Securities and Exchange Commission v. Elliott et al

Filing 260

OPINION & ORDER. For the reasons set forth above, the Court concludes that the SEC's lien has priority over Patricia Jackson's liens with respect to the sale proceeds of the properties located at 30 Baycrest Avenue, Huntington Bay, Suffo lk County, New York 11743 and 724 Stonehouse Road, Winhall, Vermont 05340. The Liquidation Agent is hereby directed to distribute the proceeds from these two properties to the SEC in partial satisfaction of the July 26, 2012 Amended Judgment entered against Michael J. Xirinachs. Ms. Jackson is directed to dissolve all restraining notices, writs, or any other state efforts to encumber, garnish, or dissipate the sale proceeds from the Vermont Property or the Baycrest Property. (As further set forth in this order) (Signed by Judge Katherine B. Forrest on 4/15/2016) (lmb)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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SECURITIES AND EXCHANGE COMMISSION, :
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Plaintiff,
:
:
-v:
:
DOYLE SCOTT ELLIOTT et al.,
:
:
Defendants.
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:
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KATHERINE B. FORREST, District Judge:

USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED: April 15, 2016

09-cv-7594 (KBF)
OPINION & ORDER

Pending before the Court is a dispute between the Securities and Exchange
Commission (the “SEC”) and Patricia Jackson, the ex-wife of Michael J. Xirinachs,
regarding the priority of their respective liens against the proceeds of the sales of
two parcels of real property that Xirinachs agreed to turn over to the SEC in partial
satisfaction of a judgment entered against him in this Court in the SEC’s favor. For
the reasons set forth below, the Court concludes that the SEC’s liens have priority
over Jackson’s. The Court therefore grants the SEC’s requested relief and directs
the Liquidation Agent for the subject properties to distribute the sale proceeds of
those properties to the SEC.
I.

BACKGROUND1
On July 26, 2012, this Court entered an Amended Judgment (the

“Judgment”) ordering Michael J. Xirinachs and Emerald Asset Advisors LLC jointly
and severally to disgorge $3,052,752 plus $730,621 in prejudgment interest, and
1 The Court here assumes familiarity with the lengthy history of this litigation and recounts only
that background that is relevant to resolving the pending dispute between the SEC and Jackson.

pay a civil penalty of $3,835,000, and ordering Xirinachs to disgorge $345,462 plus
$82,680.01 in prejudgment interest, and pay a civil penalty of $2,119,000, to the
SEC. (ECF No. 159.)
On May 4, 2015, the SEC moved for an order to show cause why Xirinachs
should not be held in contempt for failing to comply with the Judgment based on,
inter alia, his “extravagant” personal expenses, his interest in 30 Baycrest Holdings
LLC, which owned the property located at 30 Baycrest Avenue, Huntington Bay,
Suffolk County, New York 11743 (the “Baycrest Property”), and his conveyance of
the property located at 724 Stonehouse Road, Winhall, Vermont 05340 (the
“Vermont Property”) to his son, Michael W. Xirinachs. (See ECF Nos. 163, 164.)
The SEC filed a lien on the Vermont Property with the Winhall County Clerk on
June 15, 2015. (Roessner Decl., Ex. B, ECF No. 221-2.) At the October 2, 2015
hearing on the SEC’s motion, the parties settled the dispute without a contempt
finding. (See ECF Nos. 198, 200, 201.) Pursuant to that settlement, Xirinachs
agreed to effectuate the transfer of full ownership of the Vermont Property from his
son to himself, and to permit the proceeds from the sale of the Vermont Property
and the Baycrest Property to be turned over to the SEC for application to the
Judgment. (ECF No. 198.) While Xirinachs thus became the titleholder of the
Vermont Property in his own name, the Baycrest Property was—throughout these
proceedings—owned by 30 Baycrest Holdings, LLC (the “LLC”), a limited liability
company as to which Xirinachs had (during these proceedings) become the sole
member. (See ECF Nos. 201, 211.)

2

Pursuant to the SEC’s and Xirinachs’s agreement, the Court appointed a
Liquidation Agent to sell the Baycrest Property and the Vermont Property. (ECF
Nos. 199, 209.) The Liquidation Agent sold the properties at auction. (See ECF
Nos. 211, 217.) In issuing a January 22, 2016 Order confirming the Liquidation
Agent’s sale of the properties (ECF No. 217), the Court overruled Xirinachs’s
request to include certain language in the proposed sale confirmation order, stating
that pursuant to the parties’ October 2, 2015 agreement on the record, the sale
proceeds were to be subject only to existing liens attached to the subject properties,
and not to Xirinachs’s personal liabilities (ECF No. 218).
On January 19, 2016, Patricia Jackson (Xirinachs’s ex-wife) filed liens for
child and spousal support arrears valued at approximately $114,000 against
Xirinachs with the Winhall Town Clerk’s Office, clouding title on the Vermont
Property. (Roessner Decl. ¶ 7, ECF No. 221.)2 In response to Jackson’s filing of
these liens, on February 11, 2016, the SEC moved for an order to show cause
directing Jackson to set forth her claims to the proceeds of the sale of the Vermont
Property. (ECF No. 220.) The Court issued the requested order that same day,
which stated that, in order to effect the closing of the sale of the Vermont Property,
the Vermont Property was released from Jackson’s liens and instead attached to the
proceeds of the sale. (ECF No. 222.) The Court also set a briefing schedule
regarding the issue of lien priority.

