Worldwide: New York Court Of Appeals To Consider Vast Expansion To Koehler: Turnover Of Assets At A Non-US Subsidiary

Keywords: New York Court of Appeals, Koehler, non-US subsidiaries, overseas assets

The US Court of Appeals for the Second Circuit recently certified to the New York Court of Appeals two questions concerning the ability of a judgment creditor to garnish accounts of judgment debtors at non-US subsidiaries of banks that have branches in New York or are otherwise subject to jurisdiction in New York. The underlying dispute raises issues of great importance to all international banks with a New York presence.

A ruling that New York courts can compel the turnover of overseas assets held in accounts maintained by bank affiliates, where these affiliates themselves are not subject to New York jurisdiction, would represent a major step beyond the decision in Koehler w. Bank of Bermuda1. Such a result could make New York even more of a magnet for enforcement of judgments against banks with a presence in New York.

The plaintiff in Commonwealth of the Northern Marianas Islands v. Canadian Imperial Bank of Commerce alleges that it holds a judgment for unpaid taxes against two residents of the Cayman Islands. It further alleges that the judgment debtors hold accounts at a Cayman subsidiary of a Barbadian subsidiary of the defendant, which is itself a Canadian bank that plaintiffs served in the United States, by effecting service of process on its New York branch.

The plaintiff filed a petition for turnover under CPLR 5225(b). Under that statute, a judgment creditor may commence a special proceeding "against a person in possession or custody of money or other personal property in which the judgment debtor has an interest, ... where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor's rights to the property are superior to those of the transferee."

The plaintiff, however, did not argue that the Canadian bank had "possession or custody" of the relevant assets. Instead, the plaintiff argued that (i) the defendant had "control" over accounts at its Cayman corporate subsidiary and (ii) "control" is sufficient to meet the "possession or custody" standard in CPLR 5225(b). Judge Lawrence A. Kaplan, US District Court Judge (SDNY), rejected this argument, contrasting CPLR 5225(b) with other sections of the CPLR, that set a "possession, custody, or control" standard.

Although Judge Kaplan rejected plaintiff's argument, he appeared to believe it had some merit, explaining that if "the bank as a practical matter can cause its subsidiaries to comply with a turnover order, it would seem incongruous to conclude that the Court is without the power to issue such an order in the first instance." In dictum, the court went on to observe that allegations of corporate ownership "suggest that it is within [the bank's] practical power to, somehow, access and turn over the account funds."

On appeal to the Second Circuit, the parties again disputed the meaning of CPLR 5225(b). Notably, the plaintiff argued that "control" is a fact-intensive standard that could require discovery and evidentiary hearings in virtually all turnover proceedings. Further, it is unclear how a "control" standard would apply in the case of debts governed by foreign law, but the district court was extremely dismissive of foreign law: it rejected reliance on Cayman bank confidentiality laws on the grounds that "it is hardly uncommon that a large corporation, by doing business in many jurisdictions, subjects itself to potentially conflicting laws" and that US courts are not bound by what it characterized as "foreign blocking statutes." If US courts were to order turnover of debts without clear evidence that foreign courts would discharge the debt, garnishee banks could be at real risk of double liability.

In an amicus brief, the Institute of International Bankers2 argued that CPLR 5225(b) did not apply at all, because bank accounts are not "personal property." Instead, the IIB contended that the correct statute was CPLR 5227, which allows enforcement only against a "person who it is shown is or will become indebted to the judgment debtor," not anyone who might be argued to have "control" over the debt. The IIB also pointed out the risk that New York garnishees will be subject to double liability if forced to turn over their own assets, then pursue (or have their subsidiaries pursue) separate discharge proceeding in other jurisdictions.

Because the Second Circuit believed that the appeal involves unresolved issues of New York State law, it declined to rule on the merits and instead asked New York's highest court, the Court of Appeals, to consider answer two questions:

1. May a court issue a turnover order pursuant to N.Y. C.P.L.R. § 5225(b) to an entity that does not have actual possession or custody of a debtor's assets, but whose subsidiary might have possession or custody of such assets?

2. If the answer to the above question is in the affirmative, what factual considerations should a court take into account in determining whether the issuance of such an order is permissible?

The Court of Appeals can either accept or reject the certification. If it accepts certification and issues a ruling, the result could further expand New York's garnishment jurisdiction, or it could be an opportunity for the state court to limit that jurisdiction following its widely-debated 2009 decision in Koehler. If the court declines to accept the certification, the Second Circuit will rule on the appeal as currently presented.

A decision by the state court may be preferable to the banking community, as it would resolve definitively any disputed issues of state law. A decision by the Second Circuit would bind New York's federal district courts, and might be followed by state courts as well, but it would not provide the finality that a ruling by the state's highest court would provide. In either event, the outcome will be critical to international banks with a New York presence, as a decision expanding Koehler would expose such banks to New York orders requiring them to turn over assets held by their non-US subsidiaries, possibly in contravention of local laws and contractual obligations applicable in the jurisdictions where such subsidiaries are based.

To learn more about Mayer Brown's Supreme Court & Appellate practice. To learn more about Mayer Brown's Financial Services Regulatory & Enforcement practice.

Previously published on October 3, 2012.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2012. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions