courts strictly construe CPLR § 6201 “in favor of those against whom it may be employed” (Hume v. 1 Prospect Park ALF, LLC, 137 A.D.3d 1080, 1081 (2d Dept. 2016)), the burden on the movant is high. In Erensel, plaintiff could not meet this burden.