Keywords: seprate-entity rule, discovery, Koehler, separate entity rule

The recent decision by a New York State trial court in Ayyash v. Koleilat (N.Y. Sup. Ct., N.Y. County, Index No. 151471/2012 (Coin, J.)) contains important guidance on how lower-level New York State courts are inclined to interpret the decision of New York's highest court in Koehler v. Bank of Bermuda. 

Prior to Koehler, New York State courts, and their federal counterparts, followed the "separate entity rule." Under this rule, each branch of a bank is treated as a separate entity, in no way concerned with accounts maintained by depositors in other branches or in a home office. Accordingly, serving a bank branch within New York for the purpose of attaching offshore assets, is insufficient to reach accounts outside of New York. 

Koehler held that the Bank of Bermuda could be required to bring stock certificates (belonging to a judgment debtor) from Bermuda to New York so that the stock certificates could be paid over to a judgment creditor in New York. In the wake of Koehler, some New York federal courts have departed from the "separate entity rule" and held that if a judgment creditor serves the New York branch of an international bank, the bank can be required to provide discovery and to turn-over assets belonging to a judgment debtor that have been deposited in its branches outside of New York, anywhere in the world.1 By contrast, a number of lower-level New York courts have interpreted Koehler in a manner consistent with the separate entity rule.2 Ayyash is the latest example. 

In 2005, Adnan Abu Ayyash won a judgment in a Lebanese court against Rana Abdul Rahim Koleilat for fraud related to the collapse of a Lebanese bank. Ayyash domesticated the Lebanese judgment in Maryland, and then in New York. Ayyash next sought to discover and freeze Koleilat's assets on deposit with various banks that had branches or subsidiaries in New York. It served subpoenas and restraining notices that purported to apply to "any branch or office maintained in a foreign country."

Several of the banks objected, and Justice Coin, of the state trial court in Manhattan, denied a motion to compel. Citing several post-Koehler decisions, Justice Coin held that under "the well-established separate entity rule," service on one bank branch does not affect accounts in other branches. 

She further observed that New York State courts have concluded that Koehler did not expressly address or reject the separate entity rule. The court reasoned that, while Koehler focused on a statute—CPLR Article 52, which among other things establishes rules for garnishing judgment debtors' assets that are held by third parties—the separate entity rule is judge-made. Further, "the public policy considerations underlying the separate entity rule continue to be reflected in the Legislature's version of the Uniform Commercial Code." These policies include "the intolerable burden that would otherwise be placed on banking and commerce if mere service of a writ to a New York branch could subject foreign banks to competing claims" for assets on deposit in non-US branches.  

Ayyash argued that even if the separate entity rule is still valid, it applies only to attachment and turnover of assets, and not to discovery requests. Again, Justice Coin disagreed: "[Ayyash's] information subpoenas ... are but a first step in the proceeding, with the ultimate goal of subsequent attachment and turn-over." "For the Court to start down this path, knowing that the ultimate goal is unavailable in this jurisdiction," she wrote, "would be an unproductive waste of judicial resources." This portion of the opinion, too, conflicts with some federal decisions. 

Finally, Justice Coin was sympathetic to the arguments advanced by some of the banks that responding to the information subpoenas and turnover orders would violate their home country laws. She held that a New York court "should not encroach upon another nation's sovereignty by requiring citizens to take actions within their home country that would contravene their home country's laws." Moreover, she chastised the judgment creditor for "attempting to use the New York courts as a springboard for a massive, multi-jurisdictional international exercise in supplementary proceedings, instead of simply complying with the laws of the countries in which the judgment debtor's assets are actually located." 

Ayyash is significant to non-US financial institutions with a New York presence because it illustrates the growing confusion over the scope of Koehler. This decision is just the latest in a series of New York State court decisions that rejects attempts by judgment creditors to apply Koehler in an expansive manner. As noted, these state court decisions conflict with the approach taken by some lower level New York federal courts. Absent resolution in New York's highest court, judgment creditors will continue to have strong incentives to attempt these kinds of enforcement efforts in New York and to choose federal over state court, whenever possible.

Footnotes

1. JW Oilfield Equipment, LLC v. Commerzbank AG, 764 F. Supp. 2d 587 (S.D.N.Y. 2011); Eitzen Bulk A/S v. Bank of India, 827 F. Supp. 2d 234 (S.D.N.Y. 2011).

2 Global Tech., Inc. v. Royal Bank of Canada, 2012 WL 89823 (N.Y. Sup. Ct. N.Y. Cnty. Jan. 11, 2012); Samsun Logix Corp. v. Bank of China, 2011 WL 1844061 (N.Y. Sup. Ct. N.Y. Cnty. May 12, 2011); Parbulk II AS v. Heritage Maritime SA, 935 N.Y.S.2d 829 (N.Y. Sup. Ct. N.Y. Cnty. 2011). See also Shaheen Sports, Inc. v. Asia Insurance Co., 2012 WL 919664 (S.D.N.Y. Mar. 14, 2012); Levin v. Bank of New York, 2011 WL 812032 (S.D.N.Y. Mar. 4, 2011).

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