Ross et al v. Thomas et al

Filing 138

OPINION AND ORDER that for the reasons that follow, the Receiver's Application is granted in its entirety ($336,210.66), and the Creditors' Application is granted in part ($129,379.27) re: 116 MOTION for Attorney Fees, filed by Receiver, 130 MOTION for Attorney Fees, filed by Joel Ross, Jerde Development Company, Eric Levine. (Signed by Judge Shira A. Scheindlin on 6/6/11) (cd)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

._--------------------------------------------------

)(

JOEL ROSS, ERIC LEVINE, and
JERDE DEVELOPMENT COMPANY,
OPINION AND ORDER
Plaintiffs,
09 Civ. 5631 (SAS)
- againstSTANLEY E. THOMAS and S.
THOMAS ENTERPRISES OF
SACRAMENTO, LLC,
Defendants .

_--------------------------------------------------

.

)(

SHIRA A. SCHEINDLIN, U.S.D.J.:
I.

INTRODUCTION
By Order entered December 21, 2010, this Court appointed Melanie

1. Cyganowski as Receiver in this matter, authorizing her "to administer and
collect" certain interests of Stanley E. Thomas and S. Thomas Enterprises of
Sacramento, LLC (together, the "Debtors") "to the extent necessary to satisfy" the
$13,534,904.04 joint and several judgment entered against them by this Court on
October 12,2010 (the "Judgment"). I In the same Order, and upon Judgment

See 12/21110 "Appointment and Contempt Order" [Docket No. 103].

-1­

Creditors’ (“Creditors”) request, this Court held Thomas in contempt of Court.2
Now before the Court are (1) the Receiver’s Application for Allowance of
Commission, Fees, Costs, and Expenses (“Receiver’s Application”)3 and (2)
Creditors’ Application for Award of Attorneys’ Fees Incurred in Addressing
Defendant Thomas’s Contempt as Compensation for Creditors’ Expenses as
Aggrieved Parties (“Creditors’ Application”).4 For the reasons that follow, the
Receiver’s Application is granted in its entirety, and the Creditors’ Application is
granted in part.
II.

BACKGROUND
The background of this case, and the reasons for my appointment of a

Receiver and decision to hold Thomas in contempt, are laid out in great detail in
the December 21st Appointment and Contempt Order, and are further reflected in
the transcript of an Oral Argument held in this Court on December 17, 2010, on an
Order to Show Cause issued at Creditors’ request.5 In short, after this Court
entered the Judgment against Debtors on October 12, 2010, they appealed.

2

See id.

3

See Docket No. 116.

4

See Docket No. 130.

5

See Docket No. 106.
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However, because they did not file a supersedeas bond, Creditors’ enforcement of
the Judgment during the pendency of the Appeal was not stayed. Accordingly, a
Restraining Notice was served upon Debtors on October 29, 2010, forbidding
Debtors to make or suffer any sale, assignment, transfer, or interference with any
property in which he or it had an interest.
Thomas violated the Restraining Notice.6 As a result, Creditors’
Georgia counsel (SGR) and New York counsel (Tashjian & Padian (“T&P”))
“settled on a multi-state strategy” to address Thomas’s conduct.7 SGR would seek
6

First, Thomas encumbered certain land in the Cayman Islands
(“Cayman Islands Land”) by (1) creating a limited liability company (“Old
Milton”), (2) causing Old Milton to obtain a loan by giving a $6,500,000
Promissory Note to a hard-money lender, (3) personally making an Unconditional
Guaranty of Payment and Performance on the loan, and (4) collateralizing the
guaranty with the Cayman Islands Land. The proceeds of the hard-money loan
were five certified bank checks (“Certified Checks”) totaling $6,140,536.61 and
made payable to the “Rim Debtors” – four Thomas-controlled entities in
bankruptcy in the United States Bankruptcy Court, Northern District of Georgia.
The proceeds of the Certified Checks were intended to fund the Rim Debtors’ exit
from brankruptcy. Second, Thomas transferred five percent of his interests in the
Rim Debtors to J. Bruce Williams some time after October 29, 2010. See
Appointment and Contempt Order.
These violations were discovered on December 2, 2010, by Creditors’
counsel in Georgia – Smith, Gambrell & Russell, LLP (“SGR”) – while attending
a hearing in the bankruptcy cases filed by the Rim Debtors. See Declaration of
Colin Delaney, Counsel for Creditors, in Support of Creditors’ Application
(“Delaney Decl.”) ¶ 11.
7

See id. ¶ 12. According to Creditors, “[f]rom entry of the Judgment in
October 2010 through the posting of the bond in February 2011, Judgment
Creditors relied on the services of both T&P and SGR for closely coordinated
-3-

emergency relief from the federal court in Atlanta, and would work with T&P in
New York to prepare papers seeking to have Thomas held in contempt for
violating the restraining notices. In accordance with that strategy, T&P requested
an Order to Show Cause (1) why Debtors should not be (i) enjoined from taking
certain actions with respect to four specific properties controlled by Debtors, (ii)
ordered to turn over the Certified Checks, and (iii) ordered to turn over stock
certificates of any of the companies in which Debtors held interests (“Debtors’
interests”); (2) why this Court should not appoint a Receiver to administer and
collect Debtors’ interests; and (3) why Thomas should not be held in contempt of
court. I granted the Order on December 12, 2010.8
Following briefing and oral argument, I appointed Cyganowski
Receiver “[p]ursuant to Fed. R. Civ. P. 64 and CPLR § 5228(a),” and authorized
her
judgment-enforcement litigation. T&P worked on matters focused on New York,
where this case was initiated and litigated to judgment, and where post-judgment
collection activities began and ended. SGR worked on matters focused on
Georgia, where [] Thomas resides and manages his extensive business empire.”
Creditors’ Application at 5-6.
8

