Title: Lee N. Koehler v. The Bank of Bermuda Limited

State: new-york

Issuer: New York Appellate Court

Document:

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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 82  
Lee N. Koehler,
            Appellant, 
        v. 
The Bank of Bermuda Limited,
            Respondent.
Paul F. Newhouse, for appellant.
Daniel B. Rapport, for respondent.
The Clearing House Association L.L.C., amicus curiae.
PIGOTT, J.:
The United States Court of Appeals for the Second
Circuit, by certified question, asks us to decide 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,
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pursuant to CPLR article 52, when those stock certificates are
located outside New York.  We answer the certified question in
the affirmative.
I.
Sixteen years ago, on June 4, 1993, the United States
District Court for the District of Maryland awarded Lee N.
Koehler, a citizen of Pennsylvania, a default judgment in the sum
of $2,096,343 against his former business partner, A. David
Dodwell.  Koehler duly registered the Maryland judgment in the
United States District Court for the Southern District of New
York.  At that time, Dodwell, a resident of Bermuda, owned stock
in a Bermuda corporation, of which he and Koehler had been
shareholders, and certificates representing Dodwell's shares were
in the possession of the Bank of Bermuda Limited ("BBL"), and
located in that country.  Dodwell had pledged the shares to BBL
as collateral for a loan.
On October 27, 1993, Koehler filed a petition against
BBL in the United States District Court for the Southern District
of New York, seeking "payment or delivery of property of judgment
debtor," and citing CPLR article 52.  Koehler served the petition
upon an officer of the Bank of Bermuda (New York) Ltd., which he
claimed to be a New York subsidiary and agent of BBL.  On October
29, 1993, the District Court ordered BBL to deliver the stock
certificates, or monies sufficient to pay the judgment, to
Koehler.  It is this turnover order that is the subject of the
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certified question before us.
BBL argued before the District Court that service upon
the New York bank did not subject BBL to the personal
jurisdiction of the court.  Although this jurisdictional issue
was the subject of litigation in federal court for some ten
years, BBL eventually consented, by letter dated October 9, 2003,
to the personal jurisdiction of the court as of the time that
Koehler had commenced the proceeding.
In 2004, BBL revealed that the stock certificates were
no longer in its possession.  The obligations for which BBL had
held the certificates as collateral had been satisfied and BBL --
despite the District Court's turnover order -- had transferred
the stock to a Bermudan company existing for Dodwell's benefit in
July 1994.  On March 9, 2005, the District Court dismissed
Koehler's petition, on several grounds, including that the
federal court had no in rem jurisdiction over Dodwell's shares. 
In doing so, the District Court relied on the principle that a
New York court cannot attach property that is not within the
state. 
Koehler appealed to the Second Circuit, which observed
that New York law does not make clear whether a court sitting in
New York has the authority under CPLR 5225 (b) to order a
defendant, other than the judgment debtor himself, to deliver
assets into New York, when the court has personal jurisdiction
over the defendant but the assets are not located in New York. 
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The Second Circuit, finding no controlling precedent from our
Court, certified this dispositive jurisdictional question to us.
II.
CPLR article 52 governs the enforcement of money
judgments and orders directing the payment of money.  By
contrast, pre-judgment attachment is governed by article 62. 
Enforcement proceedings and attachment proceedings, while similar
in many ways, differ fundamentally in respect to a court's
jurisdiction.  While pre-judgment attachment is typically based
on jurisdiction over property, post-judgment enforcement requires
only jurisdiction over persons.
Article 52 authorizes a judgment creditor to file a
motion against a judgment debtor to compel turnover of assets or,
when the property sought is not in the possession of the judgment
debtor himself, to commence a special proceeding against a
garnishee who holds the assets.  CPLR 5225, the provision
applicable here, supplies judgment creditors with a device known
as a "delivery order" or "turnover order."  With respect to
garnishees, 5225 (b) allows a New York court to issue a judgment
ordering a party to deliver the property in which the judgment
debtor has an interest, or to convert it to money for payment of
the debt.  "[W]here it is shown that the judgment debtor is
entitled to the possession of such property . . ., the court
shall require such person to pay the money, or so much of it as
is sufficient to satisfy the judgment, to the judgment creditor"
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(CPLR 5225 [b]).  Disobedience of a turnover order is contempt of
court and punishable as such.  
