Recently, suing a non-resident debtor in New York became somewhat more complicated. Two types of jurisdictional analysis are involved. First, there is an analysis that examines the general activity of a non-resident actor in the state. Does the non-resident actor have an office in the state and conduct regular business, and if so, how much and how often? This type of jurisdiction is often referred to as “presence” jurisdiction. The second kind of analysis focuses on specific activity of the non-resident actor in the state and whether the activity has a nexus to the claim against the non-resident actor. This second form of jurisdiction is commonly referred to as “long-arm” jurisdiction.

In January 2014, the United States Supreme Court in Daimler AG v. Bauman, 134 S. Ct. 746 (2014) (“Bauman”) essentially rewrote the familiar standard concerning general jurisdiction which provided that a non-resident actor is present in the state when it “does business” both “continuously and systematically.” Instead, the Court articulated the test as not “whether a foreign corporation’s in-forum contacts can be said to be in some sense ‘continuous and systematic,’ rather, it is whether that corporation’s ‘affiliations with the State’ are so ‘continuous and systematic’ as to render it essentially at home in the forum State.”

In attempt to deal with criticisms raised in a concurrence by Justice Sotomayor that the majority had unnecessarily made the burden too difficult for a plaintiff seeking redress against a non-resident defendant that conducted substantial business in the state, the majority in Bauman reasoned that “[T]he general jurisdiction inquiry does not ‘focus solely on the magnitude of the defendant’s in-state contacts’ [citation omitted]. General jurisdiction instead calls for an appraisal of a corporation’s activities in their entirety, nationwide and worldwide. A corporation that operates in many places can scarcely be deemed at home in all of them. Otherwise, ‘at home’ would be synonymous with ‘doing business’ tests framed before specific jurisdiction evolved in the United States.” Continue reading

Consider the following facts. For many years a company provides services to a corporation. The corporation is a small business, owned and controlled by one individual. A substantial balance is incurred by the corporation which the corporation refuses to pay. A familiar scenario is then played out. The owner opens a new corporation in a similar business and dissolves the first corporation. The service provider creditor commences an action against the first corporation. The law suit is ignored by the first corporation. Thereafter, the creditor obtains a default judgment against the first corporation, but is unsuccessful in finding any assets.

The creditor then deposes the owner and requests bank and financial records. These records reveal that after the commencement of the action against the first corporation, the owner caused the first corporation to transfer a significant amount of cash to the new corporation. The owner cannot establish a credible explanation for the transfers. Thereafter, further discovery reveals that the owner has been using funds in the new corporation to pay directly for personal expenses.

Unbeknownst to the creditor, shortly prior to the deposition of the owner, the owner was granted a discharge in bankruptcy. The creditor was not aware of the owner’s bankruptcy filing and the bankruptcy petition reveals that the owner did not list the creditor as having a claim against either the first corporation or against the owner. Continue reading

It would be a mistake for a creditor to believe only that which can be seen, touched or smelled is property which is subject to a Sheriff’s levy. There are a host of other kinds of property which the creditor’s attorney should not ignore, and these are in the category of what is generally referred to as intangibles. Section 9-102 (42) of the Uniform Commercial Code defines “General intangibles” as “any personal property, including things in action, other than accounts, chattel paper, commercial tort claims, deposit accounts, documents, goods, instruments, investment property, letter-of-credit rights, letters of credit, money, and oil, gas, or other minerals before extraction. The term includes payment intangibles and software.” In the strict context of post-judgment collections in New York, Section 5201 (b) of New York’s Civil Practice Law and Rules (“CPLR”) provides that “[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.”

