We have a new guest-poster today, Aaron Simowitz, lecturer at Columbia Law School and previously an associate at Gibson Dunn. I have to say, it makes no sense to me to think that a judgment debtor could not be subject to the personal jurisdiction of a US court at least to the extent of the judgment debtor’s assets in the jurisdiction. Otherwise the judgment debtor can shield its non-exempt assets from execution, contrary to public policy. I think the courts have gotten themselves into a doctrinal mess.
The New York Supreme Court’s decision in Gliklad v. Bank Hapoalim B.M., No. 155195/2014 (N.Y. Sup. Ct. N.Y. Cnty. Aug. 11, 2014) (Schweitzer, J.), represents the continued march of the U.S. Supreme Court’s decision in Daimler AG v. Bauman, 134 S. Ct. 746 (2014) into post-judgment, post-award enforcement proceedings. In April, the Second Circuit vacated a $932 million judgment recognizing an arbitral award against a Turkish debtor, because the debtor was not subject to general jurisdiction in New York under the new test announced in Daimler. See Sonera Holding B.V. v. Cukurova Holding A.S., 750 F.3d 221 (2d Cir. 2014). In Bank Hapoalim, a New York court extends this reasoning to a third-party garnishee bank.
In Bank Hapoalim, Mr. Gliklad obtained a $505 million New York judgment against one Mr. Cherney. Gliklad served a restraining notice and a subpoena duces tecum on a New York branch of Bank Hapoalim. It turned out that Cherney had initiated a transfer from Cyprus, cleared through New York, to Bank Hapoalim’s central branch in Tel Aviv. Bank Hapoalim was willing to turn over documents held at its New York branches, but refused to turn over documents or funds located in Israel on the basis that it was not subject to general jurisdiction here and, in any event, was protected by the separate entity rule. The court agreed with the bank on all points.
Bank Hapoalim has three brick-and-mortar branches in New York—clearly enough to ground general jurisdiction under the old N.Y. CPLR 301 “doing business” test. In Daimler, a foreign plaintiff brought a claim against a foreign defendant for tortious foreign conduct. The plaintiff sought to invoke the adjudicative jurisdiction of the U.S. court based on the presence of defendant’s subsidiary in the U.S. The Supreme Court, however, held that U.S. courts lacked jurisdiction over the defendant because a corporate entity is only subject to general jurisdiction where it is “at home”—except in “exceptional circumstances,” that equals where it is incorporated or where it has its principal place of business. Justice Schweitzer held that the Supreme Court’s decision in Daimler decision applies, a fortiori, to enforcement proceedings against a third-party—much as the Second Circuit did for debtors in Sonera. Therefore, Bank Hapoalim, an Israeli bank, was not “at home” in New York.
The immediate effect of the Bank Hapoalim decision will be to place enormous pressure on the doctrines of specific and asset-based jurisdiction. But the doctrine of specific jurisdiction—which gives a U.S. court power over a party where its contacts are “related” to the underlying claim—is a very strange fit for third-party garnishees. Almost by definition, third-party garnishees are bystanders to the underlying claim. They just happen to be holding the debtor’s assets. How could a third-party garnishee be related to the underlying claim (in this case, the suit on the promissory note between Gliklad and Cherney)?
In one passing sentence, Justice Schweitzer suggests that Bank Hapoalim might be subject to specific jurisdiction if the debtor had initiated the transfers with the intent to avoid the judgment. That approach has the virtue of preserving the effectiveness of New York fraudulent conveyance statutes. But it is an odd statement from the perspective of specific jurisdiction. Specific jurisdiction normally requires some “purposeful availment” or “targeting” of the jurisdiction—that would require the bank to know or somehow recklessly remain ignorant that the transfers were made to avoid payment of a judgment. That seems like an unlikely and difficult showing.
The other possibility for frustrated creditors is asset-based jurisdiction, so-called in rem or quasi-in-rem jurisdiction. This allows a court to exert power over assets located within its territorial jurisdiction. But the assets here, bank accounts, are intangible—they don’t have a specific location in space. For banks, the issue may be resolved by the separate entity rule, which states that, for garnishment proceedings, each bank branch is treated as an independent corporate entity. But for any other garnishee, the location or ‘situs’ of intangible assets is a persistent mystery. I have argued that this inquiry essentially overlaps with the personal jurisdiction inquiry (you can read more in my paper here). But that means that asset-based jurisdiction may offer little help if personal jurisdiction contracts.
In all this, the only clear error in the decision appears to be Justice Schweitzer’s statement the separate entity rule bars not only garnishment, but also discovery from Bank Hapoalim’s Israeli branch. The separate entity rule—which continues to shamble about in New York, no matter how many stakes the federal courts try to drive through its heart—applies only to garnishment. At least one other New York court has made a similar error, see Ayyash v. Koleilat, 38 Misc.3d 916, 922 (N.Y. Sup. Ct. 2012), but New York courts have traditionally only applied the separate entity rule to restraint of assets, not to discovery. See, e.g., Therm-X-Chem. & Oil Corp. v. Extebank, 84 A.D.2d 787, 787, 444 N.Y.S.2d 26, 27 (1981). The court’s holding on jurisdiction, however, likely renders the error academic.
One final irony of the decision is that the separate entity rule—which provides that, for garnishment, every branch bank shall be treated as an independent entity—appears to now overlap with the doctrine of general jurisdiction—which seems to now provide that creditors must go to the bank’s central branch to get restraint of assets. The separate entity rule has been consistently criticized for relying on an antiquated conception of banking, where each bank had its own depositors and passbooks. Perhaps modern jurisdiction for enforcement is just now catching up to the 1950s.