Our colleagues Robert Groholski and Bethany Schols just wrote an interesting article, published by Financial Services Law 360 and Bankruptcy Law 360, regarding the recovery of documents and assets from foreign banks.  Click here to view the article.

Under Illinois law, a court may exercise control over assets held by the foreign branch of a bank with a local presence through an injunction if (1) the injunction is incidental to the claim brought; and (2) the court has personal jurisdiction over all of the interested parties.  Kosmond v. Kosmond, 830 N.E.2d 596 (1^st Dist. 2005). 

However, this is not a universal concept.  Other states that have considered the issue and have held that the “separate entity rule” requires each individual branch to be treated independently for such purposes.  See Sara Lee Corp. v Gregg, 2003 U.S. Dist. Lexis 23479 (N.C. 2003); Fidelity Partners, Inc. v. Philippine Export & Foreign Loan Guarantee Corp., 921 F. Supp. 1113, 1119 (F.D.N.Y. 1996). 

Illinois does not follow the “separate entity rule” and accordingly, so long as the court has jurisdiction over a branch of the bank, the fact that the assets are held at a different branch does not defeat jurisdiction.  Kosmond, 830 N.E.2d 596.

For example, in Kosmond, Petitioner brought suit for a dissolution of his marriage to the Respondent.  Shortly after the filing of the petition for dissolution, the Respondent transferred marital assets to a bank account in her name located at Commerzbank AG in Germany (the “German Account”). 

Commerzbank has branches in Chicago and in Germany. Petitioner filed a motion for a temporary restraining order and a preliminary injunction.  The temporary restraining order was entered, freezing the assets in the German Account.  Petitioner served notice of the order on both the Chicago and the Germany branches of Commerzbank.

The court had jurisdiction to freeze Respondent’s assets in the German Account.  First, the injunction was incidental to the petition for dissolution filed by the Petitioner.  Second, the court had jurisdiction over all of the interested parties.  Petitioner is a resident of Illinois. Respondent filed a general appearance in the case.  And, Commerzbank does business within Illinois, maintaining a Chicago office.  735 ILCS 5/2-209 (b)(4). 

However, even if a court has the power to freeze assets in a foreign jurisdiction, the inquiry cannot stop there.  The court must also consider the principles of comity.  The court must consider whether compliance with the injunction would require the third party to violate the laws of its own country. 

Comity is a rule of practice through which a court may take notice of and defer to the laws and judicial decisions of a foreign jurisdiction out of respect, goodwill and cooperation.  The decision to grant comity to the laws of another country is within the discretion of the trial court.  In deciding whether to grant comity, the court must weigh the following factors:

• (a) [the] vital national interests of each of the states,
• (b) the extent and nature of the hardship that inconsistent enforcement actions would impose upon the person,
• (c) the extent to which the required conduct is to take place in the territory of the other state,
• (d) the nationality of the person, and
• (e) the extent to which enforcement by action of either state can reasonably be expected to achieve compliance with the rule prescribed by that state.

United States v. First National Bank of Chicago, 699 F.2d 341, 345 (7^th Cir. 1983).While the Kosmond Court found that the trial court had jurisdiction over the assets and the power to grant the injunction, it, nevertheless, reversed the trial court’s decision to do so, because the trial court had failed to consider the principles of comity. The  Kosmond Court , upon remand, directed the trial court to consider the laws of German and  whether to grant them comity.

In First National Bank, the court granted comity to the laws of country in which the bank branch was located.  There the district court had ordered a bank to disclose records held by the branch in Greece. The bank argued that disclosing such records would subject its employees to imprisonment as Greek criminal law prohibited disclosure of the documents.  The court weighed the five factors.  Most persuasive for the court was that compliance with the order by bank ees would subject them to imprisonment.  Rather than entering an order requiring bank employees to break Greek law, the court directed the district court to consider ordering the bank to make a good-faith effort to receive permission form the Greek authorities to disclose the documents. 

