New York Court of Appeals issues significant decision on situs of intangible property for CPLR Attachment

In Hotel 71 Mezz Lender LLC v. Falor, __ N.Y. 3d, __ N.Y.S.2d__, 2010 NY Slip Op 01348 (Feb. 16, 210), the Court of Appeals issued a landmark decision in which it examined how the law fixes the situs of an intangible property interest and the ability to attach same pursuant to the CPLR. In short, the Court held that where New York had personal jurisdiction over the defendant garnishee, even though the defendant was not a domicile, an order of attachment was proper and allowed the Court to attach the defendants' intangible personal property (specifically -- ownership/membership interests in various out-of-state business entities).

In the instant matter, the Plaintiff, Hotel 71 Mezz Lender LLC had provided a mezzanine loan, by agreement dated March 29, 2005, to nonparty Chicago H&S Senior Investors, LLC, for the purposes of renovating a prominent Chicago hotel. On the same day, defendants, including Guy T. Mitchell, (who do not reside in New York) executed a guaranty of payment, under which they unconditionally agreed to be jointly and severally liable for the borrower's obligations under the loan and submitted to the jurisdiction of any federal or state court in New York City. In addition to be being negotiated in New York, the guaranty was to be governed and construed in accordance with the laws of New York State. Thereafter, the borrower defaulted on the loan and filed for bankruptcy protection. Plaintiff commenced suit against the guarantors in Supreme Court, New York County to enforce the guaranty and to recover the amounts due and owing under the loan.

Plaintiff applied, pursuant to CPLR 6201, for a prejudgment order of attachment, seeking to attach defendants' property interests as security for the collection of any judgment entered against defendants. The Court granted Plaintiff's application, but stayed service until Defendants were given the opportunity to oppose the attachment order. On October 23, 2007, following oral argument regarding the order of attachment, the Supreme Court permitted the Sherriff to serve the attachment order upon defendant Mitchell personally, as garnishee for any ownership/membership interests defendants may have had in 23 out-of-state entities. The property consisted of defendants' interests in 22 limited liability companies formed in Delaware, Georgia, and Florida and a Florida corporation solely owned by defendant Mitchell. The attachment served a security function only, i.e. to ensure there would be sufficient money to satisfy a judgment if the plaintiff prevailed.

The Court thereafter confirmed the order of attachment, finding that the attachment was necessary in aid of security. The court also ruled that the defendants' intangible interests were attachable property under the CPLR, and that because the interests were not evidenced by certificates, the service on defendant Mitchell was sufficient to fix the situs of said property in New York. On February 6, 2008, the Supreme Court granted plaintiff summary judgment on liability against six (6) of the defendants and ordered a judgment of USD 52,404,066.54.

By a 3 to 1 decision, the Appellate Division overturned the Supreme Court and held, "an attachment of a debt or other intangible property can only be effected as against the debtor or obligor by service upon him or her when he or she is domiciled within the state." Citing National Broadway Bank v. Sampson, 179 NY 213 (1904). Accordingly, because Mitchell was only temporarily in New York when he was served the order of attachment, and not a domicile of New York, his presence was insufficient to support the attachment. The Appellate Division granted plaintiff leave to appeal the decision and the Court of Appeals reversed by a unanimous decision.

The Court of Appeals held that the "domicile" requirement of Sampson was overturned by the U.S. Supreme Court just one (1) year later in Harris v. Balk, 198 U.S. 215 (1905). Moreover, the Court of Appeals noted that Sampson was decided more than fifty (50) years prior to the creation of the CPLR, and accordingly, it should not have been relied upon in interpreting what constitutes a proper attachment. The Court, held that the ownership/membership interests in the LLCs were clearly "assignable and transferrable" and accordingly, the interests are "property" for the purposes of CPLR 6202. Additionally, the Court analyzed the technical issue of whether the defendant's intangible ownership/membership interests have a New York situs. The Court outlined that there is no controlling provision in the CPLR to determine the situs of intangible property for attachment purposes. ABKCO Indus. V. Apple Films, 39 NY2d 670 (1976). The Court of Appeals further held that a defendant's debt to a judgment creditor is present wherever the debtor is present. In reaching this result, the Court relied on the main proposition from Harris which survives to this day, quoting, "The obligation of the debtor to pay his debt clings to and accompanies him wherever he goes. "Harris, 198 U.S. at 222-223. Accordingly, the precedent from Harris gives the debts owed by defendant Mitchell a New York situs because of the court's personal jurisdiction over the defendant.

This case is distinguishable from the Court of Appeals decision from last year in Koehler v. Bank of Bermuda, 12 NY 3d 533 (2009). In Koehler, the Court held that a New York court with jurisdiction over a bank garnishee could order the bank to turn over stock certificates located outside of the state. In that case, there was a three (3) judge dissent, primarily concerned over the ability to enforce a judgment based solely upon the Court's jurisdiction over a garnishee. In this case, there was seemingly no such issue for the Koehler dissenters as the defendants voluntarily submitted to the personal jurisdiction of the court by executing the personal guaranty and the decision was unanimous.

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