Separate Entity Rule on Bank Branches and Judgment Debtors
March 10, 2014
On Feb. 18, 2014, the New York Court of Appeals accepted certification of two legal questions from the U.S. Court of Appeals for the Second Circuit relating to the "separate entity rule." That rule, as enunciated by intermediate New York courts for over 50 years, provides that in proceedings to enforce judgments in New York, New York branches of banks shall be considered separate entities from all foreign branches of the banks. Its application has prevented judgment creditors from forcing banks, through their New York branches, to restrain and/or turn over assets of a judgment debtor held by foreign branches of banks. That may now change. Given the presence in New York of numerous banks with foreign branches, the decision by the Court of Appeals will be one of the most important rulings in New York, if not the country, in the area of post-judgment enforcement.
The specific questions before the Court of Appeals are:
First, 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 Second, 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.1 The questions arose from two appeals challenging orders entered in the U.S. District Court for the Southern District of New York, both holding that the separate entity rule precluded the court from ordering a garnishee bank with branches in New York to turn over or restrain assets of judgment debtors held in foreign branches of the bank. As argued by the bank in each case, 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."2
However, based on the recent New York Court of Appeals decision in Koehler v. Bank of Bermuda, 911 N.E.2d 825 (N.Y. 2009), the judgment creditors argued that post-judgment relief was "dependent only on personal jurisdiction" over the banks, and the court's remedies were thus available to reach the judgment debtor's property held in foreign branches of the banks. By accepting the certified questions, the Court of Appeals must reconcile the separate entity rule with Koehler. The court's decision will be the most important New York enforcement case since Koehler, and will substantially impact how foreign corporations and banking institutions conduct business in New York.
In Koehler, the Court of Appeals of New York, addressing a question certified by the Second Circuit, held that, pursuant to CPLR article 52, a New York court could order any defendant (judgment debtor or garnishee) over which it had personal jurisdiction to turn over out-of-state assets owned by a judgment debtor to a judgment creditor.3 The subject of the case was a turnover order issued by the Southern District against the Bank of Bermuda Limited (BBL), then in possession of stock certificates owned by the judgment debtor in Bermuda. Ultimately submitting to the court's jurisdiction based on service on its alleged subsidiary, the Bank of Bermuda (New York) Limited, the defendant disclosed that it no longer possessed the stock certificates at issue.
The Southern District consequently dismissed the case based on lack of in rem jurisdiction over the shares themselves, and the judgment creditor appealed to the Second Circuit. Finding no controlling precedent on this issue, the Second Circuit certified to the New York Court of Appeals the question of whether a New York court with personal jurisdiction over a garnishee could order it to turn over a judgment debtor's out- of-state assets in its possession.
Answering in the affirmative, the Koehler decision centered on the "fundamental differences between enforcement and attachment," which result in distinct jurisdictional prerequisites. Article 52 of the CPL enables a New York court to order "a party to deliver the property in which the judgment debtor has an interest, or to convert it to money for payment of the debt." Unlike attachment proceedings, which seek prejudgment seizure of the property itself and thus require in rem jurisdiction, a turnover order is premised on personal jurisdiction over the party and punishable by contempt of court. In short, prejudgment attachment proceeds solely against the property; post-judgment enforcement proceeds solely against the person.
Based on this distinction, the Court of Appeals rejected BBL's argument that, without personal jurisdiction over the judgment debtor, a New York court must have in rem jurisdiction over the debtor's property to order its turnover. Instead, "[h]aving acquired jurisdiction of the person, the court  can compel observance of its decrees by proceedings in personam against the owner within the jurisdiction." The court found further support for the extraterritorial reach of the New York statute in its legislative history and the absence of any express territorial limitation therein.
Despite the potential impact of its decision on the separate entity rule, the Koehler court did not mention the rule or attempt to reconcile the two principles. At least prior to Koehler, "New York courts ha[d] long applied the separate entity rule to garnishee banks operating branches both in New York and elsewhere."4Those courts had routinely refused to enter turnover or restraining orders against foreign branches of banks that held property of the judgment debtor, even when the bank had a New York branch subject to personal jurisdiction in the state.5 Yet "nothing required the Koehler Court to consider the [separate entity] rule's application to a foreign bank operating a subsidiary in New York that was ordered to turn over stock certificates it physically possessed."6
In Tire Engineering & Distribution, the Second Circuit heard two separate appeals regarding the validity of the separate entity rule in light of Koehler. In one of the appeals, the U.S. District Court for the Eastern District of Virginia entered a $26 million judgment in favor of Tire Engineering and Distribution, against six foreign corporations. Tire Engineering learned that one of the judgment debtors had assets at the Bank of China, which operated two branches in New York City. Tire Engineering filed an action in the Southern District of New York, seeking a turnover order against Bank of China pursuant to CPLR §5225(b), asking for "all money or other personal property in its possession in which one or more of the [j]udgment [d]ebtors have an interest, regardless of whether [the bank] possesses that money or other personal property in New York, China, the United Arab Emirates, or elsewhere."
