Motorola Credit Corporation and Standard Chartered Bank: Global banking vs New York law
New York’s highest court has delivered a boost for the global banking model but the international legal architecture remains a minefield.
Dissatisfaction with the US’s central role in the global monetary system has ignited policymakers’ ire from Paris to Buenos Aires over the past year. In July 2014, France and Germany lashed out at the large fines US regulators imposed on European lenders that fell foul of US sanctions on so-called rogue states but which broke no domestic laws in Europe. Also in July, the US Supreme Court’s ruling on Argentina’s default highlighted the US’s legal reach over sovereign-debt norms. An axiom of global finance – the US’s control of the rules, from foreign banks’ dollar-clearing to New York-listed debt securities – has been made painfully clear over the past year.
Lawyers and bankers, therefore, breathed a sigh of relief at the end of October in a scarcely reported, but profoundly important, ruling by a New York court in a case between Motorola Credit Corporation and Standard Chartered Bank. The Court of Appeals affirmed the “separate entity rule” in a five to two opinion that stated New York common law prevents a court from freezing the assets of a civil judgment debtor if held in foreign bank accounts. The case related to plaintiff Motorola’s attempts to enforce a $3.1 billion judgment against the Turkish Uzan family for its fraudulent use of a loan by serving a restraining order on the New York branch of Standard Chartered, despite the assets taking the form of deposits in its UAE branch. Standard Chartered duly froze Uzan’s UAE deposits but the local central bank intervened and declined to recognize the restraining order served on the New York branch. Standard Chartered then claimed the New York district-court notice to seize Uzans’ assets violated UAE law, subjected the bank to double liability, and undermined the “separate entity” principle for global banking.
The October ruling is a dramatic game-changer. The highest court in New York, for the first time, affirmed a century-old principle that banks’ offshore branches are distinct entities when enforcing asset seizures and beyond the reach of creditors for the purposes of judgment enforcement. This undoubtedly reduces one big challenge of global banking: double liability. New York should not be viewed as a haven for enforcing global asset recovery, easing political tensions. What’s more, it eases banks’ due-diligence costs when it comes to taking action against the malfeasance of its global customers, even as the dissenting opinion in the Motorola versus Standard Chartered case argued new technologies have eased this process.
The ruling underscores the legal challenges awaiting legislators, regulators and bankers as the G20 agrees plans to resolve cross-border banks. Global banks could still be subject to contradictory directives of multiple sovereign nations during their own bankruptcy or recapitalization proceedings, unless and until courts practise reciprocity. This, in legal parlance, is comity, the principle that one jurisdiction will extend certain courtesies to other nation’s by recognizing the precedent or validity of another’s laws.
For example, recognition of resolution proceedings are needed in contracts governing wholesale credit, Isda derivative-master agreements, to all non-EU liabilities of EU banks. But respect for legislatively enacted statutes or proceedings in one jurisdiction is by no means guaranteed in another, and is rife with subjective opinion.