Whether a court in the United States may exercise jurisdiction over assets held by a foreign bank branch is determined by whether the state applies the “separate entity rule”.  And even then, the ability and practicality of doing so is determined by the laws of the country in which the branch sits and the court’s decisions to grant comity thereto.  But certainly, finding that assets have been transferred to a foreign branch of a bank by a debtor does not automatically necessitate filing suit in that foreign jurisdiction.  Options may exist within the United States to seize those assets.

I am a big fan of Alternative Dispute Resolution ("ADR"), especially in matters involving cross-border business transactions.  Among other reasons, ADR provisions can be used to preempt many of the obstacles that arise in seeking recognition and enforcement of foreign judgments internationally.  One would think that it would be easier to enforce a judgment from a court than an arbitral award issued by a private arbitration panel.  This is not the case when a party is seeking a recovery across borders.

Incredibly, because no treaty exists for the enforcement of foreign judgments between the United States and any other country, a foreign arbitral award is generally more easily enforceable than the judgment of a foreign court.  See U.S. Department of State, Bureau of Consular Affairs, Enforcement of Judgments (visited January 11, 2007) http://travel.state.gov/law/info/judicial/judicial_691.html    Accord, David J. Levy, International Litigation: Defending and Suing Parties in U.S. Federal Courts at 176, 361 (2003, American Bar Association).  By contrast, more than 120 countries have entered into the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards, opened for signature, June 10, 1958, 21 U.S.T. 2517, T.I.A.S. No. 6997, 330 U.N.T.S. 38 (known as, and hereinafter referred to as, the "New York Convention").  The New York Convention requires that "[e]ach Contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon..."  The goal of the New York Convention "was to encourage the recognition and enforcement of commercial arbitration agreements in international contracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries."  Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n. 15 (1974); Bautista v. Star Cruises, 396 F.3d 1289, 1299-1300 ("In pursuing effective, unified arbitration standards, the Convention's framers understood that the benefits of the treaty would be undermined if domestic courts were to inject their 'parochial' values into the regime.")  Based on this reasoning, "the enforcement of international arbitral awards enjoys relatively widespread acceptance..." in courts worldwide.  See Kam-Tech Systems Ltd. v. Yardeni, 774 A.2d 644, 648 n.3 (N.J. Super. Ct. App. Div. 2001).

Collecting assets located abroad often begins with filing a lawsuit in U.S. federal courts against persons located abroad. When pursuing this route of asset collection, it is necessary to ensure that summons is properly served on the foreign defendant. Failure to properly serve a foreign defendant can result in delaying collection of the assets, thereby giving the defendant additional time to move those assets out of your reach.

Under Fed. R. Civ. Proc. 4(f) and (h), service of process on a foreign individual or corporation can be accomplished by following the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents (the "Hague Convention"). The Hague Convention provides various methods for accomplishing service. Although the Hague Convention allows service to be accomplished through a contracting country's designated Central Authority, this method often takes a long time. Article 10 of the Hague Convention does provide faster methods of service such as through postal channels or by transmitting the documents to the appropriate judicial officer (usually the sheriff or his equivalent) of the defendant's country for direct service on the defendant. The key is to ensure that the defendant's country has not objected to the methods of service set forth in Article 10 of the Hague Convention.

Recently, in Ferrostaal, Inc. v. Haci Hassan Yardim, et al., 2006 U.S. Dist. LEXIS 73994 (S.D. N.Y. Sept. 29, 2006), the plaintiff attempted to serve process on two foreign corporations located in Turkey by registered overseas mail pursuant to Fed. R. Civ. Proc. 4(f)(2)(C)(ii). When the defendant corporations objected, the plaintiff argued that service was proper because Article 10(a) of the Hague Convention allowed service to be accomplished by postal channels. What the plaintiff did not realize, however, is that Turkey objected to the provisions of Article 10(a). Thus, the court found that plaintiff's attempted service of process through postal channels was improper.

The lesson from Ferrostaal is to take the time to analyze whether the defendant's country has objected to the alternative methods of service authorized by Article 10 of the Hague Convention. Doing so before the complaint is filed allows you to focus your efforts on collecting the assets, rather than expending time defending against motions to dismiss for improper service of process.