2010 Year-End Review: Judgment Recognition and Enforcement Post-Koehler

In the groundbreaking decision, Koehler v. The Bank of Bermuda Limited (“Koehler”),¹ that was issued by the New York Court of Appeals (the state’s highest court) on June 4, 2009, the court ruled that tangible property outside the jurisdiction of New York in the possession of a garnishee subject to New York jurisdiction could be ordered delivered into New York and be made the subject of judgment turnover proceedings. The ruling appeared very promising, especially for judgment-creditors in the maritime industry, as a means to hold judgment-debtors accountable for their debts even where they were difficult to locate. This was especially the case in circumstances where they could not avail themselves of security via a “Rule B” proceeding because the underlying claim was not maritime in nature or no assets could be found in New York.

Just one week after the Koehler decision was issued, realizing the significance of this ruling, we published our first Maritime Alert on this topic, which analyzed the Court of Appeals’ rationale and the potential ramifications going forward.² We considered the ruling “landmark” because the power to compel assets to be brought to New York when the underlying matter and/or judgment-debtor may not necessarily have had any other connection to New York provided judgment-creditors with breathtaking power.

Primer on the Position of the New York Court of Appeals in Koehler

In Koehler, the judgment debtor was not present in New York but the underlying judgment had been obtained as a default judgment in Maryland. As such, the judgment from another state in the United States was entitled to “full faith and credit” (a U.S. constitutional precept) by the New York courts.³ In other words, to recognize the Maryland judgment the New York court did not require in personam jurisdiction over the judgment-debtor in New York as the judgment was a U.S. domestic judgment. Given that circumstance, where there was jurisdiction over the garnishee bank in New York and the bank was a subsidiary of and agent for its foreign parent, the turnover order reached the assets overseas. While there still is some question whether the Koehler holding can be used against a judgment-debtor which has no presence in New York (be it personal presence or assets), there are decisions that have been issued in the lower courts in New York which suggest that a U.S. judgment may be entered upon a foreign judgment notwithstanding the lack of jurisdictional presence.

In retrospect, the Koehler decision’s holding that a court located in New York could order a garnishee bank located in New York to turn over property of a judgment debtor to a judgment creditor, even when the property is located outside of New York, was not entirely unexpected. The ruling was an extension of existing appellate law jurisprudence which recognized judgment debtors for whom it had jurisdiction over could be ordered to turn over out-of-state assets under New York law under penalty of law. In so holding, the Koehler court found that a judgment ordering the turnover of assets found outside New York state should be applied equally to judgment debtors and its garnishee(s). Nonetheless, the expansive power given to a judgment-creditor as a result of this decision is impressive.

Koehler Logistics

There are a handful of pertinent questions that come to mind concerning the judgment enforcement process post-Koehler. For example, can you use Koehler pre-judgment for security or is it only for judgments? What do you do with arbitration awards? How do you find the assets? The following is a brief discussion addressing the most popular questions.

• Pre-Judgment vs. Judgment. The Court of Appeals in Koehler addressed the differences in evidentiary proof and procedure with pre-judgment attachments and garnishments and post-judgment creditor proceedings. But the key holdings only concern post-judgment restraints of property in both maritime and non-maritime cases. For pre-judgment security, there are federal and state court options, including the continued use of Rule B attachments in maritime actions. Despite the U.S. Court of Appeals for the Second Circuit’s Rule B opinion in Shipping Corp. of India Ltd. v. Jaldhi Overseas PTE Ltd.,⁴ which ended the practice of attaching electronic fund transfers, Rule B attachments of a variety of other tangible and intangible property interests continue to be a very effective form of obtaining security. To paraphrase Mark Twain, reports of Rule B’s death have been greatly exaggerated. This point is addressed in our February 10, 2011 Maritime alert, 2010 Year-End Review: Rule B Attachments of Property Are Alive and Well.
• Arbitration Award or Judgment. Koehler relief can be obtained with an underlying arbitration award or judgment. In the case of an arbitration award, it will have to be converted to a U.S. judgment based on New York state statutory requirements or, in the case of a foreign arbitration award, the New York Convention. Under certain circumstances, it may be more beneficial to have the foreign arbitration award converted into a foreign judgment before seeking Koehler relief in the United States. These strategic considerations can be assessed depending on the seat of the arbitration and the length of time since the award was issued.

