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New York’s Highest Court Rules on Restraining a Debtor’s Assets in Foreign Bank Branches

Client Advisory

November 13, 2014

Introduction

The New York Court of Appeals recently issued a decision in Motorola Credit Corp. v. Standard Chartered Bank,[1] clarifying that the “separate entity rule” continues to prevent New York courts from ordering a garnishee bank operating branches in New York to restrain a judgment debtor’s assets held in foreign branches of the bank. The majority concluded 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.”[2] While the Motorola decision makes clear that the “separate entity rule” is alive and well in New York, it is also clear that the decision is limited to assets held in a bank branch outside of the United States.

I.          What is the Separate Entity Rule?

As the Court of Appeals explained in Motorola, the separate entity rule is a judicially created doctrine which provides that if a bank holding assets of a judgment debtor (a “garnishee bank”) has a New York branch and is subject to personal jurisdiction in New York, a restraining notice or turnover order served on a New York branch of the garnishee bank is only effective as against assets in the New York branch, and “its other branches are to be treated as separate entities for certain purposes.” Accordingly, this almost century old doctrine precludes judgment creditors from restraining or obtaining the turnover of funds held in accounts of foreign bank branches by service on the bank’s New York branch.

Prior to Motorola,some courts and commentators questioned whether the Court of Appeals had abrogated the separate entity rule in its prior decision in Koehler v. Bank of Bermuda Ltd.,[3] in which it held that a judgment creditor could obtain the turnover of stock certificates located in a Bermuda bank so long as the court had personal jurisdiction over the garnishee bank in New York.

II.        The Motorola Decision

The Motorola case involved a $3 billion judgment obtained by Motorola Credit Corporation in a New York federal district court against the Uzan family arising out of a fraudulent scheme in connection with a loan from Motorola to a company controlled by the Uzans. In post-judgment collection proceedings, the District Court entered a restraining order prohibiting the sale, assignment or transfer of any of the Uzans’ property, which Motorola subsequently served on the New York branch of Standard Chartered Bank (SCB), a foreign bank incorporated and headquartered in the United Kingdom. It was determined that SCB held roughly $30 million in Uzan-related assets in branches located in the United Arab Emirates (U.A.E.). 

After SCB challenged the restraining notice, the District Court “concluded that the separate entity rule precluded Motorola from restraining assets at SCB’s foreign branches” but “stayed the release of the restraint pending the outcome of Motorola’s appeal.” On appeal, the Second Circuit requested that the New York Court of Appeals resolve the question of “whether the 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 majority held that the separate entity rule is still viable and prevents a judgment creditor from restraining a judgment debtor’s bank account in a foreign branch by serving a restraining notice on a branch located in New York. The majority emphasized that “[t]he risk of competing claims and the possibility of double liability in separate jurisdictions remain significant concerns, as does the reality that foreign branches are subject to a multitude of legal and regulatory regimes.” The majority further explained that “[b]y limiting the reach of a CPLR 5222 restraining notice in the foreign banking context, the separate entity rule promotes international comity and serves to avoid conflicts among competing legal systems.”

In rejecting Motorola’s argument that Koehler had abrogated the separate entity rule, the majority noted that the Koehler decision did not even discuss the separate entity rule, and also distinguished Koehler on the basis that it did not involve “bank branches” or “assets held in bank accounts.” This distinction was important to the majority because, in its view, “the separate entity rule functions as a limiting principle in the context of international banking, particularly in situations involving attempts to restrain assets held in a garnishee bank’s foreign branches.”[4] The majority concluded that “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.”

The dissent disagreed with the majority’s attempt to distinguish Koehler and emphasized that the separate entity rule is no longer necessary because “[i]n this day of centralized banking and advanced technology, bank branches can communicate with each other in a matter of seconds” and “[b]anks are no longer faced with this ‘intolerable burden’ when served with a restraining notice.” The dissent further opined that “[a] separate entity rule that shields assets in foreign banks will serve primarily to protect defiant judgment debtors . . . and to immunize banks who benefit from doing business in New York from their responsibilities under the statutory enforcement provisions.”

III.       Implications and Remaining Questions

The New York Court of Appeals, in Motorola, has made clear that judgment creditors will not be permitted to restrain a judgment debtor’s assets held in a bank’s foreign branch simply by serving a restraining notice on the garnishee bank’s New York branch. Although this explicit endorsement of the separate entity rule by the New York Court of Appeals is significant, the Motorola decision is not without limitations, and important questions remain. For example:   

  • Serving a restraining notice on a bank’s New York branch may still be effective to restrain assets held in accounts in branches within the United States even if the assets are held in accounts of branches outside of New York.  
  • It is unclear whether the separate entity rule only applies to assets in bank accounts and thus judgment creditors may still be able to reach a judgment debtor’s foreign assets other than assets in bank accounts by serving the garnishee in New York as long as the garnishee is subject to New York jurisdiction.
  • Earlier this year, in Daimler AG v. Bauman,[5] the U.S. Supreme Court held that a corporation shall be subject to general jurisdiction typically only where it is incorporated and where it has its principal place of business. Thus, if a garnishee is neither incorporated in nor has its principal place of business in New York, a judgment creditor may face difficulty establishing jurisdiction even if the garnishee regularly conducts business within the State. In light of the Daimler decision and on this basis, the garnishee bank in Motorola challenged personal jurisdiction (even though it had not done so previously), however, as indicated by the Motorola court, this issue was not before the Court and would have to be resolved by the federal courts.

Under New York law, the CPLR provides various tools for the restraint, seizure or recovery of assets, including restraints in connection with enforcement of money judgments (Article 52), pre-judgment attachments (Article 62), injunctions (Article 63), and provisional remedies in aid of foreign or domestic arbitration (Article 75). If you (i) have questions about the tools available to restrain or recover assets in a pre- or post- judgment context or in aid of arbitration, (ii) are subject to actions to restrain, or recover assets, or (iii) have questions about the separate entity rule, you should contact counsel.


For more information concerning the matters discussed in this publication, please contact the authors, Matthew D. Dunn (212-238-8706, mdunn@clm.com) or Michael H. Bauscher (212-238-8785, bauscher@clm.com), or your regular CL&M attorney.

Endnotes


[1]  ___ N.Y.3d ___, 2014 N.Y. Slip Op. 07199, 2014 WL 5368774 (Oct. 23, 2014),. 

[2] The use of restraining notices in the context of judgment enforcement is governed by CPLR § 5222.

[3] 12 N.Y.3d 533 (2009).

[4] The majority in Motorola also points out, in footnote 5, that “[i]t would appear that the judgment creditor in Koehler also served the bank itself in Bermuda, not only its New York subsidiary, providing yet another reason for the inapplicability of the separate entity rule in that case.”

[5] 134 S. Ct. 746 (2014). 



Carter Ledyard & Milburn LLP uses Client Advisories to inform clients and other interested parties of noteworthy issues, decisions and legislation which may affect them or their businesses. A Client Advisory does not constitute legal advice or an opinion. This document was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. © 2017 Carter Ledyard & Milburn LLP.
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