Defendants/plaintiffs appeal from an order of the Supreme Court, New York County (Shirley Werner Kornreich, J.), entered October 21, 2005, which, inter alia, modified a restraining order to delete the restraint against the Palestine Monetary Authority (PMA), granted the PMA's motion for a preliminary injunction, directed the Bank of New York to release a restraint on all funds resulting from transfer orders on the PMA's behalf and to honor all the PMA's pending and future transactions, and an order and judgment (one paper), same court and Justice, entered April 10, 2007, to the extent that it granted the PMA's motion for summary judgment, declared that it is a separate juridical entity from the Palestinian Authority and that the restrained funds should be released, and dismissed the judgment creditors' counterclaims and their cross claims against the Bank of New York for a turnover of the restrained funds.
The opinion of the court was delivered by: Catterson, J.
Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.
This opinion is uncorrected and subject to revision before publication in the Official Reports.
Angela M. Mazzarelli, J.P., David B. Saxe, John T. Buckley, James M. Catterson, JJ.
This action arises from attempts to enforce a judgment of more than $116,000,000 against the Palestinian Authority and the Palestine Liberation Organization for terrorist activities that resulted in the death of an American citizen and his Israeli wife. A federal judgment was domesticated in New York and the judgment creditors also issued restraining notices pursuant to CPLR 5222, which subsequently led the Bank of New York to freeze millions of dollars in wire-fund transfers involving the two judgment debtors, as well as entities purportedly associated with them. One of the entities, the Palestine Monetary Authority (hereinafter referred to as "PMA"), initiated this action seeking a declaration that $30,000,000 of the frozen funds transfers where the PMA was either the sender or the designated beneficiary were improperly restrained. This appeal focuses on three main issues: ownership of the frozen funds; whether the funds may be used to satisfy the judgment in part; and significantly for New York's banking industry, whether the restraint on the funds violates New York's banking laws, specifically the provisions of Uniform Commercial Code article 4-A governing creditor process and injunctions on wire-fund transfers.
The following facts are undisputed: On January 27, 2004, the children and heirs of Yaron and Efrat Ungar (hereinafter referred to as the "Ungars") secured a judgment in the amount of $116,400,000 against the Palestinian Authority (hereinafter referred to as "PA") and the Palestine Liberation Organization (hereinafter referred to as "PLO") in connection with the brutal murder of both parents on a street in Israel by members of Hamas, a terrorist organization controlled by the PA and PLO. Estates of Ungar ex rel. Strachman v. Palestinian Authority, 304 F.Supp.2d 232 (D.R.I.,2004), aff'd, 402 F.3d 274 (1st Cir. 2005), cert. denied, 546 U.S. 1034, 126 S.Ct. 715, 163 L.Ed.2d 575 (2005).
Acknowledging that the PA and PLO did not intend to honor the judgment, on May 5, 2005, the federal court in Rhode Island granted the Ungars an injunction against the PA, the PLO "and their officers, agents [...] and any natural or legal persons in privity with them and/or acting on their behalf and/or in active concert and participation with them" enjoining the withdrawal, sale or transfer of any of their assets in the United States.
The Ungars domesticated the federal judgment in New York County and on the same day served a number of financial institutions including the Bank of New York (hereinafter referred to as "BNY") with a notice of the federal injunction and information subpoenas with statutory restraining notices. The latter included the following paragraph: "the assets and property in which the judgment-debtors have an interest are held and/or titled under the names Palestine Authority, Palestine Liberation Organisation, [...] Palestine National Authority [...] Palestine Monetary Authority."
Between May 16, 2005 and June 9, 2005, the BNY responded by freezing millions of dollars of transactions by issuing a "Stop Payment. Funds suspended" instruction. The majority of the transactions were wire transfers by the Palestinian National Authority's Ministry of Finance, Gaza to the National Authority's embassies. There is no issue or controversy with respect to these funds. However, $30,000,000 of the frozen funds involved the PMA. Those are the funds at issue here.
As to the PMA itself, the sum of what is undisputed is that the PMA was established by the PA, a non-state entity which itself was created by the Oslo Accords, a series of agreements between the sovereign state of Israel and the PLO. Article IV of the Oslo Accords gave the PA the right to create a "monetary authority" and in 1997, Yasser Arafat, President of the PA and Chairman of the PLO issued a decree entitled Monetary Authority Law (hereinafter referred to as "MAL") creating the PMA.
On June 3, 2005 the PMA commenced the instant action against the Ungars and the BNY, seeking a declaratory judgment disassociating PMA from the PA and PLO. On June 6, 2005, the PMA brought an order to show cause for a preliminary injunction requiring the BNY to release the frozen PMA transactions. In the order to show cause, the annexed affidavit of George Abed, the Governor of the PMA, stated that the PMA possesses an "autonomous corporate character financially independent from the [PA] and [PLO]" and deals exclusively with privately owned commercial banks. The PMA claimed its purpose is to facilitate normal banking activity and help maintain financial stability by providing liquidity to those banks through the PMA's bank, the Palestine International Bank (hereinafter referred to as "PIB"), which acts as a clearing house for those banks whose interbank transactions in U.S. dollars are cleared through the BNY. Abed denied that the PMA holds or manages any funds of the PA or the PLO, and stated that because the PA is not yet a sovereign state, the PMA does not hold any gold reserves or act as PA's fiscal agent.