The requirement that the judgment creditor proceed
against the garnishee, rather than by a device operating on the
property alone, recognizes the possibility that the garnishee, or
a fourth party, may assert its own interests in the property. 
"If there are any other claimants to the property or money
involved, they can be allowed to intervene, if, indeed the
judgment creditor has not already joined them in the first place,
or the garnishee interpleaded them. . . .  The special
proceeding, in short, can be converted into a full-fledged test
of precisely whom the disputed property or debt belongs to . . ." 
(Siegel, NY Prac § 510, at 868 [4th ed].)  
By contrast, an article 62 attachment proceeding
operates only against property, not any person.  By means of
attachment, a creditor effects the pre-judgment seizure of a
debtor's property, to be held by the sheriff, so as to apply the
property to the creditor's judgment if the creditor should
prevail in court.  Attachment simply keeps the debtor away from
his property or, at least, the free use thereof; it does not
transfer the property to the creditor.  It is frequently used
when the creditor suspects that the debtor is secreting property
or removing it from New York and/or when the creditor is unable
to serve the debtor, despite diligent efforts, even though the
debtor would be within the personal jurisdiction of a New York
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court (see CPLR 6201).  Attachment has also been used to confer
jurisdiction.  When a debtor is neither a domiciliary nor a
resident of New York -- so that the creditor cannot obtain
personal jurisdiction of the debtor -- but owns assets in New
York, courts have exercised jurisdiction over the debtor.  This
quasi in rem jurisdiction is subject to the due process
restrictions outlined by the United States Supreme Court in
Shaffer v Heitner (433 US 186 [1977]).  (See generally Siegel, NY
Prac §§ 104, 313, 314 [4th ed].)
In short, article 52 post-judgment enforcement involves
a proceeding against a person -- its purpose is to demand that a
person convert property to money for payment to a creditor --
whereas article 62 attachment operates solely on property,
keeping it out of a debtor's hands for a time.  We approach the
certified question with these differences in mind.
III.  
It is well established that, where personal
jurisdiction is lacking, a New York court cannot attach property
not within its jurisdiction.  "[I]t is a fundamental rule that in
attachment proceedings the res must be within the jurisdiction of
the court issuing the process, in order to confer jurisdiction"
(National Broadway Bank v Sampson, 179 NY 213, 223 [1904],
quoting Douglass v Phenix Ins. Co., 138 NY 209, 219 [1893];
accord Hotel 71 Mezz Lender LLC v Falor, 58 AD3d 270, 273 [1st
Dept 2008]; National Union Fire Ins. Co. v Advanced Employment
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  Specifically, subdivision a-1 provides that "[a] subpoena
1
duces tecum authorized by this rule and served on a judgment
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Concepts, Inc. (269 AD2d 101 [1st Dept 2000]).  Significantly,
"attachment suits partake of the nature of suits in rem, and are
distinctly such when they proceed without jurisdiction having
been acquired of the person of the debtor in the attachment"
(Douglass, 138 NY at 218).  But it is equally well established
that "[h]aving acquired jurisdiction of the person, the courts
can compel observance of its decrees by proceedings in personam
against the owner within the jurisdiction" (id. at 219).  The
certified question concerns the latter process.
CPLR article 52 contains no express territorial
limitation barring the entry of a turnover order that requires a
garnishee to transfer money or property into New York from
another state or country.  It would have been an easy matter for
the Legislature to have added such a restriction to the reach of
article 52 and there is no basis for us to infer it from the
broad language presently in the statute.  Moreover, we note that
the Legislature has recently amended CPLR 5224 so as to
facilitate disclosure of materials that would assist judgment
creditors in collecting judgments, when those materials are
located outside New York.  The 2006 amendment adds a subdivision
that expressly allows the securing of out-of-state materials by
in-state service of a subpoena on the party in control of the
materials.   Recent legislation thus supports our conclusion that
1
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debtor, or on any individual while in the state, or on a
corporation, partnership, limited liability company or sole
proprietorship doing business, licensed, qualified, or otherwise
entitled to do business in the state, shall subject the person or
other entity or business served to the full disclosure prescribed
by section fifty-two hundred twenty-three of this article whether
the materials sought are in the possession, custody or control of
the subpoenaed person, business or other entity within or without
the state" (CPLR 5224 [a-1] [emphasis added]). 