See Docket No. 91. Meanwhile, one day later, SGR sought a
restraining order and charging orders against the entire Thomas Empire in Atlanta
federal court, arguing that Thomas’s contemptuous conduct showed the need for
emergency injunctive relief. See Delaney Decl. ¶ 12. The Atlanta federal court
granted the motion, entering a preliminary and permanent injunction on December
15, 2010. See id.
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to administer and collect Debtors’ interests in (i) any of the LTDs
and (ii) any other limited-company or corporation (“Debtors’
interests”) to the extent necessary to satisfy the Judgment; Debtors
retain the power to improve, lease, repair, and/or sell those
interests for the purpose of satisfying the Judgment, but may do
so only with the prior approval of the Receiver.9
I indicated that
[t]he Receiver is entitled to reimbursement by Debtors for
necessary expenses and a commission of Eight Hundred and
Thirty-Five Dollars ($835) per hour, not to exceed five percent of
the sums received and disbursed by her, and is authorized to
engage and employ persons, including accountants, attorneys,
investigators and experts, to assist in the carrying out of her duties
and responsibilities, such individuals to be reimbursed for
necessary expenses and compensated at an hourly rate.
I also ordered Debtors immediately to turn over to the Receiver any stock
certificates representing Debtors’ interests and held Thomas in civil contempt of
Court. I ordered Thomas to purge his contempt either by (1) unwinding the
transaction that led to the encumbrance of the Cayman Islands Land or (2) posting
a supersedeas bond in the full amount of the Judgment (“Appeal Bond”). Thomas
was also ordered to pay ten thousand dollars per day for each day after December
20, 2010 until January 20, 2011 that he remained in contempt, and to be jailed for
every day following January 20, 2011 that he remained in contempt. In an order
dated December 30, 2010, I clarified that Thomas was to pay his contempt fines to

9

Appointment and Contempt Order.
-5-

the Receiver (“12/30 Order”).
The same day, Debtors moved the United States Court of Appeals for
the Second Circuit to stay enforcement of the payment provisions of the
Appointment and Contempt Order and the 12/30 Order (together, the “Contempt
Orders”) (the “Stay Motion”). The Second Circuit stayed enforcement conditioned
on Debtors’ filing a supersedeas bond in the amount of one-hundred thousand
dollars. On January 5, 2011, Debtors filed a supersedeas bond in that amount (the
“Stay Bond”), but both the Receiver and Creditors alleged deficiencies in such
bond as not in conformance with either the Contempt Orders or the Second
Circuit’s order. In an attempt to remedy the deficiencies in the bond, the Receiver
filed an opposition to the Stay Motion in the Second Circuit (the “Stay
Opposition”) on the grounds that the bond: (a) omitted from its factual recitations
that it was issued with respect to the appeal from the contempt order and did not set
forth the purpose of the Bond; (b) did not recite that, in accordance with the
Court’s Orders, the one-hundred thousand dollars should be paid to the Receiver
upon the determination by the Second Circuit – were it to so decide – that the
appeal was denied; and (c) did not make clear whether the Stay Bond would be
available to pay the full amount of the daily contempt fees which, by the time the
Stay Motion was decided, would likely be far in excess of one-hundred thousand

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dollars.
After the filing of the Stay Opposition, Creditors requested that the
Second Circuit adjourn adjudication of the Stay Motion to afford Thomas
additional time to secure financing and take steps to purge his contempt by posting
a bond for the full amount of the Judgment by January 20, 2011. By Order dated
January 11, 2011, the Second Circuit agreed to adjourn its hearing of the Stay
Motion and granted a stay of enforcement of the payment provisions of the
Contempt Orders for nine days conditioned on the Debtors’ posting a second
supersedeas bond for ninety-thousand dollars.
Also during this same time period, Creditors requested that the
Receiver and her counsel review and authorize various proposed settlements
involving assets owned by Thomas and his affiliated entities. In connection with
one such proposed settlement, on January 18, 2011, the Receiver received
$19,866.15 in proceeds, to be held in escrow, as a condition of her having
authorized a sale of certain restrained real property controlled by Thomas located
in Sarasota, Florida. In addition, Thomas sought authority from the Receiver and
the Court to consummate the sale of certain real property he controlled in the
Cayman Islands (the “Cayman Islands Sale”) so that he could obtain the funds
necessary to secure the ultimate satisfaction in full of the Judgment and all

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expenses associated with it, thereby (a) purging his contempt, (b) staying all
further enforcement of the Judgment during the pendency of the appeal to the
Second Circuit, and (c) obtaining a release of all restraints presently in effect
arising from the entry of the Judgment and related proceedings.
On January 18, 2011, I entered an order signed on January 14, 2011
(the “Settlement Order”) lifting the restraints contained in the prior Orders of this
Court to the extent of permitting Thomas to consummate and close on the Cayman
Islands Sale enabling Thomas to provide the Receiver with fourteen million dollars
to be held in escrow. Thereafter, Thomas closed and consummated the Cayman
Islands Sale and caused fourteen million dollars to be delivered to the Receiver on
January 18, 2011, which funds were held in escrow by the Receiver. In the
Settlement Order, I directed the Receiver to hold in escrow all proceeds not used to
procure a conforming Appeal Bond, which proceeds would be available to pay
(i) such fees, costs, and expenses of the Receiver and her counsel
as shall be allowed by the Court on application by the Receiver .
. . , and (ii) such other amounts as the Court may award in favor
of any party hereto upon application to the Court . . . .10
All remaining amounts, I directed, were to be “remitted by the Receiver to Thomas

