The New York Court of Appeals’ recognition nearly 40 years ago in J. Zeevi & Sons, Ltd. v. Grindlays Bank (Uganda) Ltd., 37 N.Y.2d 220, 371 N.Y.S.2d 892, 333 N.E.2d 168 (1975) that New York was a “financial capital of the world” which therefore had an interest in litigation arising from international banking transactions involving U.S. dollars has led many New York courts to exercise an expansive jurisdictional reach over international transactions that pass through New York’s banking system. But recently in Mashreqbank PSC v. Ahmed Hamad A1 Gosaibi & Brothers, No. 54, 2014 WL 1356220 (N.Y. April 8, 2014), the Court of Appeals clarified that this reach was not unlimited and did not cover every instance when a “foreign national, effecting what is alleged to be a fraudulent transaction, moves dollars through a bank in New York.” Mashreqbank thus cautions that parties to an international transaction cannot automatically presume they will enjoy access to New York’s courts in the event of a dispute merely because some portion of their transaction may have passed through New York banks.
A Saudi/Dubai Transaction in the New York Courts
In Mashreqbank, the Court of Appeals dismissed an action arising from an international swap transaction when the action’s only connection to New York was a deposit in a New York bank. Under the transaction, a Dubai bank and Saudi Arabian partnership agreed to exchange U.S. dollars for Saudi riyals. When the Dubai bank deposited $150 million in a New York bank account and did not receive riyals in exchange, it sued the Saudi partnership in New York court for the riyals allegedly owed. The Saudi partnership then brought its own third-party action in New York against one of its employees and a Saudi bank, alleging that the employee, Saudi bank, and Dubai bank were engaged in a combined scheme to defraud it.
The Court of Appeals held as a matter of law that the case could not proceed in New York because of forum non conveniens (inconvenient forum) grounds. “Apart from the use of New York banks to facilitate dollar transfers,” the Court stressed,
“We see nothing in this case to justify resort to a New York forum. No party is a New York resident; no relevant conduct apart from the execution of fund transfers occurred in New York; no party has identified any important New York witnesses or New York documents; New York law does not apply; no property related to the dispute is located in New York; no related litigation is pending in New York; and no other circumstance supports an argument that New York is an appropriate forum.”
The Court in reaching this conclusion focused on the practical realities of international financial transactions today. It noted that “the parties here agree that, as a practical matter, any dollar transaction comparable in size to the one now at issue must go through New York,” citing the New York-based CHIPS system for wholesale international dollar transactions. However:
“That does not mean that every major fraud case in the world in which dollars are involved belongs in the New York courts. New York’s interest in its banking system ‘is not a trump to be played whenever a party to such a transaction seeks to use our courts for a lawsuit with little or no apparent contact with New York.’”
This situation, the Court noted, was different from that in J. Zeevi, which involved foreign entities but where the claim arose in New York, in that international banking transactions involving payments in dollars and utilizing New York banks took advantage of New York as an “international clearinghouse and market place.” The parties entering into those transactions in J. Zeevi thus “impliedly accepted” that New York had an interest in litigation arising from them. Such reasoning, however, simply could not stretch New York jurisdiction to cover a transaction involving foreign entities and foreign tortious acts, with only a lone money deposit in New York.
The Court held it erroneous for the lower court to have read Zeevi “as holding that any passage of funds through New York banks automatically implicates New York’s ‘compelling interest in the protection of [its] banking system,’ and thus provides a weighty argument against a forum non conveniens dismissal.” To the contrary, while New York’s “interest in the integrity of its banks is indeed compelling, . . . it is not significantly threatened every time one foreign national, effecting what is alleged to be a fraudulent transaction, moves dollars through a bank in New York.”
Thus, “Zeevi should not be read to imply that every party aggrieved by the outcome” of any international transaction where New York serves as a clearinghouse “may bring its grievance to the New York courts.” Rather, the jurisdiction with the greatest interest in the issues in Mashreqbank was “clearly Saudi Arabia.” Moreover, the Court held that such circumstances were so compelling that a forum non conveniens dismissal of the case was not merely a permissible exercise of judicial discretion but in fact was required as a matter of law.
Mashreqbank cautions that parties litigating issues arising from international banking transactions cannot reliably secure a New York forum by relying solely on small passing connections with New York banks. Rather, to avoid forum non conveniens difficulties, such litigants will need to show an actual and case-specific connection to New York. Courts will no longer treat New York’s general interest and role in the international banking system as giving such litigants an automatic free pass into the New York court system.