No. M18-302 (CSH).
March 8, 2005
MEMORANDUM OPINION AND ORDER
In this longstanding dispute which began as a garnishment proceeding, Lee N. Koehler seeks a writ of execution against The Bank of Bermuda Limited ("BBL"), a purported garnishee of A. David Dodwell. Koehler, a Pennsylvania resident, attempts to collect on an unsatisfied judgment in excess of U.S. $2 million he obtained against Dodwell, a Bermudian resident. The background and facts of this case have been recounted at length in prior opinions, familiarity with which is assumed. The two most recent opinions in this case provide the most helpful background in shaping the context of this present opinion. See Koehler v. The Bank of Bermuda Ltd., No. M18-302 (CSH), 2004 WL 444101 (S.D.N.Y. Mar. 10, 2004) (" Koehler I"); and Koehler v. The Bank of Bermuda, Ltd., No. M18-302 (CSH), 2004 WL 1555116 (S.D.N.Y. July 9, 2004) (" Koehler II").
In the most recent opinion, I granted BBL's motion for partial summary judgment, and denied Koehler's motion to add a fraudulent conveyance claim against BBL. Koehler II, at *3. In that opinion, I also made note, sua sponte, of an Order of the late District Judge Robert J. Ward. Sitting in Part I on October 29, 1993, Judge Ward signed an ex parte Order which directed that:
The Bank of Bermuda Limited, Respondent Garnishee, deliver to Lee N. Koehler, Judgment Creditor, any stock certificates owned by A. David Dodwell, Judgment Debtor, whose value equals $2,096,343.00 and which is an amount sufficient to satisfy said judgment or to pay over to Lee N. Koehler, Judgment Creditor, any debt owed to A. David Dodwell, Judgment Debtor, by the Bank of Bermuda Limited, Respondent, up to the sum of $2,096,343.00.
Noting that BBL disregarded Judge Ward's Order when it returned to Dodwell the post-recapitalization Class A and Class D stock certificates, I nonetheless did not hold BBL in civil contempt for violating the Order, reasoning that BBL "was not guilty of that failure to exercise reasonable diligence in compliance" thereof. Id. at *4.
Having reached that conclusion, I then raised the following questions:
(1) Does this Court have the power to order BBL, on pain of contempt, to deposit in the Registry of this Court in an interest-bearing account a sum equal to the then-existing value of the share certificates thus transferred by BBL to Dodwell, that sum to stand as security for any final judgment that Koehler as judgment creditor may ultimately obtain against BBL as garnishee?
(2) If the Court has that power, should it exercise it?
(3) Are there any other remedies available to Koehler in this Court in the present circumstances of the case?Id. at *6.
Those questions, particularly the first, arose because the stock certificates in question currently are located, and have always been located, in Bermuda — outside this Court's territorial jurisdiction. This is a crucial fact, because I must consider not only what power and authority I have at present to effectuate Koehler's judgment, but also what power and authority Judge Ward had at the time he issued his Order. I shall therefore consider whether Judge Ward had the authority to order BBL to transfer Dodwell's shares to Koehler at the time he issued his Order, and then proceed to the remaining enumerated questions above.
However, prior to doing so, I must consider BBL's allegation, found in its Reply Memorandum Pursuant to the Court's July 6, 2004 Order, Aug. 26, 2004, at 7-11, that Koehler had entered into a settlement with Dodwell on the underlying claims which also extinguished Koehler's claims against BBL. That suggestion led to further discussion during oral arguments as well as further briefing. Because I conclude that Koehler's settlement with Dodwell eliminates his claims against BBL, I shall consider the issue of settlement first.
In his own memorandum and accompanying exhibits, Koehler produced evidence that suggested that BBL had entered into an Escrow Agreement with BBL, directing that Dodwell's said shares would be placed in escrow until a time when BBL's litigation with Koehler was resolved. However, during oral arguments BBL's present counsel expressed his opinion that no Escrow Agreement was ever signed or effectuated by the parties. That conclusion is corroborated by the draft Escrow Agreement, which Koehler submitted with his memorandum, which is itself unsigned and undated. For these reasons, I shall not consider the submitted Escrow Agreement, which cannot reasonably be considered anything more than a draft. Likewise, I do not accept the suggestion that any such Escrow Agreement was ever executed between BBL and Dodwell.
In addition to Koehler's present garnishment petition against BBL before this Court, Koehler had a case ongoing against Dodwell in the United States District Court for the District of Maryland. That is the district, as will be recalled, in which Koehler obtained his original default judgment against Dodwell. See Koehler v. Dodwell, Civ. No. Q-92-2982 (D. Md. filed Oct. 21, 1992). Koehler's complaint against Dodwell arose out of budget overruns encountered by Windward Properties in its attempts to renovate the Nisbet resort in Nevis. See Koehler I, at *4. That is the default judgment against which Koehler presently seeks a writ of execution from this Court.
Koehler also asserted separate claims against Dodwell and The Reefs pending in the Circuit Court for Baltimore County; claims which arose out of Dodwell's recapitalization of his shares in The Reefs. Those claims, along with Koehler's attempts to obtain payments from the default judgment, led to continued litigation in Maryland.
According to a letter written by Brian G. West, Esq., counsel for Koehler, to Thomas C. Beach, III, Esq., counsel for Dodwell and The Reefs, dated Feb. 9, 2004, Dodwell owed Koehler $2,896,263.67, a figure which includes the original Maryland default judgment plus accumulated interest. In addition, the letter stated that Koehler was due $571,548 for his claim against The Reefs, for a total of $3,467,811.67. Whether these were the precise amounts due five months later at the time of the settlement is not dispositive. They serve as useful approximations.
In July 2004, Koehler settled his claims against Dodwell and the related corporate entities. A Settlement Agreement designated "Draft #7" was signed by the parties to that Agreement on July 12, 2004. That document recites payment to Koehler totaling $475,000. $400,000 was applied in settlement of Koehler's claims against The Reefs and Dodwell in the Baltimore County action, in which Koehler had initially alleged that $571,548 was due. The remaining $75,000 was applied to the $2.9 million default judgment Koehler had obtained against Dodwell.
