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Court's decision addresses bank restraints when debtor's account is maintained outside New York state

May a creditor with a New York default judgment obtain a bank restraint by directing the restraining notice to a local branch of a bank, when the alleged debtor's account is maintained at a branch outside New York state? In a world where many banks are huge, multinational entities connected by vast computer systems, the question is extremely relevant, and yet the answer has long been unclear. A new decision by the New York County Supreme Court called Global Technology, Inc. v. Royal Bank of Canada[1] analyzes the state of the law to date, and attempts to provide some clarity.

In Royal Bank, the bank was served with a restraining notice at a branch in New York, but the account of the judgment debtor was maintained in Canada. During the period that the creditor, Global Technology, thought the account was restrained pursuant to its restraining notice, the bank actually allowed the debtor to withdraw money from his account. Global Technology therefore brought suit against Royal Bank for violating the restraining notice.

The court's analysis in the Royal Bank case centered on what is known as "the separate entity rule," which can be traced to English law and was well-established law in New York by the 1950s, and remained so through 1980. It states generally that, for the purpose of bank restraints, a branch bank in New York is treated as if it were a separate corporate entity from a branch bank outside New York. Therefore, a restraining notice served on a branch bank in New York could not reach property held by a bank located outside New York.

In 1980, a federal court case, by acknowledging the growth of computer technology and centralized banking operations, threw into question the validity of the separate entity rule. That case, Digitrex, Inc. v. Johnson[2], held that service at the main branch of Manufacturer's Hanover bank was sufficient to restrain the debtor's account outside New York. A line of federal and state cases followed that further muddied the separate entity rule waters, culminating in a 2009 case, Koehler v. Bank of Bermuda, Ltd.[3], that caused many to question whether the separate entity rule still existed at all.

In Koehler, a 4-3 majority of the Second Circuit Court of Appeals (with the minority expressing due process concerns) 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 § 5525(b), as long as the court has personal jurisdiction over the defendant. "The key to the reach of the turnover order is personal jurisdiction over a particular defendant. A turnover order merely directs a defendant, over whom the New York court has jurisdiction, to bring its own property into New York."

The Koehler decision only increased the confusion. After Koehler, some federal cases ruled that the separate entity rule had been abrogated, while two New York state cases rejected that interpretation. Other federal cases held that Koehler was distinguishable and had no impact on the separate entity rule.

In analyzing Koehler and its progeny, the Royal Bank court held that the separate entity rule could be harmonized with the modern due process framework of personal jurisdiction if the separate entity rule is construed as similar to rules governing service of process. The separate entity rule requires that service of a post-judgment restraining notice upon a bank must be made upon the bank branch where the account is maintained. Viewed as a rule for service of post-judgment enforcement process, service of a restraining notice upon a branch bank (other than the main branch) would be improper if the restraining notice sought to restrain an account that the served branch did not maintain, even if a basis for in personam jurisdiction over the bank was not in dispute.

As a matter of policy, the Royal Bank court noted that if a state court has in personam jurisdiction over a party, that jurisdiction knows no territorial limits. Yet the strictures of the due process clause forbid a state court to exercise personal jurisdiction over a party under circumstances that would offend traditional notions of fair play and substantial justice.

"Permitting a restraining notice to restrain bank accounts anywhere in the world by service upon any bank branch subject to in personam jurisdiction could work a hardship on individuals whose accounts were restrained. For example, suppose a plaintiff obtains a default judgment over a defendant in New York and the defendant, who resides in Texas and maintains a bank account in Texas, lacks minimum contacts with New York; that plaintiff's attorney then issues a restraining notice to the defendant's bank, which does business in New York, and serves it at a bank branch in New York. If the separate entity rule were abrogated, then the bank branch in New York would have to freeze the defendant's bank account in Texas. To vacate the default judgment upon which the restraining notice depends, the defendant would have no other recourse but to come to the very jurisdiction that lacked minimum contacts with the defendant. If the bank account were a joint account, or to the extent that others could have competing claims to the bank account, the restraining notice could also work a hardship upon the rights of those who are innocent, out-of-state third parties. Such hardship would cause due process concerns…."

In conclusion, the Royal Bank court declined to abrogate the separate entity rule and held that service of Global Technology's restraining notice upon Royal Bank's branch in Manhattan did not serve to restrain the judgment debtor's accounts in Canada. The answer to the question at the beginning of this article? Under Royal Bank the answer is No.

[1] 34 Misc 3d 1209(A) [Sup Ct, New York County 2012]

[2] 491 F. Supp. 66 (S.D.N.Y. 1980)

[3] 12 NY 3d 533 [Ct App 2009], aff'd 577 F.3d 497 (2d Circ. 2009).