Trans-Jurisdictional Transactions

A broad spectrum of companies in a range of industries is taking advantage of the Internet, advancements in operational systems, and globalization to access new markets and achieve growth. In doing so, many companies are expanding their operations beyond their traditional domestic markets and jurisdictions into new states, new territories, and new countries. When company transactions and legal issues cross borders ' so-called trans-jurisdictional transactions ' companies begin facing expansive and complex legal issues related to those transactions.

This three-part series addresses emerging legal topics that are critical to the three key phases of trans-jurisdictional transactions: 1) the contracting phase before a dispute arises; 2) the information-gathering phase if/when a dispute arises; and 3) the collection/execution phase after a judgment is obtained and debts are owed. The series, which starts from the collection/execution phase and works backwards to the pre-dispute contracting phase, provides guidance to companies attempting to navigate the increasingly nuanced landscape of trans-jurisdictional transactions.

The underlying theme is that all companies engaging in trans-jurisdictional and cross-border commerce not only can, but should, conduct a specialized analysis of their transactions before entering into deals. This will ensure a path of predictability in the event a dispute arises.

The Collection/Execution Phase

How the “separate entity rule” governs the seizure of foreign assets in enforcement proceedings.

Consider the following scenario:

A business has obtained a legal judgment or arbitration award entitling the judgment-creditor to monetary damages against a judgment-debtor. However, the creditor's collection efforts hit a roadblock when the debtor attempts to shield its assets located in different, international jurisdictions. The creditor then must chase the debtor's foreign assets across the globe, where blocking statutes and differing bank secrecy laws significantly hinder, if not halt, the chase. Frustrated, the creditor ultimately considers the bloated costs incurred throughout the chase and, among other possible regrets, bemoans not having taken the time to read this article before agreeing to the underlying transaction.

The first challenge in cross-border creditor collection is garnishing international banking accounts. What happens when a debtor has separate bank accounts in separate branches of the same bank in separate countries? International banking cities in the United States with foreign bank branches have grappled with this knotty issue for years. This is especially true given recent advancements in centralized operational technology, which now allow financial institutions to communicate with their branches and affiliates in a matter of seconds through a few keyboard strokes. Litigants, lawyers, financial regulators and the courts have battled this issue in the context of post-judgment enforcement proceedings, where international comity and foreign interests must be balanced with the rights of creditors to collect their final judgments.

The Separate Entity Rule

A central area of debate in this context involves the application of a common-law rule known as the separate entity rule. This rule generally provides that each international branch of a bank or financial institution is to be treated as a separate entity for injunction or judgment execution proceedings. Thus, even when a bank-garnishee with a branch in the jurisdiction where an action is pending is subject to personal jurisdiction, the bank's other branches are to be treated as separate entities for collection purposes, including pre-judgment attachments, post-judgment freezes, garnishments and turnover orders. In practice, the separate entity rule typically requires a creditor to track down and serve each and every bank branch in the jurisdiction where a debtor might be hiding assets and to successfully freeze (or enjoin) those assets before they are transferred or withdrawn by the debtor. Naturally, judgment-creditors looking to collect from international judgment-debtors struggle to find ways to avoid the rule's application.

Short-Lived Breakthrough for Creditors in NY

In 2009, New York's highest court entered its decision in Koehler v. Bank of Bermuda Ltd, 911 N.E.2d 825 (N.Y. 2009), which seemingly turned the tides in favor of creditors seeking to garnish extra-territorial bank accounts. Specifically, the Koehler court held that a creditor could seek the turnover of stock certificates located outside the United States if the court had personal jurisdiction over the garnishee bank. The decision spawned a frenzy by judgment creditors viewing New York as a potential haven for collecting assets deposited worldwide with international banks with branches in that state.

However, before the creditor-celebration reached its fevered peak, the same court changed course in 2014 when it precluded a similarly-situated creditor from seizing international assets in the same manner. In Motorola Credit Corp. v. Standard Chartered Bank, 21 N.E.3d 223 (N.Y. 2014), a divided court held that the separate entity doctrine was “a firmly established principle of New York law” and relied on various policy reasons supporting adoption of the doctrine, including that “international banks have considered the doctrine's benefits when deciding to open branches in New York,” and that the doctrine “promotes international comity and serves to avoid conflicts among competing legal systems.” Ultimately, the majority concluded “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.”

In sharp contrast, the dissent in Standard Chartered Bank described the separate entity rule as “outmoded” and “a step in the wrong direction.” The dissent likewise opined that “use of the separate entity rule to address potential comity issues is akin to using a cannon to kill a fly,” and that a bank's concerns about double-liability (between responding to a United States court order and respecting a foreign country's blocking statutes and banking privacy laws) and other potentially conflicting exposure could be addressed on a case-by-case basis. According to the dissent, the foreign bank simply “ha[d] aided its fugitive customers by erecting a monumental roadblock to [the judgment creditor]'s enforcement of a staggering judgment” of more than $3 billion dollars.

