Complex Commercial Litigation Update: New York’s Separate Entity Rule and the Reemergence of Florida as a Potential Gateway for Judgment Creditors to Seize Debtors’ Foreign Assets in Enforcement and Collection Proceedings

Jan 13, 2015   

January 13th, 2015

All too often a judgment-creditor hits a roadblock when a judgment-debtor attempts to evade enforcement of a money judgment by shielding the debtor’s assets located outside of the jurisdiction where the judgment was obtained, whether in other parts of the United States and/or throughout the world. The creditor then must chase the debtor’s foreign assets around the globe, where blocking statutes and bank secrecy regimes in other countries often significantly hinder, if not halt, the chase.

International banking cities in the United States with foreign bank branches have struggled with this issue for years, especially given recent globalization and advances in centralized operational technology, which now allow financial institutions to communicate with their branches and affiliates in a matter of seconds or a few keystrokes.

Litigants, lawyers, financial regulators and the courts likewise have struggled with 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 upon their final judgments.

Several legal decisions recently emanating out of New York have clarified various important issues in the matter, making the creditor’s chase for foreign assets more difficult in certain respects but easier in others. Specifically, for nearly a century, the courts in New York employed a common law rule—known as the separate entity rule—providing that, even when a bank-garnishee with a New York branch is subject to personal jurisdiction, the bank’s other branches are to be treated as separate entities for certain purposes, including pre-judgment attachments and post-judgment freezes and turnover orders. The separate entity rule thus required a creditor to track down and serve each and every bank branch where a debtor might be hiding assets and to successfully freeze (or enjoin) those assets before they were transferred or withdrawn by the debtor.

In 2009, the tides seemingly turned in favor of the creditors, when the New York Court of Appeals ruled that a creditor could reach beyond New York’s borders to seize assets held elsewhere. Specifically, in Koehler v. Bank of Bermuda, the highest court in New York 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 Koehler decision spawned a frenzy by judgment creditors viewing New York as a potential haven for collecting assets located worldwide from banks with branches in that state.

Years later in 2013, Motorola (the global telecommunications giant), after having obtained a judgment of more than $3 billion against various Turkish companies and their beneficial Turkish owners, obtained a post-judgment collection order restraining the debtors and anyone with notice of the order from transferring the debtors’ property. Motorola served the restraining order on, among other international banks with branches in the United States, the New York branch of Standard Chartered Bank (SCB), a foreign bank existing under the laws of the United Kingdom. SCB, which had no connection to the dispute between Motorola and the bank’s customers, did not locate any of the debtors’ assets at its New York branch, but, following a global search of its other branches, found $30 million worth of debtor-related assets in its branches located in the United Arab Emirates (UAE). SCB froze those assets in accordance with the restraining order, but the regulatory banking authorities in the UAE and Jordon quickly intervened and unilaterally debited the $30 million from SCB’s account with the UAE’s central bank. SCB then took the matter to court, arguing, in relevant part, that service of the restraining order on SCB’s New York branch was effective only as to assets located at that sole branch. In other words, relying on New York’s separate entity rule, the foreign bank garnishee (SCB) argued that the judgment creditor (Motorola) could not freeze the judgment debtors’ funds located in the bank’s foreign branches by merely serving its New York branch alone. In response, the creditor asserted that the separate entity rule was no longer valid law in light of Koehler.

The case identified above, Motorola Credit Corp. v. Standard Chartered Bank, garnered significant attention from the business and legal communities, including global financial and banking institutions, and was recently decided in October 2014.

Significantly, the same court that had previously allowed a judgment creditor to reach beyond the jurisdiction’s borders in Koehler prevented a creditor from doing this inStandard Chartered Bank. In a 5-2 decision, with a strong dissent, the majority expressly adopted the separate entity rule for post-judgment enforcement and collection proceedings, holding that the rule precludes a creditor from ordering a garnishee bank operating branches in New York to restrain a debtor’s assets held in foreign branches of the bank.

The majority in Standard Chartered Bank preliminarily found the separate entity rule to be “a firmly established principle of New York law.” The majority also distinguishedKoehler, noting that the rule was not expressly raised in that case; the case involved neither bank branches nor assets held in bank accounts (but stock certificates); and the foreign bank at issue there had conceded the court’s personal jurisdiction over the bank. The Standard Chartered Bank majority also relied on various policy reasons supporting adoption of the separate entity 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 deemed the separate entity rule to be “outmoded” and “a step in the wrong direction.” The dissent likewise maintained 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 US 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. The Standard Chartered Bank dissent also viewed the majority’s opinion to conflict with the same court’s holding in Koehler. 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.”

As of the writing of this article, only two reported decisions have been decided in the wake of Standard Chartered Bank’s adoption of the separate entity rule.

In Lease Finance Group, LLC v. Fiske, a New York state trial court ruled that service in Pennsylvania of a non-domesticated New York judgment upon a domestic bank with branches throughout the United States, including in Georgia and New York, does not subject the debtor’s account in Georgia to the jurisdiction of New York courts for purposes of enforcing the New York judgment. However, the court in Fiske expressly noted that Standard Chartered Bank did not define the separate entity rule’s “scope in regard to domestic branches of banks located in foreign states.”

