Out of State, Out of Mind: The partial demise of the “Separate Entity” rule?

The judgment debtor and his wife maintained a joint account at JPMorgan Chase Bank at a branch located in New York. The judgment creditor’s attorney served a restraining notice on Chase’s Court Orders and Levies Department located in Ohio. The bank restrained the joint account and the judgment debtor squawked that the restraining notice should not be honored due to the “separate entity” rule.

The “Separate Entity” Rule

The “Separate Entity” rule derived from a century-old case in which the New York State Court of Appeals held that different branches of a bank are considered separate and distinct from one another. Later court decisions interpreted this rule in the context of judgment enforcement as meaning that a restraining notice served on one bank branch did not extend to the deposits held by a debtor in another branch. Therefore, a judgment creditor had to serve the restraining notice on the specific bank branch in which the debtor maintained an account.

In Koehler v. Bank of Bermuda Ltd., 12 NY3d 533 [2009], the court held that a turnover order directing a garnishee bank in Bermuda was enforceable because the bank had a presence through a subsidiary in New York. The court held that “a court sitting in New York that has personal jurisdiction over a garnishee bank can order the bank to produce stock certificates located outside New York pursuant to CPLR 5225(b).”

In Motorola Credit Corp. v. Standard Chartered Bank, 24 NY3d 149 [2014], the court clarified its prior opinion by holding that “service of a restraining notice on a garnishee bank’s New York branch is ineffective under the separate entity rule to freeze assets held in the bank’s foreign branches.” The court recognized that “abolition of the separate entity rule would result in serious consequences in the realm of international banking to the detriment of New York’s preeminence in global financial affairs.”

Service on Chase’s Court Orders and Levies Department upheld

The judgment creditor retained Richard A. Klass, Esq., Your Court Street Lawyer, to commence a turnover proceeding to obtain a court order for the bank to turn over the moneys restrained in the joint bank account maintained by the judgment debtor and his wife. Both the judgment debtor and his wife filed opposition papers claiming that, pursuant to the separate entity rule, the restraining notice should be declared ineffective since the specific branch in which they maintained their account was not served but rather at the bank’s Court Orders and Levies Department in Ohio.

In reply, the creditor countered that the restraining notice was served at the Court Orders and Levies Department according to the bank’s own instructions. The bank accepted the notice and recognized the restraint. Further, the respondents waived any affirmative defense of lack of personal jurisdiction.

The judge determined that the restraining notice was effective against the debtor’s account:

“A fair reading of Motorola indicates the Court of Appeal’s primary concern over international banking policies, not the type of transaction the parties in this proceeding present with respect to the assets held by JPMorgan in New York. Specifically, it is readily apparent that JPMorgan should not fear the risks of competing claims and double liability, nor the issue of legal and regulatory schemes inasmuch as this Court’s primary concern is the property restrained in New York.”

Accordingly, the judge granted the application to continue “the imposition of a restraining notice against the judgment debtor’s bank account to secure funds for later transfer to the judgment creditor through a sheriff’s execution or turnover proceeding.”

At this point, almost all banks maintain central subpoena/legal departments at which restraining notices may be served. The practical effect of the partial abrogation of the separate entity rule is that a creditor is able to serve a bank’s central department without having to serve a particular branch where the debtor maintains an account.


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Richard A. Klass, Esq., maintains a law firm engaged in civil litigation at 16 Court Street, 28th Floor, Brooklyn, New York. He may be reached at (718) COURT●ST or RichKlass@courtstreetlaw.comcreate new email with any questions.

Prior results do not guarantee a similar outcome.

© 2021 Richard A. Klass

Scales of justice illustrating article about legal malpractice.

Enforcing Judgments Against Bank Accounts Held Outside N.Y.

By Richard A. Klass and Elisa S. Rosenthal

[This article first appeared in the November 20, 2014 edition of the New York Law Journal.]

New York Civil Practice Law and Rules Article 52 dictates the procedures that a judgment creditor must follow to exercise its rights to enforce a judgment entered in New York.

