December 10, 2012
In-house counsel, boards, and insurers have long been averse to the risks associated with extended litigation. However, despite a company's best efforts to avoid litigation, due to recent developments in the law of prejudgment attachment and post-judgment execution in New York, companies that transact business with, or hold property of other companies may be easily dragged into litigation in New York state courts by their counterparty's creditors, forcing them to incur unexpected legal and business costs. In addition, companies may be faced with difficult choices where an aggressive creditor of one of its counterparties demands that it turn over assets of that counterparty, while simultaneously, the counterparty encourages the company to resist such efforts.
This article will first survey developments in the New York law of attachment in light of a line of pathbreaking cases—Koehler v. Bank of Bermuda, Hotel 71 Mezz Lender v. Falor, and Doubet v. Trustees of Columbia University in the City of New York. Doubet last month became the first appellate division decision to apply Koehler and Hotel 71 to restrain assets of a garnishee solely because that garnishee was subject to jurisdiction in New York.1 Second, this article will recommend specific actions a company may take to avoid the costs and burdens that accompany prejudgment attachment orders and post-judgment executions issued in New York.
Expansive Reach of Attachment Power
The New York Civil Practice Law and Rules (CPLR) provides for two kinds of restraint on a defendant's assets: (1) post-judgment execution under CPLR, Article 52, and (2) prejudgment attachment under CPLR, Article 62. Under Article 62, a plaintiff can seek a court order attaching a defendant's assets for the purpose of securing a potential future judgment. Article 52, by contrast, allows a plaintiff that has already obtained a judgment to serve a restraining notice on any garnishee holding the defendant's assets, followed by a levy on specified assets. If the garnishee refuses to comply with a levy, a plaintiff can bring a turnover proceeding.
In the last three years, New York has expansively interpreted the types of property a creditor may attach or execute upon, allowing creditors to reach property that lies beyond the reach of a court's in rem jurisdiction merely because a garnishee is subject to personal jurisdiction in New York. In the 2009 case Koehler v. Bank of Bermuda2 (which dealt with post-judgment turn over), and the 2010 case Hotel 71 Mezz Lender v. Falor3 (which dealt with prejudgment attachment), the New York Court of Appeals held that "a court with personal jurisdiction over a nondomiciliary present in New York has jurisdiction over that individual's tangible or intangible property, even if the situs of the property is outside New York."4 Under Koehler and Hotel 71, therefore, a New York court's attachment and execution power can reach out-of-state property held by a non-resident, non-defendant garnishee so long as the court has personal jurisdiction over the garnishee.
In Koehler, the Court of Appeals ruled that a New York court has the power to require a foreign bank, which has consented to personal jurisdiction, to satisfy a judgment against the bank's customer by delivering into New York stock certificates that had been held by the bank outside the state. Notably, neither the judgment creditor nor the judgment debtor were New York residents and the judgment itself had been obtained in another state.5
One year later, in Hotel 71, the Court of Appeals extended the holding of Koehler to allow prejudgment attachment of ownership interests in 23 out-of-state entities held and controlled by a defendant-garnishee merely because in personam jurisdiction existed over that entity. Here, the defendant-garnishee was a nondomicilliary, who had voluntarily submitted to personal jurisdiction in New York.6
'Doubet'. Just last month, in Doubet v. Trustees of Columbia University in the City of New York, a judgment creditor brought a special proceeding under Article 52 to recover money damages for the violation of restraining notices served on a garnishee.7 Following the issuance of the restraining notice, the garnishee entered into a written agreement with the judgment debtor to pay the judgment debtor a consulting fee upon the garnishee's sale of apartments to Columbia University. The garnishee claimed that "the restraining notices were invalid because they were mailed to an out-of-state garnishee and sought to restrain out-of-state property."8 The First Department, however, citing both Koehler and Hotel 71, held that the garnishee was properly subject to the restraining notices because even though "the situs of the property at issue—respondent's contractual obligation to pay a broker's fee—was outside of the State of New York, as a foreign corporation authorized to do business in New York, respondent has consented to personal jurisdiction in New York." Accordingly, garnishee's out-of-state property was subject to the restraining notices.9
Treatment in trial courts. There are a few unreported trial court decisions involving situations where plaintiffs attempted to attach or execute on out-of-state property held by third-party garnishees. The reactions of the parties and courts to these matters are instructive.
