Court Affirms Separate Entity Rule in Banking Context
ALBANY - A New York bank may not be compelled to garnish the funds of a debtor that are being held in accounts of the bank's own foreign branches, a divided Court of Appeals ruled Thursday.
The court's 5-2 determination affirmed the state's "separate entity" rule, which the majority said is crucial to New York's banking industry and to retaining its place of "preeminence in global financial affairs."
"The doctrine has been a part of the common law of New York for nearly a century," Judge Victoria Graffeo (See Profile) wrote for the majority in Motorola Credit Corp. v. Standard Chartered Bank, 162. "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."
The doctrine promotes international comity and also serves to "avoid conflicts among competing legal systems," Graffeo added.
The court's determination came in response to a certified question from the U.S. Court of Appeals for the Second Circuit. The federal court inquired whether the separate entity rule precludes a judgment creditor from ordering a garnishee bank that has branches in New York to restrain the assets of a debtor that are in foreign branch. The state Court of Appeals answered the question in the affirmative.
The separate entity rule holds that even when a garnishee bank with a New York branch is subject to personal jurisdiction, its other branches are to be treated as separate entities for prejudgment attachments and postjudgment turnover notices under CPLR Article 52.
The case involves Motorola's attempts to recoup a $3 billion-plus judgment against Cem Uzan and his relatives that was entered in the Southern District of New York in 2003 inMotorola Credit Corp. v. Uzan, 274 F Supp 2d 481. At that time, Judge Jed Rakoff wrote of the Turkish Uzan family, "I think the proof is very strong that the Uzans are business imperialists of the worst kind, in that they will go to any lengths, including fraud and racketeering, to preserve their business empire."
Motorola said it provided more than $2 billion in financing to a telecommunications company in Turkey that ended up being used for other purposes by the Uzan family. In 2006, a judgment of $1 billion in damages was also entered in the Southern District against the Uzans.
As part of its quest for Uzan assets to seize, Motorola sued Standard Chartered Bank, an institution based in the United Kingdom which has branches in New York. Motorola sought $30 million in Uzan assets held by a Standard Chartered bank in branches in the United Arab Emirates.
The bank froze the assets, but bank regulators in both Jordan and the United Arab Emirates intervened. The U.A.E.'s Central Bank debited $30 million from the Standard Chartered Bank's accounts to offset the assets frozen by the bank at Motorola's behest.
In its ruling Thursday, the majority of the Court of Appeals said the "regulatory and financial repercussions" that the Standard Chartered Bank encountered with U.A.E.'s Central Bank reflects the upheaval that New York's separate entity doctrine has been credited with preventing.
"In essence, SBC was placed in the difficult position of attempting to comply with the contradictory directive of multiple sovereign nations," Graffeo wrote.
Abolishing the separate entity rule, as Motorola urged the court to do, would result in "serious consequences in the realm of international banking" and threaten New York's place of prominence in global finance, Graffeo said.
Chief Judge Jonathan Lippman (See Profile) and Judges Susan Phillips Read (See Profile), Robert Smith (See Profile) and Jenny Rivera (See Profile) joined in the ruling.
Dissent
Judge Sheila Abdus-Salaam (See Profile), joined by Judge Eugene Pigott Jr. (See Profile), wrote in a dissent that the majority's ruling formally adopts the separate entity rule for post-judgment enforcement proceedings under Article 52 of the CPLR, even though the rule has no statutory basis and appears to run contrary to the responsibilities expected of banks and other large corporations in a global age.
"Today's holding permits banks doing business in New York to shield customer accounts held in branches outside of this country, thwarts efforts by judgment creditors to collect judgments, and allows even the most egregious and flagrant judgment debtors to make a mockery of our courts' duly entered judgments," Abdus-Salaam wrote.
She also said the ruling is inconsistent with the Court of Appeals' own decision in Koehler v. Bank of Bermuda, 12 NY3d 553 (2009), which held that the Legislature intended CPLR Article 52 to have "extraterritorial reach" when it comes to the turnover of out-of-state assets to judgment debtors and garnishees (NYLJ, June 5, 2009).
The existence of the separate entity rule was first noted in an Appellate Division, First Department ruling in 1916,Chrzanowska v. Corn Exch. Bank, 173 App Div 285. Its first application in a post-judgment context appeared to come in 1943 in Walsh v. Bustos, 46 NYS2d 240 (City Ct., NY County), the Court of Appeals noted in its ruling. By the 1950s and 1960s, rulings were referring to the doctrine as "well established," the court said.
Graffeo wrote that the Court of Appeals' only previous pronouncements in cases on the separate entity rule came in two cases without opinions, Chrzanowska v. Corn Exch. Bank, 225 NY 728 (1919), and McCloskey v. Chase Manhattan Bank, 11 NY2d 936 (1962).
Howard Stahl, a senior litigation counsel at Fried, Frank, Harris, Shriver & Jacobson in Washington, D.C., argued for Motorola.
Bruce Clark, of counsel at Sullivan & Cromwell who is representing the Standard Chartered Bank said in a statement that the ruling affirmed "that international banks should not be placed in the untenable position of attempting to comply with the contradictory directions of multiple sovereign nations."
Among the groups filing amicus briefs were the governments of Great Britain and Northern Ireland, the Institute of International Bankers, the Securities Industry and Financial Markets Association and the New York City Bar Association's Committee on Banking Law.
The city bar committee urged the state court to affirm the separate entity rule, saying it is "so woven into the fabric of New York banking law that its endorsement by this court is essential for a prudent administration" of banking laws.
Similarly, the brief filed on behalf of the British and Northern Irish governments by Cravath, Swaine & Moore partner Timothy Cameron urged the court to recognize the separate entity rule as blocking the garnishment attempt of the Standard Chartered Bank.
@|Joel Stashenko can be reached via email or on Twitter @JoelStashenko.
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