Additionally, in Motorola Credit Corp. v. Uzan, in post-judgment discovery proceedings related to Standard Chartered Bank, a New York federal district court addressed whether a New York judgment creditor (again, Motorola, in that case), through subpoenas issued on New York offices of international banks, could obtain discovery regarding accounts held by the judgment debtors or their agents in various foreign branches of those banks, including in France, Switzerland, Jordan and the UAE. Conducting a particularized analysis of the respective interests of those foreign jurisdictions and a “full consideration of international comity” as set forth in the United State Supreme Court’s seminal decision in Societe Nationale Industrielle Aerospatiale v. United States District Court for the Southern District of Iowa, the court in Uzan ordered the New York branches of banks in France, Jordan and the UAE to comply with the subject subpoenas and discovery requests. The court otherwise quashed (denied) enforcement of the subpoenas directed to the Swiss banks, concluding that the blocking statutes and bank privacy regime in Switzerland “is not merely protective of private interests, but expressive of public interest” and that Switzerland viewed its “bank secrecy as a positive social value and benefit.”

In sum, the foregoing decisions—Standard Chartered Bank, Fiske and Uzan—have provided creditors with new tools and strategies to chase and seize a debtor’s foreign assets, including the important discovery tools endorsed in Uzan. The decisions, while adopting the separate entity rule, also have left open numerous important legal questions, including the applicability of the rule to 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, such as the foreign bank in Koehler, where the creditor was allowed to obtain foreign assets by serving a local branch over which the court had personal jurisdiction.

The analysis in this context is also subject to forum-specific considerations, as the policy interests underlying the separate entity rule as applied in New York City might differ from those in other important banking cities in the United States, such as Miami, Atlanta, Chicago, San Francisco, Boston, Philadelphia, Dallas, Los Angeles, Minneapolis and so forth. Those differences, of course, as well as the different laws in those respective jurisdictions, can lead to strategies that favor creditors’ enforcement efforts or, conversely, debtors’ asset-protection efforts.

For example, the separate entity rule is not the law in Florida, as affirmed in Tribie v. United Development Group International LLC. Notably, the court in Tribie rejected the bank’s (there, Wells Fargo’s) reliance on the separate entity rule to quash a writ of garnishment seeking discovery regarding the debtor’s assets at all of the bank’s branches, describing the rule as “a somewhat dated and seldom-cited legal doctrine.” The court thus required the bank to respond to the subject discovery by identifying, in relevant part, “whether Wells Fargo knows of other persons [or entities] indebted to [the debtor]” (emphasis added), including, presumably, the bank’s other branches holding the debtor’s assets. Similarly, in a case involving a judgment creditor’s request for an order directing a bank’s disbursement of a judgment debtor’s (there, the American Samoa Government’s) garnished funds under Hawaiian law, the court in Marisco, Ltd. v. American Samoa Government “predict[ed] that the Hawai’i Supreme Court would decline to adopt the separate entity rule” and directed the bank to disburse the debtor’s (a government entity’s) garnished funds.

Whether a creditor is attempting to seize foreign assets or a debtor is attempting to protect its assets in any jurisdiction, the individuated analyses in Tribie and Mariscounderscore the importance of the specific factual circumstances at issue and of the applicable authority where the dispute is focused and/or litigated.

The recent case law regarding financial institutions as a means of seizing foreign assets also underscores the reemergence of jurisdictions with important banking ties—such as Miami, Florida—as potential gateways for not only litigation in this area but the resolution of all types of global legal disputes, including international arbitrations. Indeed, Miami already promotes its relatively lower costs (as compared to other major banking cities, like New York, Los Angeles and San Francisco in the United States, and Paris and London abroad), multi-lingual professional force and central-location easily reachable from South America, Europe and Asia, among its unique benefits for handling international business and legal matters. Florida law regarding the separate entity rule, especially when compared to New York law as addressed in the recent cases cited in this article, now provides yet another feather in Miami’s cap as an ideal destination for litigation regarding the seizure of foreign assets, international arbitrations, the confirmation of arbitration awards and all garnishment and other collection proceedings related thereto.

The attorneys at Fuerst Ittleman David & Joseph have extensive experience in all areas of complex civil and criminal litigation, pre-litigation and arbitration, including international and domestic business disputes. The firm also provides wealth preservation and asset protection services designed to form the foundation for continued, protected wealth-creation (both domestically and offshore). Please contact us by email at contact@fidjlaw.com or telephone at 305.350.5690 with any questions.

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FDA Regulatory Update: Forecasting FDA Regulation of Laboratory Developed Tests (LDTs) in 2015

Wednesday, January 7th, 2015
2015 is proving to be a landmark year for FDA’s regulation of laboratory developed tests. As we have previously discussed (see our blog here), the U.S. Food and Drug Administration (FDA) has been expressing its intention to begin exercising regulatory authority over laboratory developed tests (LDTs) for years. In the Federal Register, FDA has defined LDTs as “a class of in vitro diagnostics that are manufactured, including being developed and validated, and offered, within a single laboratory.” Examples of these tests include genetic tests, emerging diagnostic tests, and tests for rare conditions. While FDA has claimed authority to regulate LDTs under the Food, Drug, and Cosmetics Act (FDCA), it has not drafted applicable regulations. Consequently, the primary federal regulation of laboratories and LDTs has been under the Clinical Laboratory Amendments of 1988 (“CLIA”).

