On September 16, 2014, the New York Court of Appeals heard oral argument on a certified question from the Second Circuit in Motorola Credit Corp. v. Standard Chartered Bank, an important case concerning the application of New York’s “separate entity rule” to foreign banks that maintain a branch in New York.

When someone obtains a judgment in New York, he may enforce that judgment by serving a restraining notice on a bank that holds the judgment debtor’s assets. Once the bank receives that notice, it may not distribute the funds to any person other than the sheriff. The judgment creditor may also sue for a court order requiring the bank to turn over the judgment debtors’ assets.

Historically, New York courts have treated branch offices of foreign banks as separate entities for purposes of these enforcement provisions. That is, if a judgment debtor holds an account with a foreign bank, a judgment creditor may not restrain that account or obtain a court order requiring the assets to be turned over merely because the bank has a branch office in New York (the rule is different if the foreign bank has a New York subsidiary). This rule protects such banks against the potential double liability that arises if the foreign jurisdiction does not discharge the bank’s liability to the judgment debtor as a result of the New York proceedings. In addition, payment of the debtor’s assets to a judgment creditor in New York may violate local banking laws in the foreign jurisdiction.

The Standard Chartered dispute has its origins in Motorola’s multi-billion dollar judgment against the Uzan family, the owners of a Turkish wireless carrier that failed to repay a loan from Motorola. To execute on the judgment, Motorola served a restraining notice on the New York branch of Standard Chartered to freeze Uzan accounts in overseas branches of Standard Chartered. Foreign regulators objected, and a New York federal district judge held that the separate entity rule barred the restraint. On appeal, the Second Circuit referred the following question of state law to the New York Court of Appeals: “whether the separate entity rule precludes a judgment creditor from ordering a garnishee bank operating branches in New York to restrain a debtor’s assets held in foreign branches of the bank.”

During oral argument, Motorola maintained that the separate entity rule was unfair to judgment creditors and not codified in New York’s judgment enforcement law, Article 52 of the New York Civil Practice Law and Rules. Motorola argued that as long as the bank had any kind of physical presence in New York, it was obligated to comply with Article 52.

Standard Chartered argued that Article 52 was not meant to have extraterritorial effect. that the separate entity rule had been part of the common law long before Article 52 was enacted, and that the article did not reject its operation. It argued that foreign bank branches should not be exposed to double-liability and penalties under foreign anti-turnover laws. The Securities Industry and Financial Markets Association’s amicus brief argued that turning a New York bank branch into a “portal” for global judgment enforcement could diminish New York’s attractiveness as a financial center and overburden the court system in New York with enforcement actions involving foreign assets.

The New York Court of Appeals’ decision is likely to have a significant impact. A decision in Motorola’s favor could ease judgment creditors’ path to collection from foreign judgment debtors while increasing foreign banks’ potential exposure to liability. It could also spawn a deluge of restraining notices, including from creditors who transfer judgments from other jurisdictions to New York just for this reason. On the other hand, a decision in Standard Chartered’s favor would close the door to extraterritorial enforcement of judgments through the New York courts, and push litigants to seek recognition of judgments in the jurisdictions where assets are located. By limiting the reach of New York’s judgment enforcement laws, such a decision could provide certainty to foreign financial institutions that having a branch in New York does not expose them to conflicting instructions from courts, regulators and government authorities around the world.