What if all that a debtor has left is literally its good name and that name has been legally registered with the United States Patent and Trademark Office? Though there are not many cases dealing with the subject, two cases in New York say yes, provided the trademark will be used by someone in the same business as the debtor. The first case involved a debtor who published a magazine called Chocolate Singles and had obtained trademark registration for the name. Victoria Graphics, Inc. v. Priorities Publications, Inc., 167 Misc.2d 607 (Civ. Ct. Queens Co. 1996) (“Victoria Graphics”). Unable to find any other assets of the debtor, who was for all intents and purposes defunct, the creditor commenced an Article 52 turnover proceeding to force the debtor to assign the trademark to the creditor. Analyzing the issue by analogy to the power of a bankruptcy trustee to assign a trademark, the Court in Victoria Graphics stated that often trademarks are assigned where the assignment is made in conjunction with all of the good will associated with the trademark and other tangible assets are being assigned as well. However, the Victoria Graphics Court when on to state that some assignments of tradenames are made separate from the underlying business, particularly where “the assignee is producing a product … substantially similar to that of the assignor [such that] consumers would not be deceived or harmed” or when there is “continuity of management, and “[t]hus, a trademark may be validly transferred without the simultaneous transfer of any tangible assets, as long as the recipient continues to produce goods of the same quality and nature previously associated with the mark.” Based upon this holding, the Court in Victoria Graphics set the matter down for a hearing to detemine, among other things, whether the creditor or another person, as assignee, would be utilizing the trademark in a substantially similar business.

The second case, Application of GE Commercial Finance Business Property v. Hakakian, 13 Misc.3d 413 (Nassau Co. 2006) (“Hakakian”) involved a creditor, GE Commercial Finance (“GE”), who commenced a turnover proceeding to have the debtor’s trademark assigned in partial satisfaction of the subject judgment. Citing Victoria Graphics, the Court in Hakakian held that a trademark could not be assigned “in gross” apart from the business or good will associated with the trademark, but that a person in a similar business could be such an assignee. Based upon this restriction, the Court determined that GE could not force a turnover to itself as GE was not in the same business as the debtor, a retail clothing operator. Neither would the Hakakian Court allow the trademark to be subject to a Sheriff’s sale for fear that insiders would diminish the value of the trademark. Perhaps as a consolation, the Court in Hakakian did allow GE to file a judgment lien on the trademark in the United States Patent and Trademark Office, thereby encumbering the intangible property of the debtor for the protection of the creditor. Continue reading

In a recent decision out of the federal district court for the Eastern District of New York, the district court, in the context of a post-judgment proceeding, was faced with the issue of whether the 100% owner of an insolvent debtor could enter into a consulting agreement with a competitor of the debtor, whereby the debtor’s owner agreed to move the debtor’s “book of business” to the competitor in return for a payment of some $300,000.00. In a very reasoned decision, the district court held that the “book of business” was property of the debtor, and not the debtor’s owner; and therefore subject to New York’s fraudulent conveyance act (Article 10 of the Debtor and Creditor Law). Mitchell v. Lyons Professional Services, Inc., 09 Civ. 1587 (EDNY, Decided June 8, 2015).

Originally commenced as a post-judgment proceeding in the district court based upon Article 52 of New York’s Civil Practice Law and Rules (“CPLR”), the following facts were presented. The debtor, a company providing security guard services, had a certain number of customer accounts. While these customer accounts were not represented by written agreements, they did represent on-going business of the debtor. Shortly after entry of the judgment, Christopher Lyons (“Lyons”), the debtor’s owner, entered into a consultant agreement with a competitor of the debtor, whereby Lyons represented that he was terminating his employment with the debtor; that he had the right to solicit the debtor’s customers; that the debtor’s customers were developed through his efforts and that after payment of the consultant fee, the competitor would become the owner of the accounts.

