Gambone v. Lite Rock Drywall

• Court: Court of Appeals for the Third Circuit
• Decided: July 25, 2008
• Docket: 05-5284
• Status: Unpublished

Opinion

Opinions of the United 2008 Decisions States Court of Appeals for the Third Circuit

7-25-2008

Gambone v. Lite Rock Drywall Precedential or Non-Precedential: Non-Precedential

Docket No. 05-5284

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IN THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

NOS. 05-5181 and 05–5284

SALVATORE GAMBONE; SUSAN GAMBONE; AMERICO MOSCARIELLO; VERA MOSCARIELLO; VINCENT CANE; BARBARA CANE Appellees in Nos. 05-5181 and 05-5284

v.

LITE ROCK DRYWALL; ADVANCED CONSTRUCTION MATERIAL CORPORATION; JOSEPH LUONGO; THOMAS BOBST; JOHN P. DUBACK Advanced Construction Material Corporation Appellant in No. 05-5181

LITE ROCK DRYWALL; ADVANCED CONSTRUCTION MATERIAL CORPORATION; JOSEPH LUONGO; THOMAS BOBST; JOHN P. DUBACH; JAMES NICHOLLS; ROBERT HILDRETH and INNOVATIVE TECHNOLOGIES ENTERPRISES CORP.* James Nicholls, Robert Hildreth and Innovative Technologies Enterprises Corp.* Appellants in No. 05-5284

(*Dismissed Per Clerk’s Order Dated 2/8/06) On Appeal From the United States District Court For the Eastern District of Pennsylvania (D.C. Civil Action No. 01-cv-01071) District Judge: Hon. Robert F. Kelly

Argued May 8, 2008

BEFORE: BARRY and STAPLETON, Circuit Judges, and RESTANI,* Judge

(Opinion Filed: July 25, 2008)

James J. Oliver Oliver, Caiola & Gowen 2500 DeKalb Pike - Suite 100 East Norriton, PA 19401 and Kevin W. Mahoney (Argued) 17 Bentwood Drive Bordentown, NJ 08505 Attorneys for Appellees in Nos. 05-5181 and 05-5284

Shawn J. Lau (Argued) Lau & Associates 4228 St. Lawrence Avenue Reading, PA 19606 Attorney for Advanced Construction Material Corporation, Appellant in No. 05-5181

Sharon L. Gray (Argued) 906 Penn Avenue Wyomissing, PA 19610 Attorney for Appellants Nicholls and Hildreth in No. 05-5284

* Hon. Jane A. Restani, Chief Judge, United States Court of International Trade, sitting by designation.

2 OPINION OF THE COURT

STAPLETON, Circuit Judge:

This appeal arises from post-judgment proceedings in the District Court and

presents the issue of whether that Court properly exercised its ancillary jurisdiction to

preliminarily enjoin appellants from transferring assets they received in an allegedly

fraudulent transfer. We hold that the District Court did not err.

I.

Plaintiffs/Appellees (“Planitiffs”) secured a judgment against Advanced

Construction Materials Corp. (“ACMC”) and its founder, Joseph Luongo, in this

securities fraud case. Through post-judgment discovery, they uncovered evidence tending

to show that Luongo and ACMC had engaged in a pattern of transferring ACMC’s assets

for no value in order to thwart plaintiffs’ recovery on their judgment. This pattern

included the transfer without consideration of certain patents from ACMC to Innovative

Technologies Enterprises Corp. (“IT”), a British Virgin Islands corporation which is

owned by James Nicholls and Robert Hildrith, a former ACMC board member. Nicholls,

like plaintiffs, is a resident of Pennsylvania.

Plaintiffs promptly filed a “Motion for Proceedings Supplementary, Preliminary

3 Injunctive Relief, and for Leave to File Complaint for Fraudulent Transfer Impleading

Third-Party Defendants” (hereafter “Motion for Proceedings Supplementary”). This

motion sought to implead IT, James Nicholls and Robert Hildreth (hereafter the

“Transferees”) and to restrain further transfer of the patents. Attached was a certificate of

counsel setting forth the evidence supporting the motion. Copies of these documents

were sent by first class mail to ACMC, James Nicholls and Robert Hildreth on September

15, 2005.

