August 19, 2013
In the Dec. 10, 2012 Special Report of the New York Law Journal, I wrote about how two Court of Appeals decisions— Koehler v. Bank of Bermuda1 and Hotel 71 Mezz Lender v. Falor2—expanded the reach of the pre-judgment attachment and post-judgment turnover provisions of the CPLR by making personal jurisdiction the linchpin of judicial authority under these provisions.3 As a result of these decisions, New York has become a destination for judgment creditors seeking to recover assets owned by its judgment debtors and held by others that are dispersed throughout the world. Some judgment creditors have even come to New York to attempt to collect assets held by out-of-state entities simply because one of their affiliates is subject to jurisdiction in New York. Accordingly, in the December article, I offered guidance to companies with affiliates spread across several jurisdictions as to how they could limit their foreign affiliates' risk of being hauled into litigation in New York where their sole involvement is that they happen to do business with someone else's judgment debtor.
Now, months later, in its April 30, 2013 decision in Commonwealth of the Northern Mariana Islands v. Canadian Imperial Bank of Commerce,4 the Court of Appeals has confirmed the efficacy of these recommendations and provided additional guidance to multi-jurisdictional business enterprises seeking to limit their garnishment risk in the New York courts.
The Unresolved Issue of 'Control'
While Koehler and Hotel 71 broadened New York courts' attachment and turnover powers through an expansion of the reach of New York's personal jurisdiction, these cases nevertheless did not address a scenario common in commercial litigation—namely, the situation in which the entity over which New York has personal jurisdiction does not have actual possession or custody of the property to be attached or garnished, but nevertheless controls the entity that does have such possession or custody. CPLR 5225 provides that an entity can be named as a garnishee in a turnover order if it has "possession or custody of money or other personal property in which the judgment debtor has an interest"; the statute, however, does not include the word "control."5 Prior to Mariana Islands, no New York court had conclusively resolved the question of whether actual possession—as opposed to "control"—was necessary in order for an entity to be named as a garnishee.6 Nevertheless, several previous New York decisions had suggested in dicta that "control" alone might be sufficient for a turnover order.7 These decisions, coupled with the Court of Appeals' expansion of New York courts' personal jurisdiction and garnishment powers in Koehler, led to conflicting interpretations among practitioners regarding the scope of CPLR 5225(b), with some arguing that so long as the entity over which New York has personal jurisdiction controls the entity that has physical possession of the property in question, it can be subject to a turnover order.8
Such a rule, if adopted, would have had far-reaching ramifications. It would have made any non-New York company that is controlled by a New York affiliate (or an affiliate otherwise subject to New York's personal jurisdiction) susceptible to a turnover order. Given that many companies have at least one entity in their corporate family which is subject to personal jurisdiction in New York, this would have had the effect of subjecting almost all property held in a multi-jurisdictional business enterprise to New York's turnover power, with a concomitant increase in the enterprise's potential litigation risk and expense.
Court of Appeals Slows 'Koehler' Expansion
This confusion was put to rest on April 30, 2013, when the Court of Appeals stepped in to resolve the issue of "control" in Mariana Islands. Upon certified questions from the Second Circuit, the Court of Appeals determined that "control" alone is insufficient for a turnover order under CPLR 5225(b).9
Mariana Islands arose out of two separate tax judgments obtained by the Commonwealth of the Northern Mariana Islands (the Commonwealth) in 1994 in the U.S. District Court for the Northern Mariana Islands. Unable to collect the tax judgments from the judgment debtors themselves, the Commonwealth registered the judgment in the U.S. District Court for the Southern District of New York and commenced proceedings as a judgment creditor against Canadian Imperial Bank of Commerce (CIBC), on the theory that the judgment debtors maintained accounts at subsidiary banks of CIBC that could be used to satisfy the judgments. CIBC argued in the district court, however, that it was not the proper garnishee for a turnover proceeding—and that, therefore, the judgment creditors could not reach the accounts held at its subsidiary banks—because under the plain language of CPLR 5225(b), only the entity that has actual "possession" or "custody" of the property is subject to a turnover order.10 In response, the Commonwealth maintained that CPLR 5225(b) intended to encompass situations where the garnishee has "control" over the property—i.e., constructive possession—even if it lacks actual possession or custody.11
The district court agreed with CIBC that the omission of the word "control" from CPLR 5225(b) meant that actual, not constructive, possession was required for a turnover order under New York law, and denied the Commonwealth's motion. Nevertheless, recognizing that the scope of the phrase "possession or custody" in CPLR 5225(b) was an issue of first impression that should be determined by the New York Court of Appeals, the district court tentatively set aside its own interpretation of the scope of CPLR 5225(b) and issued a temporary injunction preventing the further dissolution or movement of the judgment debtors' accounts pending appeal.12 On appeal, the Second Circuit agreed with the district court that this issue should be resolved by the Court of Appeals, and therefore certified the question to the court.13
