Epperson v. Entertainment Express

Decision Date01 August 2000
Docket NumberDocket No. 00-7567
Parties(2nd Cir. 2001) DIRK EPPERSON and BETTY SCHNEIDER, Plaintiffs-Appellants, v. ENTERTAINMENT EXPRESS, INC., now known as Advantix, Inc., IRVIN RICHTER, HILL INTERNATIONAL, INC., and HILL ARTS & ENTERTAINMENT SYSTEMS, INC., now known as Haesi Software, Inc., Defendants-Appellees
CourtU.S. Court of Appeals — Second Circuit

Appeal from an order of the United States District Court for the District of Connecticut (Dominic J. Squatrito, Judge) dismissing plaintiffs-appellants' claims for lack of subject matter jurisdiction.

VACATED and REMANDED.

[Copyrighted Material Omitted] ROBERT SULLIVAN, Westport, CT, for Plaintiffs-Appellants.

CAROLYN W. KONE, Brenner, Saltzman & Wallman, LLP, New Haven, CT, for Defendants-Appellees.

Before: VAN GRAAFEILAND and KATZMANN, Circuit Judges and JONES, District Judge.*

JONES, District Judge:

Introduction

This case requires us to consider whether this Court's decision in Empire Lighting Fixture Co. v. Practical Lighting Fixture Co., 20 F. 2d 295 (2d Cir. 1927), survives the Supreme Court's ruling in Peacock v. Thomas, 516 U.S. 349 (1996). We hold that it does. Having decided on the basis of Empire Lighting that the district court had jurisdiction over this action, we also hold that the appellants are not precluded from bringing this suit and the district court erred in dismissing it.

We vacate and remand.

I. BACKGROUND

On October 4, 1995, the appellants filed a diversity action ("the first action") in the United States District Court for the District of Connecticut against Hill Arts and Entertainment Systems, Inc. ("HAESI") seeking damages for breach of a software development contract and an unpaid account. In October 1996, appellants learned that HAESI had previously sold substantially all of its assets in May of 1996 to Entertainment Express, Inc. ("Express"). After HAESI failed to appear and to comply with the district court's discovery orders, the court granted a default judgment against it on February 11, 1997.1

On March 12, 1997, after the default judgment against HAESI was granted but before its entry, the appellants amended the complaint in the first action. The amended complaint incorporated the two contract claims alleged in the original complaint and added two new claims and three new defendants: Express, Hill International, Inc. ("Hill") and Irvin Richter ("Richter"). The new third claim alleged that Richter and Hill owned and controlled HAESI and that by virtue of the unity of interest and ownership between the three defendants Hill and Richter should be held liable for HAESI's obligations on an alter ego theory. The fourth claim specifically alleged that HAESI's May 1996 asset sale to defendant Express was a fraudulent conveyance. Both the original and amended complaints asserted the diversity of citizenship of the parties under 28 U.S.C. § 1332 as the basis for subject matter jurisdiction.

On June 30, 1997, the appellees moved to dismiss the amended complaint on the ground that diversity no longer existed. They argued that as of the date of the amended complaint defendant Express (which at this point had changed its name to Advantix, Inc.) had shifted its corporate governance from Connecticut to California making it a California citizen and destroying diversity.

On March 23, 1998 the district court dismissed the amended complaint against the appellees for lack of subject matter jurisdiction because the parties lacked complete diversity. The court concluded that both the appellants and appellee Express were citizens of California. The district court subsequently denied appellants' motion for reconsideration without opinion in a summary order.

Appellants did not appeal the decision. Rather, on April 27, 1999 they filed a new action ("the second action") in the District of Connecticut. The first claim essentially mirrored the fraudulent conveyance claim in the amended first action, alleging that HAESI fraudulently conveyed its assets to defendant Advantix, Inc. The second claim alleged that HAESI had fraudulently granted liens in its property in favor of Hill and/or Richter and that the liens lacked consideration and were not properly perfected. The complaint pled the court's inherent enforcement jurisdiction as the basis of subject matter jurisdiction, acknowledging the lack of diversity among the parties. Notably, plaintiffs did not plead alter ego as a basis for liability in this second action.2 On March 31, 2000 the district court dismissed the second action for lack of subject matter jurisdiction.