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the Legislature intended CPLR article 52 to have extraterritorial
reach.
The First Department of the Appellate Division has
expressly held that judgment debtors can be ordered to turn over
out-of-state assets under CPLR article 52 (see Gryphon Dom. VI,
LLC v APP Intl. Fin. Co., B.V., 41 AD3d 25 [1st Dept 2007], lv
denied 10 NY3d 705 [2008]; see also Miller v Doniger, 28 AD3d 405
[1st Dept 2006]; Starbare II Partners, L.P. v Sloan, 216 AD2d 238
[1st Dept 1995]).  "[T]he explicit rationale was that the court
could order the defendant judgment debtor to turn over property
because it had personal jurisdiction over the defendant"
(Gryphon, 41 AD3d at 31, citing Starbare, 216 AD2d at 239). 
Recently, the First Department endorsed the position that "New
York courts have the power to command a garnishee present in the
state to bring out-of-state assets under the garnishee's control
into the state" (Morgenthau v Avion Resources Ltd., 49 AD3d 50,
54 [1st Dept 2007], modified on other grounds, 11 NY3d 383
[2008]).
As that court noted, the key to the reach of the
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turnover order is personal jurisdiction over a particular
defendant.  "[A] turnover order merely directs a defendant, over
whom the New York court has jurisdiction, to bring its own
property into New York" (Gryphon, 41 AD3d at 31).  A New York
court has the authority to issue a turnover order pertaining to
extraterritorial property, if it has personal jurisdiction over a
judgment debtor in possession of the property.  "As long as the
debtor is subject to the court's personal jurisdiction, a
delivery order can be effective even when the property sought is
outside the state" (Siegel, NY Prac § 510, at 866 [4th ed]).  
Indeed, BBL concedes that, when a judgment debtor is
subject to a New York court's personal jurisdiction, that court
has jurisdiction to order the judgment debtor to bring property
into the State, because the Court's authority is based on its
personal jurisdiction over the judgment debtor.  BBL argues,
however, that when the judgment debtor -- in this case Dodwell --
is not within the personal jurisdiction of the New York court,
the Court's authority over the judgment debtor's property must be
based on in rem jurisdiction, even if the garnishee is within the
court's personal jurisdiction.  Because we find no indication in
CPLR 5225 that in rem jurisdiction is required in such
circumstances, we disagree.  
Both CPLR 5225 (a) and CPLR 5225 (b) provide that a
judgment creditor may obtain an order from a New York court,
requiring a defendant who is in possession or custody of money or
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other personal property in which a judgment debtor has an
interest to turn over the property or pay the money to the
judgment creditor.  CPLR 5225 (a) applies when the property
sought is in the possession of the judgment debtor himself.  CPLR
5225 (b) applies when the property is not in the judgment
debtor's possession.  The most significant difference between the
subsections is that 5225 (a) is invoked by a motion made by the
judgment creditor, whereas 5225 (b) requires a special proceeding
brought by the judgment creditor against the garnishee.  The
reason for this procedural distinction is that the garnishee, not
being a party to the main action, has to be independently
subjected to the court's jurisdiction.  But both 5225 (a) and
5225 (b) contemplate an order, directed at a defendant who is
amenable to the personal jurisdiction of the court, requiring him
to pay money or deliver property.  Neither contemplates the
situation in which attachment is typically sought -- where it
would be impossible or futile to protect a creditor's rights by
means of an order issued to defendant (see CPLR 6201).  In the
attachment scenario, authority is conferred on the court in part
or in whole by the situs of property within New York.  In post-
judgment enforcement, such in rem jurisdiction is not required. 
Bearing in mind the fundamental differences between enforcement
and attachment discussed above, we hold that a New York court
with personal jurisdiction over a defendant may order him to turn
over out-of-state property regardless of whether the defendant is
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a judgment debtor or a garnishee.
IV.
In short, the principle that a New York court may issue
a judgment ordering the turnover of out-of-state assets is not
limited to judgment debtors, but applies equally to garnishees. 
Consequently, we conclude 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 CPLR 5225 (b).
Accordingly, the certified question should be answered
in the affirmative.