Based upon these facts, the district court ruled that the customer accounts were the property of the debtor for the purposes of CPLR Section 5201 and that the customer accounts had been fraudulently transferred. However, on appeal, the Second Circuit remanded the case to the district court with instructions for the district court to consider whether the customer accounts or what the Court referred to as the “book of business” was property for the purposes of CPLR Section 5201, and specifically, whether the “book of business” was assignable or transferable. Continue reading

We always tell our clients that getting the judgment is easy; it’s collecting on it that is the hard part. For the creditor that has pursued a collection matter in federal court where there has to be complete diversity of citizenship and a monetary claim of at least $75,000.00, exclusive of interest, the hard part of collecting has been made a little easier by the decisional law in the Second Circuit and its lower federal district courts (where New York is located) which state that a federal district court has the power to enforce its own judgments, using the post-judgment enforcement tools of state practice. The concept is known as ancillary jurisdiction, which together with Rule 69 of the Federal Rules of Civil Procedure allows creditors to bring post-judgment enforcement proceedings in federal district court.

In Peacock v. Thomas, 516 U.S. 349 (1996), the Supreme Court described the breadth of the federal court’s inherent power to enforce its own judgments through the exercise of ancillary jurisdiction over third parties, provided, however, that the district courts could not impose liability for a money judgment on a person not otherwise liable for the judgment in the context of a post-judgment enforcement proceeding.  The Supreme Court reasoned that without such authority, “the judicial power would be incomplete and entirely inadequate for the purposes for which it was conferred by the Constitution”.

Applying the teaching of Peacock, the Second Circuit held in Epperson v. Entertainment Express, Inc., 242 F.3d 100, 104 (2d Cir. 2001) that such ancillary jurisdiction extends to “the assets of the judgment debtor [,] even though the assets are found in the hands of a third party”.  Therefore, a creditor seeking to enforce a judgment obtained in federal court can bring a turnover proceeding under Article 52 of the CPLR in federal court and seek not only garnishment, but also any of the other remedies available under Article 52, including a claim for fraudulent conveyance. In particular, post-judgment enforcement proceedings based upon fraudulent conveyance claims are to be distinguished from claims involving alter ego liability and veil-piercing that raise an independent theory of recovery in which liability is shifted to a third party. A fraudulent conveyance claim on the contrary, does not seek to shift liability to a third party; it is simply a means to disgorge the judgment debtor’s assets that are wrongfully in the hands of another. Continue reading

Creditors are often frustrated when they discover that the debtor has a substantial amount of money on deposit in a retirement or other similar trust account and these accounts cannot be reached. Retirement accounts are clearly exempt from judgment execution under Section 5205 (c) of New York’s Civil Practice Law and Rules (“CPLR”) which states that except for other provisions set forth in the subsection, “all property while held in trust for a judgment debtor, where the trust has been created by, or the fund so held in trust has proceeded from, a person other than the judgment debtor, is exempt from application to the satisfaction of a money judgment.” The subsection goes on to state that “all [accounts]…qualified as an individual retirement account…or other plan..qualified under section 401 of the United States Internal Revenue Code…shall be considered a trust…

One of the exceptions provided by the subsection concerns additions to the trust and provides that “Additions to an asset described in paragraph two of the subdivision [i.e. qualified trusts] shall not be exempt from application to the satisfaction of a money judgment if (i) made after the date that is ninety days before the interposition of the claim on which such judgment was entered, or (ii) deemed to be fraudulent conveyances under article ten of the debtor and creditor law.”

So, for example, an action on a monetary debt is commenced on May 1, 2015 and subsequently a money judgment is entered against the debtor. The creditor undertakes post-judgment discovery and finds that the debtor has a traditional IRA account with a value of $120,000.00. Further examination reveals that on April 1, 2015, the debtor deposited $20,000.00 in the IRA account which came from a salary check earned by the debtor.

