This article was originally published by the International Bar Association in “IBA Arbitration News,” Volume 19 No. 1 in February 2014. The original article may be found on the IBA Arbitration Committee website at http://www.ibanet.org/LPD/Dispute_ Resolution_Section/Arbitration/Default.aspx. Information on the International Bar Association can be found at www.ibanet.org.

In the IBA Arbitration News September 2011 issue, Alden L. Atkins and Adrianne Goins of Vinson & Elkins discussed a New York Court of Appeals opinion that made New York a highly favorable venue for creditors to enforce and collect on judgments and awards.1  In Koehler v. Bank of Bermuda, Ltd.,2 a creditor sought turnover in New York of a Bermudan debtor’s assets, which were held in Bermuda by the Bank of Bermuda. The highest court of New York State ordered the Bank of Bermuda to turn over the assets, even though New York had no connection to the underlying subject matter and no jurisdiction over the Bermudan debtor or his assets. The Koehler decision sparked concern that New York was overreaching its territory and becoming a “Mecca for creditors,” which would prompt a mass exodus of global financial institutions.3

Since 2009, federal and state courts have struggled to interpret Koehler and its effects; however, earlier this year, the New York Court of Appeals clarified the scope of New York authority. The result limits Koehler significantly and appears to level the playing field between debtors and creditors in New York.

Enforcing Judgments and Arbitral Awards in New York

In New York, parties seeking enforcement of judgments and arbitral awards rely on the Civil Procedure Law and Rules (CPLR), Article 52 on the Recognition of Judgments, which controls enforcement of money judgments, including converted arbitral awards.

New York courts have interpreted the CPLR Article 52 to authorize turnover orders even where  the judgment debtor’s assets are held outside New York.4 Likewise, if a third-party garnishee holds the judgment debtor’s assets or owes a debt to the judgment debtor, the court can compel the garnishee to turn over the assets or pay the debt to satisfy the judgment.5

The Koehler Decision and the Separate Entity Doctrine

In Koehler, a judgment creditor sought to enforce a Maryland judgment against the assets of a Bermudan judgment debtor, held in Bermuda by the Bank of Bermuda. The creditor served the Bank of Bermuda, as well as its New York subsidiary, to compel turnover in New York. After ten years of litigation, the Bank of Bermuda consented to New York jurisdiction. The Court of Appeals found a turnover order proper, holding that a New York court required only personal jurisdiction over the garnishee to compel it to turn over the debtor’s assets. There was no requirement that the assets or the debtor be subject to New York jurisdiction.

Naturally, this prompted concern. Given the somewhat murky circumstances of the Bank of Bermuda’s consent to jurisdiction, some judges and commentators theorized that Koehler had abrogated New York’s separate entity doctrine.6

Developed in the United States in the early 1900s, the separate entity doctrine considers each branch of a bank a separate entity from all other branches, without access to information or funds held by one another, for the purposes of judgment enforcement. The doctrine responded to three concerns: first, it was impracticable to require that each bank branch constantly monitor accounts held at sister branches; second, requiring banks to turn over, freeze or divulge information about foreign accounts could violate foreign banking laws; and third, a bank facing competing turnover orders in different jurisdictions might become doubly liable for the same debtor’s funds.

Abrogation of the separate entity doctrine would mean that a judgment debtor’s assets held by any bank in the world would be accessible through a New York turnover order, so long as the bank had a New York branch.

Koehlers Effects

Following Koehler, New York state courts and federal district courts in New York struggled to interpret the reach of New York law, resulting in a rift between federal and state judges interpreting state law.

The first few federal cases interpreting Koehler found that the separate entity doctrine had been abrogated, and the courts compelled New York bank branches to turnover funds and account information held abroad.7

In contrast, the vast majority of New York state courts found that the separate entity doctrine was alive, well and justified by the same comity concerns that prompted its development in the first place. In Samsun Logix Corp. v. Bank of China,8 a judgment creditor served New York branches of Bank of China for turnover of “any property” of the judgment debtor held in Chinese branches. The Bank of China successfully argued that compliance with the New York turnover order would result in civil liability in China against the banks and criminal liability in China against their executives. The Supreme Court of New York County found the comity concerns that prompted the separate entity doctrine applicable, and held that the doctrine protected Bank of China from the turnover order. Furthermore, the Samsun court admonished that Article 52 requires judgment creditors to identify specific assets, held by specific garnishees. It does not authorize a worldwide fishing expedition to locate assets held by third parties.