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Lee N. Koehler v The Bank of Bermuda Limited
No. 82
SMITH, J.(dissenting):
The majority holds in substance that a judgment may be
enforced by garnishment in New York if the garnishee is subject
to New York jurisdiction, even though the judgment creditor, the
judgment debtor and the property that the judgment creditor is
trying to seize are all elsewhere.  I would not read New York's
garnishment statutes so expansively.  Such a broad garnishment
remedy is unsupported by any precedent in New York or,
apparently, in any other jurisdiction.  Its policy implications
are troubling, and it may well be unconstitutional in many of its
applications.
The majority's holding opens a forum-shopping
opportunity for any judgment creditor trying to reach an asset of
any judgment debtor held by a bank (or other garnishee) anywhere
in the world.  If the bank has a New York branch -- either one
that is not separately incorporated, or a subsidiary with which
the parent's relationship is close enough to subject the parent
to New York jurisdiction -- the judgment creditor, having
registered the judgment in New York, can obtain an order
requiring the asset to be delivered here.  It is, apparently,
irrelevant whether New York has any relationship with the
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judgment creditor, the judgment debtor or the dispute between
them -- indeed, in this case, so far as the record shows, no such 
relationship exists.  And what a judgment creditor can do in New
York, he can also do in Alabama, Alaska and 47 other states, if
those states interpret their garnishment statutes as the majority
interprets ours.
To offer this opportunity to judgment creditors seems
to me a recipe for trouble.  There may be competing claims to the
asset, by parties who think they have as much right to it as the
judgment creditor.  It is obvious that claims against a single
asset should be decided in a single forum -- and almost equally
obvious that that forum should be, as it traditionally has been,
a court of the jurisdiction in which the asset is located.  If
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
Clearing House Association L.L.C., an association of banks
operating in New York and many other domestic and international
jurisdictions, has submitted an amicus brief predicting for its
members and other banks significant administrative burdens, and
risks of being subject to conflicting adjudications, resulting
from the rule the majority now adopts.  These fears may be
exaggerated, but it seems unwise to put that question to the
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test.
It would not matter, of course, whether the majority's
rule were wise or unwise if our Legislature had enacted it, or if
our precedents required us to follow it.  But neither is true. 
The relevant statutes, CPLR 5201 (b) (defining "property") and
5225 (b) (relating to payment or delivery of property not in the
possession of the judgment debtor), say nothing about the
extraterritorial effects of garnishment proceedings.  The
majority points out that the statute relating to garnishment in
judgment enforcement proceedings (CPLR 5225 [b]), unlike the
statutes governing prejudgment attachment (CPLR article 62),
operates in personam, rather than in rem; that difference does
not suggest to me, however, that the Legislature intended the
judgment-enforcement statute to have broader extraterritorial
impact.  Rather, I think the difference arises  from the
differing nature of pre-judgment and post-judgment remedies: pre-
judgment remedies are designed, essentially, to freeze assets in
place, while post-judgment remedies serve to compel their
transfer and/or sale.  An in rem approach is adequate for the
former purpose, but an in personam remedy is better suited to the
latter.  Whether, and to what extent, the Legislature intended
post-judgment remedies to reach property outside New York is a
different question, one that the text of the statutes does not
answer.
Nor has the judgment creditor cited any case, from New
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York or anywhere else, in which it has been held that a third
party garnishee that is independent of the judgment debtor may be
compelled to bring assets into a state as part of judgment
enforcement proceedings.  The judgment creditor relies on several
Appellate Division cases (Gryphon Dom. VI, LLC v APP Intl. Fin.
Co., B.V., 41 AD3d 25 [1st Dept 2007]; Miller v Doniger, 28 AD3d
405 [1st Dept 2006]; Starbare II Partners v Sloan, 216 AD2d 238
[1st Dept 1995]) in which judgment debtors (and, in Miller,
family members who had received presumptively fraudulent
transfers) were ordered to bring property into the state.  But
those cases are distinguishable.  Judgment debtors who can
control where property is located may put it out of reach in
order to frustrate enforcement of the judgment, and it may well
be reasonable to prevent or thwart such maneuvers by ordering the
property brought into New York.  But this reasoning does not
apply to third parties like The Bank of Bermuda here, which had
interests independent of the judgment debtor and was presumably
dealing with him at arms length.
