Case of the Day: Samsun Logix Corp. v. Bank of China

Our case of the day, Samsun Logix Corp. v. Bank of China (S.D.N.Y. 2010), involves the question of a district court’s removal jurisdiction over a state court action to garnish the bank account of the losing party in a foreign arbitration after the district court granted a motion to recognize and enforce the award. The court ultimately remanded the case on the grounds that the FAA did not provide a basis for removal to the federal court.  In addition to reviewing the case, I also consider whether the winning party would have been better off seeking garnishment in the action for recognition and enforcement rather than bringing a new state court action against the banks.

Samsun was a South Korean shipping company in bankruptcy proceedings. It obtained an award from a London arbitral tribunal against three Chinese companies, Dalian Dong Zhan Group Co., Beitai Iron & Steel Group Importing & Exporting Co., and Hong Kong Dongzhan Logistics Ltd., for breach of a maritime contract. In a previous decision, the S.D.N.Y. granted Samsun’s motion for recognition of the award. Samsun then registered the earlier decision with the New York state courts, which had the effect, under New York law, of making the federal court’s judgment a New York state judgment.

Samsun then filed a petition in the state Supreme Court seeking to require the Bank of China, Standard Chartered, and other banks to turn over funds they were holding for the judgment debtors. The Bank of China filed a notice of removal, predicating federal jurisdiction on § 4(b) of the International Banking Act, 12 U.S.C. § 3102(b), and the Edge Act, 12 U.S.C. § 632. I don’t consider the merits of this theory here, beyond noting that the Court ultimately disagreed with the Bank of China’s theory of removal. Standard Chartered then filed its own notice of removal, adding a new theory of jurisdiction based on Section 205 of the FAA. Samsun moved to remand the case to the state Supreme Court.

The court first considered jurisdiction under § 205, which, it noted, “raises a difficult and novel question.” The statute provides:

Where the subject matter of an action or proceeding pending in a State court relates to an arbitration agreement or award falling under the Convention, the defendant or the defendants may, at any time before the trial thereof, remove such action or proceeding to the district court of the United States for the district and division embracing the place where the action or proceeding is pending.

The banks argued that the claim against them “related to” the award because Samsun was seeking to satisfy a judgment recognizing and enforcing the award, but the court disagreed. Another judge of the S.D.N.Y. had previously adopted a broad construction of § 205, holding that it created removal jurisdiction over motions to vacate a foreign arbitral award (I discussed this point in my post on the Ingaseosas v. Aconcagua case, where I contrasted the broad removal provisions of § 205 with the narrower original jurisdiction provisions of § 203, which, read together, suggest that a district court has jurisdiction over a motion to vacate if it is first filed in the state court and then removed, but not if it is filed in the federal court in the first instance). Various other cases, including Beiser v. Weyler, 284 F.3d 665 (5th Cir. 2002), had also construed the statute rather broadly. But  the Court distinguished the prior cases reading the statute broadly on the grounds that they all “arose before arbitration had been completed.” Here, there was no way the arbitration agreement could “conceivably affect the outcome of the plaintiff’s case”–the test applied in Beiser–because the only possible defenses to the action were arguments about the garnishment procedure itself, e.g., whether service on a branch bank was sufficient, and those arguments had nothing to do with the arbitration. In short, “[t]he incantation of the word ‘arbitration’ somewhere in the record of a case does not convey federal jurisdiction.”

The court’s reasoning seems sound. I do want to explore one procedural and jurisdictional wrinkle, which is whether Samsun could have saved itself some trouble by seeking to require the banks to pay to Samsun money they held on account for the judgment debtors in the federal court, rather than filing a new action in the state courts.

Rule 69(a)(1) provides:

The procedure on execution–and in proceedings supplementary to and in aid of judgment or execution–must accord with the procedure of the state where the court is located, but a federal statute governs to the extent it applies.

Section 5225(b) of the New York Civil Practice Law and Rules provides:

Upon a special proceeding, commenced by the judgment creditor, against a person in possession or custody of money or other personal property in which the judgment debtor has an interest, or against a person who is a transferee of money or other personal property from the judgment debtor, where it is shown that the judgment debtor is entitled to the possession of such property or that the judgment creditor’s rights to the property are superior to those of the transferee, the court shall require such person to pay the money.

Of course, the rule does not create jurisdiction. There was no diversity jurisdiction in Samsun’s case, because both Samsun and the banks were aliens. There likely would also be no jurisdiction under § 203 of the FAA, because the turn-over proceeding does not “fall[] under the [New York] Convention.” However, it is likely that the court would have found ancillary jurisdiction. The key case is Peacock v. Thomas, 516 U.S. 349 (1996). There, the court found that there was no ancillary jurisdiction over a post-judgment action to satisfy a judgment by bringing a claim against a new party that was not party to the underlying case and could not have been liable for the judgment there. But in Aaron v. Mattikow, 225 F.R.D. 407 (E.D.N.Y. 2004), the court found that it had ancillary jurisdiction over a turn-over action under § 5225(b), noting that Peacock had drawn a distinction between true proceedings to enforce a judgment (such as turn-over actions) and new substantive claims such as alter ego or veil-piercing claims.

Thus maybe there was a simpler way for Samsun to proceed–in the federal court. There might still be issues of personal jurisdiction or the court’s power to order a bank with a branch office in New York to bring assets into New York from abroad. But those issues would be the same whether in state or federal court. And Samsun could have avoided the delay inherent in removal and remand.

About Ted Folkman

Ted Folkman is a shareholder with Murphy & King, a Boston law firm, where he has a complex business litigation practice. He is the author of International Judicial Assistance (MCLE 2d ed. 2016), a nuts-and-bolts guide to international judicial assistance issues, and of the chapter on service of process in the ABA's forthcoming treatise on International Aspects of US Litigation, and he is the publisher of Letters Blogatory, the Web's first blog devoted to international judicial assistance, which the ABA recognized as one of the best 100 legal blogs in 2012, 2014, and 2015.

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