¶ 1.A. of the Settlement Agreement specified that the "Releasors" are "Koehler and his heirs, personal representatives, and assigns." The "Releasees" are "Dodwell, Reefs, Windward, IRR [a corporate entity named Island Resorts Reservations Limited], and their respective employees, directors, officers, representatives, agents, successors, subsidiaries, affiliates, and attorneys." That paragraph went on to provide that "`Releasees' shall not include the BOB Group. . . ." That is a reference to the Bank of Bermuda Group, which includes BBL.
¶ 2 of the Settlement Agreement required Koehler as the Releasor to give:
Release of and from any and all claims, actions, proceedings, garnishments, of any nature whatsoever against Releasees, known or unknown, worldwide, from the beginning of time to the date of the release, and in the future to the extent such claims or proceedings arise out of events occurring prior to the date of this Settlement Agreement, to the full extent permitted by law, except however, that the release to Dodwell shall not in any way constitute a release of the Default Judgment, nor is it intended in any way [to] impair or prejudice Koehler's claims against BoB in New York. . . .
¶ 2.A. of the Settlement Agreement provided:
Subject to #5, Releasors covenant and agree: (i) to refrain from taking any action to collect, execute upon, or enforce all or any part of the Default Judgment against Dodwell or against any other person, entity, asset, or thing, with the exception that Releasor may pursue claims against BOB as discussed in paragraph 5 below, and (ii) hereafter not to record or re-record the Default Judgment in any judicial or governmental, public, or commercial record anywhere in the world, except as required to pursue the permitted actions against BoB.
Finally, ¶ 5 of the Settlement Agreement, referred to in ¶ 2.A. cited above, provided:
The Releasees acknowledge that there is currently pending in United States District Court for the Southern District of New York a garnishment proceeding between Koehler and BOB. Nothing in this Settlement Agreement shall be construed so as to prohibit or preclude or otherwise limit Koehler from continuing to prosecute such New York action against the BOB Group, or adding claims or causes of action or defenses against the BOB Group therein, except however that Koehler shall not seek, obtain, assume, acquire by assignment or operation of law or fact, or exercise any rights, claims or causes of action which BOB has or may have against any Releasee now or in the future.
Thus, the intent of the parties clearly appears from the face of the agreement. Koehler released Dodwell, Windward, IRR, and The Reefs from any and all liability, except that "the release to Dodwell shall not in any way constitute a release of the [Maryland] Default Judgment." Settlement Agreement ¶ 2. With respect to that judgment, Koehler makes a covenant not to sue Dodwell to enforce the Default Judgment against him, while keeping the judgment itself intact. See id. at ¶ 2A. Koehler took this course of action in an attempt to preserve his claims against BBL.
Ordinarily, a settlement between judgment creditor and judgment debtor eliminates the right of the judgment creditor to pursue claims against a judgment debtor's garnishee. This is because the settlement removes the underlying debt upon which the judgment creditor's claim against the garnishee is based. See, e.g., 6 Am. Jur. 2d Attachment and Garnishment § 418:
It is generally held that a valid judgment against the principal defendant, in force and effect, is essential to authorize a judgment against the garnishee, and that where there is no valid judgment against the principal defendant, there is no jurisdiction to render any judgment against a garnishee. Where, by expiration of time, or by reversal or other cause, a judgment against the defendant in the main action has ceased to be of force and effect, the garnishment proceedings lose their vitality, and a judgment therein against the garnishee is as completely without force and effect as the judgment against the defendant.
This principle has been reaffirmed in the caselaw. See Allard v. DeLorean, 884 F.2d 464 (9th Cir. 1989) (holting that trustee's claim against recipient of funds from allegedly fraudulent conveyance was moot due to trustee's settlement of underlying action against debtor); Baltimore Ohio R.R. Co. v. Equitable Bank, N.A., 550 A.2d 407, 411-12 (Md.Ct.Spec.App. 1988) (citing to an earlier version of the American Jurisprudence section quoted above); State of Rio De Janeiro v. E.H. Rollins Sons, Inc., 299 N.Y. 363, 367 (1949) ("A creditor's bill attacking his debtor's transfer is adjective and ancillary only, to the creditor's right to collect his original debt.").
However, Koehler contends that his settlement with Dodwell, et. al., falls under an exception to this general rule, an exception known as the "reservation of rights" doctrine, and described in a case arising out of the Court of Special Appeals of Maryland, Chicago Title Ins. Co. v. Lumbermen's Mut. Cas. Co., 707 A.2d 913 (Md.Ct.Spec.App. 1998).
In Chicago Title, a title insurance company filed suit against its insurance agent, the agent's principal officer, and the agent's surety company, after the agency allegedly misappropriated funds in escrow. At approximately the same time, a separate party, the agency's insurance company, filed suit against the title company, the agency, and the principal officer, seeking a declaratory judgment that it was not liable for any claims the title insurance company might have against the agency and officer.
During the pendency of the suits, four of the five parties reached a mediated settlement with regard to their respective claims — the title company, agency, officer, and insurance company.
The surety company did not participate in the settlement. Id. When it was made aware of the settlement, it filed a motion for summary judgment, arguing that the title company's release of the agency and officer also discharged the surety company from liability. In opposing the motion, the title company argued that the terms of the settlement agreement manifested its clear intent to preserve its claims against the surety. When the lower court found in favor of the surety, the title company appealed.
The Court of Appeals held that while, as a general rule, the release of the principal discharged the obligations of the surety, an exception lay if the parties intended not to release the surety from liability, and that intention was clearly expressed in the settlement agreement. In such a case "the release is viewed only as a covenant by the creditor not to sue the principal," and "the creditor can pursue the surety, and the surety — not the creditor — may then recover from the principal." Id. at 921.
