International Banks in the Crosshairs: Cross-Border Judgment Enforcement in New York

By Gregory A. Litt

Posted: 20th July 2012 10:05

As the world of international transactions expands, cross-border judgment enforcement has become an increasingly important part of litigation and arbitration strategy, and successful parties often resort to aggressive judgment enforcement techniques in attempts to satisfy judgment debts.   A recent decision by the chief judge of the federal district court in Manhattan may have begun to release international banks from the uncertainty of an ambiguous regime of judgment enforcement with respect to assets held by those banks outside the United States.   This regime, which has reigned in New York for the past three years, is a result of the 2009 decision by the New York Court of Appeals – New York’s highest state court – in Koehler v. Bank of Bermuda Ltd., 12 N.Y.3d 533 (2009) ("Koehler").
 
In Koehler, a judgment creditor, Koehler, sought a turnover order against Bank of Bermuda's Bermuda branch, which heldstock certificates owned by a judgment debtor.   The New York Court of Appeals held that a New York court may order a bank to deliver property of a judgment debtor to a judgment creditor even though that property is held by the bank outside New York, so long as the court has personal jurisdiction over the bank in New York.   Notably, Bank of Bermuda had consented to the jurisdiction of the courts in New York, a fact emphasised by the Court of Appeals.  SeeKoehler, 12 N.Y.3d at 536; see also Koehler v. Bank of Bermuda Ltd., No. M18-302, 2005 WL 551115, at *12 (S.D.N.Y. Mar. 9, 2005), vacated, 577 F.3d 497 (2d Cir. 2009).
 
In the years since Koehler, judgment creditors have sought to use the court's holding to reach judgment debtors' assets held in foreign bank branches that, unlike Bank of Bermuda in Koehler, have not consented to personal jurisdiction in New York.   The judgment creditors in those cases have served petitions to turnover assets on the foreign banks' New York branches, arguing that the presence of a New York branch allows the New York courts to exercise jurisdiction over the entire bank. 
 
Given that well over 100 foreign banks from dozens of countries maintain branches or agencies in New York, see www.federalreserve.gov/releases/iba/201112/bytype.htm (last visited July 10, 2012), judgment creditors may seek to use a foreign bank's New York presence – however small – as a portal to try to reach into depositors' accounts and other assets held outside the United States, bypassing judgment enforcement laws and regulatory regimes in other countries around the world.   If the effort is successful, international banks subject to personal jurisdiction in New York could be faced with endless enforcement proceedings before the New York courts.   This, in turn, may spawn parallel – and potentially conflicting – anti-turnover litigation in the foreign branches' home countries.  See, e.g., Prodprogramma-Impuls Ltd. v. Bank of India,Nos. 12 Civ. 3036, 11 Civ. 5559, 2012 WL 2411809, at *3 (S.D.N.Y. June 25, 2012).
 
In this respect, judgment creditors have been forced to contend with a longstanding rule of New York law known as the "separate entity rule."  Under this rule, bank branches that are not separately incorporated nevertheless historically have been treated as separate jurisdictional entities from their sister branches in other countries for judgment enforcement and other purposes.   Under the separate entity rule, serving process on a New York branch of a foreign bank would not be sufficient to establish jurisdiction over the bank's foreign branches where a judgment debtor may have accounts or assets.
 
After Koehler, New York's state courts have steadfastly held that the separate entity rule remains intact, and cannot be abrogated absent legislative action or a clear statement to that effect by the Court of Appeals.   For instance, in Global Technology, Inc. v. Royal Bank of Canada, No. 150151/2011, 2012 WL 89823 (N.Y. Sup. Ct. Jan. 11, 2012), a state court held that "under the separate entity rule, service of the petitioner's restraining notice upon respondent's branch in Manhattan did not restrain [the judgment debtor's] bank accounts in Canada."  Id. at *13.  See also, e.g.,Samsun Logix Corp. v. Bank of China, No. 105262/10, 2011 WL 1844061 (N.Y. Sup. Ct. May 12, 2011).
 
In contrast, certain federal district court judges sitting in Manhattan have been more equivocal about the survival of the separate entity rule after Koehler.   For instance, in a January 2011 decision, one district judge took the view that "Koehler indicates that New York courts will not apply the separate entity rule in post-judgment execution proceedings."   JW Oilfield Equip., LLC v. Commerzbank, AG, 764 F. Supp. 2d 587, 595 (S.D.N.Y. 2011).    The court appears to have based its decision, in part, on a concession by Commerzbank that the separate entity rule had been preempted in certain instances.  Id.  Nine months later, another district judge cited JW Oilfield approvingly and rejected contrary precedents from the New York state courts.  Eitzen Bulk A/S v. Bank of India, No. 09 Civ. 10118, 2011 WL 4639823 (S.D.N.Y. Oct. 5, 2011).
 
Courts and commentators took note of the growing split between and the state and federal courts, and the state court in Global Technology even observed in January 2012 that "[f]ederal courts are deeply divided from New York trial-level courts on this issue."  Global Technology, 2012 WL 89823, at *1.
 
However, in March 2012, Judge Loretta Preska, Chief Judge of the federal district court in Manhattan, in a detailed decision, expressed the view that the foregoing federal decisions did not reflect the overall view of the federal courts, and joined the New York state trial courts in holding that the separate entity rule remains the law of New York.   Hamid v. Habib Bank Limited, No. 11-cv-920, 2012 WL 919664 (S.D.N.Y. Mar. 14, 2012), app. pending, No. 12-1481-cv (2d Cir.)   In Hamid, a judgment creditor petitioned for turnover of the judgment debtor's assets by Habib Bank Limited.  The petitioner served Habib's New York branch even though it alleged that the judgment debtor's assets were held by a Habib branch in Pakistan.   The court declined the petitioner's invitation to discard the separate entity rule, and refused to order Habib to turnover assets held by the Pakistani branch.
 
The Hamid court took the view that if the New York Court of Appeals intended to abrogate the long-standing separate entity rule, "it is not unreasonable to expect that . . . it would have said so."  Id. at *5.   The court also pointed out that there are "significant policy principles underlying the separate entity rule," including "the 'intolerable burden' that would otherwise be placed on banking and commerce if mere service of a writ to a New York branch could subject foreign bank branches to competing claims" in New York and the foreign jurisdiction.  Id.
 
It remains to be seen whether the appellate courts in New York will act in Hamid or another case to address the viability of the separate entity rule after Koehler.   Standing alone, the Hamid opinion is a first instance decision that is not binding on other federal judges, but it may influence them to fall in line with the New York state courts and restrict the ability of judgment creditors to use local branches of foreign banks to enforce judgments against assets around the world.

 
Gregory A. Litt is counsel in litigation and international arbitration in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP.   This article does not necessarily represent the views of Skadden Arps or any one or more of its clients.
 
Mr. Litt represents clients in complex commercial disputes before state and federal courts and domestic and international arbitral tribunals, and he is actively litigating matters concerning the issues addressed in this article.   He has represented clients in a wide range of international corporate, commercial and securities disputes in a variety of industries, including aviation, energy, finance, hospitality, and insurance.
 
Mr. Litt can be contacted  by phone on +1 212 735 2159 or alternatively via email at Greg.Litt@Skadden.com.


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