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Hotel 71 Mezz Lender LLC v. Falor

February 16, 2010


The opinion of the court was delivered by: Jones, J.

This opinion is uncorrected and subject to revision before publication in the New York Reports.

The primary issue before the Court is whether the intangible personal property plaintiff sought to attach, i.e., defendants' ownership/membership interests in various out-of-state business entities, was subject to attachment under CPLR article 62. We conclude that the issuance of an order of attachment in New York on defendant Guy T. Mitchell, the nondomiciliary garnishee of defendants' intangible personal property, who voluntarily submitted to personal jurisdiction in New York, was appropriate.

We further hold that Supreme Court did not abuse its discretion in appointing a receiver pursuant to CPLR 5228.

By agreement dated March 29, 2005, plaintiff Hotel 71 Mezz Lender LLC made a $27,338,801 mezzanine loan to nonparty Chicago H & S Senior Investors, LLC (borrower) for the purpose of developing and renovating Hotel 71, a prominent hotel located in Chicago.*fn1 This loan was made by plaintiff and accepted by the borrower in New York. Further, the proceeds of this loan were disbursed from New York. On that same day, defendants, including Guy T. Mitchell, who do not reside in New York, executed a guaranty of payment (guaranty) 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 any suit, action or proceeding arising out of or relating to the guaranty. By executing this guaranty, defendants waived all defenses and counterclaims that might have been asserted against plaintiff in the event the borrower defaulted on the loan. In addition to being negotiated in New York, the guaranty was to be governed by and construed in accordance with the laws of New York State.

The borrower thereafter defaulted on the loan and filed for bankruptcy protection. On April 9, 2007, plaintiff commenced this action against the guarantors in Supreme Court, New York County to enforce the guaranty and recover the amounts due under the loan. After defendants answered, plaintiff made an ex parte application, pursuant to CPLR 6201, for a prejudgment order of attachment.*fn2 Plaintiff sought to attach defendants' property interests as security for the collection of any judgment entered against defendants. On September 25, 2007, Supreme Court granted the order of attachment in the sum of $65,149,926 (the amount secured by the order). The court, however, stayed service of the levy by the Sheriff to afford defendants the opportunity to oppose plaintiff's application for an order of attachment. In early October 2007, the order of attachment was delivered to the Sheriff of the City and State of New York.

On October 23, 2007, Supreme Court heard oral argument from counsel regarding the order of attachment. Defendant Mitchell, who had been deposed in Supreme Court that day, was present to oppose the order. Following the hearing, Supreme Court permitted the Sheriff to serve the order of attachment upon defendant Mitchell personally, as garnishee for any ownership/membership interests defendants may have had in 23 outof-state entities, and as the apparent manager of the entities.*fn3

The property at issue consisted of defendants' interests in 22 limited liability companies formed in Delaware, Georgia and Florida and a Florida corporation solely owned by defendant Mitchell. Unlike stock certificates, which are tangible property, defendants' ownership/membership interests are intangible and uncertificated.

After Supreme Court sealed the record, defendant Mitchell, pursuant to CPLR 6219, provided plaintiff with garnishee statements for the 23 entities. Defendant Mitchell does not dispute that he is the "proper garnishee" (within CPLR 5201 [c] [1]) for defendants' ownership/membership interests.*fn4

Nor does defendant Mitchell argue that he was improperly served. Defendant Mitchell, through counsel, stated in a letter to Supreme Court dated January 28, 2008, "[w]e are prepared to waive any argument that the proper garnishee was not served with the order of attachment or the related levies in this case."

In separate orders to show cause, plaintiff moved to confirm the order of attachment in the sum of $65,149,926, and for the appointment of a receiver due to defendants' alleged refusal to produce documents related to their finances and their refusal to attend duly noticed depositions. By order entered February 8, 2008, Supreme Court granted plaintiff's motion to confirm the order of attachment, finding that plaintiff made the necessary showing under CPLR 6212 to confirm attachment*fn5 and that attachment was necessary in the aid of security. Further, the court ruled that defendants' intangible interests were attachable property under the CPLR and that, because those interests were not evidenced by certificates, the service of the levy on defendant Mitchell was sufficient to fix the situs of said property in New York. Two months later, Supreme Court issued an order stating, "[c]onditioned upon the entry of judgment, . . ., [plaintiff's] motion for the appointment of a receiver [of defendants' ownership/membership interests in 23 out-of-state entities] is granted." As set forth in this order, the receiver is authorized to take such actions as are appropriate to satisfy the order of attachment and any judgment(s) entered against defendants.

On February 6, 2008 and April 22, 2008, Supreme Court granted plaintiff summary judgment on liability against six of the defendants, including defendant Mitchell. By August 27, 2008, judgment in the amount of $52,404,066.54 was entered against these defendants. To date, the judgment has not been satisfied.

The Appellate Division reversed in a 3-1 decision, holding that because Supreme Court lacked jurisdiction over the defendants' interests in the limited liability companies and other entity, that court erred in granting plaintiff's motion to confirm the order of attachment. Citing National Broadway Bank v Sampson (179 NY 213 [1904]), the Appellate Division majority stated, "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." Thus, because defendant Mitchell was only temporarily in New York when he was served, his presence was insufficient to support the attachment. The majority also concluded that Supreme Court abused its discretion in appointing a receiver.

In concluding that Supreme Court's orders should be affirmed, the dissent argued, based on the statutory framework of CPLR article 62 and Harris v Balk (198 US 215 [1905]), that service on a proper garnishee while that individual is in New York--even temporarily--is enough to permit the attachment of an intangible asset. The dissent also concluded, given defendants' alleged conduct in refusing to produce documents and appear for depositions, that Supreme Court was warranted in appointing a receiver to aid in post-judgment enforcement. The Appellate Division granted plaintiff leave to appeal, and we now reverse.

Plaintiff argues that Supreme Court's order of attachment was proper in all respects. Defendants counter that Supreme Court lacked jurisdiction over the ownership interests plaintiff sought to attach because they were not located in New York and, thus, could not be properly attached. Accordingly, defendants conclude, Supreme Court erred in granting ...

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