Resolving an issue of significant importance to non-US banks which maintain New York branches, the New York Court of Appeals has held in Motorola Credit Corp. v. Standard Chartered Bank that New York's separate entity rule prevents a judgment creditor from freezing the judgment debtor's funds located in a non-US bank's foreign branches.
The separate entity rule is a doctrine under New York common law, which provides that "even when a bank . . . with a New York branch is subject to personal jurisdiction, its other branches are to be treated as separate entities for certain purposes." In particular, "a restraining notice or turnover order served on a New York branch will be effective for assets held in accounts at the branch but will have no impact on assets in other branches."
Motorola argued that the Court of Appeals effectively abrogated the separate entity rule in Koehler v. Bank of Bermuda Ltd., 12 N.Y. 3d 533 (2009). In Koehler, the court held that a New York court was authorized to order a bank to deliver stock certificates owned by a judgment debtor to a judgment creditor, even where those stock certificates were located outside New York, as long as the court had personal jurisdiction over the bank. In Motorola, the Court of Appeals explained that its decision in Koehler had no impact on the separate entity rule because the foreign bank in that case never raised the issue and "because that case involved neither bank branches nor assets held in bank accounts."
The court noted that the separate entity rule "has been a part of the common law of New York for nearly a century" and that courts "have repeatedly used it to prevent the postjudgment restraint of assets situated in foreign branch accounts based solely on the service of a foreign bank's New York branch." As an example of how the rule's "endurance continues into the 21st century," the court cited Gliklad v Bank Hapoalim B.M., 2014 WL 3899209 (N.Y. Sup. Aug. 4, 2014). In Gliklad, Herbert Smith Freehills, on behalf of Bank Hapoalim, successfully moved to dismiss a turnover petition on several grounds, including that, under the separate entity rule, service upon Bank Hapoalim's New York branch was insufficient to require the turnover of documents or assets maintained by the bank outside of the United States. The import of the Gliklad decision was explained by Scott Balber and Jonathan Cross from our New York office in this briefing.
The Court of Appeals concluded that "the underlying reasons that led to the adoption of the separate entity rule still ring true today." Namely, the "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."
The Motorola decision is good news for international financial institutions because it reaffirms that judgment creditors cannot obtain a New York court order reaching a bank's customer accounts and documents located at foreign branches solely on the basis that the bank maintains a New York branch.