Second Circuit Certifies “Separate Entity Rule” to New York Court of Appeals

February 12, 2014

Daniel B. Goldman and Adam W. Braveman

The second Circuit has certified two questions to the New York Court of Appeals concerning the "separate entity" rule.  If the Court of Appeals accepts the certification, its decision will be one of the most important decisions in New York and the country concerning the ability of a judgment creditor to collect assets of a foreign judgment debtor.
The separate entity rule provides that “even if a bank is subject to personal jurisdiction due to the presence of a New York branch, the other branches of the bank will be treated as separate entities for certain purposes, such as attachments, restraints, and turnover orders.”  Tire Engineering and Distribution LLC v. Bank of China, Ltd., Nos. 13-1519-cv, 13-2535-cv(L), 13-2639-cv(con), -- F.3d --, 2014 WL 114285, at *1 (2d Cir. Jan. 14, 2014).  Last month, in Tire Engineering and Distribution LLC, the Second Circuit certified the following two questions to the New York Court of Appeals:

1)    Whether the separate entity rule precludes a judgment creditor from ordering a garnishee bank operating branches in New York to turn over a debtor’s assets held in foreign branches of the bank; and

(2)   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 Second Circuit certified these questions after hearing two appeals challenging orders entered in the United States District Court for the Southern District of New York, which held that the separate entity rule prevented the court from ordering the turnover of a judgment debtor’s assets held in foreign banks that had New York branches.  In both cases the judgment creditors argued that pursuant to the New York Court of Appeals decision in Koehler v. Bank of Bermuda Ltd., 911 N.E.2d 825 (N.Y. 2009), post-judgment relief was “dependent only on personal jurisdiction” over the banks.  Accordingly, because the court had personal jurisdiction over the New York branches of the banks, the court’s remedies, such as issuing restraining and turnover orders, were available to reach the judgment debtor’s property held in the foreign branches.  The Southern District of New York disagreed, holding that the separate entity rule precluded the court from entering such an order.  The Second Circuit, finding that both cases turned on “unsettled and important questions of New York law,” certified the questions to the New York Court of Appeals.
Should the Court of Appeals accept certification and overturn the separate entity rule, judgment creditors would have a potent weapon to collect judgments from foreign judgment debtors.  To wit, if a foreign judgment debtor, who may not otherwise have assets in the United States, maintains bank accounts with a foreign bank in a foreign country and if that bank happens to have a branch in New York City, a judgment creditor could force the New York branch to turnover monies of the judgment debtor held by the bank anywhere in the world.  We will continue to monitor this situation closely.