By: Thomas S. Tripodianos Published: August 2010

May Lender seeking to enforce guaranty against nonresident guarantors of loan attach ownership/membership interests in various out-of-state business entities?

Question. May Lender seeking to enforce guaranty against nonresident guarantors of loan attach ownership/membership interests in various out-of-state business entities?

Answer. Yes.

By agreement dated in 2005, Lender made a loan to borrower for the purpose of developing and renovating real property. This loan was made by Lender and accepted by the borrower in New York. Further, the proceeds of this loan were disbursed from New York. On that same day, Guarantors 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, Guarantors waived all defenses and counterclaims that might have been asserted against Lender 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. Lender seeks to enforce the guaranty and recover the amounts due under the loan. Lender sought and obtained a prejudgment order of attachment seeking to attach Guarantors' property interests as security for the collection of any judgment entered against Guarantors.

Attachment simply keeps the debtor away from his property or, at least, the free use thereof; it does not transfer the property to the creditor. It is frequently used when the creditor suspects that the debtor is secreting property or removing it from New York and/or when the creditor is unable to serve the debtor, despite diligent efforts, even though the debtor would be within the personal jurisdiction of a New York court.

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

Lender eventually obtained a judgment against the Guarantor. To date, the judgment has not been satisfied. Guarantor challenges the attachment because he does not live in New York and his temporary presence in New York when he was served was insufficient to support the attachment and that the Court lacked jurisdiction over the ownership interests Lender sought to attach because they were not located in New York and, thus, could not be properly attached.

Guarantor voluntarily submitted to the personal jurisdiction of the court by executing the personal guaranty. Because personal jurisdiction was properly asserted over Guarantor the Court had the authority to order pre-judgment attachment of the property Guarantor owned and/or controlled, and service of the order upon him while he was in New York was appropriate.

The next consideration is whether the property sought to be attached was subject to attachment. The intangible property Lender sought to attach-Guarantor’s ownership/membership interests in 22 out-of-state limited liability companies-are akin to intangible contract rights, and are clearly assignable and transferable. Thus, the interests in question are “property”.

Here, the intangible interests sought to be attached are not evidenced by written instruments, such as certificates or negotiable instruments. If these interests were so evidenced, their situs would be where the written instruments were physically present. Just as a debt clings to the debtor when he enters a state other than the state where the debt was incurred, it follows that Guarantors' uncertificated ownership interests, which Guarantor possesses or has custody over, travel with him, and were attachable in New York based on his presence this state.

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