10

Settlement Order ¶ 18.
-8-

upon the termination of the Receivership, or further Order of this Court.”11
As part of the global settlement entered into by the parties pursuant to
the Settlement Order, the Receiver also withdrew a “limited objection” she had
filed to the Disclosure Statement for the Rim Debtors’ Third Amended Joint Plan
of Reorganization (the “Plan”) in their consolidated Northern District of Georgia
Chapter 11 bankruptcy cases. The Rim Debtors’ proposed Plan contemplated the
disposition of assets of the Debtors (particularly of Thomas) that were restrained
by the terms of the Appointment Order.
On February 8, 2011, I entered another order directing the Receiver to
release from escrow and remit to a named surety sufficient funds to obtain a
supersedeas bond in the amount of the Judgment and to pay the surety’s premium
for issuance of the appeal bond (“Bond Order”).12 After the Receiver paid the
surety for the face amount of the bond and the premium, $369,915.11 remained in

11

Id. ¶ 19. Following entry of the Settlement Order, SGR worked with
Thomas’s counsel to prepare and submit joint motions to dissolve the restraints and
charging orders in Georgia and return property that was levied upon by a Georgia
sheriff or subject to garnishment in Georgia courts, as required by the Settlement
Order. See Delaney Decl. ¶ 13. Similarly, T&P “coordinated and supervised the
unwinding of various actions taken in California, Texas, Florida and Georgia to
enforce the Judgment,” as required by the Settlement Order. See Affidavit of
Gerald Padian, Counsel for Creditors, in Support of Creditors’ Application
(“Padian Aff.”) ¶ 17.
12

See Docket No. 111.
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escrow held by the Receiver.13 In accordance with the Bond Order, Creditors
calculated that over a period of two years, $64,967.54 in post-judgment interest
would accrue on the Judgment (the “Interest Amount”).14
III.

DISCUSSION
A.

Receiver’s Application
The Receiver now applies for allowance of payment of $299,519.55,

providing as support a detailed list of professional services rendered; computerized
time records; a summary sheet of the attorneys and paraprofessionals and their
corresponding initials, billing rates, and the number of hours incurred by
Receiver’s Counsel, along with computerized time records of Counsel; and a
computerized printout of the disbursements of the Receiver and her Counsel,
actually and necessarily incurred in the performance of the Receiver’s duties.
Debtors object to the Receiver’s Application, maintaining that it should be rejected
in its entirety because (1) the Rules of the Chief Judge of the New York State

13

See Schedule 1 to the Declaration of Melanie L. Cyganowski, Esq., in
Support of Receiver’s Application, Ex. A to Receiver’s Application.
14

In the Bond Order, the Receiver was directed to remit the Interest
Amount to the Clerk of the Court to be held in the registry for the sole and
exclusive benefit of Creditors as security for payment of accruing post-judgment
interest. See Bond Order ¶¶ 5-7. Therefore, after payment of the Interest Amount,
$304,947.57 remains in escrow for satisfaction of the Receiver’s Application and
Creditors’ Application.
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Court of Appeals “preclude[] a receiver from using the services of his or her law
firm in the absence of a ‘compelling reason’”15 and (2) the Receiver “improperly
seeks reimbursement for services that her own submissions demonstrate fall well
beyond the appropriate scope of her appointment.”16
1.

Applicability of the Rules of the Chief Judge of New York

Section 36.2 of Title 22 of the New York Compiled Codes, Rules and
Regulations governs “Appointments by the Court.” Subsection (c)8 of part 36.2 of
the Rules provides that
[n]o receiver or guardian shall be appointed as his or her own
counsel, and no person associated with a law firm of that receiver
or guardian shall be appointed as counsel to that receiver or

15

Debtors’ Objection to Receiver’s Application at 1 (quoting N.Y.
Comp. Codes R. & Regs. 22 § 36.2(c)(8)).
16

Id. at 2. Debtors do not challenge either the hourly rates charged by
the Receiver’s firm, Otterbourg, Steindler, Houston & Rosen, P.C. (“OSH&R”), or
the amount of time spent by the individual OSH&R attorneys in completing any of
the tasks performed on behalf of the Receiver. See, e.g., Finkel v. Allstate Elec.
Corp., No. 09-CV-4071, 2010 WL 5558899, at *6 (E.D.N.Y. Nov. 24, 2010) (“To
determine whether attorneys’ fees are reasonable, the Second Circuit uses the
‘presumptively reasonable fee,’ which equals a reasonable hourly rate multiplied
by a reasonable number of expended hours.”) (quoting Simmons v. New York City
Transit Auth., 575 F.3d 170, 174 (2d Cir. 2009)) (citing Arbor Hill Concerned
Citizens Neighborhood Assoc. v. County of Albany, 493 F.3d 110, 117-18 (2d Cir.
2008) and Finkel v. Omega Commc’n Servs., Inc., 543 F. Supp. 2d 156, 164
(E.D.N.Y. 2008)).
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guardian, unless there is a compelling reason to do so.17
Debtors argue that, because the Appointment Order “specifically invokes
[N.Y.C.P.L.R. § 5228(a)] as the statutory authority for” the appointment of the
Receiver – a provision of New York law – and because “New York law expressly
prohibits a receiver from employing the services of his or her law firm to assist him
or her in execution of the duties of the receiver,” I must reject the Receiver’s
instant application,18 at least to the extent it seeks allowance for services “illegally
provided by other individuals at [the Receiver’s] law firm,” which amount to
$192,603.50.19
I note at the outset that the Appointment and Contempt Order
specifically authorized the Receiver to retain counsel of her own choosing and did
not prohibit her from retaining her own law firm, OSH&R. Indeed, this Court was
unaware of part 36.2 when it issued the Appointment Order and knew the Receiver

17

22 N.Y. Comp. Codes R. & Regs. § 36.2(c)(8). In addition, persons
seeking appointments as receivers are required to complete a certified training
course as a prerequisite to their eligibility. Part 36.2 also bars or limits political
leaders, high-level court officials and former judges from accepting fiduciary
appointments, and disqualifies lawyers who earn more than fifty-thousand dollars
from court appointments in a single year from accepting any appointments in the
following year.
18

Debtors’ Objection to Receiver’s Application at 3.

