Koehler v. Bank of Bermuda Ltd.

• Decision Date: 04 June 2009
• Docket Number: No. 82.,82.
• Citation: 12 N.Y.3d 533,911 N.E.2d 825
• Parties: Lee N. KOEHLER, Appellant, v. The BANK OF BERMUDA LIMITED, Respondent.
• Court: New York Court of Appeals Court of Appeals

911 N.E.2d 825

12 N.Y.3d 533

Lee N. KOEHLER, Appellant, v. The BANK OF BERMUDA LIMITED, Respondent.

No. 82.

Court of Appeals of New York.

June 4, 2009.

Paul F. Newhouse, of the Maryland bar, admitted pro hac vice, for appellant.

Friedman Kaplan Seller & Adelman LLP, New York City (Daniel B. Rapport, Robert J. Lack and Jason C. Rubinstein of counsel), for respondent.

Sullivan & Cromwell LLP, New York City (H. Rodgin Cohen, Bruce E. Clark, Michael M. Wiseman, Daniel A. Goldschmidt and Norman R. Nelson of counsel), for Clearing House Association L.L.C., amicus curiae.

OPINION OF THE COURT

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, 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) Limited, 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 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 10 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 (2005 WL 551115, 2005 U.S. Dist LEXIS 3760 [S.D.N.Y. (2005)]). 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. The Second Circuit, finding no controlling precedent from our Court, certified this dispositive jurisdictional question to us (544 F.3d 78 [2nd Cir.2008]).

II.

CPLR article 52 governs the enforcement of money judgments and orders directing the payment of money. By contrast, prejudgment attachment is governed by CPLR article 62. Enforcement proceedings and attachment proceedings, while similar in many ways, differ fundamentally in respect to a court's jurisdiction. While prejudgment attachment is typically based on jurisdiction over property, postjudgment 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, CPLR 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" (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, N.Y. 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 prejudgment 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 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 U.S. 186, 97 S.Ct. 2569, 53 L.Ed.2d 683 [1977]; see generally Siegel, N.Y. Prac. §§ 104, 313, 314 [4th ed].

In short, article 52 postjudgment 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 N.Y. 213, 223, 71 N.E. 766 [1904], quoting Douglass v. Phenix Ins. Co. of Brooklyn, N.Y, 138 N.Y. 209, 219, 33 N.E. 938 [1893]; accord Hotel 71 Mezz Lender LLC v. Falor, 58 A.D.3d 270, 273, 869 N.Y.S.2d 61 [1st Dept.2008]; Matter of National Union Fire Ins. Co. of Pittsburgh, Pa. v. Advanced Empl. Concepts, 269 A.D.2d 101, 703 N.Y.S.2d 3 [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 N.Y. at 218, 33 N.E. 938). But it is equally well established that "[h]aving acquired jurisdiction of the person, the court[] can compel observance of its decrees by proceedings in personam against the owner within the jurisdiction" (id. at 219, 33 N.E. 938). 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 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...