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United States of America > New York > Litigation Dispute resolution > Advisory > Article > New York Court of Appeals Confirms the Viability of the Separate Entity Rule

Article: New York Court of Appeals Confirms the Viability of the Separate Entity Rule

In answering a certified question from the Second Circuit, the New York Court of Appeals recently held that the “separate entity rule” was not abrogated by the court’s decision in Koehler v. Bank of Bermuda, 12 N.Y.3d 533 (2009). In Koehler, the court had held that a judgment creditor could seek the turnover of stock certificates located outside of the United States as long as the court had personal jurisdiction over the garnishee.

The separate entity rule provides that even when a bank garnishee with a New York branch is subject to personal jurisdiction, its other branches are treated as separate entities with respect to CPLR article 52 post-judgment restraining notices and turnover orders and article 62 prejudgment attachments. Motorola Credit Corp. v. Standard Chartered Bank, 24 N.Y.3d 149, 158 (2014).Courts have generally provided three rationales for the separate entity rule. First, they emphasize 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.” Second, the rule has been considered necessary to protect banks from being subject to competing claims and double liability. Third, the rule has been justified because of the “intolerable burden” that banks would otherwise face if they had to monitor the status of accounts at other branches. Id. at 159.

In Motorola Credit Corporation, Motorola had served a restraining order on the New York branch of Standard Chartered Bank (“SCB”). Motorola was attempting to collect more than $3 billion in judgments against the Uzan family, which controlled a Turkish telecom company to which Motorola had loaned more than $2 billion. In response to the restraining order, SCB did not locate any Uzan property at its New York branch. However, several months later, a global search of SCB’s branches revealed Uzan-related assets valued at $30 million in SCB’s branches in the United Arab Emirates (“UAE”). SCB froze the assets to comply with the restraining order. However, regulatory authorities in the UAE and Jordan intervened. The UAE Central Bank debited $30 million from SCB’s account with the bank and the Central Bank of Jordan seized documents at SCB’s Jordan branch. Id. at 157.

SCB sought relief from the restraining order, arguing that its restraint of Uzan’s $30 million violated UAE law and subjected the bank to double liability. SCB also argued that as a general matter, under the separate entity rule, the restraining order served on the New York branch was only effective as to assets located in accounts at that particular branch. Motorola contended that the separate entity rule was no longer valid in light of Koehler. Id.

The Court of Appeals held that the separate entity rule was still valid and necessary to promote international comity and avoid conflicts among competing legal systems. Id. at 162. Indeed, the court noted that when SCB complied with the restraining order served on its New York branch and froze the Uzan assets in the UAE, it faced international regulatory and financial repercussions. The court asserted that the “abolition of the separate entity rule would result in serious consequences in the realm of international banking to the detriment of New York’s preeminence in global financial affairs.” Id. at 163.

Notably, two justices wrote a scathing dissent, arguing that the separate entity rule is obsolete and runs counter to public policy. The dissent noted that any difficulties banks would face if their foreign branches had to comply with post-judgment proceedings would likely pale in comparison to their obligation to comply with governmental regulations such as the U.S. Patriot Act and the Bank Secrecy Act. In addition, any burden on the banks would be far outweighed by the rights of judgment creditors to enforce their judgments. Id. at 169-70.

This ruling is good news for international banks that do business in New York. Not only will post-judgment restraining orders only be effective on assets actually located in New York, but banks will also not have to spend time and resources investigating the location of assets outside of New York.

Article by Charles E. "Trip" Dorkey III and Rebecca Tingey

Last Update: 2015-Mar-01 Charles E. “Trip” Dorkey III - Dentons
The contents of this page do not constitute legal advice or create an attorney- client relationship with the contributor. Do not apply anything you read here without contacting a professional.
Author: Charles E. “Trip” Dorkey III
Law Firm: Dentons
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