Motorola Credit Corp. and Nokia Corp. v. Uzan, No. 02 Civ. 666 (S.D.N.Y. Aug. 16, 2013) [click for opinion]
This case involves a decades-long effort by Motorola Credit Corp. to track down and execute upon assets of Defendants (the "Uzans"), who diverted large loans made by Motorola to a Turkish telecommunications company owned in large part by the Uzans. On July 31, 2003, the district court awarded Motorola more than $2 billion in damages. On February 13, 2013, the district court issued an order pursuant to Rules 65 and 69 of the Federal Rules of Civil Procedure and New York Civil Practice Law and Rule § 5222 enjoining the Uzans and their proxies from transferring or dissipating any Uzan assets, and required any subpoenaed party in possession of Uzan property to immediately freeze and restrain access to such property. Among the entities which Motorola subpoenaed was the New York branch of nonparty Standard Chartered Bank.
Upon receiving the subpoena, Standard Chartered's United Arab Emirate ("UAE") branch froze four interbank deposits, worth approximately $30 million, placed by Jordan Dubai Islamic Bank ("JDIB"), an identified Uzan proxy. When, in compliance with the court's injunction, Standard Chartered refused to process JDIB's payments, the UAE Central Bank debited from Standard Chartered's account with the Central Bank funds the full amount of JDIB's assets. Faced with the risk of double liability, Standard Chartered filed a motion in the district court to lift the court's injunction order.
Standard Chartered made essentially three arguments: (1) the interbank payments belonged to Standard Chartered, not JDIB, and were therefore not subject to the restraint; (2) even if the assets belonged to JDIB, the district court should equitably modify the restraint to allow the release of the JDIB assets due to the risk that Standard Chartered could be subject to double liability; and (3) New York's "separate entity rule" prohibits the restraint under the circumstances here. The district court issued an order rejecting the first two arguments, but agreed that the separate entity rule prohibited the restraint.
On the determinative question of whether the separate entity rule applies to bar the restraint here, the district court began by observing that, in the ordinary case, a New York court with personal jurisdiction over a garnishee may order him to turn over out-of-state property of a judgment debtor in post-judgment enforcement proceedings. But an exception to this general rule is New York's separate entity rule, under which, for purposes of attachment, among others, courts must treat each branch of a bank as a separate entity "in no way concerned with the accounts maintained by depositors in other branches or at the home office." Standard Chartered argued that, because Motorola had served its New York branch only, its service of the restraining notice was ineffective as to JDIB's assets held at Standard Chartered's UAE location. This was so, Standard Chartered claimed, even though Motorola had obtained personal jurisdiction over Standard Chartered and even though the injunction order applied to all Uzan property in the possession or custody of any person or entity in the State of New York or elsewhere.
Motorola argued that the separate entity rule no longer applied in the wake of Koehler v. Bank of Bermuda, Ltd. In that case, the New York Court of Appeals—applying the principle that, for purposes of post-judgment attachment, a New York court need only obtain personal jurisdiction over the garnishee—ordered the Bank of Bermuda, Ltd., which held stocks in Bermuda belonging to a judgment debtor, to turn over the stock certificates to the judgment creditor in that case. The district court was not persuaded by Motorola's argument, pointing out that, in Koehler, the Bank of Bermuda's Bermuda branch had consented to the personal jurisdiction of the U.S. district court and therefore the separate entity rule was not at issue in the case. The district court was not convinced that the Court of Appeals would have silently overruled such an important, long-standing policy and precedent as the separate entity rule.
Finally, the district court rejected Motorola's policy argument that the separate entity rule no longer makes sense due to technological advances. Motorola claimed that the separate entity rule was motivated by the concern that, without such a rule, no bank branch could safely pay a check drawn by its depositor without first having to coordinate with other branches to make sure that no warrant of attachment had been served upon any of them, thus placing an intolerable burden on banks. The district court explained, however, that the separate entity rule serves other purposes as well. These include avoiding undue disruption of routine banking practices due to inconsistent foreign laws and practices, and, more significantly, as in the case of Standard Chartered, mitigating the risk that a bank that freezes and turns over to a judgment creditor a judgment debtor’s assets held at a foreign branch could potentially violate local laws and be subject to double liability (to both debtor and creditor) if the foreign law were not to recognize the validity of the action.
Accordingly, the district court granted Standard Chartered's motion for relief from the restraint on the basis of the separate entity rule. Nevertheless, the district court ordered the asset freeze to remain in place pending Motorola's appeal, reasoning that (1) Motorola would likely suffer irreparable harm if the freeze were removed, given the Uzans' history of secreting assets; and (2) the separate entity rule's applicability in the wake of Koehler remains an open and hotly contested issue presenting a "sufficiently serious question going to the merits of the dispute," with the potential financial hardship to Motorola outweighing the risk to Standard Chartered that its banking operations would be meaningfully hindered during the course of the appeal.