Pegaso Development Inc. v. Moriah Education Management LP

Background

Pegaso Development Inc. brought two claims concerning promissory notes: Count I alleged that Moriah Education Management LP breached a 2016 promissory note, and Count II alleged that Moriah Software Management LP breached a 2017 promissory note. Count II had been dismissed with prejudice. A judgment on Count I found Moriah Education Management LP and Moriah Education Management LLC jointly and severally liable to Pegaso for $2,758,567.13, plus interest accruing after March 17, 2020.

Pegaso moved for a turnover order under Federal Rule of Civil Procedure 69 and New York law. A turnover order is a court order directing a judgment debtor, or in some circumstances another person, to transfer money or property that can be used to satisfy a judgment. Pegaso relied on a promissory note issued by AnswerNet Education Services, Inc. to Moriah Education Management LLC. Pegaso argued that the note or its proceeds were available to satisfy the judgment.

Parties’ Positions

Pegaso asserted that AnswerNet’s note had a principal amount that had increased to $490,000 and that Moriah was in possession of the note. Pegaso sought an assignment of the note, documents needed to carry out the assignment, and turnover of any proceeds paid on the note.

The debtors responded that AnswerNet had paid approximately $400,000 on the note. They said $250,000 was available to pay Pegaso and that $150,000 had been paid as $50,000 advance retainers for Moriah Education Management, Black Dolphin Capital Management, LLC, and Greg Zilberstein. They asked that the turnover motion be denied as moot and argued that the retainers were proper.

Pegaso asked the court to order turnover of the $250,000, allow 60 days of discovery concerning the remaining $150,000 and the liquidation of the note, and require the disputed $150,000 to be held in escrow. Pegaso also sought a declaration that accepting $250,000 would not waive its ability to challenge the liquidation of the note or the transfers to counsel.

Court’s Analysis

The court found that both sides had failed to comply with certain local motion rules, including requirements concerning affidavits, exhibits, and requests for relief beyond simply opposing a motion. The court nevertheless addressed the merits of the turnover request because of the preference for resolving disputes on their merits. It warned that future rule violations could result in denial of requested relief with prejudice.

The court also found significant ambiguity in the debtors’ submissions. The debtors and their counsel used “MEM” to refer interchangeably to Moriah Education Management LP, Moriah Education Management LLC, or both entities collectively. The court noted that the AnswerNet note identified Moriah Education Management LLC as the lender and that the record did not show the legal relationship between the two Moriah entities or establish that one was the other’s successor or assignee.

The court rejected an undated and unsigned subscription agreement submitted by the debtors as inadmissible evidence. It also found that counsel had not submitted the purported retainer agreement and that the submissions did not adequately establish the identity of the client, the nature of the retainer, the timing of the payment, or the basis for any indemnification obligation.

The court determined that the parties’ positions showed a continuing dispute concerning the $400,000 received from AnswerNet. Although the debtors did not contest that $250,000 was available for partial payment and Pegaso requested that amount, the parties disputed the remaining $150,000. The court concluded that limited discovery about the liquidation of the AnswerNet note and the transfer of funds to Spiro Harrison was warranted to help resolve the dispute.

Disposition

The court ordered that the entire $400,000 received in connection with the AnswerNet note be held in an escrow account until the turnover motion was resolved. It allowed the parties 60 days from the order’s date to conduct discovery limited to the liquidation of the AnswerNet note and the transfer of funds to Spiro Harrison. The parties were required to file a joint status letter within seven days after that discovery period ended.

The court held the resolution of Pegaso’s turnover motion in abeyance until further notice. Thus, the order did not finally grant or deny the turnover motion or decide whether the disputed $150,000 had been improperly transferred.