While the Maryland Court of Appeals held that this exception, known as the "reservation of rights" doctrine, did not allow the creditor in Chicago Title to pursue claims against the surety — for the reason that the settlement agreement did not "expressly reserve the creditor's rights against the surety," id. at 922, it is nevertheless clear from this case that Maryland has adopted the doctrine into its caselaw. The rule is well described in the Restatement of Security § 122 (1941), cited in Chicago Title, 707 A.2d at 921, which states:
Where the creditor releases a principal, the surety is discharged, unless (a) the surety consents to remain liable notwithstanding the release, or (b) the creditor in the release reserves his rights against the surety.See also, Restatement of Security § 122, Comment (d), cited in Chicago Title, 707 A.2d at 921:
Where the creditor releases the principal but reserves his rights against the surety, this is construed as a covenant not to sue the principal. Historically, the covenant not to sue did not prevent a suit in violation of the covenant, although a liability might be incurred by such a suit. The creditor, by a release with reservation of rights against the surety, was in effect notifying the principal that, in spite of the release, the surety might pay as the result of compulsion or voluntarily and that the principal would then be liable to reimburse the surety. Since the release was regarded as only a covenant not to sue, even the surety's right of subrogation was technically preserved. The reservation of rights showed that the creditor had no intention to release the surety. The principal had no cause for complaint since, having accepted his release with the reservation, he necessarily accepted the consequence that the liability might still be enforced against him through action by the surety.
What both Chicago Title and the Restatement make clear is that in order for the "reservation of rights" doctrine to apply, the party against whom the creditor is seeking judgment must be a surety or guarantor of the principal. As revealed in the Restatement comment quoted above, the principal who settles with the creditor "necessarily accept[s] the consequence that the liability might still be enforced against him through action by the surety." Id. Therefore, if a judgment creditor enters into a settlement with the judgment debtor, and after which time, guided by the reservation of rights doctrine, continues to pursue a claim to judgment against the surety, the surety is then entitled to seek indemnification from the judgment debtor. The surety's right to indemnification arises out of the surety contract that it entered into with the judgment debtor (its principal), which governs the rights and obligations of the parties. This principal/surety relationship is described in Chicago Title:
A contract of suretyship is a tripartite agreement among a principal obligor, obligee, and a surety. This contract is a direct and original undertaking under which the surety is primarily or jointly liable with the principal obligor and therefore is responsible at once if the principal obligor fails to perform. A surety is usually bound with his principal by the same instrument, executed at the same time, and on the same consideration. . . .
Ultimate liability rests upon the principal obligor rather than the surety, but the obligee has a remedy against both. . . .Chicago Title, 707 A.2d at 550, citing General Motors Acceptance Corp. v. Daniels, 303 Md. 254, 259 (1985).
It is clear then, why a settlement with the creditor may be "worthless insofar as the principal debtor is concerned." Chicago Title, 707 A.2d at 913. For, "if the creditor is successful against the surety, then the surety, in turn, may proceed to recover against the principal, notwithstanding the creditor's earlier release of the principal." Id.
In the present case, Koehler alleges that BBL is the proper garnishee of Dodwell. Whether or not this is so is irrelevant as far as the reservation of rights is concerned, because there is no evidence indicating that BBL is the surety or guarantor of Dodwell. There was no such contract between BBL and Dodwell. It is not evident that BBL agreed to act as guarantor or surety to Dodwell, nor is it evident that Dodwell assumed a contractual obligation to repay BBL in the event Koehler obtained a judgment against BBL.
Other courts who have considered the "reservation of rights" doctrine have done so strictly in a surety or guarantor relationship. See Federal Land Bank of Baltimore, Inc. v. Esham, 406 A.2d 928 (Md.Ct.Spec.App. 1979) (giving effect to creditor's clear manifestation to reserve its rights against party described by court as either "co-principal" or "guarantor); Compagnie Financiere de Cic et de L'Union Europeene v. Merrill Lynch, Pierce, Fenner Smith Inc., No. 93 Civ. 3004 (LBS), 1997 WL 626393 (S.D.N.Y. Oct. 8, 1997) (citing the Restatement of Suretyship and Guaranty (1996) and noting the "potentially illusory nature of a `release' of the borrower by a lender when rights are reserved against a guarantor who then seeks indemnification against that borrower" (emphasis added)); Will H. Hall Son, Inc. v. Ace Masonry Constr., Inc., 677 N.W.2d 51 (Mich.Ct.App. 2004) (surety); Hendershot v. Charleston Nat'l Bank, 563 N.E.2d 546 (Ind. 1990) (surety); Montana Bank of Livingston v. Old Saloon, Inc., 766 P.2d 878 (Mont. 1988) (surety); Gebrueder Heidemann, K.G. v. A.M.R. Corp., 688 P.2d 1180 (Idaho 1984) (guaranty); Griffen Wellpoint Corp. v. Englehardt, Inc., 414 N.E.2d 941 (Ill.App.Ct. 1980) (surety); Gholson v. Savin, 31 N.E.2d 858, 862 (Ohio 1941) ("In Ohio, as elsewhere, the rule prevails that when a lease is assigned by the lessee, the assignee becomes the principal obligor for the payment of the rent thereafter accruing and the future performance of the covenants, and the lessee assumes the position of surety toward the lessor.").
By contrast, no "reservation of rights" case cited by Koehler, nor any that I have found in my own research, has applied the exception in the context of a garnishment proceeding.
Koehler suggests that BBL is nevertheless jointly liable with Dodwell due to its July 1, 1994 transfer of Dodwell's stock in The Reefs, in disobedience of Judge Ward's prior Order. Koehler's assertion inappropriately fuses two wrongdoings into one. Koehler obtained a default judgment against Dodwell — and Dodwell only — in the District of Maryland in 1992. The following year, Judge Ward issued an Order in the Southern District of New York requiring BBL to transfer to Koehler stock certificates in its possession but belonging to Dodwell, in execution of the Maryland judgment. This was an Order which BBL subsequently disobeyed. Nevertheless, BBL's alleged negligence, or fraudulent conveyance, arising out of its disobedience of Judge Ward's Order does not make BBL jointly liable with Dodwell in the underlying Maryland proceeding, a case in which BBL was never a party. Therefore, with regard to the underlying Maryland default judgment, BBL's liability is vicarious at best, not joint.