Following Samsun, New York state courts continued to uphold the separate entity doctrine,9 and eventually the Southern District of New York found in Shaheen Sports, Inc. v. Asia Insurance that the overwhelming evidence confirmed that the separate entity doctrine was never abrogated and remained a necessary fixture in New York enforcement law.10 The federal court opined that the Koehler court did not need to assert jurisdiction over the Bank of Bermuda through its New York branch, because the Bermudan branch itself consented to personal jurisdiction in New York. Thus, Koehler did not deal with the separate entity doctrine at all. In addition, the Shaheen court found that the Pakistani garnishee bank whose New York branch was served adequately demonstrated that it could be subject to liability in Pakistan for complying with the New York turnover order, and potentially double liability for the same assets, in light of litigation in Pakistan against the judgment debtor. Based on these comity concerns and a finding that Koehler did not deal with the separate entity doctrine, the Shaheen court upheld the legal distinction between the bank’s Pakistani and New York branches and refused to order a turnover.

Northern Marianas Islands

Finally, earlier this year, the New York Court of Appeals clarified the holding in Koehler. In Commonwealth of the Northern Mariana Islands v. Canadian Imperial Bank of Commerce (CIBC),11 the Commonwealth filed in New York to enforce two tax judgments against former citizens whose assets were held by CIBC First Caribbean International Bank (CFIB), a 92% owned Cayman Islands subsidiary of CIBC. The Commonwealth served CIBC’s New York branch in an action to turn over those assets, arguing that CIBC had the power to compel CFIB to turn over the assets: CIBC was the majority owner of CFIB, shared overlapping personnel with CFIB and exercised oversight over CFIB’s regulatory requirements. CIBC argued that it was a separate legal entity from CFIB, and could not access the accounts held at CFIB – or even information on those accounts – without a formal bank sharing agreement.

The Court of Appeals found that Article 52 of the CPLR on enforcement of foreign judgments permitted turnover orders only against garnishees that had actual possession of a judgment debtor’s assets. Garnishees with mere constructive control over the assets are not subject to turnover orders under CPLR Article 52. In Northern Marianas, CFIB in Cayman was the entity with actual possession of the assets, and the New York courts did not have personal jurisdiction over CFIB; therefore a turnover could not be ordered.

In addition to limiting the reach of CPLR Article 52, Northern Marianas expressly rejected Koehler’s supposed abrogation of the separate entity doctrine in New York. According to the Court in Northern Marianas, Koehler’s only significance was to hold that “personal jurisdiction is the linchpin of authority under [CPLR] section 5225(b).”12

The Future of Enforcement in New York

Northern Marianas’ “actual custody” holding tips the balance of New York enforcement law  back, particularly in light of Samsun’s admonishment that CPLR Article 52 does not authorize international fishing expeditions for assets or information. With its ruling, the Northern Marianas court made clear that a judgment or award creditor may not use New York as a springboard to access undefined assets located anywhere in the world. Instead, an award creditor must locate  a garnishee in actual possession of defined assets of the debtor, over whom New York can assert personal jurisdiction, before filing for a turnover order.

Where the garnishee is a bank, the “actual custody” standard is relatively clear: separate branches are separate entities, regardless of their corporate form. Thus, a subsidiary does not have actual custody of accounts and information held at a fellow subsidiary or a parent, nor does a parent have actual custody of accounts and information held by its subsidiaries.

Nonetheless, some uncertainty remains for creditors wishing to enforce a judgment or award in New York, particularly with regard to the separate entity doctrine in New York. On 14 January 2014, facing two appeals from the Southern District of New York where the court refused to order turnovers against two garnishee banks, the Second Circuit certified to the New York Court of Appeals two questions, asking the Court of Appeals to explicitly clarify the scope of the separate entity doctrine in judgment enforcement proceedings.13 In addition, the present case law provides no guidance on the liability of foreign garnishees with subsidiaries in New York that are not financial institutions.

In response to both Koehler and Northern Marianas and in the interest of international comity, the New York legislature has proposed legislation to limit New York courts’ extraterritorial reach under Article 52 to assets and information held within the United States.14 This legislation has not yet passed, and the standard that will apply to non-bank garnishees remains uncertain.

The status of the separate entity doctrine in judgment enforcement remains undecided. Nonetheless, it would appear that contrary to fears that New York would become a creditor “Mecca” from which financial institutions would flee, at least as far as garnishee banks are concerned, the pendulum is swinging back into balance: a New York court can only compel transfer of a debtor’s assets into the state to enforce a judgment if the court has personal jurisdiction over the entity that possesses those assets.