Where corporations are: why casual visits to New York are bad for business.

• Author: Schroeder, Jeanne L.

Some time prior to 1881, the president of the Terre Haute Car & Manufacturing Co. was traveling through New York on his way to a seaside resort when he was served with process in a civil suit against his company. (1) The president was "not in his official capacity or upon any business of the defendant." (2) The company, "being a foreign corporation, had no place of business, and transacted no business, and had no property within this State." (3)

Most lawyers today would say that New York courts could not compel this corporation to stand trial in New York. But, this being the nineteenth century, before the days of International Shoe v. Washington, (4) the New York Court of Appeals in Pope v. Terre Haute Car & Manufacturing Co. happily imposed jurisdiction on the corporation. (5) It never occurred to the Pope court that the United States Constitution might constitute the slightest impediment to the imposition of jurisdiction. (6)

After International Shoe, such a holding became unthinkable. International Shoe involved a tax on businesses employing salesmen within the state. (7) A corporation had resident salesmen and a showroom in Washington. (8) The state commenced litigation against the corporation by serving process on its salesmen and mailing notice to International Shoe in St. Louis. (9) The Supreme Court upheld jurisdiction of the Washington courts because the defendant had "minimum contacts with [Washington] such that the maintenance of the suit [did] not offend 'traditional notions of fair play and substantial justice."' (10) In so holding, the Court remarked that "the casual presence of the corporate agent or even his conduct of single or isolated items of activities in a state in the corporation's behalf [would not have been] enough to subject it to suit on causes of action unconnected with the activities there." (11)

Many examples--three at the United States Supreme Court level--can be given in which the casual visit by an officer of a corporation that was not otherwise doing business in New York was an insufficient peg on which to hang the hat of New York jurisdiction. (12) The Restatement (Second) of Conflicts of Laws summarizes the matter in the following illustration:

A brings an action in state X against the B corporation which was incorporated in state Y. Process is served in X upon C, the president of the B corporation, who happens to be temporarily in X on his own private business. The court does not thereby acquire jurisdiction over B. (13) It would appear Pope is no longer infallible law in New York. Yet, in 2010, the New York Court of Appeals in Hotel 71 Mezz Lender LLC v. Falor (14) revived its holding in Pope and once again took the position that a casual visit to New York by a company officer is quite enough to sustain personal jurisdiction over a foreign company not otherwise doing business in New York. (15) Pope lives again, as if International Shoe had never happened.

How could the Falor court have turned back the clock to the primitive days of 1881, ignoring the minimum contacts requirement for bringing foreign businesses under New York jurisdiction? The answer is that, given the confused facts of Falor, it is likely the court failed to appreciate the logical predicates of its own holding. (l6) The case involved a pre-judgment order of attachment. (17) It seemed to be an exercise in quasi in rem jurisdiction. (18) The Falor court therefore viewed the controversy as involving jurisdiction over things, not over persons. (19) Nevertheless, Falor was indeed a holding on in personam jurisdiction over a business with no minimum contacts with New York. (20) It stands for the proposition that casual visits to New York by company agents can, without anything more, submit the company to New York jurisdiction. (21) A company officer that flies to New York to take in a Broadway show threatens to put his company at the mercy of the New York courts.

Because the Falor decision ignores at least three direct holdings and one dictum of the United States Supreme Court that casual visits by an officer do not, without more, imply jurisdiction over the company, Falor must be viewed as bad law. (22) It should not be followed or cited in New York or other states. It probably should not even be accorded res judicata respect in New York or full faith and credit in other states. (23)

But there is more! The Falor court re-defines the word "possession" in New York personal property law, so that it encompasses intangible property. (24) It does so because it felt compelled by the United States Constitution to so define it. (25) We shall show that this is completely erroneous. The Constitution does not require the states to adopt a specific theory of property. (26)

In short, the Falor court violates the Constitution by imposing jurisdiction over a company with no minimum contacts with New York. In addition, it purports to change New York property law based on a non-existent constitutional principle.