In addition, Koehler asserts that his settlement agreement with Dodwell is a nudum pactum, and therefore could not release BBL from liability — a contention that is without merit. Koehler cites Eastover Co., Inc. v. All Metal Fabricators, Inc., 158 A.2d 89 (Md. 1960) for the proposition that "payment of a less sum of money than the whole debt, without a release, is no satisfaction of the plaintiff's claim. A mere agreement to accept less than the real debt, would be nudum pactum." Id. at 92, citing Hardey v. Coe, 5 Gill 189, 196-197 (Md. 1847) (emphasis added). Koehler asserts that his settlement agreement with Dodwell was not actually a release of judgment but a covenant not to sue, and that "under Maryland law it is doubtful said covenant is of any legal effect." Koehler's Memorandum of Law Involved in the July 12-13, 2004 Proceedings, Dec. 13, 2004, at 7.
Certainly, this would be unhappy news to Dodwell. However, Dodwell may be rest assured that with respect to his settlement entitlements, a covenant not to sue is materially the equivalent of a release of judgment:
A covenant not to sue a debtor or to forbear perpetually has from early times been held a bar to the original cause of action. This is to avoid circuity of action; for, if the plaintiff in the original action should recover, the defendant could recover precisely the same damages back for breach of the covenant to forbear or not to sue. Instead of permitting the double action, the court produces the same effect more simply by giving judgment for the defendant in the original action.Roe v. Citizens Nat'l Bank, 358 A.2d 267, 269 (Md. Ct. Spec. App. 1976), quoting Williston on Contracts § 338.
All technicalities aside, Koehler's covenant not to sue Dodwell serves as a sufficient release and satisfaction of Koehler's claims against Dodwell, and is not a nudum pactum.
For these reasons, I hold that the settlement between Koehler and Dodwell discharges any rights Koehler may have had to pursue claims against BBL, Dodwell's purported garnishee. Despite the intent of the parties, the "reservation of rights" doctrine does not apply in this case, as a matter of law.
Even if the "reservation of rights" doctrine could be said to apply to BBL as purported garnishee, Koehler's claims against BBL would nevertheless fail for the reason that this Court has no in rem jurisdiction over Dodwell's share certificates, which underlies Koehler's remaining claims against BBL. Moreover, I find that the Court had no jurisdiction over those certificates at the time of Judge Ward's Order. The remainder of this opinion deals with this question at length, and considers those questions I enumerated in my prior opinion and directed the parties to answer in their briefs.
BBL contends that this Court cannot order it to deposit into the Registry a money payment equivalent to the value of Dodwell's share certificates for the same reason that Judge Ward could not require BBL to transfer Dodwell's shares to Koehler — because this Court does not have in rem jurisdiction over the shares in question. Koehler opposes this proposition for two reasons — first, Koehler contends that the shares in question are an intangible good whose situs does lie within the jurisdiction of this court, and second, that personal jurisdiction over BBL itself is sufficient to establish in rem jurisdiction over Dodwell's shares.
It is undisputed that the shares in question were always located in Bermuda. The Reefs is a Bermuda corporation that owns and operates a resort in Bermuda. When BBL first took possession of certificates representing Dodwell's shares, it did so in Bermuda, pursuant to a Memorandum of Deposit governed by Bermuda law. BBL asserts that at all times during its possession, the shares and certificates were located in Bermuda. Finally, when BBL transferred ownership back to Dodwell, they were transferred to a Bermudian corporation owned by a Bermuda trust established for the benefit of Dodwell and his family. The shares were never present in New York.
Nevertheless, Koehler argues that a New York situs exists for Dodwell's shares, under either New York C.P.L.R. §§ 5201(a) or 5201(b). I shall consider both these subdivisions but in reverse order. I do so because, as one commentator has rightly noted, subdivisions (a) and (b) of § 5201 "should be reversed," since (b) involves "the general rule about what property may be applied" while (a) "is an exception to" (b), "and a very small exception at that," David D. Siegel, N.Y.C.P.L.R. § 5201, Practice Commentaries, 1997 ("Siegel Commentaries"), C5201:1 Debt Owed to Debtor. 5201(b)
N.Y.C.P.L.R. § 5201(b) states:
(b) Property against which a money judgment may be enforced. A money judgment may be enforced against any property which could be assigned or transferred, whether it consists of a present or future right or interest and whether or not it is vested, unless it is exempt from application to the satisfaction of the judgment. A money judgment entered upon a joint liability of two or more persons may be enforced against individual property of those persons summoned and joint property of such persons with any other persons against whom the judgment is entered.
Dodwell's shares may be leviable as "property" under this subdivision "if a `situs' could be found for them in New York." Siegel Commentaries at C5201:5. Koehler argues that a New York situs can be found for Dodwell's shares based on CPLR § 5201(c)(4), and UCC § 8-112, or § 8-317(c), which Koehler argues was the relevant UCC provision prior to October 10, 1997. However, none of these provisions provides authority for the propositions, either, that Dodwell's shares have a New York situs, or that this Court has authority to garnish stock certificates outside New York.
CPLR § 5201(c)(4) states:
Where property or a debt is evidenced by a . . . certificate of stock of an association or corporation, the . . . certificate shall be treated as property capable of delivery and the person holding it shall be the garnishee; except that section 8-112 of the uniform commercial code shall govern the extent to which and the means by which any interest in a certificated security, uncertificated security or security entitlement (as defined in article eight of the uniform commercial code) may be reached by gamishment, attachment or other legal process.
According to this section, stock certificates are considered property capable of delivery, and the possessor of those certificates (in this case, BBL), the garnishee. UCC § 8-112 states in relevant part:
(d) The interest of a debtor in a certificated security for which the certificate is in the possession of a secured party, or in an uncertificated security registered in the name of a secured party, or a security entitlement maintained in the name of a secured party, may be reached by a creditor by legal process upon the secured party.
