Second Circuit Declines to Follow Appellate Division Interpretation of New York Law

While we normally do not blog about Second Circuit decisions, that court's decision in Licci v. Lebanese Canadian Bank, SAL, No. 10-1306-cv (October 18, 2013), shows the difficulties that can arise when state and federal appellate courts interpret New York law differently.

Licci involves claims by American, Canadian, and Israeli citizens who were killed in rocket attacks in Israel that were carried out by Hizballah (aka Hezbollah) in 2006. Instead of suing their attackers, the Licci plaintiffs sued the banks that their attackers used to facilitate the logistics of carrying out the attacks: Lebanese Canadian Bank ("LCB"), a Lebanese bank with no operations, employees, or branches in the United States, and American Express Bank Ltd. ("Amex"). LCB maintained a correspondent bank account with Amex in New York. According to plaintiffs, LCB used this correspondent account to wire millions of dollars on behalf of Hizballah knowing that these wire transfers would enable Hizballah to carry out its rocket attacks.

Last year, the Second Circuit certified two questions to the New York Court of Appeals: (i) does a foreign bank's maintenance of a correspondent bank account at a financial institution in New York and use of that account to effect dozens of wire transfers on behalf of a foreign client, constitute transacting businesses in New York under CPLR 302(a)(1); and (ii) do plaintiffs' claims under the federal Anti-Terrorism Act, the federal Alien Tort Statute, or for negligence or breach of statutory duty, in violation of Israeli law, arise from LCB's transactions of business in New York within the meaning of CPLR 302(a)(1). The New York Court of Appeals accepted these certified questions and answered both of them in the affirmative. Last week, the Second Circuit released its decision holding that, in light of the answers to these certified questions, the exercise of personal jurisdiction over LCB under New York's long-arm statute does not violate the Due Process Clause of the Fourteenth Amendment and vacating the district court's decision granting LCB's motion to dismiss.

So far, so good. However, in its earlier decision certifying questions to the New York Court of Appeals, the Second Circuit affirmed the dismissal of all claims asserted against Amex after concluding that New York law, rather than Israeli law, should apply to those claims, because under New York’s choice-of-law analysis, New York had the greater interest in the litigation because all the challenged conduct undertaken by Amex occurred in New York.

On September 17, 2013, the Appellate Division First Department released its decision in Elmaliach v. Bank of China, Ltd., 2013 NY Slip Op 05858, unanimously affirming the decision by New York County Commercial Division Justice Barbara Kapnick denying a motion to dismiss made by the Bank of China with respect to claims that it had facilitated the funding of terrorist attacks against plaintiffs in Israel by Palestinian Islamic Jihad and Hamas. The First Department held that these claims were actionable because Israeli law, rather than New York law, governed these claims.

The Second Circuit's October 18, 2013, decision in Licci, declined to follow the reasoning in Elmaliach. The Second Circuit acknowledged that its earlier decision in Licci and the First Department's decision in Elmaliach reached opposite conclusions concerning whether New York or Israeli law should apply to cases brought by Israeli citizens against banks operating in New York for their roles in funding terrorist attacks in Israel. The Second Circuit emphasized that it was not required to follow the law of New York as interpreted by an intermediate New York appellate court if it believed that the New York Court of Appeals would reach a different conclusion and acknowledged that the New York Court of Appeals had yet to decide the precise issued decided by the Second Circuit and the First Department. The Second Circuit also noted that Elimaliach was not the first case in which the First Department has held that, where there is a conflict between the conduct regulating rules of the place of the conduct and those of the place of the injury, the law of the place of the injury generally applies.

Given the frequency with which these terrorism funding cases appear to be litigated in New York's state and federal courts, as well as the Second Circuit's more frequent use of the certification process to the New York Court of Appeals in recent years, it is difficult to understand the Second Circuit's reluctance to seek guidance from the Court of Appeals on an issue where the First Department has repeatedly reached a different conclusion. In any event, given the split between the Second Circuit and the First Department on this issue, plaintiffs looking to sue banks for their alleged roles in facilitating terrorists attacks abroad should be filing those suits in state court, and banks that get hit with these suits should be looking to remove them to federal court if there is a basis for doing so.