To establish these propositions, this article is divided into six parts. First, we review the confusing facts in Falor, emphasizing that the source of confusion was the fact that the "proper garnishee" in the case had consented to New York jurisdiction for himself, but not for the entities of which he was agent. (27) Second, we review the nature of prejudgment attachment in New York, much humbled since Shaffer v. Heitner required that a defendant have minimum contacts with a state before a quasi in rem jurisdiction can be asserted against his things. (28) Third, we review the little understood law of uncertificated securities and limited liability company (LLC) interests, which is crucial to the case. Fourth, we examine the paradox of one person being both a defendant in a lawsuit and a garnishee under an order of attachment--mutually exclusive categories under New York law. Fifth, we review the new definition of the word "possession" introduced by the Falor case and show how this definition supplants the definition in the famous case of Harris v. Balk. (29) Ironically, having supplanted the old definition of "possession," the Falor court actually uses Harris v. Balk to change the New York law of situs of intangible property. (30) That is, the Falor court simultaneously disregards and relies on this classic old chestnut. Finally, we set forth the theory of in personam jurisdiction operable in Falor and show that it is unconstitutional. We examine what this means for res judicata in the case going forward and for full faith and credit in other states.

1. THE FACTS IN FALOR

   The circumstances of Falor are so confusing that the Court of Appeals likely did not understand it was asserting in personam jurisdiction over a foreign company with no minimum contacts in New York.

   Guy T. Mitchell was a real estate developer in Florida and the leader of a group of investors. (31) Their enterprises were organized via twenty-two limited liability companies chartered in Delaware, Georgia, and Florida. (32) Mitchell and the other investors owned the equity interests in these LLCs. (33) In addition, Mitchell was the one-hundred percent shareholder of a regular Florida corporation. (34)

   Some years before, the investors established an additional LLC--not one of the twenty-three garnishees just mentioned--to acquire a hotel in Chicago. (35) To finance this enterprise, the Chicago LLC borrowed money from yet another LLC, Mezz Lender LLC, who would be the plaintiff in the ensuing litigation. (36) As to this loan, all the investors, including Mitchell, signed a guaranty contract in their individual capacities. (37) In the contract, the defendants "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." (38) Significantly, the twenty-three garnishees were not parties to this guaranty. (39)

   The meaning of this agreement was that Mitchell was both a private defendant in his own right and the president of all the entities in which the defendants--including Mitchell--owned equity interests. Mitchell operated in two capacities, one as private citizen and the other as corporate fiduciary of twenty-three garnishees. (40) It was this dual capacity that apparently confused the New York Court of Appeals as to the impact and significance of International Shoe.

   The Chicago enterprise soon turned sour and the Chicago LLC was bankrupt. (41) The plaintiff brought suit in Supreme Court, New York County against all of the defendants on their guaranty obligation. (42)

   In this litigation, the plaintiff sought to take the deposition of Mitchell. (43) Simultaneously, it sought an order of attachment against property of the defendants. (44) The plaintiffs idea was to place a lien on the equity interests of all the defendants in the LLCs and in Mitchell's wholly-owned corporation. (45) In an ex parte hearing, the supreme court granted the order of attachment in an ex parte proceeding, but the court delayed levy by the sheriff until after a hearing on the merits of the attachment. (46)

   Meanwhile, Mitchell came to New York to attend the requested deposition, which was held in the supreme court's Manhattan courthouse. (47) The deposition was scheduled just before the hearing on the order of attachment. (48)

   After the deposition recessed, Mitchell personally attended the attachment hearing. (49) At the hearing, the court approved the order of attachment. (50) On the spot, with the court's permission, a sheriffs deputy served Mitchell with the order of attachment. (51)

2. ATTACHMENT IN NEW YORK

   Once glorious and powerful, quasi in rem jurisdiction has become a mediocre backwater. In the golden age of the "power" theory of jurisdiction, a state could render judgment if it had power over a defendant or over a defendant's property. (52) New York in particular raised quasi in rem jurisdiction to a high art when it permitted garnishments of national insurance...