The US Court of Appeals for the Second Circuit recently certified to the New York Court of Appeals two questions concerning the ability of a judgment creditor to garnish accounts of judgment debtors at non-US subsidiaries of banks that have branches in New York or are otherwise subject to jurisdiction in New York. The underlying dispute raises issues of great importance to all international banks with a New York presence.
A ruling that New York courts can compel the turnover of overseas assets held in accounts maintained by bank affiliates, where these affiliates themselves are not subject to New York jurisdiction, would represent a major step beyond the decision in Koehler w. Bank of Bermuda1 . Such a result could make New York even more of a magnet for enforcement of judgments against banks with a presence in New York.
The plaintiff in Commonwealth of the Northern Marianas Islands v. Canadian Imperial Bank of Commerce alleges that it holds a judgment for unpaid taxes against two residents of the Cayman Islands. It further alleges that the judgment debtors hold accounts at a Cayman subsidiary of a Barbadian subsidiary of the defendant, which is itself a Canadian bank that plaintiffs served in the United States, by effecting service of process on its New York branch.
The plaintiff filed a petition for turnover under CPLR 5225(b). Under that statute, a judgment creditor may commence a special proceeding “against a person in possession or custody of money or other personal property in which the judgment debtor has an interest, … where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor’s rights to the property are superior to those of the transferee.”
The plaintiff, however, did not argue that the Canadian bank had “possession or custody” of the relevant assets. Instead, the plaintiff argued that (i) the defendant had “control” over accounts at its Cayman corporate subsidiary and (ii) “control” is sufficient to meet the “possession or custody” standard in CPLR 5225(b). Judge Lawrence A. Kaplan, US District Court Judge (SDNY), rejected this argument, contrasting CPLR 5225(b) with other sections of the CPLR, that set a “possession, custody, or control” standard.Although Judge Kaplan rejected plaintiff’s argument, he appeared to believe it had some merit, explaining that if “the bank as a practical matter can cause its subsidiaries to comply with a turnover order, it would seem incongruous to conclude that the Court is without the power to issue such an order in the first instance.” In dictum, the court went on to observe that allegations of corporate ownership “suggest that it is within [the bank’s] practical power to, somehow, access and turn over the account funds.”
On appeal to the Second Circuit, the parties again disputed the meaning of CPLR 5225(b). Notably, the plaintiff argued that “control” is a fact-intensive standard that could require discovery and evidentiary hearings in virtually all turnover proceedings. Further, it is unclear how a “control” standard would apply in the case of debts governed by foreign law, but the district court was extremely dismissive of foreign law: it rejected reliance on Cayman bank confidentiality laws on the grounds that “it is hardly uncommon that a large corporation, by doing business in many jurisdictions, subjects itself to potentially conflicting laws” and that US courts are not bound by what it characterized as “foreign blocking statutes.” If US courts were to order turnover of debts without clear evidence that foreign courts would discharge the debt, garnishee banks could be at real risk of double liability.
In an amicus brief, the Institute of International Bankers2 argued that CPLR 5225(b) did not apply at all, because bank accounts are not “personal property.” Instead, the IIB contended that the correct statute was CPLR 5227, which allows enforcement only against a “person who it is shown is or will become indebted to the judgment debtor,” not anyone who might be argued to have “control” over the debt. The IIB also pointed out the risk that New York garnishees will be subject to double liability if forced to turn over their own assets, then pursue (or have their subsidiaries pursue) separate discharge proceeding in other jurisdictions.
Because the Second Circuit believed that the appeal involves unresolved issues of New York State law, it declined to rule on the merits and instead asked New York’s highest court, the Court of Appeals, to consider answer two questions:
- May a court issue a turnover order pursuant to N.Y. C.P.L.R. § 5225(b) to an entity that does not have actual possession or custody of a debtor’s assets, but whose subsidiary might have possession or custody of such assets?
- If the answer to the above question is in the affirmative, what factual considerations should a court take into account in determining whether the issuance of such an order is permissible?
The Court of Appeals can either accept or reject the certification. If it accepts certification and issues a ruling, the result could further expand New York’s garnishment jurisdiction, or it could be an opportunity for the state court to limit that jurisdiction following its widely-debated 2009 decision in Koehler. If the court declines to accept the certification, the Second Circuit will rule on the appeal as currently presented.
A decision by the state court may be preferable to the banking community, as it would resolve definitively any disputed issues of state law. A decision by the Second Circuit would bind New York’s federal district courts, and might be followed by state courts as well, but it would not provide the finality that a ruling by the state’s highest court would provide. In either event, the outcome will be critical to international banks with a New York presence, as a decision expanding Koehler would expose such banks to New York orders requiring them to turn over assets held by their non-US subsidiaries, possibly in contravention of local laws and contractual obligations applicable in the jurisdictions where such subsidiaries are based.