A Turnover Proceeding With Disputes Over A Forum Selection Clause and The Application of the Internal Affairs Doctrine

• Posted on: Mar 28 2022

By: Jeffrey M. Haber

Today, we examine 79 Madison LLC v. Ebrahimzadeh, 2022 N.Y. Slip Op. 02052 (1st Dept. Mar. 24, 2022) (here), a judgment enforcement action under Article 52 of the CPLR that contains some interesting issues that this Blog has not addressed in quite some time, if at all. 

The first issue we examine is the forum selection clause.  A forum selection clause is a contractual provision that sets forth the location designated by the parties for dispute resolution. Such clauses can be found in virtually every type of contract imaginable, e.g., lease agreements (as in 79 Madison), employment agreements, commercial contracts, and purchase and sale agreements. Parties require forum selection clauses to reduce litigation expenses, avoid adverse laws, and mitigate the risks associated with unknown foreign judges and/or juries. In short, forum selection clauses “provide certainty and predictability in the resolution of disputes.”¹ 

Forum selection clauses come in two forms: mandatory and permissive. In the former, the parties are “required to bring any dispute to the designated forum,” while the latter “only confers jurisdiction in the designated forum, but does not deny plaintiff his choice of forum, if jurisdiction there is otherwise appropriate.”² The use of the word “shall” in a forum selection clause has been interpreted as making the clause mandatory.³ 

Under New York law, “parties to a contract may freely select a forum which will resolve any disputes over the interpretation or performance of the contract.”⁴  Such clauses “are prima facie valid” and “are not to be set aside unless a party demonstrates that the enforcement of such would be unreasonable and unjust or that the clause is invalid because of fraud or overreaching, such that a trial in the contractual forum would be so gravely difficult and inconvenient that the challenging party would, for all practical purposes, be deprived of his or her day in court.”⁵

In interpreting forum selection clauses, courts apply the principles of contract construction.

The second issue we examine is the internal affairs doctrine. The internal affairs doctrine is a “conflict of laws principle which recognizes that only one State should have the authority to regulate a corporation’s internal affairs—matters peculiar to the relationships among or between the corporation and its current officers, directors, and shareholders—because otherwise a corporation could be faced with conflicting demands”.⁶  Stated differently, “[u]nder the internal affairs doctrine, claims concerning the relationship between the corporation, its directors, and a shareholder are governed by the substantive law of the state or country of incorporation.”⁷ 

However, the “internal affairs doctrine, although potent, has very specific applications.”⁸ In particular, the doctrine only “governs the choice of law determinations involving matters peculiar to corporations, that is, those activities concerning the relationships inter se of the corporation, its directors, officers and shareholders.”⁹ The doctrine “does not apply to those defendants who are not current officers, directors, and shareholders” of the corporation.¹⁰ 

In New York, the Limited Liability Law contains a provision that mirrors the foregoing principles with respect to foreign LLCs. In that regard, LLC Law § 801(a) provides, “the laws of the jurisdiction under which a foreign limited liability company is formed govern its organization and internal affairs and the liability of its members and managers.”

The third issue we examine is the anti-suit injunction. Courts in New York have long recognized the propriety and importance of issuing anti-suit injunctions where a parallel action in a foreign court is being prosecuted in contravention of a New York forum selection clause and where such parallel action undermines the integrity of the court’s judgments.¹¹ In the First Department, “the use of injunctive relief to enforce a forum selection clause has been upheld as a proper exercise of discretion.”¹² 

In Indosuez, the First Department held that the issuance of an anti-suit injunction was proper “[i]n the face of the mandatory choice of law and forum selection clauses.”¹³ The Court explained that “comity was not implicated because there was no possibility of treading on the legitimate prerogatives of the foreign jurisdictions to which defendant had repeatedly turned,” and that the “injunction was consonant with our policy of enforcing choice of law and forum election clauses.”¹⁴ Moreover, the Court held that where “once there [is] a New York judgment on the merits, the courts of this State [are] entitled to protect it” by issuing an anti-suit injunction to prohibit “defendant’s harassing and bad faith foreign litigation.”¹⁵ 

79 Madison LLC v. Ebrahimzadeh

79 Madison was commenced by plaintiff to recover a money judgment against defendant pursuant to his personal guaranty of the obligations under a lease agreement for space located in New York City.¹⁶ The lease was assigned to, and assumed by, the judgment debtor’s company pursuant to an assignment and assumption of lease agreement. 

