Koehler v. Bank of Bermuda Three Years Later: Fewer Places to Hide

To appreciate the impact of Koehler, imagine a counseling session between a client (“Mr. Bermuda”) and his Bermudian solicitor before Koehler:

Solicitor: I have reviewed the court papers you have given me. They say a Mr. Koehler has sued you in a Maryland federal court in the United States. Do you have any assets in Maryland?
Mr. Bermuda: No.
Solicitor: Do you have any assets in the United States?
Mr. Bermuda: No.
Solicitor: What connection does this lawsuit have to Maryland or even to the United States?
Mr. Bermuda: None that I can see. Mr. Koehler and I had a business venture in Nevis that went bad.
Solicitor: Unless you have any assets in the United States, I don’t see any reason to respond to these papers. It sounds like the Maryland court does not have jurisdiction over you. Let’s make him come to Bermuda and sue you here. Our courts are plenty fair. In fact, we may even be able to home-cook him here.
Mr. Bermuda: Sounds good to me.

Before Koehler, the solicitor’s advice would have been sound. The case started routinely in 1993. Lee Koehler obtained his default judgment in Maryland and had it domesticated in a New York federal court under Article 52 of the New York Civil Practice Law and Rules (CPLR). Mr. Koehler then brought collection proceedings in New York against the Bank of Bermuda as a stakeholder of stock certificates belonging to Mr. Koehler that were in the possession of a branch of the same bank in Bermuda. After 10 years of litigation, the court ordered the bank to turn over the certificates, but the bank then revealed that it no longer had them in its possession.

In 2005, the Southern District of New York dismissed Mr. Koehler’s action against the bank, ruling that the stock certificates at issue were outside of the court’s jurisdiction and could not be reached in the New York action. The U.S. Court of Appeals for the Second Circuit “certified” Mr. Koehler’s case to the New York State Court of Appeals, which ruled (4–3) in June 2009 that the state’s courts may order New York branches of international banks to turn over a judgment debtor’s funds located in other states (or other countries) to satisfy judgments registered in New York, even default judgments and even if the creditor, debtor, underlying dispute, or the asset all had nothing to do with New York. A New York court may order the garnishee over whom there is jurisdiction to turn over the assets wherever they may be located, even when the judgment debtor has no assets in New York. Koehler, 12 N.Y.3d at 541.

Following that ruling, the Second Circuit remanded Koehler to the Southern District of New York for further proceedings. There the district court records go silent. Presumably, the case then settled, at long last.

The dissent in Koehler expressed policy concerns that New York would become a collection venue for anyone who wanted to collect a judgment against a debtor—regardless of whether or not there are any jurisdictional ties to New York for either party—arguing that this could result in an increase in the volume of foreign judgments domesticated in New York and a consequent increase in executions on assets held by banks with New York offices, regardless of the location of the debtor’s assets.

Koehler, however, is not the only example of New York encouraging the use of its courts for dispute resolution unrelated to New York. For example, New York’s General Obligations Law §5-1401 permits parties to choose a New York forum for disputes involving over $250,000, regardless of the parties’ connections to New York. Should international commercial (and maybe other) creditors with large debts owed to them by solvent debtors, after due process and final judgment, be required to jump through hoops to collect final judgments? Should it take 16 years of additional litigation (and countless litigation dollars) after judgment, to collect on a debt? Do Rule 104 of the CPLR (providing that the CPLR “shall be liberally construed to secure the just, speedy and inexpensive determination of every judicial proceeding”) and Rule 1 of the Federal Rules of Civil Procedure (providing that the FRCP “should be construed and administered to secure the just, speedy, and inexpensive determination of every action and proceeding”) mean anything? Isn’t international commerce facilitated by more efficient judicial mechanisms for judgment collections? If a state permits and even encourages international financial institutions to do business within its borders, what would be wrong with the state deciding, as a policy matter, that it would enhance the state’s position in international commerce to facilitate collections, as New York seems to have done? One need not go as far as one commentator to think something was wrong with the system before Koehler. See Gluck, “National (and Perhaps Global) Judgment Enforcement through New York’s Banks?,” Judgment Marketplace, March 6, 2012 (encouraging international collections could create an appropriate and desirable “cottage industry” in New York, resulting “in well-paying jobs and new revenue for the under-funded court system”).

