US law - New York court reaches assets abroad

US law – New York court reaches assets abroad

A recent opinion by the New York Court of Appeals states that New York courts may require a bank or other garnishee¹ subject to their jurisdiction to “turn over” to a judgment creditor any property of the judgment debtor, even if that property is located outside the state (or the country).

New York Court of Appeals’ opinion
In Lee N. Koehler v. The Bank of Bermuda Limited,² the Second Circuit Court of Appeals requested by “certified question” clarification from the New York Court of Appeals as to “whether a court sitting in New York may order a bank over which it has personal jurisdiction to deliver stock certificates owned by a judgment debtor (or cash equal to their value) to a judgment creditor, pursuant to New York’s Civil Procedure Laws and Rules (CPLR) article 52, when those stock certificates are located outside New York. The New York Court of Appeals answered in the affirmative.

The court recognised that under CPLR 5225(b) the court can order a defendant garnishee (other than the judgment debtor) over whom it has personal jurisdiction to turn over assets held by the defendant garnishee even though those assets are not located in New York. The court reasoned that post-judgment enforcement requires only personal jurisdiction over the garnishee (i.e., the bank or other entity which holds property belonging to the judgment debtor) and not jurisdiction over the property or assets themselves. The court noted that judgment enforcement proceedings differ from attachment proceedings (including Rule B) since the latter require that the court have jurisdiction over the attached property (and therefore, the property must be located in the state).³

The court noted that the wording of CPLR article 52 does not prevent the entry of a turnover order requiring the defendant garnishee to deliver assets to New York from elsewhere. Since “[it] would have been an easy matter for the Legislature to have added such a restriction” the court found no reason “to infer it from the broad language presently in the statute”. While the property held in the foreign bank in Koehler was stock certificates, the opinion would clearly also reach funds held in foreign bank accounts.

Implications
The Koehler opinion has important implications for enforcing both foreign and domestic arbitration awards and judgments. With respect to foreign arbitration awards or judgments, a claimant can make an application to confirm the arbitration award or judgment in any US state where it can establish personal jurisdiction over the defendant. Once confirmed, this judgment will be recognised by the New York courts.⁴

The enforcing party may then bring a special proceeding against a potential garnishee, such as a bank, naming that financial institution as a defendant, in which it requests an order (known as a “turnover order” or a “delivery order”) requiring the New York branch of a bank located anywhere in the world to deliver all assets of the judgment debtor that it holds in any location, whether inside or outside the United States. Unless certain specific factors can be demonstrated, the order will only be effective as against the specific bank entity subject to jurisdiction in New York. For example, an order against Citibank N.A. (United States) will not be effective against Citibank PLC (London). The factors include, among others, common ownership, lack of corporate formality, and whether the New York bank is a “mere department” of the foreign bank (or vice-versa).

It is important to note that turnover orders reaching assets outside the US are available in all types of cases, not just those involving maritime claims. Nevertheless, this opinion has broad implications for the maritime community. As previously discussed in Gard News,⁵ in certain circumstances claimants can secure their maritime claims (before judgment) using the much discussed Rule B attachment procedure to attach EFTs (electronic fund transfers) passing through the US banking system. Some defendants have sought to avoid such attachments by registering to do business in New York. As noted above, registering to do business in New York means that a company becomes subject to the general jurisdiction of the New York courts. The Koehler opinion will permit claimants to seek to enforce their judgments or awards by means of a turnover proceeding against companies that have registered to do business in New York.⁶

Of course, the turnover procedure is not limited to foreign awards or judgments and can also be used to enforce domestic arbitration awards or judgments. Thus, if, for example, the parties have arbitrated in New York and judgment on the award is entered in a New York court, the prevailing party can now seek a turnover order of the defendant’s assets held by a garnishee bank over which New York has jurisdiction, wherever those assets may be located.

Constitutionality questioned
It should be noted that the opinion of the New York Court of Appeals was accompanied by a lengthy dissent, raising questions about its constitutionality. Thus, it is possible that the extraterritorial reach of the opinion will ultimately be challenged in the United States Supreme Court. Nevertheless, unless and until such a challenge is successfully made, Koehler is the law of New York. It is therefore only a matter of time before judgment creditors will seek to take advantage of Koehler to try and reach world-wide assets of judgment debtors.

Footnotes
1 A garnishment is a means of collecting a monetary judgment against a defendant by ordering a third party (the garnishee) to pay money, otherwise owed to the defendant, directly to the plaintiff.
2 No. 82; N.Y. 4th June 2009.
3 The use of CPLR article 52 against a judgment debtor is not new. If the court has personal jurisdiction over a judgment debtor (for example, if the judgment debtor has registered to do business in New York), then the court may order the judgment debtor to deliver assets held outside New York to the judgment creditor. Failure to turn over foreign assets would place the judgment debtor in contempt of court. Of course, contempt proceedings may not have the effect of motivating a judgment debtor, who is not physically present in New York and has no assets in the US, to turn over his foreign assets.  By contrast, a bank that is physically present in New York would probably turn over assets belonging to the judgment debtor rather than risk being held in contempt of court.
4 New York will accord such a “sister state” judgment “full faith and credit”. Of course, if the defendant is already subject to personal jurisdiction in New York, then the claimant can simply apply to have the foreign award or judgment recognised in New York. A company that registers to do business in New York in an effort to avoid Rule B attachment of wire transfers becomes subject to personal jurisdiction in New York. This issue is discussed in more detail later in this article.
5 See articles “US law – Rule B FAQ” in Gard News issue No. 193 and “US law – Is Rule B losing steam?” in Gard News issue No. 184.
6 The registration issue is significant primarily for those companies that would not otherwise be subject to personal jurisdiction anywhere in the US. If, for example, a judgment debtor is doing business in California, then it would be subject to the jurisdiction of the California courts and a claimant could seek to confirm a foreign arbitration award or judgment against the judgment debtor in California, have that California judgment recognised in New York and apply for a turnover order. However, if a company that is not otherwise subject to jurisdiction in the US takes the step of registering to do business in New York, then it will now be exposed to the prospect of a Koehler “turnover” proceeding because a New York court will have jurisdiction to confirm a foreign award or judgment against it.