LESLIE FOSCHIO, Magistrate Judge
JURISDICTION
Pursuant to 28 U.S.C. § 636(b)(1)(B), this matter was referred to the undersigned by the Hon. William M. Skretny on October 29, 2003 for determination of Plaintiff's motion for seizure of chattel and preliminary injunction (Docket Item 10), and on June 14, 2004 for determination of Defendant's cross motion to dismiss the complaint (Docket No. 16).
BACKGROUND
Plaintiff commenced this action on December 20, 2002, alleging a cause of action for breach of a promissory note and loan agreement (Docket Item 1, ¶ 17). On September 10, 1999, Plaintiff entered into a loan agreement whereby it agreed to loan $400,000 to the Defendant, a Canadian affiliate, Applied Carbon Technology, Inc. ("ACT") and its parent corporation, 1364274 Ontario Inc. ("the Ontario Corporation") for the purchase of 4.5 million pounds of graphite from the Defense National Stockpile Center ("DNSC") (Docket No. 12, Exh. A). Contemporaneously, the parties executed a promissory note which provided for six payments of $66,666.67 (Docket No. 12, Exh. B). Additionally, a security agreement granted Plaintiff a security interest in the graphite (Docket No. 12, Exh. C). All three agreements provide that they are to governed and construed according to the law of the Province of Ontario (Docket No. 3, Exhs. A, B, D). Plaintiff alleges that Defendant defaulted on its obligation under the loan agreement and promissory note.
The court notes that Plaintiff previously brought a similar action in New York State Supreme Court, Erie County, and was awarded a default judgment. However, when Plaintiff sought to enforce the judgment, the United States Department of Defense, which apparently oversees the National Stockpile, would not honor the judgment of the state court and release the collateral. Additionally, Defendant has asserted that it was not properly served in the state court action, and so could have moved to vacate the default judgment, although this has not been done. Plaintiff has stated that it "stands ready to vacate the default judgment . . . in order to permit this Court to adjudicate the merits of this action. . . ." (Docket No. 24, ¶ 14). At this juncture, the state court default judgment is a final judgment on the merits for purpose of res judicata, see Eagle Ins. Co. v. Facey, 707 N.Y.S .2d 238, 239 (2d Dep't 2000), and the case is therefore dismissible on the basis of the Rooker-Feldman doctrine. See Rooker v. Fidelity Trust Co., 263 U.S. 413 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462 (1983) (inferior federal courts have no jurisdiction over suits that seek direct review of state court judgments or that seek to resolve issues that are "inextricably intertwined" with earlier state court determinations). To avoid dismissal on Rooker grounds, Plaintiff is directed to vacate the state court judgment within ten days of entry of this order and to file proof of such vacatur with the Clerk of this Court.
The National Defense Stockpile is an entity created by statute for the purpose of the acquisition, retention and disposal of certain strategic materials. See 50 U.S.C. § 98 et seq.
In its answer, Defendant admitted that this court has jurisdiction by virtue of diversity of citizenship of the parties, and also agreed that venue in this district was proper (Docket No. 3, ¶ 3). Defendant also admitted that Plaintiff provided the funding for the purchase of the graphite according to the terms of the loan agreement and that "one of the parties to the Loan Agreement and Promissory Note conceded a breach of one or more of the terms of the Loan Agreement or Promissory Note. . . ." (Docket No. 3, ¶¶ 7, 12).
On October 10, 2003, Plaintiff filed this motion for the seizure of chattel pursuant to Fed.R.Civ.P. 64 and New York Civil Practice Law Rules § 7102, and for a preliminary injunction preventing Defendant from moving or disposing of the graphite (Docket No. 10).
In response to the motion, on November 21, 2003, Defendant filed a response to the motion and a cross motion to dismiss (Docket No. 16). It argued that Plaintiff has proceeded against an improper party, in that the graphite is owned by the Ontario Corporation. Defendant also argued that Plaintiff has not stated a cause of action.
