Second Circuit Asks Court of Appeals to Clarify Application of "Separate Entity Rule" to Post-Judgment Enforcement Proceedings

On January 14, 2014, in Tire Engineering & Distribution, L.L.C., et al. v. Bank of China Ltd., and Motorola Credit Corp. v. Standard Chartered Bank, the Second Circuit certified questions to the New York Court of Appeals concerning the application of the "separate entity rule" to post-judgment enforcement proceedings under CPLR Article 52.

Under a long-standing judge-made rule, even if a foreign bank has a branch in New York (and is therefore subject to personal jurisdiction), other branches of the bank are "treated as separate entities for certain purposes, such as attachments, restraints, and turnover orders." As a result, where the separate entity rule applies, "in order to reach a particular bank account, the branch of the bank where the account in maintained must be served." The Court of Appeals has never decided whether this rule applies to post-judgment enforcement proceedings. However, in a 2009 decision, Koehler v. Bank of Bermuda Ltd., the Court, without expressly addressing the "separate entity rule," held that "a New York court has authority to issue a turnover order pertaining to extraterritorial property [in that case a stock certificate], if it has personal jurisdiction over a judgment debtor in possession of the property." Although some courts have concluded that Koehler "forecloses the application of the separate entity rule to post-judgment enforcement proceedings," the Second Circuit, in Tire Engineering and Motorola, "decline[d] to reach the issue," and instead certified the following two questions to the Court of Appeals:

"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 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 answers to these questions will potentially have wide-ranging implications not only for New York civil procedure, but also for the international banking industry, since, as the Second Circuit notes in its decision, "international banks are subject to 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."