Transitory Movement of Funds through New York Banks No Guarantee of Jurisdiction

In a case of interest to foreign parties that routinely use New York's banking system to facilitate dollar transactions, the New York Court of Appeals has reversed a decision by the Appellate Division that would have foreclosed forum non conveniens dismissals as a matter of law whenever a foreign national, "effecting what is alleged to be a fraudulent transaction, moves dollars through a bank in New York."  Left undisturbed, this ruling would have burdened overseas litigants in cases lacking any other nexus to the state by preventing them from using the doctrine of forum non conveniens in response to the often broad jurisdictional reach of New York's "long-arm" statute.

Background

 As "a financial capital of the world, serving as an international clearinghouse and marketplace for a plethora of international transactions," vast sums of money pass through New York banks each day, making its courts a magnet jurisdiction for those claiming injury from such transactions.  J. Zeevi & Sons v. Grindlays Bank (Uganda) Ltd., 37 N.Y. 2d 220, 227 (1975).  Among other things, "'[a]ll wholesale international transactions involving the use of the dollar go through CHIPS,' which is a department of the New York Clearing House Association.'"  See Mashreqbank, No. 54, slip op. at 8 (citation omitted).              

Mashreqbank involved payment orders issued by parties in Saudi Arabia and Dubai to New York banks, instructing them to electronically transfer US dollars between New York accounts controlled by Bahraini and Saudi entities.  The dispute arose out of a "foreign exchange swap transaction" between Mashreqbank (Mashreq) – a UAE-based bank – and Ahmed Hamad Al Gosaibi & Bros. (AHAB) – a partnership headquartered in Saudi Arabia.  Mashreq agreed to, and did, transfer $150 million to AHAB's account at Bank of America in New York in exchange for AHAB's promise to pay Mashreq equivalent value in Saudi riyals several days later, which never happened.  Mashreq thereafter sought recovery against AHAB in New York state court, in the mistaken belief that AHAB held assets there.  AHAB answered the complaint and filed a counterclaim as well as a third-party complaint against one of its employees (a Saudi national) alleging that he had ordered the foreign exchange transaction at issue as part of "a massive scheme to loot AHAB," and that Mashreq aided and abetted his fraud.

The Error Below

On the allegedly rogue employee's motion, and without objection from Mashreq, the trial court dismissed the complaint and AHAB's third-party complaint on forum non conveniens grounds – exercising its discretionary power to decline jurisdiction in favor of another forum – based on the fact, among others, that Saudi law governed the relationship between AHAB and its employee, that the alleged fraud took place in Saudi Arabia and Kuwait, that the evidence needed to determine whether AHAB's employee was authorized to do what he did was located in those nations, and that AHAB had commenced a number of proceedings against its employee in other countries.  AHAB appealed.

Over the dissent of two justices, a divided panel of the Appellate Division reversed, holding (as relevant here) that New York's "compelling interest in the protection of [its] native banking system from misfeasance or malfeasance" essentially barred New York courts from granting forum non conveniens dismissals in any case involving the passage of funds through New York banks, even when the dispute's center of gravity rests elsewhere.  Mashreqbank PSC v. Ahmed Hamad Al Gosaibi & Bros. Co., 101 A.D. 3d 1, 8 (1st Dep't 2012).  The dissenters, by contrast, viewed the ministerial transfer of funds through New York banks as no more than "peripheral and transitory," stressing that "the proceeds" of the third-party defendant's alleged fraud only incidentally "passed through the New York banking system."  Id. at 19.  The Court of Appeals sided with the dissenters.

The Correction

In a unanimous decision (with one Justice not participating), the Court of Appeals reversed the Appellate Division and reinstated the trial court's judgment dismissing the entire action on forum non conveniens grounds.  Rejecting the idea that "any passage of funds through New York banks automatically implicates New York's 'compelling interest in the protection of [its] banking system'" for forum non conveniens purposes (slip op. at 7; alteration in original), the Court of Appeals declared that the mere ministerial execution of a funds transfer by a New York bank does not compel New York courts to retain jurisdiction over disputes that would be better adjudicated in another forum. 

Holding that "dismissal on forum non conveniens grounds is required as a matter of law" on such facts, the Court of Appeals explained: 

Our State's interest in the integrity of its banks … is not significantly threatened every time one foreign national … moves dollars through a bank in New York.  [A]s a practical matter, any dollar transaction comparable in size to the one now at issue must go through New York[.] … That does not mean that every major fraud case in the world in which dollars are involved belongs in the New York courts.  New York's interest in its banking system is not a trump to be played whenever a party to such a transaction seeks to use our courts for a lawsuit with little or no apparent contact with the New York.

Mashreqbank, No. 54, slip op. at 7-8 (emphasis added; internal quotation marks and citation omitted).

Distinguishing its earlier choice-of-law decision in Zeevi, on which the Appellate Division grounded its decision, the Court of Appeals said the case "should not be read to imply that every party aggrieved by the outcome of one among" the many international transactions that touch New York in some way "may bring its grievance to the New York courts."  Id. at 9.

Conclusion

Absent any material connection to New York, the ministerial use of New York banks to facilitate dollar transfers in connection with an otherwise wholly foreign transaction is a fact of "minor importance" that does not "justify resort to a New York forum."  Id. at 10.  It's instead "a classic case for the application of the forum non conveniens doctrine."  Id.

A copy of the decision is available here.