November 28th, 2012
It is safe to assume that New York tort law was not on the minds of the Hezbollah teams that launched rockets into Israel in the 2006 Lebanon War. However, the victims responded to these acts by taking Hezbollah’s bank to court in New York and launching a legal battle that has stretched the scope of that state’s jurisdiction.
On 20 November 2012, the New York Court of Appeals (NYCA) held in Licci v Lebanese Canadian Bank (pdf) that the state’s long-arm jurisdiction can be extended over foreign banks that use NY-based bank accounts for wire transfers. Given New York’s connectedness to the global banking market, this case represents a potentially significant expansion of that state’s jurisdiction over foreign defendants. Those considering banking in NY have been put on notice: if you fund a tort using a NY bank account, you can be sued no matter where you are.
The plaintiffs in this case are several dozen American, Canadian, and Israeli citizens. During the 2006 conflict between Hezbollah and Israel, many of the plaintiffs were injured or lost family members as a result of Hezbollah rocket attacks on northern Israel.
The defendants are Lebanese Canadian Bank (LCB), which is based in Beirut, and American Express (AmEx), which is based in New York. The plaintiffs allege that LCB maintained bank accounts and carried out international wire transfers of several million dollars for one of Hezbollah’s allies, the Shahid (Martyrs) Foundation. These wire transfers were done through LCB’s correspondent bank account at AmEx in New York.
The plaintiffs argue that LCB’s role in arranging the wire transfers facilitated Hezbollah’s ability to plan and carry out the rocket attacks. They further claim that AmEx is liable for negligence because its facilitation of the wire transfers on behalf of LCB and Shahid breached a legal duty of care to the plaintiffs, which caused the plaintiffs’ harm. The plaintiffs based their claim on NY’s long arm statute (s. 302(a)(1) of the NY Civil Practice Law and Rules), which allows a NY court to assert jurisdiction over a foreign defendant when it transacts any business in the state.
The District Court ruling
This case is an appeal of an earlier New York District Court ruling, which granted LCB’s motion to dismiss for lack of personal jurisdiction. LCB argued that its use of a correspondent account at AmEx in New York was not enough to establish jurisdiction, and the court agreed: “[t]he execution of wire transfers … alone is [not] sufficient to confer jurisdiction over a foreign bank… .”
In order to establish jurisdiction under s. 302(a)(1), a claimant must show that (1) the defendant has transacted business within the state and (2) the claim asserted must arise from that business activity. The District Court held that the plaintiffs’ claim fails on both grounds because (1) the execution of wire transfers is not a sufficient use of the account to qualify as “business” and (2) there was no substantial connection between LCB’s general use of the correspondent account and the specific rocket attacks.
However, the District Court acknowledged that its judgment did not settle the issue of whether a court could have jurisdiction over foreign banks based on their use of correspondent banking accounts in New York.
The Circuit Court certifies the issues
The Circuit court also did not settle this issue definitively, deciding instead to certify the foreign bank jurisdiction issue to the NY Court of Appeals (NYCA). Certification allows a NY court to request a higher court for its opinion on a question of law. The Circuit court decided to certify the jurisdiction issue on its own motion, but parties may also request certification.
There are three factors that guide a NY court’s discretion on whether it should certify a question to a higher court: (1) The NYCA has not provided a clear answer of the question and the case law does not predict how the NYCA would decide the issue; (2) the question must be important to the state, and; (3) the question is determinative of the claim before the court. The Circuit court held that the jurisdiction issue meets all three criteria.
Motivating this certification was the apparent division in NY case law over this issue. On the one hand, the NYCA held in Amigo Foods Corp v Marine Midland Bank-NY (39 NY 2d 391) that “a correspondent bank relationship, without other inidica or evidence to explain its essence, may not form the basis for long arm jurisdiction under … [s. 302(a)(1)].” On the other hand, three subsequent decisions of the NY Second Circuit court suggest that maintaining and using a correspondent account may satisfy the “transaction of business” prong of s. 302(a)(1). The unclear state of the case law on the second prong of the long-arm jurisdiction test motivated the Circuit court to certify that issue as well.
If you bank in New York, you can be sued in New York
Beginning its analysis with the first prong of the test under s. 302(a)(1), the NYCA finds that use of a correspondent bank account in NY is sufficient to extend jurisdiction to a foreign defendant as long as “the defendant’s use of that account was purposeful.”
Whether an act is purposeful is an objective inquiry requiring the defendant to avail itself of the privilege of conducting activities in NY in a way that invokes the benefits and protections of its laws. This inquiry is also informed by the quality of the defendant’s contacts with NY, such as how often business is transacted there. The NYCA finds that LCB’s use of the AmEx correspondent account passes this threshold:
[C]omplaints alleging a foreign bank’s repeated use of a correspondent account in New York on behalf of a client … show purposeful availment of New York’s dependable and transparent banking system… and the predictable jurisdictional and commercial law of New York and the United States.
Regarding the second “arise-from” prong under s. 302(a)(1), the NYCA finds that there must be an “articulatable nexus” or “substantial connection” between the business transaction and the claim. Applying this test, the NYCA holds that LCB’s repeated use of its AmEx account indicate that it was deliberately connected with financing Hezbollah and not a coincidental usage: “LCB did not route a transfer for a terrorist group once or twice by mistake.”
Therefore, the NYCA parts with the District Court in finding that the plaintiffs can bring claims against LCB in NY courts. More generally, this decision is authority for extending jurisdiction over foreign defendants who use NY bank accounts to finance torts.
A jurisdictional door, widened
The unique position of New York as the financial capital of the world underlines the significance of this jurisdictional expansion. The NYCA was well aware of the sweeping scope this judgment could have within the specific context of NY by noting the “widespread use of correspondent accounts nominally in New York to facilitate the flow of money worldwide, often for transactions that otherwise have no connection to New York, or indeed the United States.”
It remains to be seen how many claims NY courts allow though this seemingly open jurisdictional door, but it is clear that this decision represents a potentially broad expansion of NY’s long-arm jurisdiction. It will also be interesting to see whether this decision has any appreciable effect on the banking market in NY. Given that opening a bank account in NY now exposes individuals, corporations, and governments to potential liability in its courts, the banks in jurisdictions without this rule may start looking more attractive.
In any case, it appears that the NYCA has paved a wide avenue for tort claims in NY courts. The amount of claims that will be allowed remains unclear, but there is one question that foreign tortfeasors will now have to start asking: “Do we bank in New York?”[filed: List of cases]