Iantosca v. Step Plan Services, Inc.

United States Court of Appeals
For the First Circuit

Nos. 09-1038, 09-1953, 09-2184

JOSEPH IANTOSCA, Individually and as Trustee of the Faxon Heights
Apartments Realty Trust and Fern Realty Trust; BELRIDGE
CORPORATION; GAIL A. CAHALY; JEFFREY M. JOHNSTON; BELLEMORE
ASSOCIATES, LLC; MASSACHUSETTS LUMBER COMPANY, INC.,

Plaintiffs, Appellees,

v.

STEP PLAN SERVICES, INC.; BENISTAR 419 PLAN SERVICES, INC.,

Defendants, Appellants.
__________

BENISTAR ADMIN SERVICES, INC.; DANIEL CARPENTER; MOLLY CARPENTER;
BENISTAR PROPERTY EXCHANGE TRUST COMPANY, INC; BENISTAR LTD.;
BENISTAR EMPLOYER SERVICES TRUST CORPORATION; CARPENTER FINANCIAL
GROUP, LLC; BENISTAR INSURANCE GROUP, INC.; TRAVELERS INDEMNITY
COMPANY; CERTAIN UNDERWRITERS AT LLOYD'S LONDON; TRAVELERS
PROPERTY CASUALTY COMPANY OF AMERICA,

Defendants.

APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Nathaniel M. Gorton, U.S. District Judge]

Before

Boudin, Circuit Judge,
Souter,* Associate Justice,
and Howard, Circuit Judge.

*
The Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
 John B. Farley with whom James V. Somers, Renee M. Reed,
Halloran & Sage LLP, Jack E. Robinson, Ira B. Silverstein and Thorp
Reed & Armstrong LLP were on brief for appellants.
Anthony R. Zelle with whom Thomas W. Evans, Zelle McDonough &
Cohen, John E. O'Brien, Jr., Bradford S. Babbitt, Robinson & Cole
LLP, William C. Nystrom, Colleen C. Cook and Nystrom Beckman &
Paris were on brief for appellees.

May 3, 2010
 BOUDIN, Circuit Judge. This is an appeal from a

preliminary injunction (and related orders) granted to the

district-court plaintiffs in their reach-and-apply action. The

effect is to freeze pendente lite certain funds, now in the hands

of third parties (the reach-and-apply defendants), due to one or

more of the other defendants who owe, or are alleged to owe, money

judgments to the plaintiffs. The background is complicated and

involves proceedings in several different courts. We begin with a

summary.

Benistar Property Exchange Trust Company, Inc. is a

Delaware corporation that held itself out as an escrow agent for

persons seeking to perform tax-deferred, "like-kind" property

exchanges pursuant to 26 U.S.C. § 1031 (2006). These transactions

achieved tax benefits but required that certain funds be held in

escrow for a period; Benistar Property fulfilled this escrow role.

The plaintiffs (now appellees in this court), whom we will call

"the creditors," are former Benistar Property clients.

In 2001, the creditors filed suit in Massachusetts state

court alleging that Benistar Property; Martin Paley, its president;

Daniel Carpenter, its chairman and sole shareholder; and several

others had breached contractual and fiduciary duties by losing

escrowed funds in high-risk options trading rather than holding the

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funds in safer, liquid accounts as promised.1 After a trial, the

defendants in that case were found liable, and enhanced damages and

attorneys' fees were awarded under Mass. Gen. Laws. ch. 93A (2009).

See Cahaly v. Benistar Prop. Exch. Trust Co., Inc., 885 N.E.2d 800

(Mass.), cert. denied, 129 S. Ct. 637 (2008). The final award--

which we refer to as "the Cahaly judgement"--was for approximately

$20 million, of which only a portion has been paid.

In September 2003, the Massachusetts state court pierced

the corporate veil and extended liability to five additional

corporate entities controlled by Carpenter: Benistar Admin

Services, Benistar Employer Services Trust Corp., Benistar Ltd.,

Carpenter Financial Group, LLC, and U.S. Property Exchange. In so

doing, the court found that Carpenter owned each of the entities

either by himself or with his wife, Molly; that Carpenter exercised

control over all entities; that assets were intermingled; and that

the entities were under-capitalized and failed to observe corporate

formalities.

