In a decision significant for international banks doing business in New York, the Court of Appeals, New York’s highest court, unanimously held that a court cannot issue a "turnover order" against a bank unless the bank has actual, not merely constructive, possession or custody over the assets sought by the judgment creditor. The decision likely will limit judgment creditors’ ability to enforce judgments against international bank deposits by commencing proceedings against third-party banks in New York.
By way of background, in 1994, the Commonwealth of the Northern Mariana Islands (the "Commonwealth") obtained two separate tax judgments against William and Patricia Millard in amount of approximately $18.3 million each. In 2011, the Commonwealth registered the judgments in the United States District Court for the Southern District of New York and commenced proceedings seeking to garnish the Millards’ assets. The Commonwealth named Canadian Imperial Bank of Commerce ("CIBC") — a Toronto headquartered bank with branches in New York — a garnishee under the theory that the Millards maintained accounts in one or more of CIBC’s Cayman Islands subsidiaries. The Commonwealth served CIBC through its New York branch and moved under New York’s CPLR 5225(b) for an order compelling CIBC to turn over all property held by its Cayman Islands subsidiaries in the Millards’ names. CIBC opposed on the ground that its subsidiaries were legally separate and independent entities and that, absent an information sharing agreement, CIBC could not access their accounts or account information. The District Court denied the motion for a turnover order and the Commonwealth appealed. The United States Court of Appeals for the Second Circuit determined that the motion turned on unresolved issues of New York law and certified the following question to New York’s Court of Appeals: May a court issue a turnover order pursuant to CPLR 5225(b) to an entity that does not have actual possession or custody of the judgment debtor’s assets, but whose subsidiary might have possession or custody of such assets?
The Court of Appeals answered the question in the negative. CPLR 5225(b) enables a judgment creditor to enforce a judgment against an asset of a judgment debtor held in the "possession or custody" of a third party. The Commonwealth argued that the phrase "possession or custody" inherently encompasses the concept of "control." CIBC exercised “control” over its subsidiaries and, therefore, CIBC was in constructive possession or custody of the Millards’ assets. CIBC was subject to the personal jurisdiction of the New York courts, by virtue of its New York branches, and, therefore, the Millards’ assets were subject to turnover under CPLR 5225(b). The court, however, rejected the Commonwealth’s argument as a fundamental misinterpretation of CPLR 5225(b)’s plain language. Several sections of the CPLR use the phrase "possession, custody or control"; particularly those establishing the scope of documents subject to discovery in litigation. For example, documents held by a party’s agents or affiliates are generally deemed discoverable in litigation because courts deem them to be within the party’s "control." The Legislature, however, employed the narrower "possession or custody" standard in CPLR 5225(b) and several other CPLR provisions pertaining to the disposition of property. Statutory interpretation counsels that the omission of "control" from the statutory language is meaningful and intentional. The most reasonable interpretation of the differing language, the court held, is that "possession, custody or control" contemplates constructive possession, whereas "possession or custody," by its omission of the term "control," refers to actual possession. Accordingly, a court cannot issue a turnover order against a garnishee lacking actual possession or custody of the judgment debtor’s assets.
The Northern Mariana decision narrows the reach of the Court of Appeal’s 2009 decision in Koehler v. Bank of Bermuda Ltd. There, the court held that non-party banks subject to the personal jurisdiction of New York’s state or federal courts could be compelled to deliver to a judgment creditor the assets of the judgment debtor held by the bank outside New York. It is now clear that Koehler does not extend to assets held by a separate entity, which is not subject to personal jurisdiction in New York, in a foreign jurisdiction.