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United States District Court, S.D. New York

July 6, 2004.

LEE N. KOEHLER, Petitioner,

The opinion of the court was delivered by: CHARLES HAIGHT, District Judge


Two motions are presently pending before the Court. In one, Respondent The Bank of Bermuda Limited ("BBL"), a Bermudian company, moves under Rule 56, Fed.R. Civ. P., for partial summary judgment in respect of a Petition filed in this Court by Lee N. Koehler, a Pennsylvania resident, against BBL as a garnishee. By that Petition Koehler is attempting to collect on an unsatisfied judgment in excess of U.S. $2 million he obtained in the District of Maryland against A. David Dodwell, a Bermudian resident. In the other, Koehler moves for an order construing his prior motion under Rule 25(c), to substitute BBL for or join it with Dodwell as Respondents in the garnishment proceeding, as an amendment to the Petition to add a claim against BBL for fraudulent conveyance, or in the alternative, granting Koehler leave to file an serve such an amended pleading. This Opinion resolves both motions, and makes a further Order for the governance of the case.


  Familiarity with all the Court's prior opinions in this protracted litigation is assumed. In an opinion reported at 2004 WL 444101 (S.D.N.Y. March 10, 2004) (the "March 10 Opinion"), I held that three foreign judgments obtained by BBL, referred to as the Bermuda Deficiency Judgment, the Nevis Enforcement Judgment, and the Bermuda Declaratory Judgment, were each entitled to full recognition by this Court.

  In contemplation of deciding the two pending motions, the March 10 Opinion directed the parties to make two additional submissions. First, the parties were directed to address the effect of the recognition by this Court of the three foreign judgments upon any issues or claims pending before this Court. Second, the parties were directed to address BBL's contention that this Court could not make any order in respect of Dodwell's shares in The Reefs resort because the share certificates were not and never had been situated within the Court's territorial boundaries. In regard to that latter contention, the March 10 Opinion directed BBL to file and serve an affidavit executed by an individual with personal knowledge, attesting to the present location and ownership of all existing share certificates in The Reefs, as well as all transfers or other disposition of those shares between the time Koehler commenced this proceeding and the present date. BBL complied with that last direction by submitting a declaration sworn to on April 15, 2004 by William Ackerman, a Vice President in BBL's Commercial Loan Department ("Ackerman Dec.").

  Ackerman attests that as of July 1993, BBL had possession of stock certificates representing Class A and Class D shares in The Reefs, owned by Dodwell and held by BBL as collateral for Dodwell's obligations to BBL, arising out of loans BBL had made to Dodwell. Ackerman Dec. at ¶ 3. During the period that those share certificates were in BBL's possession, they were always located at BBL's main office in Hamilton, Bermuda, and were never located in BBL's branch in New York. Id.

  In October 1993, BBL and Dodwell entered into a recapitalization of The Reefs which was intended to satisfy Dodwell's obligations to BBL. Specifically, Class X and Class Y shares in The Reefs were issued based upon certain of Dodwell's Class D shares, sold, and the proceeds applied against Dodwell's outstanding obligations. The Class X and Class Y shares were always located in Bermuda, and never in New York. Ackerman Dec. at ¶ 4.

  This recapitalization of The Reefs stock was fully executed on October 29, 1993. See the March 10 Opinion, 2004 WL 444101, at *4. Having registered his District of Maryland judgment against Dodwell in this Court, Koehler filed his initial Petition in this Court on October 27, 1993. The case came before the late District Judge Robert J. Ward, sitting in Part I, who on October 29, 1993 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.
  We know from the Ackerman Declaration that on October 29, 1993, the date of Judge Ward's order, BBL was in fact in possession of "stock certificates owned by A. David Dodwell." We know that because Ackerman Dec. ¶ 5 says:


In or about July 1994, Dodwell's Class A and Class D shares were returned to Dodwell because the obligations for which BBL had held these shares as collateral had been repaid. At Dodwell's instructions, the shares were transferred to Andadod Limited ("Andadod"). Upon information and belief, Anadadod is a Bermuda company that is 100% owned by Harrington Limited in its capacity as trustee of a Bermuda trust for the benefit of Dodwell and his children, and the address for Andadod is Cedar House, 41 Cedar Avenue, Hamilton, Bermuda.
It would appear that the only inference one can draw from this assertion is that the recapitalization creation of Class X and Class Y shares in The Reefs through the vehicle of Dodwell's Class D shares did not consume all of Dodwell's Class A and Class D shares; some of those shares remained in BBL's possession until July 24, when on Dodwell's instruction, and in disregard of Judge Ward's October 29, 1993 order that such shares be delivered to Koehler, BBL transferred Class A and Class D shares in The Reefs to a Dodwell family trust.

