Motorola Credit Corp. v. Standard Chartered Bank

• Citation: 24 N.Y.3d 149,21 N.E.3d 223,2014 N.Y. Slip Op. 07199,996 N.Y.S.2d 594
• Court: New York Court of Appeals Court of Appeals
• Decision Date: 23 October 2014
• Parties: MOTOROLA CREDIT CORPORATION, Appellant–Respondent, et al., Plaintiff–Counter–Defendant, et al., Counter–Defendants, v. STANDARD CHARTERED BANK, Respondent–Appellant, et al., Defendants–Counter–Claimants, et al., Defendants.

24 N.Y.3d 149

21 N.E.3d 223

996 N.Y.S.2d 594

2014 N.Y. Slip Op. 07199

MOTOROLA CREDIT CORPORATION, Appellant–Respondent, et al., Plaintiff–Counter–Defendant, et al., Counter–Defendants

v.STANDARD CHARTERED BANK, Respondent–Appellant, et al., Defendants–Counter–Claimants, et al., Defendants.

Court of Appeals of New York.

Oct. 23, 2014.

Fried, Frank, Harris, Shriver & Jacobson LLP (Howard H. Stahl, of the District of Columbia bar, admitted pro hac vice, Jerald S. Howe, Jr., of the District of Columbia bar, admitted pro hac vice, George R. Calhoun, V, of the District of Columbia bar, admitted pro hac vice, and Douglas W. Baruch of counsel), for appellant-respondent.

Sullivan & Cromwell LLP, New York City (Bruce E. Clark, H. Rodgin Cohen, Sharon L. Nelles, Bradley P. Smith and Patrick B. Berarducci of counsel), for respondent-appellant.

White & Case LLP, New York City (Dwight A. Healy, Ernest T. Patrikis, Owen C. Pell and Marika M. Lyons of counsel), for Institute of International Bankers and others, amici curiae.

Cravath, Swaine & Moore LLP, New York City (Timothy G. Cameron of counsel), for Government of the United Kingdom of Great Britain and Northern Ireland, amicus curiae.

Jones Day, New York City (Lee M. Pollack, Lee A. Armstrong and Sevan Ogulluk of counsel), for Central Bank of Jordan, amicus curiae.

Davis Polk & Wardwell LLP, New York City (James L. Kerr, Karen E. Wagner and Margaret E. Tahyar of counsel), for Committee on Banking Law of the Association of the Bar of the City of New York, amicus curiae.

Skadden, Arps, Slate, Meagher & Flom LLP, New York City (Scott D. Musoff, Timothy G. Nelson and Amanda Raymond Kalantirsky of counsel), and Ira D. Hammerman, Washington, D.C., and Kevin Carroll, Washington, D.C., for Securities Industry and Financial Markets Association, amicus curiae.

OPINION OF THE COURT

GRAFFEO, J.

In this case, the United States Court of Appeals for the Second Circuit asks us whether the “separate entity” rule prevents a judgment creditor from ordering a garnishee bank operating branches in New York to restrain a judgment debtor's assets held in foreign branches of the bank. We conclude that it does.

I

Between April 1998 and September 2000, several members of the Uzan family (the Uzans) induced plaintiff Motorola Credit Corporation (Motorola) to loan over $2 billion to a Turkish telecommunications company they controlled, purportedly to finance a major expansion of the company's operations. Unbeknownst to Motorola, the Uzans diverted a substantial portion of these funds to themselves and other entities they controlled. In 2003, after discovering that the Uzans had “perpetrated a huge fraud” and concealed “their scheme through an almost endless series of lies, threats, and chicanery,” the United States District Court for the Southern District of New York entered a judgment in Motorola's favor for compensatory damages of about $2.1 billion (Motorola Credit Corp. v. Uzan, 274 F.Supp.2d 481, 490 [S.D.N.Y.2003] ). Three years later, the District Court awarded Motorola an additional $1 billion in punitive damages (see Motorola Credit Corp. v. Uzan, 413 F.Supp.2d 346 [S.D.N.Y.2006] ).

The Uzans have gone to great lengths to avoid satisfying the judgments and remain in contempt for failure to comply with the District Court's orders, subjecting them to arrest if they enter the United States. As a result of enforcement obstacles, Motorola has pursued collection of the judgments through third-party discovery and the District Court has conducted postjudgment proceedings ex parte and under seal. In February 2013, the District Court entered an order pursuant to Federal Rules of Civil Procedure rules 65 and 69 and CPLR 5222 restraining the Uzans and anyone with notice of the order from selling, assigning or transferring their property.

Motorola served the restraining order on the New York branch of defendant Standard Chartered Bank (SCB), a foreign bank incorporated and headquartered in the United Kingdom. SCB, which had no connection to Motorola's loan to the Uzans or the underlying litigation, did not locate any Uzan property at its New York branch. Two months later, a global search of its branches revealed Uzan-related assets valued at roughly $30 million in its branches in the United Arab Emirates (U.A.E.). SCB froze those assets in accordance with the restraining order, but regulatory authorities in the U.A.E. and Jordan quickly intervened. The Central Bank of Jordan sent a bank examiner to seize documents at SCB's Jordan branch, while the U.A.E. Central Bank unilaterally debited about $30 million from SCB's account with the bank.