In Poah One Acquisition Holdings V Limited v. Armenta, an Article 52 post-judgment turnover proceeding, Supreme Court ordered a third-party Cayman company to turn over certain equity interests to one of the plaintiff's affiliates to satisfy a judgment after concluding that the third-party was subject to the court's jurisdiction.10 Documents filed in that case show that the garnishee chose to consent to jurisdiction in New York rather than dispute it.11
In International Legal Consulting v. Malabu Oil & Gas,12 the Supreme Court refused to apply Hotel 71 to an Article 62 prejudgment attachment proceeding brought against a third-party garnishee (a bank) because of what it described as two distinguishable facts. First, in Hotel 71, the garnishee was one of the defendants, and the court had personal jurisdiction over all of the defendants. By contrast, in International Legal Consulting, the court could not exercise personal jurisdiction over any of the named defendants, even though it had jurisdiction over the garnishee. Second, in Hotel 71, the res sought to be attached consisted of defendants' ownership interests in 23 limited liability companies, which were "intangible contract rights" that could be attached in New York because the defendant-garnishee with control over those rights was physically present in New York when he was served with the attachment order. By contrast, in International Legal Consulting, the res consisted of funds located in a foreign bank account.13 There is no appellate decision construing this decision.
In ACP Master v. Vitro S.A.B. de C.V.,14 and Elliott Int'l v. Vitro S.A.B. de C.V.,15 the bond creditors of guarantors of a Mexican glassmaker—whose parent, but not subsidiaries, was in insolvency proceedings in Mexico—served a series of orders of attachment on the glassmaker's customers. While the propriety of these orders of attachment has not been adjudicated, due to a stay imposed by parallel bankruptcy litigation, there have been interim rulings of interest. One in particular involves orders of attachment served on certain automobile manufacturers who used the defendant as a glass supplier. The automobile companies moved to vacate the orders as served, arguing that they would cripple the automotive industry. The Supreme Court vacated the orders of attachment.16 Notably, however, the creditors subsequently secured a judgment in New York and initiated execution proceedings to effectuate their judgment. These latest enforcement efforts, however, are subject to the stay.
Limiting Legal and Business Risk
Although New York has become attractive to judgment creditors, it has become a challenge to garnishees. While certain trial courts have placed limits on Koehler and Hotel 71, the propriety of those limitations is far from settled. Thus, below are some recommendations as to how companies can limit the cost and risks posed by these legal developments before and after being served with a sheriff's levy.17
Due diligence on counterparties. It is always prudent to conduct due diligence on an entity before entering a business relationship. One informative and low cost piece of research is a New York judgment and lawsuit search. Obviously, if this search yields results, a company should inquire as to the nature of those lawsuits or judgments and weigh that as a factor in determining whether to enter into a business relationship with that counterparty.
Obtaining an indemnity. Another way to limit the cost of an attachment or turnover proceeding is to have a sound indemnification provision in a contract with the counterparty. Such a provision would require the counterparty to indemnify against expenses that could result from attachment proceedings. Additionally, should the judgment debtor or attachment defendant want the garnishee to challenge the proposed restraint, including on the basis of jurisdiction, the garnishee may seek an indemnification provision that would require reimbursement for any legal fees or costs prior to asserting such a challenge.
Limiting a New York court's personal jurisdiction reach. Companies may also avoid attachment or execution by structuring their businesses (including their foreign affiliates) in a way that would not warrant a finding that the company is subject to personal jurisdiction in New York. Absent consent or specific jurisdiction, courts will find that a company is subject to jurisdiction either because it is "doing business" in New York, or because the potential garnishee is a "mere department" of a New York entity (or vice versa). To determine if a company is "doing business" in New York, courts have considered several factors such as the presence of an office or the solicitation of business in New York coupled with some other continuous activity.18 Additionally, in evaluating whether a foreign affiliate of a New York entity may be deemed a "mere department" of the New York entity, courts have considered the following factors: (1) common ownership; (2) financial dependency of the subsidiary on the parent corporation; (3) the degree to which the parent corporation interferes in the selection and assignment of the subsidiary's executive personnel or fails to observe corporate formalities; and (4) the degree of control exercised by the parent over the marketing and operational policies of the subsidiary.19 Thus, foreign entities with New York affiliates, or New York entities with foreign affiliates, should consider structuring these relationships, and their New York presence, in such a way that their foreign entities would not be deemed to be "doing business" in New York, or a "mere department" of the New York entity (or vice versa).
