On October 23, 2014, the New York Court of Appeals decided Motorola Credit Corp. v. Standard Chartered Bank, -- N.E.3d --, 2014 N.Y. Slip Op. 07199 (2014), upholding the separate entity rule as it applies to a foreign bank operating branches in New York. That rule, as enunciated by intermediate New York courts for over 50 years, provides that in proceedings to enforce judgments in New York, New York branches of a bank shall be considered separate entities from all foreign branches of the bank. The rule’s application has prevented judgment creditors from forcing banks, through their New York branches, to restrain and/or turnover assets of a judgment debtor held by foreign branches of the bank.
Pursuant to the court’s ruling in Motorola Credit Corp., New York law is now settled, and the separate entity rule is here to stay. The decision, however, may impact the application of Koehler v. Bank of Bermuda, 911 N.E.2d 825 (N.Y. 2009), which held that a New York court could order any judgment debtor or garnishee over which it had personal jurisdiction to turnover assets owned by a judgment debtor, even if those assets were located outside of New York. The Court’s attempt to distinguish its holding in Motorola Credit Corp. from Koehler could actually result in a significant limitation of Koehler,particularly with respect to funds held in foreign bank accounts.
Motorola Credit Corp.’s Reliance on International Comity
In Motorola Credit Corp. the New York Court of Appeals upheld the separate entity rule, finding that the rule precludes a 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. There, the Southern District of New York entered a $2.1 billion judgment against the Uzans, a Turkish family who induced Motorola to loan money to a Turkish company that the family controlled. In an effort to collect its judgment, Motorola served a CPLR section 5222 restraining order issued by the Southern District of New York on the New York branch of Standard Chartered Bank (“SCB”), a foreign banking corporation incorporated in the United Kingdom. The bank did not find any Uzan property in its New York branch, but did identify relevant assets valued at roughly $30 million in its branch in the United Arab Emirates.
SCB, attempting to comply with the restraining order, froze those assets belonging to the Uzans. However, regulatory authorities in the U.A.E. and Jordan intervened, seizing documents at SCB’s Jordan branch while the U.A.E. Central Bank unilaterally debited approximately $30 million from SCB’s account. In turn, SCB filed a motion for relief from the restraining order, arguing that the order subjected it to legal and regulatory risk in the U.A.E., and that the order was in contravention of the separate entity rule. The district court agreed, finding in a sealed order that the separate entity rule prohibited Motorola from restraining assets held by the bank’s foreign branches, but the court stayed the release of the restraint pending appeal.
The Second Circuit heard Motorola’s appeal and certified the following question to the New York Court of Appeals: whether the separate entity rule precludes a 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.
In answering “yes” to the certified question and upholding the separate entity rule, the New York Court of Appeals explained the “three basic rationales” for the creation of the separate entity doctrine, all of which relate to international comity: (1) the importance of international comity; (2) protecting banks from being subject to competing claims and the possibility of double liability; and (3) shielding banks from the “intolerable burden” of monitoring and ascertaining the status of bank accounts in numerous other branches. The court was not convinced that technological advances, such as centralized and computerized databases and banking systems, rendered the comity concerns obsolete. Conversely, “[t]he 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.” Accordingly, “the separate entity rule promotes international comity and serves to avoid conflicts among competing legal systems.”
The court observed that the facts of Motorola Credit Corp. “aptly demonstrate” the importance of the separate entity rule in maintaining international comity. “In seeking to comply with the restraining order, SCB faced regulatory and financial repercussions abroad . . . [as] [t]he U.A.E. Central Bank, which possesses regulatory oversight in that nation, would not allow SCB’s Uzan-related payment obligation to remain unsatisfied.” As a result, “SCB was placed in the difficult position of attempting to comply with the contradictory directives of multiple sovereign nations.” The application of the separate entity rule prevents this very dilemma.
Reconciling the Separate Entity Rule with Koehler
The court also attempted to reconcile the separate entity rule with Koehler. In Koehler, the New York Court of Appeals, answering a certified question by the Second Circuit, held that under CPLR article 52, a New York court may order a bank over which it has personal jurisdiction to deliver stock certificates owned by a judgment debtor, even when those stock certificates are located outside of New York. There, the garnishee foreign bank – Bank of Bermuda, Ltd. (“BBL”) – did not contest that it was subject to personal jurisdiction in New York based on the actions of Bank of Bermuda (New York) Ltd. (“BBL-NY”). BBL-NY was not a “branch” of BBL, but rather was a wholly owned subsidiary. The Southern District of New York issued a turnover order against BBL, who at that time was in possession of stock certificates owned by the judgment debtor in Bermuda, but then dismissed the case based on lack of in rem jurisdiction over the shares themselves. On appeal the Second Circuit certified the question of whether a New York court with personal jurisdiction over a garnishee could order it to turn over a judgment debtor’s out of state assets in its possession.
The Koehler court concluded, without mentioning the separate entity rule, that “the key to the reach of the turnover order is personal jurisdiction over a particular defendant.”  In short, post-judgment enforcement proceeds against the person, not the property, and thus “[a] New York court has the authority to issue a turnover order pertaining to extraterritorial property, if it has personal jurisdiction over a judgment debtor in possession of the property.” The court found that this rule applied with equal force to garnishees; “a New York court with personal jurisdiction over a defendant may order him to turn over out-of-state property regardless of whether the defendant is a judgment debtor or a garnishee.”
In Motorola Credit Corp., the judgment creditor argued that Koehler “abrogated the [separate entity] rule.” The court disagreed, finding Koehler inapplicable. “[T]he separate entity rule, as it has been applied by the courts, would not have aided the bank in Koehler because that case involved neither bank branches nor assets held in bank accounts.”
Potential Effect of Motorola Credit Corp.
Yet, what happens now when a judgment creditor seeks to invoke Koehler to force a judgment debtor to turnover funds held in a foreign bank account? According to the Court of Appeals, a judgment creditor’s ability to compel the turnover of such funds has not been resolved by Koehler. That is no small issue. In efforts to collect judgments against foreign corporations with little contact in this country, judgment creditors typically target liquid assets such as funds held in foreign bank accounts. Now, after, Motorola Credit Corp., judgment debtors will, no doubt, make comity arguments as to why they should be not be compelled to turnover funds held in foreign bank accounts. They will also likely seek to enlist their foreign banks to join in such arguments, particularly if the judgment debtors have significant relationships with such banks.
Given the Court’s heavy reliance on comity in Motorola Credit Corp., there will be other arguments available to foreign entities seeking to avoid turnover orders. For example, unlike in the United States, countries such as Korea forbid a party from transferring funds to satisfy a judgment until all appeals are exhausted and a “judgment of execution” has been issued. A party in violation of this law could be subject to both civil and criminal penalties. Under Motorola Credit Corp., a judgment debtor or garnishee could now argue that, even if a New York court has personal jurisdiction over both a judgment debtor and a New York branch of a garnishee bank, a judgment creditor cannot reach the debtor’s assets held in a foreign country if such a procedure would conflict with the laws of the foreign country. This would be a considerable exception to Koehler that personal jurisdiction is the “key to the reach” of post judgment turnover orders, and one the New York Court of Appeals may have to address in the future.
Although the full impact of the decision remains to be seen, judgment debtors and banking institutions doing business in New York now have some clarity – and a very favorable decision – in the law of enforcement of judgments.
This article originally appeared in print in The New York Law Journal.