United States: Koehler - New York Court Confirms The Availability Of A Powerful Remedy For Judgment Creditors

Koehler v. Bank of Bermuda Ltd., 2009 NY Slip Op. 04297 (Jun. 4, 2009)

The New York Court of Appeals held on 4 June 2009 by a close 4-3 majority that courts in New York have the power to order banks to turn over assets held on behalf of their customers – including those held outside of New York – to creditors with court judgments or arbitration awards converted into judgments.

The ruling, which is of great interest to international commercial business generally, was requested from the Court of Appeals (a state court) by a US (federal) court on the basis that the question was controlled by New York state law.  New York statutory law defines the rules for the enforcement of judgments in any court within the State of New York (including federal courts).  The New York Court of Appeals is the highest court of the State of New York and the ultimate arbiter of New York law.

Background

In June 1993, Lee Koehler obtained a default judgment from a US court in the state of Maryland for more than US$2 million against his former business partner, David Dodwell, a resident of Bermuda.  Mr Koehler registered his judgment with a US court located in New York in order to enforce the judgment against Mr Dodwell's assets.  Mr Dodwell owned shares in a Bermuda company, which he had pledged to Bank of Bermuda Limited ("BBL") of Bermuda as collateral for a loan.  In October 1993, Mr Koehler requested an order from the US court that BBL turn over Mr Dodwell's share certificates, which BBL held in Bermuda, or money sufficient to pay the US$ 2 million judgment.  The US court in New York granted that order.

For about ten years, BBL disputed the US court's jurisdiction over BBL – the court's authority to exercise its power over BBL.  However, in October 2003, BBL agreed that it was subject to the US court's jurisdiction.

In March 2005, the US court dismissed Mr Koehler's claim, stating that the court had no in rem jurisdiction (that is, jurisdiction over the property, the type of power out of which ship arrests originate) over the assets because they were not located in New York.  Mr Koehler appealed to the Second Circuit Court of Appeals (the federal appellate court).  As a question of New York law was involved, the Second Circuit Court of Appeals referred the matter to the New York Court of Appeals for an advisory opinion on that issue.

Reasoning

The Court of Appeals distinguished pre-judgment and post-judgment orders made in relation to assets of the debtor which might satisfy the creditor's claim.

The statute considered was Section 5225(b) of the New York Civil Practice Law and Rules.  Section 5225(b) provides that a creditor with a judgment may commence legal proceedings against a person, such as a bank, who is in possession of the debtor's assets.  This statute is located within the provisions providing for the power to make orders for the enforcement of existing court judgments.  The New York Court of Appeals distinguished these rules from those setting out the power to make orders preserving property before a judgment has been obtained.

Prior to judgment, a court in New York will not order a debtor to hand over assets to a creditor, as the court has not yet made a determination that the creditor is entitled to those assets.  At the pre-judgment stage, the court may order that the state take control of the assets within the state's territory so that those assets can be preserved and later satisfy a judgment in favour of the creditor.  The Court of Appeals held that the basis for a court's power to make this type of order is the fact that the property is within New York – that is, jurisdiction is over the property, or in rem jurisdiction.

This remedy was distinguished from the situation in which a creditor has already obtained a judgment (or an arbitration award) against a debtor.  The Court of Appeals concluded that the statute empowers a court in New York to order a person who holds property owned by a judgment debtor to hand over that property or pay money to a person holding a judgment.  The basis for the court's power to do so was held to be its power over the person holding the property – that is, jurisdiction over the person, or in personam jurisdiction.

Three Judges of the Court of Appeals dissented, noting that the relevant New York statutes do not expressly confer on the courts power to make orders with such extraterritorial effect.  In addition, the dissenting Judges questioned whether such power was beyond the limits of the US Constitution, which require that a party have sufficient contact with a state before its courts exercise their power over that party.

On the basis of its jurisdiction over BBL, which BBL had accepted after a decade of litigation over that point, the Court of Appeals concluded that courts in New York (both state and federal) have the power to order a party subject to their jurisdiction to hand over assets – whether or not those assets are within New York or anywhere else in the world.

Impact

BBL may make efforts in the (federal) Second Circuit Court of Appeals and the US Supreme Court to challenge the ruling of the New York Court of Appeals on US Constitutional grounds (building on the comments of the dissenting Judges).  However, if the Koehler rule remains as it stands, it could make New York as popular for enforcement of judgments as it has become for maritime attachments.

The potential scope for application of Koehler is remarkable, particularly in relation to banks, which in the course of their business hold the assets of their clients in diverse locations.  Any party over whom a court sitting in New York (whether federal or state) accepts jurisdiction will be subject to an order which applies to their assets anywhere in the world.  This could include the affiliates or branches of banks operating in New York City.  Such parties could be ordered to hand over assets they hold anywhere for their clients who become subject to judgments or arbitration awards.

Some maritime companies have registered a presence in the State of New York in an effort to avoid having their US Dollar electronic funds transfers seized pursuant to a US court order made under Rule B of the Supplemental Rules for Certain Admiralty and Maritime Claims.  There was already a risk to this strategy in that such a company could become subject to proceedings in US and New York courts, as well as to the authority of governmental agencies such as the tax authority of the US Internal Revenue Service.  Following Koehler, there is now a risk that a company registered in New York will be subject to a court order to pay, out of its worldwide assets, money to satisfy any judgment (or arbitration award) against it.

In recent years, the maritime world has seen pre-judgment attachment remedies in US courts in New York emerge as popular and powerful tools in the pursuit of maritime claims.  This has resulted largely from the use of the US Dollar as the currency of choice in many fields of international business, and the position of New York as a centre for US Dollar transactions.  However, Koehler could apply to any judgment (or arbitration award converted to a judgment) – not merely maritime claims.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.