Like the district court, the Court of Appeals held that the Legislature's omission of the word "control" in CPLR 5225(b) was intentional, and, "[a]ccordingly, a section 5225(b) turnover order cannot be issued against a garnishee lacking actual possession or custody of a judgment debtor's assets or property."14 The court rested its interpretation of CPLR 5225(b) on two canons of statutory construction: First, the court noted that, prior to the 1963 amendments enacting the CPLR, the New York Civil Practice Act did require either "possession" or "control" for a turnover order. The revision of the turnover statute in 1963 to include "possession" and "custody"—but not "control"—must therefore have been intentional.15 Second, the court observed that the Legislature has employed the word "control" elsewhere in the CPLR when it meant to include constructive possession, such as in the discovery context.16 Noting, by contrast, that "control" is omitted in the sections of the CPLR pertaining to the disposition of property, the court concluded: "This distinction supports the view that the Legislature has applied a higher standard to insure the proper disposition of property."17
The court was unmoved by the Commonwealth's attempt to support its reading of CPLR 5225(b) by using analogous provisions of the Federal Rules and the court's prior decision in Koehler. With respect to the Federal Rules, the court rejected the Commonwealth's claim that the drafters of the CPLR "blindly duplicated" the standard applicable under the Federal Rules, which does treat "control" alone as sufficient.18 The court noted that such an approach failed to take account of the plain meaning of CPLR 5225(b) and further failed to harmonize the various provisions of the CPLR, which do reflect a distinction between "possession" and "custody," on the one hand, and "control," on the other hand.19
The court also refuted the Commonwealth's argument that Koehler itself stood for the proposition that constructive possession alone is sufficient for a turnover order. As the court noted, "Koehler does not interpret the meaning of the phrase 'possession or custody' [in CPLR 5225(b)], and is only significant in holding that personal jurisdiction is the linchpin of authority under section 5225(b)."20 The court further noted that in Appellate Division cases that affirmed turnover orders issued against out-of-state property—and were therefore predicated on personal jurisdiction over the named garnishee alone—"the garnishee was directed to deliver assets already within its possession. No case supports the Commonwealth's attempt to broadly construe Koehler and require that a garnishee be compelled to direct another entity, which is not subject to this state's personal jurisdiction, to deliver assets held in a foreign jurisdiction."21
On the basis of this reasoning, the Court of Appeals answered the Second Circuit's certified question in the negative.22 On remand, with the benefit of the Court of Appeals' guidance, the Second Circuit affirmed the district court's denial of the Commonwealth's turnover motion and vacated the temporary injunction.23
Implications of 'Mariana Islands'
While Mariana Islands reaffirmed the central holding of Koehler and Hotel 71 that a New York court can order an entity over which it has jurisdiction to bring assets that are in its "possession" or "custody" into New York, the court also made a critical distinction that this broad reach does not extend to assets held by entities that are not subject to New York jurisdiction, even if a New York affiliate "controls" the assets. Mariana Islands therefore lessens the burden on multi-jurisdictional business enterprises seeking to avoid the expense of turnover proceedings for assets they hold for others outside of New York. Without the guidance of Mariana Islands, a company wishing to avoid turnover proceedings in New York may have considered revising its corporate structure to ensure that a company subject to New York's personal jurisdiction does not have "control" over its foreign affiliates (and, by extension, the property they hold). Mariana Islands now clarifies that this is unnecessary.24
On June 10, 2013, a bill was introduced in the New York Senate and referred to the Judiciary Committee (S5734) that, if passed, would amend various sections of CPLR article 52 to reverse certain changes introduced by Koehler into the CPLR's turnover regime.25 S5734, by its terms, limits the issuance of turnover orders or levies against property held outside of the United States.26 Sponsoring State Senator Hugh Farley explained in his supporting memorandum that the impetus for this proposed legislation had been the fact that, as the December article observed, Koehler "carries a great potential for liability in that New York could become a magnet for plaintiffs seeking to use New York banks and New York offices of foreign banks as worldwide collection agents." Senator Farley further noted that while the subsequent decision in Mariana Islands "clarifies that Koehler does not extend to a situation where the foreign bank affiliate is a separate corporate entity, the impact of Koehler on foreign branches is still an open question," and thus necessitates a legislative solution to "correct the problem caused by Koehler by restoring the clear rules that were in effect before the decision."27 If adopted, S5734 would significantly limit the litigation risk created by Koehler and Hotel 71, allowing global business enterprises to maintain their contacts with New York without undue fear of being hauled into court for turnover proceedings in which they have no direct interest.