19

Id. at 5.
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had retained her own law firm as Counsel. And despite Debtors’ full knowledge of
the same, they have remained silent until now concerning the Receiver’s retention
of OSH&R.
Of course, oversight as to the applicability of a Rule does not excuse
its application. But part 36.2 was not and is not applicable to the receivership in
this case, for two reasons. First, whether a federal court should appoint a receiver
in a diversity action – a power it holds in equity – is governed by federal law.20
“[A]lthough a state statute may provide a vehicle for the appointment of a receiver,
such a statute does not change the nature of the federal courts’ equitable powers.”21
20

See Fed. R. Civ. P. 66 (“These rules govern an action in which the
appointment of a receiver is sought or a receiver sues or is sued.”); Varsames v.
Palazzolo, 96 F. Supp. 2d 361, 365 (S.D.N.Y. 2000) (“Whether a federal court
should appoint a receiver in a diversity action is governed by federal law.”); 12
Charles A. Wright & Arthur R. Miller, Federal Practice and Procedure § 2983
(1973). “The following factors are considered relevant to establishing the need for
a receivership: ‘[F]raudulent conduct on the part of defendant; the imminent
danger of the property being lost, concealed, injured, diminished in value, or
squandered; the inadequacy of the available legal remedies; the probability that
harm to plaintiff by denial of the appointment would be greater than the injury to
the parties opposing appointment; and, in more general terms, plaintiff's probable
success in the action and the possibility of irreparable injury to his interests in the
property.’” Varsames, 96 F. Supp. 2d at 365 (quoting Wright & Miller § 2983). I
have already found most of these factors to be present in this case. See Transcript
of Oral Argument on Order to Show Cause held on December 17, 2010 [Docket
No. 106].
21

Canada Life Assurance Co. v. LaPeter, 563 F.3d 837, 843 (9th Cir.
2009) (“In [Guaranty Trust Co. of New York v. York], the [Supreme] Court
acknowledged that a federal court sitting in equity is not constrained by what
-13-

It is true that this Court invoked a New York state statute – N.Y.C.P.L.R. § 5228(a)
– when appointing the Receiver pursuant to Federal Rule of Civil Procedure 64,
under which “every remedy is available that, under the law of the state where the
court is located, provides for seizing a person or property to secure satisfaction of
the potential judgment.”22 But my power to appoint a receiver is governed by
federal law, even if “the practice in administering an estate by a receiver . . . must
accord with the historical practice in federal courts or with a local rule”23 – here,
N.Y.C.P.L.R. § 5228(a). And, at least in this Court’s view, the process by which a
federal court appoints a receiver does not fall within “the practice in administering
an estate” such that a federal court is bound by local rules setting forth certain
requirements for and prohibitions on state courts’ appointment of receivers and
guardians.24 Nor does a receiver’s retention of her counsel fall within “the

remedies are available under state law. [See 326 U.S. 99, 105 (1945).] Thus,
regardless of whether state law provides a vehicle by which to appoint a receiver,
the federal courts are free to provide that remedy solely by virtue of their equitable
powers.”) (citations omitted).
22

Fed. R. Civ. P. 64.

23

Fed. R. Civ. P. 66 (emphasis added)

24

See Phelan v. Middle States Oil Corp., 210 F.2d 360, 363 (2d Cir.

1954):
“[A]dministration” means the receiver’s dealings with the
property, and the “practice” in such administration refers to orders
he must get to allow [her] to dispose of the property, to spend
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receiver’s dealings with the property”25 such that it, too, would be governed by a
local rule. Therefore, in the absence of any federal restraints analogous to those
supplied by part 36.2 on the method of appointment or a receiver’s retention of
counsel, I hold that the Receiver’s retention of OSH&R was proper.
Second, the history and genesis of part 36 reinforce its inapplicability
to a receivership created by a federal court judge sitting in diversity jurisdiction.26
Former Second Circuit Judge Sonia Sotomayor carefully recounted that genesis in
Kraham v. Lippman:
New York courts appoint fiduciaries to assist courts and litigants
in a number of capacities, including as guardians for incapacitated
persons, receivers for properties involved in foreclosure

money to protect it, to distribute it among the creditors or lienors,
and the like. In short, the “practice” means the procedure by
which [she] gets the power to do those things which an owner of
the property would have without court authorization. It is only
after [she] has “administered” the “estate” and wishes to get
immunity from personal liability that [she] files [her] final
accounting and brings the parties into court to assert any claims
they may make against [her] personally on account of [her]
administration. We doubt whether even [her] application for an
allowance is a part of [her] administration, although it does
determine how a part of the assets shall be distributed.
25

Id.

26

Indeed, by its express terms, Part 36 applies only to “appointments by
any judge or justice of the [New York State] Unified Court System.” 22 N.Y.
Comp. Codes R. & Regs. § 36.1(a).
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proceedings, and guardians ad litem for children involved in
litigation. In general, fiduciary appointees are private attorneys
who are compensated from the assets of the individuals or
businesses they have been assigned to represent or manage, and
many fiduciary positions are highly remunerative. Because judges
historically have had unregulated discretion to make these
appointments, the process has been susceptible to abuse – for
example, by judges’ choosing appointees based on political
connections – and has long been a subject of public attention and
controversy. Beginning in 1967, New York undertook a number
of reforms in the hopes of eliminating corruption in the process,
but none successfully alleviated the problem. In January 2000,
public concerns about political influence in court fiduciary
appointments reached a peak, after the press published a letter
written by two disgruntled attorneys seeking to perpetuate their
receipt of Brooklyn Supreme Court appointments as a political
reward for service to their party.
In response to the explosion of public concern
generated by the letter’s disclosure, and the resulting impairment
of public confidence in the judicial system, Chief Judge Judith S.
Kaye announced a comprehensive program to reform the
appointment process. To further this purpose, she established a
Commission on Fiduciary Appointments (the “Commission”) and
an Office of the Special Inspector General for Fiduciary Matters
(the “Special Inspector General”), and charged them with
gathering data on appointments and making recommendations for
improved practices. After conducting far-reaching investigations,
these bodies released to the Chief Judge detailed reports
documenting widespread problems in the appointment process,
including appointments based on political party connections. For
example, the Special Inspector General found that one county
political leader had received nearly one hundred appointments,
another had received over seventy-five appointments, and an
attorney whose small law firm employs another county leader had
received nearly one hundred appointments. In light of these
findings, the Commission recommended that political party
leaders, their immediate relatives, and the partners, legal
associates, and other employees of their law firms be prohibited
-16-

