Hotel 71 Mezz Lender LLC v. Falor

• Decision Date: 16 February 2010
• Citation: 926 N.E.2d 1202,900 N.Y.S.2d 698,14 N.Y.3d 303
• Parties: HOTEL 71 MEZZ LENDER LLC, Appellant, v. Robert D. FALOR et al., Respondents, et al., Defendant.
• Court: New York Court of Appeals Court of Appeals

900 N.Y.S.2d 698

14 N.Y.3d 303

926 N.E.2d 1202

HOTEL 71 MEZZ LENDER LLC, Appellant,

v.Robert D. FALOR et al., Respondents, et al., Defendant.

Court of Appeals of New York.

Feb. 16, 2010.

Gibson, Dunn & Crutcher LLP, New York City (Robert L. Weigel of counsel), for appellant.

Mitchell Silberberg & Knupp LLP, New York City (Paul D. Montclare of counsel), for respondent.

[14 N.Y.3d 307, 926 N.E.2d 1204]

OPINION OF THE COURT

JONES, J.

The primary issue before the Court is whether the intangible personal property plaintiff sought to attach, i.e., defendants' ownership/membership interests in various out-of-state business entities, was subject to attachment under CPLR article 62. We conclude that the issuance of an order of attachment in New York on defendant Guy T. Mitchell, the nondomiciliary garnishee of defendants' intangible personal property, who voluntarily submitted to personal jurisdiction in New York, was appropriate.

We further hold that Supreme Court did not abuse its discretion in appointing a receiver pursuant to CPLR 5228.

By agreement dated March 29, 2005, plaintiff Hotel 71 Mezz Lender LLC made a $27,338,801 mezzanine loan to nonparty Chicago H & S Senior Investors, LLC (borrower) for the purpose of developing and renovating Hotel 71, a prominent hotel located in Chicago.¹ This loan was made by plaintiff and accepted by the borrower in New York. Further, the proceeds of this loan were disbursed from New York. On that same day, defendants, including Guy T. Mitchell, who do not reside in New York, executed a guaranty of payment (guaranty) under which they unconditionally agreed to be jointly and severally liable for the borrower's obligations under the loan and submitted to the jurisdiction of any federal or state court in New York City in any suit, action or proceeding arising out of or relating to the guaranty. By executing this guaranty, defendants waived all defenses and counterclaims that might have been asserted against plaintiff in the event the borrower defaulted on the loan. In addition to being negotiated in New York, the guaranty was to be governed by and construed in accordance with the laws of New York State.

The borrower thereafter defaulted on the loan and filed for bankruptcy protection. On April 9, 2007, plaintiff commenced this action against the guarantorsin Supreme Court, New York County to enforce the guaranty and recover the amounts dueunder the loan. After defendants answered, plaintiff made an ex parte application, pursuant to CPLR 6201, for a prejudgment order of attachment.²

Plaintiff sought to attach defendants' property interests as security for the collection of any judgment entered against defendants. On September 25, 2007, Supreme Court granted the order of attachment in the sum of $65,149,926 (the amount secured by the order). The court, however, stayed service of the levy by the sheriff to afford defendants the opportunity to oppose plaintiff's application for an order of attachment. In early October 2007, the order of attachment was delivered to the sheriff of the City and State of New York.

On October 23, 2007, Supreme Court heard oral argument from counsel regarding the order of attachment. Defendant Mitchell, who had been deposed in Supreme Court that day, was present to oppose the order. Following the hearing, Supreme Court permitted the sheriff to serve the order of attachment upon defendant Mitchell personally, as garnishee for any ownership/membership interests defendants may have had in 23 out-of-state entities, and as the apparent manager of the entities.³

The property at issue consisted of defendants' interests in 22 limited liability companies formed in Delaware, Georgia and Florida and a Florida corporation solely owned by defendant Mitchell. Unlike stock certificates, which are tangible property, defendants' ownership/membership interests are intangible and uncertificated.

After Supreme Court sealed the record, defendant Mitchell, pursuant to CPLR 6219, provided plaintiff with garnishee statements for the 23 entities. Defendant Mitchell does not dispute that he is the "proper garnishee" (within CPLR 5201[c][1] )for defendants' ownership/membership interests. ⁴ Nor does defendant Mitchell argue that he was improperly served. Defendant Mitchell, through counsel, stated in a letter to Supreme Court dated January 28, 2008, "[w]e are prepared to waive any argument that the proper garnishee was not served with the order of attachment or the related levies in this case."

