Court of Appeals Reaffirms the “Separate Entity” Doctrine and Prevents Garnishment of Funds Held in Foreign Accounts
The New York Court of Appeals recently reaffirmed the continuing viability of the “separate entity” doctrine which provides that “even when a bank garnishee with a New York branch is subject to personal jurisdiction, its other branches [outside of the state] are to be treated as separate entities” with regard “to CPLR article 62 prejudgment attachments and CPLR article 52 postjudgment restraining notices and turnover orders.” See Motorola Credit Corp. v. Standard Chartered Bank, No. 162, 2014 N.Y. Slip. Op. 07199 (Ct. App. Oct. 23, 2014). In that vein, such attachments and orders will only be effective against the assets held in accounts at the branch served and “will have no impact on assets in other branches.” This becomes particularly important when banks, with branches in New York, also hold assets of debtors in branches abroad.
The Court’s ruling arose out of a $3.1 billion judgment issued by the Southern District of New York against a Turkish family (the “Uzans”) that controlled a telecommunications company. The Uzans obtained a $2 billion loan from plaintiff to purportedly expand their operations but, instead, diverted the funds to themselves and other companies. Plaintiff obtained an Order from the Southern District “restraining the Uzans and anyone with notice of the order from selling, assigning or transferring their property” (the “Restraining Order”) pursuant to, among others, CPLR article 52. Plaintiff served the Restraining Order on Standard Chartered Bank (“Standard”) which was incorporated and headquartered in the United Kingdom but had branches in New York. Standard discovered that the Uzans had $30 million in assets held at branches in the United Arab Emirates (the “UAE”) and froze the same. Disagreeing with Standard’s actions, the UAE Central Bank debited $30 million from Standard’s account to satisfy Standard’s payment obligation to the Uzans.
Standard then sought relief from Restraining Order arguing that the “separate entity” doctrine made the same only effective against assets held by the branch that was served and precluded the enforcement of the same on assets located in foreign branches. The Southern District agreed but stayed the release of the restraint pending an appeal to the Second Circuit. The Second Circuit, however, noted that a recent Court of Appeals decision called into question the continuing viability of the “separate entity” doctrine. Specifically, in Koehler v. Bank of Bermuda, Ltd., 12 N.Y.3d (2009), the Court of Appeals ruled, in another question certified by the Second Circuit, that New York courts could order a Bermudan bank to turn over stock certificates located in Bermuda pursuant to CPLR article 52. Thus, the Southern District certified the question of “[w]hether 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” to the Court of Appeals.
The Court first discussed history and rationale of the “separate entity” doctrine. The same traced back to the early twentieth century and was consistently applied both before and after the adoption of the CPLR. The primary justification for the doctrine centered around principles of comity and the burden that would be placed on banks that were subject to competing foreign laws and regulation, competing claims and double liability, and the burden to “monitor and ascertain the status of bank accounts in numerous branches.” As to its decision in Koehler, the Court distinguished the same by noting that, there, the applicability of the “separate entity” doctrine was not addressed by the parties. Moreover, the defendant in Koehler consented to personal jurisdiction, while Standard disputes it, and was served in New York and Bermuda. Importantly, the Court noted that “the separate entity rule . . . would have not aided the bank in Koehler because that case involved neither bank branches nor assets held in bank accounts.”
Ultimately, in light of the long-standing application of the “separate entity” doctrine and foreign banks’ indubitable reliance on the same, the Court answered the certified question in the affirmative. Indeed, the Court recognized that by “limiting the reach of a CPLR [article 52] restraining notice in the foreign banking context, the separate entity rule promotes international comity and serves to avoid conflicts among competing legal systems.” In contrast, “abolition of the separate entity rule would result in serious consequences in the realm of international bank to the detriment of New York’s preeminence in global financial affairs.” Thus, the “separate entity” doctrine continues to preclude the garnishment efforts against assets held in foreign branches of banks that also have New York branches. In a footnote, the Court recognized that there is even case law applying the “separate entity” doctrine to other branches within New York. The Court noted, however, that the “separate entity” doctrine’s application to branches within New York or other states was not before it, leaving this question open for inevitable further litigation.
Two Justices dissented, noting that banks can no longer “rely on blind and unwavering adherence to legal norms birthed in the bygone era which [the ‘separate entity’] rule represents . . . surely every bank knows that it no longer exists in a world where it can shrug off a duly entered judgment for assets in its collective coffers on the theory that it would have to resort to a long game of international telephone tag, as opposed to a brief search of its computer database, to retrain funds subject to collection.”
For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.