Mariana Islands clarifies a significant ambiguity in the CPLR's turnover provisions and limits the burden and litigation risk on multi-jurisdictional business enterprises that include at least one company subject to personal jurisdiction in New York.
Yehudah Buchweitz is a partner in the complex commercial litigation group at Weil, Gotshal & Manges. Josh Schlenger, a litigation associate, assisted in the preparation of this article.
1. 12 N.Y.3d 533 (2009).
2. 14 N.Y.3d 303 (2010).
3. See Yehudah Buchweitz, "Developments in Attachment and Execution Law, and Tips for Limiting Resulting Risk," NYLJ, (Dec. 10, 2012) (hereinafter, the December article), available athttp://www.newyorklawjournal.com/PubArticleNY.jsp?id=1202580721313.
4. 21 N.Y.3d 55 (2013).
5. See CPLR 5225(b) (McKinney 2013) (emphasis added).
6. Even counsel for the judgment creditor in Mariana Islands, who urged that "control" alone should be deemed sufficient for a turnover order, acknowledged that "no prior court appears to have been called upon to directly decide the question of whether Section 5225(b) requires actual, physical dominion over the assets or other property." See Pls.'-Apps.' Opening Br., Commonwealth of the N. Mariana Islands v. Canadian Imperial Bank of Commerce, No. 12-1857, 2012 WL 2366538, at *24 (2d. Cir. filed June 18, 2012) (hereinafter Appellant's Brief).
7. See, e.g., Morgenthau v. Avion Res., 49 A.D.3d 50, 54 (1st Dept. 2007) ("…New York courts have the power to command a garnishee present in the state to bring out-of-state assets under the garnishee's control into the state.") (citations omitted); Payne v. Garnett McKeen Lab., 232 A.D.2d 419, 420 (2d Dept. 1996) (noting that in a turnover proceeding, "the judgment creditor bears the burden of proof that the person is actually in custody or control of such money or other personal property") (emphasis added); Dewar v. Bangkok Bank Public, No. 112560/2010, 37 Misc.3d 1231(A), at *5 (N.Y. Sup. Ct. Oct. 26, 2012) ("…Koehler and CPLR §5225(b) requires that the turnover petition must be directed at the garnishee who holds or has control of the judgment debtors's [sic] assets") (emphasis added).
8. See Appellant's Brief, supra note 6, at *19.
9. 21 N.Y.3d at 57-58.
10. Id. at 58-59; see supra note 5 and accompanying text.
11. See Mariana Islands, 21 N.Y.3d at 58, 59.
12. See N. Mariana Islands v. Millard, 287 F.R.D. 204, 215 (S.D.N.Y. 2012).
13. See N. Mariana Islands v. Canadian Imperial Bank of Commerce, 693 F.3d 274 (2d Cir. 2012).
14. See Mariana Islands, 21 N.Y.3d at 63.
15. Id. at 61-62.
16. See id. at 62-63 (citing CPLR 3111 and 3119, governing the production and subpoena of discovery materials).
17. Id. at 63 (citing CPLR 5209; JPMorgan Chase Bank, NA. v. Motorola, 47 A.D.3d 293 (1st Dep't 2007)).
18. See id.
20. Id. at 64.
22. See id. at 65.
23. See Commonwealth of N. Mariana Islands v. Canadian Imperial Bank of Commerce, 717 F.3d 266, 268 (2d Cir. 2013).
24. Companies should be cautioned, though, that, as noted above, the CPLR's discovery standard does include "control." Accordingly, companies served with information subpoenas or subpoenas duces tecum in post-judgment turnover proceedings may be required to turn over documents located outside of New York that are within the actual possession of affiliates over which they exercise control. See Ayyash v. Koleilat, 38 Misc.3d 916, 924, 957 N.Y.S.2d 574, 580 (N.Y. Sup. Ct. 2012) (agreeing that CPLR 5224(a-1) would reach documents held outside of the state by subsidiaries over which the named garnishees exercise "control," but refusing to issue turnover order against those foreign subsidiaries because of the "separate entity rule," which is uniquely applicable to banks and was not abrogated by Koehler); cf. December article, supra note 3, ¶11 (discussing cases where information subpoenas were served successfully).
25. See S5734, 2013-2014 S., Reg. Sess. (N.Y. 2013).
26. See id., proposed amendments to CPLR 5222, 5224, 5225, 5227, and 5232.
27. Id., Introducer's Mem. in Supp., "Justification," ¶¶4, 6, 10.
Reprinted with permission from the August 19, 2013 edition of the New York Law Journal © 2013 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.