In May 2013, SCB sought relief from the restraining order, claiming in the District Court that the restraint of the $30 million in assets violated U.A.E. law and subjected it to double liability. SCB also contended that, under New York's separate entity rule, service of the restraining order on SCB's New York branch was effective only as to assets located in accounts at that branch and could not freeze funds situated in foreign branches. In opposition, Motorola asserted that the separate entity rule was no longer valid law in light of Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533, 883 N.Y.S.2d 763, 911 N.E.2d 825 (2009), where we held that a judgment creditor could seek the turnover of stock certificates located outside the country so long as the court had personal jurisdiction over the garnishee. In a sealed order, the District Court agreed with SCB and concluded that the separate entity rule precluded Motorola from restraining assets at SCB's foreign branches. Nevertheless, the District Court stayed the release of the restraint pending the outcome of Motorola's appeal.

The Second Circuit, recognizing that we have never explicitly addressed the separate entity doctrine and finding that its viability was unclear in the wake of Koehler, certified the following question to us:

“[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” (740 F.3d 108, 118 [2d Cir.2014] ).

We accepted certification (22 N.Y.3d 1113, 982 N.Y.S.2d 442, 5 N.E.3d 590 [2014] ).¹

II

Motorola, as the judgment creditor, argues that the service of a CPLR 5222 restraining notice on the New York branch of a foreign bank garnishee is sufficient to freeze the funds of the judgment debtor in any branch account with the bank, regardless of where the assets are located. Motorola questions whether the separate entity rule, which is not mentioned in CPLR article 52, was ever the law of New York and asserts that, even if it was, we necessarily abolished it in Koehler . In any event, Motorola asks us to disavow the separate entity doctrine as outmoded and unnecessary.

As the garnishee bank, SCB responds that the separate entity rule is deeply rooted in New York banking law and that foreign banks have reasonably relied on it over the years when deciding whether to open branches and conduct business in New York. Supported by several amici curiae, SCB asserts that Koehler did not discard the separate entity rule and urges that the rule remains vital in the context of international banking. Unlike our dissenting colleagues, we conclude that SCB has the better argument.

The separate entity rule, as it has been employed by lower New York courts and federal courts applying New York law, provides that even when a bank garnishee with a New York branch is subject to personal jurisdiction, its other branches are to be treated as separate entities for certain purposes, particularly with respect to CPLR article 62 prejudgment attachments and article 52 postjudgment restraining notices and turnover orders (see Matter of National Union Fire Ins. Co. of Pittsburgh, Pa. v. Advanced Empl. Concepts, 269 A.D.2d 101, 703 N.Y.S.2d 3 [1st Dept.2000] ; Therm–X–Chem. & Oil Corp. v. Extebank, 84 A.D.2d 787, 444 N.Y.S.2d 26 [2d Dept.1981] ; Allied Mar., Inc. v. Descatrade SA, 620 F.3d 70, 74 [2d Cir.2010]

662843;00126; 2022917850;RP;;0000506;74

Courts and commentators traditionally have ascribed three basic rationales for the separate entity doctrine. First, courts applying the rule have emphasized 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” (Global Tech., Inc. v. Royal Bank of Can., 34 Misc.3d 1209[A], 2012 N.Y. Slip Op. 50023[U], *3, 2012 WL 89823 [Sup.Ct., N.Y. County 2012] [internal quotation marks and citation omitted] ). Second, it was viewed as necessary to protect banks from being “subject ... to competing claims” and the possibility of double liability (Shaheen Sports, Inc. v. Asia Ins. Co., Ltd., 2012 WL 919664, *5, 2012 U.S. Dist. LEXIS 36720, *14 [S.D.N.Y., Mar. 14, 2012, Nos. 98–CV–5951 (LAP), 11–CV–920 (LAP) ] ), a concern strenuously voiced by the amici in this case. And third, the rule has been justified based on the “intolerable burden” that would otherwise be placed on banks to monitor and ascertain the status of bank accounts in numerous other branches (Cronan v. Schilling, 100 N.Y.S.2d 474, 476 [Sup.Ct., N.Y. County 1950], aff'd. without op. 282 App.Div. 940, 126 N.Y.S.2d 192 [1st Dept.1953] ; see generally Geoffrey Sant, The Rejection of the Separate Entity Rule Validates the Separate Entity Rule, 65 S.M.U. L. Rev. 813, 814 [2012] ).

The existence of the separate entity rule as a component of New York's common law can be traced back to a 1916 decision (see Chrzanowska v. Corn Exch. Bank, 173 App.Div. 285, 291, 159 N.Y.S. 385 [1st Dept.1916], aff'd. without op. 225 N.Y. 728, 122 N.E. 877 [1919] [“With respect to the question presented for decision, the different branches were as separate and distinct from one another as from any other bank”] ). It was first applied in the postjudgment context a few decades later in Walsh v. Bustos, where the court concluded that a...