Since Koehler, there have been numerous cases and several legislative efforts both to narrow and to broaden its holding. There are, however, relatively few court decisions.

Domestication of Foreign Country Judgments
Koehler can be seen as the latest step in the increasing availability of New York courts to provide remedies for international disputes. New York has a long-standing tradition of recognizing and enforcing non-U.S. money judgments (see CPLR Art. 53). The New York Court of Appeals held that personal jurisdiction over a judgment debtor is not needed for domestication of a non-U.S. judgment and execution on the resulting New York judgment, as long as there is jurisdiction over the garnishee. Koehler, 12 N.Y.3d at 541; see alsoMcCarthy v. Wachovia, 759 F. Supp, 2d 265, 275 (E.D.N.Y. 2011).

Aside from international comity and foreign-relations considerations that are addressed in those lines of cases, there should be no serious due-process concerns arising out of Koehler, inasmuch as domestication of a foreign judgment (at least in non-default situations) does not involve the merits of a claim, but merely the recognition of an existing debt after a judicial or an arbitral determination. Once a foreign-country judgment is domesticated, remedies are available as they would be for any other New York judgment, with the limited exception of certain claims against sovereigns.

Post-Judgment Discovery
Koehler involved recognition of a sister-state judgment under the CPLR, but post-judgment discovery and collections are the same for recognition of either Article 52 sister-state judgments or Article 53 foreign-country judgments. Once a judgment is domesticated in New York, post-judgment discovery, execution, and other enforcement may begin. Koehlerinvolved post-judgment restraining notices under Article 52, rather than pre-judgment attachments under Article 62.

Koehler makes a clear distinction between the jurisdictional requirements for pre-judgment attachment and post-judgment collection. In an Article 62 proceeding, there must be in remjurisdiction over the assets themselves or personal jurisdiction over a debtor to attach the assets.

Before Koehler, only judgment creditors with serious prospects of finding judgment debtors’ assets in New York in the near term wanted to go to the expense of domesticating foreign judgments in New York. This changed dramatically after Koehler. Since then, a number of non-U.S. judgment-enforcement proceedings have been filed in New York by judgment creditors, especially against international bank stakeholders with offices in New York. The paucity of reported decisions, however, suggests that once judgments are domesticated in New York, debtors and creditors find ways to resolve their cases, perhaps encouraged by innocent stakeholders who do not wish to become embroiled in expensive and intrusive discovery and motion practice.

For post-judgment restraint or turnover of property belonging to the debtor, the Koehler court held that all that is necessary is personal jurisdiction over the garnishee that is in possession of the property. The court found that a garnishee may be ordered to turn over out-of-state assets even if there is no jurisdiction over the original debtor. Koehler, 12 N.Y.3d at 540–41. That being the case, there are only limited grounds for resisting discovery of such out-of-state assets.

In a recent case, EM, Ltd v. Republic of Argentina,  decided on August 23, 2012, the U.S. Court of Appeals for the Second Circuit has now decided that the New York branches of Bank of America and Banco de la Nacion Argentina must comply with subpoenas served on them for information about any assets owned by Argentina that they might hold. The Second Circuit also refused to limit discovery of the banks based on claims of sovereign immunity by the debtor. The appellate court (1) pointed out that discovery is distinguished from attachment, and “does not implicate Argentina’s immunity from attachment” and (2) held that the banks themselves had no immunity claims. This ruling opens up the door for creditors to discover through non-party banks information that might otherwise be unavailable about sovereign debtors and their assets, at least in the Second Circuit.

Because Koehler is based on an interpretation of a state statute, and because the New York State Court of Appeals has the last word on interpretation of New York state statutes, federal courts are theoretically without power to overrule Koehler. Thus, there should be few grounds to resist Koehler turnover orders, with two possible exceptions. First, a federal court may still take the position that it was only a New York state statutory interpretation question that was “certified” from the federal to the state appellate court in Koehler. That would leave it open to defendant-judgment debtors and stakeholder institutions to argue that there are constitutional due-process arguments still available to them, such as those raised in the “minimum contacts” line of cases following International Shoe Co. v. Washington, 326 U.S. 310 (1945). Second, the federal courts can, and some have tried to, distinguish Koehler by using New York’s “separate entity” doctrine.