from receiving judicial appointments while the leaders served and
for two years after resigning their positions.
In consultation with the Administrative Board of the
Courts and with the approval of the New York Court of Appeals,
Chief Judge Kaye responded to these recommendations by
adopting a new part 36 of the Rules of the Chief Judge.27
This history makes clear that part 36 was enacted to curb some of the dysfunction
inherent in a (state) judiciary that is elected rather than appointed. Federal judges
are, of course, also capable of political favoritism, but their appointment for life
rather than election for a fixed term renders the federal judiciary far less
susceptible to the types of abuses part 36 was enacted to curb, providing further
support for my holding that part 36.2 does not apply to this Court’s appointment of
a receiver in this action or her retention of counsel. Accordingly, Debtors’
objection to the Receiver’s Application on this ground fails.28
2.

The Scope of the Services for Which the Receiver Seeks
Reimbursement

Debtors also contend that the Receiver should be denied
reimbursement for her services in connection with two proceedings: (1) her

27

478 F.3d 502, 504-05 (2d Cir. 2007).

28

Debtors also oppose the Receiver’s Application to the extent it seeks
reimbursement for “ex parte meetings and telephone conversations with
[Creditors’] attorneys.” Debtors Opp. at 7 n.4 (emphasis in original). But this
Court is aware of no rule prohibiting a Receiver from engaging in such
communications, which the Appointment Order in no way forbade.
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intervention in the United States Bankruptcy Court for the Northern District of
Georgia to oppose Debtors’ reorganization plan; and (2) her appearance before the
Second Circuit Court of Appeals to object to Debtors’ request for a stay of the
contempt pending appeal based on the sufficiency and validity of Debtors’
supersedeas bond. Both objections are without merit.
a.

Applicable Law

As noted above, Rule 66 provides that “the practice in administering
an estate by a receiver . . . must accord with the historical practice in federal
courts or with a local rule.”29 Under New York law, a “receiver may exercise only
such powers as are granted pursuant to statute, as delimited by court order.”30 “A
Receiver is an officer of the court and not an agent of the mortgagee or the owner. .
. . [Her] duty is to preserve and operate the property, within the confines of the
order of appointment and any subsequent authorization granted to [her] by the
court.”31
b.

29

Application

Fed. R. Civ. P. 66 (emphasis added).

30

Jacynicz v. 73 Seaman Assocs., 704 N.Y.S.2d 68, 70 (1st Dep’t 2000)
(citations omitted) (citing Daro Indus. v. RAS Enters., 44 N.Y.2d 969, 970 (1978)).
31

Kaplan v. 2108-2116 Walton Ave. Realty Co., 425 N.Y.S.2d 817
(1980) (citations omitted).
-18-

Under N.Y.C.P.L.R. § 5228(a), receivers may be authorized “to
administer, collect, improve, lease, repair or sell any real or personal property in
which the judgment debtor has an interest or to do any other acts designed to
satisfy the judgment.”32 The Appointment and Contempt Order, as noted above,
authorized the Receiver to
to administer and collect Debtors’ interests in (i) any of the LTDs
and (ii) any other limited-company or corporation (“Debtors’
interests”) to the extent necessary to satisfy the Judgment; Debtors
retain the power to improve, lease, repair, and/or sell those
interests for the purpose of satisfying the Judgment, but may do
so only with the prior approval of the Receiver.
i.

Objection to the Rim Debtors’ Plan of
Reorganization

One of the essential underpinnings of the Rim Debtors’ Plan was a
contemplated capital contribution to be made by Old Milton – an entity solely
controlled by Thomas – to fund distributions to certain creditors in the Rim
Debtors’ bankruptcy cases. Those distributions were to be made on the effective
date of the Rim Debtors’ Plan and, as described above, derived from the Certified
Checks that comprised the proceeds of a loan that Thomas procured for Old Milton
from a third party – by further encumbering assets that he controlled – in violation
of the restraints imposed on him by New York law and the Appointment Order.

32

N.Y.C.P.L.R. § 5228(a).
-19-

Thus, the Rim Debtors’ proposed Plan contemplated the disposition of assets of
Debtors – particularly of Thomas – that were restrained by the terms of the
Appointment Order.33 I appointed the Receiver to “administer and collect the
Debtors’ interests” to the extent necessary to satisfy the Judgment against the
Debtors; this encompassed all actions necessary to prevent the dissipation of any
proceeds of the Certified Checks for purposes other than the satisfaction of the
Judgment. Accordingly, the Receiver’s objection to the Rim Debtors’ Plan fell
“within the confines of the order of appointment.”34
ii.

The Second Circuit Intervention

The Receiver appeared in the Second Circuit to assure that the
Debtors were required to post a proper bond that complied with the terms of the
Contempt Orders. In particular, she sought to ensure that, as Receiver, she would
“collect” one-hundred thousand dollars of Debtors’ interests – then bonded – upon
any denial of the Debtors’ appeal by the Second Circuit. Accordingly, her actions
fell within the scope of the Appointment Order.
3.