While historically FDA has continued to claim authority to regulate LDTs, the agency consistently maintained the position that it would not enforce regulations regarding LDTs. FDA began departing from its “enforcement discretion” position on June 10, 2010, when it issued five Untitled Letters to companies stating that their tests did not qualify as LDTs as they were “not developed by and used in a single laboratory.” (To read the FDA’s Untitled Letters to Industry, please click here, here, here, here, and here.) In those instances, FDA determined that it would regulate those tests as medical devices and require premarket approval. In June 2010, FDA stated that increased regulation of LDTs may be necessary due to the changing nature of LDTs from “generally relatively simple, well-understood pathology tests” to tests that “are often used to assess high-risk but relatively common diseases and conditions and to inform critical treatment decisions.” (To read the full text of the Federal Register notice regarding federal oversight of LDTs, please click here.)

In 2012, the Food and Drug Administration Safety and Innovation Act (“FDASIA”) was signed into law requiring that FDA notify Congress if it intended to issue guidance on the regulation of LDTs. On July 31, 2014, in compliance with FDASIA, FDA notified Congress that it would issue two draft guidance documents pertaining to its regulation of LDTs. Shortly thereafter, FDA issued these guidance documents entitled “Framework for Regulatory Oversight of Laboratory Developed Tests (LDTs)” (hereinafter FDA’s “Framework Guidance”) and “FDA Notification and Medical Device Reporting for Laboratory Developed Tests (LDTs)” (hereinafter FDA’s “Notification Guidance”). (For the full text of FDA’s notification and the two anticipated draft guidance documents, please click here.)

FDA’s Framework Guidance adopts the same definition of LDTs that FDA proposed in 2010, “an IVD that is intended for clinical use and designed, manufactured and used within a single lab.” It also identifies three groups of LDT: (1) LDTs that are subject to full enforcement discretion, (2) LDTs that are subject to partial enforcement discretion, and (3) LDTs that are subject to complete FDA regulation. Essentially, FDA explains how it will regulate these different types of LDTs under the current framework of medical devices. For example, low-risk LDTs are classified as class I medical devices and will be subject to partial enforcement discretion. FDA has grouped LDTs that are moderate- to high-risk into tests that FDA intends to fully regulate. Moderate-risk LDTs are those classified as class II devices, which will be required to gain clearance or approval through submissions to FDA. High-risk LDTs are those with the same intended use as a cleared or approved companion diagnostic, LDTs with the same intended use as a class III device approved by FDA, and LDTs for determining safety and effectives of blood or blood products.

The anticipated Notification Guidance describes how laboratories must notify FDA if they intend to “manufacture, prepare, propagate, compound or process” an LDT. FDA also plans to exercise enforcement discretion when it comes to establishment registration and devices listing for LDTs, as long as the laboratories notify FDA that they are manufacturing an LDT within six months after the final Framework Guidance is finalized by FDA. After notification, FDA will issue a notification confirmation number to the laboratory. The Notification Guidance also goes on to explain the types of record keeping, procedures, and reporting requirements the laboratories will need to incorporate into their procedures.

While the two guidance documents place a very high burden on the developers of LDTs, it is important to note that the guidance documents are themselves neither laws nor regulations. FDA specifically states that “[g]uidance documents represent FDA’s current thinking on a topic. They do not create or confer any rights for or on any person and do not operate to bind FDA or the public. You can use an alternative approach if the approach satisfies the requirements of the applicable statutes and regulations.” However, FDA does utilize such guidance documents regularly in its oversight of industry.

Most recently, the House Energy and Commerce Committee has issued a white paper regarding its 21st Century Cure Initiative in which it requests input related to FDA’s proposed LDT regulatory framework. This white paper sets forth eleven questions related to the proposed LDT guidance documents to which the committee seeks answers. These questions relate to a range of issues including: the clarification between the practice of medicine and developing these types of tests, the delineation between what constitutes a device and what constitutes a test not subject to device regulation, how will FDA determine the risk in its “risk-based” approach, the implementation of post-market processes to reduce hurdles to patient access to tests, and separation of CLIA and FDA regulation of LDTs, among others. The Committee requested that all comments be submitted by last week, so we should have a better idea of the reaction to these comments and FDA’s proposed guidance documents in the next few weeks.

Based on this timeline, we expect 2015 to be a remarkable year for LDT regulation as FDA’s policies and regulatory framework evolves and these types of tests are subjected to heightened scrutiny. It will be interesting to see how industry responds to this development in FDA’s LDT policies. In the past, various members of industry have submitted citizen petitions urging FDA not to regulate LDTs so there will likely be a strong reaction from industry to FDA’s notice to Congress and these two draft guidance documents. Fuerst, Ittleman, David, and Joseph, PL will continue to monitor the developments in FDA’s regulation of laboratory developed tests.