The case that is perhaps most relevant to the question
the Second Circuit has asked us seems to me to support a negative
answer.  In United States v First National City Bank (321 F2d 14
[1963], revd 379 US 378 [1965]), the United States, trying to
collect taxes owed by a Uruguayan corporation, sought an in
personam order against a New York bank to freeze, pendente lite,
assets of the Uruguayan company that were on deposit in the
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bank's branches outside the United States.  The Second Circuit
rejected the government's claim, on the ground that "the
garnishor obtains no greater right against the garnishee than the
garnishee's creditor had" (321 F2d at 19).  The Second Circuit
held that, since the bank's depositor could not require payment
in New York of the overseas deposits, the government could not do
so either.  The Supreme Court reversed, stressing that the case
involved only a pendente lite injunction, but seemed to endorse
the Second Circuit's basic theory: that the government's rights
as creditor were limited to "whatever rights the debtor ... may
have" against the garnishee bank (379 US at 381).  Here, the
judgment creditor has made no attempt to show -- and there is no
apparent basis for concluding -- that the judgment debtor could
have compelled The Bank of Bermuda to deliver the shares to the
judgment debtor in New York.  First National City Bank implies
that the judgment creditor should not be permitted to do what the
judgment debtor could not do.
The majority's broad view of New York's garnishment
remedy may cause it to exceed the limits placed on New York's
jurisdiction by the Due Process Clause of the Federal
Constitution.  In Shaffer v Heitner (433 US 186, 212 [1977]), the
Supreme Court held that "all assertions of state-court
jurisdiction," whether labeled in personam, in rem or quasi in
rem, must be evaluated according to the standards contained in
International Shoe Co. v Washington (326 US 310 [1945]) -- i.e.,
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according to "traditional notions of fair play and substantial
justice" (326 US at 316, quoting Milliken v Meyer, 311 US 457,
463 [1940]).  The Supreme Court has never had occasion to apply
the International Shoe standard to judgment enforcement
proceedings, but a footnote in Shaffer makes clear that the
traditional in rem approach of such proceedings -- permitting
judgments to be enforced against property wherever it may be
located -- is constitutionally acceptable: "Once it has been
determined by a court of competent jurisdiction that the
defendant is a debtor of the plaintiff, there would seem to be no
unfairness in allowing an action to realize on that debt in a
State where the defendant has property, whether or not that State
would have jurisdiction to determine the existence of the debt as
an original matter" (433 US at 210 n36).  
It is by no means equally clear that the novel in
personam approach to judgment enforcement that the majority
adopts today can meet the International Shoe standard.  A
somewhat similar question was carefully considered in a recent
decision of the Maryland Court of Special Appeals, Livingston v
Naylor (173 Md App 488, 920 A2d 34 [2007]).  In that case, a
judgment creditor, a nonresident of Maryland, was trying to
garnish in Maryland the wages of a judgment debtor, also a
nonresident of Maryland, owed to him for work not done in
Maryland.  Though the garnishee was subject to Maryland
jurisdiction, the court in Livingston held that there would be "a
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lack of fair play and substantial justice in permitting such
wages to be garnished by operation of a Maryland court order"
(173 Md App at 517, 920 A2d at 51). 
In this case, as I have mentioned, the record discloses
no New York contact with the parties or the dispute, except the
amenability of The Bank of Bermuda, the garnishee, to personal
jurisdiction in this State.  I have serious doubt that that is
enough contact under International Shoe to justify the
enforcement of a non-New York judgment by a non-New York creditor
against a non-New York debtor, to recover an asset that is
located in Bermuda.  The constitutional issue, of course, is not
before us; the Second Circuit does not turn to us for rulings on
federal constitutional law.  The constitutional issue may not
even be before the federal courts in this action, and if it had
been raised there the judgment creditor might have been able to
show enough New York contact to make the result he seeks
constitutional.  Still, I think the majority errs in interpreting
New York's garnishment statutes in a way that will render them,
as applied in future cases, subject to constitutional challenge.
I would answer the certified question no.  
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*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Following certification of a question by the United States Court
of Appeals for the Second Circuit and acceptance of the question
by this Court pursuant to section 500.27 of the Rules of Practice
of the New York State Court of Appeals, and after hearing
argument by counsel for the parties and consideration of the
briefs and the record submitted, certified question answered in
the affirmative.  Opinion by Judge Pigott.  Chief Judge Lippman
and Judges Ciparick and Graffeo concur.  Judge Smith dissents and
votes to answer the certified question in the negative in an
opinion in which Judges Read and Jones concur.
Decided June 4, 2009