2 Jackson subsequently obtained two additional judgments for child support and spousal support
arrears in the amounts of $114,905.39 and $115,000, respectively. (Poster-Zimmerman Decl. ¶¶ 7-8.)

3

On February 29, 2016, the Court received an ex parte proposed order to show
cause from Jackson seeking to restrain the SEC from applying the proceeds of the
sale of the Baycrest Property to the Judgment until final disposition of the SEC’s
application regarding the proceeds of the sale of the Vermont Property. (ECF No.
237-1.) After the Court denied Jackson’s request to issue her proposed order and
instead set a hearing date (ECF No. 237), the SEC and Jackson informed the Court
that they had agreed that a portion of the proceeds of the sale of the Baycrest
Property and Vermont Property should be held in escrow pending a final
determination by the Court of the relative priorities of the SEC’s and Jackson’s
claims. (ECF No. 239.) The parties agreed that their applications regarding both
subject properties should be considered together by the Court. (ECF No. 239.)
The Court subsequently endorsed a proposed briefing schedule on March 2,
2016 (ECF No. 242), and then endorsed a revised briefing schedule on March 18,
2016 (ECF No. 244); the latter schedule called for Jackson to file a responsive brief
on March 25, 2016, and the SEC to file a reply brief on April 8, 2016.3 In
accordance with the Court’s March 18, 2016 Order, Jackson filed her opposition
brief on March 25, 2016 (ECF No. 251); the SEC filed its reply brief on April 8, 2016
(ECF No. 259), and the matter became fully briefed on that date.4

In the meantime, on March 16, 2016, Jackson sought Writs of Execution directed to the Liquidation
Agent and his counsel. (Poster-Zimmerman Decl., Ex. 8, ECF No. 250-2.)
3

On April 1, 2016, Jackson sought leave to file an additional brief after the SEC’s anticipated filing
of its reply brief. (ECF No. 255.) The Court denied that request. (ECF No. 256.)

4

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II.

LEGAL STANDARDS
A.

Enforcement of a Money Judgment

Pursuant to Federal Rule of Civil Procedure 69(a), the procedure for
enforcement of a money judgment must accord with the procedure of the state
where the court is located (in this case, New York), except that a federal statute
governs to the extent that it applies. Fed. R. Civ. P. 69(a)(1). Because the SEC, an
agency of the United States, is the recipient of the judgment against Xirinachs,
federal law provides that a writ of execution to enforce the judgment may be
executed nationwide. 28 U.S.C. § 2413.
The enforcement of money judgments in New York is governed by Article 52
of the New York Civil Practice Law and Rules (“CPLR”). The CPLR provides that a
“money judgment may be enforced against any property which could be assigned or
transferred, whether it consists of a present or future right or interest and whether
or not it is vested, unless it is exempt from application to the satisfaction of the
judgment.” N.Y CPLR § 5201(b). Pursuant to CPLR §§ 5239 and 5240, the Court
has the power to adjudicate questions of any interest that either the SEC or
Jackson has in the subject properties underlying the instant dispute. N.Y. CPLR §§
5239, 5240.
B.

Lien Priority
1.

New York law

Generally, under New York law, executions or orders of attachment on
personal property are delivered to the Sheriff and are given priority in the order in
which they are delivered to the enforcement officer, except that executions for child
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support have priority over any other assignment, levy or process. N.Y. CPLR §
5234(b). This rule has exceptions. For instance, a judgment creditor may obtain a
lien on personal property of the judgment debtor through an order appointing a
receiver over the property. N.Y. CPLR § 5228.5.5 Where a receiver of personal
property has been appointed by order, and the order is filed before the property is
levied upon, the rights of the judgment creditor who secured the order are superior
to those of the judgment creditor entitled to the proceeds of the levy. N.Y. CPLR §
5234(c). New York law further provides that where a judgment creditor has secured
an order for appointment of a receiver of an interest of the judgment debtor in
personal property, the judgment creditor’s rights in the property are superior to the
rights of any transferee of the property. N.Y. CPLR § 5202(b).
As to real property, New York law provides that a judgment creditor secures
a lien against the real property of a judgment debtor by causing the judgment to be
docketed in the county where the real property is located. N.Y. CPLR § 5203(a); In
re Scarpino, 113 F.3d 338, 341 (2d Cir. 1997). The priorities among competing
judgment creditors are determined on the basis that the first to docket a judgment
in the county where the realty is located has full rights in the property, unless there
is a surplus. Musso v. Ostashko, 468 F.3d 99, 106 (2d Cir. 2006); see N.Y. CPLR §
5203(a). This bright line rule “serves not only to notify potential creditors and other
interested parties of the existing lien, but also to permit the lienholder to rely on its

