Court of Appeals Holding Expands the Scope of Prejudgment Attachment
Prejudgment attachment can be an extremely useful and important tool in litigation. By attaching a defendant’s property while a lawsuit is in progress, it can ensure that a favorable judgment, once obtained, will be collectible. Recently, the New York Court of Appeals significantly expanded the provisional remedy of prejudgment attachment to reach out-of-state property. The new ruling is particularly important in New York City, where individual defendants may live outside New York State.
Imagine this scenario: You loan $100 million to Luxco, Inc., a reputable hotel developer based in New Haven, whose latest venture is an outer space-themed luxury resort – the Nebulus - set to be built in Miami. You have a good feeling about this one because outer-space is very trendy, especially in the hotel business. Bob Smith, who lives in Greenwich, comes to your office in New York City to guarantee the loan. A clause in the guaranty states that all disputes arising from and related to the guaranty shall be heard in the courts of the State of New York, and that Bob submits to the jurisdiction of New York courts. An officer of Luxco signs the loan agreement in New Haven, Bob signs the guaranty in New York, and the two of you celebrate with porterhouses and California reds at Wolfgang’s.
Unfortunately, the stock market plummets, and the Nebulus Hotel project folds. Luxco is now in default on the loan. You sue Luxco and Bob, your former steak and merlot buddy, in New York County Supreme Court to enforce the guaranty.
Word of the lawsuit spreads and you soon learn that Bob is someone not usually amenable to his promises, as friends share stories with you of Bob’s failure to pay back several large loans to investors. Your friends also inform you that he often travels to his family’s home in the South of France for prolonged periods of time when facing legal trouble. Fortunately, you also learn that Bob owns a dozen LLC’s all located in states outside of New York, with a total value of about $100 million. To secure a potential judgment against Bob, you make a motion for an attachment against Bob’s LLC’s under Article 62 of the CPLR. This way, you will be able to temporarily seize Bob’s interests in the LLC’s as security, and should you obtain a judgment against Bob, a non-resident, you can satisfy the money judgment from the LLC’s. As you’re about to file your papers in court, you realize that there’s just one problem: since New York has long held that attachment can be granted against out of state property only if its owner or keeper is domiciled in New York, can a New York court order an attachment against out of state property owned by a lifelong resident of Connecticut?
The Court of Appeals answered this question affirmatively in Hotel 71 Mezz Lender, LLC v. Falor1, the facts of which are very similar to the above situation. The New York County Supreme Court granted the plaintiff/lender’s motion for prejudgment attachment under Article 62 against the defendant/guarantor’s 22 out of state LLC’s. The Appellate Division, First Department, reversed the Supreme Court’s order, citing New York’s long-standing rule that prejudgment attachment against property located outside of New York State can only be accomplished when the owner of the property or garnishee2 is a New York domiciliary3. In Hotel 71, that was the issue: Mitchell, a defendant/guarantor, was not domiciled in New York. Reversing the First Department’s holding, the Court of Appeals said this was no longer a problem, and affirmed the attachment. The new rule is that as long as New York has personal jurisdiction over the owner or garnishee, an attachment can be had against his or her tangible or intangible property, even if located outside of the state. The Court had personal jurisdiction over defendant Mitchell because the guaranty he signed contained a clause under which the defendant consented to jurisdiction of the courts of New York.
The holdings of two earlier cases underpin the Court’s decision: first, less than a year before deciding Hotel 71, the Court reached a very similar conclusion in Koehler v. Bank of Bermuda Limited4, regarding post judgment attachment under Article 525. In Koehler, the court held that a New York court could order a Bermuda bank to deliver its stock certificates owned by the judgment debtor into New York to satisfy the judgment. In reaching this conclusion, the Court held that this was possible as long as New York had personal jurisdiction over the garnishee6, and the property need not be located in New York.
