MOSCOW, January 15 (RAPSI, Ingrid Burke) – A US federal court has posed to New York’s highest state court unresolved questions of state law regarding whether banks operating within its borders should be spared from having to turn over or restrain a debtor’s assets when such are held in foreign branches.

The order arises from two claims being heard in tandem by the US Court of Appeals for the Second Circuit.

The first is Tire Engineering and Distribution, L.L.C. v. Bank of China Ltd., which involves a $26 million award for damages. According to the order, “the judgment debtors have refused to pay the judgment.”

The second is Motorola Credit Corp. v. Standard Charter Bank, which involves approximately $2 billion in compensatory damages, and a separate $1 billion in punitive damages. According to the order, the defendants in the initial suit have “attempted to avoid paying these judgments.”

In both cases, the plaintiffs went after foreign banks with branches in New York in an effort to recover their awards.

Tire Engineering sought from the Bank of China the judgment debtors’ assets in its possession, “regardless of whether [BOC] possesses that money or other personal property in New York, China, the United Arab Emirates, or elsewhere."

Motorola sought from Standard Chartered Bank (SCB) – which is incorporated under the laws of and headquartered the UK – relevant assets connected with its United Arab Emirates (UAE) branches. Though SCB initially endeavored to comply with the order, the Central Bank of Jordan deployed an auditor to seize documents from SCB’s Jordan branch, and the Central Bank of the UAE debited SBC’s account.

In both cases, the US District Court for the Southern District of New York held that the separate entity rule “precludes a court from ordering a garnishee bank operating branches in New York to turn over or restrain assets of judgment debtors held in foreign branches of the bank.”

On appeal, the plaintiffs from both cases are judgment creditors, who argue that a 2009 New York Court of Appeals decision makes clear that if a court has personal jurisdiction over a garnishee bank, remedies are available under New York law to reach the assets held by judgment debtors in the given bank’s foreign branches. The element of state law relevant to this argument is Article 52 of the New York Civil Practice Law and Rules (CPLR), which concerns the enforcement and collection of money judgments.

According to the order, CPLR Section 5222 provides for the issuance of a restraint notice to prohibit third parties from disposing of debt owed to a judgment debtor for a year following service of the notice, or until the judgment is satisfied or vacated. Under CPLR 5223(b), a judgment creditor can commence proceedings to compel a third party to turn the judgment debtor’s assets over.

Likewise, the defendant garnishee banks in both cases argue that they are protected by New York’s so-called separate entity rule.

The separate entity rule provides that: “even if a bank is subject to personal jurisdiction due to the presence of a New York branch, the other branches of the bank will be treated as separate entities for certain purposes, such as attachments, restraints, and turnover orders,” in the words of the Second Circuit court.

The order notes that the separate entity rule was initially rationalized based on concerns that it would be intolerably burdensome to require every branch of a bank to be notified any time one of its branches is served with a warrant of attachment.

Considering the state-law issues presented, the Second Circuit court opted to reserve its decision and to certify two questions for the New York Court of Appeals.

The questions pertain specifically to: “whether the separate entity rule precludes a judgment creditor from ordering a garnishee bank operating branches in New York to [turn over or restrain] a debtor's assets held in foreign branches of the bank.”

The federal court noted that the state court is free to expand upon the questions presented in order to address any other relevant issues. The former retained jurisdiction of the cases and noted that it will consider any remaining issues on appeal upon either receiving the state court’s guidance, or its decision to decline the questions.