When both the judgment debtor and its assets are located within New York State, the procedure is fairly straightforward. When the assets of the judgment debtor are located outside of New York State, however, the ability to levy upon the judgment debtor’s assets can be tricky.

There are several factors that both federal and state courts in New York have considered in determining whether or not assets held in another state can be used to satisfy a New York judgment, including: (a) the separate entity rule; (b) jurisdiction; and (c) the type of proceeding.

The Separate Entity Rule

The separate entity rule, one which was adopted from the old English common law, provides that each branch of a bank is considered to be a separate entity. The mere fact that a bank may have a branch inside of New York is insufficient to render accounts outside of New York subject to attachment by a New York court. See Motorola Credit Corp. v. Uzan, 288 F.Supp.2d 558 (S.D.N.Y. 2003).

In 2009, the separate entity rule was loosened by the Court of Appeals, due to the computerization of bank information and centralized systems, Digitrex v. Johnson, 491 F.Supp. 66 (S.D.N.Y. 1980). Indeed, in Koehler v. Bank of Bermuda, 12 N.Y.3d 533 (2009), the New York State Court of Appeals held that the Legislature intended CPLR Article 52 to have extraterritorial reach when it amended CPLR 5224 (Consol. 2011) to facilitate the disclosure of materials located outside of New York to judgment creditors seeking to collect a judgment.

Following Koehler, courts facing similar issues wondered whether the separate entity rule had been completely abrogated by Koehler. See, e.g.,Global Tech. v. Royal Bank of Can., 34 Misc.3d 1209(A) (Sup. Ct. New York Co. 2012), Parbulk II AS v. Heritage Maritime, 35 Misc.3d 235 (Sup. Ct. New York Co. 2011). Subsequent decisions, particularly in the First Department, however, have held that if the Court of Appeals had intended to eliminate the separate entity rule, it would have, and that “any future exception to the separate entity rule would require a pronouncement from the Court of Appeals or an act of the Legislature.” Ayyash v. Koleilat, 38 Misc.3d 916, 924 (Sup. Ct. New York Co. 2012) citing Nat’l Union Fire Ins. Co. v. Advanced Empl. Concepts, 269 A.D.2d 101 (1st Dept. 2000).

In fact, several trial courts since Koehler have instead held by the traditionally well-settled rule that “in order to reach a particular bank account the judgment creditor must serve the office of the bank where the account is maintained.” See, e.g., Global Tech. v. Royal Bank of Can., 34 Misc.3d 1209(A) (Sup. Ct. New York Co. 2012), Parbulk II AS v Heritage Maritime, 35 Misc.3d 235 (Sup. Ct. New York Co. 2011). The Court of Appeals’ deliberate sidestepping1 the issue of the separate entity rule in Koehler may be the impetus for its most recent determination in Motorola Credit v. Standard Chartered Bank, decided on Oct. 23, 2014.

In a divided opinion, the Court of Appeals, in Motorola, affirmed the long-standing common law tenet of the separate entity rule, holding that “limiting the reach of CPLR 5222 restraining notice in the foreign banking context, the separate entity rule promotes international comity and serves to avoid conflicts among competing legal systems.” Motorola Credit v. Standard Chartered Bank, No. 162, NYLJ 1202674400477 at *11 [Oct. 23, 2014].

Jurisdiction

The Court of Appeals in Koehler analyzed the issue of jurisdiction in connection with judgment enforcement proceedings. The court explained that since a post-judgment enforcement action is against a person, and the purpose of the proceeding is to force the person to convert property he owns into money for payment to a creditor, that New York has the authority to order the holder of a judgment debtor’s asset to turn over property of the judgment debtor held outside the state if the court has personal jurisdiction over a judgment debtor. Koehler, 12 N.Y.3d at 540, citing Siegel, N.Y. Prac. §510, at 866 [4th ed].