  BBL did not comply with Judge Ward's order because it took the position that this Court did not have personal jurisdiction over BBL. That issue consumed years of litigation, involving sanctionable dilatory conduct by BBL and its former counsel, the dismal details of which it is not necessary to recount here. For present purposes suffice it to say that BBL has recently, through successor counsel, abandoned that position entirely, and acknowledged that this Court has personal jurisdiction over BBL in respect of Koehler's Petition. See the March 10 Opinion, 2004 WL 444101, at *6.

  Ackerman concludes by attesting that Dodwell's shares in The Reefs "were the only asset that BBL ever had in its possession. BBL does not currently have in its possession any assets belonging to Dodwell." Ackerman Dec. at ¶ 6. Koehler does not accept the accuracy of those assertions, which in some respects volunteer information that the Court did not request. Koehler's brief in response to the March 10 Opinion at 2-3 refers to documents produced by BBL to Koehler in discovery that raise at least the possibility that at one time BBL had possession of Dodwell's share certificates in Windward Properties Limited, again as security for Dodwell's indebtedness to BBL. It may be necessary in future to inquire further into the Windward shares, since Judge Ward's October 29, 1993 order directed BBL to deliver to Koehler "any stock certificates owned by A. David Dodwell" up to the value of the Maryland judgment; the order was not limited to shares in The Reefs. But the Court can decide the pending motions without pursuing the question of the Windward shares.


  A. The Effect of the Bermuda Declaratory Judgment

  The Bermuda Declaratory Judgment, entitled to full recognition and effect in this Court, is dispositive of BBL's motion for partial summary judgment and Koehler's motion for leave to assert a claim for fraudulent conveyance against BBL. That Judgment requires that BBL's motion be granted and Koehler's motion be denied.

  In the Bermuda Declaratory Judgment, the Bermuda Supreme Court held that the recapitalization of The Reefs in October 1993 was, in respect of BBL's and Dodwell's dealings with each other, entirely valid, legal, and untainted by fraud or any other impropriety. The Bermuda Court did not sign that judgment until 2001, but it spoke nunc pro tunc, and in doing so affixed that Court's seal of approval upon the 1993 dealings between BBL and Dodwell. Since the Bermuda Declaratory Judgment is recognized by this Court and consequently binding upon Koehler, Koehler has no basis in fact or in law to claim that the treatment of Dodwell's shares in The Reefs by the recapitalization constituted a fraudulent conveyance of those shares by BBL to Dodwell.

  It necessarily follows that (1) BBL's motion for partial summary judgment will be granted, to the extent that it involves the conduct of BBL and Dodwell in respect of Dodwell's Class D shares in The Reefs that formed the basis in the recapitalization for the issuance and subsequent sale of the Class X and Class Y shares; and (2) Koehler's motion to add a fraudulent conveyance claim against BBL in respect of those shares in The Reefs will be denied.

  B. Remaining Remedies Available to Koehler

  The facts recounted in Part I of this Opinion demonstrate that when in July 1994 BBL transferred to Dodwell's family trust the Class A and Class D shares in The Reefs that Dodwell owned and were not involved in The Reefs recapitalization, BBL acted in derogation of the October 29, 1993 order of this Court signed by Judge Ward, which directed BBL as garnishee to deliver to Koehler "any stock certificates owned by A. David Dodwell" in BBL's possession at that time.

  When BBL transferred these shares to the Dodwell family trust, the bank surely had knowledge of Judge Ward's order, either directly, or constructively through the knowledge of New York counsel representing BBL at the time. It is no answer for BBL to say that initially it challenged this Court's personal jurisdiction over it. Of course, BBL had every right to make that challenge; and had it succeeded, Judge Ward's order ex parte order would have been vacated. But BBL could not safely assume in 1994 that its jurisdictional challenge would ultimately succeed, and in point of fact BBL has now abandoned it, agreeing that it is subject to this Court's jurisdiction. The only equitable course now open is to regard BBL as subject to this Court's jurisdiction ab initio, that is to say, on October 27, 1993, when Koehler filed his Petition against BBL as garnishee. It follows that BBL acted imprudently and, more to the point, in violation of Judge Ward's order, still in effect, when the bank yielded to Dodwell's demand that Dodwell's remaining shares in The Reefs be transferred by BBL to the Dodwell family trust. Unless I am myself prepared to disregard Judge Ward's order as a nullity or meaningless exercise (and there is no basis for me to do so), I must consider whether BBL's disregard of Judge Ward's order has legal consequences for BBL. I am certainly not prepared at present to conclude that there are none. The question will be reserved for further briefing and argument.

