July 31, 2016

First Circuit Affirms Lower Court’s Substitution of Parties Post Judgment

John Austin

Where the judgment debtor purportedly transferred its interest in intellectual property belonging to the debtor to the mother of the president of the debtor, Malek Benin, prior to the lawsuit, the First Circuit Court of Appeals held that the district court properly employed rule 25(c) to substitute the mother and subsequently incorporated company as joint judgment debtors to the original party. Rodriquez-Miranda v. Benin et al, Nos. 14-1334, 14-1518, decided July 13, 2016.

Nearly a year after obtaining the original judgment, Rodríguez filed a motion asking the district court to order the sale of Coquico’s assets to satisfy the judgment, which was approved by the Court. Three days prior to the sale, Benin’s mother, Acquanetta Benin sought to intervene in the collection action and to stay execution, claiming that she was the record owner of the property set for sale having previously purchased the relevant intellectual property from Coquico years before. Benin moved to stay the sale of the intellectual property, arguing, for the first time, that Acquanetta was an “indispensable party to the action” because she, not Coquico, owned the property. Throughout the previous action, Benin represented “that Coquico—not Acquanetta—was the owner of the copyrights. Now, Benin alleged his mother “purchased” the intellectual property back in 2006. The district court denied both Acquanetta’s motion to intervene and Benin’s motion to stay the sale.

On appeal, Benin argued that “the district court erred in using rule 25(c) to hold them liable for the judgment entered in favor of Rodríguez.” Rule 25(c), which governs the substitution of parties, provides, in relevant part:

(c) Transfer of Interest. If an interest is transferred, the action may be continued by or against the original party unless the court, on motion, orders the transferee to be substituted in the action or joined with the original party.

Although rule 25(c) applies only to actions that are “pending,” it “does not preclude substitution during subsequent proceedings brought to enforce a judgment.” A proceeding to enforce a judgment is “pending again, and Rule 25 applies.” The court found the debtors’ arguments “disingenuous, to say the least, . . . to argue now that the district court erred in its application of Rule 25(c) because the transfer of interest occurred after judgment had been entered,” given their prior representations and claims.

In addition to using a fraudulent conveyance claim, creditor rights’ practitioners can also look for relief under rule 25(c) where debtors allege valuable assets have been transferred to third parties.

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John Austin

Principal at John Austin Law Firm in Raleigh, North Carolina