Monday, November 14, 2011

The Territorial Scope of Garnishment upon Multinational and International Banks

The process of garnishment is intended to reach the intangible property of the judgment debtor. Accordingly, garnishment is used to attach a judgment debtor’s bank account in order to satisfy the underlying judgment. Often, however, the judgment debtor’s bank accounts were opened or are maintained at a branch of a bank located outside the jurisdiction where the underlying judgment was rendered. For example, a judgment debtor maintains bank accounts at a bank with branches in Virginia and Maryland but originally opened its accounts at a Maryland branch of the bank. If the judgment creditor obtained a judgment in a Virginia Circuit Court, where can the judgment creditor garnish the bank account?

If one subscribes to the notion that the judgment debtor’s account is physically located in Maryland (where it was opened), then it seems obvious that a garnishment summons issued by a Virginia court cannot reach the Maryland assets of the judgment debtor. Academically, this is not a serious concern as the judgment creditor could simply docket the judgment in Maryland pursuant to full faith and credit and garnish out of a Maryland court.

This problem is not merely academic when the judgment debtor maintains its bank accounts in a foreign country. Clearly, not every judgment rendered in an American Court can be domesticated into the judicial system of a foreign country. The Edge Act, 12 U.S.C. § 604, et. seq., states that a domestically chartered bank is permitted to maintain foreign branches if the accounts of those foreign branches are maintained independently and if the profits and losses of those foreign branches are reported to the domestically chartered bank at the end of each fiscal period as a separate item. This statutory scheme ostensibly creates a situation where the foreign branches of a domestic bank constitute a legally separate entity that is not subject to domestic process, except that it must report its profits and losses at the end of each fiscal period to the domestic bank.

Thus, in 1950, the New York Supreme Court of New York County held that a “warrant of attachment served upon a branch bank does not reach the assets held for, or accounts maintained by, the defendant in other branches or in the home office.” Cronan v. Schilling, 100 N.Y.S.2d 474 (Sup. Ct. N.Y.Co. 1950). This ruling has been upheld as recently as 2003 with regard to foreign held accounts:

the affected accounts are believed to be held in the banks’ foreign branches. This implicates the doctrine of New York law knows as the ‘separate entity rule,’ which in its pristine form provides that ‘each branch of a bank is treated as a separate entity … in no way concerned with accounts maintained by depositors in other branches or at a home office.

Motorola Credit Corporation v. Uzan, 288 F.Supp.2d 558 (S.D.N.Y. 2003). Given the staggering volume of international business and banking transactions that go through New York City, these two opinions carry enormous weight in the banking industry.

There is little guidance from appellate courts on this issue as it arises only in very narrow circumstances. The United States Supreme Court has held that if the bank has control over the foreign assets, then the assets held in the foreign branch are subject to execution. See, United States v. First National City Bank, 379 U.S. 378 (1965). The Second Circuit Court of Appeals has held that if a bank maintains unincorporated foreign branches operating under the same name as the domestic bank, then the foreign accounts are subject to garnishment. First National Bank of Boston v. Banco Nacional de Cuba, 658 F.2d 895 (2nd Cir. 1981). Consequently, the question is: Can a U.S. court compel a domestically chartered bank to disgorge accounts maintained in a foreign subsidiary even if such disclosure would cause the bank to violate foreign law?

The Board of Governors of the Federal Reserve System has issued a published interpretation stating that “[a] foreign branch established by a national bank is not an independent corporation and the creditors of the branch are general creditors of the parent bank.” Published Interpretations of the Board of Governors of the Federal Reserve System § 5600 (1980). The Second Circuit has also adamantly suggested that “[i]f the Bank cannot, as it were, serve two masters and comply with the lawful requirements of both the United States and of [the foreign government], perhaps it should surrender to one sovereign or the other the privileges received therefrom.” First National City Bank of New York v. I.R.S., 271 F.2d 616 (2nd Cir. 1959). The Second Circuit has also ruled that a Court can compel a Garnishee to turnover stock held by the Defendant in a foreign country so long as the court has personal jurisdiction over the Defendant. Koehler v. Bank of Bermuda, Ltd., 577 F.3d 497 (2nd Cir. 2009).

