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Dispute over foreign bank assets sent to New York's highest court

A woman walks past a Standard Chartered bank in London October 13, 2010. REUTERS/Stefan Wermuth
A woman walks past a Standard Chartered bank in London October 13, 2010. REUTERS/Stefan Wermuth

By Dena Aubin

NEW YORK (Reuters) - In a case with wide implications for the global banking industry, New York's highest state court has been asked to decide if banks operating in the state can be forced to turn over to litigants assets held in their foreign branches.

At issue are two high-profile cases being heard by the U.S. 2nd Circuit Court of Appeals. The cases involve U.S. companies that are trying to reach assets held overseas by UK-based Standard Chartered Plc and Bank of China.

In a ruling on Tuesday, a three-judge panel for the 2nd Circuit in Manhattan delayed a decision on the lawsuits, saying they raise policy concerns that should be resolved by the New York Court of Appeals.

"The questions presented by these appeals involve important issues of New York state law and policy that are likely to recur and may have important effects on a highly regulated industry," the 2nd Circuit court wrote.

At stake is whether companies can evade the enforcement of judgments by keeping assets in overseas banks. The outcome could be important to foreign banks with New York branches, which are subject to New York courts' jurisdiction.

UZAN DISPUTE AT STAKE

In one of the two cases, Motorola Credit Corp, part of Motorola Solutions, has been trying for over a decade to recover billions of dollars from Turkey's Uzan family, which ran the Turkish mobile phone company Telsim.

The Uzans borrowed more than $2 billion from Motorola Credit between 1998 and 2000 for Telsim, but diverted much of the money for other uses, according to court documents.

Lawyers for the Uzans and Motorola could not immediately be reached for comment.

Motorola won a restraining order to freeze the Uzans' assets held by Standard Chartered at its branch in the United Arab Emirates, but regulators in Jordan and the United Arab Emirates intervened, according to court documents.

In May, the U.S. District Court in New York's Southern District found that New York law precludes Motorola from restraining the Uzans' assets in Standard Chartered's foreign branches. That decision was appealed.

In the second case, privately held Tire Engineering and Distribution of Sarasota, Florida, has been trying to get the Bank of China to turn over money the tire maker is owed after winning judgments against China-based competitors.

The bank has refused, saying Chinese banking laws prohibit it from complying with U.S. court orders to freeze customer bank accounts.

Tire Engineering in December asked the U.S. District Court in New York's Southern District to order Bank of China to turn over the assets, but its case was dismissed in April. Tire Engineering appealed to the 2nd Circuit.

Lawyers for Tire Engineering and Bank of China could not immediately be reached for comment.

GLOBAL BANKING GROUPS STEP IN

Global banking organizations have opposed allowing U.S. courts to reach assets of bank customers in another country.

In a friend-of-the-court brief filed last year in the Motorola case, the Institute of International Bankers, the European Banking Federation and the New York Bankers Association said that compelling banks to turn over assets held at overseas branches would create "serious problems for international banks doing business in New York" and hurt the city's position as a world financial center.

To resolve the issues, the 2nd Circuit on Monday asked the New York Court of Appeals to decide whether a "separate entity rule" precludes a U.S. court from ordering banks with a New York branch to turn over assets held in foreign branches. The separate entity rule is a long-held doctrine that treats bank branches as separate for purposes of enforcing judgments.

Under the rule, courts have long held that if a foreign bank has a branch in New York, U.S. creditors cannot reach assets of its customers outside the country. However, New York's highest court "has never unequivocally approved or disapproved of the separate entity rule," the 2nd Circuit wrote in its ruling.

The cases are Motorola Credit Corp v Standard Chartered Bank, No. 13-2639; and Tire Engineering & Distribution et al v Bank of China Limited, No 13-1519, both in U.S. Court of Appeals for the 2nd Circuit

(Editing by Kevin Drawbaugh and Dan Grebler)

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