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posted 9 years ago
In answering a certified question from the Second Circuit, the New York
Court of Appeals recently held that the “separate entity rule” was not
abrogated by the court’s decision in Koehler v. Bank of Bermuda,
12 N.Y.3d 533 (2009). In Koehler, the court had held that a
judgment creditor could seek the turnover of stock certificates located
outside of the United States as long as the court had personal
jurisdiction over the garnishee.
The separate entity rule provides that even when a bank garnishee with
a New York branch is subject to personal jurisdiction, its other branches
are treated as separate entities with respect to CPLR article 52
post-judgment restraining notices and turnover orders and article 62
prejudgment attachments. Motorola Credit Corp. v. Standard Chartered
Bank, 24 N.Y.3d 149, 158 (2014).Courts have generally provided three
rationales for the separate entity rule. First, they emphasize the
importance of international comity and the fact that “any banking
operation in a foreign country is necessarily subject to the foreign
sovereign’s own laws and regulations.” Second, the rule has been
considered necessary to protect banks from being subject to competing
claims and double liability. Third, the rule has been justified
because of the “intolerable burden” that banks would otherwise face if
they had to monitor the status of accounts at other branches.
Id. at 159.
In Motorola Credit Corporation, Motorola had served a
restraining order on the New York branch of Standard Chartered Bank
(“SCB”). Motorola was attempting to collect more than $3 billion in
judgments against the Uzan family, which controlled a Turkish telecom
company to which Motorola had loaned more than $2 billion. In
response to the restraining order, SCB did not locate any Uzan property at
its New York branch. However, several months later, a global search of
SCB’s branches revealed Uzan-related assets valued at $30 million in SCB’s
branches in the United Arab Emirates (“UAE”). SCB froze the assets to
comply with the restraining order. However, regulatory authorities
in the UAE and Jordan intervened. The UAE Central Bank debited $30
million from SCB’s account with the bank and the Central Bank of Jordan
seized documents at SCB’s Jordan branch. Id. at 157.
SCB sought relief from the restraining order, arguing that its
restraint of Uzan’s $30 million violated UAE law and subjected the bank to
double liability. SCB also argued that as a general matter, under the
separate entity rule, the restraining order served on the New York branch
was only effective as to assets located in accounts at that particular
branch. Motorola contended that the separate entity rule was no
longer valid in light of Koehler. Id.
The Court of Appeals held that the separate entity rule was still valid
and necessary to promote international comity and avoid conflicts among
competing legal systems. Id. at 162. Indeed, the court noted that
when SCB complied with the restraining order served on its New York branch
and froze the Uzan assets in the UAE, it faced international regulatory
and financial repercussions. The court asserted that the “abolition
of the separate entity rule would result in serious consequences in the
realm of international banking to the detriment of New York’s preeminence
in global financial affairs.” Id. at 163.
Notably, two justices wrote a scathing dissent, arguing that the
separate entity rule is obsolete and runs counter to public policy. The
dissent noted that any difficulties banks would face if their foreign
branches had to comply with post-judgment proceedings would likely pale in
comparison to their obligation to comply with governmental regulations
such as the U.S. Patriot Act and the Bank Secrecy Act. In addition, any
burden on the banks would be far outweighed by the rights of judgment
creditors to enforce their judgments. Id. at 169-70.
This ruling is good news for international banks that do business in
New York. Not only will post-judgment restraining orders only be
effective on assets actually located in New York, but banks will also not
have to spend time and resources investigating the location of assets
outside of New York.
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