The highest New York state court, the Court of Appeals, has recently held that the New York courts have the power to order banks incorporated outside New York to deliver money or other personal property they hold for a judgment debtor to a judgment creditor even where the asset in question is held outside New York. While a welcome decision for judgment creditors, this is a worrying decision for international banks with a presence in New York. This is because the bank could be ordered to pay over funds held in a bank account outside New York which would almost certainly not constitute a good discharge of the debt owed to its customer and the bank will therefore end up paying with its own money. However, if the bank refuses to comply with the New York order, it risks being held in contempt of court in New York.
Facts of the case
The case of Koehler v The Bank of Bermuda Limited concerned a default judgment for some US$2 million obtained by Koehler in Maryland against his former business partner, Dodwell. Koehler registered the judgment debt in New York. Dodwell owned shares in a Bermudian company which were held for him in Bermuda by The Bank of Bermuda. Koehler sought to enforce his judgment against the shares held by The Bank of Bermuda and sought an order pursuant to article 52 of the New York Civil Practice Law and Rules (CPLR) against The Bank of Bermuda ordering it to deliver the shares (or their cash equivalent) in satisfaction of the judgment debt. This type of order is commonly known as a “turnover order”. The Bank of Bermuda had no branch in New York and Koehler served the petition for a turnover order on The Bank of Bermuda (New York) Ltd which Koehler contended was the New York subsidiary and agent of The Bank of Bermuda. The New York Court of Appeals was asked for an opinion on 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 when those stock certificates are located outside New York. By a majority of 2:1, it ruled that the New York courts have such a power. The New York Court of Appeals acts as the court of final review in the New York state court system and over issues of New York law.
In the case, one of the judges gave a powerful dissenting judgment pointing out the “policy implications [of the majority] are troubling” in that the decision of the majority opens a:
“forum-shopping opportunity for any judgment debtor trying to reach an asset of any judgment debtor held by a bank (or other garnishee) anywhere in the world … [t]o offer this opportunity to judgment creditors seems to me to be a recipe for trouble”.
Consequences for international banks
The consequences of this decision are far reaching for international banks which have branches or subsidiaries in New York. An unsatisfied foreign arbitration award or judgment could now be enforced in New York (where the requirements for recognition and enforcement are met) and execution levied by obtaining a turnover order against the judgment debtor's bank. CPLR 5225(b) permits a turnover order to be obtained against bank accounts, so the bank will be obliged, as a matter of New York law, to turnover the account balance of the judgment debtor even if its bank account is held outside New York. The New York court does need jurisdiction over the judgment debtor in order to recognise or enforce a foreign judgment or arbitral award which means that not all foreign judgments or arbitral awards could take advantage of the decision in Koehler.
For judgment creditors, this presents an excellent new opportunity to enforce against judgment debtors’ assets worldwide. However, international banks subject to these orders may find themselves in a difficult position. If, for example, a turnover order is obtained against the New York branch of an English bank to turnover the funds of a customer held by that bank in an account in England, the bank will almost certainly be acting in breach of mandate to its customer in England if it delivers the funds to the judgment creditor because the New York order has no effect in England. Accordingly, if the bank complies with the New York order and makes the payment, this will not be a good discharge of the debt owed to its customer meaning that the bank will have to make payment out of its own funds. However, if it fails to comply with the turnover order, the English bank may be held to be in contempt of court in New York.
While it is only right that a judgment creditor is able to realise the fruits of its judgment when faced with a recalcitrant judgment debtor, this decision is extraterritoriality taken too far. The decision fails to recognise that the bank in this type of case is an innocent third party with no interest in the underlying dispute between the judgment creditor and judgment debtor. In being made subject to a turnover order, the bank is placed in a situation of “double jeopardy” in that a refusal to comply with the New York judgment is contempt of court in New York but that compliance with the order will probably require it to pay out of its own funds. Seeking a declaration from the English courts as to what the English bank should do is unlikely to assist because a judgment of the English courts confirming that the New York order is not enforceable in England would not relieve the English bank from the obligation to comply with the New York court order (or the risk of being held in contempt in New York).
The approach of the English courts
The approach taken by the English courts is rather more restrained. The nearest English equivalent to a New York turnover order is known as a third party debt order. This is a form of execution which allows a judgment creditor to obtain an order requiring a third party who owes money to the judgment debtor to pay the amount direct to the judgment creditor to satisfy the judgment debt. The most common form of third party debt owed to a judgment debtor is a bank account in credit which represents a debt owed by the bank to the judgment debtor. The English courts will not allow a third party debt order to be made against the branch of a foreign bank in respect of a foreign bank account. This is because the court will not make a third party debt order where payment by the bank would not be a good discharge of the debt owed to its customer and also because the English courts consider such an order to be an exorbitant exercise of the English courts’ jurisdiction.1
CPLR 5209 does contain a provision, similar to that relating to English third party debt orders, stating that a third party who pays the debt owed to the judgment debtor is discharged from his obligation to the judgment debtor to the extent of the payment. Presumably this issue did not arise in Koehler because the case concerned shares rather than a debt. However, it will be interesting to see if a bank faced by a turnover order over an account outside New York raises the fact that compliance with the turnover order is unlikely to be a good discharge under the law governing the debt in future cases.
While the English courts have jurisdiction to appoint a receiver by way of equitable execution over foreign assets owned by the judgment debtor to satisfy an unpaid judgment debt, the receivership order invariably contains protections for third parties in respect of foreign assets. Typically the receivership order contains a proviso in the following form:
“Assets located outside England and Wales
Nothing in this order shall, in respect of assets located outside England and Wales, prevent any third party from complying with (1) what it reasonably believes to be its obligations, contractual or otherwise, under the laws and obligations of the country or state in which those assets are situated or under the proper law of any contract between itself and the defendants or either of them; and (2) any orders of the courts of that country or state, provided that reasonable notice of any application for such an order is given to the claimant's solicitors.”2
The decision in Koehler v The Bank of Bermuda Limited may yet be subject to a discretionary appeal in the US Supreme Court and, indeed, the dissenting judgment questioned whether the approach taken by the majority was contrary to the US Constitution. However, until the matter is decided by the US Supreme Court, it stands as a worrying precedent for international banks with a presence in New York. Moreover, as the decision was handed down only very recently, the full impact of the decision remains to be seen. The various actions which no doubt will be filed using Koehler as a basis may serve to provided some guidance.