Foreign judgments can be converted to U.S. judgments under principles of international comity. Domestic judgments entered outside New York can be registered under fairly simple statutory procedures. Whether in federal court or state court, the state law, namely the Uniform Foreign Money Judgments Recognition Act,⁵ controls the procedure for judgment recognition and enforcement against a judgment debtor and/or its garnishees.

• Judgment Recognition by the Court. Judgment recognition seeking Koehler relief required the preparation of carefully-crafted applications to the court and forms/notices to banks or other parties. Having prepared and filed a number of Koehler enforcement actions, the process has become more efficient for new creditors going forward. Once the U.S. judgment is obtained, restraining notices are sent to banks or other parties which may owe a debt to the judgment-debtor. Service of the restraining notice precludes the garnishee from releasing property until further order of the court. These notices can be issued without a court order though a copy of the restraining notice and related documents must be served on the judgment-debtor. If the judgment-creditor is aware of specific property in the possession of a garnishee, the restraining notice is tailored to the property. However, restraining notices can be sent to targeted garnishees even though it is unclear if the judgment-debtor’s property in the garnishee’s possession is in New York or instead is held overseas.

A garnishee cannot refuse to accept service of a restraining notice. There is no requirement for a garnishee bank to even investigate the validity of a restraining notice served upon it. Once a garnishee is served, the garnishee can be held liable for releasing the assets to the judgment-debtor. This is what happened in the Koehler decision itself when the Bank of Bermuda released stock certificates in its possession notwithstanding the restraining notices putting the bank itself in harms way. Had the judgment-creditor not served the restraining notices on the bank, the point of Koehler would have been lost as the bank would not have been compelled to make the judgment-creditor whole. Of course, garnishees can resist discovery. Then the judgment-creditor would have to file a motion to compel or the garnishee can file a motion to quash.

Court Reaction to Koehler in Late 2009 and During 2010

Not surprisingly, banks, i.e., the garnishees most often targeted for debtor assets, have reacted with concern to the Koehler ruling. The thorniest legal issues raised by banks have not been the constitutionality of the ruling (which was predicted by the dissenting opinion in Koehler). Rather, the arguments of choice have been fact-based questions of whether the New York court has jurisdiction over a foreign bank holding a judgment-debtor’s assets by way of the bank’s contacts in New York and/or legal defenses of claimed bank secrecy laws overseas preventing the production of property information of the debtor. Garnishees with no assets tend to inform the judgment-creditor of such to avoid litigation, but those holding assets will refuse to respond and resist turning over the assets.

While banks were more or less comfortable playing a secondary role (to that of a defendant) in challenging aspects of Rule B attachment, they have been forced to play a prominent role in Koehler proceedings because their garnishee roles are being directly challenged. It is important to remember that disregarding a New York court order can lead to sanctions and seeking a blocking order in a foreign court where the property is located would not solve the issue of being held in contempt in New York. Thus, suits in New York federal and state court have been winding their way through the legal system. Reported decisions are few, because the issues in dispute continue to be litigated. And courts have not passed many times on the key defenses described above. Most of the cases citing Koehler do so in passing to explain the pre-judgment and post-judgment process under state law, to dismiss a judgment-creditor’s contention of applicability, or to foreshadow an issue that may be relevant once judgment is entered.

One Koehler case in September 2010 involving a shipping company briefly appeared in federal court before the matter was remanded back to state court. The shipping company confirmed a London arbitration award in federal court, judgment was entered, and then a separate state court petition was filed naming a number of banks where assets of the debtor may have been held. A few of the garnishee banks sought to have the case removed to federal court, relying on two federal statutes to confer jurisdiction. The federal court rejected the removal of the state court case to federal court and remanded the case to state court, where it remains pending.⁶

Just recently, a federal court judge from the Eastern District of New York issued a ruling with the most significant analysis of Koehler to date. The plaintiffs sought damages as a result of post-judgment restraining notices having been served on the plaintiffs’ out-of-state bank account in Florida (which they had opened in January 2008). They sued the law firm that issued the restraining notices and its national bank for complying with the attorney-issued restraining notice. After a default judgment had been issued against the plaintiffs in New York (they resided in New York and maintained a residence in Florida), the law firm attempted to collect on the default judgment by issuing a restraining notice on the bank. The only bank account with assets of the plaintiffs was in a Florida branch of the national bank. Complying with the restraining notice, the bank restrained these funds and provided notice to the plaintiffs of its action.

