On June 4, 2009, the New York Court of Appeals issued a decision that provides judgment creditors new recourse against assets of judgment debtors held by foreign or out-of-state banks that are subject to personal jurisdiction in New York. This extraterritorial reach of the New York creditor process endorsed by the Court of Appeals has potentially disruptive consequences for banking relationships in New York and elsewhere.
The recent decision in Koehler v. Bank of Bermuda Ltd., N.Y. Slip Op. 04297, 2009 WL 1543698 (N.Y. Ct. App. June 4, 2009), is the latest in a nearly 15-year creditor action involving a Pennsylvania resident, Lee Koehler, who had obtained a default judgment from a Maryland federal court against his former business partner, A. David Dodwell, a resident of Bermuda. Koehler commenced collection efforts against Dodwell and learned that Dodwell had pledged shares in his Bermuda company to Bank of Bermuda Limited (“BBL”) as collateral for a loan. Rather than petitioning a Bermuda court to recover the shares, Koehler took his judgment to a New York federal court and invoked New York state turnover proceedings against BBL for the shares even though BBL and the shares were located in Bermuda.
Koehler managed to avoid recourse to the Bermuda courts by serving a writ of execution on BBL through personal service on an officer of its NY subsidiary, Bank of Bermuda (New York), Ltd. The issue of whether personal jurisdiction over BBL could be obtained via the NY subsidiary was vigorously litigated for almost ten years. BBL ultimately consented to jurisdiction. The issue then became whether New York creditor laws authorized an order against BBL, now subject to the court’s jurisdiction, to bring foreign-held assets into New York.
The federal district court agreed with BBL that foreign assets could not be compelled into the jurisdiction. On appeal, the Second Circuit certified the question to the New York Court of Appeals given the lack of binding authority on this question of New York State law. On June 4, 2009, the Court of Appeals held in its 4:3 decision that “a court sitting in New York that has personal jurisdiction over a garnishee bank can order the bank to produce stock certificates located outside New York, pursuant to C.P.L.R. § 5225(b).”
The court reasoned that Article 52 has extraterritorial reach because Article 52 does not expressly prohibit the turnover of foreign assets into the jurisdiction, and observed that it would have been an easy matter for the Legislature to have included such a prohibition if one had been intended. Moreover, the majority gleaned support from a 2006 amendment in which the Legislature had added a sub-division to Article 52 that authorizes production of out-of-state materials by service of a subpoena in New York on the party in control of these materials. The court found additional support from a handful of New York First Department appellate decisions.
The dissent rejected the majority’s broad interpretation of Article 52, which would allow a judgment to be enforced by garnishment in New York even when “the judgment creditor, the judgment debtor and the property that the judgment creditor is trying to seize are all elsewhere.” The dissent observed that the majority opinion may exceed the constitutional Due Process standard of “fair play and substantial justice” and warned against what it perceived to be a “recipe for trouble,” stating that the majority opinion creates an opportunity for forum-shopping and the potential for conflicting decisions from different courts over the same property. Agreeing with the amicus brief of the Clearing House Association L.L.C., which predicted significant burdens for its members, including potential exposure to conflicting adjudications, the dissent stated that “[i]f any court with power over the garnishee can order the garnishee to change the asset’s location, significant disruption in the process of deciding whose rights are superior seems inevitable. And the business of banking itself, for banks with offices in several states or countries, will also be disrupted.”
The majority opinion, which is based on only limited authority, is now controlling New York law. The Koehler decision could become an issue for the New York State Legislature. Until then, banks subject to personal jurisdiction in New York should expect increased use of New York writs by judgment creditors to seize judgment-debtor assets located outside of New York and the United States.