Court of Appeals Accepts Certified Questions Concerning the “Separate Entity Rule”

March 13, 2014

Daniel B. Goldman and Adam W. Braveman

We reported previously that last month, in Tire Engineering and Distribution LLC, the Second Circuit certified the following two questions to the New York Court of Appeals relating to the “separate entity” rule:

(1) 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 foreign branches of the bank; and

(2) Whether 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.

On February 18, 2014, the New York Court of Appeals accepted these questions. Now, the Court of Appeals may overturn fifty years of precedent in the New York lower and federal courts that created a legal fiction that New York branches of banks are separate legal entities from all other branches of the banks wherever located.

Should the Court of Appeals overturn the separate entity rule, judgment creditors would have a potent weapon to collect judgments from foreign judgment debtors by going directly after assets held by banks, which have New York branches. To wit, if a foreign judgment debtor, who may not otherwise have assets in the United States, maintains bank accounts with a foreign bank in a foreign country and if that bank happens to have a branch in New York, a judgment creditor could force the New York branch to turnover monies of the judgment debtor held by the bank anywhere in the world. Moreover, because international banks are subject to the competing laws of multiple jurisdictions, turnover or restraining orders issued by New York courts may cause conflicts with the laws of other jurisdictions, thereby exposing foreign banking institutions to potential criminal and/or civil liability in their home country, as well as double liability to customers. Last, if the separate entity rule is overturned, there will undoubtedly be an increase in enforcement activity in New York against banks. Appellants’ briefs are due April 21, 2014, respondents’ briefs are due June 5, 2014, and appellants’ reply briefs are due June 16, 2014. Oral argument will most likely be in September. We will continue to monitor this situation closely.