The second case underlying the Hotel 71 decision is Harris v. Balk7, which held that in the attachment context, it is the location of the debtor, not the property itself, that matters. Significantly, New York had previously adhered to the holding of National Broadway Bank v. Sampson8, which stands for the opposite proposition of Harris. National Broadway, the Court said, was no longer good law9.
Property, for the purposes of Articles 52 and 62 of the CPLR, can be real or personal, tangible, e.g., a car, intangible, e.g., a debtor’s bank account, or even an interest in property without an actual present value e.g., a contract for future royalty payments see ABKCO Indus. v. Apple Films10. In Hotel 71, the debtor’s interests in the out of state LLC’s were intangible and had uncertain present value, but based upon the holdings of Harris v. Balk11 and ABKCO, the court found the interests to be attachable.
So how can the rule from Hotel 71 be put to use? From a creditor’s perspective, the Hotel 71 rule means that it is now easier to secure a judgment before the lawsuit ends. When your client commences a suit against a defendant who lives outside of New York, it is recommended to survey that person’s assets. You can use tools like Smartlinks™ from Lexis Nexis® to ascertain what the person owns and where the assets are located. If there are grounds for an attachment12, your client will have a much broader choice of property that can be attached and possibly used to satisfy a judgment. However, keep in mind that personal jurisdiction over the debtor or garnishee is still required. To more easily obtain personal jurisdiction, take a cue from the holding in Hotel 71, and make sure you include a forum selection and consent to jurisdiction clause in favor of New York in your contract.
For a defendant, the Hotel 71 holding is not as friendly. If you have a client who lives and owns personal property (or is a garnishee of a defendant’s property) outside of New York, those assets are now far more susceptible to prejudgment attachment. If you want to keep a plaintiff from seizing your client’s out-of-state assets, the key is to prevent a New York court from obtaining personal jurisdiction over him/her. Most importantly, try to avoid New York friendly forum selection and jurisdiction clauses in contracts your client signs. Also, keep in mind that a New York court may obtain long-arm jurisdiction over your client in any of the ways listed in CPLR § 302 and the relevant case law.
Always remember that if you become involved in a lawsuit, please consult with an attorney before taking any actions with regard to the litigation.
1 2010 WL 519821 (Feb. 16, 2010).
2 A garnishee is either someone who is holding the owner’s property, owns property in which the defendant or debtor has an interest, or owes a debt to the defendant or debtor.
3 In New York, domicile is where a person physically resides, and intends to permanently remain. Kartiganer v. Koenig, 194 A.D.2d 879, 880, 599 N.Y.S.2d 312, 313 (3rd Dept. 1993). Residence, on the other hand, is established by physical presence, coupled with intent to stay for some length of time. Allen v.Handszer, 148 Misc.2d 334, 340-341, 560 N.Y.S.2d 593, 597 (N.Y. Sup. 1990).As such, residence is a broader concept than domicile. Consequently, a person may have many residences, but only one domicile. See Matter of Newcomb, 192 N.Y. 238, 84 N.E. 950 (1908).
4 12 NY.3d 533, 911 N.E.2d 825, 883 N.Y.S.2d 763 (2009).
5 Under Article 52, a creditor can commence a turnover or delivery proceeding against either the debtor by motion (§ 5225(a)) or against the garnishee by special proceeding (§ 5225(b)), wherein a separate judgment is entered against that person. In this procedure, the assets are then used to satisfy the judgment.
6 In Koehler, the court had personal jurisdiction over the Bermuda bank because it had a branch located in New York.
7 198 U.S. 215 (1905).
8 179 N.Y. 213 (1904).
9 The Court also noted that Harris overruled National Broadway only a year after it was decided.
10 39 N.Y.2d 670 (1976) (even if property interest has no present specific value, it can be considered “property” for attachment purposes, as long as it has potential economic value).
11 The “situs” or presence of intangible property follows the person who has an interest in it. In Hotel 71, it was the Court’s jurisdiction over the defendant/guarantor that brought the situs of his out of state LLC’s into New York.
12 See CPLR § 6201.