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Asset Freeze by Motorola Was Out of Line

MANHATTAN (CN) - Motorola cannot freeze assets in the foreign branches of a bank with a New York office to recover a $3 billion judgment, the 2nd Circuit ruled.

The case stems from Motorola Credit Corp.'s loan of more than $2 billion to a Turkish family that said it would use the money to expand a telecommunications firm.

Much of the cash actually went into the pockets of members of the Uzan family or other businesses they controlled, court records show.

A federal judge in Manhattan awarded Motorola $2.1 billion in compensatory damages in 2003, plus $1 billion in punitive damages three years later.

When the Uzans failed to pay up, the court last year authorized state and federal restraining orders to prevent the sale, assignment or transfer of Uzan property.

Motorola sent a restraining notice to Standard Chartered Bank, headquartered in the United Kingdom, which had no connection to the loan but had a branch in New York.

Though Motorola did not find any Uzan assets in the New York branch, it later located Uzan-related assets valued at some $30 million in branches in the United Arab Emirates, which it froze.

The UAE Central Bank retaliated by debiting $30 million from Standard's account in that country.

Standard then sought relief from the restraining order, contending that New York's separate-entity rule made service of the order on the New York branch effective only to the assets there, not to its foreign branches.

Motorola countered that the rule was no longer valid in light of a 2009 decision by New York's high court, the Court of Appeals, that permitted recovery of stock certificates located outside the United States, so long as a court had jurisdiction over the holder of the certificates.

The District Court sided with Standard on the restraining order but held off releasing it pending the outcome of Motorola's appeal to the 2nd Circuit.

The federal appeals court then turned to the Court of Appeals for guidance on the separate entity rule in the wake of the 2009 decision, Koehler v. Bank of Bermuda Ltd.

In its decision against Motorola last month, the Court of Appeals noted that Koehler involved the Bermuda bank's release of stock certificates after agreeing to personal jurisdiction under CPLR Article 52, based on having a subsidiary in New York.

Koehler was silent, however, on the separate entity rule because it was not raised and predates CPLR Article 52, which governs enforcement and collection of money judgments in New York, the court said.

"In short, we did not analyze, much less overrule, the separate entity doctrine in Koehler," the five-judge majority said. Two judges dissented.

"We decline Motorola's invitation to cast aside the separate entity rule," the majority stated, citing its existence as "part of the common law of New York for nearly a century."

That the principle is longstanding, and "undoubtedly" led international banks to look favorably on opening branches in New York, the judges said. "The separate entity rule promotes international comity and serves to avoid conflicts among competing legal systems," according to the ruling.

"We believe that abolition of the separate entity rule would result in serious consequences in the realm of international banking to the detriment of New York's preeminence in global financial affairs," the judges added.

This guidance resolved the Motorola appeal, the circuit said Thursday, finding in an unsigned opinion that Standard could not freeze the Uzan assets in its foreign branches because of New York's separate entity rule.

Judges Guido Calabresi, Denny Chin and Christopher Droney remanded the case to the District Court to vacate the restraining order.

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