October 29, 2014

New York Freezing Orders Do Not Restrain Funds Held in Foreign Branches of a Garnishee Bank

4 min

Last week, New York State's highest court confirmed that a freezing order served on a bank branch in New York does not restrain assets held by the same debtor at foreign branches of the bank. See Motorola Credit Corp. v. Standard Chartered Bank, __ N.Y.3d __, 2014 Slip. Op. 07199 (Oct. 23, 2014). In Motorola Credit, the New York Court of Appeals upheld a longstanding common law doctrine known as the "separate entity rule," which provides that even when a bank branch is subject to personal jurisdiction in New York, its other branches are to be treated as separate legal entities for purposes of orders to restrain or turn over funds held in accounts at that branch.

The rule is designed to save banks from conflicting obligations in multiple jurisdictions, as well as the related risk of double liability. The rule also spares banks the burden of attempting to comply with a freezing order at its branches around the world. Even so, it was unclear whether the Court would find the rule still appropriate in the modern banking landscape.

Motorola sought to execute on U.S. federal court judgments exceeding $3 billion against members of a Turkish family, who Motorola claimed "perpetrated a huge fraud…through an almost endless series of lies, threats, and chicanery." The federal court issued a restraining order under New York law, barring the family members and "anyone with notice of the order" from dissipating the family members' assets. Motorola Credit served the restraining order on the New York branch of Standard Chartered Bank. Standard Chartered had no assets of the debtor in New York, but froze $30 million in the debtor's account at its branch in the United Arab Emirates. Regulatory authorities in Jordan and the United Arab Emirates took issue with Standard Chartered's actions, and the U.A.E. Central Bank unilaterally debited $30 million from Standard Chartered's account at the Central Bank in response.

Standard Chartered then sought relief from the restraining order in U.S. federal district court (the federal court of first instance). The district court held that, under New York's separate entity rule, the restraining order did not freeze funds at Standard Chartered's foreign branches. On appeal, the U.S. Court of Appeals for the Second Circuit questioned whether the separate entity rule remained valid under New York. The Second Circuit noted that that the New York Court of Appeals had ruled five years earlier that a judgment creditor could seek turnover of stock certificates held in a garnishee bank's foreign branches, as long as the New York courts had personal jurisdiction over the garnishee bank's New York branch. See Koehler v. Bank of Bermuda, Ltd., 12 N.Y.3d 533 (2009). Through a process known as certification, the Second Circuit asked the New York Court of Appeals to explain whether the separate entity rule was still the controlling law in New York.

In a 5-2 decision, the New York Court of Appeals upheld the separate entity rule, holding that the policy reasons behind the rule were still sound. The majority opinion noted that if the freezing order were enforceable against Standard Chartered's U.A.E. branch, the bank would be bound by contradictory directives from different regulatory authorities, subjecting it to potential double liability and creating an uncertain regulatory environment for international banking. The majority also noted that banks would face practical constraints and expenses if they were required to conduct worldwide searches for assets of a judgment debtor every time a restraining order was served.

The two dissenting judges asserted that the separate entity rule is obsolete in light of changes in banking technology and modern public policy concerns. The dissent stated that "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."

Motorola Credit does not simplify the work of judgment creditors seeking to execute against foreign-based assets of recalcitrant debtors. Instead, it furthers the majority's greater concern: To avoid "serious consequences in the realm of international banking to the detriment of New York's preeminence in global financial affairs."

Please contact one of the authors if you would like to discuss these issues further.