Receiver’s Request for Additional Compensation for Time
and Expense in Responding to Judgment Debtors’
Objection

33

Indeed, I directed Thomas to purge his contempt by, among other
things, retrieving the Certified Checks.
34

Kaplan, 425 N.Y.S.2d at 817 (citations omitted).
-20-

As part of the $299,519.55 allowance for which the Receiver applies,
$7,500 is “for payment of any additional fees and expenses of the Receiver and/or
OSH&R for services performed after the date of this Application (but prior to the
Receiver’s discharge) rendered in connection with this Application and any other
related fees and expenses, including payment for expenses incurred for
computerized legal research that have been incurred but not yet recorded, as to
which nothing has been paid to date.”35 In her Reply Declaration, the Receiver
also seeks to “reserve the right to request the allowance of additional fees and
expenses (both for [the Receiver] and for [her] counsel) in the event of [an] appeal
[of this ruling], to be paid from any available remaining proceeds of the
Receivership or, if necessary, from the proceeds of the supersedeas bond procured
by the Receiver for the Judgment Debtors’ account in connection with their
pending appeal from the Judgment.”36
Debtors do not oppose the Receiver’s request for reimbursement for
fees, costs, and expenses incurred in the preparation of the instant Application.
Nor in their sur-reply do they object to the Receiver’s request to apply for an
allowance of additional fees and expenses associated with any appeal of this ruling.
35

Receiver’s Application at 12.

36

Reply Declaration of Melanie L. Cyganowski, Esq., in Support of
Receiver’s Application at 10.
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Indeed, there is no reason why a Receiver – like any party entitled to an award of
attorneys’ fees – should not be “entitled to compensation ‘for time reasonably
spent in preparing and defending’ the fee application”37 – i.e., “fees on fees.”
Debtors’ objection, instead, is to the “unspecific” nature of the future
services for which the Receiver requests $7,500.38 Responding to Debtors’
(proper) objection, I asked the Receiver to supplement her Application by
providing additional support for the fees and expenses incurred after her initial
(March 4, 2011) filing of the Application. Those expenses, according to the
Receiver’s June 1, 2011 Sur-Reply Declaration, amounted to an additional
$44,191.11, which the Receiver attributes to the “vigorous opposition filed by the
Judgment Debtors” to her Application:
When I first filed my Fee Application, I did not foresee more than
7.5 hours of additional services to be performed. Among other
reasons, I believed that the Judgment Debtors had agreed, as part
of the Settlement Order filed with the Court on January 24, 2011,
to the allowance of the Receiver’s commissions and the fees and
expenses of OSH&R, except with respect to any challenge based
on reasonableness. [But] [b]ecause of the vigorous opposition
37

Robbins & Myers, Inc. v. J.M. Huber Corp., No. 01–CV–00201S,
2011 WL 1598973, at *6 (W.D.N.Y. Apr. 27, 2011) (quoting Weyant v. Okst, 198
F.3d 311, 316 (2d Cir. 1999)) (emphasis added). “As a general matter, such
‘motion costs should be granted whenever underlying costs are allowed.’” Weyant,
198 F.3d at 316 (quoting Valley Disposal, Inc. v. Central Vt. Solid Waste Mgmt.
Dist., 71 F.3d 1053, 1060 (2d Cir. 1995)).
38

Debtors’ Objection to Receiver’s Application at 10.
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filed by the Judgment Debtors, both myself and my counsel have
been required to spend time analyzing, reviewing, and researching
the papers filed in opposition to the Fee Application by the
Judgment Debtors, and also preparing a reply in further support of
the Fee Application.39
Having carefully reviewed the Receiver’s Sur-Reply Declaration, and the detailed
time records attached as exhibits, I conclude that the Receiver is entitled to
reimbursement for all of this additional $44,191.11 in fees “for time reasonably
spent in opposing [Debtors’ objection] and in . . . defending [her] initial fee
application.”40 Therefore, the Receiver’s Application for $336,210.6641 in fees is
granted in its entirety.
However, only $304,947.57 is available in escrow. Although this
Court’s previous orders envisioned that the Receiver’s allowance would be paid
out of this escrow account, there is no reason why that allowance – all of which
stems in the first instance from Thomas’s contemptuous conduct – should be

39

Sur-Reply Declaration of Melanie L. Cyganowski, Esq., in Further
Support of Receiver’s Application ¶¶ 6-7.
40

Weyant, 198 F.3d at 316. A small portion of the additional expenses
for which reimbursement is sought in the Sur-Reply Declaration constitutes
reasonable expenses incurred in further execution of the Receiver’s duties as
Receiver, and is therefore also allowable.
41

$366,210.66 represents the initial $299,519.55 requested, less the
unspecific request for $7,500, plus the additional $44,191.11 requested in the SurReply Declaration.
-23-

limited by the arbitrary amount of funds remaining in escrow after the posting of
the Appeal Bond and transmittal of the Interest Amount.42 Contrary to Debtors’
contention, the escrow account does not define “the outer limits of [Debtors’]
financial exposure.”43 Rather, the escrow fund is one potential source of attorneys’
fees and expenses. My reasons for previously directing that any fees be paid out of
the escrow account was to ensure that there would be at least some funds available
to satisfy the Receiver’s and Creditors’ requests for such fees, in light of Thomas’s
multiple attempts – prior to being held in contempt – to tie up every last dollar he
had in assets unreachable by Creditors. Those escrow funds’ having been depleted
entirely, Debtors are now directly liable to the Receiver for the balance of her
Application – $31,263.09.
B.

