On February 22, 2016, the U.S. District Court for the Southern District of New York found that New York “Separate Entity” Rule bars enforcement of an international award against a bank’s local branch if this entity is a garnishee, not if the bank itself is a debtor. Crescendo Maritime Co. v. Bank of Communications Co. Ltd.
Background. Petitioner Crescendo Maritime Co. (“Crescendo”) – a special purpose vehicle incorporated in the Republic of the Marshall Islands, where it maintains its principal place of business – entered into a shipbuilding contract for the construction of a vessel. After the Sellers’ cancellation of the contract, petitioner demanded reimbursement from Bank of Communications Co. Ltd. (“BOCOM”), a Chinese bank as guarantor. BOCOM maintains 224 branches in Mainland China and 13 branches outside of China, including one in Manhattan, where it maintains approximately $4.8 billion in assets.
The London Arbitral Tribunal in three of the 4 awards that he issued in favor of Crescendo, ordered that – in the event the Sellers failed to make repayment – BOCOM was required to pay Crescendo $18.6 million under the Refund Guarantees plus costs and interest. Because neither the Sellers nor BOCOM made payment, Crescendo filed a petition to enforce the arbitration awards in New York.
BOCOM opposed the petition on several grounds, among which lack of personal jurisdiction, forum non conveniens, and “Separate Entity” rule.[1]
Under this latter perspective, the Court rejected BOCOM’s argument that jurisdiction would be precluded under New York “Separate Entity” rule.
Under the “Separate Entity Rule” each branch of a bank is a separate entity. Therefore – even “when a bank garnishee with a New York branch is subject to personal jurisdiction, its other branches are to be treated as separate entities for certain purposes”, including pre-judgment attachments and post-judgment restraining notices and turnover orders. However, the Court highlighted how the “separate entity rule” only applies when the bank is acting as a garnishee, i.e., “where the bank holds assets on behalf of a customer, and a creditor of the customer seeks to attach those assets”. Because BOCOM itself is a party liable under the arbitration awards, and Crescendo seeks to recover against BOCOM’s own corporate assets, the “separate entity rule” is inapplicable.
Crescendo Maritime Co. v. Bank of Communications Co. Ltd., is available here
Related material on Separate Entity Rule is available at International bank compelled to provide information concerning account holders regardless of the location of their accounts
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[1] On the jurisdiction perspective, the court held that it that quasi in rem jurisdiction because “petitioner seeks to recover on a judgment already adjudicated in a forum with personal jurisdiction over the respondent”. The court also refused to dismiss on forum non conveniens holding that while China was technically an adequate alternative forum, it was not “unreasonable to infer that BOCOM’s preference for China as an alternative forum is motivated by tactical reason rather than genuine concerns of convenience.” The District Court also rejected BOCOM’s argument that, because the awards were issued against BOCOM’s branch in Qingdao, China, and not its New York branch, BOCOM’s New York assets could not be used to satisfy the awards. The Court noted that BOCOM’s New York and Qingdao branches were the same legal identity.
Originally published on Crystal & Giannoni-Crystal on September 2016