Personal Jurisdiction Over Non-U.S. Financial Institutions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 24, 2012 at 9:54 am
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Editor’s Note: The following post comes to us from Michael M. Wiseman and Samuel W. Seymour, managing partners of the Financial Institutions Group and Criminal Defense and Investigations Group, respectively, at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell LLP publication by Mr. Wiseman and Mr. Seymour.

Summary

On November 20, 2012, the New York Court of Appeals issued an opinion that is of substantial importance to international banks and financial institutions that maintain and use correspondent banking accounts in New York. In Licci v. Lebanese Canadian Bank, SAL (N.Y. Nov. 20, 2012), the Court of Appeals held that a non-U.S. bank’s maintenance and use of such an account to effect “dozens” of wire transfers, worth millions of dollars, on behalf of a non-U.S. client was sufficient to form the basis for personal jurisdiction under the New York State long-arm statute, N.Y. C.P.L.R. § 302(a)(1). Due to the prevalence of U.S. dollar-denominated financial transactions, many non-U.S. banks maintain and use correspondent accounts in New York. As a result, the Licci decision has the potential to increase plaintiffs’ ability to establish personal jurisdiction over non-U.S. financial intuitions in state and federal courts in New York.

Background

The plaintiffs in Licci are American, Canadian and Israeli citizens, all of whom reside in Israel, who were injured, or whose family members were killed or injured, in a series of rocket attacks allegedly committed by Hizballah. The plaintiffs sued Lebanese Canadian Bank, SAL (“LCB”), a Lebanese bank headquartered in Beirut. The plaintiffs allege that LCB assisted Hizballah in committing the rocket attacks by knowingly maintaining bank accounts for an alleged Hizballah-affiliated entity—the Shahid Foundation (“Shahid”)—and carrying out dozens of U.S. dollar-denominated wire transfers on Shahid’s behalf. These wire transfers, which allegedly totaled several million dollars, were conducted using LCB’s correspondent banking account at American Express Bank (“AmEx Bank”) in New York. [1] LCB did not operate branches or offices, or maintain employees, in the United States. Rather, “[LCB’s] sole point of contact with the United States” was its correspondent account with AmEx Bank.

LCB moved to dismiss the lawsuit for lack of personal jurisdiction on the grounds that its maintenance and use of the correspondent banking account in New York was insufficient to establish specific personal jurisdiction over LCB under N.Y. C.P.L.R. § 302(a)(1). A federal district court in the Southern District of New York agreed and granted LCB’s motion. On appeal, however, the U.S. Court of Appeals for the Second Circuit certified two questions to the New York Court of Appeals:

(1) Does a foreign bank’s maintenance of a correspondent bank account at a financial institution in New York, and use of that account to effect “dozens” of wire transfers on behalf of a foreign client, constitute a “transact[ion]” of business in New York within the meaning of N.Y. C.P.L.R. § 302(a)(1)?

(2) If so, do the plaintiffs’ federal claims under the Anti-Terrorism Act and the Alien Tort Statute, or claims under Israeli tort law, “aris[e] from” LCB’s transaction of business in New York within the meaning of N.Y. C.P.L.R. § 302(a)(1)?

The New York Court of Appeals accepted the certification and answered both questions in the affirmative.

Discussion

New York’s long-arm statute, N.Y. C.P.L.R. § 302(a)(1), provides, in relevant part, that “a court may exercise personal jurisdiction over any non-domiciliary . . . who in person or through an agent . . . transacts any business within the state” as long as the “cause of action arise[s] from” that transaction. Thus, a court must decide (1) whether a defendant “transacts any business” in New York and, if so, (2) whether the plaintiff’s cause of action “aris[es] from” such a business transaction.

With respect to the “transaction-of-business” prong, the New York Court of Appeals emphasized that the analysis requires a close “examination of the particular facts in each case” and of “the defendant’s contacts for their quality.” The Court of Appeals further recognized that in the banking context, the analysis “may be complicated by the nature of inter-bank activity, especially given the widespread use of correspondent accounts nominally in New York to facilitate the flow of money worldwide, often for transactions that otherwise have no other connection to New York, or indeed the United States.” Nonetheless, the Court of Appeals held that a foreign bank’s “repeated use” of a correspondent account on behalf of its client amounts to a “course of dealing” and demonstrates “purposeful availment of New York’s dependable and transparent banking system, the dollar as a stable and fungible currency, and the predictable jurisdictional and commercial law of New York and the United States.”

With respect to the “arises-from” prong, the Court of Appeals clarified that only one element of a cause of action need arise from a defendant’s alleged contacts with New York in order to sustain personal jurisdiction under § 302(a)(1). The Court of Appeals held that the requisite “articulable nexus or substantial relationship” existed in this case “between the transaction and the alleged breaches of statutory duties” because LCB’s “repeated use of the correspondent account” demonstrated LCB’s ongoing commitment to providing support to Shahid and Hizballah, which support arguably violated the various provisions of law on which plaintiffs sought relief. The Court of Appeals reasoned that LCB’s frequent use of the AmEx Bank correspondent account suggested that using the “account was cheaper and easier for LCB than other options, and whatever financial and other benefits LCB enjoyed as a result allowed the bank to retain Shahid as a customer and to support its allegedly terrorist activities and programs.”

Implications

While Licci relates specifically to allegations of terrorist financing, the case could extend to many other potential causes of actions against non-U.S. financial institutions. The New York Court of Appeals’ decision clarified that many courts previously had misinterpreted its earlier precedent “to mean that a ‘nondomiciliary defendant’s maintenance and use of such an account in New York, standing alone, [is] ipso facto insufficient to support personal jurisdiction under the New York long-arm statute.” Following this decision, non-U.S. financial institutions are subject to the claim that personal jurisdiction in New York courts is established by the institutions’ maintenance and use of correspondent accounts. While under constitutional limitations that have been read into New York’s long-arm statute the transaction must be “purposeful,” Licci holds that that requirement is satisfied through allegations of “repeated” use of a correspondent account in New York, which at a minimum encompasses “dozens” of wire transfers. Combined with a relatively permissive inquiry into whether a plaintiff’s claims “arise from” such “purposeful” use of correspondent accounts, foreign banks that process thousands of wire transfers per day face a changed and less favorable landscape in which to defend themselves from suit in the state and federal courts of New York. With that said, there does linger a remaining question of whether asserting personal jurisdiction under such circumstances comports with constitutional due process requirements, a question on which the Second Circuit reserved decision pending the answer to its certified questions but indicated it would address if necessary as is now the case.

Endnote

[1] The plaintiffs named AmEx Bank as a co-defendant; however, the federal district court granted AmEx Bank’s motion to dismiss for failure to state a claim upon which relief could be granted.
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