In Koehler, the plaintiff sought to enforce a domesticated foreign judgment as against the defendant by issuing a restraining notice to the Bank of Bermuda, which it asserted held stock on behalf of the defendant. The court established personal jurisdiction over the defendant based upon defendant’s willingness to subject itself to the court’s jurisdiction without objection. The court then determined that, based upon its in personam jurisdiction over the defendant, it can extend its reach to assets of the defendant, even when those assets are held outside of New York State, either in another state or another country. Koehler v. Bank of Bermuda, 12 N.Y.3d 533 (2009). In fact, the court in Koehler went so far as to hold that the broad language of CPLR Article 52 extends to the turnover of out-of-state assets held by a garnishee. Id. at 541.

Utilizing a jurisdictional analysis to determine whether the out-of-state assets of a judgment creditor can be turned over, as in Koehler, has precedential support. In U.S. v. First Nat’l City Bank, the case involved notice and levy of a federal tax lien upon all of the assets of an Uruguayan corporation. U.S. v. First Nat’l City Bank, 379 U.S. 378 (1965). The United States sought to foreclose its tax lien upon all sums held for the corporation in the Montevideo branch office of the bank. Id. The bank had been served with an injunction preventing the bank from transferring any assets of the corporation during the pendency of the foreclosure, but the corporation had not been served. Id.

The U.S. Supreme Court held the bank “has actual, practical control over its branches; it is organized under a federal statute, which authorizes it to sue and be sued, complain and defend, in any court of law and equity, as fully as natural persons as one entity, not branch by branch. Id. The branch bank’s affairs are, therefore, as much within the reach of the in personam order entered by the District Court as are those of the home office…” Id.

Although the determinations in Koehler and First Nat’l City Bank appear to put to bed the issue of New York’s jurisdiction over out-of-state bank branches, there remains an important factor to address before determining whether, in fact, a judgment should, or needs to be domesticated in a foreign state or whether New York can assert its jurisdiction. The remaining issue is determining whether the proceeding is an attachment proceeding, an injunction proceeding or a turnover/garnishment proceeding.

Collection Proceedings

Under New York law, there are several different ways in which a debtor’s assets can be reached; (a) attachment; (b) turnover proceeding; and (c) restraining notice/execution.

Attachment: An attachment proceeding is a pre-judgment remedy involving the seizure of the defendant/debtor’s property so that they are no longer able to use the property in order to ensure satisfaction of a prospective judgment. Attachment proceedings in New York are governed by CPLR Article 62, and as stated in Koehler, enable a court to have jurisdiction over the property rather than the person. Koehler, 12 N.Y.3d at 539, (“It is a fundamental rule that in attachment proceedings, the res must be within the jurisdiction of the court issuing the process in order to confer the jurisdiction”).

In Abuhamda, moneys were transferred from a bank branch located in New York to a branch in Jordan. Abuhamda v. Abuhamda, 654 N.Y.S.2d 11 (1st Dept. 1997). The court held that it had the authority to order a preliminary injunction to direct the bank to freeze the account in Jordan, based upon the Supreme Court’s ruling in First Nat’l City Bank. Id. The fact that the bank did business in New York State subjected the bank to its jurisdiction. Id.

Turnover Proceeding: A turnover proceeding is a post-judgment special proceeding, under CPLR Article 52, in which the judgment creditor may obtain an order from the court forcing a third-party garnishee in possession of property belonging to the judgment debtor to turn the property over to the judgment creditor. The analysis performed in Koehler resulted in a determination that “a New York court with personal jurisdiction over a defendant may order him to turn over out-of-state property regardless of whether the defendant is a judgment debtor or garnishee.”

In Gryphon, the plaintiff, through a turnover proceeding, sought to have assets of the defendant turned over to the plaintiff to satisfy the judgment issued against the defendant based upon its non-payment of guaranteed notes. Gryphon Dom. VI v. APP Int’l. Fin. Co., 41 A.D.3d 25 (1st Dept. 2007). The court held that New York had jurisdiction over the defendant based upon the language of the notes and that on the basis of the court’s jurisdiction over the defendant it could order the turnover of assets held outside of New York. Id.

