New York’s Highest Court Rules That Creditors May Seize, Before Obtaining A Judgment, Debtors’ Uncertificated, Ownership Or Membership Interests In Out-Of-State Limited Liability Companies

Under N.Y. C.P.L.R. Article 62, a plaintiff creditor may “attach” (that is, seize) “[a]ny debt or property of a defendant debtor who does not reside in Manhattan, NY, or who is secreting his property with intent to defraud his creditors or to frustrate the enforcement of a potential judgment in the creditor’s favor.” The sheriff actually or constructively holds the property so as to apply the property to the creditor’s judgment if the creditor should prevail in court. On February 16, 2010, in Hotel 71 Mezz Lender LLC v. Falor (N.Y. Feb. 16, 2010), linked here: http://www.nycourts.gov/ctapps/decisions/2010/feb10/9opn10.pdf, the New York Court of Appeals held that a debtor’s ownership or membership interests in limited liability companies (“LLCs”) are “property” subject to pre-judgment seizure under N.Y. C.P.L.R. Article 62, even where (i) the LLCs are formed outside of New York State and (ii) the debtor’s interests in the LLCs “are not evidenced by written instruments, such as certificates or negotiable instruments.” As a result, the Hotel 71 Mezz Lender Court, reversing the Appellate Division’s order and reinstating the orders of the New York County Supreme Court, held that the Supreme Court properly issued an order of attachment in the sum of $65,000,000 on the defendant manager of twenty-two LLCs formed in Delaware, Georgia, and Florida, in which the non-party borrower possessed uncertificated, ownership or membership interests. In the Hotel 71 Mezz Lender case, the defendant manager (of the 22 out-of-state LLCs) did not reside in New York State. However, the manager had executed a guarantee of payment of the plaintiff creditor’s loan to the borrower in which the manager consented to the jurisdiction of any federal or state court in Manhattan, NY in any lawsuit arising out of or relating to the guarantee. Further, the sheriff served the defendant manager personally with the order of attachment while the manager was present in Manhattan. The New York Court of Appeals’ Hotel 71 Mezz Lender decision is consistent with, and is not a departure from, prior case law. The Hotel 71 Court observed that, under Harris v. Balk, 198 U.S. 215 (1905), “where a creditor seeks to attach a debt (an intangible form of property) solely for security purposes (i.e., the debtor is subject to the court’s personal jurisdiction), the situs of the debt is wherever the debtor is present.” In other words, the Hotel 71 Mezz Lender case confirms that a creditor may attach, pre-judgment, the uncertificated, ownership or membership interests of a debtor (who does not reside New York) in out-of-state LLCs, as long as the New York courts have personal jurisdiction over the debtor. If your company is a creditor which is seeking to seize a debtor’s assets before obtaining a judgment against the debtor, and you reside in the Manhattan, NY area, call Attorney David S. Rich at (347) 603-1143.