We always tell our clients that getting the judgment is easy; it’s collecting on it that is the hard part. For the creditor that has pursued a collection matter in federal court where there has to be complete diversity of citizenship and a monetary claim of at least $75,000.00, exclusive of interest, the hard part of collecting has been made a little easier by the decisional law in the Second Circuit and its lower federal district courts (where New York is located) which state that a federal district court has the power to enforce its own judgments, using the post-judgment enforcement tools of state practice. The concept is known as ancillary jurisdiction, which together with Rule 69 of the Federal Rules of Civil Procedure allows creditors to bring post-judgment enforcement proceedings in federal district court.
In Peacock v. Thomas, 516 U.S. 349 (1996), the Supreme Court described the breadth of the federal court’s inherent power to enforce its own judgments through the exercise of ancillary jurisdiction over third parties, provided, however, that the district courts could not impose liability for a money judgment on a person not otherwise liable for the judgment in the context of a post-judgment enforcement proceeding. The Supreme Court reasoned that without such authority, “the judicial power would be incomplete and entirely inadequate for the purposes for which it was conferred by the Constitution”.
Applying the teaching of Peacock, the Second Circuit held in Epperson v. Entertainment Express, Inc., 242 F.3d 100, 104 (2d Cir. 2001) that such ancillary jurisdiction extends to “the assets of the judgment debtor [,] even though the assets are found in the hands of a third party”. Therefore, a creditor seeking to enforce a judgment obtained in federal court can bring a turnover proceeding under Article 52 of the CPLR in federal court and seek not only garnishment, but also any of the other remedies available under Article 52, including a claim for fraudulent conveyance. In particular, post-judgment enforcement proceedings based upon fraudulent conveyance claims are to be distinguished from claims involving alter ego liability and veil-piercing that raise an independent theory of recovery in which liability is shifted to a third party. A fraudulent conveyance claim on the contrary, does not seek to shift liability to a third party; it is simply a means to disgorge the judgment debtor’s assets that are wrongfully in the hands of another.
Finally, as long as the federal district court obtains personal jurisdiction over the object of the enforcement proceeding, there is no need that all the parties be diverse. Ancillary jurisdiction gives the federal district court a basis of federal subject matter jurisdiction separate and apart from diversity jurisdiction. On the issue of personal jurisdiction, federal district courts sitting in New York are likely to require that a non-party garnishee be served with process that meets the requirements of Rule 4 of the Federal Rules of Civil Procedure as well as the comparable rules under Article 3 of the CPLR. However, there does appear to be some lack of clarity among the federal courts in the Second Circuit as to how to deal with claims of improper service of a post judgment proceeding; that is, whether an enforcement action should be dismissed for lack of personal jurisdiction or whether it should simply be denied with leave to serve correctly. The resolution may have to do with whether the non-party garnishee is not in the physical jurisdiction of the court or otherwise subject to long-arm jurisdiction. That is, if the non-party garnishee is without the state and not subject to long-arm jurisdiction, the action will be dismissed, otherwise, where there is a mere insufficiency based upon improper or inadequate service, leave to re-serve will be granted. See LaBarbera v. Audax Const. Corp., 971 F.Supp.2d 273 (E.D.N.Y. 2013).
While there are occasions when enforcing a federal court judgment in state court is more convenient, the power of the federal court is considerable and it has been our experience that judgment debtors and recalcitrant non-party garnishees give serious attention to directives of the federal bench.