A second law suit now enters the picture frame. In April

2006, a suit--"the Koresko litigation"--was brought against John

Koresko and several entities owned by him by (1) two companies

engaged as sponsors of multiple-employer welfare benefit plans,

1
A criminal case was also brought against Daniel Carpenter; he
was convicted on multiple counts of wire and mail fraud but was
granted a new trial due to prosecutorial misconduct. United States
v. Carpenter, 494 F.3d 13, 15-16 (1st Cir. 2007).

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STEP Plan Services, Inc. and Benistar 419 Plan Services, and their

common president, Wayne Bursey, and (2) two other Benistar

entities, one of which--Benistar Admin Services--was a party in the

earlier Cahaly litigation, and one of which--Benistar Insurance

Group, Inc.--was not. The outcome was a settlement from Koresko's

insurers (Travelers Insurance Company and Certain Underwriters at

Lloyds, London) in the amount of roughly $4.5 million.2

In late 2008, the creditors, holding their unsatisfied

Cahaly judgment, brought suit in Massachusetts state court to reach

and apply money that the two insurance companies had agreed to pay

on behalf of the Koresko entities to settle the litigation against

them. The state court granted a temporary restraining order at the

creditors' request enjoining the distribution of any settlement

proceeds by either of the reach-and-apply defendants.3 This reach-

and-apply case, the third law suit which is now before us, was

thereafter removed to federal district court.

2
There is some question as to whether a settlement agreement
was ever formally consummated. The Benistar entities claim in
their brief that decisions by the state and federal courts to
enjoin distribution of settlement proceeds "derail[ed] the
settlement agreement," but nothing in the record verifies that
assertion.
3
The TRO stated that "Travelers Insurance Company and
Underwriters at Lloyds, London be and hereby are enjoined and
otherwise restrained from selling, conveying, transferring,
assigning, hypothecating, depleting or otherwise disposing of or
diminishing any property, right, title or interest . . . of the
above-referenced defendants in settlement proceeds from a
Pennsylvania Lawsuit: Step Plan Service, Inc. et al. v. Koresko
Associates."

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 In the district court, the reach-and-apply defendants

were the insurance companies; the other defendants were the

plaintiffs in the Koresko litigation (other than Bursey) and the

judgment debtors in the Cahaly litigation. After removal, the

defendants (other than the insurance companies) filed motions to

dismiss or transfer venue. Rather than granting the motion, the

district court temporarily extended the state court's TRO,

thereafter held a hearing on the creditors' request for a

preliminary injunction, and, on November 21, 2008, granted a

preliminary injunction tracking the restraining order.

In granting the injunction--which required a $400,000

bond from the creditors--the court found that "Step is likely

abusing the corporate form," and a "substantial risk that, unless

enjoined, the [Benistar] defendants will dissipate or conceal the

assets" gained from the Koresko litigation settlement. The court

also ordered the creditors to seek clarification from the state

court in the Cahaly case to confirm that the Cahaly judgment did

not preclude enforcing the judgment against new alter egos of the

original defendants.4

The litigation before the district court has

proliferated. The creditors have sought to establish alter ego

4
The creditors were required by the injunction to periodically
update the court as to the status of their motion for
clarification. As of creditors' the most recent update, filed
January 22, 2010, the state-court motion was still pending.

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status for the Koresko plaintiffs who were not already subject to

the Cahaly judgment. The insurance companies filed claims of their

own in the district court; the Benistar defendants claimed against

the creditors and the insurance companies and also asserted

numerous defenses and arguments for dismissal. It appears that

there are also proceedings in the Koresko case to enforce the

settlement. See generally Iantosca v. Benistar Admin Servs., Inc.,

No. 08-11785-NMG, 2009 WL 2382750, at *1-4 (D. Mass. July 30,

2009).

The district-court case is now in a holding pattern while

awaiting clarification by the Massachusetts Superior Court, and the

preliminary injunctions' effect is to preserve funds in the hands

of the insurance companies pending disposition of the reach-and-

apply claims in this case. The preliminary injunction granted by

the district court in November 2008 was extended in May 2009,

motions to vacate and reconsider were denied, and the present

appeal--by STEP Plan and Benistar 419 Plan only--ensued.

