United States: The "Separate Entity Rule" Remains Alive And Well In New York State

On October 23, 2014, in Motorola Credit Corp. v. Standard Chartered Bank, No. 162, 2014 N.Y. LEXIS 2946 (2014), the New York State Court of Appeals, New York's highest court, answered in the affirmative the following question certified to the court by the U.S. Court of Appeals for the Second Circuit:

"[w]hether 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."

(Tire Engineering and Distribution LLC v. Bank of China Ltd., 740 F.3d 108, 118 (2d Cir. 2014).1

While some observers believed the separate entity rule had been abrogated by the court's decision in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009), the Motorola 5-2 decision establishes that the rule is indeed alive, and that, under New York law, a bank having a branch in New York that has been served with a judgment creditor's restraining notice or orders is not permitted to restrain the judgment debtor's assets held in a branch of the bank located in a foreign country. Stated another way, a judgment debtor need not fear that its assets in a foreign bank account will be subject to restraint based on a restraining notice and order served on a New York branch of the bank. The New York and foreign branches of the same bank are treated as legally separate entities.

The separate entity rule, a product of common law tracing back to a 1916 decision of an intermediate New York appellate court (Chrzanowska v. Corn Exch. Bank, 173 A.D. 285 (1st Dep't 1916), aff'd without opn, 225 N.Y. 728 (1919)), as utilized by New York State courts and federal courts in applying New York law, provides that branches of a garnishee bank are to be treated as separate entities for purposes of CPLR Article 62 (Attachment) pre-judgment attachments and CPLR Article 52 (Enforcement of Money Judgments) post-judgment restraining notices and orders, so that writs of attachment and restraining notices and orders are effective only as to assets held in the specific branch or branches served with the writ of attachment or restraining notice or order in New York. Accordingly, under the separate entity rule, foreign branches of a garnishee New York bank are to be treated as separate entities from the New York branch with respect to pre-judgment attachments and post-judgment restraining notices and orders, although the New York bank branch is subject to personal jurisdiction in New York State and federal courts. The court's decision in Koehler (discussed below), however, placed the continuing vitality of the separate entity rule in doubt.

The Motorola case concerned a loan of more than $2 billion issued by Motorola Credit Corporation to Cem Uzan and members of his family, a wealthy Turkish family with several telecommunications and media holdings. In 2003, the U.S. District Court for the Southern District of New York, finding that the Uzan Family engaged in a scheme to fraudulently divert funds of over $2 billion loaned by Motorola Credit to the Uzan Family, and concealed their scheme through "an almost endless series of lies, threats, and chicanery," entered a judgment against the Uzan Family of approximately $2.1 billion. Motorola Credit Corp. v. Uzan, 274 F. Supp. 2d 481, 580 (S.D.N.Y. 2003). Upon a subsequent imposition of punitive damages, that award was increased by the District Court by an additional $1 billion. Motorola Credit Corp. v. Uzan, 413 F. Supp. 2d 346 (S.D.N.Y. 2006).

In an effort to collect on its judgment, Motorola Credit served a restraining order under CPLR 5222 on the New York branch of Standard Chartered Bank (SCB), a foreign bank incorporated and headquartered in the United Kingdom. The SCB branch in New York was unable to locate any assets owned by the Uzan Family held in its branch. However, a global search of the Uzan Family's assets identified approximately $30 million in SCB branches located in the United Arab Emirates (UAE). Complying with the restraining order, SCB froze $30 million in the UAE accounts. The Central Bank of UAE, having regulatory authority over SCB, upon being notified of SCB's UAE branch's compliance with the New York restraining order, responded by debiting SCB's account in the same approximate $30 million amount. The Central Bank of UAE asserted that debiting SCB's account was necessary to protect claims by potential creditors other than Motorola Credit.

SCB, finding itself between the proverbial rock and a hard place, and at risk to lose $30 million of its own money by twice paying Uzan Family creditors, moved in federal district court in the Southern District of New York for a protective order. SCB argued that the separate entity rule prevented the District Court from ordering the restraint of property outside of SCB New York's accounts. The District Court agreed with SCB but stayed the release of the restraint pending resolution of Motorola Credit's appeal to the Second Circuit. The Second Circuit then certified its question to the New York Court of Appeals.

