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CSX Transportation Inc. v. Island Rail Terminal, Inc.

United States Court of Appeals, Second Circuit

January 10, 2018

CSX Transportation, Inc., Plaintiff- Counter-Defendant-Appellee,
Island Rail Terminal, Inc., Maggio Sanitation Service, Inc., Eastern Resource Recycling, Inc., Appellants, Emjay Environmental Recycling, Ltd., Defendant-Counter-Claimant.

          Argued: September 25, 2017

         On Appeal from the United States District Court for the Eastern District of New York

         Appeal from a judgment and post-judgment order of the United States District Court for the Eastern District of New York (Seybert, /.), directing third-party garnishees to satisfy a creditor's judgment against a judgment debtor as damages for the garnishees' violation of certain restraining notices.

         Affirmed in Part and Vacated and Remanded in Part.

          Jeffrey D. Cohen, Keenan Cohen & Merrick P.C, Philadelphia, Pennyslvania, for Plaintiff-Counter-Defendant-Appellee.

          Jarrett M. Behar, Sinnreich Kosakoff & Messina LLP, Central Islip, New York, for Appellants.

          Before: Livingston, Lynch, and Chin, Circuit Judges.

          Chin, Circuit Judge

         Third-party garnishees appeal from a judgment of the district court (Seybert, /.) directing them to turn over $1, 056, 444.15 to a judgment creditor to satisfy a judgment against a judgment debtor. The district court awarded the sum as damages for the garnishees' violation of certain restraining notices. The garnishees also appeal from the district court's post-judgment order denying their motion to alter the judgment.

         On appeal, the garnishees principally argue that (1) plaintiff was required to commence a special proceeding against garnishees under New York Civil Practice Law and Rules ("C.P.L.R.") article 52, instead of proceeding by motion; (2) garnishees did not violate the restraining notices under C.P.L.R. § 5222(b); and (3) the district court erred in awarding damages and doing so without holding a hearing.

         We affirm in part and vacate and remand in part.


         Plaintiff-counter-defendant-appellee CSX Transportation, Inc. ("CSX") is an interstate rail carrier. Defendant-counter-claimant Emjay Environmental Recycling, Ltd. ("Emjay") operates a waste transfer station. In 2012, appellant Island Rail Terminal, Inc. ("Island Rail") purchased "substantially all" of Emjay's assets for $3, 572, 011.52 pursuant to an Asset Purchase Agreement and Amended Promissory Note. Appellants Maggio Sanitation Services, Inc. ("Maggio") and Eastern Resource Recycling, Inc. ("Eastern Resource") guaranteed Island Rail's payment and performance obligations.

         On September 25, 2014, the district court entered an amended judgment for CSX and against Emjay in this breach of contract suit for $1, 056, 444.15. We affirmed the judgment. CSX Transp., Inc. v. Emjay Envtl. Recycling, Ltd., 629 Fed.Appx. 147 (2d Cir. 2015) (summary order). By this point, at least three other creditors already held judgments against Emjay (based on unrelated claims): Environmental Logistics Services ("ELS") for $1, 238, 807.03, Sullivan Gardner for $294, 318.82, and Matthew Crescimanni ("Crescimanni") for $402, 013.83.

         On November 12, 2014, CSX served third-party garnishees Island Rail, Maggio, and Eastern Resource (collectively, "Garnishees") with restraining notices (the "Restraining Notices") to aid its judgment entered in this case below.[1]The Restraining Notices prohibited Garnishees from "mak[ing] or suffer[ing] any sale, assignment or transfer of, or any interference with" and from "otherwise dispos[ing] of any [] debt" owed to Emjay, except as otherwise provided. N.Y. C.P.L.R. § 5222(b); see also App. 99, 107, 115 (restraining notices). By this point, at least two creditors, Crescimanni and ELS, had already served writs of execution for their judgments against Emjay.[2]

         Approximately three months later, on February 26, 2015, the New York State Supreme Court, Suffolk County, approved a consolidated $2.2 million settlement (the "State Settlement Order") in two unrelated actions involving Emjay, Garnishees, and several of Emjay's other creditors, including ELS, Sullivan Gardner, and Crescimanni.[3] CSX, after joining early settlement talks at the invitation of the parties in the state court proceedings, ultimately declined to participate. Under the terms of the settlement, Garnishees settled the claims asserted by Emjay for $2.2 million, which was then distributed to creditors ELS, Sullivan Gardner, and Crescimanni to satisfy their judgments against Emjay. The state court "so ordered" the settlement. App. 154.

