Motorola Credit Corp. v. Standard Chartered Bank, 2014 NY Slip Op 07199 (N.Y. Oct. 23, 2014) [click for opinion]
Members of a wealthy Turkish family (the “Uzans”) were held to have perpetrated a fraud against Plaintiff Motorola Credit Corp. (“Motorola”) by fraudulently diverting Motorola’s $2.1 billion loan rather than fulfilling its intended purpose to finance expansion of a Turkish telecommunications company. Because the family refused to pay the nearly $3.1 billion in compensatory and punitive damages awarded by the United States District Court for the Southern District of New York, the district court entered a restraining order to prevent the family (and others with notice of the order) from “selling, assigning or transferring their property.”None of the family's property was in Defendant Standard Chartered Bank's ("SCB") New York branch, but searches conducted by SCB identified Uzan-related assets valued at roughly $30 million in its branches in the United Arab Emirates (U.A.E.). After SCB froze those assets to comply with the restraining order, the U.A.E. Central Bank responded by debiting $30 million from SCB’s account with the Central Bank.
SCB sought relief from the court’s restraining order, claiming that it faced double liability since its restraint of the $30 million violated U.A.E. law. SCB also relied on New York’s separate entity rule, arguing that prejudgment attachments, restraining notices or turnover orders are effective only on assets held in accounts at the bank’s New York branch, not on assets held in the bank’s foreign branches. Motorola countered by relying on prior New York case law, which, it argued, invalidated the separate entity rule.
The district court sided with Defendant. The court held that, due to the separate entity rule, Plaintiff could not restrain assets within Defendant’s foreign branches. The district court then ordered a stay of the restraining order until Plaintiff’s appeal was resolved.
On appeal, the Second Circuit certified the question of whether the separate entity rule allows a judgment creditor to force a bank (with an operating branch in New York) to restrain a debtor’s assets held in that bank’s foreign branch. The New York Court of Appeals accepted certification.
Motorola argued to that court that the separate entity rule was not the law, because it was not even mentioned in the statutory provisions dealing with enforcement of judgments, and that even if it were, the rule was abolished in the Court of Appeals’ 2009 decision in Koehler v. Bank of Bermuda Ltd. The court disagreed, noting that the separate entity rule is a creature of New York common law, supported by nearly 100 years of case law. Further, the court held that the separate entity rule was not overturned in Koehler, as Plaintiff argued. The Koehlercase did not involve assets held in bank accounts, and there was no analysis or discussion of overturning the separate entity rule. Ultimately, the court concluded that the separate entity rule was still good law and was necessary to (1) prevent double liability in multiple jurisdictions, (2) promote international comity, and (3) ease the pressures on banks’ regulatory compliance.
Two judges dissented from the decision, arguing that the separate entity rule was obsolete and against New York public policy.
Adam Pascarella of the New York office contributed to this summary.