On September 30, 2005, Nicholls filed a motion for a protective order opposing

the Motion for Proceedings Supplementary and seeking a stay of all proceedings until 90

days following service of process on him. On the same day, Hildreth filed a “Response”

to the Motion for Proceedings Supplementary opposing that motion and seeking an

extension of time to file a full response until December 29, 2005.

On October 5, 2005, the District Court entered an order temporarily restraining the

Transferees from transferring the patents and scheduling a hearing on the motion for a

preliminary injunction and the application to implead the Transferres for 9:00 A.M. on

October 15, 2005. Copies of this order were mailed and e-mailed by the clerk to the

Transferees. This hearing was continued at the request of ACMC until October 31, 2005.

Prior to that hearing, Nicholls filed a “Motion to Dismiss” the Motion for Proceedings

Supplementary.

Nicholls was present at the October 31, 2005, hearing and testified. At the

4 conclusion of the testimony, the District Court made oral findings and granted a

preliminary injunction. Shortly thereafter, the District Court granted the motion for leave

to file the complaint for fraudulent transfer and filed a memorandum further explaining

the basis for the preliminary injunction.

In its memorandum, the District Court concluded that it had ancillary jurisdiction

to enter the preliminary injunction sought. It found, primarily on the basis of Nicholls’

testimony, that Luongo and ACMC had engaged in a pattern of transfers of ACMC’s

assets for no value in order to defeat the creditors in this case, that this included the

transfer of 15 patents to IT for no consideration, and that ACMC had been insolvent at the

time it transferred these patents to IT. The District Court concluded that the plaintiffs

were likely to succeed on their fraudulent transfer claims and that they would suffer

irreparable injury if the preliminary injunction were not granted. ACMC and the

Transferees then filed this timely appeal.

On February 8, 2006, IT’s appeal was terminated for procedural default.

The ultimate issue for resolution in this appeal is whether the District Court acted

properly on October 31, 2005, when it entered the preliminary injunction it did against

Nicholls and Hildreth. This requires us to determine whether the District Court had

subject matter jurisdiction to enter the injunction and, if so, whether it was otherwise

appropriate to do so. This ultimate issue does not require or permit us to pass upon the

propriety or effectiveness of anything occurring after October 31, 2005. Accordingly, we

5 decline the appellees’ invitation to pass on the validity of plaintiffs’ efforts to serve the

Transferees with the third party complaint.

II.

Turning first to subject matter jurisdiction, it is true that federal courts are courts of

limited jurisdiction, and therefore are generally precluded from hearing matters that do

not involve a federal question or diverse parties. However, this rule is subject to

exceptions, the relevant one here being ancillary jurisdiction permitting District Courts to

retain jurisdiction over post-judgment enforcement proceedings. Cf. T HE J UDICIAL

IMPROVEMENTS A CT OF 1990, codified at 28 U.S.C. § 1367. As the Supreme Court

explained:

That a federal court of equity has jurisdiction of a bill ancillary to an original case or proceeding in the same court, whether at law or in equity, to secure or preserve the fruits and advantages of a judgment or decree rendered therein, is well settled. And this, irrespective of whether the court would have jurisdiction if the proceeding were an original one. The proceeding being ancillary and dependent, the jurisdiction of the court follows that of the original cause, and may be maintained without regard to the citizenship of the parties or the amount involved.

Local Loan Co. v. Hunt, 292 U.S. 234, 239 (1934) (citations omitted). Or more

colloquially, ancillary jurisdiction lets prevailing litigants go to the District Court that

entered their judgment for help in resolving matters related to its enforcement.

Accordingly, so long as the plaintiffs’ demand for injunctive relief qualifies as a post-

judgment enforcement proceeding, which is a proceeding that functions as a means for

executing a judgement, the District Court has subject matter jurisdiction. See, e.g., IFC

6 Interconsult, AG v. Safeguard Int’l Partners, LLC, 438 F.3d 298, 315 (3d Cir. 2006);

Thomas, Head & Greisen Employees Trust v. Buster, 95 F.3d 1449, 1453-54 (9th Cir.