  This question arises because BBL violated Judge Ward's order. In some circumstances, the violation of a judge's order is punishable as a civil contempt of Court. Should BBL therefore be held in civil contempt of this Court? I think not. A court has the power to hold an individual or entity in civil contempt when (1) there is a "clear and unambiguous" court order; (2) there is clear and convincing proof of noncompliance; and (3) the party has not attempted to comply in a reasonably diligent manner. New York State Nat'l. Org. for Women v. Terry, 886 F.2d 1339, 1351 (2d Cir. 1989), cert. denied, 495 U.S. 947 (1990). In the case at bar, the first two elements are satisfied. Judge Ward's order directing BBL to turn over any Dodwell-owned share certificates to Koehler could not be more clear or less ambiguous; and BBL does not even pretend to have complied with it. But BBL was not guilty of that failure to exercise reasonable diligence in compliance that is required by the third element. As noted, BBL responded to Koehler's Petition, in aid of which Judge Ward issued his order, by challenging this Court's jurisdiction over BBL. That challenge was legally permissible; and, while BBL and its former counsel did not conduct themselves in a reasonably diligent manner in pressing it (for which they have paid a price), that conduct does not satisfy the third element of civil contempt of Judge Ward's order.*fn1

  BBL stresses the fact, sufficiently established by the Ackerman Declaration, that share certificates owned by Dodwell were never physically present in the offices of BBL's New York affiliate, and accordingly beyond the jurisdiction of this Court. The briefs of counsel debate at length the "separate entity rule," established by New York court decisions, which holds generally that "a warrant of attachment served upon a branch bank does not reach assets held for, or accounts maintained by, the defendants in other branches," the courts reasoning that "each branch of a bank is a separate entity, in no way concerned with accounts maintained by depositors in other branches." Cronan v. Schilling, 100 N.Y.S.2d 474, 476 (Sup.Ct. N.Y. Cty. 1950). In diversity cases, federal courts follow the New York rule. See, e.g., Lok Prakashan Ltd. v. Indian Abroad Publications, Inc., No. 00 Civ. 582, 2002 WL 1585820 (S.D.N.Y. July 16, 2002) ("New York adheres to the separate entity rule . . . the rationale for [which] . . . is that an intolerable burden would otherwise be placed upon banking and commerce." (citations omitted). A corollary to the separate entity rule is the equally well established proposition that "a New York Court cannot attach property that is outside of its jurisdiction." Lok Prakashan, 2002 WL 1585820, at *2.

  The application of these rules of law to the case at bar would appear to preclude this Court from entering an in rem order of attachment against share certificates which at the time were owned by Dodwell and possessed by BBL but were not situated within this Court's territorial jurisdiction. No such order could be entered at the present time in any event, since the Ackerman Declaration shows that BBL has not possessed any of Dodwell's share certificates since July 1994, when it turned Dodwell's remaining shares in The Reefs over to the Dodwell trust. But Koehler's entitlement to some form of relief — or, to phrase the matter differently, BBL's vulnerability to the some consequences for violating Judge Ward's order — remains, as I have said, an open question.

  That question remains open because, as noted supra, BBL is subject to personal jurisdiction in this Court and, in contemplation of law, has been since the filing of Koehler's Petition and the entry of Judge Ward's order. And it is well settled that "[o]nce personal jurisdiction of a party is obtained, the District Court has authority to order it to freeze property under its control, whether the property be within or without the United States." United States v. First National City Bank, 379 U.S. 378, 384 (1965). See also United States v. Ross, 302 F.2d 831, 834 (2d Cir. 1962) (Second Circuit stated, in respect of share certificates located in the Bahamas, that "[p]ersonal jurisdiction [over the defendant] gave the [district] court power to order Ross to transfer property whether that property was within or without the limits of the court's territorial jurisdiction.").

  While First National City and Ross involved tax claims on behalf of the federal government, the Second Circuit has extended the rule to suits between private parties. See, e.g., Inter-Regional Financial Group, Inc. v. Hashemi, 562 F.2d 152, 155 (2d Cir. 1977) (in action for breach of an indemnity against defendant, subject to the district court and owning share certificates situated abroad, the Second Circuit upheld a Connecticut state statute which "authorize[d] the court to issue an injunction in aid of the attachment which may take the form of a mandate to bring the certificates into the state . . . and to deliver them into the actual physical control and possession of the sheriff)."

  Hashemi involved a state attachment statute, but a court's power over an entity subject to its jurisdiction to direct a transfer of property does not depend upon the existence of a legislative enactment; courts also derive such powers from principles of equity. See First National City, 379 U.S. at 383.

  If one accepts the Ackerman Declaration's assertion that BBL presently does not have in its possession any share certificates owned by Dodwell in any company, then it would appear that this Court, unlike the district courts in Ross and Hashemi, is simply not in a position to order BBL to transfer Dodwell's shares from BBL to the Registry of this Court.

  But the Court raises the following questions sua sponte. Assume arguendo that BBL transferred to Dodwell or to the Dodwell trust share certificates, not involved in The Reefs recapitalization, in such a manner and at such a time as to constitute a violation of Judge Ward's order. (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?

  Since counsel have not had an opportunity to brief these questions, which I raise for the first time in this Opinion, they are directed to file and serve simultaneously further briefs on or before July 16, 2004, and reply briefs, if so advised, on or before July 23, 2004. These briefs will be limited to the issues posed in Part II.B. of this Opinion, as further defined by the preceding questions. The case will be called for oral argument on these issues at 2:00 p.m. on July 28, 2004.


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