In separate orders to show cause, plaintiff moved to confirm the order of attachment in the sum of $65,149,926, and for the appointment of a receiver due to defendants' alleged refusal to produce documents related to their finances and their refusal to attend duly noticed depositions. By order entered February 8, 2008, Supreme Court granted plaintiffs motion to confirm the order of attachment, finding that plaintiff made the necessary showing under CPLR 6212 to confirm attachment ⁵and that attachment was necessary in the aid of security. Further, the court ruled that defendants' intangible interests were attachable property under the CPLR and that, because those interests were not evidenced by certificates, the service of the levy on defendant Mitchell was sufficient to fix the situs of said property in New York. Two months later, Supreme Court issued an order stating, "[c]onditioned upon the entry of judgment, ... [plaintiff's] motion for the appointment of a receiver [of defendants' ownership/ membership interests in 23 out-of-state entities] is granted." As set forth in this order, the receiver is authorized to take such actions as are appropriate to satisfy the order of attachment and any judgment(s) entered against defendants.

On February 6, 2008 and April 22, 2008, Supreme Court granted plaintiff summary judgment on liability against six ofthe defendants, including defendant Mitchell. On April 21, 2008, judgment in the amount of $52,404,066.54 was entered against these defendants. To date, the judgment has not been satisfied.

The Appellate Division reversed in a 3-1 decision, holding that because Supreme Court lacked jurisdiction over the defendants' interests in the limited liability companies and other entity, that court erred in granting plaintiff's motion to confirm the order of attachment. Citing National Broadway Bank v. Sampson, 179 N.Y. 213, 71 N.E. 766 [1904], the Appellate Division majority stated, "an attachment of a debt or other intangible property can only be effected as against the debtor or obligor by service upon him or her when he or she is domiciled within the state" (58 A.D.3d 270, 273, 869 N.Y.S.2d 61 [2008] ). Thus, because defendant Mitchell was only temporarily in New York when he was served, his presence was insufficient to support the attachment. The majority also concluded that Supreme Court abused its discretion in appointing a receiver.

In concluding that Supreme Court's orders should be affirmed, the dissent argued, based on the statutory framework of CPLR article 62 and Harris v. Balk, 198 U.S. 215, 25 S.Ct. 625, 49 L.Ed. 1023 [1905], that service on a proper garnishee while that individual is in New York-even temporarily-is enough to permit the attachment of an intangible asset. The dissent also concluded, given defendants' alleged conduct in refusing to produce documents and appear for depositions, that Supreme Court was warranted in appointing a receiver to aid in postjudgment enforcement. The Appellate Division granted plaintiff leave to appeal, and we now reverse.

Plaintiff argues that Supreme Court's order of attachment was proper inall respects. Defendants counter that Supreme Court lacked jurisdiction over the ownership interests plaintiff sought to attach because they were not located in New York and, thus, could not be properly attached. Accordingly, defendants conclude, Supreme Court erred in granting plaintiff's motion to confirm the order of attachment. We find defendants' arguments unpersuasive.

The provisional remedy of attachment, which is governed by CPLR article 62, operates only against the property of the defendant, not on his/her person.One purpose of attachment is to provide security for a potential judgment against a nonresident debtor. This Court recently stated:

"By means of attachment, a creditor effects theprejudgment seizure of a debtor's property, to be held by the sheriff[, actually or constructively], 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 court ( see CPLR 6201)" ( Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533, 538, 883 N.Y.S.2d 763, 911 N.E.2d 825 [2009]; see Siegel, N.Y. Prac § 313, at 499 [4th ed] ).

Although attachment always serves a security function, it can also be used to obtain "quasi in rem" jurisdiction over a defendant not amenable to personal jurisdiction, but with tangible or intangible property in the state ( see id.; Douglass v. Phenix Ins. Co. of Brooklyn, N.Y., 138 N.Y. 209, 219, 33 N.E. 938 [1893] ["(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"] ).⁶ "This quasi in rem jurisdiction is subject to the due process restrictions outlined by the United States Supreme Court in Shaffer v. Heitner, 433 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 [1977]; ⁷ see generally Siegel, N.Y. Prac §§ 104, 313, 314 [4th ed]" ( Koehler, 12 N.Y.3d at 538, 883 N.Y.S.2d 763, 911 N.E.2d 825). In short, when attachment is used to serve as a jurisdictional...