(e) A creditor whose debtor is the owner of a certificated security, uncertificated security, or security entitlement is entitled to aid from a court of competent jurisdiction, by injunction or otherwise, in reaching the certificated security, uncertificated security, or security entitlement or in satisfying the claim by means allowed at law or in equity in regard to property that cannot readily be reached by other legal process.
Nothing in these provisions provides authority for the proposition that Dodwell's shares have or had a New York situs. Section (e) provides that Koehler is entitled to aid "from a court of competent jurisdiction," but does not further elaborate. Nor do the pre-1997 versions of the CPLR and UCC provide any further legal authority:
Pre-October 10, 1997 CPLR § 5201(c)(4):
Where property or a debt is evidenced by a . . . certificate of stock of an association or corporation, the . . . certificate shall be treated as property capable of delivery and the person holding it shall be the garnishee; except that in the case of a security which is transferable in the manner set forth in section 8-320 of the uniform commercial code, the firm or corporation which carries on its books an account in the name of the judgment debtor in which is reflected such security, shall be the garnishee; provided however, that if such security has been pledged, the pledgee shall be the garnishee.
Pre-October 10, 1997 UCC § 8-317(c)(3)
The interest of a debtor in a certificated security which is in the possession of a secured party not a financial intermediary or in an uncertificated security registered in the name of a secured party not a financial intermediary or in the name of a nominee of such secured party may be reached by a creditor by legal process upon the secured party.
Again, § 8-317(c)(3) does not define the parameters of the "legal process" referred to.
What is clear, under New York law, is that stock certificates must be located within the state in order to be attached. See ABKCO Indus., Inc. v. Apple Films, Inc., 39 N.Y.2d 670, 676 (1976) ("[S]ome intangibles are deemed to have become embodied in formal paper writings, e.g., negotiable instruments, and in such instances attachment depends on the physical presence of the written instrument within the attaching jurisdiction."); Dyer v. Dyer, 231 A.D. 453, 454, 247 N.Y.S. 540, 541-42 (1st Dep't 1931) ("Shares owned by a non-resident defendant in a foreign corporation are not property within the State of New York, even though the corporation be doing business here, unless the stock certificates themselves are found within the State.").
Quite simply, Dodwell's shares have their situs in the place in which the share certificates have always been located — that is, Bermuda. Therefore, Koehler cannot enforce a money judgment order against that property based on CPLR 5201(b).
Without recourse to § 5201(b), Koehler must find legal authority for New York situs based on § 5201(a), conceded to be a "very small exception" to 5201(b). Siegel Commentaries, at C5201:1.
N.Y.C.P.L.R. § 5201(a) provides:
(a) Debt against which a money judgment may be enforced. A money judgment may be enforced against any debt, which is past due or which is yet to become due, certainly or upon demand of the judgment debtor, whether it was incurred within or without the state, to or from a resident or non-resident, unless it is exempt from application to the satisfaction of the judgment. A debt may consist of a cause of action which could be assigned or transferred accruing within or without the state.
According to this section, if BBL owes a debt to Dodwell, Koehler can pursue that particular debt. That is so, because Koehler has a money judgment against Dodwell.
Koehler goes to great lengths to contend that BBL owed a debt to Dodwell. In actuality, their respective positions as debtor and creditor were reversed. As will be recalled from prior opinions and briefs, in May 2, 1989, BBL made a personal loan to Dodwell, in the sum of $1,750,000, in connection with an investment in a Nevis property. That loan was secured under a Memorandum of Deposit under which Dodwell gave BBL a security interest in his shares in The Reefs. See Koehler I, at *2; BBL's Rule 56.1 Statement accompanying its Notice of Motion for Partial Summary Judgment, Dec. 16, 2002, at ¶ 4; Supplemental Affidavit of Laurie R. Rockett, Dec. 16, 2002, at Ex. B. As a result, BBL held Dodwell's shares until, first, the recapitalization, and second, the transfer of the remaining shares to Dodwell's family trust.
That BBL was in possession of Dodwell's shares by no means made it indebted to Dodwell. BBL held these shares as collateral for a loan the bank made to Dodwell. Thus it was Dodwell who was indebted to BBL. What Koehler argues is that "at anytime, Dodwell could have obtained refinancing, or alternative purchasers/investors, given notice of termination to BBL, and upon payment of the outstanding balances, BBL was obligated to return the pledged shares." See Koehler's Memorandum of Law in Response to BBL's Memorandum Pursuant to the Court's March 10, 2004 Order, May 7, 2004, at 12-13 (emphasis added). What Koehler asserts is that if Dodwell had paid back to the bank his $1,750,000 loan, then BBL would be obligated to return the collateralized shares, and would be "indebted" to Dodwell. Completing the argument, if BBL was indebted to Dodwell, Koehler can legitimately pursue BBL for his money judgment against Dodwell, pursuant to § 5201(a).
Where Koehler's argument breaks down is in the fact that it relies on a contingent event to take place — Dodwell's repayment of the bank's loan. Debts which are dependent upon contingent events cannot be pursued through § 5201(a). This is made clear by Professor Siegel's Practice Commentary for the statute:
To qualify for application to the judgment under subdivision (a), the debt must be either past due or certain to become due either upon demand or by the mere passage of time. If the debt depends on a contingency, in other words, and if the contingency is not certain to arise, such as an event that may never happen, the purpose of subdivision (a) is to exclude the debt from levy.
Siegel Commentaries, at C5201:1.
Even Koehler concedes that BBL was obligated to return the shares only upon payment of the outstanding balances. Because BBL's "debt" to Dodwell depended on a contingency, it cannot be levied under § 5201(a).
For these reasons, the situs of Dodwell's shares is properly Bermuda.