In its opinion the district court noted that the appellants sought to enforce a prior default judgment entered against HAESI and that they were proceeding on a fraudulent conveyance theory. The court acknowledged that federal courts have ancillary jurisdiction to enforce their judgments, but held that plaintiffs' fraudulent conveyance claims fell outside the court's ancillary jurisdiction. Citing Peacock, the court found that the fraudulent conveyance claims were "based on new theories of liability that were not asserted in the original complaint" and required an independent basis for jurisdiction. Since the court had determined that the parties lacked diversity, it held that it lacked subject matter jurisdiction and dismissed the action.3 That decision is the subject of this appeal.

II. DISCUSSION
A. Jurisdiction

We begin with the question of whether the district court had jurisdiction to consider the second action -- a question we review de novo. See In re Vogel Van & Storage, Inc., 59 F.3d 9, 11 (2d Cir. 1995).

The seminal case in this Circuit is Empire Lighting Fixture Co. v. Practical Lighting Fixture Co., 20 F.2d 295 (2d Cir. 1927). There, the plaintiff obtained a judgment against the Practical Company for infringement of a design patent. Thereafter, it filed a "supplemental bill" alleging that the Practical Company had fraudulently transferred its assets to the Perfect Company and a Mr. Aarons for the purpose of preventing plaintiff from recovering its judgment. The District Court found that the transfer had in fact been made to prevent the execution of plaintiff's judgment and awarded judgment against the Perfect Company for the amount of profits due to the plaintiff from the Practical Company.

On appeal, the Second Circuit first considered whether the action against the Perfect Company came within the ancillary jurisdiction of the district court, "regardless of the fact that there was no diversity of citizenship between the parties." Id. at 296. Writing for the Court, Judge Learned Hand answered that question in the affirmative:

[W]e think that the District Judge was right in concluding that out of it might be spelled enough to support it as a bill to set aside a fraudulent conveyance. As such it was within the ancillary jurisdiction of the District Court, regardless of the fact that there was no diversity of citizenship between the parties. A fraudulent conveyance is void under the New York statute, and may be disregarded, even by a creditor whose judgment is entered afterwards. A suit to set it aside is not therefore essential, but is only an alternative remedy. It clears the title of the creditor in limine, and is in aid of the principal purpose of the suit; it "is in substance an equitable execution."

20 F.2d at 296-97 (internal citations omitted).

In so holding, the Court distinguished H.C. Cook Co. v. Beecher, 172 F. 166 (D. Conn. 1909), aff'd, 217 U.S. 497 (1910):

Cook v. Beecher was quite another case. There the plaintiff tried to hold the directors of a company upon their liability as such for a judgment rendered against it. Such a liability is not an incident to the collection of the judgment itself, but an independent cause of action.

Empire Lighting, 20 F.2d at 297 (citations omitted).

Thus, in this Circuit, under Empire Lighting, a distinction for jurisdictional purposes exists between an action to collect a judgment (as in Empire Lighting) and an action to establish liability on the part of a third party (as in Beecher). The former does not require an independent jurisdictional basis and may proceed even if the parties are non-diverse. The latter must have its own source of federal jurisdiction, so that absent an independent basis for federal jurisdiction a new defendant may not be haled into federal court. If Empire Lighting remains good law, the conclusion seems inescapable: because the second action in this case was a suit to set aside a fraudulent conveyance (and not to establish liability) "it was within the ancillary jurisdiction of the District Court." Id. at 296.

Appellees' principal argument is that Empire Lighting is no longer good law after the Supreme Court's decision in Peacock v. Thomas, 516 U.S. 349 (1996). We disagree.

In Peacock, plaintiff Thomas prevailed on an ERISA claim against his employer in the district court. While the judgment was on appeal, an officer and shareholder of the employer company named Peacock settled many of the employer's accounts. Thomas failed to execute on the judgment pending appeal, and was unsuccessful in collecting on the judgment after its affirmance by the court of appeals. Thomas thereafter sued Peacock personally in federal court, alleging fraudulent conveyance of the company's assets to prevent satisfaction of the ERISA judgment, and later added a claim to pierce the corporate veil. The district court pierced the corporate veil and entered a judgment against Peacock in "the precise amount of the judgment" against the employer. Id. at 352. The court of appeals affirmed, holding that the district court had ancillary jurisdiction over the suit against Peacock.

The Supreme Court agreed to hear Peacock's appeal and framed the issue as "whether federal courts possess ancillary jurisdiction over new actions in which a federal judgment creditor seeks to...

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