Although the Court of Appeals in Koehler appeared to give broad discretion to a judgment creditor in terms of its ability to enforce its judgment, in 2013, the court narrowed the holding in Koehler in the case of Commonwealth of Northern Mariana Islands v. Canadian Imperial Bank of Commerce, 21 N.Y.3d 55 (2013).

In Commonwealth of Northern Mariana Islands, the issue became one of not just possession and custody, but of control over the judgment debtor’s assets. Id. The court held that the bank’s parent company in Toronto maintained possession and custody over the judgment debtor’s assets, not the subsidiary, and the fact that the holder of the assets controls the subsidiary was not sufficient to “compel another entity, which is not subject to this state’s personal jurisdiction, to deliver assets held in a foreign jurisdiction.” Id.

Restraining Notices/Execution: A restraining notice or execution does not necessarily require court assistance or intervention. Once the court has issued a judgment, the judgment creditor may pursue collection of that judgment pursuant to the rules laid out in CPLR Article 52, including issuance of an income execution, a restraining notice upon a bank, or an execution issued to the sheriff to levy upon property owned by the judgment debtor.

In Global Tech., a restraining notice relative to a judgment was served upon a defendant, Royal Bank of Canada, on its New York branch. The court in Global Tech. discussed that, “a party that seeks a restraining notice need only engage an attorney, who is authorized to issue a restraining notice as an officer of the Court. The court has no involvement with the issue of whether service of the restraining notice upon the garnishee comports with due process until the garnishee challenges the restraining notice…when serving a restraining notice of assets held outside the state, the restraining notice must be served upon the individual bank branches holding the assets of the judgment debtor, rather than the home office or a branch within the State of New York.” Global Tech. v. Royal Bank of Can., 34 Misc.3d 1209(A) (Sup. Ct. New York Co. 2012).

The holding in Global Tech. has support in Koehler as well. In the court’s analysis of CPLR 5225(a)-(b) (Consol. 1964), the court took special note of the how the authority is invoked; in CPLR 5225(a) the judgment creditor must file a motion to order the judgment debtor to turn over property in his possession, while CPLR 5225(b) requires a special proceeding by the judgment debtor over a garnishee who is not a party to the main action. See Koehler, 12 N.Y.3d at 541.

In Motorola, the issue with Standard Chartered Bank began when Motorola served a restraining order on the New York branch of the defendant, a foreign bank from the United Kingdom. Motorola argued that based upon Koehler, the separate entity rule was no longer valid law. Standard Chartered Bank disagreed, asserting the separate entity rule is essential in the realm of international banking. The Court of Appeals’ determination affirmed Standard Chartered Bank’s position that “abolition of the separate entity rule would result in serious consequences in the realm of international banking.” Motorola v. Standard Chartered Bank at *13.

On the question of how to enforce a judgment against a judgment debtor against assets held outside of New York, a determination of the type of enforcement action must first be ascertained. If the judgment creditor prefers collection by a restraining notice, the separate entity rule applies, and the judgment should then be domesticated in the foreign jurisdiction in order to assert jurisdiction over the assets. Should the judgment creditor instead prefer to enforce its judgment by a turnover proceeding, the court can assert its authority over assets held outside of the state so long as the court has exercised its jurisdiction over the holder of the assets.

Endnotes:

  1. “Notably absent from our decision in Koehler was any discussion of the separate entity rule.”Motorola Credit v. Standard Chartered Bank, No. 162, NYLJ 1202674400477 at *9 (Oct. 23, 2014).

Richard A. Klass is an attorney with the Law Office of Richard A. Klass in Brooklyn. Elisa S. Rosenthal is an associate of the firm.

Reprinted with permission from the November 20, 2014 edition of the New York Law Journal © 2014 ALM Media Properties, LLC. All rights reserved.
Further duplication without permission is prohibited. ALMReprints.com – 877-257-3382 – reprints@alm.comcreate new email.