Nevertheless, in 1993, Koehler still sought to attach Dodwell's shares. Now, because BBL is no longer in possession of those shares, Koehler seeks, in the alternative, a money equivalent from BBL. Because Koehler seeks aid in enforcing his $2 million money judgment against Dodwell, and more importantly, against BBL as Dodwell's garnishee, the applicable Federal Rule of Civil Procedure that governs this case — and the proper place to begin this analysis — is Rule 69(a), which states:
Process to enforce a judgment for the payment of money shall be by a writ of execution, unless the court directs otherwise. The procedure on execution, in proceedings supplementary to and in aid of a judgment, and in proceedings on and in aid of execution shall be in accordance with the practice and procedure of the state in which the district court is held, existing at the time the remedy is sought, except that any statute of the United States governs to the extent that it is applicable. In aid of the judgment or execution, the judgment creditor or a successor in interest when that interest appears of record, may obtain discovery from any person, including the judgment debtor, in the manner provided in these rules or in the manner provided by the practice of the state in which the district court is held.
No United States statute is applicable to this case. Thus, in order to obtain relief in accordance with Rule 69(a), Koehler must seek a writ of execution — in accordance with the practice and procedure of New York — "unless the court directs otherwise." However, for the following reasons, I find that this Court has no authority to assist Koehler in enforcing his money judgment, either through writ of execution or the "otherwise" clause of Rule 69(a).
It is a well established principle that a New York court cannot attach property not within its jurisdiction. Fidelity Partners, Inc. v. Philippine Export Foreign Loan Guarantee Corp., 921 F.Supp. 1113, 1119-21 (S.D.N.Y. 1996) ("Although [plaintiff] argues that nothing more than a valid money judgment is necessary for the issuance of a restraining order and an order of execution, the law in fact does require more: it requires that the property sought to be levied against exist within the jurisdiction" (citing cases)); National Union Fire Ins. Co. of Pittsburgh, Pa. v. Advanced Employment Concepts, Inc., 269 A.D.2d 101 (1st Dep't 2000); Intercontinental Credit Corp. v. Roth, 152 Misc.2d 751, 752 (Sup.Ct. N.Y. Co. 1990) ("[A] New York court cannot attach property not within its jurisdiction"); Galvines v. Matavosian, 475 N.Y.S.2d 987, 989 (Civ.Ct. Queens Co. 1984) (same). See also Limonium Maritime, S.A. v. Mizushima Marinera, S.A., 961 F.Supp. 600, 606-609 (S.D.N.Y. 1997) (denying a writ of attachment under Rule B(1) of the Supplemental Rules for Certain Admiralty and Maritime Claims of the Federal Rules of Civil Procedure — a rule analogous to Rule 69(a) — for lack of any res to attach within the district). There is no relief this Court can provide Koehler with respect to Dodwell's shares — or more precisely, and respectfully, there was no relief Judge Ward could have provided Koehler in 1993 — since this Court had no jurisdiction over the shares.
Much was made by the parties in this case about New York's separate entity rule — its application, if any, and its consequences, if any. The separate entity rule provides that "each branch of a bank is a separate entity, [and is] no way concerned with accounts maintained by depositors in other branches or at a home office." Fidelity Partners, Inc., 921 F.Supp. at 1119, citing Cronan v. Shilling, 100 N.Y.S.2d 474, 476 (Sup.Ct. N.Y. Co. 1950), aff'd 126 N.Y.S.2d 192 (1st Dep't 1953). Under the separate entity rule, Koehler would not have been able to obtain either personal jurisdiction over BBL or assets held by BBL, if it had merely served BBL's main office.
However, Koehler asserts that BBL itself was served three times, twice by the U.S. Marshal's Office in New York, and once via the Hague Convention in Bermuda. Assuming service to be proper, the separate entity rule has no role to play in this case, since the rule involves circumstances where a party attempts to obtain the assets of an entity's foreign or auxiliary branch through service of its main branch. Here, the foreign branch itself was properly served.
What effect does this have on this Court's ability to attach a res located beyond this Court's jurisdiction? None that I can see. Simply because the separate entity rule is of no moment in this case does not create jurisdictional authority beyond what this Court has under the law. Service of process on a foreign entity does not provide personal jurisdiction over it or its assets. Otherwise, any foreign entity could be forced into a court not of its choosing merely because it was served.
On the other hand, this Court has personal jurisdiction over BBL. The road by which this Court acquired personal jurisdiction over BBL was neither short nor conventional. BBL contended early in this case that this Court lacked personal jurisdiction against it — an issue that led to many more years of litigation — until, by letter dated October 9, 2003 to this Court, BBL consented to the personal jurisdiction of this Court for purposes of this proceeding. See Koehler I, at *5. In any event, the question arises whether personal jurisdiction over BBL may also lead to in rem jurisdiction over Dodwell's shares.
In the prior opinion in this case, I raised the question of whether this Court had authority to order BBL to transfer property into this jurisdiction from without. See Koehler II, at *5. I raised the possibility because other courts had issued such orders in the past. See e.g., United States v. First Nat'l Bank, 379 U.S. 378, 384 (1965); United States v. Ross, 302 F.2d 831, 834 (2d Cir. 1962). See also Inter-regional Fin. Group, Inc. v. Hashemi, 562 F.2d 152, 155 (2d Cir. 1977); Fleming v. Gray Mfg. Co., 352 F.Supp. 724 (D.Conn. 1973).
Rule 69(a) states that "proceedings on and in aid of execution shall be in accordance with the practice and procedure of the state in which the district court is held." Both First National and Ross were decided under the U.S. tax code, which provided specific statutory authority for such orders. Likewise, Connecticut state law governed the holdings of Hashemi and Fleming. Koehler has not cited to, nor have I found, independent New York statutory authority for ordering such a transfer, even if this Court has personal jurisdiction over the defendant.