Creditors’ Application

42

As Creditors rightly note, “[w]hatever anyone might have assumed
when negotiating the [Settlement] Order in mid-January, no one knew for certain
how much the bond premium would be, how much would be needed to cover
future interest on the judgment, how much the Receiver would ultimately apply for
as a commission, or how much work was entailed in actually obtaining the bond
required by the [Settlement] Order.” Creditors’ Reply to Debtors’ Objection to
Creditors’ Application at 8.
43

Debtors’ Objection to Creditors’ Application at 9. Nor was it
“impliedly assumed by all participants” – including the Court – “that the agreed
upon size of the escrow account to be funded by [] Thomas would be sufficient to
satisfy all subsequent demands for attorneys’ fees by the [R]eceiver and
[Creditors’] lawyers.” Id. at 8.
-24-

In a separate application, Creditors apply for an award of $134,125.27
in attorneys’ fees, providing as support the declarations of attorneys Gerald Padian
(T&J) and Colin Delaney (SGR) attesting to their firms’ work addressing
Thomas’s contemptuous conduct; the reasonableness of the work done and time
spent on tasks related to Thomas’s contempt; the reasonableness of the rates
charged to Creditors for the work; and that the rates are their firm’s customary
rates for work of this nature.44 Attached to their declarations are copies of their
firms’ billing statements for the periods during which Creditors “dealt with []
Thomas’s contemptuous conduct.”45 Debtors object to Creditors’ Application on
the grounds (1) that they seek “compensation for work performed as part of the
enforcement and collection activities that [Creditors] had launched long before
they became aware of the transaction that formed the basis of their contempt
motion”46 and (2) that Creditors’ lawyers’ time entries are too vague to support an
award of attorneys’ fees.
1.

Applicable Law

44

See Delaney Decl.; Padian Aff.

45

Delaney Decl. ¶ 15; Padian Aff. ¶ 19.

46

Debtors’ Objection to Creditors’ Application at 2 (emphasis added).
As with the Receiver’s Application, Debtors do not object to the reasonableness of
the hourly rates charged by Creditors’ attorneys.
-25-

“[T]he sanctions for civil contempt serve two purposes: to coerce
future compliance and to remedy any harm past noncompliance caused the other
party. . . . The compensatory goal . . . can only be met by awarding to the plaintiff
any proven damages.”47 “The amount awarded should be the fees and costs
incurred by the aggrieved party as a direct product of the contemptuous conduct.”48
Moreover, “it is appropriate for the court . . . to award the reasonable costs of
prosecuting the contempt, including attorney’s fees . . . .”49 “[W]hile willfulness
may not necessarily be a prerequisite to an award of fees and costs, a finding of
willfulness strongly supports granting them.”50
2.

The Scope of the Services for Which Creditors’ Attorneys
Seek Fees

Having closely reviewed the clear and detailed time entries51 attached
47

Weitzman v. Stein, 98 F.3d 717, 719 (2d Cir. 1996) (citations omitted)
(citing United States v. United Mine Workers of Am., 330 U.S. 258, 302-04
(1947)).
48

Lembo v. Mayendia-Vales, 739 N.Y.S.2d 775, 790 (3d Dep’t 2002).

49

Vuitton et Fils S. A. v. Carousel Handbags, 592 F.2d 126, 130 (2d Cir.

1979).
50

Weitzman, 98 F.3d at 719 (footnote omitted).

51

Debtors’ contention that the time entries do not provide “sufficient
clarity and detail to enable the reviewing court to render a fair and informed
determination as to their appropriateness for payment” is patently false. Debtors’
Objection to Creditors’ Application at 5-6. Moreover, very few of SGR’s time
records “commingl[e]” non-contempt-related work with contempt-related work, as
-26-

to the attorney declarations submitted in support of Creditors’ Application, I
conclude that $129,379.27 of those entries reflect reasonable costs incurred “as a
direct product of [Thomas’s] contemptuous conduct”52 – not as a result of
Creditors’ attempts to enforce the Judgment, as Debtors contend.53 Debtors’
argument overlooks the fact that it was Thomas’s contemptuous conduct that
resulted in the drastic diminution in assets reachable by Creditors to satisfy the
Judgment.54 Absent that contemptuous conduct, the extraordinary restraints I
placed on Thomas’s ability to control certain of his proprietary interests – above
and beyond the restraints already imposed as a result of Creditors’ enforcement
efforts – would not have been necessary. Nor would the restraints and charging
orders sought and obtained by SGR attorneys in Atlanta federal court have been

Debtors assert, id. at 7; for those that do, the SGR invoices make clear that the firm
“conservatively apportioned” such work to contempt-related work, Creditors’
Reply to Debtors’ Objection to Creditors’ Application at 5.
52

Lembo, 739 N.Y.S.2d at 790.

53

Debtors argue that Creditors may not recover any costs incurred (1)
after the entry of the Appointment and Contempt Order on December 21, 2011,
when Thomas was found to be in contempt; (2) in connection with attempting to
collect their Judgment in Georgia; or (3) in connection with securing and finalizing
the supersedeas bond. See Debtors’ Objection to Creditors’ Application at 5.
54

Debtors’ argument also appears to rest on an inexplicable misreading
of Creditors’ attorneys’ declarations and the time entries for which they seek an
award of fees. See id. at 6-7.
-27-

necessary absent Thomas’s contemptuous conduct – restraints that cost Creditors
money in the form of attorneys’ fees both to obtain and to unwind (when Thomas
finally purged his contempt by posting the supersedeas bond).
In sum, all of the costs incurred by Creditors to obtain and enforce the
terms of the Appointment and Contempt Order and the emergency relief granted in
Atlanta federal court were a “direct product of [Thomas’s] contemptuous conduct,”
including Creditors’ attorneys’
•

discussions regarding how to address Thomas’s contemptuous conduct,
preparations for court appearances and filings seeking relief for that conduct,
and research into the highly complex business transactions that constituted
Thomas’s contemptuous conduct;55

•

development of strategies for implementing, and implementation of, this
Court’s Appointment and Contempt Order, including working with the
Receiver to effect the turnover of the Certified Checks and Thomas’s
interests in certain properties;56