The firm’s website: www.CourtStreetLaw.com

Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York. He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.

Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Debt Collection Tips: Motions to Dismiss Affirmative Defenses or Counterclaims

After a suit is filed against a debtor to collect upon a debt, the defendant will file an Answer which may include ” affirmative defenses ” or ” counterclaims. ” These allegations must be handled with vigilance from the onset to attempt successful recovery in the litigation.

An ” affirmative defense ” is a defense to a law suit which must be proved by the defendant. Examples of affirmative defenses would include, e.g., bankruptcy, statute of limitations, improper service, and accord and satisfaction. The notion is that those types of defenses would likely be determinative to the claim. Therefore, the defendant must assert them in the Answer so as not to “surprise” the plaintiff-creditor at the time of trial. Some affirmative defenses must be asserted either pre-Answer or in the Answer, or they are deemed waived by the defendant. After receipt of the Answer, the plaintiff’s counsel should scan the Answer to identify any affirmative defenses and assess their viability. To the extent that an affirmative defense seems frivolous, meritless, or superfluous, an appropriate motion to dismiss the affirmative defense should be made sooner rather than later. The court will then determine whether to sustain the affirmative defense or dismiss it from the onset of the litigation.

As to any counterclaims which may be asserted in the Answer, a careful review must take place as to whether it relates to the matter complained of in the complaint, or relates to a separate matter. Sometimes, the plaintiff will have an insurance policy which covers the counterclaim, and the insurance company will provide a defense to the counterclaim separate from the prosecution of the underlying suit. If it is deemed that the counterclaim “fails to state a valid cause of action,” then an appropriate motion may be brought to dismiss the same.


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New York foreclosure cases nearing 6 year statute of limitations

As reported today in the New York Times, there are increasing numbers of foreclosure cases in New York State where lenders may be unable to seize homes. Why? Because the State’s statute of limitations on foreclosure cases may be exceeded.

If you have a foreclosure case that has been dragging on for nearly six years, there may be relief on the horizon.

Does this sound similar to your situation? If so, and if you require legal representation, call my office for more information.

The full New York Times article is available.

by Richard A. Klass, Esq.

copyr. 2015 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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Debt Collection Tips: Restraining an Account

Once the creditor has obtained a Judgment from a court, one of the options for obtaining payment of the Judgment is to restrain funds of the debtor contained in an account.

The process is to serve a “restraining notice” upon the subject bank, as permitted by statute. In turn, the bank then holds the funds contained in accounts belonging to the judgment debtor pending further action on the part of the creditor. This restraint remains in effect upon the funds for a period of one year.

The next step of the creditor is to remove the restrained funds from the bank. This is done either through an Execution issued to a Sheriff or Marshal (since that person is deemed as “enforcement officer” able to obtain the funds), or through a “turn-over proceeding,” where the creditor begins a separate action against the debtor and the bank as a garnishee requesting that the court direct the garnishee/bank to turn over the restrained funds.

Once the restrained funds are delivered to the creditor through either of the above methods, the accounts of the debtor will continue to be restrained by the bank (where, in the event that new funds were deposited, they would be restrained as well) until the creditor issues a “release” letter to the bank or a Satisfaction of Judgment is filed by the creditor.

Where an account of the debtor is held jointly with another person, it is necessary to file a turn-over proceeding, as the court must determine the respective rights of the account-holders to the funds. One defense to the proceeding is that the debtor is a joint account-holder only for convenience purposes.

copyr. 2014 Richard A. Klass, Esq.
The firm’s website: www.CourtStreetLaw.com
Richard A. Klass, Esq., maintains a law firm engaged in civil litigation in Brooklyn Heights, New York.
He may be reached at (718) COURT-ST or e-ml to RichKlass@courtstreetlaw.comcreate new email with any questions.
Prior results do not guarantee a similar outcome.

R. A. Klass
Your Court Street Lawyer

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