• Enforcement of Judgments in New York: Koehler v. Bank of Bermuda Lt
  • March 19, 2010 | Author: Jack A. Greenbaum
  • Law Firm: Blank Rome LLP - New York Office
  • Most participants in the marine industry are aware of the relatively short lived frenzy of Rule B attachments of electronic funds transfers being processed by intermediary banks in New York City. Most are also aware of the judicial holdings that such attachments could be avoided merely by submitting to the personal jurisdiction of the Courts in New York by registering to do business here. Consequently, hundreds, if not thousands, of shipping companies preferred the risk of submitting to jurisdiction to the certainty of interference with their funds transfers in the event of a claim, and registered with the New York Department of State.

    Fewer are aware of a decision of New York State’s highest Court in June 2009, which magnified the risk of submitting to personal jurisdiction here. Still, most of those who became aware of the decision continued to believe the avoidance of restraints on funds transfers outweighed the potential significance of the new risk.

    In October 2009, the Second Circuit overruled its earlier decision that commenced the flood of Rule B cases, and held electronic funds transfers may no longer be attached. The Shipping Corp. of India v. Jaldhi, 585 F.3d 58 (2d Cir. 2009). Since then, a consistent flow of District Court decisions has frustrated every attempt to get around Jaldhi that the imaginations of the best maritime lawyers in New York could muster.

    In view of Jaldhi, the risk-benefit analysis of registering in New York must be looked at again. Whether registering is of any benefit at all to a particular company is something to be reviewed by each client with its attorney. The purpose of this article is to explain the new risk.

    In Koehler v. The Bank of Bermuda Ltd., 12 N.Y. 3d 533 (2009), New York State’s Court of Appeals held the holder of a judgment in a New York Court can obtain an order directing a foreign garnishee holding assets of a foreign judgment debtor to deliver such assets to the judgment creditor in New York, if the foreign garnishee is subject to the personal jurisdiction of the New York Court. Therefore, if, for example, a foreign judgment or arbitration award has been made a judgment in New York, and if the judgment debtor has a bank account with a foreign bank that has a branch in New York, the foreign bank can be ordered to turn over funds from that account to the judgment creditor.

    It is to be emphasized that such a “turnover” proceeding is a post-judgment remedy, unlike a pre-judgment attachment of property to obtain security for an eventual judgment. To obtain a pre-judgment attachment, the property must be situated within the Court’s territorial jurisdiction. The attachment of such property serves as a basis upon which the Court may exercise jurisdiction over the foreign defendant, enter judgment, and enforce judgment against the attached property. If a defendant’s property here is attached, there is no requirement that there be an independent basis for the Court to exercise personal jurisdiction over the defendant in order to enter judgment.

    In the absence of attachable property located here, there must exist some other grounds upon which the New York Court may exercise jurisdiction over the person of a foreign defendant in an action on the merits or a proceeding to confirm a foreign arbitration award. In Frontera Resources Azerbaijan Corp. v. State Oil Company, 582 F.3d 393 (2d Cir. 2009), the Second Circuit confirmed there must exist either an independent basis of personal jurisdiction or a prejudgment attachment, in order to enter a judgment upon a foreign arbitration award. The Court rejected the argument that the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards dispenses with the necessity of a basis of personal jurisdiction.

    However, the same is not true with respect to entering a judgment upon a foreign judgment. In Lenchyshyn v. Pelko Electric, Inc., 723 N.Y.S. 2d 285 (A.D. 4 2001), New York’s Appellate Division for the Fourth Department (which does not cover New York City), held a judgment may be entered in New York upon a foreign judgment, pursuant to New York’s Uniform Foreign Country Money Judgments Recognition Act, despite the lack of an independent basis for exercising personal jurisdiction and the absence of any assets within the State.

    Similarly, a federal statute permits a judgment in one U.S. District Court to be registered as a judgment in any other U.S. District Court, irrespective of the existence of grounds for personal jurisdiction. Koehler was just such a case.

    In other words, registering to do business in New York would subject a foreign defendant to personal jurisdiction in a plenary law suit or in an action to confirm an arbitration award, where grounds might not otherwise exist, but it would make no difference in an action to enter a judgment on a foreign judgment, because the latter does not require a basis of personal jurisdiction. This would be of particular interest in cases involving Foreign Freight Agreements and other contracts which call for disputes to be resolved in the English Courts, rather than in arbitration. Additionally, a creditor who holds a foreign arbitration award could confirm the award as a foreign judgment, and then as a New York judgment, despite an absence of grounds for personal jurisdiction in New York.

    Returning to Koehler: A post-judgment turnover proceeding is governed by Section 5225 of New York State’s Civil Practice Law and Rules. It is available in both the federal and state courts, because the Federal Rules of Civil Procedure adopt State law regarding post-judgment remedies. The proceeding is available in both maritime and nonmaritime cases.