Among other arguments, the plaintiffs claimed that in honoring the restraining notice seeking to restrain property outside of New York, the defendants violated their due process rights. In rejecting the argument, the court cited Koehler and stated “the case law is clear that a restraint on out-of-state property is both permissible under CPLR Section 5222 and constitutional.” In so holding, the court noted the national bank has branches within New York and therefore conducts business in New York which subjects the bank to the jurisdiction of New York courts. As such, it was permissible for the bank to honor the restraining notice served on it. The court also rejected the due process claim that the judgment debtor was constitutionally entitled to notice and the hearing prior to a garnishment. Instead, the existence of the underlying judgment is sufficient notice in itself that subsequent actions will be taken to restrain any property the creditors may find.⁷

The case is significant because it is the first decision to address the validity of out-of-state restraints post-Koehler. It also reminds banks and law firms of their obligations when treading in this new legal landscape.

Interestingly, a decision has been issued by a judge outside of New York which supports the Koehler judgment reasoning. A Florida state court relied on the extraterritorial property concepts in Koehler when supporting similar actions under Florida law. The court found that once it had jurisdiction over the garnishee and jurisdiction over the defendant, in the context of a wage garnishment it could order the garnishee to pay a portion of the judgment-debtor’s wages to a judgment-creditor. This was the case even though the defendant’s wage was paid to him in another state (Illinois). In so holding, the Florida court found New York’s Koehler ruling “persuasive.” Ordering the monies brought from Illinois to Florida was proper with the jurisdictional predicates realized.⁸

We will know soon if the Florida court ruling is an outlier or whether other courts will find its reasoning persuasive. We believe the latter. And the more courts that do rule in favor of judgment-creditors, the weaker the due process concerns reflected in the minority opinion in Koehler will be to subsequent judges during the judgment enforcement process. State and federal courts in the United States strongly support judgment enforcement in the context of both foreign and domestic judgments. Creditors who can avail themselves of the leading judgment enforcement rights in New York will have a leg-up in the asset recovery process.

Holland & Knight – Guiding Clients on Koehler Matters

Our experience with judges and opposing parties during the end of 2009 and throughout 2010 has developed our capabilities in this emerging field with regard to the logistics related to bringing Koehler-type actions as well as strategic options available to a judgment-creditor. Further, with each month that passes, we accumulate further information on the courts’ application and treatment of Koehler in both New York and, most recently, beyond New York.

Legal and Logistical Aspects of Vessel Arrests and Attachments This webinar was held on January 26, 2011.

Speakers: Michael J. Frevola, Partner in Holland & Knight’s Maritime Practice Group

G. Robert Toney, Chairman of National Liquidators/National Maritime Services, Inc.

Use this link to get copies of both speakers’ PowerPoint presentations in PDF format (for easy printing) and follow along with the webinar.

¹ 12 N.Y.3d 533 (2009).

² Holland & Knight Maritime Alert, New York Court Issues Landmark Decision on Judgment Enforcement (June 12, 2009).

³ 28 U.S.C. § 1963 provides the procedure for registering any U.S. federal court money judgment in any other judicial district, such as the U.S. District Court for the Southern District of New York.

⁴ 585 F.3d 58, 66-67 (2d Cir. 2009).

⁵ C.P.L.R. Article 53.

⁶ Samsun Logix Corp. v. Bank of China, 2010 WL 3817544 (S.D.N.Y. Sept. 9, 2010).

⁷ McCarthy v. Harris, et al., -- F. Supp. 2nd -- , 2011 WL 79854 (E.D.N.Y. Jan. 11, 2011).

⁸ S. Account Serv., Inc. v. Rodriguez, 2010 WL 2832869 (Fla. Co. Ct. July 16, 2010).