A preliminary injunction is appealable but review is

deferential as to the weighing of considerations under the familiar

four-part test. Bl(a)ck Tea Soc'y v. City of Boston, 378 F.3d 8,

11 (1st Cir. 2004).5 Although there are exceptions, usually the

5
The considerations are "(1) the likelihood of success on the
merits; (2) the potential for irreparable harm if the injunction is
denied; (3) the balance of relevant impositions, i.e., the hardship
to the nonmovant if enjoined as contrasted with the hardship to the
movant if no injunction issues; and (4) the effect (if any) of the

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injunction requires the movant to show likelihood of success, New

Comm Wireless Servs., Inc. v. SprintCom, Inc., 287 F.3d 1, 9 (1st

Cir. 2002), and two of the arguments offered by STEP Plan and

Benistar 419 Plan contest the district court's finding of such a

likelihood.

The first of these arguments is that the creditors should

have been precluded from bringing veil-piercing claims against the

two appellants (to make them liable under the Cahaly judgment),

because the judgment itself dismissed--with prejudice, appellants

say--all claims against "Jane Doe Affiliates and Subsidiaries" of

the Benistar defendants. The relevant portion of the judgment

reads as follows:

8. The Claims of All Plaintiffs Against the
Defendants Jane Doe Affiliates and
Subsidiaries of Benistar Defendants and Jane
Doe Entities controlled by Daniel Carpenter:

That judgment enter against all the plaintiffs
and in favor of the defendants Jane Doe
Affiliates and Subsidiaries of Benistar
Defendants and Jane Doe Entities controlled by
Daniel Carpenter on all the plaintiffs' claims
against these defendants, and that all such
claims be dismissed.

Given their ties to other Benistar entities, the appellants argue

that they qualify as "Jane Does" under the judgment; that the "all

such claims be dismissed" language applies to them and resolves

court's ruling on the public interest." Bl(a)ck Tea Soc'y, 378
F.3d at 11 (quoting Charlesbank Equity Fund II v. Blinds To Go,
Inc., 370 F.3d 151, 162 (1st Cir. 2004)).

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such claims with prejudice; that the creditors' veil-piercing

claims against them are res judicata; and that the creditors are

thus unlikely to prevail on the merits of their reach-and-apply

action, rendering the preliminary injunction erroneous.

The district court disagreed. While requiring the

creditors to seek clarification in the state court (a request that

is still pending), it concluded that the Cahaly judgment's language

was not intended to "foreclose prospectively plaintiffs' ability to

enforce that judgment against an entity later determined to be an

alter ego [of Benistar Property]" and accordingly declined to

"construe [its] ambiguous language" in that fashion. STEP Plan and

Benistar 419 Plan now say that this determination is reversible

error.

Res judicata, in its claim preclusion aspect, is intended

to prevent the re-litigation of claims already litigated or that

should have been litigated in an earlier action; in its issue

preclusion aspect, it prevents (with qualifications) re-litigation

of issues earlier decided even if the subsequent case involves a

different claim. In re Sonus Networks, Inc., 499 F.3d 47, 56 (1st

Cir. 2007). In considering the preclusive effect of a

Massachusetts judgment, we look to Massachusetts law. Mulrain v.

Bd. of Selectmen, 944 F.2d 23, 25 (1st Cir. 1991).

The inclusion of Jane Does in the Cahaly complaint likely

reflected an expectation that, through discovery or otherwise,

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other participants in the wrongdoing might be identified or other

Benistar companies with alter ego status made liable. But neither

of the current appellants' liability nor their alter ego status was

actually tried in Cahaly and found in the appellants' favor. One

of the two appellants had not even been acquired by the Benistar

interests until after the Cahaly litigation began. So issue

preclusion is out of the picture.

In many courts claim preclusion extends to claims that

were not tried in the earlier case but arose out of the same

transaction or occurrence, see Giragosian v. Ryan, 547 F.3d 59, 63

(1st Cir. 2008); McDonough v. City of Quincy, 452 F.3d 8, 16 (1st

Cir. 2006), making the doctrine in part a surrogate for compulsory

joinder; but it normally applies to claims between the named

plaintiff and the named defendant. To extend claim preclusion in

favor of new defendants, who were not named or served as parties in

the earlier litigation, would be dubious as a matter of policy and

is not supported by any case cited by appellants.

