New York’s Highest Court Limits Ability of New York Courts to Attach Assets Held in Foreign Bank Branches
In Landmark Ruling in New York, “Separate Entity Rule” Lives On
Landmark Ruling Affirms the Existence of the “Separate Entity Rule” Holding That Service of an Asset Freeze Order on a New York Branch of an International Bank Does Not Restrain Assets Held in International Branches of the Bank.
On October 23, 2014, the New York Court of Appeals issued a decision in Motorola Credit Corporation v. Standard Chartered Bank, No. 162 (N.Y. Oct. 23, 2014), holding that the separate entity rule, which has been recognized by New York courts for almost a century, remained a valid rule of law and thus a "judgment creditor's service of a restraining notice . . . on a bank's New York branch is ineffective . . . to freeze assets held in the bank's foreign branches." The separate entity rule, upheld by the Court of Appeals in Motorola, provides that while New York courts may have personal jurisdiction over a New York branch of an international bank, the bank's other branches shall be deemed "separate entities" for the purpose of attaching or restraining assets. The practical effect of the decision is that a freezing order served on an international bank's New York branch does not reach accounts held at the bank's international branches. Therefore, a creditor seeking to restrain assets held by an international bank outside of the United States will need to obtain formal recognition of the freezing order in the jurisdiction in which the account in question is located.
Koehler v. Bank of Bermuda, an earlier ruling by the Court of Appeals, had caused many to question the continued validity of the separate entity rule. This most recent decision by the Court of Appeals puts those doubts to rest. But the influence of the decision is likely to be felt more widely still: The Court of Appeals' decision in Motorola, when considered in light of the United States Supreme Court's decisions in Daimler AG v. Bauman and Morrison v. National Australia Bank, highlights the ever-increasing inclination of both federal and state courts to limit the extraterritorial application of US laws.
Factual Background and Procedural History
The Motorola case is the result of the decade-long effort by Motorola, Inc. and Nokia Corporation to recover in excess of $3.1bn dollars from the Uzan family.
Between April 1998 and September 2000, the plaintiffs lent more than $2bn to a telecommunication company controlled by the Uzan family. After discovering that that Uzans had diverted a substantial portion of these funds to themselves, plaintiffs brought suit in the Southern District of New York. In 2003, the District Court awarded plaintiffs $2.1bn in compensatory damages, holding that the Uzans had "perpetrated a huge fraud" concealing "their scheme through an almost endless series of lies, threats, and chicanery." The court subsequently awarded Motorola an additional $1bn in punitive damages.
Faced with the Uzan's refusal to satisfy the judgments, Motorola pursued third-party discovery to identify attachable assets. In 2013, the District Court issued a restraining order barring the Uzans and anyone with notice of the order from selling, assigning or otherwise transferring property - regardless of where in the world that property was held (the "Restraining Order").
Motorola subsequently served the Restraining Order on the New York branch of Standard Chartered Bank ("SCB"), a foreign bank incorporated and headquartered in the United Kingdom. After performing a global search of its system, SCB discovered Uzan-related assets at an SCB branch in the United Arab Emirates. SCB froze those assets while seeking an order from the District Court that the Restraining Order did not reach assets held by SCB's foreign branches. Meanwhile, regulatory authorities in the UAE unilaterally debited the amount of the restrained assets from SCB's account at the UAE central bank.
In seeking release from the Restraining Order, SCB argued that New York's separate entity rule - which has long provided that a freezing order served on a bank's New York branch does not restrain assets held in the bank's foreign branches - precluded the restraint of assets held at SCB's branches abroad. SCB further argued that applying the attachment order to its international branches would put it in a position of having to choose between complying with that order or complying with the banking regulations of the UAE. For its part, Motorola argued that the Court of Appeals' decision in Koehler - which ordered an international bank to turn over, in New York, stock certificates held abroad - had effectively abrogated the separate entity rule.
The District Court sided with SCB, and Motorola appealed. Acknowledging thatKoehler had put the continued validity of the separate entity rule in doubt, the Second Circuit Court of Appeals certified to the New York Court of Appeals the question of whether the separate entity rule continued to exist.
The Separate Entity Rule Lives On
In a 5-2 decision, the Court of Appeals held that a "judgment creditor's service of a restraining notice on a . . . bank's New York branch is ineffective under the separate entity rule to freeze assets held in the Bank's foreign branches."
In rejecting the argument that its previous decision in Koehler had abrogated the separate entity rule, the Court of Appeals noted that Koehler did not actually address the separate entity rule as that argument was not made by the defendant in that case. In any event, the Court of Appeals continued, the separate entity rule was inapplicable toKoehler because "that case involved neither bank branches nor assets held in bank accounts." The Court of Appeals also rejected Motorola's alternative argument that the adoption of New York's procedural rules governing post-judgment restraining notices, which did not expressly embrace the separate entity rule, abrogated the rule. The Court of Appeals held that the separate entity rule is a common-law rule and was unaffected by the adoption of New York's rules of civil practice.
The Court of Appeals also rejected Motorola's policy argument that advances in communications and technology had rendered the separate entity rule outdated. The Court of Appeals identified three policy rationales that supported the creation of the separate entity rule: (i) the importance of international comity and the fact that "any banking operation in a foreign country is necessarily subject to the foreign sovereign's own laws and regulations"; (ii) banks should be protected from "competing claims" and the "possibility of double liability"; and (iii) the "intolerable burden" that would be faced by a bank required to "monitor and ascertain the status of bank accounts in numerous branches" around the world. The Court of Appeals observed that these policy rationales "still ring true today," noting that the facts of the case - including that SCB would have "faced regulatory and financial repercussions" abroad had it been forced to comply with the Restraining Order - demonstrate the continued need for the separate entity rule.
In so ruling, the majority rejected the views of Judge Sheila Abdus-Salaam, who argued in dissent that technological innovations which lessened the burden of monitoring foreign accounts had made the separate entity rule obsolete. The majority also found unpersuasive the dissent’s alternative argument that by upholding the separate entity rule, the Court of Appeals was effectively aiding fugitive customers of international banks.
Impact of the Decision
Motorola clearly and unambiguously reaffirms that the separate entity rule is a critical part of New York law. In the short term, it is clear that serving a restraint notice on a New York branch of an international bank will not restrain assets or accounts held in the bank's foreign branches. However, Motorola's impact is likely to be felt in other areas as well. Motorola is the latest in a series of decisions by American federal and state courts restricting the extraterritorial application of US law and directing trial courts - be they federal or state - to be mindful of the implications of their decisions on international comity. This emerging body of law may offer significant assistance to foreign financial institutions facing suit in the United States.