    Section 5225(a) provides for a turnover proceeding with respect to property in the possession of the judgment debtor itself. The judgment debtor may be ordered to turn over such property, even if the property is located abroad. However, before obtaining such an order, the judgment creditor must show that the judgment debtor actually possesses property. In other words, the Court may not simply order the debtor to pay the debt, but only direct the debtor to turn over specific property or funds that it has been shown to possess.

    Koehler explained that a judgment debtor may be ordered to turn over its foreign assets because the debtor is subject to the Court’s personal jurisdiction and, therefore, to orders directed at the debtor personally. However, that would suggest that a turnover order is not available against a judgment debtor where the New York judgment was based upon a foreign judgment and entered here despite a lack of personal jurisdiction.

    Section 5225(b) provides for a turnover proceeding with respect to the judgment-debtor’s property held by a third-party garnishee. This section provides for a “special proceeding,” in which the garnishee is named as a defendant. The garnishee must be identified, and, in addition to a showing that the garnishee in fact possesses the debtor’s property, there must also exist a basis upon which to exercise personal jurisdiction over the garnishee. Therefore, Section 5225(b) may not be used to cast a net over every bank with a foreign office in the manner that Rule B was used to cast a net over the largest intermediary banks.

    For the foregoing reasons, on February 2, 2010, the District Court for the Southern District of New York denied an application for a turnover order against a debtor and “any garnishee” holding property of the debtor. The turnover application was made simultaneously with an application for a judgment, and therefore was premature, as no judgment was entered yet. Moreover, no special proceeding had been commenced against an identified garnishee, and there was no showing that either the debtor or any garnishee possessed property of the debtor.

    The question of what facts are sufficient to establish personal jurisdiction over a foreign garnishee is likely to be contentious in many cases. New York law subscribes to the “separate entity” rule with respect to bank branches in pre-judgment attachment cases. It is not sufficient to serve one branch of a bank with an attachment order if funds are held by a different branch. That rule has been relaxed with respect to intrastate branches of the same bank because modern technology enables each branch to ascertain what accounts the other branches hold. However, the separate entity rule still applies to out-of-state and foreign branches because, as taught by Koehler, pre-judgment attachments are aimed at the property itself, and not at the holder of the property. Therefore, the property must be within the Court’s territorial jurisdiction in order for it to be reached by the Court’s process of attachment.

    A turnover proceeding, on the other hand, is directed against the person or entity that holds the property, not against the property itself. Therefore, the separate entity rule is inapplicable. If the garnishee is subject to the Court’s personal jurisdiction, it must comply with the Court’s orders, notwithstanding that the property which is the object of the order is located beyond the Court’s territorial jurisdiction.

    Personal jurisdiction over a foreign bank or corporation is not established solely by the presence in New York of a subsidiary or affiliate, if the foreign and local offices are different corporate entities. In that event, something more will have to be shown, such as that the local branch or office is an agent of the foreign entity. In Koehler, the judgment creditor argued that the Bank of Bermuda’s subsidiary in New York was an agent for the Bermudan entity, and that this relationship was sufficient to establish personal jurisdiction here over the latter. The parties litigated that and other issues for some ten years, until the Bermudan bank finally consented to jurisdiction. Therefore, there was no substantive holding whether in fact the subsidiary’s activities established a sufficient agency relationship.

    Another basis for holding a local subsidiary’s presence here is sufficient to establish personal jurisdiction over a foreign entity is that the entities themselves disregard their separate corporate integrity. In Yayasan Sabah Dua Shipping SDN v. Scandinavian Liquid Carriers Ltd., 335 F. Supp. 2d 441 (S.D.N.Y. 2004), a Rule B attachment served upon the New York branch of a Cayman Islands bank was upheld, notwithstanding the defendant’s bank account was located in the Cayman Islands branch, because “the Cayman Islands branch is a paper bank entirely controlled and managed by Danske Bank’s New York operation.” Yayasan involved a prejudgment attachment and branches, not separate corporate entities. Nevertheless, similar reasoning conceivably may be used to find a basis on which to exercise personal jurisdiction in a turnover proceeding against a foreign bank.

    Although C.P.L.R. § 5225 itself may not support a fishing expedition in the sea of banks and potential corporate debtors of judgment debtors, that is not necessarily a reason for a sigh of relief. There are other post-judgment remedies available to judgment creditors that may serve that purpose. C.P.L.R. § 5222 provides that judgment creditors’ attorneys may serve a restraining notice upon potential garnishees, which restrains the recipient from disposing of any judgment debtor’s assets it may possess. Additionally, C.P.L.R. § 5223 and 5224 permit attorneys to serve questionnaires, known as information subpoenas, upon potential garnishees. These devices do not require a prior showing that the garnishee possesses the judgment debtor’s property. They are regularly used by collection lawyers on a sort of “mass produced” basis. Given that these remedies, like a turnover proceeding, are directed against garnishees personally, we see no reason such devices could not be used to find and restrain property located abroad, as long as the garnishee is subject to personal jurisdiction in New York.