The creditor entered into an agreement with the debtor to provide it telecommunications services in exchange for payments of over $3,000,000 per month. The debtor defaulted, and the creditor brought an action to recover the amount on the unpaid invoices. The trial court entered judgment in favor of the creditor, and the creditor sent a restraining notice to the bank that it was prohibited from transferring or assigning any of the debtor’s property, absent a court order, satisfaction of the judgment, or state law. The bank complied and held the debtor’s accounts in a deposit box. At the same time, the debtor’s parent company had filed for Chapter 11 bankruptcy. A third party (the “secured party”) had agreements with both the debtor and its parent company and had perfected its security interests in the debtor’s assets before the judgment was entered for the creditor by the trial court. The secured party claimed that the debtor’s parent company had defaulted and that it was entitled to the debtor’s funds. However, the bank refused to release the debtor’s funds to the secured party unless the creditor consented to the release or a court ordered its release. The creditor did not consent; therefore, the secured party filed a motion to quash the restraining notice the creditor provided the bank, to intervene in the dispute between the creditor and debtor, for an order requiring the bank to release the debtor’s funds to satisfy the secured interest, and for attorney’s fees.
In Acemetel USA LLC v. Ptgi Int’l Carrier Servs., 23-cv-11027 (LJL), 2024 WL 4467174, 2024 U.S. Dist. Lexis 186029 (S.D.N.Y. Oct. 10, 2024) (opinion not yet released for publication), the court vacated the restraining notice provided to the bank, permitted the secured party to intervene, and declined to award attorney’s fees. As a preliminary matter, the court addressed whether it had subject matter jurisdiction. The creditor argued that the secured party did not show complete diversity. However, the court disagreed because the original proceeding established diversity between the creditor and the debtor, and courts have “ancillary jurisdiction over subsequent proceeding necessary to ‘vindicate its authority.’” Dulce v. Dulce, 233 F.3d 143, 146 (2d Cir. 2000). Therefore, this court, which had previously entered judgment for the creditor and permitted it to issue the restraining notice, was the “only court with authority to relieve [the secured party] from the effect of the restraining notice.” The court then addressed the motion to quash or vacate the restraining notice. The secured party argued that the restraining notice “violat[ed] the rights of priority lienholders” because it had perfected its security interest in the debtor’s property before the trial court entered the judgment in favor of the debtor. The court agreed, stating that “a perfected security interest affords the creditor a superior claim… over a subsequent-arising judgment.” Thus, the court found that because the secured party had properly perfected its security interest, it had a “superior claim to the [debtor’s] accounts,” and the restraining notice should be vacated. Next, the court permitted the secured party to intervene in the proceeding between the debtor and the creditor. The court reasoned that because the secured party’s security interest in the debtor’s property was perfected, and the bank would not release the funds, intervention was “necessary for [the secured party] to vindicate its security interest in the accounts.” Finally, the court declined to award the secured party attorney’s fees because the creditor had not acted “clearly in bad faith.” Ultimately, the court vacated the restraining notice and permitted the secured party to intervene.
By Hayden Mariott: [email protected]
Edited By Kristin Meurer: [email protected]