The creditor commences a turnover proceeding against the institution where the IRA is maintained, claiming that the $20,000.00 deposited by the debtor one month prior to the commencement of the action is not exempt by reason of the exception in CPLR Section 5205 (c) which provides that any such addition to the trust made ninety days before the interposition of a claim on such judgment is not exempt property. The debtor, however, argues that since the money deposited is income of the debtor it is subject to the 90 percent income exemption under CPLR 5205 (d) and that the exemption applies and take precedence over the addition exemptions under CPLR 5205 (c). Continue reading

Next to the purchase of a home, the purchase of an automobile is the most expensive transaction most consumers in this country make. And like the purchase of a home, most car buyers finance this purchase with a bank loan, where the lender as security for the loan gets a lien on the car so as to allow the bank to repossess the car in the event the car buyer defaults on the loan.

When there is a default on a car loan, most lenders do not immediately repossess the vehicle. Instead, there is a long process of notices, demand letters, calls, and attempts to work out a payment plan. If none of these efforts work, in all likelihood, the lender takes steps to repossess the car and sell it in a commercially reasonable manner in order to recoup as much of the default loan amount as possible from the sale proceeds. After that, collection efforts may continue until it is clear that the borrower will not pay anymore. Upon reaching that point, the lender may send the claim to its attorneys for collection, assign the claim to a collection agency or perhaps sell the claim to a debt buyer. Thereafter, these subsequent entities in the chain of collection may pursue further collection efforts and then ultimately sue the borrower.

The prudent lender, collection agency or debt buyer keeps close watch of the time which transpires from default until suit is commenced to prevent the claim from being time barred, but sometimes years can go by before a suit is commenced and the holder of the claim may well be presented with a defense that the claim is time barred by the applicable Statute of Limitations. The question then becomes what is the applicable Statute of Limitations, which, in turn, is a function of what kind of transaction is at issue. Continue reading

If you are a vendor or supplier of services outside of New York you may want your transaction with your New York customer to be controlled by the law of your state and not that of New York. There may be some good reasons to want your state’s law to control, particularly if it provides certain advantages to you as a seller if you end up having to sue your customer in New York. So, you ask your company’s attorneys to draft up language in your standard contract which provides that in the event of a dispute the law of your state will govern. You think you are protected until the day you end up suing that New York customer you knew was going to be trouble and your customer’s attorneys argue that despite what the contract says, applying your state’s law is unfair. How do New York courts handle choice of law clauses?

In Welsbach Electic Corp. v. MasTec North America, Inc., 7 N.Y.3d 624 (2006) (“Welsbach”), New York’s highest court set forth a two-pronged approach in determining whether a choice of law clause in a written contract would be enforced. First, the Court stated that as a general matter, a choice of law clause would be enforced if the chosen law bears a reasonable relationship to the parties or the transaction. If the agreement is clear and unambiguous, a court will not interfere with the contract and the intent of the parties in choosing a particular law. However, New York’s highest court goes on to state that a contract, which is clearly illegal or contravenes some fundamental principle that is deeply rooted in New York State’s history, or as the high court put it — those foreign laws that are “truly obnoxious” — will not be enforced. If this type of moral repugnancy is not present, New York will enforce the intent of the parties in choosing to be governed by a sister state’s law.

Welsbach is a good example of how New York analyzes choice of law clauses. In Welsbach, the issue concerned whether a Delaware sub-contractor’s agreement with a Florida general contractor which contained a “pay if paid” provision (legal under Florida law) and which agreement provided that Florida law applied would be enforced even though the provision was illegal under Section 34 of New York’s lien law. In order to determine the issue, the Court needed to decide whether a fundamental concept was in question. Finding that prior precedent has found fundamental concepts to be present in cases involving human rights and civil rights discrimination, the Court held that the issue of risk allocation present in the lien law context did not arise to the level of a fundamental concept, particularly where the parties are commercial entities and voluntarily entered into the contract. In short, the Court held that the given all of the circumstances, the “pay if paid” clause was not “truly obnoxious” so as to void the parties’ choice of law. Continue reading

Creditors do not want to hear it, but the answer to the question of when a debtor can defeat a claim for collection of monies due based upon a defense of no written agreement is – “it depends”, the dreaded, sometimes unhelpful response that attorneys give. So what are the parameters of “depends”? On a general level the answer to the question is a function of what kind of transaction is at issue. Sales of goods are governed by a special set of rules, whereas brokerage claims, employment contracts and real estate agreements are covered by other rules.