In a majority opinion authored by Judge Graffeo2, the court confirmed the separate entity rule's continuing vitality in New York. The Motorola majority reaffirmed the justifications for the rule that have been oft cited by lower courts since the doctrine's inception nearly one hundred years ago. First, the court confirmed that the separate entity rule is still necessary for the promotion of international comity. Recognizing that a bank's branch in a foreign country is subject to the foreign sovereign's own laws and regulations, the court reasoned that it would be improvident to impose New York court restraining orders upon foreign bank branches that might contravene the laws of the foreign country. The court expressed concern about the risk of "competing claims and the possibility of double liability in separate jurisdictions" in the absence of the protections afforded garnishees under the separate entity rule. Second, the court further reasoned that abolishing the separate entity rule would have a negative impact on New York's preeminent position as a commercial banking center. "Undoubtedly, international banks have considered the doctrine's benefits when deciding to open branches in New York, which in turn has played a role in shaping New York's 'status as the preeminent commercial and financial nerve center of the Nation and the world.'" Motorola (citing Ehrlich-Bober & Co. v. Univ. of Houston, 49 N.Y.2d 574, 581 (1980)). Finally, the court acknowledged the "intolerable burden" that would result from abolishing the rule, particularly the imposition upon banks to constantly "monitor and ascertain the status of bank accounts in numerous other branches."3

Judge Abdus-Salaam dissented.4 Focusing on the alleged contumacious conduct of the Uzan Family, the dissent criticized the majority for rendering an opinion which "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." Judge Abdus-Salaam identified four arguments which she contended undermined the majority's answer to the certified question: (i) the absence of any explicit or implied mention of the separate entity rule in Article 52 of the CPLR; (ii) the obsolescence of a separate entity rule in an environment where banks overwhelmingly centralize their computer management systems, facilitating ease of effort to track account holders' assets worldwide; (iii) the overbreadth of the separate entity rule inasmuch as many foreign countries have laws that would permit recognition of a New York restraining order and, therefore, the rule does little to promote international comity; and (iv) the Motorola majority decision cannot be reconciled with the court's holding in Koehler.

Rebutting the dissent's first three arguments, the Motorola majority found that (i) because the separate entity rule predates the CPLR and is necessarily a creation of common law, its absence from mention in the CPLR is of no moment; (ii) the dissent's faith in the technological advancement of the international banking industry since the rule was created is belied by the real-world limitations (including costs) associated with a bank's worldwide search for assets; and (iii) the separate entity rule's promotion of comity is its paramount rationale, and, as such, the rule serves to avoid conflicts among competing legal systems.

The Motorola majority took issue with the dissent's fourth argument that the court abrogated the separate entity rule in its 2009 decision in Koehler. In Koehler, the New York Court of Appeals answered in the affirmative the Second Circuit's certified question as to whether a New York court may order a foreign garnishee bank over which it has personal jurisdiction to deliver stock certificates owned by the judgment debtor, but located in the garnishee bank outside of the country. The Motorola majority emphasized that Koehler is limited to the issue of whether CPLR Article 52 has extraterritorial reach when the court has personal jurisdiction over the garnishee. The majority also noted that the garnishee foreign bank in Koehler failed to raise the separate entity rule. The Motorola majority further acknowledged that the cases were distinct, given that Koehler "involved neither bank branches nor assets held in bank accounts."

Motorola has put to rest important questions following Koehler as to whether the separate entity rule survived that 2009 decision. The separate entity rule indeed lives on – at least where bank branches in foreign countries are involved.

Footnotes

1. The U.S. Court of Appeals for the Second Circuit also certified to the New York State Court of Appeals, in the same order, the question as to 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 held in a foreign branch of that bank. That certified question was subsequently withdrawn by the Second Circuit.

2. Judge Graffeo was joined by Chief Judge Lippman and Judges Read, Smith and Rivera.

3. In a footnote, the Motorola majority recognized that, although most cases analyzing the separate entity rule involved bank branches in foreign countries, some courts have applied the rule to bar restraints even where the unserved branch was located in New York. The Motorola majority limited its treatment of the separate entity rule to situations involving foreign country bank branches, declining to rule on the application of the separate entity rule to domestic bank branches in the United States.

4. Judge Pigott, who authored the Court's opinion in Koehler, joined in the dissent.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions