Marc J. Goldstein Arbitrator & Mediator NYC
February 01, 2014

New York Confronts Archaic Obstacle to Award Enforcement Against Assets Held in Bank Branches Abroad

There may shortly be a dramatic change in the powers of an unpaid Award Creditor to use New York’s courts to seize Award Debtor assets held in foreign bank accounts. If the change occurs, Award Creditors will be able to require foreign banks that have a New York branch to deliver to the creditor in New York assets held in foreign branches to satisfy a judgment enforcing an international arbitration award. The implications for international arbitrations seated in New York, and for New York’s attractiveness as an arbitral seat, are considerable.

The stage has been set for this potential change by a decision two weeks ago from the US Second Circuit Court of Appeals, in which the Second Circuit has asked New York State’s highest court, the New York Court of Appeals, to decide an unresolved question of New York law. The “certified question” is whether New York’s so-called “Separate Entity Rule” has been, or should be, abolished, such that an order to turn over assets to satisfy a judgment, when served on the New York branch of a foreign or global bank, would require the bank to turn over the judgment debtor’s assets held in all the bank’s branches wherever located. (Tire Engineering & Distribution, L.L.C. v. Bank of China Ltd. (and two consolidated cases raising the same issue), 2014 WL 114285 (2d Cir. Jan. 14, 2014)).

Consider the current plight of the Award Creditor, victorious against a non-US party in an arbitration with a New York seat. A judgment from a federal district court in New York giving recognition to the Award under the New York Convention is readily obtainable, and on a very short timetable if there are good reasons for expedition such as demonstrable risk of asset dissipation or concealment by the Award Debtor. That process also enables the Award Creditor to enlist the district court’s support in fixing a short timetable for the Award Debtor to present, in the same proceeding, any cross-motion to set aside the award — rather than the longer timetable otherwise afforded to the Award Debtor by Chapter Two of the FAA. But proceedings to recognize the Award in the USA are unhelpful if there are no assets here and the Award Debtor is not physically present, unless the US court has an enforcement “long-arm” based on the presence here of a bank whose foreign branches hold Award Debtor assets.  Such “long-arm” enforcement power, if it exists, potentially eliminates the need for the Award to be recognized and enforced in multiple jurisdictions where the Award Debtor may keep assets.

The New York Court of Appeals has addressed some related issues in the last few years, but the decisions offer little predictive value. In the Koehler case in 2009, the Court held that a foreign bank that was jurisdictionally present in New York could be required by a turnover order to deliver in New York stock certificates held for the Judgment creditor at the bank’s headquarters office in Bermuda.  (Koehler v. Bank of Bermuda Ltd., 12 N.Y.2d 533 (2009)). After Koehler, many litigants have argued, and a few trial level courts have held, that the “separate entity” rule was overruled by implication in that case. But the assets in Koehler were not held by a foreign branch of the bank, and so the “separate entity” issue was not presented. In the Commonwealth of Northern Mariana Islands v. Canadian Imperial Bank of Commercce case last year (21 N.Y.2d 55), the Court held that assets in possession of a foreign subsidiary of a Canadian bank jurisdictionally present in New York did not have to be delivered in satisfaction of a turnover order, because the turnover provision of New York’s Civil Practice Law & Rules requires turned over of assets in “possession or custody” of the garnishee but does not extend to assets in the “control” of a garnishee by reason of a parent-subsidiary relationship. Commonwealth also fails to answer the question now certified to the Court by the Second Circuit, which presents the situation of a bank with New York and foreign branches that are in the same corporate entity, i.e. they are not legally separate under applicable laws, and are to be regarded as separate only if the legal fiction of separateness based on the “Separate Entity Rule” is recognized by New York’s highest court.

The Separate Entity Rule is an anachronism, on a practical level, having its origins long before the Internet Age in a concern about the burden that would be imposed if far-flung branches had to communicate with one another about account balances. A broader comity concern is also associated with the Rule, as it operates to force the Judgment Creditor to proceed in the courts of, and subject to the banking laws and debtor-creditor laws of, the jurisdiction where the assets are located. Comity is likely to be much debated before the Court of Appeals. The banking industry will argue that forced compliance with US turnover orders will subject the banks to criminal violations of banking laws in many jurisdictions. Creditor interests will argue that such concerns are overstated and, indeed, that bank secrecy laws and related restrictions sometimes exist to foster the growth of the banking industry in emerging global financial centers, and that the laws serve the interest of the banks and their customers more than the interests of the enacting States.

The Separate Entity Rule has never received the imprimatur of New York’s highest court, a fact that should make it easier for the Court to reject it. Such rejections seems reasonably likely, and also likely to be coupled with a reminder that comity is a discretionary doctrine and that courts may on case-by-case basis excuse compliance with a turnover order if considerations of comity counsel in favor of requiring the judgment creditor to apply for relief in the jurisdiction where the assets are held.  That would send the Tire Engineering case back to the Second Circuit, and perhaps in turn back to the District Court for a first instance consideration of comity in each of the consolidated cases.

But rejection of the Separate Entity Rule would be a major step in modernizing judgment enforcement law in New York, making New York a more appealing host venue for international arbitrations.

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