Southern District Finds “Separate Entity Rule” No Obstacle to Foreign Arbitration Awards Against Bank Guarantor

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In Crescendo Maritime Co. v. Bank of Communications Co. Ltd., the District Court for the Southern District of New York considered, among other things, whether the New York State “Separate Entity Rule” barred the enforcement of arbitration awards against bank assets located in New York.  Specifically, Crescendo Maritime Co. brought an action against the New York branch of the Bank of Communications Co. Ltd. (“BOCOM”), a Chinese bank with head offices in Shanghai and over two hundred branches throughout mainland China, for the enforcement of London arbitration awards issued in Crescendo’s favor.

The underlying construction contract and refund guarantees

The events leading up to the arbitrations involved contracts for the construction of a large bulk carrier vessel.  In August 2007, Crescendo, acting as a buyer, entered into a shipbuilding contract with Nanton Mingde Heavy Industry Stock Co. Ltd. and New Future International Trade Co. Ltd. (collectively, the “Sellers”) for the construction of a large bulk carrier vessel.  The shipbuilding contract entailed, among other things, a purchase price of $18.6 million to be paid in five installments. Crescendo paid three installments of $6.2 million each from September 2007 to January 2010.  Under the shipbuilding contract, disputes “arising out of relating to” the contract were referred to arbitration in London, and governed by English Law.

On behalf of the Sellers, BOCOM issued three refund guarantees to Crescendo – one for each of the $6.2 million installment payments that Crescendo had made toward the shipbuilding contract – through a branch office in Qingdao, China.  BOCOM’s refund guarantees provided for reimbursement of the installment payments in the event that (1) the installments became repayable to Crescendo under the terms of the shipbuilding contract and (2) the Sellers failed to pay any refunds owed.  The refund guarantees also contained choice of law and arbitration provisions, designating London, England as the place where any disputes would be arbitrated in accordance with the rules of the London Maritime Arbitration Association.

The terminations and demands for reimbursement

After several delays in the construction of the vessel and modifications to the shipbuilding contract, the agreement between Crescendo and the Sellers broke down completely.  The Sellers subsequently terminated the shipbuilding contract the day before the contract was eligible to be cancelled by Crescendo for failure to meet the modified delivery deadline, and commenced arbitration proceedings against Crescendo in London the following day.  In response, Crescendo wrote to the Sellers cancelling the shipbuilding contract and demanded repayment of its installment payments.  Crescendo then demanded reimbursement from BOCOM under the refund guarantees.  After BOCOM refused to pay, Crescendo commenced arbitration against BOCOM.

The arbitrations and worldwide legal proceedings

The shipbuilding contract and the refund guarantee arbitrations were heard concurrently by the same tribunal.  The Sellers and BOCOM appointed one arbitrator, Crescendo appointed the other, and the appointed arbitrators selected a final arbitrator to complete the panel.  Subsequently, Alpha Bank, Crescendo’s financier for the installment payments, intervened.  It is worth noting that, at arbitration, BOCOM described itself as “Bank of Communications Qingdao Branch,” but did not present any evidence that it was a separate legal entity from Bank of Communications Co. Ltd.

As the parties were embroiled in the London arbitrations, BOCOM filed a separate action in the Qingdao Maritime Court in China.  In the Chinese action, BOCOM alleged maritime fraud against Crescendo, Crescendo’s financier, Alpha Bank, and the Sellers. The Chinese court issued a ruling freezing the principal sum and interest under the refund guarantees and “refraining [sic] [BOCOM] from making any payment” to Crescendo or Alpha.

Following the Chinese court’s ruling, Crescendo and Alpha obtained a preliminary anti-suit injunction in England.  The English injunction ordered BOCOM not to pursue the proceedings in China because its claims were subject to the ongoing arbitration in London.  Thereafter, BOCOM unsuccessfully requested that the London arbitration be suspended, and notified the arbitrators that BOCOM would not attend final hearings or further participate in the arbitration proceedings.

