Separate Entity Rule Prevents Garnishment of Assets in Foreign Bank Through its New York Branch

On October 23, 2014, the Court of Appeals issued a decision in Motorola Credit Corp. v. Standard Chartered Bank, 2014 NY Slip Op. 07199, upholding the "separate entity rule" to prevent 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 Motorola decision arose from Motorola Credit Corp.'s efforts to enforce a judgment of the United States District Court for the Southern District of New York, awarding it $2.1 billion in compensatory damages, and an additional $1 billion in punitive damages, against members of the Turkish Uzan family who had "perpetuated a huge fraud" against Motorola relating to the financing of a telecommunications company. The federal "District Court entered an order pursuant to Federal Rules of Civil Procedure 65 and 69 and CPLR 5222 restraining the Uzans and anyone with notice of the order from selling, assigning or transferring their property," which Motorola served on the New York branch of Standard Chartered Bank (SCB). Although the Uzans had no assets at SCB's New York branch, the bank seized approximately $30 million in assets held by the bank in the United Arab Emirates. When regulatory authorities in the UAE quickly intervened by unilaterally debiting the frozen account, SCB sought relief from the District Court's restraining order, contending that, "under New York's separate entity rule, service of the restraining order on SCB's New York branch was effective only as to assets located in accounts at that branch and could not freeze funds situated in foreign branches." Motorola countered that the judge-made "separately entity rule" was abrogated by the Court of Appeals' decision in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009), which held that a judgment creditor could seek the turnover of stock certificates located outside the country so long as the court had personal jurisdiction over the garnishee. The District Court held that the separate entity rule precluded Motorola from restraining assets at SCB's foreign branches. On appeal, the Second Circuit certified the issue to the Court of Appeals.

In a decision by Judge Graffeo (joined by Chief Judge Lippman and Judges Read, Smith and Rivera), the Court of Appeals held that the separate entity rule applied and precluded enforcement of the restraining order against assets at SCB's foreign branches. First, the Court rejected the argument that the separate entity rule had been overturned by Koehler. The Court noted that the doctrine was not raised by the parties, or discussed by the Court, in that decision, and that the rule was, in any event, inapplicable in Koehler because the case did not involve "bank branches" or "assets held in bank accounts." The majority also "decline[d] Motorola's invitation to cast aside the separate entity rule":

[T]he doctrine has been a part of the common law of New York for nearly a century. Courts have repeatedly used it to prevent the post judgment restraint of assets situated in foreign branch accounts based solely on the service of a foreign bank's New York branch. Undoubtedly, international banks have considered the doctrine's benefits when deciding to open branches in New York, which in turn has played a role in shaping New York's status as the preeminent commercial and financial nerve center of the Nation and the world.

In large measure, the underlying reasons that led to the adoption of the separate entity rule still ring true today. The risk of competing claims and the possibility of double liability in separate jurisdictions remain significant concerns, as does the reality that foreign branches are subject to a multitude of legal and regulatory regimes. By limiting the reach of a CPLR 5222 restraining notice in the foreign banking context, the separate entity rule promotes international comity and serves to avoid conflicts among competing legal systems. And although Motorola suggests that technological advancements and centralized banking have ameliorated the need for the doctrine, courts have continued to recognize the practical constraints and costs associated with conducting a worldwide search for a judgment debtor's assets.

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We believe that abolition of the separate entity rule would result in serious consequences in the realm of international banking to the detriment of New York's preeminence in global financial affairs.

(Citations and internal quotation marks omitted.)

Judge Abdus-Salaam dissented in a decision joined by Judge Pigott. The dissent urged the rejection of the separate entity rule on four grounds:

(1) The rule is inconsistent with the text of Article 52 of the CLPR, which provides no special exemption for "third parties that are banks, or branches of banks, from complying with [a] restraining notice."

(2) The rule is obsolete "[i]n this day of centralized banking and advanced technology, [when] bank branches can communicate with each other in a matter of seconds."

(3) A "blanket rule" shielding foreign bank branches from complying with restraining notices served on a New York branch is not necessary to promote international comity, as there will not always be a conflict between New York law and the law of the foreign forum; considerations of comity can be taken into account on a case-by-case basis.

(4) "Although the Koehler court did not address the separate entity rule, Koehler's interpretation of CPLR article 52 and its holding that article 52 has extraterritorial reach cannot be reconciled with . . . the separate entity rule."