         On June 12, 2015, CSX filed a motion for a turnover order to compel Garnishees to satisfy CSX's September 25, 2014 amended judgment against Emjay, as entered by the district court in this case. In its motion, CSX also argued, alternatively, that Garnishees were liable to CSX for damages because entering into the state settlement violated the Restraining Notices. While the motion was pending, on June 24, 2015, Garnishees issued a check to CSX for $8, 015.03 - the "remainder of the proceeds of the settlement of the [Garnishees'] debt to Emjay pursuant to the" State Settlement Order. App. 230-31. The remaining settlement payments to ELS, Sullivan Gardner and Crescimanni were paid out before this check was issued, but the dates of these payments do not appear to be included in the record. On or about July 9, 2015, CSX served writs of execution for its judgment.

         On February 25, 2016, the district court granted CSX's motion for a turnover order and directed Garnishees to turn over $1, 056, 444.15 to CSX. The district court also held that "to the extent that the Garnishees already made disbursements under the [State] Settlement Order, CSX is entitled to damages in the amount of the Judgment: $1, 056, 444.15." Sp. App. 12. As to damages, the court explained that the Garnishees "acted negligently by ignoring the Restraining Notices because only an order from this Court could alter the Garnishees' obligations." Sp. App. 13. If Garnishees had not violated the Restraining Notices by paying out the $2.2 million state settlement, the district court concluded, the Garnishees would still have had $1, 056, 444.15 available, the amount of CSX's unsatisfied judgment.

         On March 2, 2016, CSX moved the court to enter judgment against Garnishees on the ground that Garnishees already disbursed funds pursuant to the state settlement. On March 10, 2016, Garnishees moved for reconsideration of the district court's February 25, 2016 turnover order. In their motion, Garnishees objected to the district court's failure to hold a hearing and also requested oral argument on their motion.

         On November 2, 2016, without holding oral argument or providing a hearing, the district court denied Garnishees' motion for reconsideration and granted CSX's motion to enter judgment against Garnishees, reaffirming that Garnishees would have been able to satisfy CSX's judgment of $1, 056, 444.15 if Garnishees had not violated the Restraining Notices by distributing funds pursuant to the $2.2 million state settlement. Although the court's initial order rested on the mistaken premise that the settlement funds were still available at the time of judgment, the court clarified that its "ultimate conclusion rested on a damages analysis, " Sp. App. 25, not a turnover analysis, and that Garnishees remained liable. As to damages, the court recognized that the Restraining Notices did not grant priority and agreed that priority creditors should be paid first. Based on the information before it, the court concluded that only Crescimanni's property execution granted him a superior right over CSX, and that offsetting Crescimanni's judgment of $402, 013.83 still would have left sufficient funds for Garnishees to satisfy CSX's judgment. Finally, the court concluded that Garnishees "have not raised any issues of fact" and thus it "need not hold a hearing to determine the proper judgment amount." Sp. App. 33. The Second Amended Judgment was issued on November 8, 2016, and awarded CSX damages in the amount of $1, 056, 444.15 against Garnishees.

         On November 4, 2016, Garnishees moved by letter to alter the judgment on two grounds, which they contended would reduce the judgment to $201, 945.11. On December 1, 2016, the district court issued an order electronically denying Garnishees' motion. First, the district court declined to consider new evidence demonstrating that ELS served its property execution several months earlier - thereby granting it priority before the State Settlement Order - because Garnishees failed to show that they were "justifiably ignorant" of the evidence "despite due diligence." Elec. Order Den. Mot. to Alter J., CSXTransp. v. Island Rail Terminal, Inc., No. 12-cv-1865 (E.D.N.Y. Dec. 1, 2016) (quoting Becnel v. Deutsche Bank AG,838 F.Supp.2d 168, 171 (S.D.N.Y. 2011)). Second, the district court concluded that ...

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