The London arbitration hearing took place in November of 2014, without the appearance of BOCOM or the Sellers.  Around this same time, BOCOM notified the tribunal that the Sellers had entered bankruptcy. On December 31, 2014, the tribunal ruled in favor of Crescendo in both the shipbuilding arbitration and the refund arbitration.  Per the tribunal’s awards, the Sellers were ordered to make immediate repayment of the $18.6 million paid under the shipbuilding contract, plus costs and interest.  In the event that the Sellers could not make repayment, BOCOM was required to satisfy the arbitration awards.

Crescendo then demanded payment from the Sellers, as well as payment from BOCOM, pursuant to the shipbuilding and refund arbitration awards.  Neither the Sellers nor BOCOM paid.  As a result, Crescendo filed a petition to enforce the arbitration awards in the Southern District for the District of New York.

Petition in New York to enforce and collect on the awards

BOCOM opposed Crescendo’s petition on three grounds.  First, BOCOM argued that the District Court lacked jurisdiction over BOCOM’s person or property.  Second, BOCOM argued that, even if jurisdiction existed, the District Court should decline to exercise jurisdiction pursuant to the doctrine of forum non conveniens.  Third, BOCOM argued that the foreign arbitration awards are unenforceable under the New York convention because the arbitration panel exceeded its authority.

The District Court in Crescendo found that quasi in rem jurisdiction was available because BOCOM, as a debtor of Crescendo, maintains sufficient assets in New York to satisfy the awards.  The District Court also rejected BOCOM’s argument that, because the awards were issued against BOCOM’s branch in Qingdao, China, and not its New York branch, BOCOM’s New York assets could not be used to satisfy the awards.  In rejecting BOCOM’s argument, the District Court noted that Crescendo had established BOCOM’s New York and Qingdao branches were the same legal identity, and that BOCOM had not produced any evidence to the contrary.

The District Court also found that New York’s common-law “Separate Entity Rule” did not apply to bar enforcement of the arbitration awards against BOCOM’s New York assets.  Under the “Separate Entity Rule,” even when a bank garnishee with a New York branch is subject to personal jurisdiction, its other branches are to be treated as separate entities for certain purposes, including pre-judgment attachments and post-judgment restraining notices and turnover orders.  However, the “separate entity rule” only applies when the bank is acting as a garnishee; in other words, the “separate entity rule” is only applicable when the bank holds assets on behalf of a customer, and a creditor of the customer seeks to attach those assets.  Because BOCOM itself was liable for the arbitration awards and Crescendo sought to recover against BOCOM’s own corporate assets, the District Court in Crescendo found that the “separate entity rule” was inapplicable.

The District Court also found that forum non conveniens did not prevent it from exercising jurisdiction.  This was because, given the summary nature of the action, Crescendo had little tactical advantage in seeking enforcement in New York.  Similarly, the inconvenience and expense associated with BOCOM litigating the matter in New York would be minimal since the arbitrations had already taken place and all that remained was a relatively narrow issue of confirmation.  Additionally, since BOCOM had chosen to proceed with an action in China in an apparent collateral attack on the London arbitration, the District Court found that there were legitimate concerns related to forum shopping.  Thus, while China was technically an adequate alternative forum, the District Court found that it was not “unreasonable to infer that BOCOM’s preference for China as an alternative forum is motivated by tactical reason rather than genuine concerns of convenience.”

Finally, the District Court rejected BOCOM’s New York Convention defenses.  Specifically, the District Court found that BOCOM failed to demonstrate that the tribunal erred in permitting Alpha Bank to join in the arbitrations, or that Alpha’s joinder in any way caused the arbitration awards to contain decisions on matters beyond the scope of arbitration.  The District Court rejected BOCOM’s argument that the arbitrators lacked authority to address BOCOM’s fraud allegations against Crescendo, finding that, pursuant to the arbitration clause governed by English law, there was a presumption that all disputes arising out of the contractual relationship between the parties was encompassed by the agreement to arbitrate absent explicit language to the contrary.  Since the refund guarantees contained clauses referring “any dispute under this Guarantee” to arbitration, the District Court concluded that the London tribunal acted within its authority in considering and rejecting BOCOM’s arguments that the refund guarantees were void and unenforceable on account of fraud or misrepresentation.

In summary, New York State’s “Separate Entity Rule” may bar enforcement of an award against a local branch of a bank for assets held in another branch when the bank is a garnishee.  However, this Rule does not apply when the bank itself is the liable party.