Consenting to, or contesting, personal jurisdiction. If served with an attachment order or post-judgment execution, a company should consider whether it is more appropriate to consent to, or contest, personal jurisdiction in New York. The procedural posture for such a contest would generally arise after a demand for payment is made (generally by the sheriff of the relevant New York county) and the garnishee refuses to turn over property, thus requiring the creditor to bring a turnover proceeding. In such a proceeding, if the garnishee consents to jurisdiction—to avoid legal expense or because the garnishee does not believe there is a high likelihood of success for such a challenge—the turnover would likely be ordered, absent some successful challenge by the judgment debtor. If the garnishee contests jurisdiction, it would be adjudicated in the turnover proceeding, and could include disclosure and a hearing, and concomitant legal costs. While such costs could be substantial, there may be business reasons to contest jurisdiction, either for precedent to maintain a foreign entity's lack of connection to New York, or because of the relationship with the debtor/counterparty. In any case, the decision should be based, at least in part, on an assessment of the likelihood of success.
Consider filing an interpleader action. A garnishee may also consider filing an interpleader action to minimize costs and involvement in a litigation between a judgment creditor and debtor. Under CPLR 1006, an interpleader action enables the stakeholder to deposit the contested money or property to a court, or as directed, and to be discharged from further obligation, if all other elements are met.20 CPLR 1006 also provides for recovery of litigation fees and costs "as may be just." While an interpleader action may be a useful tool if the property to be executed on is a definitive sum or piece of property, it may not be effective if the property is something continually accruing, such as accounts payable to a judgment debtor.
If there is anything to be gleaned from the recent developments in New York attachment and execution law, it is that an early, and ongoing, assessment of your primary business relationships—whether with suppliers, vendors, investors or other parties—can provide relatively inexpensive insurance against unforeseeable future third-party legal risks. Applied in a sensible manner, such proactive diligence affords a company invaluable peace of mind, and better aligns its legal and litigation strategy with that of its counterparties.
Yehudah Buchweitz is a partner in the complex commercial litigation group at Weil, Gotshal & Manges in New York. Lucia Maxwell and Josh Schlenger, associates, assisted in the preparation of this article.
1. See 952 N.Y.S.2d 16, 18 (1st Dept. 2012).
2. 12 N.Y.3d 533 (2009).
3. 14 N.Y.3d 303 (2010).
4. Id. at 312 (citing Koehler, 12 N.Y.3d at 539).
5. 12 N.Y.3d at 541.
6. 14 N.Y.3d at 312.
7. See 952 N.Y.S.2d at 17.
8. Id. at 18.
10. See No. 600917/2010 (ACS) (N.Y. Sup. Ct.) [Poah], Doc. No. 232, Order (June 22, 2012).
11. See id. at 2; Poah, Doc. No. 155, Pls.' Opp. Mem., at 27 (Oct. 28, 2011).
12. 35 Misc.3d 1203(A), 2012 N.Y. Slip Op. 50546(U) (N.Y. Sup. Ct. 2012) (Fried, J.).
13. Id. at *8. International Legal Consulting also demonstrates that banks may still be able to rely on the "separate entity rule" to prevent judgment creditors from seizing assets held abroad by a bank by serving a bank's New York branch. Id. at *9.
14. No. 652146/2010 (BJF) (N.Y. Sup. Ct.) [ACP].
15. No. 652223/2010 (BJF) (N.Y. Sup. Ct.) [Elliott].
16. See Order, Elliott, Feb. 9, 2011, Doc. No. 68, aff'd, Order, M-629 (1st Dept. April 5, 2011); Order, ACP, Feb. 9, 2011, Doc. No. 154, aff'd, Order, M-630 (1st Dept. April 5, 2011).
17. A potential garnishee cannot necessarily assume that a distressed counterparty will file for bankruptcy protection, as this option is not always available, particularly if the company is foreign.
18. See Laufer v. Ostrow, 55 N.Y.2d 305, 310 (1982).
19. See Volkswagenwerk Aktiengesellschaft v. Beech Aircraft, 751 F.2d 117, 120-23 (2d Cir. 1984).
20. See Bank of N.Y. v. Nickel, 2004 WL 5487976 (N.Y. Sup. Ct. April 28, 2004), aff'd as modified, 14 A.D.3d 140 (1st Dept. 2004)
Reprinted with permission from the December 10, 2012 edition of the New York Law Journal © 2012 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877-257-3382, firstname.lastname@example.org or visit www.almreprints.com.
This article was referenced in the NYLJ's Litigation round-up on December 12, 2012.