The Separate-Entity Doctrine
One line of post-Koehler cases has limited the perceived negative effects of Koehler on stakeholding international financial institutions by raising the “separate entity rule.” Koehlerdoes not purport to directly abrogate this rule, a judge-made doctrine based on banking and accounting procedures that existed in the pre-computer era. This rule characterizes each branch of a bank as a separate, independent entity and holds, as a matter of law, that each branch should be considered an individual entity, without access to assets of other branches of the same bank to avoid an “intolerable burden” on the banking industry due to the difficulty of transmitting information between branches at the time. Cronan v. Schilling, 100 N.Y.S.2d 474, 476 (N.Y. Sup. 1950), aff’d, 282 A.D. 940 (1st Dep’t 1953). As a factual matter, of course, this has probably not been true since the advent of modern computer systems.

Even before Koehler, the separate-entity rule has been found to be a basis for refusal to allow a judgment creditor to access funds from a non-New York bank through attachment or execution on a New York branch. See Lok Prakashan Ltd. v. India Abroad Publ’ns, Inc., 2002 WL 1585830, at *2 (S.D.N.Y 2002).

In Koehler, after many years of litigation, the bank branch that was purported to hold the assets in Bermuda did submit to the jurisdiction of the New York courts, mooting the question of whether or not there was jurisdiction over the separate branch of the bank. Thus, Koehlerdid not address the separate-entity issue.

Post-Koehler Cases
Cases following Koehler are split on whether or not Koehler is in conflict with the separate-entity rule. J.W. Oilfield v. Equipment, LLC. V. Commerzbank AG, 764 F. Supp. 2d 587, 595 (S.D.N.Y 2011) states that although the separate-entity rule may still apply to pre-judgment attachment, “New York courts will not apply the separate entity rule in post-judgment execution proceedings,” holding that the court had the authority to order the bank to turn over the assets to the New York branch. The presence of a branch of the bank in New York was found sufficient to grant “general jurisdiction over the entire entity.” Eitzen Bulk A/S v. State Bank of India, 2011 WL 4639823 at *4 (S.D.N.Y 2011) also cites Koehler for the same proposition.

Not all post-Koehler cases agree with this analysis. Samsun Logix Corp. v. Bank of China,2011 WL 1935954 (N.Y. Sup. 2011) and Parbulk II AS v. Heritage Maritime, SA, 935 N.Y.S.2d 829 (N.Y. Sup. 2011), both addressing post-judgment execution after Koehler, found that Koehler had not overturned the separate-entity rule. Following Samsun and Parbulk, Shaheen Sports, Inc. v. Asia Ins. Co., 2012 WL 919664 (S.D.N.Y. 2012), one federal district court recently denied a turnover order under CPLR 5225(b), acknowledging Koehler, but invoking the separate-entity rule. Based on the complicated nature of the issues and the “lack of clarity permeating this area of the law,” the court encouraged the plaintiff to appeal the decision, Shaheen, at *9, although it appears that the plaintiff did not do so.

International financial-institution advocates and others have also attempted, unsuccessfully, to deal with Koehler by devising legislative solutions to problems it presents them. Those efforts have thus far failed in the New York state legislature. See H.B. A11109 and S.B. S7972 (N.Y. May, 2010).

Conclusion
As evidenced by the “separate entity” cases, New York courts have shown considerable sympathy toward stakeholding international financial institutions that may need to bear the additional work and expense imposed on them after Koehler. Indeed, many stakeholders apparently have customer agreements that provide for appropriate cost-shifting so that financial institution should not need to bear the cost of defending defaulting debtors against creditors’ legitimate efforts to enforce their rights, including discovery costs. It also seems unlikely that the problems some courts are addressing by invoking the separate-entity rule remain as actual problems given centralized record keeping in use in modern financial-services institutions. Other problems remain, however, such as foreign banking laws that are inconsistent with New York law, which could place multi-jurisdictional institutions in double jeopardy. Those are issues that courts and legislatures should resolve, keeping in mind the actual business and technical realities of global commerce and finance as they exist today.

Keywords: business torts litigation, judgment, domesticate, discovery, Koehler, debtor, creditor, collection, bank