True enough, one of the appellants was potentially one of

the Jane Does who could have been brought into the case, but that

is hardly the same thing. Cf. James v. Mazda Motor Corp., 222 F.3d

1323, 1324 n.6 (11th Cir. 2000) (noting that "John Doe was never in

any sense 'before the court.'"). There is economy in requiring

that related claims against present defendants be pressed in the

initial suit, and various devices exist for that purpose. It is

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quite another matter to require automatically--on pain of

preclusion--that everyone potentially liable for a wrong be

identified and included in the initial law suit.

Even if res judicata protected the appellants, which we

doubt, the injunction itself ran only against the insurers, and, to

the extent that the creditors had claims against Benistar Admin

Services, a plaintiff in the Koresko litigation and also liable on

the Cahaly judgment, the injunction served a separate purpose. The

appellants say that Benistar 419 was the only payee of the Koresko

settlement. But this premise tends rather to reinforce concerns

about fraudulent transfers that are also alleged here.6

Appellants' second attack on the likelihood of the

creditors' success is that the proceeds of the Koresko settlement

are assets of an ERISA plan and accordingly "may not be assigned or

alienated." 29 U.S.C. § 1056(d)(1) (2006). It is unclear that the

settlement proceeds are protected plan "benefits" and unclear too

(as already noted) whether the proceeds belong only to either plan.

The Supreme Court, moreover, has held that ERISA plans "may be sued

. . . for run-of-the-mill state-law claims such as unpaid rent,

6
The circumstances of Benistar 419's assignment as the sole
payee of the Koresko settlement are troubling: after arguing at the
preliminary injunction stage that the proceeds would be payable
entirely to STEP Plan, the defendants abruptly changed their
stance--in a single footnote and without explanation--and named
Benistar 419 Plan as payee. Benistar Admin Services paid for all
of STEP Plan's legal bills in the Koresko litigation, yet it would
stand to receive nothing for its trouble.

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failure to pay creditors, or even torts committed by an ERISA

plan." Mackey v. Lanier Collection Agency & Serv., Inc., 486 U.S.

825, 833 (1988).

Appellants' citations in support of their argument are to

suits by creditors against the beneficiaries of ERISA plans (e.g.,

a challenge to the transfer of interests in pension benefits by a

nonparticipant spouse, see Boggs v. Boggs, 520 U.S. 833, 846-47

(1997)), not the plans themselves. As the district court pointed

out, Benistar's inalienability argument is also in tension with

appellants' midstream switch from STEP Plan to Benistar 419 Plan as

sole payee of the settlement proceeds. The likelihood-of-success

finding by the district court is more than adequately supported.

The appellants next argue that the district court lacked

personal jurisdiction over them, lacked subject matter

jurisdiction, violated the Anti-Injunction Act, 28 U.S.C. § 2283,

and should have abstained pursuant to Colorado River Water

Conservation District v. United States, 424 U.S. 800 (1976). On

appeal from a preliminary injunction, appellants are free to argue

against the injunction based on defenses that might not be

appealable now absent the injunction, but these objections all

fail.

The district court held that "the question of personal

jurisdiction over [STEP Plan and Benistar 419 Plan] overlaps with

plaintiffs' substantive veil-piercing claim," and delayed

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resolution of the issue until after the appellees had been afforded

an opportunity for jurisdictional discovery. Appellants insist

that delay is one thing and the grant of a preliminary injunction

another, citing United Electric, Radio and Machine Workers v. 163

Pleasant St. Corp., 960 F.2d 1080 (1st Cir. 1992), but that case

treated the order of disposition as a matter of convenience rather

than a requirement. Id. at 1085.

In all events, the district court made a more than

adequate assessment on affidavits that STEP likely is an alter ego

of the Cahaly defendants, and this finding is sufficient to support

the entry of a preliminary injunction. See Visual Sciences, Inc.

v. Integrated Commc'ns Inc., 660 F.2d 56, 59 (2d Cir. 1981).7 The

appellants complain that the creditors have not provided similar

affidavits demonstrating that Benistar 419 Plan would also be

subject to corporate disregard. As the district court noted, "that

omission is understandable given the . . . initial insistence that

Step was the only beneficiary of the [Koresko] Settlement."