Plaintiff submitted a reply declaration on December 15, 2003 (Docket No. 19). The court heard oral argument on January 5, 2004. At that time, the parties were granted permission to file an additional brief. On February 6, 2004, Plaintiff's counsel filed a declaration in support of the motion (Docket No. 24), and Defendant filed a Declaration of James Olive, president of Defendant, who asserted that despite evidence to the contrary in contract documents with the DNSC, the parties intended that the graphite be considered the property of the Ontario Corporation (Docket No. 26).
FACTS
This factual statement is taken from the pleadings and papers filed in the action.
In support of its motion, Plaintiff offered the loan agreement, promissory note and security agreement (Docket No. 12, Exhs. A, B, and C). Under the terms of the loan agreement, Defendant, ACT and the Ontario Corporation are listed as "Debtors," and "[a]ll obligations of the Debtors to the Lender pursuant to this Agreement are joint and several." Docket No. 12, Exh. A, ¶¶ 1(b), 2. All three debtors agreed to pay the Plaintiff $400,000 plus interest in six equal payments of $66,666.67. The debtors further agreed to use the proceeds of the loan to acquire the graphite inventory and move the inventory to Defendant's premises. Id., ¶ 8. Under the terms of the promissory note, the three debtors agreed to be jointly and severally liable for the debt, and acknowledged Plaintiff's security interest in the graphite inventory. Docket No. 12, Exh. B. According to the terms of security agreement, the Ontario Corporation granted "a continuing security interest in all of the Collateral in favour of the Creditor." Docket No. 12, Exh. C, ¶ 3.1. Collateral includes "without limitation approximately four and a half (4.5) million pounds of graphite to be acquired from the US government. . . ." Id., ¶ 1.1(c)(vi). The security agreement also expressly was made to "secure payment of all amounts due pursuant to a Loan Agreement between Applied Carbon Technology, Inc., Applied Carbon Technology (America), Inc., the Debtor, and the Creditor. . . ." Id., ¶ 2.2. It is undisputed that the debtors defaulted on the loan. In a declaration in support of the motion, Abigail Slater, a principal in Plaintiff corporation, stated that notice of default was mailed to the debtors on March 26, 2001. Docket No. 13, Exh. A. As of October 3, 2003, Plaintiff asserted that the amount due was $436,421.53 including accrued interest. In e-mail messages between Slater and Scott Sinclair, a principal in one or more of the debtor corporations, Plaintiff agreed to accept payment of $299,594.56 on the defaulted loan in accordance with Sinclair's computation of interest. Id., Exh. B.
The contract documents between Defendant and the DNSC indicate that the purchase of graphite was made by Defendant from the DNSC. In a declaration, James Olive, president of the Defendant, stated that although the three corporations, Defendant, ACT and the Ontario Corporation, were joint debtors on the loan, the parties contemplated that ownership of the graphite would be vested in the Ontario Corporation. Docket No. 26, ¶ 5. It was Mr. Olive's understanding that the United States government would only allow domestic corporations to bid on the graphite, so Defendant acted as agent for the Ontario Corporation in bidding for the purchase of the graphite from the DNSC. Id., ¶ 11. Mr. Olive stated that while the government's records may indicate that Defendant is the owner of the graphite "to the extent that there has not been any formal `transfer of ownership,'" it was always the intention of the parties that the Ontario Corporation be the owner. Id., ¶ 12. Mr. Olive also stated that the graphite has never been shown as an asset in Defendant's books. Id., ¶ 13.
DISCUSSION
Rule 64 of the Fed.R.Civ.P. provides that during the course of an action, "all remedies providing for seizure of person or property for the purpose of securing satisfaction of the judgment ultimately to be entered in the action are available under the circumstances and in the manner provided by the law of the state in which the district court is held. . . ." New York Civil Practice Law Rules § 7102 provides the rules for the recovery of chattel under New York State law. The application for an order of seizure must be supported by an affidavit which identifies the chattel to be seized, the fact that the plaintiff is entitled to possession and that the chattel is wrongfully held by the defendant, whether an action to recover the chattel has been commenced, whether the defendants have been served, have appeared or defaulted, the value of the chattel, and the fact that no defense is known to plaintiff. N.Y. Civ. Prac. L. R. § 7102 (c)(1)-(7) (McKinney 1998).