Later, the federal courts began to spar over the same issues. In late 2014, the federal court of appeals (in New York) relied on the majority's decision in the Standard Chartered Bank state court action, and held that the separate entity rule precludes a court from ordering a garnishee bank's New York branch from freezing assets held in the bank's foreign branches. Motorola Credit Corp. v. Standard Chartered Bank, 771 F.3d 160, 160-61 (2d Cir. 2014). Nevertheless, the following month, a New York federal district court in a separate case involving Motorola Credit Corp., Motorola Credit Corp. v. Uzan, 73 F. Supp. 3d 397 (S.D.N.Y. 2014), narrowed the implication of the rule by compelling New York branches of banks in France, Jordan and the United Arab Emirates to comply with a judgment-creditor's requests for information and disclose information pertaining to the judgment-debtor's foreign bank accounts during post-judgment discovery proceedings (as opposed to collection proceedings). The net result of these decisions is that the final word on the separate entity rule (in New York and elsewhere) has yet to be written.

Across Jurisdictions

The debate over the separate entity rule is not limited to the courtrooms of New York, and courts across the United States have reached differing conclusions on the rule. For example, courts in Florida, Hawaii, Michigan and Illinois have shunned application of the separate entity rule. On the other hand, just last year, an appellate state court in Florida implicitly adopted the separate entity rule (and thus set up a potential conflict within Florida on this issue) and held that a trial court lacks jurisdiction to compel the turnover of property (in that case, stock certificates) located outside the state.

At bottom, the recent case law discussing the separate entity rule has provided creditors with new tools and strategies to chase, locate and even seize a debtor's foreign assets.

At the same time, the case law has left open important legal questions, including:

• the applicability of the separate entity rule to bank branches located outside of the jurisdiction of the judgment but within the United States and its territories;
• the extent that the corporate relationship between a bank and its affiliates distinguishes the rule's application; and
• the degree to which a banking branch or affiliate conducts business within a jurisdiction for jurisdictional purposes.

The analysis, of course, is subject to forum-specific considerations, as the policy interests underlying the separate entity rule as applied in New York City might differ from other important banking cities in the United States, such as Miami, Chicago, Dallas or San Francisco. Those differences, as well as the different laws in those respective jurisdictions, can lead to strategies before, during and after litigation that might favor creditors' enforcement efforts or, conversely, debtors' asset-protection efforts. Whether a creditor is attempting to find and/or seize foreign assets or a debtor is attempting to protect its assets, the custom analyses across jurisdictions underscore the importance of the specific factual circumstances at issue measured against the applicable authority where the dispute is centered.

Forum Selection

Recent case law regarding the use of U.S. financial institutions to seize foreign assets also underscores the re-emergence of jurisdictions with important international commerce and banking ties ' such as Miami, FL ' as potential gateways for global dispute resolution, including international arbitrations.

In 2010, for example, the Florida Legislature enacted the Florida International Commercial Arbitration Act, ” 684.0001-684.0049, Fla. Stat. (2015), which is modeled after (and effectively adopts) the United Nations Commission on International Trade Law (UNCITRAL) Model Arbitration Act. This Act has resulted in Miami fast-becoming a leading forum for resolving international commercial disputes. This is because the Act is amongst the most arbitration-friendly in the nation and Florida courts are inclined to not only compel the arbitration process but quickly confirm the award. Also, in Miami, there is the availability of qualified multi-lingual, multi-cultural arbitrators, and the city enjoys comparatively lower costs than other major worldwide banking cities like New York, Paris or London. Of course, Miami has a central geographic nexus to the international community and is easily reached from South America, Europe and Asia.

Conclusion

This discussion regarding the separate entity rule vis-'-vis debt-collection underscores that the viability of a company's trans-jurisdictional transactions often depends on careful planning before entering into the deal or the litigation. This includes agreeing upon the forum for resolving disputes, the forum where awards may be confirmed or “domesticated,” the currency to pay the judgment, and the procedure to execute on the judgment. Through this advanced planning, one may attain a modicum of predictability in a world of uncertainty.

Please look for the next two parts in this three-part series. In Part Two, we will focus in greater detail on the information-gathering phase, when disputes arise either pre-suit, in-suit or post-suit and foreign blocking statutes hinder a party's access to discovery of documents and information for use in litigation and otherwise. Part Three, the last installment, will focus on the contracting phase ' the “deal” ' at which point the parties are able to establish a dispute resolution process that incorporates predictability and accountability directly into the terms of the agreement.

Allan A. Joseph and Stephen H. Wagner are attorneys with Fuerst Ittleman David & Joseph, PL. They gratefully acknowledge the contribution of Francis Massabki in the preparation of this article.