1996).

The Transferees cite Peacock v. Thomas, 516 U.S. 349, 357-58 (1966), in an effort

to argue that the proceedings surrounding the plaintiffs’ request for a preliminary

injunction cannot be so characterized, and therefore that the District Court’s activities

went beyond its ancillary jurisdiction.

In Peacock, the Supreme Court held that a motion to pierce the corporate veil was

not an enforcement proceeding, and thus could not be entertained by the District Court

absent some independent basis for federal jurisdiction. Id. In reaching this conclusion,

the Court explained that ancillary jurisdiction was not intended for use as a tool for

establishing personal liability on the part of a new defendant, for instance by designating

that third party as an alter ego of the indebted party or by piercing the corporate veil. Id.

At the same time, however, the Supreme Court reiterated the propriety of traditional

ancillary jurisdiction, citing with approval previous cases providing garnishment,

attachment, mandamus and prejudgment avoidance of fraudulent conveyances in order to

demonstrate that enforcement jurisdiction encompasses “a broad range of supplementary

proceedings involving third parties to assist in the protection and enforcement of federal

judgments.” Id. at 356-57.

The Transferees here argue that “[t]he Fraudulent Transfer Complaint advanced by

7 the Plaintiffs presents a new legal theory of fraud allegedly perpetrated by IT and its

officers, similar to piercing a corporate veil, or alter ego claim, not raised in the original

litigation with ACMC.” (Transferees’ Br. at 18.) Nothing in Peacock, however,

precludes ancillary jurisdiction over suits involving assets already subject to the

judgment; it only bars the exercise of ancillary jurisdiction over attempts to impose

personal liability for an existing judgment on a new party. 516 U.S. at 357-58. In short,

Peacock holds that ancillary jurisdiction does not extend to suits demanding that a third

party use its legitimately held assets to satisfy a previously rendered judgment. Id. In

arriving at this conclusion, we join three of our sister Courts of Appeals who have

reached a similar conclusion. See, e.g., Epperson v. Entertainment Express, Inc., 242

F.3d 100, 106 n.6 (2d Cir. 2001) (noting that the “important distinction is not whether the

claim is brought in a second action but whether it seeks to impose liability for the

underlying judgment on a new party.”); USI Properties Corp. v. M.D. Const. Co., 230

F.3d 489, 498 (1st Cir. 2000) (explaining that Peacock drew “a distinction between

postjudgment proceedings that simply present a mode of execution to collect an existing

judgment and proceedings that raise an independent controversy with a new party,

attempting to shift liability.”); Thomas, Head & Greisen Employees Trust, 95 F.3d at

1454-55 (Peacock’s analysis turns on “whether it seeks . . . to establish liability on the

part of the third party.”).

Plaintiffs’ fraudulent conveyance claim does not seek to impose personal liability

8 on the Transferees. Rather, the relief they seek is solely to corral ACMC’s assets in an

effort to preserve their access to them. Accordingly, we conclude that the District Court

had ancillary jurisdiction to enter its October 31, 2005, preliminary injunction.1

III.

We next consider the District Court’s exercise of personal jurisdiction in light of

the Transferees’ argument that they “lack sufficient minimum contacts with the Eastern

District of Pennsylvania,” and thus find litigating there to be “unfair,” and “substantially

burdensome.” (Reply Br. 9-10.) Because Pennsylvania’s long arm statute provides for

jurisdiction “to the fullest extent allowed under the Constitution,” our inquiry turns on

whether the transferee’s constitutional rights were violated when they were hailed into the

District Court. 42 P A. C ONS. S TAT. A NN. § 5322(b).