•

discussions, research, and actions taken regarding the means by which
55

See, e.g., SGR January 20, 2011 Invoice, Ex. A to Delaney Decl., at 420; T&J January 5, 2011 Invoice, Ex. A to Padian Aff., at 1-4.
56

See, e.g., SGR January 20, 2011 Invoice at 20, 22, 23; SGR February
17, 2011 Invoice, Ex. A to Delaney Decl., at 2, 3; T&J January 5, 2011 Invoice at
5-6.
-28-

Thomas might purge his contempt by unwinding the Old Milton transaction,
including objecting to the Rim Debtors’ Plan;57
•

responses to Debtors’ motion to stay this Court’s contempt order and
evaluations of and responses to Debtors’ allegedly deficient Stay Bond;58

•

efforts taken to facilitate Thomas’s sale of the Cayman Islands Land and to
execute the Settlement Order;59

•

actions taken to unwind restraints imposed as a result of Thomas’s
contemptuous conduct;60

•

research and actions taken to ensure that the Appeal Bond was properly
posted (one of the means by which Thomas was ordered to purge his
contempt).61

Therefore, subtracting $4,746 in fees which I hereby find were not incurred as a
57

See, e.g., SGR January 20, 2011 Invoice at 20, 22; SGR February 17,
2011 Invoice at 4.
58

See, e.g., SGR January 20, 2011 Invoice at 23-24; SGR February 17,
2011 Invoice at 5-8; T&J January 5, 2011 Invoice at 6; T&J February 4, 2011
Invoice, Ex. A to Padian Aff., at 1-2, 5;
59

See, e.g., SGR February 17, 2011 Invoice at 7-11; T&J February 4,
2011 Invoice at 3.
60

See, e.g., SGR February 17, 2011 Invoice at 11-12; SGR March 3,
2011 Invoice, Ex. A to Delaney Decl., at 1-2.
61

See, e.g., SGR February 17, 2011 Invoice at 11-13; SGR March 3,
2011 Invoice at 2; T&J February 4, 2011 Invoice at 3-5.
-29-

direct result of Thomas’s contemptuous conduct – namely, fees incurred for
researching “whether other creditors of judgment debtor are necessary parties . . .
to a judgment creditors action to enforce judgment,”62 addressing the United States
Attorney’s Office’s proposed motion to intervene,63 and determining the Interest
Amount64 – Creditors are entitled to an award of $129,379.27 in fees. Finally, for
the same reasons I did not limit the Receiver’s reimbursable expenses to the funds
held in escrow, Creditors are not prevented from recovering fees for addressing
Thomas’s contemptuous conduct simply because the escrow fund is depleted.
Therefore, Debtors are now directly liable to Creditors for $129,379.27.
IV.

CONCLUSION
For the foregoing reasons, it is HEREBY ORDERED that:
1.

The commission, fees, costs and expenses of the Receiver and her

62

SGR January 20, 2011 Invoice at 14 (12/12/10 JFW entry). Creditors
seek reimbursement for $1,325 for this research. See SGR Spreadsheet of
Contempt-Related Attorneys’ Fees, Ex. B to Delaney Decl.
63

See SGR March 3, 2011 Invoice at 3 (2/8/11 CRD entry and 2/9/11
ASC entry) ($1,643.50); T&J March 4, 2011 Invoice, Ex. A to Padian Aff., at 2
(2/8/11 RGT entry and 2/9/11 GP entry) ($875). Creditors seek reimbursement of
$2,518.50 for these services. See SGR Spreadsheet of Contempt-Related
Attorneys’ Fees; T&J Spreadsheet of Contempt-Related Attorneys’ Fees, Ex. B to
Padian Aff.
64

See T&J March 4, 2011 Invoice at 2 (2/7/11 BMR entry and 2/10/11
RGT, HMR, and GP entries). Creditors seek reimbursement for $902.50 for these
calculations. See T&J Spreadsheet of Contempt-Related Attorneys’ Fees.
-30-

counsel requested in the Receiver’s Application, as modified by the
Receiver’s Sur-Reply Declaration, are allowed in full in the aggregate
amount of $336,210.66;
2.

The attorneys’ fees requested in the Creditors’ Application are
allowed in part in the aggregate amount of $129,379.27;

3.

As soon as practicable following entry of this Opinion and Order, the
Receiver is hereby permitted and directed to remit the sum of
$304,947.57 to OSH&R (which amount is inclusive of the Receiver’s
allowed commissions);

4.

Debtors are hereby liable to the Receiver in the amount of $31,263.09
and to Creditors in the amount of $129,379.27;

5.

The Receiver, and her counsel, shall be exempt from liability of any
kind, nature or description arising from the good faith performance of
her duties, responsibilities and obligations as Receiver;

6.

The Receiver shall be permitted to seek payment for such fees and
expenses incurred in connection with any appeal taken from this
Opinion and Order granting the Receiver’s Application;

7.

The Receiver is hereby discharged and released from any and all
duties to administer and collect any of Debtors’ interests or to do any

-31-

other acts designed to satisfy the Judgment;

Dated:

New York, New York
June 6, 2011

-32­

- Appearances For Receiver:
Melanie L. Cyganowski, Esq.
Otterbourg, Steindler, Houston & Rosen, P.C.
230 Park Avenue
New York, New York 10169
[phone]
For Plaintiffs-Judgment Creditors:
John Jongmin Lee, Esq.
Colin Rhys Patrick Delaney, Esq.
Smith, Gambrell & Russell, LLP
250 Park Avenue
Suite 1900
New York, New York 10177
[phone]
For Defendants-Judgment Debtors:
Edward R. Gallion, Esq.
Steven Spielvogel, Esq.
Gallion & Spielvogel LLP
75 Rockefeller Plaza, 18th Floor
New York, New York 10019
[phone]

-33-