A broad spectrum of companies in a range of industries is taking advantage of the Internet, advancements in operational systems, and globalization to access new markets and achieve growth. In doing so, many companies are expanding their operations beyond their traditional domestic markets and jurisdictions into new states, new territories, and new countries. When company transactions and legal issues cross borders ' so-called trans-jurisdictional transactions ' companies begin facing expansive and complex legal issues related to those transactions.

This three-part series addresses emerging legal topics that are critical to the three key phases of trans-jurisdictional transactions: 1) the contracting phase before a dispute arises; 2) the information-gathering phase if/when a dispute arises; and 3) the collection/execution phase after a judgment is obtained and debts are owed. The series, which starts from the collection/execution phase and works backwards to the pre-dispute contracting phase, provides guidance to companies attempting to navigate the increasingly nuanced landscape of trans-jurisdictional transactions.

The underlying theme is that all companies engaging in trans-jurisdictional and cross-border commerce not only can, but should, conduct a specialized analysis of their transactions before entering into deals. This will ensure a path of predictability in the event a dispute arises.

The Collection/Execution Phase

How the “separate entity rule” governs the seizure of foreign assets in enforcement proceedings.

Consider the following scenario:

A business has obtained a legal judgment or arbitration award entitling the judgment-creditor to monetary damages against a judgment-debtor. However, the creditor's collection efforts hit a roadblock when the debtor attempts to shield its assets located in different, international jurisdictions. The creditor then must chase the debtor's foreign assets across the globe, where blocking statutes and differing bank secrecy laws significantly hinder, if not halt, the chase. Frustrated, the creditor ultimately considers the bloated costs incurred throughout the chase and, among other possible regrets, bemoans not having taken the time to read this article before agreeing to the underlying transaction.

The first challenge in cross-border creditor collection is garnishing international banking accounts. What happens when a debtor has separate bank accounts in separate branches of the same bank in separate countries? International banking cities in the United States with foreign bank branches have grappled with this knotty issue for years. This is especially true given recent advancements in centralized operational technology, which now allow financial institutions to communicate with their branches and affiliates in a matter of seconds through a few keyboard strokes. Litigants, lawyers, financial regulators and the courts have battled this issue in the context of post-judgment enforcement proceedings, where international comity and foreign interests must be balanced with the rights of creditors to collect their final judgments.

The Separate Entity Rule

A central area of debate in this context involves the application of a common-law rule known as the separate entity rule. This rule generally provides that each international branch of a bank or financial institution is to be treated as a separate entity for injunction or judgment execution proceedings. Thus, even when a bank-garnishee with a branch in the jurisdiction where an action is pending is subject to personal jurisdiction, the bank's other branches are to be treated as separate entities for collection purposes, including pre-judgment attachments, post-judgment freezes, garnishments and turnover orders. In practice, the separate entity rule typically requires a creditor to track down and serve each and every bank branch in the jurisdiction where a debtor might be hiding assets and to successfully freeze (or enjoin) those assets before they are transferred or withdrawn by the debtor. Naturally, judgment-creditors looking to collect from international judgment-debtors struggle to find ways to avoid the rule's application.

Short-Lived Breakthrough for Creditors in NY

In 2009, New York's highest court entered its decision in Koehler v. Bank of Bermuda Ltd , 911 N.E.2d 825 (N.Y. 2009), which seemingly turned the tides in favor of creditors seeking to garnish extra-territorial bank accounts. Specifically, the Koehler court held that a creditor could seek the turnover of stock certificates located outside the United States if the court had personal jurisdiction over the garnishee bank. The decision spawned a frenzy by judgment creditors viewing New York as a potential haven for collecting assets deposited worldwide with international banks with branches in that state.

However, before the creditor-celebration reached its fevered peak, the same court changed course in 2014 when it precluded a similarly-situated creditor from seizing international assets in the same manner. In Motorola Credit Corp. v. Standard Chartered Bank , 21 N.E.3d 223 (N.Y. 2014), a divided court held that the separate entity doctrine was “a firmly established principle of New York law” and relied on various policy reasons supporting adoption of the doctrine, including that “international banks have considered the doctrine's benefits when deciding to open branches in New York,” and that the doctrine “promotes international comity and serves to avoid conflicts among competing legal systems.” Ultimately, the majority concluded “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.”

In sharp contrast, the dissent in Standard Chartered Bank described the separate entity rule as “outmoded” and “a step in the wrong direction.” The dissent likewise opined that “use of the separate entity rule to address potential comity issues is akin to using a cannon to kill a fly,” and that a bank's concerns about double-liability (between responding to a United States court order and respecting a foreign country's blocking statutes and banking privacy laws) and other potentially conflicting exposure could be addressed on a case-by-case basis. According to the dissent, the foreign bank simply “ha[d] aided its fugitive customers by erecting a monumental roadblock to [the judgment creditor]'s enforcement of a staggering judgment” of more than $3 billion dollars.