On June 23, 2005, the Ungars answered the PMA complaint and counterclaimed for a declaratory judgment that the PMA and the PA are indistinguishable, and for a turnover from the PMA of any and all PA assets held. They also cross-claimed against the BNY for turnover of the PMA's assets. The Ungars argued that the PMA is a shield for the PA's financial activities and assets and that the PA is de facto in control of the PMA. The Ungars relied on the MAL to assert that the PMA's initial capital was to come from the PA, its shortfall was to be paid by the PA, and its profits were to be paid to the PA. As to management, the PMA's governor is appointed by the PA chairman as are its board members; their salaries are determined by him, and he has the right to terminate the PMA board members and officers. Additionally, the Ungars showed that the PMA regularly used the PA's letterhead.
On June 30, 2005 the motion court heard arguments on the PMA's order to show cause for a preliminary injunction. The court stated that there were two issues that needed to be determined: whether the PMA is the alter ego or an agent of the PA or the PLO; and even if it is not, whether or not it holds any funds of the PA or the PLO. The hearing was inconclusive. The Ungars requested discovery on whether the private banks, the claimed owners of the restrained funds, had either complained or asserted claims against the PMA, whether the PMA had paid them from other funds, and on the sources of the PMA's reserves of more than $500 million. The court decided that a factual hearing was necessary, which was scheduled and held over four days in the first week of August 2005. The court limited pre-hearing discovery.
The testimony and evidence adduced at the hearing focused on the ownership of the funds as of a time prior to the PMA's issuance of payment orders, that is before the funds transfers were set in motion. Mr. Abu-Habsa, executive director of the PMA's banking supervision department for the 21/2 years prior to the hearing, testified that a summary chart in evidence reflected holdings of various commercial banks and not of the PMA itself.
He testified that the PMA's capital came from its revenues over the years, and not from an infusion of funds from another source (such as the PLO or the PA). He explained that the PMA took required reserves from commercial banks and invested that amount, and then used the investment revenue to pay expenses; the PMA had its account at the PIB. Thus, a 2003 PMA circular which provided certain operating rules for banks in the Palestinian Territories required that they cover their current accounts in dollars by transferring reserves to the PMA's account with the PIB at the BNY. According to Abu-Habsa, all of the frozen BNY accounts were commercial bank reserves belonging to those banks; however, he did not know whether the funds were required reserves or were reserves with interest.
Jessica Goodwin, a long-time BNY employee who had effected the freeze, identified the BNY's summary list of the transfers in the frozen "suspense account," with the PMA as the originator of 14 transfers and the beneficiary of 5 transactions totaling about $30 million; all of the PMA transactions were bank-to-bank transfers.
PIB general manager, Usama Mohamed Khader, confirmed that the PMA had its clearinghouse account with the PIB, which was used in the checks and payments settlement process between banks, and testified that the BNY freeze evoked complaints from the affected commercial banks that owned the funds.
Abed, the PMA governor, reiterated the contents of his affidavit regarding the PMA's role as a regulator, details of its enabling law (the MAL) and its failure to issue currency or hold gold reserves despite the law's "aspirational" provisions. He opined, based on his prior experience with the International Monetary Fund, that, with the above exceptions, the PMA's operations were typical of central banks. He denied taking any direction from the PLO, the PA, or any other government officials. He denied that the PMA is the "fiscal agent" for the PLO or the PA.
Abed explained that the PMA invests the reserves deposited by the commercial banks and keeps some of the interest, thereby generating a profit for itself. After paying expenses, it then pays over the remainder of the profit to the PA as required under the MAL.
Significantly, the court precluded the Ungars' attempts to cross-examine Abed regarding any discussions he may have had with the PA ministry of finance or anyone at the PA concerning the instant judgment.
A central bank expert called by the PMA, who had worked for the Federal Reserve and the International Monetary Fund, also opined, over the Ungars' objection, that the frozen funds belonged to the commercial banks. Notably, when the Ungars' wire-transfer expert testified about the mechanics of such transfers, on cross-examination the PMA's counsel referred to UCC article 4-A, which governs wire transfers. However, at the hearing, the PMA's counsel did not use the statute substantively to attack the Ungars' claims.
At the conclusion of the hearings, the parties submitted post-hearing memoranda and briefs. The PMA, for the very first time, relied on the Uniform Commercial Code (UCC) §§ 4-A-502 and 4-A-503 to assert that the Ungars' judgment could not be enforced against funds in an intermediary bank like the BNY during a wire transfer and that anyway, title to the funds had passed from the PMA. The focus thus shifted to the issue of ownership of the funds during transfer, and specifically their ownership once they reached the intermediary bank, the BNY as determined by the provisions of the UCC article 4-A.
In an order entered October 21, 2005, the motion court, inter alia, modified the state restraining notice by deleting the PMA on the grounds that pursuant to UCC 4-A the BNY holds no property belonging to the PMA because all funds frozen by the BNY were transfers. At that juncture, the court held that title to the funds had passed from the PMA. The court, however, recognized that the funds were still restrained pursuant to the federal injunction, but nevertheless found that the PMA was likely to prevail on the issue of its separate ...