Koehler argues that in deciding Hashemi, the Second Circuit cited to § 8-317 of the Connecticut Uniform Commercial Code, whose pertinent parts are substantially identical to § 8-317 (now known as § 8-112) New York Uniform Commercial Code. While that may be true, both Hashemi and Fleming embody a material distinction that make them inapplicable to Koehler: both involved a judgment creditor attempting to recover damages from the judgment debtor itself. BBL is not itself the judgment debtor but rather a garnishee. Neither N.Y.U.C.C. § 8-317 nor, for that matter, N.Y.C.P.L.R. §§ 5225 and 5227 "provide a basis for directing" BBL to "deliver a definitive bearer bond" either to Koehler or to this Court's registry, where BBL "was a financial intermediary, and not a judgment debtor." Fidelity Partners, Inc. v. First Trust Co. of New York, 58 F.Supp.2d 55, 57 (S.D.N.Y. 1999) (emphasis added). See also In re Gaming Lottery Sec. Litig., No. 96 Civ. 5567 (RPP), 2001 U.S. Dist. LEXIS 1204 (S.D.N.Y. Feb. 13, 2001) (granting judgment creditor's motion for a turnover order against judgment debtor). Hence, Hashemi and Fleming notwithstanding, there is no statutory authority under New York law to require BBL, a financial intermediary, to transfer property from outside this jurisdiction pursuant to Rule 69(a).
Both states' statutes are also substantially similar to UCC § 8-112, cited previously.
Koehler contends that, to the contrary, Mones v. National Bank of Kuwait, S.A.K., No. M 18-32, 2004 WL 594855 (S.D.N.Y. Mar. 24, 2004) stands for the proposition that personal jurisdiction does in fact lead to in rem jurisdiction. In that case, a judgment creditor sought to obtain assets held by the defendant bank by serving the defendant bank's main branch in Kuwait, rather than its New York branch. The Court held that "the separate entity rule is inapplicable where, as here, the judgment creditor seeks to obtain funds of the debtor held by the branch of the bank upon which service has been made." Id. at *1.
The Court went on to hold that the defendant bank "waived its right to challenge Petitioner's claim that it has obtained jurisdiction over [defendant's] main branch which holds funds of the judgment debtors." Id. The Court then found, "Petitioner advises that it seeks to recover $218,290.00 held by the Bank of Kuwait from non-settling judgment debtors not parties to the pending litigation in the District of Columbia. There appears to be no valid reason why Petitioner should not be permitted to go forward as to these funds." Id.
The Court does not explain how personal jurisdiction over the Bank of Kuwait led to in rem jurisdiction over the bank's assets, a finding which goes against the weight of prior authority. BBL submits that the defendant in Mones never raised the argument that in rem jurisdiction was absent. Because I find the reasoning in Fidelity Partners more persuasive, I choose not to follow the Mones holding.
For the foregoing reasons, Koehler cannot attach Dodwell's assets by writ of execution. Alternatively, Koehler seeks to attach the shares by means of the equitable powers of this Court found in the "unless the court directs otherwise" clause of Rule 69(a). A closer examination of the rule, however, demonstrates that the clause is narrowly construed.
The Second Circuit has not yet ruled on whether the "otherwise" clause can be used to attach assets in a foreign jurisdiction in circumstances similar to Koehler's. But the issue was touched upon by the First Circuit in Aetna Cas. Surety Co. v. Markarian, 114 F.3d 346 (1st Cir. 1997), which ruled against such a proposition. In that case, the First Circuit reversed a lower court's ex parte issuance of a writ of ne exeat, which prohibited defendant from leaving or removing any of his assets from the Commonwealth of Massachusetts without prior court approval. The defendant had been found guilty of civil RICO violations and trade practices, and there were also concerns that he was moving assets out of the jurisdiction in an effort to prevent enforcement of judgment. Nevertheless, the First Circuit held that "Massachusetts procedure permits issuance of the writ [of ne exeat] only in support of an order punishable by the court as a contempt," and that a "money judgment is not such an order." Id. at 349.
With respect to Rule 69(a)'s "otherwise" clause, the First Circuit held that it "does not authorize enforcement of a civil judgment by methods other than a writ of execution, except where `well established principles [so] warrant.'" Id., citing 13 J. Moore, Moore's Federal Practice ¶ 69.02, at 69-5 to -7 (3d ed. 1997). The Court went on to recite circumstances where "well established principles" would authorize enforcement of civil judgment, citing cases in the Supreme Court, statute, and other circuits:
One such situation is where an action for contempt has been instituted for failure to pay an obligation imposed by statute in order to enforce the public policies embodied in the statutory scheme. See, e.g., McComb v. Jacksonville Paper Co., 336 U.S. 187, 193-95, 69 S.Ct. 497, 500-01, 93 L.Ed. 599 (1949). Another is where there has been a congressional determination to provide the government with the ability to seek a writ of ne exeat in furtherance of enforcing tax obligations. See, e.g., 26 U.S.C. § 7402(a). A third is where the judgment is against a state which refuses to appropriate funds through the normal process provided by state law. See, e.g., Spain v. Mountanos, 690 F.2d 742, 744-45 (9th Cir. 1982); Gary W. v. Louisiana, 622 F.2d 804, 806 (5th Cir. 1980).Id. at 349 n. 4. However, the same footnote makes plain that circumstances involving a private judgment creditor having difficulty obtaining his reward — a situation analogous to Koehler's — would not fall within Rule 69's "otherwise" clause:
In contrast, the size of the award and the difficulties in enforcing the judgment due to the location of the assets and the uncooperativeness of the judgment debtor are not the types of extraordinary circumstances which warrant departure from the general rule that money judgments are enforced by means of writs of execution rather than by resort to the contempt power of the courts. See Hilao, 95 F.3d at 855.Id.
The case the Court referred to at the end of the footnote was Hilao v. Estate of Marcos, 95 F.3d 848 (9th Cir. 1996). In that case, involving foreign banks in which assets of a judgment debtor were deposited and over whom the district court had personal jurisdiction, the Ninth Circuit held that despite the "size of the judgment awarded to the plaintiffs," the fact that some of the parties were "prominent figures," the "difficulty of enforcing" judgment," the far-off "location of the assets" and the "uncooperativeness of the judgment debtor," the district court nonetheless did not have equitable powers under Rule 69(a) to order the banks to deposit the contested funds into the court's registry. Id. at 855. Like the First Circuit, the Ninth Circuit interpreted Rule 69(a)'s equitable powers narrowly, finding that historically the exception was used by courts to justify enforcement of a money judgment against recalcitrant states. Id., citing Spain v. Mountanos, 690 F.2d 742 (9th Cir. 1982); Gary W. v. Louisiana, 622 F.2d 804, 806 (5th Cir. 1980) ("Where a state expresses its unwillingness to comply with a valid judgment of a federal district court, the court may use any of the weapons generally at its disposal to ensure compliance." (internal quotation and citation omitted)).
