Executing on a Judgment Debtor’s Interest in a Corporation or Other Intangible Property
Occasionally a judgment creditor will be fortunate to locate and restrain a brokerage account containing shares of stock in publicly traded corporation or other marketable securities. The process of liquidating that is fairly easy: after restraining the account, an Execution is delivered to the Sheriff or, in New York City, a City Marshal, who will levy on the account and in due course receive the value of the securities after they are liquidated.
But what if the debtor owns stock in a closely held corporation or other intangible property? How can a judgment creditor seize and liquidate that? We recently obtained an excellent ruling by Justice Paul A. Goetz of the Supreme Court, New York County, in Lucero v. Kahn, 2020 NY Slip Op 33019[U], 2020 N.Y. Misc. LEXIS 6079, which shows that the process can be easier than it seems. A copy of the decision is available here.
In Lucero, we prevailed in a fraudulent conveyance action and obtained a large money judgment against Kahn, but Kahn claimed he had no assets. However, our investigation indicated that Kahn was connected to a valuable commercial building owned by a corporation named Polaris. We issued a subpoena to the mortgage company and obtained the loan application and other documents indicating that Kahn had 100% ownership of Polaris and that the property had an appraised value well in excess of the mortgage amount.
It was not possible to execute on the real property directly because we only had a judgment against Kahn personally, so we elected to proceed with an execution sale of Kahn’s interest in Polaris. After "the Marshal" levied and noticed a sale, Kahn filed a motion to enjoin the sale, arguing that an execution sale was premature because the Marshal did not have physical possession of anything to sell. Kahn claimed that we were required to file a turnover order proceeding under CPLR 5225 to obtain possession of the shares of stock, to identify Kahn’s other creditors, and to determine his actual interest in Polaris. Kahn’s counsel colorfully argued that a Marshal may not sell property “on speculation” because if he did so he would be “on the same level as a carnival barker hustling speculative interests in personal property. . . . Bidders be damned.”
Justice Goetz rejected all the debtor’s arguments and directed the execution sale to proceed. The Court found nothing in the applicable execution statutes, CPLR 5232 and CPLR 5233, or any other statute requiring a judgment creditor to file a turnover proceeding before seeking to sell personal property of this type at an execution sale. The Court held that uncertificated ownership interests in a corporation are subject to levy and an execution sale, citing Hotel 71 Mezz Lender LLC v. Falor, 14 N.Y.3d 303, 315-316 (2010). Further, “while the general rule is that the personal property being sold at an execution sale must be on hand for inspection by bidders, there are certain exceptions,” including “when inspection may be pointless because the sale involves bonds or shares of stock.” Moreover, the Court noted that an execution sale could proceed even if stock certificates existed.
As for the Kahn’s contention that he did not own 100% of the Polaris stock, as the bank records indicated, that did not matter either. Whether “Kahn owns 100%, 60%, 40% or some other percentage in Polaris Properties is of no moment because ‘the lack of specific value [has] no legal effect on the validity of the attachment" (Hotel 71, 14 N.Y.3d at 313). Rather, ‘the operative fact [is] whether the property interest [has] potential economic value that [is] worthy of pursuit by the [judgment] creditor’ (id.).” And whether Kahn's interest in Polaris “is encumbered, subject to other liens or claims or is contingent and speculative in value is not an impediment to the Marshal's execution sale because whoever purchases the ownership interest does so subject to any superior interests.”
After this ruling the case was quickly settled. Lucero thus reminds us that intangible property interests in any form can be levied upon and sold at an execution sale. See Gutierrez v. Bernard, 27 A.D.3d 377 (1st Dep’t 2006) (“intangible property—here the contract to purchase the cooperative apartment—may be subject to execution”); Carbo Indus. Inc. v. Alcus Fuel Oil Inc., 46 Misc. 3d 726 (Sup. Ct. Nassau County 2014) (“’intangible interests . . . are subject to levy and are infinite in their variety’”) (quotingHotel 71 Mezz Lender LLC v. Falor, 14 N.Y.3d 303, 312 (2010) (quoting D. Siegel, New York Practice § 487)); see alsoWoodgate v. Fleet, 44 N.Y. 1 (1870) (reversionary interest in real estate may be the subject of levy and sale upon execution even though the extent of such interest cannot be ascertained at the time of such sale and the reversion is contingent upon the happening of events that may never occur).
That the Sheriff or Marshal does not have physical possession of share certificates or other indicia of the debtor’s interest should not normally be an impediment. See Manhattan Taxi Serv. Corp. v. Checker Cab Mfg. Corp., 253 N.Y. 455, 459 (1930) (Cardozo, Ch. J.) (“the requirement of view and presence [at an execution sale] is not [not] so absolute as to admit of no exception. The need for some exceptions and their range must depend upon considerations of policy and fairness that cannot be formulated with precision in advance of the event. [For example] an inspection may be useless, as upon a sale of bonds or shares of stock.).”
That an asset may be encumbered, subject to other liens or claims, or is contingent and speculative in value, is not an impediment either. Whoever purchases the asset (which may be the judgment creditor by credit bid) takes the asset subject to superior interests and the risks inherent in an execution sale. Professors Siegel and Connors aptly describes this as the “stand-in-the-shoes rule.” D. Siegel & P. Connors, New York Practice § 488, at 931 (6th ed. 2018). In the end, a judgment creditor is entitled by execution on his judgment to force a sale of any asset in which he believes the judgment debtor may have an interest and he thinks may have value. Id. § 487, at 926-27.
It is not up to a Marshal or Sheriff to make a determination whether an execution sale is worth the judgment creditor’s trouble and expense. Nor should the judgment debtor be in a position to complain.