Baker & McKenzie David Zaslowsky and Grant Hanessian

Cayman Islands, USA March 25 2013

Execution of Judgment.  Turnover.  District court denies motion for an order to compel bank to turn over funds located in accounts of the bank’s foreign subsidiaries because the bank did not have “possession or custody” of the funds within the meaning of Section 5225 of the New York Civil Practice Law and Rules.

Plaintiff, the Commonwealth of the Northern Mariana Islands (the “Commonwealth”), had judgments against William and Patricia Millard (the “Millards”) for unpaid taxes.  The Commonwealth registered the judgments in the District Court for the Southern District of New York.  Alleging that the Millards had funds in accounts with Cayman Islands subsidiaries of garnishee Canadian Imperial Bank of Commerce (“CIBC”), the Commonwealth sought an order pursuant to § 5225(b) of the New York Civil Practice Law and Rules (“CPLR”) compelling CIBC to turn over the money.

Section 5225(b) authorizes courts to order turnover of property that is in the “possession or custody” of the garnishee.  The court denied the Commonwealth’s motion because it was not satisfied that CIBC was in “possession or custody” of the Millards’ Cayman Islands accounts.

Without precedent to guide it, the court looked to the text of § 5225(b) to evaluate the ability of a court to order a bank to turn over funds located in accounts of its foreign subsidiaries.  The Commonwealth attempted to argue that the concept of “control” applied such that CIBC controlled its foreign subsidiaries and had the legal and practical ability to order the foreign subsidiaries to turn over the assets.  But the court found that the word “control” is entirely absent from § 5225.

The court observed that the phrase “possession, custody, or control” appears in the CPLR mainly in the context of the potential disclosure of information — i.e., discovery.  By contrast, the phrase “possession or custody” — without reference to “control” — appears in the CPLR eleven times, in all instances related to the disposition of property.  Therefore, the court found that the Legislature persistently chose to set a higher standard for asset turnover than for the mere disclosure of information.  The court concluded that the Commonwealth had not satisfied its burden under § 5225(b) to show that CIBC was in “possession or custody” of the Millards’ Cayman Islands accounts.

However, the court realized that the precise meaning of “possession or custody” under § 5225(b) is an unsettled question of New York law due to the scarcity of state-law decisions on the issue.  The court noted that the Commonwealth had made a substantial showing that under the more relaxed, “practical” standard the Commonwealth had advocated, its evidence might have been sufficient to warrant a turnover order.  Furthermore, without interim relief, there was a substantial risk that the funds in question would be dissipated during an appeal of the court’s decision.  Therefore, the court decided to continue a restraining order that it had previously issued as to the CIBC and the Millard accounts at issue.  The court found that it was appropriate to leave that restraint in place, under Federal Rule of Appellate Procedure 8, pending the Commonwealth’s appeal to the Second Circuit.