Koehler makes reference to one case which he asserts stands for the proposition that the "otherwise" clause gives me authority to order assets be brought into New York from overseas. That case is Motorola Credit Corp. v. Uzan, 288 F.Supp.2d 558 (S.D.N.Y. 2003) (Rakoff, J.).
In Motorola, a judgment creditor — in aid of enforcing its $4.2 billion money judgment — filed a motion seeking to require certain banks to transfer assets belonging to individual defendants from outside this jurisdiction into the registry of the Court. Making reference to Rule 69(a)'s "otherwise" clause, Judge Rakoff noted that while "there appears to be no Second Circuit case construing this latter qualification, the First Circuit has ruled that it should be construed narrowly, lest it eviscerate the primary reliance on state law." Id. at 561. He then cited the same footnote 4 in the First Circuit's Aetna case as I have.
Judge Rakoff then veered towards a different path. He stated that "[n]otwithstanding this dictum from another circuit, this Court cannot say on the papers here submitted that the present situation might not qualify for the invocation of the Court's equitable powers entitling Motorola to some or all of the relief here sought." Id. at 562. Thus, Judge Rakoff appeared to at least consider the possibility that Rule 69(a) allowed a judgment creditor to obtain a writ of execution to attach foreign assets outside this Court's jurisdiction.
Ultimately, however, the judge concluded that "the issue is not ripe for adjudication," for two reasons: First, because the judgment creditor had not yet sought an order directing individual defendants to transfer the foreign assets to the Court's registry, and second, because the judgment creditor had not shown that its attempts to enforce its judgment against the relevant foreign banks had proven "nugatory." Id.
In the present case, Koehler argues that he has met the two requirements noted in Motorola that makes the issue "ripe for adjudication." First, it is certain that Koehler seeks an order, here in New York, to enforce his judgment, which would require transfer of Dodwell's shares, or at least a monetary equivalent for value, to this Court's registry. Second, even BBL would concede that Koehler's judgment would not be recognized in Bermuda. All prior history in this case, including the Bermudian Deficiency and Declaratory Judgements, and the Nevis Enforcement Judgement, all against Koehler, indicate the same.
Though Judge Rakoff may have intimated that he would have ruled favorably towards the judgment creditor had the issue been ripe, there is no guarantee that he would have done so. Nor, for that matter, would I be obligated to follow his ruling if he had done so, particularly considering the weight of authority outside this circuit taking a narrower approach.
Therefore, I construe Rule 69(a)'s "otherwise" clause narrowly, and do not find, in these circumstances, that it provides this Court equitable powers to attach foreign assets outside this jurisdiction.
Based on the above analysis, I respectfully conclude that Judge Ward, notwithstanding his 1993 Order, had no authority to require BBL to transfer Dodwell's shares to Koehler. It therefore stands to reason that I similarly have no authority to require BBL to deposit a sum equal to the value of those shares into the Court's Registry. While it was reprehensible for BBL to have violated Judge Ward's Order — prudence would suggest it should have remained in possession of the shares until the power and authority of this Court had been clearly established — it would be improper to require BBL to now do the functional equivalent of what Judge Ward had no authority to order. Therefore, the answer to the first enumerated question is "no." Given that answer, the second enumerated question becomes moot.
Finally, in answer to the third question, because I find that Judge Ward had no jurisdiction to issue the ex parte Order, the other remedies that Koehler suggests are also inapplicable. Koehler seeks to amend its petition to add claims of fraudulent conveyance or for negligence against BBL, for BBL's violation of Judge Ward's Order. The parties dispute whether such claims must be considered under New York or Bermudian law. Regardless of which law applies, either claim must be buttressed by a valid Order. That is, if Koehler contends that BBL fraudulently conveyed stock to Dodwell's family trust, in defiance of Judge Ward's Order, or if Koehler alleges that BBL was negligent in doing so, then Judge Ward's Order itself must be a valid one. Otherwise, neither claim has a foundation upon which to rest. However, for reasons discussed at length in this opinion, I find Judge Ward's Order a nullity for lack of jurisdiction. It therefore follows that neither a claim of negligence or fraudulent conveyance based on his Order can stand. Finally, Koehler's contention that BBL is generally liable for fraudulent concealment or negligent misrepresentation is bereft of any particularized allegations, and therefore I do not find any merit in it.
In essence, Koehler has attempted to bring two separate fraudulent conveyance claims against BBL, based on two separate transfers of stock. The first involved the recapitalization and the creation of Class X and Class Y shares in The Reefs through the vehicle of Dodwell's Class D shares. See Koehler I, at *4, Koehler II, at *2. I held, in Koehler II, at *3, that the effect of the Bermuda Declaratory Judgment was that the recapitalization was untainted by fraud or any other impropriety. Therefore, I denied Koehler's first attempt to amend its complaint to add a fraudulent conveyance claim. Koehler's second attempt to raise a fraudulent conveyance claim involves the remainder of Dodwell's Class A and Class D shares, post-recapitalization, which BBL transferred to the Dodwell family trust. Koehler II, at *2. The Bermuda Declaratory Judgment offers no protection regarding this second transfer. However, for the reasons stated in the body of this opinion, Koehler's second fraudulent conveyance claim also fails.
For the foregoing reasons, Koehler's petition for a writ of execution is denied. Koehler's request to amend his petition to include claims of negligence, fraudulent conveyance, fraudulent concealment, and negligent misrepresentation are also denied.
The proceedings commenced by Koehler in this Court are dismissed with prejudice.
It is SO ORDERED.