Further, the preliminary injunction runs only against the

insurers, and they have not contested personal jurisdiction. Those

7
The district court found that the appellees had "presented
substantial evidence that [STEP Plan] should be subject to the
doctrine of corporate disregard," that the court could thus
attribute STEP Plan's alter egos' contacts to STEP Plan, and that
the court would have jurisdiction over it as a result. A number of
cases support this theory. See, e.g., Donatelli v. Nat'l Hockey
League, 893 F.2d 459, 468-69 (1st Cir. 1990); Telenor Mobile
Commc'ns AS v. Storm LLC, 587 F. Supp. 2d 594, 619 (S.D.N.Y. 2008).

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entitled to the settlement could suffer from delay, but courts do

not need personal jurisdiction over every party that might be

affected--even only indirectly--by an injunction. See Hendricks v.

Bank of America, N.A., 408 F.3d 1127, 1135-36 (9th Cir. 2005).

Such entities may, of course, themselves choose to appear. And in

this case both appellants have the protection of a generous bond

required by the district court.8

The appellants' subject matter objection is that the

district court lacked authority to hear the case because the reach-

and-apply case was not ripe when filed. This is so, they say,

because Massachusetts law prevents the execution of a judgment

"until the exhaustion of all possible appellate review thereof."

Mass. Gen. Laws ch. 235, § 16 (2010). At the time this reach-and-

apply suit was filed in October 2008, a petition for certiorari was

pending in the U.S. Supreme Court and was not denied until

December.

It is unclear whether the possibility of certiorari

counts under the cited statute. The Massachusetts Supreme Judicial

Court has "said many times[] [that] certiorari does not provide an

8
The appellants argue that they are "necessary" parties to the
plaintiffs' request for injunctive relief; the injunction, they
say, will "impair or impede [their] ability to protect [their]
interest" in the Pennsylvania settlement. Fed. R. Civ. P.
19(1)(B)(i) (2010). Quite apart from the bond, the injunction
"merely preserves the asset pending a final judgment on the merits
. . . [and] [t]hus, as a practical matter, . . . does not impede
[their] ability to protect that asset." Hendricks, 408 F.3d at
1136 (internal quotation marks omitted).

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additional or alternative avenue of appellate review." Picciotto

v. Super. Ct. Dept. of Trial Ct., 771 N.E.2d 151, 152 (Mass. 2002).

Anyhow, certiorari was long ago denied and the concern of the

ripeness doctrine--premature adjudication, Rhode Island Ass'n of

Realtors, Inc. v. Whitehouse, 199 F.3d 26, 33 (1st Cir. 1999)--is

now irrelevant. No purpose would be served by requiring that same

suit be refiled now.

The Anti-Injunction Act, also offered as an objection,

forbids a federal court from granting "an injunction to stay

proceedings in a State court" except "as expressly authorized by

Act of Congress, or where necessary in aid of its jurisdiction, or

to protect or effectuate its judgments." 28 U.S.C. § 2283 (2006).

The phrase "proceedings in a State court" includes settlement

proceedings, Hill v. Martin, 296 U.S. 393, 403 (1935), but the

injunction granted by the district court does not stay proceedings

in the Koresko litigation, merely requiring that the insurers

retain the funds until third party claims to them are resolved.

Further, because the creditors in this case were not

parties in the Koresko litigation or in privity with parties, they

are considered "strangers" to that suit and are accordingly

unrestricted by the Anti-Injunction Act. See Casa Marie, Inc. v.

Super. Ct. of Puerto Rico, 988 F.2d 252, 264 (1st Cir. 1993). The

Anti-Injunction Act "does not prohibit third parties from seeking

to enjoin a state proceeding with a federal injunction" if the

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third party is "a stranger to the state proceedings." Garcia v.

Bauza-Salas, 862 F.2d 905, 909 (1st Cir. 1988); accord Hale v.

Bimco Trading, Inc., 306 U.S. 375, 377-78 (1939).

Nor is abstention by the federal court compelled, as

appellants now argue, by Colorado River Water Conservation Dist. v.

