Safe Haven: How A Recent United States Supreme Court Decision Stands To Protect Foreign Banks From Their Depositors’ Creditors

By Charles H. Camp and Theresa B. Bowman

The United States Supreme Court in the pre-judgment case of Daimler AG v. Bauman, 134 S. Ct. 746 (2014) begs the question as to whether the United States – not just New York – is to continue to offer the kind of creditor protection that allows domestic investment to flourish, or to become a “haven” for foreign banks seeking to “evade the consequences of valid judgments against their depositors.”

New York has long been known as one of the great financial capitals of the World. New York’s sterling reputation as a centre for international markets and business is premised, in part, upon a tradition of extending vigorous protections against schemes intended to defraud creditors. Robust creditor protection in New York has enabled investors and other market participants to do business in New York with greater confidence. Last year, however, the United States Supreme Court in the pre-judgment case of Daimler AG v. Bauman, 134 S. Ct. 746 (2014) made explicit a basic change to the general jurisdiction rules United States courts must follow. Since the Supreme Court’s decision, foreign banking institutions have sought to use Daimler, with limited success, to roll back creditor protections.

In light of the Supreme Court’s Daimler decision, the question, as recently phrased by a United States District Court Judge in New York, is whether the United States – not just New York – is to continue to offer the kind of creditor protection that allows domestic investment to flourish, or to become a “haven” for foreign banks seeking to “evade the consequences of valid judgments against their depositors.” Vera v. Republic of Cuba, 2015 U.S. Dist. LEXIS 32846 at *10 (S.D.N.Y. Sep. 10, 2014).

This article examines the impact the Daimler decision has had on one of New York’s most important legal traditions.

New York courts’ application of the United States Supreme Court’s decision in United States v. First National City Bank, 379 U.S. 378 (1965) provides an excellent example of the strident creditor protections New York’s legislature and courts have maintained for decades. Years ago, the Supreme Court held in First National City Bank that, “[o]nce personal jurisdiction of a party is obtained, the District Court has authority to order it to ‘freeze’ property under its control, whether the property be within or without the United States.” 379 U.S. at 384.

While First National City Bank involved the United States’ Internal Revenue Service seeking to collect taxes by freezing money held outside of the United States, the First National City Bank decision served as the basis for private litigants seeking turnover orders against foreign banks operating through branches in New York, requiring the turnover of judgment debtor deposits held by those banks outside the United States.

With careful avoidance of the so-called “separate entity rule” under which each branch of a bank is treated by New York-based courts as a separate entity rather than as part of the bank as a whole (meaning that only deposits held within the branch served with a freeze or turnover order could be frozen or seized), this strategy was repeatedly used with great success against foreign debtors with deposits with foreign banks maintaining New York branches. All that was required to avoid the “separate entity rule” was to serve the home or main office of the foreign bank, rather than the New York branch of the foreign bank. And because the foreign bank was “doing business” in New York through its New York branch,1 the separate entity rule, applicable only to bank branches, was of no protection to the foreign judgment debtor.

A good example of how this successful strategy operated to protect creditors is the case of Mones v. National Bank of Kuwait, 2004 U.S. Dist. LEXIS 4984 (S.D.N.Y. 2004) in which Mr. Mones was able to recover against dozens of Kuwaiti judgment debtors having funds on deposit at the headquarters of the National Bank of Kuwait – one of hundreds of foreign banks that maintain branches in New York. In that case, the New York federal judge stated:

Petitioner [Mr. Mones] . . . served the main headquarters and not the New York branch. The Kuwait headquarters holds the accounts of the judgment debtors. The separate entity rule is inapplicable where, as here, the judgment creditor seeks to obtain funds of the debtor held by the branch of the bank upon which service has been made.

Importantly, in the Mones case, as well as in many other cases, maintaining a branch in New York was considered “doing business” sufficient to give a New York court general jurisdiction over the foreign bank as a whole sufficient to authorise the court to freeze or order the turnover of deposits “under its control, whether the property be within or without the United States.” United States v. First National City Bank, 379 U.S. at 384.