Plaintiff's affidavit in support of the motion establishes the fact of the loan, the breach of the loan obligation, Plaintiff's security interest in the graphite and Plaintiff's entitlement under the security agreement to take possession of the graphite inventory. The graphite is sufficiently identified as in the possession of the DNSC, and its value and location are specified. Docket No. 12, ¶¶ 10-11. It is asserted that an action has been commenced in this court for breach of contract and that plaintiff has no defense to the action. Additionally, Plaintiff has agreed to post a bond in the amount of $308,295.44, twice the amount of the value of the graphite. Docket No. 13, ¶ 10.
Defendant, however, has asserted a defense to this action, which is the basis for its cross motion to dismiss. Defendant contends that it is not the owner of the graphite and thus Plaintiff has proceeded against an improper party. Citing the loan agreement, promissory note and security agreement, Defendant states that it was the intention of the parties that the Ontario Corporation be the owner of the graphite. In fact, the loan agreement indicates that the Ontario Corporation "desires to purchase approximately 4.5 million pounds of graphite inventory" and that Defendant "will acquire the Graphite Inventory from the Corporation on an as needed basis." Docket No. 12, Exh. A, ¶ A. The security agreement, which grants Plaintiff the right to take possession of the graphite upon the breach of the loan agreement, is between the Plaintiff and the Ontario Corporation only. Defendant is not a party to the security agreement, and the documents do not contemplate that Defendant has a right to grant a security interest in the graphite. The security agreement indicates that the Ontario Corporation "is, or is to become, the beneficial owner of the Collateral" and has "the right to create a security interest in the Collateral in favour of the Creditor." Id., Exh. C, ¶¶ 4.2, 4.3. Defendant argues that, absent "an assertion or evidence of an assignment of ownership or physical transfer [to Defendant] of possession of the graphite stockpile at issue, it is clear that the Defendant is not the owner and/or party in possession or control of such collateral." Docket No. 16, ¶ 6.
In response to this argument, Plaintiff has offered contract documents and other evidence to show that Defendant is the owner of the graphite. Contract documents between Defendant and the DNSC indicate that Defendant contracted with the DNSC to purchase the graphite and to remove it from the DNSC. Docket No. 24, Exh. A. Additionally, in e-mail correspondence to Plaintiff's counsel, Scott Romans, Associate Counsel for the DNSC, stated that under the provisions of the contracts with the DNSC, "title to the graphite passes to Applied Carbon upon payment to DNSC for the material. Applied Carbon has paid for all of the material . . . so Applied Carbon is the current owner." Docket No. 19, Exh. A. Defendant has not stated that it sold, pledged or otherwise promised the graphite to another party and there has been no formal transfer of ownership. Mr. Olive stated only that it was the intent of the parties that the graphite would be the property of the Ontario Corporation.