Concurrently, Tire Engineering served a restraining notice on Bank of China pursuant to CPLR §5222, prohibiting it from selling, assigning, or transferring any property of the judgment debtors in its possession. The district court granted Bank of China's motion to dismiss, finding that because the bank had no accounts or property belonging to any of the judgment debtors in its New York branches, the separate entity rule precluded the relief requested by Tire Engineering. The court, however, stayed the restraining notice pending appeal.
The Second Circuit also heard the appeal in Motorola Credit v. Standard Charter Bank, where the Southern District entered a judgment against the Uzans, a Turkish family who induced Motorola to loan more than $2 billion to a Turkish company that the family controlled. In an effort to collect its judgment, Motorola served a CPLR §5222 restraining order issued by the district court on the New York branch of Standard Chartered Bank, a foreign banking corporation incorporated in the United Kingdom.
The bank did not find any Uzan property in its New York branch, but did identify relevant assets connected with its branches in the United Arab Emirates. As the bank attempted to comply with the restraining order, regulatory authorities in both Jordan and the United Arab Emirates intervened. In turn, the bank filed a motion for relief from the restraining order, arguing that the order was contrary to the law in the United Arab Emirates and therefore subjected it to legal and regulatory risk, and that the order was in contravention of the separate entity rule. The district court agreed, finding that the separate entity rule prohibited Motorola from restraining assets held by the bank's foreign branches. As in Tire Engineering, the court stayed the release of the restraint on the assets pending appeal.
The Second Circuit found that the appeals of both cases turned on "unsettled and important questions of New York law" that have not been addressed by the New York Court of Appeals, and that it was impossible to predict, based on other decisions by New York courts, how the Court of Appeals would decide the issue. In certifying the questions, the court found that the New York Court of Appeals has never "explicitly addressed the separate entity rule in any context." Rather, the Court of Appeals has merely "affirmed, without opinion, intermediate courts' application of the separate entity rule in cases that did not involve post-judgment enforcement proceedings."
Effect of Decision
The Second Circuit identified some of the far reaching effects that the New York Court of Appeals decision could have on foreign corporations and banking institutions. For one, "[a]s defendants and amici note, international banks are subject to the competing laws of multiple jurisdictions, and turnover or restraining orders by New York courts may cause conflicts with the regulations, laws, and policies of other sovereign jurisdictions."7
Additionally, "[a] decision that branches of a bank anywhere in the world are subject to post-judgment enforcement orders if that bank maintains a New York branch could potentially affect decisions of international banks to maintain New York branches."8 For example, 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 turn over monies of the judgment debtor held by the bank anywhere in the world. Accordingly, should the Court of Appeals eliminate the separate entity rule, companies, in particular foreign ones, may feel the need to restructure their banking relationships depending on whether their banks have New York branches. Indeed, while a typical strategy of foreign judgment debtors with little connection to the United States is simply to ignore all U.S. based collection efforts and orders, banks present in New York will not have this option. If the separate entity rule is overturned, one thing, however, is certain: There will be an increase in enforcement activity in New York against banks.
Daniel B. Goldman is a partner and Adam W. Braveman is an associate in the New York litigation department of Paul Hastings. Jena A. Sold, an associate at the firm, assisted in the preparation of this article.
1. Tire Engineering & Distribution v. Bank of China, slip. op., No. 2014 NY Slip Op 64029 (Feb. 18, 2014) (citing Tire Engineering & Distribution v. Bank of China, Nos. 13-1519-cv, 13-2535-cv(L), 13-2639-cv(con),—F.3d—, 2014 WL 114285, at *1 (2d Cir. Jan. 14, 2014)).
2. Tire Engineering & Distrib., 2014 WL 114285, at *1 (citations omitted).
3. 911 N.E.2d at 831.
4. Tire Engineering & Distrib., 2014 WL 114285, at *1.
5. See id. at *1 n.3 (citation omitted); Cronan v. Schilling, 100 N.Y.S.2d 474 (Sup. Ct. N.Y. Cty. 1950); Det Bergenske Dampskibsselskab v. Sabre Shipping, 341 F.2d 50 (2d Cir. 1965)).
6. Id. at *6.
7. Id. (citations omitted).
8. Id. (citations omitted).