United States, in which the Supreme Court held that deference by

federal courts may be appropriate "in situations involving the

contemporaneous exercise of concurrent jurisdiction[] . . . by

state and federal courts." 424 U.S. at 817. That case dealt with

essentially parallel proceedings in state and federal court;

nothing of the kind is present here.

Appellants' penultimate argument is that the creditors

failed to provide evidence supporting renewal of the injunction

after it expired. The district judge had set the preliminary

injunction to last six months, noting that it could be extended.

The injunction expired, and after a six day hiatus the creditors

asked for its continuation, which the district court duly granted

relying on earlier evidence. Nothing relevant impaired the

district court's original justification which equally supports the

extension.

The appellants' final argument is that the injunction

exceeds the limits of the district court's equity power pursuant to

Grupo Mexicano de Desarrollo, S. A. v. Alliance Bond Fund, Inc.,

527 U.S. 308 (1999). There, a closely divided Supreme Court held

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that a preliminary injunction freezing a defendant's assets was

beyond the conventional equity power of the federal courts when the

movants were merely alleged general creditors who lacked a judgment

lien on or equitable interest in those assets. Id. at 319-20, 333.

But, of course, the creditors do have such a judgment against

Benistar Admin Services.

Appellants say that no such judgment was entered against

them and that the funds owed by the insurers under the Koresko

settlement belong only to one of them, Benistar 419 Plan. But the

creditors themselves have a colorable claim that appellants' own

supposed interest under the settlement rests upon a fraudulent

conveyance that a court will not recognize, and that the settlement

funds properly belong to one or more of the named defendants who

are liable to the creditors under the Cahaly judgment. So the

creditors do have a claimed lien interest to support the

preliminary injunction.

Grupo Mexicano itself distinguished Deckert v.

Independence Shares Corp., 311 U.S. 282 (1940), an earlier decision

upholding a preliminary injunction freezing assets, by noting that

Deckert involved claims for rescission and restitution. 527 U.S.

at 325. In so doing, the Court said that "this case does not

involve a claim of fraudulent conveyance," id. at 324 n.7, and,

while it declined to say how it would decide such a case, other

courts have held that Grupo Mexicano "thus exempts from its

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proscription against preliminary injunctions freezing assets cases

involving . . . fraudulent conveyances.”9

Appellants say that the creditors primarily aim to obtain

legal relief to collect money damages from them and cite JSC

Foreign Economic Association Technostroyexport v. International

Development & Trade Services, Inc., 295 F. Supp. 2d 366, 388

(S.D.N.Y. 2003); that case invoked Grupo Mexicano where the

fraudulent conveyance claim depended upon first establishing alter

ego status. Even assuming we were to agree with JSC, proving alter

ego status is not a precondition to showing that, if the fraudulent

conveyance is disregarded, the settlement belongs to Cahaly

judgment debtors. See note 6, above.

If it were necessary to rule on the point, we would

likely agree with decisions concluding that a court may, consistent

with Grupo Mexicano, "issue[] asset freezing injunctions in 'mixed'

cases . . . where both equitable and legal remedies are sought."10

As matters stand, it is enough that those funds may belong not to

alter egos but to named defendants subject to the Cahaly judgment.

9
In re Focus Media Inc., 387 F.3d 1077, 1085 (9th Cir. 2004);
see also Johnson v. Couturier, 572 F.3d 1067, 1083-84 (9th Cir.
2009); Animale Group Inc. v. Sunny's Perfume Inc., 256 F. App'x
707, 709 (5th Cir. 2007); Kennedy Bldg. Assocs. v. CBS Corp., 476
F.3d 530, 535 (8th Cir. 2007).
10
Nilson v. JPMorgan Chase Bank, N.A., No. 1:09-cv-00121, 2009
WL 5205994, at *25 (D. Utah Dec. 23, 2009); see also Animale Group
Inc., 256 F. App'x at 709; Matrix Partners VIII, LLP v. Natural
Res. Recovery Inc., No. 1:08-CV-547, 2009 WL 175132, at *4-5 (E.D.
Tex. Jan. 23, 2009).

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A preliminary injunction freezing the funds pendente lite is thus

fully consistent with Grupo Mexicano.

Affirmed.

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