Two weeks ago, the New York Court of Appeals issued a decision
of great importance to global financial institutions. For the first
time, the state's highest court confirmed that New York common
law prevents a court from freezing a civil judgment debtor's
assets held in foreign bank accounts. Motorola Credit Corp. v.
Standard Chartered Bank.1 In its highly anticipated
decision, the court expressly adopted New York's nearly
century-old "separate entity rule," which provides that
even when a bank branch is subject to personal jurisdiction in New
York, that bank's other branches are treated as separate
entities for purposes of judgment enforcement, putting them beyond
the reach of judgment creditors. 2
Motorola is a particularly noteworthy decision for the
international banking community because just five years ago, in
Koehler v. Bank of Bermuda, 3 the Court of
Appeals eschewed the separate entity rule in favor of one bank
worldwide, enabling judgment creditors to reach far beyond New
York's borders to grab debtors' assets. Koehler
held that a bank subject to personal jurisdiction in New York could
be ordered to deliver to a judgment creditor assets in a foreign
branch even where the underlying litigation, the targeted assets,
and the parties themselves bore no connection to New York. In the
wake of Koehler, judgment creditors worldwide flocked to
New York courts as a portal to reach assets all over the world,
demanding that banks located in the state turn over a judgment
debtor's assets in faraway places.
With Motorola, the Court of Appeals has dramatically
curtailed (and perhaps gutted) Koehler, limiting its
application drastically and emphasizing the strong policy
considerations favoring recognition of the separate entity rule and
the significant restrictions that longstanding doctrine (which was
never specifically discussed in Koehler) places on efforts
to reach foreign assets. Moreover, the strong policy arguments and
considerations recognized by the Court of Appeals will undoubtedly
feature in other settings where the specter of double liability,
conflicting obligations in multiple jurisdictions, and
international comity come into play, especially in the context of
international banking.
Background
In 2003, the U.S. District Court for the Southern District of New
York awarded plaintiff Motorola a multibillion-dollar judgment
against members of Turkey's Uzan family, finding that the Uzans
diverted for their personal benefit more than US$2 billion in loans
Motorola made to a Turkish company the family controlled. For the
better part of a decade, Motorola has engaged in an international
hunt for the Uzans and their assets.
In 2013, as part of Motorola's efforts to collect on this
judgment, the district court issued a restraining order (pursuant
to New York and federal law) freezing the Uzans' assets.
Motorola served the restraining order on the New York branch of
non-party Standard Chartered Bank ("Standard"), a
multinational bank based in the United Kingdom. Although Standard
had no Uzan assets at its New York branch, its branch in the United
Arab Emirates ("UAE") held about US$30 million in
deposits related to the Uzans. When Standard sought to freeze those
assets in accordance with the restraining order, regulatory
authorities in the UAE and Jordan intervened and debited US$30
million in Standard's account at the UAE Central Bank. The
rationale for this action was that Standard could not dishonor its
obligations to repay UAE deposits based on an order from a foreign
court. 4
Faced with conflicting obligations and the prospect of double
liability under U.S. and foreign law, Standard sought relief from
the district court. Standard argued that, under New York's
separate entity rule, the restraining notice Motorola served on its
New York branch could not restrain assets held in another Standard
branch in the UAE. Motorola responded that Koehler allowed
the restraint of assets in the UAE via Standard's New York
branch. The district court found for Standard. On appeal, the U.S.
Court of Appeals for the Second Circuit certified to New York's
high court the question of whether the state's separate entity
rule precludes a judgment creditor from ordering a garnishee bank
operating branches in New York to restrain a debtor's assets
held in foreign branches of the bank. The Court of Appeals answered
that it did.
Pro-Bank Policy Considerations Keep an Old Doctrine
Alive
In a 5–2 decision, the Court of Appeals held that
"service of a restraining notice on a garnishee bank's New
York branch is ineffective under the separate entity rule to freeze
assets held in the bank's foreign branches." The
longstanding common law doctrine, the court held, was firmly rooted
and very much alive in New York, citing state and federal decisions
applying the rule for nearly a century. Driving the court's
decision was the fundamental policy for the separate entity rule.
Acknowledging the multiple amicus curiae submissions by
sovereigns, regulators, and trade groups, the court recognized that
allowing U.S. courts to restrain assets overseas would undermine
international comity. The rule, the court held, also eliminates
competing claims on the same assets and protects banks from double
liability. Moreover, the rule avoids placing banks in the
"difficult position of attempting to comply with the
contradictory directives of multiple sovereign nations," as
Standard had faced. Finally, the court recognized that directing
banks to process restraint orders for foreign assets imposes an
"intolerable burden" by forcing banks to identify and
monitor assets in numerous foreign branches. International banks,
the court held, have long relied on the benefits afforded by the
separate entity rule "when deciding to open branches in New
York, which in turn has played a role in shaping New York's
status as the preeminent commercial and financial nerve center of
the Nation and the world."
But what about Koehler? Just a few years ago, this same
Court of Appeals held in that case that a bank subject to personal
jurisdiction in New York could be ordered to deliver a judgment
debtor's stock certificates located in a non-U.S. branch of the
bank. The Motorola court rejected the argument that
Koehler effectively overruled the separate entity rule. It
noted that the parties did not raise, and the court did not
address, the doctrine in that case. Moreover, the court explained,
Koehler involved the repatriation of stock certificates
and was therefore inapposite to the assets (deposit accounts)
here.
An impassioned two-judge dissent argued that the majority opinion
could not be reconciled with Koehler, and that an
"outmoded" separate entity rule now frustrated collection
of judgments, enabled judgment creditors to evade enforcement, and
allowed international banks to shirk responsibility. Against the
backdrop of global "banks being held more accountable than
ever for their actions vis-à-vis their customers," the
dissent described the majority opinion as a "step in the wrong
direction."
Although the precise scope of the separate entity rule in the
context of assets held in domestic branches (as well as assets
other than deposit accounts, as in Koehler) has yet to be
determined, judgment creditors can no longer view New York as a
haven for collecting assets located worldwide. Creditors' best
course of action may be to utilize the judgment enforcement tools
provided by the foreign venues in which the assets are held.
Footnotes
1 Motorola Credit Corp. v. Standard Chartered Bank, __ N.Y.3d __, 2014 WL 5368774 (N.Y. Oct. 23, 2014).
2 The authors of this Commentary submitted amicus curiae briefs in Motorola, on behalf of the Central Bank of Jordan, urging the Court of Appeals to uphold the separate entity rule.
3 Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (N.Y. 2009). See also Sevan Ogulluk and Alan Schwartzald, "New York's High Court Beckons Foreign Judgment Creditors to New York—but does Koehler Loosen Cornerstone of New York's Economy?," Bloomberg Law Reports, New York Law, Vol. 1, No 14 (October 26, 2009); Lee A. Armstrong, William J. Hine, and Sevan Ogulluk, "New York Taps the Brakes on Foreign Judgment Collection," Jones Day Commentary (June 2013).
4 Motorola never attempted to domesticate its U.S. judgment in the UAE's courts.
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