The lease contained a broad, mandatory forum selection clause designating New York County as the place of litigation. The guaranty did not; but the parties signed it, contemporaneously with the lease. [Ed. Note: under New York law, because the guaranty was signed contemporaneously with, and made part of the transaction, the forum selection clause also governed the guaranty.¹⁷] 

Defendant defaulted on the lease and guaranty obligations. Soon thereafter, plaintiff commenced default proceedings, which culminated with the entry of judgment against defendant. 

During judgment enforcement proceedings, plaintiff learned that defendant had entered into a contract to purchase real property in Bridgehampton, New York. Plaintiff also learned that defendant commenced an action in Suffolk County, Supreme Court, seeking specific performance of the contract that defendant claimed had been breached. In the complaint, defendant alleged that he had sufficient funds to close on the purchase without a mortgage, which he claimed was supported by a letter from City National Bank (“CNB”).

In the letter, CNB advised that defendant was the sole owner of Corniche Capital LLC (“Corniche”), which had an account at the bank containing almost $5 million. Upon learning this information, plaintiff issued subpoenas with restraining notices seeking information relating to the Suffolk County action and the sale of the premises. In response to the subpoenas, plaintiff learned that the premises had been purchased by Brick House NY, LLC (“BHNY”). Plaintiff issued additional subpoenas with restraining notices to the parties involved in the BHNY transaction. 

In response to the additional subpoenas, defendant filed an action in Supreme Court, Kings County, seeking temporary restraints as to compliance with the subsequent subpoenas and relief under CPLR § 5240. The court granted the temporary restraints. 

Thereafter, plaintiff filed an order to show cause in Supreme Court, New York County seeking (a) a temporary restraining order and injunctive relief prohibiting defendant from filing or maintaining actions in other jurisdictions wherein he could seek to collaterally attack the judgment or prevent plaintiff’s enforcement of the judgment, as well as (b) the turnover of defendant’s membership interests in Corniche pursuant to CPLR § 5225(a). The court granted the request for the temporary restraints and prohibited defendant from filing any actions outside New York County or taking any steps in existing actions “collaterally attacking, or attempting to limit, modify, or prevent the enforcement of, [plaintiff’s] judgment against him”. 

Later, Supreme Court granted the motion in its entirety (i.e., it ordered the turnover of defendant’s interest in Corniche and issued an anti-suit injunction). In doing so, the court rejected defendant’s argument that the anti-suit injunction was an effort to change venue, finding that defendant was attempting to frustrate plaintiff’s efforts to litigate enforcement of the judgment in New York County, and rejected defendant’s contention that Corniche was a Wyoming entity, whose law applied instead of the law of New York as required under the forum selection clause. 

The Appellate Division, First Department affirmed.

The Court held that plaintiff “met its burden of proving that defendant was ‘in possession or custody of’ … a membership interest in Corniche.”¹⁸ The Court explained that plaintiff did so by “submit[ing] a letter from City National Bank saying that defendant was Corniche’s sole owner” and the complaint in the Suffolk County action, to which a copy of the bank letter was attached as an exhibit.¹⁹

[Ed. Note: Where a judgment debtor is in possession of property subject to a judgment, CPLR § 5225(a) permits a judgment creditor to seek turnover by post-judgment motion in the pending proceeding (as opposed to commencing a special proceeding pursuant to CPLR §§ 5225(b) or 5227). Upon determining that the subject property is due to or belongs to the judgment debtor, the court must direct turnover of all non-exempt money or property to the judgment creditor or to the Sheriff for sale at a regularly noticed auction.²⁰ Shares of stock and membership interests are property that is subject to, and is not exempt from, execution.²¹] 

The Court also held that Supreme Court properly rejected defendant’s argument that the court should have issued a charging order under the internal affairs doctrine.²² Defendant argued that under Wyoming law, membership interests cannot be turned over to a judgment creditor. Instead, the sole remedy for a judgment creditor is a charging order that requires the LLC “to pay over to the person to which the charging order was issued any distribution that would otherwise be paid to the judgment debtor.”²³ In rejecting defendant’s argument, the Court explained that the internal affairs doctrine, on which defendant’s argument was based, only applied to “relationships between a company and its directors and shareholders.”²⁴ It “does not apply where the rights of third parties external to the corporation are at issue.”²⁵ 

The Court noted that even under New York law, a charging order was not plaintiff’s sole remedy.²⁶ The Court explained that under Department authority, a court could compel a judgment debtor to turnover its interest in an LLC.²⁷ Moreover, said the Court, under CPLR §5201(b), “[a] money judgment may be enforced against any property which could be assigned or transferred … unless it is exempt from application to the satisfaction of the judgment.”²⁸ “An interest in an LLC,” observed the Court, “‘is clearly assignable and transferable’ … and … is not exempt under CPLR 5205.”²⁹ Finally, noted the Court, “[t]o the extent Limited Liability Company Law § 607(a) permits a judgment creditor to obtain a charging lien against a member’s interest, it does not say that this is the creditor’s exclusive remedy, nor does it purport to abolish or limit CPLR 5225(a).”³⁰

