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Leber-Krebs Inc. v. Capitol Records

December 23, 1985

LEBER-KREBS, INC., PLAINTIFF-APPELLANT
v.
CAPITOL RECORDS, DEFENDANT-APPELLEE



Appellant Leber-Krebs appeals from an order of the United States District Court for the Southern District of New York (Goettel, J.) dismissing its complaint against Capital Records in an action alleging fraud on the court. Reversed and remanded.

Author: Cardamone

Before FEINBERG, Brief Judge, KEARSE and CARDAMONE, Circuit Judges

CARDAMONE, Circuit Judge:

Ordinarily, after a plaintiff obtains an ex parte attachment order against a debtor's property it attempts to garnish assets of the debtor in the hands of a third party. This appeal presents the vexing problem that arises when a plaintiff claims that its rights to enforce a judgment against the debtor were lost because the garnishee falsely denied holding any of the debtor's property. As a result, when plaintiff moved within the statutorily mandated five-day period to confirm its attachment, the district court denied the motion. Thereafter plaintiff commenced the instant litigation against the third party as defendant claiming that the third party's false failure to reveal debtor's property in its hands was a damaging lie constituting a fraud on plaintiff and on the court. Defendant moved to dismiss plaintiff's action arguing that the intervening decision to Eisenberg v. Citation-Langley Corp., 92 A.D.2d 795, 459 N.Y.S.2d 788 (1st Dep't 1983), now made it impossible for plaintiff to state a case inasmuch as the unconfirmed attachment order was void. The district court agreed that no remedy could be fashioned on a void order and granted defendant's motion to dismiss.

We disagree with this result. First, Eisenberg does not mandate so stringent an application of New York's CPLR when fraud is alleged. Moreover, the allegations of fraud on a motion to dismiss must be assumed to be true particularly where, other than a denial, there is no evidence in opposition. See Klapprott v. United States, 335 U.S. 601, 603-04, 93 L. Ed. 266, 69 S. Ct. 384 (1949). Second, courts have always had the power to do equity to prevent the rigors of the law or the rigidity of its words from accomplishing an injustice. See id. at 614-15. We therefore reverse and remand to determine whether Capitol prevented Leber-Krebs from confirming its attachment order by the use of fraud.

I FACTS

The facts are relatively straightforward. On February 19, 1981 plaintiff Leber-Krebs Inc., a management company, commenced an action in federal court for commissions against a contemporary recording artist, George Clinton, for his alleged breach of a management contract. An action based upon the same facts and seeking the same relief was then pending in the New York State Supreme Court. Pursuant to Rule 64 of the Federal Rules of Civil Procedure and Article 62 of New York's CPLR, Leber-Krebs obtained an ex parte order that attached royalties due Clinton from record companies, music publishers and concert promoters in New York.

It then attempted on two occasions to levy on the attachment order. First, on March 29, 1982 it caused a copy of the order to be served on Capitol Records, Inc. pursuant to N.Y. CPLR 6214(a) (McKinney 1980). Four days later on April 2 it moved to confirm the ex parte order, giving notice to both Clinton and Capitol.*fn1 Capitol on April 15, 1982 filed a garnishee's statement in compliance with N.Y. CPLR 6219*fn2 reporting that, on that date, Capitol neither held any of Clinton's property, nor was it indebted to him. Capitol did not participate in the argument on the motion to confirm, although Clinton and Leber-Krebs both appeared. The district court denied Leber-Krebs' motion to confirm the attachment because of its belief that confirmation was "not yet ripe for adjudication" inasmuch as Capitol claimed, without dispute, that it held none of Clinton's property.

Leber-Krebs later learned that Capitol had arguably been in possession of property belonging to Clinton. Thus, on December 27, 1982 it made a second attempt to levy on the original attachment order, and timely moved to confirm. Capitol responded in a second garnishee statement dated January 28, 1983. While Capitol continued to maintain that it held none of Clinton's property, this statement did disclose that a division of Capitol, EMI America Records, had entered into a recording contract with Clinton on November 2, 1981. Capitol revealed that it had advanced to Clinton on December 23 and 27, 1982 a total of $100,000 under the terms of that 1981 agreement. On March 1, 1983 the district court, for reasons not here relevant, denied Leber-Krebs' motion to confirm and granted Clinton's cross-motion to vacate the order of attachment.

The instant action against Capitol was then instituted by plaintiff Leber-Krebs on February 22, 1983 in the United States District Court for the Southern District of New York (Goettel, J.). The gravamen of plaintiff's complaint alleges that Capitol's first garnishee statement was false and in violation of the attachment order. Support for this assertion is based on Capitol's second garnishee statement of January 1983 which proves, plaintiff insists, that Capitol falsely filed its initial garnishee statement in April 1982. Leber-Krebs alleges that the payments made to Clinton in December 1982 evidence that Capitol was holding Clinton's property in April of 1982 pursuant to the November 2, 1981 contract between Clinton and EMI. The complaint also asserts that Capitol's false statement constituted a fraud damaging Leber-Krebs' ability to retain control of Clinton's assets and to use them to enforce any subsequently rendered judgment. On June 10, 1983 the district judge denied Capitol's motion for summary judgment, reserved decision on its motion to dismiss the action pending the outcome of Leber-Krebs' state court action against Clinton, and placed this case on its suspense calendar.

In November 1983 plaintiff obtained a State Supreme Court verdict in its action against Clinton. Clinton thereafter filed for bankruptcy in July 1984, which stayed the state court proceeding. In February 1985 Leber-Krebs' action against Capitol was taken off the suspense calendar, and Capitol's motion to dismiss was granted. The district court relied on Eisenberg, 92 A.D.2d at 795, decided on March 15, 1983, nearly a month after plaintiff commenced the instant action against Capitol. Because Eisenberg held that the five-day period for confirming an attachment runs from the first levy of the order whether or not the garnishee possesses the debtor's property, the district court judge held that Leber-Krebs' initial motion to confirm on April 2, 1982 should have been granted. Yet, because Eisenberg made clear that an unconfirmed attachment order was void, the district court held that Leber-Krebs could not maintain an action against Capitol for violating it.

In discussing the plaintiff's action the district court was troubled by the fact that it had been under a "mistaken impression" regarding "appropriate attachment procedures." But, the district judge did not discuss the merits of Leber-Krebs' fraud claim, nor did it explore whether Capitol had in fact falsified its garnishee statement. Rather, it held that the Eisenberg decision left it no choice but to allow the fraud, if any, practised by Capitol to stand, regardless of whether Leber-Krebs' original motion to confirm had been denied in reliance on Capitol's false representations. It believed there was no remedy to redress plaintiff's grievance.

II DISCUSSION

Leber-Krebs argues that the Eisenberg decision, which clarified the law during the course of this litigation, should be ignored for purposes of this lawsuit to avoid a manifestly unjust result. Plaintiff also maintains that Capitol's actions in allegedly falsifying its garnishee statement constituted a fraud upon the court; and that the district court relied upon Capitol's statement when it granted Clinton's motion to deny confirmation of the initial attachment order. Thus, Leber-Krebs ...


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