Enforcing a judgment on foreign assets – the “separate entity” rule

Motorola Credit Corp. v Standard Chartered Bank, 24 N.Y.3d 149, ___ NYS2d ___, 2014 NY Slip Op 07199 [2014]
The Court here held that a common-law rule, the “separate entity” rule,

“prevents a judgment creditor 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 issue came to the court as a certified question from the Second Circuit Court of Appeals, in a case with a long and tangled history.     Simplifying greatly, the underlying judgment debtors, a Turkish family named Uzan, had been found to have perpetrated an enormous fraud on the plaintiff Motorola Credit, diverting the proceeds of a loan of over $2 billion. Compensatory damages of $2.1 billion and punitive damages of $1 billion have already been awarded. In a worldwide search for reachable assets, plaintiff served a restraining notice on the New York branch of the defendant Standard Chartered Bank (“SBC”). SBC is incorporated and has its headquarters in the United Kingdom. It failed to locate any of the Uzans’ assets in the New York branch, but eventually found assets worth $30 million in branches in the United Arab Emirates. SCB froze the assets in compliance with the restraining notice, but authorities in the Emirates and Jordan stepped in, with the Central Bank of Jordan seizing documents in SCB’s Jordan branch, and the UAE Central Bank debiting $30 million from SCB’s account there.
SCB asked to be relieved from the order, on the grounds that restraining the assets in the UAE violated the law there and subjected SCB to double liability. The Second Circuit certified the question to the Court of Appeals, asking whether the separate entity rule precluded a judgment creditor from ordering a garnishee bank, operating branches in New York, to restrain debtor’s assets held in foreign branches. The Court concluded that there is such a rule, that it in fact has been established as part of New York common law for over a century, and that it does in fact preclude the restraining notice from freezing assets in foreign branches of the garnishee bank.
The Court faced what seemed like a similar issue in 2009, with Koehler v Bank of Bermuda Ltd., 12 N.Y.3d 533, 883 N.Y.S.2d 763 [2009]. There, the Court of Appeals held that where the court has personal jurisdiction over an entity, holding property of a judgment debtor out of the state, the court can compel that entity to deliver the property (or its value) to a judgment creditor within the state. This is so, even where none of the parties, their dispute, or the disputed property have any connection to New York. The plaintiff here (and a two-judge dissent) argued that the determination in Koehler had effectively abrogated the separate entity rule. The majority distinguished Koehler, on the grounds that first the parties there had not raised the separate entity rule. Second, and more importantly, the separate entity rule would not have applied to Koehler, since the assets there were not held in branches nor in bank accounts, but was held by the bank itself.
SCB also pointed out that the separate entity rule is not mentioned in CPLR Article 52. That is true, but does not preclude the holding that it was a part of New York common law long before the adoption of the CPLR, and was not abrogated by it. The Court found that the rationale for the rule is still valid today. Unless it continues, banks with branches here and in foreign countries will be faced with competing claims, double liability in different jurisdictions, and the possibility of violating foreign laws and regulatory schemes. Retaining the rule promotes international comity. Abrogating it would detrimentally affect New York’s position in global financial affairs, and would be a disincentive to foreign banks opening branches in New York in the first place