Relates to making service upon a financial institution of orders of attachment in aid of enforcement of judgments effective upon any account

We recommend that the "separate entity rule," which limits the effect of levies, restraining notices and orders of attachment served upon financial institutions as garnishees to accounts maintained at the branch served, be statutorily repealed so that service of such levies and orders upon any office of the institution will be effective as to any account held by the institution as garnishee, regardless of any nominal identification of the account with a particular office. The separate entity rule may have made sense in the past, when considerable time might be required for one branch office to alert others and the main office of service of a levy. Today, however, when all offices of every financial institution are in instant communication with each other by computer networks, this rule has outlived any usefulness and should be eliminated.

The separate entity rule of long standing is that "(I)n order to reach a particular bank account the judgment creditor must serve the office of the bank where the account is maintained...." Therm-X-Chemical & Oil Corp. v EXTEBANK, 84 A.D. 2d 787 (2d Dept. 1981) (Restraining notice served on main office of bank ineffective as to branch which did not receive actual notice); McCloskey v Chase Manhattan Bank, 11 N.Y. 2d 936 (1962) (Wan-ant of attachment and sheriffs levy in New York ineffective to reach balance of accounts in New York bank's branch in Germany). The original purpose of the rule was to avoid undue interference with ordinary banking transactions and the possibility of a bank suffering multiple liabilities because of the inability of one branch served with a restraining notice or other order to instantaneously notify all other branches.

In recent decades, some judicial decisions have relaxed the separate entity rule. In 1980, in an action to enforce a foreign judgment, the Southern District found that service of a restraining notice on the main office of Manufacturer's Hanover Bank was effective to restrain funds in accounts of a branch office, at least in the case of a bank like Manufacturer's Hanover, which was largely computerized and had centralized many functions, including imposition of a hold on a depositor's account. DIGITREX, INC, v Johnson, 491 F. Supp. 66,69 (U.S.D.C., S.D.N.Y. 1980). In Therm-X-Chemical & Oil Corp., supra, the Second Department implicitly endorsed this relaxing of the separate entity rule, but only in the circumstances found by the DIGITREX court.

It remains the case that the DIGITREX exception is applicable only if (1) the restraining notice is served on the bank's main office, (2) the main office and branch with funds on deposit are in the same jurisdiction and (3) the branches are connected to the main office by high speed computers and are under the centralized control of the main office, all of which elements must be established by the party seeking to exploit the exception. Limonium Maritime, S.A. v Mizshima Marinera, S.A., 961 F. Supp. 600,607 (D.S.D.C., S.D.N.Y. 1997) (Denying order of attachment under Federal Supplemental Rule B; citing Therm-X-Chemical & Oil Corp., supra); National Union Fire Insurance Co. v Advanced Employment Concepts, Inc., 269 A.D.2d 101 (1st Dept. 2000). (Holdings of DIGIT REX and Limonium Maritime endorsed in decision rejecting attachment of bank account in Florida because beyond the New York court's jurisdiction.)

A recent example of the continuing vitality of the separate entity rule occurred in John Wiley & Sons v Kirtsaeng, 2009 WL 3003242 (S.D.N.Y. 9/15/2009). In that case plaintiff was seeking an order holding Bank of America ("BOA") in contempt for failing to obey a temporary order of attachment on defendant's funds in an account at a BOA branch in California. The order was served on a BOA branch in Manhattan and the funds were subsequently paid to the defendant by the California Branch. The Southern District denied the plaintiffs motion because service on BOA did not comply with New York's separate entity rule and the funds as to which attachment was sought were not located in the district of the court issuing the process. The separate entity rule has been applied with equal vigor to enforcement of judgments (Therm-X-Chemical & Oil Corp., supra) and attachments (John Wiley, supra).

We believe that the now ubiquitous use of computer networks that gives all branch offices of a financial institution instantaneous access to central data banks makes the limitation of the separate entity rule obsolete, and that the rule's continued existence unnecessarily complicates and limits enforcement of judgments and attachments without any mitigating benefit to concepts of fairness or the functioning of the civil justice system. Accordingly, we recommend that the operative language in the CPLR concerning restraining notices (CPLR 5222(a)), turnover orders for property of the debtor (CPLR 5225(b)) or debts owed to the debtor (CPLR 5227), levy upon personal property (CPLR 5232) and orders of attachment (CPLR 6214) be amended by providing that service upon a financial institution may be made by "serving the institution's main office or any branch office of the financial institution."

The proposed amendments do not directly address another issue raised by service on an office of a garnishee other than that in which the account is nominally maintained, viz., whether such service would be effective with respect to property held outside of the State. Two recent opinions of the Court of Appeals have considered the levy and attachment of out-of-State assets.

In Koehler v Bank of Bermuda, 12 N.Y. 3d 533 (June 4,2009), the court of Appeals, in response to a question certified to it by the Second Circuit, considered the issue whether a judgment creditor could compel a bank to turn over stock certificates held in Bermuda by a bank not a party to the action by means of a proceeding commenced

pursuant to CPLR 5225(b) in New York where the court had personal jurisdiction over the Bermuda bank. Federal District Court had denied the petition upon the ground that a New York court cannot order turnover of property not within the state. The Second Circuit then certified the issue to the New York Court of Appeals, which found that the turn over order should have been granted, because the court had personal jurisdiction over the garnishee, the Bermuda bank.

In Hotel 71 Metz Lender LLC v Falor, 14 N.Y.3d 30 (2010), the Court of Appeals addressed the same question with respect to attachments. The Court held that because the court below had personal jurisdiction (through his physical presence in New York) over the non-resident garnishee of the property being attached, interests in 23 out-of-State business entities controlled by the garnishee, the attachment was valid notwithstanding the location of the property being attached outside the State.

These decisions address levy and attachment of out-of-State assets after service has been made and jurisdiction obtained. This measure addresses only how service is made upon a financial institution. The constitutional limits on the execution or garnishment of assets should be determined by case development.

This measure would have no fiscal impact on the State. It would take effect on the first day of January next succeeding the date on which it shall become law.

2010 Legislative History: OCA 2010-86