The graphite is currently in the possession of the DNSC, which will not release the graphite to Plaintiff without a federal court order. Under the terms of the loan agreement, promissory note and security agreement, Plaintiff is entitled to take possession of the graphite upon the breach of the loan agreement. All three corporations, the Defendant, ACT and the Ontario Corporation, are jointly and severally liable for the loan obligation, and the default has been admitted. Defendant does not deny that Plaintiff has a security interest in the graphite, although, perhaps anticipating the rejection of its argument regarding ownership of the graphite, Defendant argues that Plaintiff has not been granted a security interest in any "collateral or any other assets owned by the Defendant." Docket No. 16, ¶ 6. In fact, the security interest in the graphite was granted to the Plaintiff by the Ontario Corporation. Docket No. 12, Exh. C. However, all parties to the loan agreement and promissory note, including Defendant, acknowledged that "[S]ecurity for repayment of the Debt has been granted to the Creditor pursuant to a Security Agreement. . . ." Docket No. 12, Exh. B, ¶ 2. Defendant purchased the graphite using the funds borrowed from Plaintiff, in recognition of both the loan obligation and the security agreement. Thus, by its actions, Defendant has ratified the security agreement and cannot now assert that it is unenforceable. See In re Syosset Laboratories Co., Inc., 1995 WL 432621, *3 (E.D.N.Y. July 14, 1995) (security agreement enforceable where ratified by party's conduct in receiving full benefits of the contract). Applying New York law, Plaintiff has properly proceeded against the owner of the graphite and the defense is not meritorious. Accordingly, the motion to dismiss should be DENIED. Moreover, Plaintiff has shown "an immediate and superior right to possession of the goods," and has thus satisfied the requirements of N.Y. Civ. Prac. L. R. § 7102. Southland Corp. v. Froelich, 41 F.Supp.2d 227, 249 (E.D.N.Y. 1999) (motion for seizure of chattel granted where security agreement allowed for repossession of store inventory upon termination of franchise agreement). The motion for seizure of chattel should therefore be GRANTED.
Although Defendant has asserted that the loan agreement, promissory note and security agreement are subject to Ontario law, it has not presented the court with any authority which would indicate that construction of the contracts at issue would differ under Ontario law, and any argument to this effect has thus been waived. See Alfadda v. Fenn, 149 F.R.D. 28, 34 (S.D.N.Y. 1993) (party relying on foreign law has burden of pleading and proving such law).
Finally, Plaintiff asks for preliminary injunctive relief preventing Defendant from removing the graphite from the DNSC. Issuance of a preliminary injunction is dependent on the movant's demonstration of (1) irreparable harm and (2) either a likelihood of success on the merits, or a sufficiently serious question as to the merits of the case to make it a fair ground for litigation and a balance of hardships tipping decidedly in its favor. Tom Doherty Assoc., Inc. v. Saban Entertainment, Inc., 60 F.3d 27, 33 (2d Cir. 1995).
Having found that Plaintiff is entitled to an order of seizure, the court is satisfied as to the likelihood of success on the merits. Plaintiff cannot, however, show irreparable harm. "Irreparable harm" is injury that is actual and imminent. If a monetary award will provide adequate compensation for the injury suffered, a preliminary injunction should not issue. Tom Doherty Assoc., Inc. v. Saban Entertainment, Inc., 60 F.3d at 37-38. In the unlikely event that the Defendant is able to remove the graphite from the DNSC, a money judgment would compensate Plaintiff for its loss. Accordingly, the motion for preliminary injunctive relief should be DENIED.
CONCLUSION
The Plaintiff's motion (Docket No. 10) for seizure of chattel should be GRANTED and the motion for a preliminary injunction should be DENIED. The Defendant's cross motion to dismiss the complaint (Docket No. 16) should be DENIED.
Pursuant to 28 U.S.C. § 636(b)(1), it is hereby
ORDERED that this Report and Recommendation be filed with the Clerk of the Court.
ANY OBJECTIONS to this Report and Recommendation must be filed with the Clerk of the Court within ten (10) days of receipt of this Report and Recommendation in accordance with the above statute, Rules 72(b), 6(a) and 6(e) of the Federal Rules of Civil Procedure and Local Rule 72.3.
Failure to file objections within the specified time or to request an extension of such time waives the right to appeal the District Court's Order. Thomas v. Arn, 474 U.S. 140 (1985); Small v. Secretary of Health and Human Services, 892 F.2d 15 (2d Cir. 1989); Wesolek v. Canadair Limited, 838 F.2d 55 (2d Cir. 1988).
Let the Clerk send a copy of this Report and Recommendation to the attorneys for the Plaintiff and the Defendant.
SO ORDERED.