Supreme court, New York


Daimler, however, has forced courts to reexamine the very definition of general personal jurisdiction in the United States and, by extension, mechanisms of creditor protection if they are dependent upon that definition. Under Daimler, in order for a court to assert general jurisdiction over an out-of-state or foreign corporation, the corporation’s “affiliates with the States are so ‘continuous and systematic’ as to render [it] essentially at home in the forum State.” Id. at 761. And in order to be “at home in the forum State,” it must have been incorporated or maintain its principal place of business there, id. at 760. In short, Daimler explicitly imposes a much higher standard for a court to obtain general jurisdiction than the previously applicable “doing business” standard easily satisfied when a foreign bank maintains a branch office in the State.

Importantly, Daimler was a case involving personal jurisdiction over sister subsidiaries in pre-judgment proceedings. Although Daimler AG v. Bauman was a pre-judgment case, foreign banks with branches in New York have already begun to assert, with only limited success, that Daimler also should apply to post-judgment enforcement proceedings. They argue that New York courts cannot properly obtain jurisdiction over a foreign bank unless it is either incorporated or maintains its principal place of business in New York. This standard would be difficult to apply to a “foreign bank” operating in New York through a branch.

In critically analysing that argument, many New York courts have responded by limiting the areas of post-judgment proceedings for which issues of personal jurisdiction are even relevant.

One federal court in New York recently held that Daimler did not limit the ability of New York creditors to serve discovery on foreign banks regarding a debtor’s assets because such a proceeding did not implicate the question of where a corporation may be sued. Notably, the court took the opportunity to strongly condemn erosion of creditor protections in the name of Daimler, observing:

Were Daimler to be read the way that [the foreign bank] argues, the United States would become a haven for banks seeking to evade the consequences of valid judgments against their depositors.

Vera, 2015 U.S. Dist. LEXIS 32846 at *10.

Similarly, some New York courts have made clear that it is not necessary for a court to have jurisdiction over a foreign bank in order to freeze judgment debtor assets held by that bank as long as the court has jurisdiction over the judgment debtor itself. For example, in reliance upon the First Nat’l City Bank decision discussed above, the United States Court of Appeals for the Second Circuit (in New York), recently rejected Bank of China’s argument that personal jurisdiction over the Bank was required for the district court to restrain a defendant’s assets. Citing First Nat’l City Bank, the court held that “personal jurisdiction over the defendants, not the Bank, is all that was needed for the district court to restrain the defendants’ assets pending trial.” Gucci Am. v. Bank of China, 768 F.3d 122, 129 (2d Cir. 2014).

Nevertheless, based upon Daimler, the Second Circuit held that while the court’s authority to issue an injunction upon a foreign bank did not implicate issues of personal jurisdiction, “a district court can enforce an injunction against a nonparty such as [Bank of China] only if it has personal jurisdiction over that nonparty.” Id. at 134. Because the Bank of China was neither incorporated in, nor maintained its principal office in New York, factors which Daimler suggests are crucial to general jurisdiction, the district court did not have general personal jurisdiction over the Bank of China sufficient to compel its compliance with the injunction to restrain the Defendants’ assets. Id. at 134-135.

In response, creditors now argue that even where personal jurisdiction is implicated by a post-judgment proceeding, a foreign bank consents to general jurisdiction in New York when it registers to open a branch in New York. Creditors point to New York Banking Law § 200, which states that foreign banks registering in New York must appoint appropriate representatives “upon whom all process in any action or proceeding against it on a cause of action arising out of a transaction with its New York agency or agencies or branch or branches may be served.” Creditors argue that the provision establishes that foreign banks consent to general personal jurisdiction, excepting them from the heightened standard required by Daimler to find general personal jurisdiction.