A liquidation agent is functionally equivalent to a receiver. Cf. Nat’l Credit Union Admin. Bd. v.
U.S. Bank Nat. Ass’n, No. 14-cv-9928 (KBF), 2015 WL 2359295, at *4 (S.D.N.Y. May 18, 2015); In re
Libor-Based Fin. Instruments Antitrust Litig., No. 11 MDL 2262 NRB, 2015 WL 4634541, at *110
(S.D.N.Y. Aug. 4, 2015).
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interest in the property.” Musso, 468 F.3d at 106. As to the priority of liens against
real property, New York law does not confer any higher priority with respect to
executions for child support.
2.

Vermont law

Under Vermont law, a final judgment issued in a civil action constitutes a
lien on any real property of a judgment debtor if properly recorded. 12 V.S.A. §
2901. A judgment creditor may record a judgment lien in the town clerk’s office of
the town where real property of the debtor is located. 12 V.S.A. § 2904. Vermont
follows the common law “first in time, first in right” rule for priority of liens, and
priority is based on the time a lien attaches and becomes perfected. Colson v. Town
of Randolph, 35 A.3d 1065, 1070 (Vt. 2011). Vermont law does not contain any
provision conferring higher priority for judgment liens against real property arising
from a claim for child support.
III.

DISCUSSION
A.

Baycrest Property

On March 16, 2016, Jackson sought Writs of Execution, arising from her
judgments for child and spousal support arrears, directed to the Liquidation Agent
and his counsel with the Suffolk County Sheriff in regards to Xirinachs’s property.
(Poster-Zimmerman Decl., Ex. 8.) As applied to the Baycrest Property, Jackson’s
Writs of Execution suffer from (at least) one fatal defect. The Baycrest Property
was not owned by Xirinachs, but rather was owned by the LLC, and Jackson has
never obtained a judgment against that entity. Because Jackson has no claims

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against the LLC, she has no interest in the proceeds of the sale of the Baycrest
Property.
Seeking to avoid an adverse ruling on the basis that she does not in fact have
any legal claim against the titleholder to the Baycrest Property, Jackson argues
that, based on the SEC’s acceptance of the Baycrest Property in partial satisfaction
of the Judgment against Xirinachs, the SEC should be collaterally estopped from
arguing that Jackson’s liens attached only to Xirinachs in his personal capacity, and
not also to property owned by the LLC. This argument fails because Jackson
misconstrues the events giving rise to the SEC’s entitlement to the sale proceeds of
the Baycrest Property.
In support of its May 4, 2015 motion for an order to show cause why
Xirinachs should not be held in contempt, the SEC did seek to demonstrate that the
Baycrest Property was an asset that Xirinachs should have liquidated to partially
satisfy the Judgment against him. As a result of the SEC’s and Xirinachs’s
settlement of the contempt proceeding, however, there has been no finding in this
action that Xirinachs’s personal liabilities attached to the proceeds of the Baycrest
Property, or that the LLC’s assets may be reached by Xirinachs’s creditors. Rather,
the posture of the settlement was that the LLC itself agreed to turn over the
Baycrest Property with the proceeds to go to the SEC, and the SEC agreed to accept
those proceeds in partial satisfaction of the Judgment against Xirinachs.6 Jackson
was not a party to that agreement. She additionally fails to cite any authority that
6 To the extent that any party has any standing to challenge the order to turn over the Baycrest
Property in partial satisfaction of the Judgment, it is either Xirinachs or the LLC itself. In any case,
Jackson is not the proper party to bring such a challenge.

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a judgment lien against an individual is effective against a limited liability company
owned by that individual. Such a view contradicts the well-established principle
that a limited liability company and its members are not generally liable for each
other’s debts. Angelino v. Francis J. Angelino, D.D.S., P.C., 83 A.D.3d 1186, 1188
(3d Dep’t 2011) (citing Matter of Morris v. New York State Dep’t of Taxation &
Finance, 82 N.Y.2d 135, 140 (1993)). As a result of this determination, the Court
need not and does not reach the parties’ remaining arguments regarding priority as
to the Baycrest Property.
B.

