Morgenthow & Latham v Bank of NY Co., Inc.

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[*1] Morgenthow & Latham v Bank of NY Co., Inc. 2005 NY Slip Op 52248(U) [10 Misc 3d 1076(A)] Decided on December 7, 2005 Supreme Court, New York County Cahn, J. Published by New York State Law Reporting Bureau pursuant to Judiciary Law ยง 431. This opinion is uncorrected and will not be published in the printed Official Reports.

Decided on December 7, 2005
Supreme Court, New York County



The Bank of New York Company, Inc., THE BANK OF NEW YORK, and JOINT STOCK BANK INKOMBANK, Defendants.


Herman Cahn, J.

The Bank of Cyprus Public Company Ltd. (BoC), a non-party in this action, moves to vacate a default judgment, dated May 2, 2001, CPLR 5015 (a), entered against defendant Joint Stock Bank Inkombank (Inkombank).

Based upon the default judgment; plaintiffs Morgenthow & Latham, New York International Insurance Group and Oriental XL Funds have commenced a special proceeding against BoC, to collect funds allegedly belonging to Inkombank, said to be on deposit with BoC.

BoC now moves to vacate the default judgment based upon the Appellate Division decision in Morgenthow & Latham v Bank of New York (305 AD2d 74 [1st Dept 2003]).

The plaintiffs are three Cayman Islands companies which, together, invested $40 million in Inkombank, formerly a leading Russian Bank. Plaintiffs' investment was lost when Inkombank collapsed in October of 1998. Plaintiffs commenced this action in October 2000, alleging fraud against Inkombank, as well as against the Bank of New York Company, Inc. and the Bank of New York (together, BoNY).

Plaintiffs alleged that, in the summer of 1993, they purchased 20,000 shares of stock in Inkombank, at a price of $40,000,000. The stock purchase agreement provided that, in return for their investment , Inkombank would guarantee a 12% annual return and the right, after 36 months, to redeem the securities at face value.

In 1996, the Central Bank of Russia (CBR) conducted an audit of Inkombank and issued a report which was highly critical of Inkombank. The report contained numerous warnings regarding Inkombank's financial position, and concluded that restrictions should be imposed on Inkombank. Plaintiffs allege that they found the CBR report so alarming that they decided to exercise their right to redeem their shares. Plaintiffs further allege that their request was met by a "concerted effort" on the part of Inkombank and BoNY to convince plaintiffs to withdraw their redemption demand. [*2]

Thereafter, in October 1998, the CBR revoked Inkombank's license to conduct a banking business and Inkombank subsequently was ordered liquidated, causing plaintiffs to lose their entire investment.

This action was thereupon commenced.

As to BoNY, the complaint alleged that representatives of BoNY: (I) knowingly and falsely misrepresented to the plaintiffs that Inkombank was a sound, reputable and reliable financial institution, and (ii) concealed from the plaintiffs that Inkombank's senior management were actively engaged in unlawful and criminal activities, which included, inter alia, theft of Inkombank's assets and money laundering. Plaintiffs further alleged that they justifiably relied on BoNY's false assurances based upon BoNY's status and credibility as a highly respected United States financial institution, and, consequently, agreed to withdraw their redemption demand.

BoNY moved to dismiss the complaint as against it, on the ground that the Morgenthow plaintiffs' "attorney-in-fact" and "trustee" in a separate action pending in the U.S. District Court, Zeltser v Joint Stock Bank Inkombank, (SD NY, 95 Civ 0796 [KTD]), had made certain statements which constituted binding judicial admissions, which were irreconcilable with the plaintiffs' allegations of fraud by BoNY in the instant case.

The federal action was commenced in April 1995, by Foreign Investors Portfolio Management, Inc. (FIPM) which identified itself as "trustee" for Inkombank's major shareholders, including the plaintiffs. FIPM alleged causes of action for fraud and breach of contract, relating, in part, to the same securities purchase which is the subject of this action. In its amended complaint, FIPM alleged that "[i]n or about the later part of 1994, Incombank [sic] defendants . . . openly admitted to [FIPM and its attorneys] that they never intended to honor Inkombank's obligations to FIPM with respect to the $40 million stock purchase." The amended complaint further alleged that the "Inkombank defendants no longer made a secret of their links to Russian organized crime . . . [and] used this aspect in their attempts to intimidate [FIPM's principals and attorneys]." The amended complaint in the federal action, further alleges that FIPM's attorney wrote to Inkombank on October 30, 1994, "demanding that Inkombank's indebtedness to FIPM be resolved or legal action would commence." FIPM alleged that, as a result of that letter, a principal of FIPM went to a meeting in Moscow at Inkombank's invitation and was later found murdered.

In its motion, BoNY asserted that the federal complaint demonstrated that the Morgenthow plaintiffs had notice of Inkombank's alleged fraud and intent not to honor plaintiffs' stock purchase agreements long before the alleged August 1996 statements by BoNY agents which formed the basis of the fraud claims against BoNY in the instant action. Thus, the Morgenthow plaintiffs' prior allegations defeated any claim of justifiable reliance upon BoNY's alleged statements.