In New York, like most other states in the Union, sales of goods transactions are governed by the Uniform Commercial Code (“UCC”), which has its own specific section on when and under what conditions a writing is necessary to enforce a collection claim. The rule on when a writing is required, generally referred to as the Statute of Frauds (dating from the early days of English law) can be found in UCC Section 2-201 (1) which states that “Except as otherwise provided in this section a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker.” This does not necessarily mean that a buyer and seller need to have signed a written agreement in order to satisfy the UCC’s Statute of Frauds requirement. Whenever possible, the drafters of the UCC wanted the statute to reflect practical business reality. Therefore, UCC Section 2-201 (2) provides that as between merchants, if within a reasonable time the seller sends a written confirmation of the order or the contract which is sufficient against the seller (i.e. that it is signed by the seller or clearly attributable to the seller) and the buyer has reason to know of the contents, then unless within ten (10) days after it is received, the Buyer objects, there is an enforceable agreement under UCC section 2-201. Section 2-201 (2) covers the typical situation where a buyer and seller reach an oral agreement on an order for goods and the seller thereafter sends a confirmatory memo or even an invoice. There are, however, other practical circumstances which create exceptions to the writing requirements. Suppose a seller sends goods which were ordered by a buyer and the buyer accepts the goods or even pays for the goods prior to acceptance? Then, no writing is required. UCC section 2-201 (3) (c) specifically covers that situation. Another situation is where goods are specially manufactured and it is clear that the goods are designated for the particular buyer and the seller has commenced manufacture – again, no specific writing required here. See UCC section 2-201 (3) (a). Continue reading

Not often used as a means to collect on a judgment, Section 5228 of New York’s Civil Practice Law and Rules (“CPLR”) provides that a judgment creditor can make an application to the court for the appointment of a receiver “who may be authorized to administer, collect, improve, lease, repair or sell any real or personal property in which the judgment debtor has an interest or to do any other acts designed to satisfy the judgment.” The application requires that notice be given to the judgment debtor and as far as practicable; notice must also be given to other judgment creditors of the judgment debtor. The order appointing the receiver must specify the property to be received and the duties of the receiver. The order will also provide for the duration of the receivership, which may be extended upon further application to the court. The judgment creditor applying for the appointment of a receiver may be appointed receiver but will not be entitled to any compensation for exercising the duties of the receiver.

The appointment of a receiver is desirable in situations where the debtor’s property is small or there are some special considerations where the normal execution and sale will not produce significant value. One situation that makes sense is where the debtor has an interest in jointly held property. Sometimes parsing out ownership can get difficult, but with the appointment of a receiver this process can be made easier. Another situation is where the debtor’s property may not actually have an attractive market value, but the property is income producing. A receiver can manage the property with instructions to allocate a specific percentage to be applied against the judgment. While the is kind of receivership is not always favored by the courts because it involves extended management by the receiver and the court, in a special situation where the amount of the judgment warrants the management and expense of the receiver, the court will allow such an appointment. An alternative approach would be to allow the judgment debtor to continue operating the asset with the proviso that an agreed percentage periodically be applied to the judgment.

Yet another type of asset owned by the debtor which is suitable for management by a receiver is a cause of action that the debtor may have against another person (garnishee). This kind of asset is expressly made subject to enforcement by a judgment creditor under New York law. See CPLR 5201 (a). Not surprisingly, a judgment debtor may well have no incentive to pursue such a claim if the proceeds of the lawsuit are going to be handed over to the judgment creditor. The remedy is to have a receiver appointed who will sue in the name of the judgment debtor and then turn over to the judgment debtor whatever the law suit generates. Continue reading