Later, the federal courts began to spar over the same issues. In late 2014, the federal court of appeals (in New York) relied on the majority's decision in the Standard Chartered Bank state court action, and held that the separate entity rule precludes a court from ordering a garnishee bank's New York branch from freezing assets held in the bank's foreign branches. Motorola Credit Corp. v. Standard Chartered Bank , 771 F.3d 160, 160-61 (2d Cir. 2014). Nevertheless, the following month, a New York federal district court in a separate case involving Motorola Credit Corp., Motorola Credit Corp. v. Uzan , 73 F. Supp. 3d 397 (S.D.N.Y. 2014), narrowed the implication of the rule by compelling New York branches of banks in France, Jordan and the United Arab Emirates to comply with a judgment-creditor's requests for information and disclose information pertaining to the judgment-debtor's foreign bank accounts during post-judgment discovery proceedings (as opposed to collection proceedings). The net result of these decisions is that the final word on the separate entity rule (in New York and elsewhere) has yet to be written.

Across Jurisdictions

The debate over the separate entity rule is not limited to the courtrooms of New York, and courts across the United States have reached differing conclusions on the rule. For example, courts in Florida, Hawaii, Michigan and Illinois have shunned application of the separate entity rule. On the other hand, just last year, an appellate state court in Florida implicitly adopted the separate entity rule (and thus set up a potential conflict within Florida on this issue) and held that a trial court lacks jurisdiction to compel the turnover of property (in that case, stock certificates) located outside the state.

At bottom, the recent case law discussing the separate entity rule has provided creditors with new tools and strategies to chase, locate and even seize a debtor's foreign assets.

At the same time, the case law has left open important legal questions, including:

• the applicability of the separate entity rule to bank branches located outside of the jurisdiction of the judgment but within the United States and its territories;
• the extent that the corporate relationship between a bank and its affiliates distinguishes the rule's application; and
• the degree to which a banking branch or affiliate conducts business within a jurisdiction for jurisdictional purposes.

The analysis, of course, is subject to forum-specific considerations, as the policy interests underlying the separate entity rule as applied in New York City might differ from other important banking cities in the United States, such as Miami, Chicago, Dallas or San Francisco. Those differences, as well as the different laws in those respective jurisdictions, can lead to strategies before, during and after litigation that might favor creditors' enforcement efforts or, conversely, debtors' asset-protection efforts. Whether a creditor is attempting to find and/or seize foreign assets or a debtor is attempting to protect its assets, the custom analyses across jurisdictions underscore the importance of the specific factual circumstances at issue measured against the applicable authority where the dispute is centered.

Forum Selection

Recent case law regarding the use of U.S. financial institutions to seize foreign assets also underscores the re-emergence of jurisdictions with important international commerce and banking ties ' such as Miami, FL ' as potential gateways for global dispute resolution, including international arbitrations.

In 2010, for example, the Florida Legislature enacted the Florida International Commercial Arbitration Act, ” 684.0001-684.0049, Fla. Stat. (2015), which is modeled after (and effectively adopts) the United Nations Commission on International Trade Law (UNCITRAL) Model Arbitration Act. This Act has resulted in Miami fast-becoming a leading forum for resolving international commercial disputes. This is because the Act is amongst the most arbitration-friendly in the nation and Florida courts are inclined to not only compel the arbitration process but quickly confirm the award. Also, in Miami, there is the availability of qualified multi-lingual, multi-cultural arbitrators, and the city enjoys comparatively lower costs than other major worldwide banking cities like New York, Paris or London. Of course, Miami has a central geographic nexus to the international community and is easily reached from South America, Europe and Asia.

Conclusion

This discussion regarding the separate entity rule vis-'-vis debt-collection underscores that the viability of a company's trans-jurisdictional transactions often depends on careful planning before entering into the deal or the litigation. This includes agreeing upon the forum for resolving disputes, the forum where awards may be confirmed or “domesticated,” the currency to pay the judgment, and the procedure to execute on the judgment. Through this advanced planning, one may attain a modicum of predictability in a world of uncertainty.

Please look for the next two parts in this three-part series. In Part Two, we will focus in greater detail on the information-gathering phase, when disputes arise either pre-suit, in-suit or post-suit and foreign blocking statutes hinder a party's access to discovery of documents and information for use in litigation and otherwise. Part Three, the last installment, will focus on the contracting phase ' the “deal” ' at which point the parties are able to establish a dispute resolution process that incorporates predictability and accountability directly into the terms of the agreement.

Allan A. Joseph and Stephen H. Wagner are attorneys with Fuerst Ittleman David & Joseph, PL. They gratefully acknowledge the contribution of Francis Massabki in the preparation of this article.