On one hand, we do not find that any rights were violated in Nicholls’s case

because he “does reside in York, Pennsylvania,” and therefore is plainly subject to the

1 We pause briefly to resolve any tension between this ruling and our prior ruling in IFC Interconsult, AG v. Safeguard Intern. Partners, where, in the context of a garnishment action permitted under Rule 69, we said, “Our reading of Peacock comports with the jurisprudence of the Seventh Circuit.” 438 F.3d 298, 313 (3d Cir. 2006). Although the Transferees argue that this means we adopted the logic of the Seventh Circuit’s unpublished opinion in Galuska v. Geoquest, Inc., No. 98-1892, 1998 WL 879510 at *1 (7th Cir., Dec. 9, 1998), this reading is untenable given the context in which the statement was made. IFC makes it clear that this comment was referring to the Seventh Circuit’s opinion in Argento v. Melrose Park, 838 F.2d 1483 (7th Cir. 1988), which permitted the District Court to exercise jurisdiction over garnishment proceedings. The IFC opinion did not mention Galuska, or suggest that this Court was contemplating adopting its logic. Accordingly, we see no tension between the instant ruling and IFC.

9 District Court’s jurisdiction. (Supp. App. at 5.)

On the other hand, the District Court’s exercise over Hildreth requires a more

detailed analysis. Hildreth correctly argues that since he is not a Pennsylvania resident,

any exercise of personal jurisdiction over him must comport with International Shoe and

its progeny, prohibiting the exercise of in personam jurisdiction over non-resident

defendants absent their having “minimum contacts” such that the exercise of jurisdiction

“does not offend traditional notions of fair play and substantial justice.” Int’l Shoe Co. v.

Washington, 326 U.S. 310, 316 (1945) (internal quotation marks omitted).

Accepting, as we must for present purposes, that Hildreth was a party to a

fraudulent conveyance, we must determine if, by engaging in this sham transaction,

Hildreth established the requisite minimum contacts. See, e.g., Carteret Sav. Bank, FA v.

Shushan, 954 F.2d 141, 142 n.1 (3d Cir. 1992). It is well-settled that a defendant

“committ[ing] an intentional tort outside the forum, the unique effects of which caused

damage to the plaintiff within the forum,” has established such contacts. IMO Indus. Inc.

v. Kiekert AG, 155 F.3d 254, 256 (3d Cir. 1998) (citing Calder v. Jones, 465 U.S. 783

(1984)). In IMO, we held that three factors needed to be considered in determining

whether personal jurisdiction under this theory was proper:

First, the defendant must have committed an intentional tort. Second, the plaintiff must have felt the brunt of the harm caused by that tort in the forum, such that the forum can be said to be the focal point of the harm suffered by the plaintiff as a result of the tort. Third, the defendant must have expressly aimed his tortious conduct at the forum, such that the forum can be said to be the focal point of the tortious activity.

10 Here, Hildreth (1) participated in a fraudulent conveyance, which is a species of the

intentional tort of fraud, (2) for the purpose of preventing the plaintiffs, who are

Pennsylvania creditors, from collecting on a judgment rendered in their favor by a court

in Pennsylvania, (3) and thus “expressly aimed” his conduct at the forum. Id. This was

sufficient to subject Hildreth to the personal jurisdiction of the District Court.

It is true, as the Transferees stress, that Nicholls and Hildreth had not been served

with the Third Party Complaint at the time the preliminary injunction was issued.

However, (1) each of them had received copies of the Motion for Proceedings

Supplemental and thus had actual notice of the application for preliminary relief and the

basis therefor; (2) each had filed responses to that motion and indicated an intent to

litigate the subject matter of that Motion before the District Court; (3) each was afforded

an opportunity to oppose the entry of preliminary relief; (4) the District Court was

confronted with an exigent situation in which avoidance of serious and irreparable injury

to plaintiffs depended on it providing preliminary relief as soon as possible; and (5) both

Transferees appeared to be readily amenable to service of process. Under these

circumstances, we hold that it was within the discretion of the District Court to enter the

October 31st preliminary injunction prior to formal service of process in anticipation that

service would promptly follow.2

2 In so holding, we express no opinion on the issue of whether that preliminary injunction was or is enforceable against a transferee who had not been served with process at the time of any alleged violation.

11 IV.

We will affirm the District Court’s preliminary injunction order of October 31,

2005.