• New York Court of Appeals Says Judgment Creditors Can Garnish Property Held Overseas by Banks with New York Presence
  • June 25, 2009 | Authors: Joseph A. DiBenedetto; Vincent A. Sama; David E. Mollón; Michael J. Friedman; Linda T. Coberly; Gene C. Schaerr; Steffen Johnson
  • Law Firms: Winston & Strawn LLP - Chicago Office ; Winston & Strawn LLP - New York Office ; Winston & Strawn LLP - Chicago Office ; Winston & Strawn LLP - Washington Office ; Winston & Strawn LLP - Chicago Office
  • In a decision that will significantly impact foreign banks and their clients, the New York Court of Appeals ruled recently that New York courts can order a bank with a New York presence to turn over to a judgment creditor any property it holds for a judgment debtor, even if the bank is holding that property at a branch outside New York, and even if neither the judgment debtor nor the judgment creditor has any ties to New York. The Court of Appeals held in Koehler v. Bank of Bermuda, 2009 NY Slip Op 4297 (June 4, 2009), that a New York court’s jurisdiction to assist in the enforcement of money judgments against a garnishee turns on the court’s in personam jurisdiction over the garnishee, not on the court’s in rem jurisdiction over the property to be garnished.

    The dispute giving rise to this decision was between two shareholders of a Caribbean resort, Koehler and Dodwell. Both had deposited the certificates representing their shares in the resort at the Bank of Bermuda (“BBL”) in Bermuda, and both pledged those certificates to BBL to secure loans issued by BBL to the resort. After a falling out, Koehler sued Dodwell in the U.S. District Court for the District of Maryland. Dodwell did not defend the action, and a default judgment was entered against him in the amount of $2,096,343.

    Koehler then brought a garnishment proceeding against BBL in the U.S. District Court for the Southern District of New York pursuant to CPLR § 5225(b), which permits a judgment creditor to bring a special proceeding against a third party in possession of assets of a judgment debtor (a garnishee), and authorizes a New York court to order the garnishee to turn over to the judgment creditor any of the judgment debtor’s assets in which the garnishee does not itself have a superior interest.

    BBL initially argued that it was not subject to personal jurisdiction in New York despite the fact that its affiliate, Bank of Bermuda (New York) Ltd., maintained offices there. After several years of litigation, BBL eventually consented to personal jurisdiction in New York. But the District Court nevertheless dismissed Koehler’s petition because it found that it did not have in rem jurisdiction over the assets in question (Dodwell’s shares), which were still in Bermuda.

    In a 4-3 decision, the Court of Appeals ruled that in rem jurisdiction was not required. Writing for the majority, Judge Pigott, joined by Chief Judge Lippman and Judges Ciparick and Graffeo, held that a New York court can order a bank over which it has in personam jurisdiction to deliver property over which the court has no in rem jurisdiction. The court noted that its precedent requiring in rem jurisdiction prior to granting a pre-judgment order of attachment under CPLR Article 62 was not dispositive of whether in rem jurisdiction was also required for post-judgment garnishment under CPLR Article 52. According to the court, only pre-judgment attachment requires in rem jurisdiction because CPLR Article 62 allows a creditor to proceed against property by ordering a New York sheriff to take custody of it. By contrast, post-judgment enforcement requires only jurisdiction over persons because CPLR 5225 provides for a “delivery order” or a “turnover order” when the assets of his judgment debtor are in someone else’s possession. It therefore creates a means by which a judgment creditor can proceed against a person, not a piece of property.

    The court concluded that the legislature never intended a territorial restriction on CPLR Article 52, citing as further support a recent amendment to a parallel provision, CPLR § 5224 requiring garnishees to produce out-of-state discovery materials in response to in-state subpoenas in aid of collecting judgment.

    Judge Smith’s dissent, joined by Judges Read and Jones, considered this an “expansive” view of CPLR Article 52 and raised policy and constitutional concerns, noting that the majority’s decision allows judgment creditors to register judgments in New York and seek out offshore assets of any bank with a New York branch. The dissent opined that this could lead to conflicting judgments on competing claims from different courts and cause significant administrative and substantive legal burdens on banks left in legal limbo between any number of courts, none of which sits in the jurisdiction in which the property is located. Furthermore, the dissent argued that the court’s holding raised federal due process issues, including the question of whether jurisdiction over out-of-state property in post-judgment enforcement violates Shaffer v. Heitner and other long-held jurisdictional precedents.

    The federal constitutional due process issues noted in Judge Smith’s dissent may be the subject of further review on remand to the Second Circuit, or of a potential appeal to the U.S. Supreme Court. If undisturbed, the Koehler decision makes the assets of foreign judgment debtors vulnerable to garnishment by New York courts, even where the judgment debtor has no connection to New York beyond the fact that his or her bank does business in New York. In light of this decision, foreign judgment debtors should exercise caution in depositing assets with foreign banks with a New York presence, and foreign banks serving such clientele should advise their clients of these risks and may wish to reconsider whether to maintain their New York branches.