On June 14, 2022, the Appellate Division, First Department reversed the trial court’s dismissal of claims against out-of-state contractual obligors and their alleged alter egos in Taxi Medallion Loan Trust III v. Brown Eyes Cab Corp., Case Nos. 2021-04240 and 2022-00624. The case centered on claims against out-of-state contractual obligors who had continuously defaulted on payments to their creditor, and their alter egos who had allegedly participated in a number of related fraudulent transactions. The First Department confirmed that, by negotiating, executing and delivering an agreement to settle their debts in New York, the defendant obligors transacted business within the state, conferring jurisdiction over both them and their alter egos under CPLR § 302(a)(1). Accordingly, the First Department reversed the trial court’s dismissal and reinstated the claims.

Facts Underlying Taxi Medallion Loan Trust’s Complaint
In 2011 and 2012, plaintiffs Medallion Bank, Medallion Financial Corp. and Taxi Medallion Loan Trust III, as assignee of Medallion Funding LLC (collectively, “Medallion”) issued a number of loans to Illinois corporations to purchase and/or refinance City of Chicago taxi medallions. Those loans were personally guaranteed by certain individuals, all but one of whom are domiciled outside of New York. The obligors repeatedly failed to make the required payments to Medallion under the terms of the loans and guaranties. In 2019, the parties entered into settlement agreements pursuant to which the obligors reaffirmed their existing obligations and agreed to pay Medallion pursuant to a specified schedule. However, less than two years later, the obligors defaulted again.

Medallion filed suit in New York State Supreme Court, New York County, to collect the nearly $11 million then owed under the settlement agreement. Medallion named both the borrowers and the guarantors, as well as various of the guarantors’ alter egos. According to Medallion, the defendants’ network of trusts and corporations is a mere façade designed to facilitate their transfer of assets to third-parties as part of a concerted effort to avoid paying their debts to Medallion. For example, Medallion pointed to evidence that at least $13 million of real estate assets were transferred by certain defendant guarantors to closely-held companies, personal trusts and immediate family members. The transfers were made for nominal consideration at a time when taxi medallions had decreased in value and creditors were likely to seek payment.

The trial court nonetheless found that the out-of-state defendants did not subject themselves to suit in New York, and dismissed the claims on jurisdictional grounds. The trial court further held that that dismissal compelled dismissal of certain related fraudulent conveyance claims due to the absence of necessary parties.

Arguments On Appeal
Prior to this case, New York courts had yet to confirm that out-of-state defendants subjected themselves to personal jurisdiction in New York under CPLR § 302(a)(1) by negotiating, executing and delivering a settlement agreement within the state, where such acts were evidenced solely by a contractual provision. Medallion contended that the settlement agreements’ plain language was dispositive.

The obligor defendants countered that they did not transact business in New York because:
1. the execution of an agreement in New York is insufficient, standing alone, to confer jurisdiction over out-of-state domiciliaries;

2. the settlement agreement and the underlying loans and guaranties are governed by Illinois law; and

3. according to defendants, none of the out-of-state obligors set foot in New York throughout the settlement process.

However, the First Department recognized that none of these arguments or alleged facts were availing and that the plain language of the settlement agreements was dispositive.

The defendants principally relied on McKee Elec. Co. v. Rauland-Borg Corp., 20 N.Y.2d 377 (1967), where the Court of Appeals declined to find jurisdiction over an Illinois defendant whose contract was allegedly negotiated and executed in New York, but performed out-of-state. However, the contract that the McKee plaintiff attempted to base jurisdiction on had actually expired years prior and was superseded by renewal agreements executed outside of New York. Accordingly, the First Department recognized that the McKee decision was readily distinguishable and provided no support for a dismissal on the current facts.

Conclusion
This decision confirms that negotiating, executing and delivering a contract in New York constitutes transacting business within the state. More importantly, it establishes that the inclusion of language memorializing such transaction of business in New York is a sufficient basis for jurisdiction over both debtors and their alter egos. Lenders intending to hold their borrowers accountable in New York courts should include language in their contracts that mirrors the provisions in Brown Eyes Cab. If such a provision is included in a settlement agreement resolving a debtor’s default, creditors may confidently oppose an out-of-state debtor’s argument that New York lacks jurisdiction to adjudicate such claims.

Mitchell Cohen is a Vedder Price shareholder and chair of the firm’s New York Litigation Group.