On January 14, 2014, the United States Court of Appeals for the Second Circuit issued an order in Tire Engineering and Distribution L.L.C. v. Bank of China Ltd., 13-1519-cv (“Tire Engineering”) and Motorola Credit Corp. v. Nokia Corp. 13-2535-cv(L), 13-2639(con) (“Motorola”), which were heard in tandem, certifying to the New York Court of Appeals the question of whether New York’s separate entity rule bars a judgment creditor from ordering a garnishee bank with branches in New York to restrain or turn over a judgment debtor’s assets held in foreign branches of the bank. As the Second Circuit noted in its order, resolution of this important issue by New York’s highest court carries significant implications for international banks that operate New York branches.
The District Court's Decision in Tire Engineering
In Tire Engineering, judgment creditors (collectively, “Tire Engineering”) initiated a New York CPLR Article 52 turnover proceeding against the Bank of China (“BOC”), as garnishee bank, in the United States District Court for the Southern District of New York, in an effort to enforce a judgment they obtained from another federal court in 2010 against several foreign defendants (the “Judgment Debtors”). Specifically, Tire Engineering sought an order requiring BOC to turn over funds allegedly held by the Judgment Debtors in BOC bank accounts in China.
BOC filed a motion to dismiss the proceeding on the basis that the relief sought by Tire Engineering was precluded by New York’s longstanding separate entity rule, under which the New York state and federal courts have long been held to lack authority to order a garnishee bank to attach, restrain or turn over assets held by a judgment debtor in out-of-state branches, even if the bank also has a branch in New York. On April 12, 2013, the district court granted BOC’s motion and dismissed the proceeding. Agreeing with BOC, the district court held that the requested relief was barred by the separate entity rule, and that, contrary to the argument advanced by Tire Engineering, the New York Court of Appeals’ decision in Koehler v. Bank of Bermuda, 12 N.Y.3d 533 (2009), did not abolish the separate entity rule. Tire Engineering’s appeal to the Second Circuit followed.
Allen & Overy LLP represents Bank of China in this case.
The District Court's Decision in Motorola
Motorola likewise involves a post-judgment collection effort aimed at recovering assets held in foreign bank accounts. The district court in that case granted a restraining order in favor of the judgment creditor, Motorola Credit Corporation (“Motorola”), which had previously obtained a judgment against members of the Uzan family. The restraining order enjoined anyone served with it from transferring any property in its possession that belonged to the Uzans. Motorola then served the restraining order on Standard Chartered Bank (“SCB”), which held property allegedly belonging to the Uzans in its branches located in the United Arab Emirates (“U.A.E.”).
After Motorola demanded that SCB freeze those foreign bank accounts, SCB filed a motion for relief from the restraining order, arguing that the separate entity rule limited the reach of the order to assets held in SCB’s New York branch. The district court agreed with SCB, holding that the separate entity rule barred Motorola from restraining assets held in SCB’s foreign branches. Motorola appealed to the Second Circuit.
The Second Circuit’s Certification Decision
Argument on the appeals filed by Tire Engineering and Motorola was heard in tandem on October 11, 2013. On January 14, 2014, the Second Circuit issued its order reserving decision on the appeals and certifying to the New York Court of Appeals the following two questions:
First, whether the separate entity rule precludes a judgment creditor from ordering a garnishee bank operating branches in New York to turn over a debtor’s assets in foreign branches of the bank;
Second, 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 explaining its decision to certify these issues, the Second Circuit first noted that although the lower courts in New York had routinely applied the separate entity rule to bar judgment creditors from restraining, attaching and turning over foreign bank accounts, “the New York Appeals has never unequivocally approved or disapproved of the separate entity rule.” On that basis, the Court concluded that there was “no ‘controlling precedent’ in New York that governs this case.”
Second, and most pertinently for members of the banking industry, the Second Circuit emphasized that the two questions being certified “involve important issues of New York state law and policy that are likely to recur and may have important effects” on the “highly regulated” banking industry. In this regard, the Court took note of the fact that “international banks are subject to the competing laws of multiple jurisdictions, and turnover or restraining orders by New York courts may cause conflicts with the regulations, laws, and policies of other jurisdictions.”