Vermont Property

In contrast to the Baycrest Property, Xirinachs held title to the Vermont
Property in his own name. On June 15, 2015, the SEC filed a judgment lien against
Xirinachs with the Winhall Town Clerk’s Office. (Roessner Decl., Ex. B.) On
January 19, 2016 and March 15, 2016, Jackson filed judgment liens for unpaid child
and spousal support with the Winhall Town Clerk’s Office. (Roessner Decl. ¶ 7;
Barr Decl. ¶ 7, ECF No. 247.) As explained above, New York and Vermont both
apply—with respect to liens against real property—the principle that the first
creditor to record a judgment lien where the realty is located has full rights in the
property. Whether this dispute is governed by New York or Vermont law, it seems
clear that the SEC’s June 2015 lien against the Vermont Property takes priority
over Jackson’s subsequently filed liens.
Jackson argues that, notwithstanding the above, her liens take priority over
the SEC’s based on the priority given to executions for child support under CPLR §
5234(b). Although recognizing that the Vermont Property is real property, Jackson
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argues that § 5234—which applies only to personal property—governs this issue
because she seeks to execute against the cash proceeds from the sale of the Vermont
Property, which are being held in escrow by the Liquidation Agent, rather than
against the Vermont Property itself. The Court is unpersuaded. The Vermont
Property was real property that the Liquidation Agent was authorized to arrange
the sale of for the purpose of turning over the sale proceeds to the SEC to partially
satisfy the Judgment. At the time that the Vermont Property was converted into
cash proceeds by the Liquidation Agent’s sale, the Vermont Property was already
being held by the Liquidation Agent for the benefit of the SEC. The cash proceeds
of the sale were never possessed by or belonged to Xirinachs. The rules governing
liens against personal property therefore do not apply. Jackson fails to provide any
support for her position that CPLR 5234(b) applies to proceeds from the sale of real
property, or explain why her proposed approach would not disrupt the distinction
that the legislature has drawn between the priority of liens against real property
versus personal property.7
Jackson also argues—without citation to any authority—that her liens are
entitled to priority because public policy dictates that child support arrears reduced
to a money judgment should be satisfied from a judgment debtor’s funds before a
governmental agency’s lien is satisfied, and that the Court should invoke its
equitable powers to re-order the lien priorities with respect to the Vermont Property
(and the Baycrest Property). (Jackson’s Opp. Mem. of Law at 9, ECF No. 251.)
7 Jackson’s proposed rule would effectively alter which rules govern lien priority at the instant that
real property is sold for cash. Such an approach produces potentially odd results and would
undermine the certainty provided by the first in time first in right rule.

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While there are certain contexts in which a court may invoke equitable powers to
adjust rights and priorities between creditors, see, e.g., Raleigh v. Illinois Dep’t of
Revenue, 530 U.S. 15, 24 (2000) (“Bankruptcy courts do indeed have some equitable
powers to adjust rights between creditors. . . . That is, within the limits of the Code,
courts may reorder distributions from the bankruptcy estate, in whole or in part, for
the sake of treating legitimate claimants to the estate equitably” (citation omitted));
Wagner v. Maenza, 223 A.D.2d 640, 641 (2d Dep’t 1996) (“The doctrine of equitable
subrogation applies where the funds of a mortgagee are used to satisfy the lien of an
existing, known incumbrance when, unbeknown to the mortgagee, another lien on
the property exists which is senior to his but junior to the one satisfied with his
funds.” (quotation marks omitted)), Jackson has not identified any instance—nor
has the Court found any—in which a court subordinated a governmental agency’s
claim in the sort of circumstances present here. Jackson does not assert that the
SEC has committed any malfeasance or other inequitable conduct or that there are
any particular facts or unusual circumstances in this case that allow the Court to
subordinate the SEC’s earlier filed lien to her liens. While this Court acknowledges
the public policy of protecting minors caught in the midst of divorces which have a
negative financial impact, here the Court finds there is no adequate basis to hold
that the SEC’s lien should be subordinated to Jackson’s liens in conflict with the
general rules applicable under New York and Vermont law.
IV.

CONCLUSION
For the reasons set forth above, the Court concludes that the SEC’s lien has

priority over Patricia Jackson’s liens with respect to the sale proceeds of the
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properties located at 30 Baycrest Avenue, Huntington Bay, Suffolk County, New
York 11743 and 724 Stonehouse Road, Winhall, Vermont 05340. The Liquidation
Agent is hereby directed to distribute the proceeds from these two properties to the
SEC in partial satisfaction of the July 26, 2012 Amended Judgment entered against
Michael J. Xirinachs. Ms. Jackson is directed to dissolve all restraining notices,
writs, or any other state efforts to encumber, garnish, or dissipate the sale proceeds
from the Vermont Property or the Baycrest Property.
SO ORDERED.
Dated:

New York, New York
April 15, 2016

KATHERINE B. FORREST
United States District Judge

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