This Court denied the motion to dismiss. On appeal, the Appellate Division reversed and found that the plaintiffs' fraud allegations against BoNY were irreconcilable with their trustee's prior allegations in the federal action, and that consequently, the complaint should have been dismissed (Morgenthow, 305 AD2d at 77).

BoC now seeks to vacate the default judgment against Inkombank, based upon the Appellate Division's ruling with respect to BoNY. The Appellate Division ruling found that the plaintiffs were bound by their prior allegations in the federal court action. Those allegations [*3]included statements that, in 1994, one year after the plaintiffs had invested in Inkombank, they were informed that Inkombank did not intend to honor the purchase agreement.

In essence, BoC asserts that, based upon the plaintiffs' "admission" that they had learned of Inkombank's fraud in 1994, and not, as asserted in the complaint, in 1996, the default judgment against Inkombank should be vacated upon the ground that it was procured by fraud and/or misrepresentation.

CPLR 5015 (a) provides that "[t]he court which rendered a judgment or order may relieve a party from it upon such terms as may be just, on motion of any interested person with such notice as the court may direct, upon the ground of . . . (3) fraud, misrepresentation, or other misconduct of an adverse party" [emphasis added]. " To seek relief from a judgment or order, all that is necessary is that some legitimate interest of the moving party will be served and that judicial assistance will avoid injustice'" (Oppenheimer v Westcott, 47 NY2d 595, 602 [1979], quoting 5 Weinstein-Korn-Miller, NY Civ Prac, par. 5015.15) (emphasis added).

BoC has not shown that it is an "interested person" pursuant to CPLR 5015, nor that this Court's vacatur of the judgment against Inkombank will avoid injustice. BoC does not allege, for example, that it has a direct interest in the funds which are subject to the judgment against Inkombank. Rather, it acknowledges that it is a garnishee, and argues that its interest lies in the expense of defending plaintiff's claims, if it determines that the Morgenthow plaintiffs seek improper information regarding its customers. BoC asserts also that "[t]he vacatur of the Default Judgment will serve also to safeguard BoC's domestic and international reputation as a banking institution which adheres to the letter of the law and protects the privacy interests of its clients. This reputation is instrumental to its success as a financial institution" (Memorandum of Law, at 9). This is not a sufficient interest to permit BoC as a non-party, to seek to set aside the default judgment. After all, BoC does not assert that it is now holding or has held in the past, any sums which it would have to turn over to plaintiffs.

The circumstances here are substantially different than those presented in Oppenheimer v Westcott, supra, 47 NY2d 595, cited by BoC. In Oppenheimer, the movant, Bernstein, was a principal of a Hancock Securities Corporation (Hancock) an insolvent corporation, against which the plaintiff, Oppenheimer, had procured a default judgment. Oppenheimer was suing the Bernstein defendants, alleging that they had looted Hancock and caused it to become insolvent. Bernstein alleged that Oppenheimer had obtained the judgment by fraud. The Court of Appeals noted that, "[w]ithout a valid judgment against Hancock, Oppenheimer has no claim against the Bernstein defendants. In light of that fact and of Hancock's insolvency, it is manifest that no one has a greater or more legitimate interest in setting aside Oppenheimer's judgment against Hancock than they do" (47 NY2d at 602). A garnishee, however, is defined in CPLR 105 (I) as "a person other than the judgment debtor who has property in his possession or custody in which a judgment debtor has an interest." A garnishee has no interest in the property. Rather, the sole basis of liability in the enforcement proceeding, is whether the garnishee holds the funds belonging to the judgment debtor. Where, as here, the movant has no direct interest in the funds which are the subject of a judgment, and in fact, may not even be in possession of such funds, and has only a potential liability if the judgment stands, the movant is not an "interested person" within the meaning of CPLR 5015 (a) (see e.g., Lloyd Capital Corp. v Behrmann, 122 AD2d 783 [2d Dept 1986]; Jakobleff v Jakobleff, 108 AD2d 725 [2d Dept 1985]). As to BoC's contention regarding its interest in the privacy of its clients, BoC is free to argue that issue in the special [*4]enforcement proceeding that is currently underway before J.H.O. Gammerman.

Nor has BoC shown that justice will be served by vacatur of the default judgment against Inkombank. BoC does not contend that Inkombank did not commit fraud against the Morgenthow plaintiffs, but rather that, in two different pleadings, the Morgenthow plaintiffs stated different dates upon which the fraud occurred.

In this respect, Inkombank is in a different position than BoNY. As to BoNY, the statements made in the federal action are relevant because they show that when they were allegedly made, plaintiffs either did not rely on them, or should not reasonably have relied on them. As to Inkombak, it is accused of committing bad acts, not simply making misrepresentations. Regardless, of when the statements were allegedly made, it could still be held liable on its acts.[FN1]

Accordingly, it is

ORDERED that the motion by Bank of Cyprus to vacate the default judgment against defendant Joint Stock Bank Inkombank, is denied.

Dated: December 7, 2005

ENTER: _______________/s/___________________

J.S.C. Footnotes

Footnote 1: The court notes that in its ordering paragraph at 305 AD2d at 82, the Appellate Division directed: " The clerk is directed to enter judgment in favor of defendants dismissing the complaint." Reading the decision in its entirety, it is quite clear that the defendants referred to are the two BoNY defendants, and not Inkombank, which did not itself appeal.