Motorola Credit Corp. v. Uzan, specifically affirmed the doctrine despite noting that the incongruity of allowing banks to “trumpet their account-holders’ ability to access their funds instantaneously anywhere in the world” yet continue to rely upon the separate entity rule. As communications advance, it seems anachronistic for courts to continue to hold that a domestic bank cannot readily determine assets held on the other side of the world.

Multi-national banks may, for a variety of reasons, continue to assert the validity of the “separate entity doctrine” in order to prevent judgment creditors from recovering the monies to which they are entitled. Future articles will discuss the relationship between banks and their customers in the collection process.

If you have a judgment to collect, contact Gross & Romanick.

Tuesday, November 8, 2011

The Role of Federal Courts in the Judgment Collection Process

Judgment Collection is a creature of state law. Rule 69(a) of the Federal Rules of Civil Procedure very clearly articulates the procedures that will apply if a judgment is collected in federal court: “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 …” It is important to note that the language of Rule 69(a) goes beyond the traditional outlines of the Erie doctrine. Rule 69(a) does more than graft state substantive law onto federal procedure; Rule 69(a) authorizes the federal courts to utilize state procedural tools to aid in the execution of judgments. This means that the federal courts are not limited to Writs of Execution as defined in Rule 69(a), but are also able to provide the full panoply of post-judgment collection proceedings, including garnishments. See, e.g., Grenada Bank v. Willey, 694 F.2d 85 (5th Cir. 1982); Skevofilax v. Quigley, 810 F.2d 378 (3rd Cir. 1987).

Although Rule 69(a) may provide the federal courts with power that is coterminous with coordinate state courts to enforce judgments, it begs the question as to why a judgment creditor would want to enforce a judgment in the federal courts. After all, it seems fairly self-evident that state courts would be better arbiters of state procedure than the federal courts. An initial analysis may conclude that the geographic scope of the federal courts would be beneficial to a judgment creditor. A federal court can, at least in theory, enter an order that has nationwide effect; conversely, a state court is geographically limited. This analysis, however facially appealing, is faulty. A federal court engaged in execution proceedings may actually be more geographically limited than a state court. A recent opinion from the Western District of Virginia held that a garnishment sued out of a federal court is only enforceable against wages earned within the territorial limits of Virginia. Memorial Hospital of Martinsville v. D’Oro, Docket No. 4:10MC00001 (July 8, 2011). The opinion further notes that the Writ of Execution is limited to property located within the territorial confines of the Western District of Virginia. Id.
If the availability of procedural tools for collection of judgments and the geographic limitations of state and federal courts are, at least, co-extensive, what then would be a compelling reason to attempt to enforce a judgment in federal court? In our practice at Gross & Romanick, P.C. in Fairfax, VA, we have identified two types of cases where it is advantageous to attempt execution in the federal courts.

The first is where the judgment debtor lives out of state and the creditor has little information regarding the assets of the judgment debtor. In a Virginia state court, the judgment creditor has the ability to issue a summons to the judgment debtor to answer interrogatories regarding the judgment debtor’s assets. Va. Code § 8.01-506. However, if the debtor resides outside of the Commonwealth, it is usually impossible to compel the debtor to return to the Commonwealth to answer interrogatories. However, Rule 69(b) of the Federal Rules of Civil Procedure allows a judgment creditor to simply conduct discovery in accordance with the Federal Rules. Thus, depositions in aid of execution can simply be noticed, subpoenas can have nationwide effect and the judgment creditor can issue interrogatories in aid of execution on a judgment.

The second class of cases where federal execution is useful is when the federal court holds some property of the judgment debtor. Principals of federalism prevent state courts from issuing orders directing the federal courts how to dispose of property; thus, state court enforcement in these circumstances is impossible. Typically, these cases occur when the judgment debtor has obtained a judgment against a third party or when the judgment debtor has posted some kind of bond with the federal court. In these circumstances, enforcement in the federal courts is required.

While there are many reasons to use the federal courts to enforce a judgment, there also good reasons to avoid federal courts. Future articles will discuss the pros and cons of utilizing federal courts.

If you have a judgment to enforce, please contact us a Gross & Romanick.