In-house counsel, boards, and insurers have long been averse to the risks associated with extended litigation. However, despite a company's best efforts to avoid litigation, due to recent developments in the law of prejudgment attachment and post-judgment execution in New York, companies that transact business with, or hold property of other companies may be easily dragged into litigation in New York state courts by their counterparty's creditors, forcing them to incur unexpected legal and business costs. In addition, companies may be faced with difficult choices where an aggressive creditor of one of its counterparties demands that it turn over assets of that counterparty, while simultaneously, the counterparty encourages the company to resist such efforts.
This article will first survey developments in the New York law of attachment in light of a line of pathbreaking casesKoehler v. Bank of Bermuda, Hotel 71 Mezz Lender v. Falor, and Doubet v. Trustees of Columbia University in the City of New York. Doubet last month became the first appellate division decision to apply Koehler and Hotel 71 to restrain assets of a garnishee solely because that garnishee was subject to jurisdiction in New York.1 Second, this article will recommend specific actions a company may take to avoid the costs and burdens that accompany prejudgment attachment orders and post-judgment executions issued in New York.
Expansive Reach of Attachment Power
The New York Civil Practice Law and Rules (CPLR) provides for two kinds of restraint on a defendant's assets: (1) post-judgment execution under CPLR, Article 52, and (2) prejudgment attachment under CPLR, Article 62. Under Article 62, a plaintiff can seek a court order attaching a defendant's assets for the purpose of securing a potential future judgment. Article 52, by contrast, allows a plaintiff that has already obtained a judgment to serve a restraining notice on any garnishee holding the defendant's assets, followed by a levy on specified assets. If the garnishee refuses to comply with a levy, a plaintiff can bring a turnover proceeding.
In the last three years, New York has expansively interpreted the types of property a creditor may attach or execute upon, allowing creditors to reach property that lies beyond the reach of a court's in rem jurisdiction merely because a garnishee is subject to personal jurisdiction in New York. In the 2009 case Koehler v. Bank of Bermuda2 (which dealt with post-judgment turn over), and the 2010 case Hotel 71 Mezz Lender v. Falor3 (which dealt with prejudgment attachment), the New York Court of Appeals held that "a court with personal jurisdiction over a nondomiciliary present in New York has jurisdiction over that individual's tangible or intangible property, even if the situs of the property is outside New York."4 Under Koehler and Hotel 71, therefore, a New York court's attachment and execution power can reach out-of-state property held by a non-resident, non-defendant garnishee so long as the court has personal jurisdiction over the garnishee.
In Koehler, the Court of Appeals ruled that a New York court has the power to require a foreign bank, which has consented to personal jurisdiction, to satisfy a judgment against the bank's customer by delivering into New York stock certificates that had been held by the bank outside the state. Notably, neither the judgment creditor nor the judgment debtor were New York residents and the judgment itself had been obtained in another state.5
One year later, in Hotel 71, the Court of Appeals extended the holding of Koehler to allow prejudgment attachment of ownership interests in 23 out-of-state entities held and controlled by a defendant-garnishee merely because in personam jurisdiction existed over that entity. Here, the defendant-garnishee was a nondomicilliary, who had voluntarily submitted to personal jurisdiction in New York.6
'Doubet'. Just last month, in Doubet v. Trustees of Columbia University in the City of New York, a judgment creditor brought a special proceeding under Article 52 to recover money damages for the violation of restraining notices served on a garnishee.7 Following the issuance of the restraining notice, the garnishee entered into a written agreement with the judgment debtor to pay the judgment debtor a consulting fee upon the garnishee's sale of apartments to Columbia University. The garnishee claimed that "the restraining notices were invalid because they were mailed to an out-of-state garnishee and sought to restrain out-of-state property."8 The First Department, however, citing both Koehler and Hotel 71, held that the garnishee was properly subject to the restraining notices because even though "the situs of the property at issuerespondent's contractual obligation to pay a broker's feewas outside of the State of New York, as a foreign corporation authorized to do business in New York, respondent has consented to personal jurisdiction in New York." Accordingly, garnishee's out-of-state property was subject to the restraining notices.9
Treatment in trial courts. There are a few unreported trial court decisions involving situations where plaintiffs attempted to attach or execute on out-of-state property held by third-party garnishees. The reactions of the parties and courts to these matters are instructive.
In Poah One Acquisition Holdings V Limited v. Armenta, an Article 52 post-judgment turnover proceeding, Supreme Court ordered a third-party Cayman company to turn over certain equity interests to one of the plaintiff's affiliates to satisfy a judgment after concluding that the third-party was subject to the court's jurisdiction.10 Documents filed in that case show that the garnishee chose to consent to jurisdiction in New York rather than dispute it.11
In International Legal Consulting v. Malabu Oil & Gas,12 the Supreme Court refused to apply Hotel 71 to an Article 62 prejudgment attachment proceeding brought against a third-party garnishee (a bank) because of what it described as two distinguishable facts. First, in Hotel 71, the garnishee was one of the defendants, and the court had personal jurisdiction over all of the defendants. By contrast, in International Legal Consulting, the court could not exercise personal jurisdiction over any of the named defendants, even though it had jurisdiction over the garnishee. Second, in Hotel 71, the res sought to be attached consisted of defendants' ownership interests in 23 limited liability companies, which were "intangible contract rights" that could be attached in New York because the defendant-garnishee with control over those rights was physically present in New York when he was served with the attachment order. By contrast, in International Legal Consulting, the res consisted of funds located in a foreign bank account.13 There is no appellate decision construing this decision.
In ACP Master v. Vitro S.A.B. de C.V.,14 and Elliott Int'l v. Vitro S.A.B. de C.V.,15 the bond creditors of guarantors of a Mexican glassmakerwhose parent, but not subsidiaries, was in insolvency proceedings in Mexicoserved a series of orders of attachment on the glassmaker's customers. While the propriety of these orders of attachment has not been adjudicated, due to a stay imposed by parallel bankruptcy litigation, there have been interim rulings of interest. One in particular involves orders of attachment served on certain automobile manufacturers who used the defendant as a glass supplier. The automobile companies moved to vacate the orders as served, arguing that they would cripple the automotive industry. The Supreme Court vacated the orders of attachment.16 Notably, however, the creditors subsequently secured a judgment in New York and initiated execution proceedings to effectuate their judgment. These latest enforcement efforts, however, are subject to the stay.