New York Courts’ reaction to this reading of New York Banking Law § 200 has been strikingly mixed. One New York federal court rejected this interpretation, observing that banks registering under the statute consent only to specific personal jurisdiction.2 7 W. 57th St. Realty Co., LLC v. CitiGroup, Inc., 2015 U.S. Dist. LEXIS 44031 at *39-40 (S.D.N.Y. March 15, 2015). In that case, the Court held that the “plain language of this provision limits any consent to personal jurisdiction by registered banks to specific personal jurisdiction,” id., but not to general jurisdiction.

However, a different judge in the same New York federal court reached the opposite result two days later, finding that New York Banking Law § 200 did provide a grant of jurisdiction, and that, as discussed above, Daimler could not be applied to bar post-judgment discovery. Vera, 2015 U.S. Dist. LEXIS 32846 at *24-25. Instead of distinguishing between grants of general and specific jurisdiction, the Vera opinion viewed the New York Banking Law § 200 as an expression of basic fairness and reciprocity. The court explained:

The state of New York in general, and New York City in particular, is a leading world financial centre. In order to benefit from the advantages of transacting business in this forum, a foreign bank must register with and [comply with New York Banking Law § 200].

The Second Circuit recognised that the privileges and benefits associated with a foreign bank operating a branch in New York give rise to commensurate, reciprocal obligations. Foreign corporations which do business in New York are bound by the laws of both the state of New York and the United States, and are bound by the same judicial constraints as domestic corporations.

Under New York Banking Law, foreign banks operating local branches in New York can both sue and be sued.

Id. (internal citations omitted).

The New York legislature is considering legislation, New York Senate Bill S4846-2015, which would resolve this consent debate in favor of creditors. The Bill’s preamble provides that “a foreign corporation’s application for authority to do business in this state constitutes consent to jurisdiction of the courts of this state.”

The idea that New York legislation could require foreign corporations to essentially consent to general jurisdiction in New York is controversial. Critics believe the legislation is “bad policy” as it would contradict Daimler. Lanier Saperstein, et al., New York State Legislature Seeks to Overturn ‘Daimler,’ N.Y. Law J., May 20, 2015.

In turn, supporters of the Bill are quick to point out that the Daimler opinion itself recognises states’ authority to define jurisdictional limits, noting that “[f]ederal courts ordinarily follow state law in determining the bounds of their jurisdiction over persons.” 134 S. Ct. at 753. Likewise, the Supreme Court makes clear that Daimler only applies where the entity has not consented to suit in the forum. Id. at 755-56.

It remains to be seen whether New York can constitutionally legislate the bounds of general personal jurisdictional in the wake of the Daimler decision. If the legislation passes, the pre-Daimler protections extended to creditors in New York will receive an unambiguous mandate. In the meantime, New York courts will undoubtedly continue to balance Daimler with a desire to prevent New York from becoming “a haven for banks seeking to evade the consequences of valid judgments against their depositors.” The impact Daimler has on creditor protection mechanisms in New York will have worldwide implications for businesses within and without the United States.

About the Authors
charles-campCharles Camp teaches international negotiations at the George Washington University Law School and is an international lawyer with over thirty years experience representing foreign and domestic clients in international litigation, arbitration, negotiation, and international debt recovery. In 2001, Mr. Camp opened the Law Offices of Charles H. Camp, P.C. to focus on effective, personalised representation in complex, international matters.
theresa-HeadshotTheresa Bowman is an associate at the Law Offices of Charles H. Camp, P.C., practicing in the areas of international commercial disputes and arbitration. Before her current post, Ms. Bowman, a graduate of the George Washington University Law School and President of its Student Bar Association, completed a post-graduate fellowship as a judicial law clerk for the Honorable Reggie B. Walton, District Court Judge for the District of Columbia.

1. Prior to Daimler AG v. Bauman, 134 S. Ct. 746 (2014), discussed below, it was settled law that “a foreign bank with a branch in New York is ‘doing business’ in New York for purposes of personal jurisdiction.” Dietrich v. Bauer, 2000 U.S. Dist. LEXIS 11729 at *12, n. 4 (S.D.N.Y.).
2. Specific personal jurisdiction is the legal doctrine that a state has jurisdiction over a defendant where the claim arises from the defendants’ activities in the state itself.