The Court further held that defendant was “bound by the forum selection clause in the lease that he guaranteed.”³¹ The Court noted that “[r]egardless of whether the forum selection clause [was] broad enough to include post judgment enforcement proceedings, Supreme Court properly exercised its discretion in enjoining defendant from prosecuting the special proceeding that he brought in Kings County against plaintiff.”³²

Since the judgment that plaintiff is trying to enforce was issued by Supreme Court, New York County, plaintiff properly issued subpoenas with restraining notices out of that court …. Anyone who wanted to vacate the restraining notices should have made a motion in that same court …. Thus, it was improper for defendant to commence a special proceeding in Kings County to quash the subpoenas.

However, the Court held that the injunction was “too broad”.³⁴ Therefore, the Court limited the anti-suit injunction to the Kings County proceeding.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.

References

1. Boss v. American Express Fin. Advisors, Inc., 6 N.Y.3d 242, 247 (2006) (quoting, Brooke Grp. Ltd. v. JCH Syndicate, 87 N.Y.2d 530, 534 (1996)).
2. Phillips v. Audio Active Ltd., 494 F.3d 378, 383, 386 (2d Cir. 2007).
3. ASM Communications v. Allen, 656 F. Supp. 838 (S.D.N.Y. 1987).
4. Brooke Grp., 87 N.Y.2d at 534.
5. Sterling Nat. Bank as Assignee of Norvergence, Inc. v. Eastern Shipping Worldwide, Inc., 35 A.D.3d 222 (1st Dept. 2006) (citations and quotations omitted).
6. New Greenwich Litig. Trustee, LLC v. Citco Fund Servs. [Europe] B.V., 145 A.D.3d 16, 22 (1st Dept. 2016), lv. denied, 29 N.Y.3d 917 (2017) (quoting, Edgar v. MITE  Corp., 457 U.S. 624, 645 (1982)); see also Culligan Soft Water Co. v. Clayton Dubilier & Rice LLC, 118 A.D.3d 422 (1st Dept. 2014).
7. Davis v. Scottish Re Group Ltd., 138 A.D.3d 230, 233 (1st Dept. 2016).
8. Matter of Am. Intl. Group, Inc., 965 A.2d 763, 817 (Del. Ch. 2009) (cited with approval, New Greenwich, 145 A.D.3d at 23). 
9. Id. at 817 (internal quotation marks omitted).
10. Culligan, 118 A.D.3d at 422.
11. See, e.g., Indosuez Int’l Fin., B.V. v. Nat’l Reserve Bank, 304 A.D.2d 429 (1st Dept. 2003).
12. Babcock & Wilcox Co. v. Control Components, Inc., 161 Misc. 2d 636, 645 (Sup. Ct., NY County 1993) (citations omitted).
13. 304 A.D.2d at 430 (citations omitted).
14. Id.
15. Id. at 430-31; see also Sebastian Holdings, Inc. v. Deutsche Bank AG, 78 AD3d 446, 453 (1st Dept 2010) (citation omitted).
16. The facts of 79 Madison were obtained from the electronically filed briefs and record on appeal and the First Department’s decision.
17. Brax Capital Grp., LLC v. Win Win Gaming, Inc., 83 A.D.3d 591 (1st Dept. 2011).
18. Slip Op. at *1.
19. Id.
20. Cardew v. Gialanella, 92 A.D.3d 1002 (3d Dept 2012) (citations omitted).
21. CPLR §§ 5201, 5205; ABKCO Indus. v. Apple Films, 39 N.Y.2d 670, 674 (1976).
22. Slip Op. at *1.
23. Wyoming Limited Liability Company Act § 17-29-503. Plaintiff maintained that Corniche is a Delaware LLC. Slip Op. at *1. Delaware law provides the same as Wyoming law. 6 Del. C. § 18-703(d).
24. Slip Op. at *1.
25. Id. (citation omitted).
26. Id.
27. Id. (citing, Matter of Gliklad v Chernoi, 129 A.D.3d 604 (1st Dept. 2015), lv. denied, 26 N.Y.3d 918 (2016)).
28. Id.
29. Id. (citing, Hotel 71 Mezz Lender LLC v. Falor, 14 N.Y.3d 303, 314 (2010).
30. Id. at *1-*2.
31.  Id. at *2.
32. Id. (citations omitted).
33. Id. (citations omitted).
34. Id.