Recent TRIA Decision Could Ease Garnishment Burden

Keywords: garnishment litigation, blocked accounts, Terrorism Risk Insurance Act, TRIA

A recent decision from the US Court of Appeals for the District of Columbia Circuit is good news for banks facing an ongoing crush of garnishment litigation. The decision in Heiser v. Islamic Republic of Iran reduces the universe of blocked accounts that are subject to turnover under the Terrorism Risk Insurance Act (TRIA) and may persuade the Court of Appeal for the Second Circuit to take the same approach in an appeal before that court raising similar issues.

Various federal sanctions programs require banks to freeze funds in which foreign governments or other entities linked to terrorism or nuclear proliferation may have an interest. Many of those parties are subject to huge default judgments for acts of terrorism, and the frozen assets are among the few US assets that can be reached to satisfy those judgments. The Terrorism Risk Insurance Act allows plaintiffs to execute judgments for compensatory damages on "blocked assets of that terrorist party" "[n]otwithstanding any other provision of law."

Federal district courts have endorsed two different reading of this language.1 The DC District,2 along with Judge Cote in the Southern District of New York in Calderon-Cardona v. JP Morgan Chase Bank,3 had tried to reconcile TRIA with generally applicable asset turnover law, holding that "blocked assets of that terrorist party" are blocked assets that the terrorist party owns. Ownership, in turn, must be determined by otherwise-applicable property law. Those courts would read the "[n]otwithstanding" clause to override only sovereign immunity and perhaps the blocking regulations.

At least two other courts in the Southern District of New York (in Levin v. Bank of New York and Hausler v. JP Morgan Chase Bank) have held instead that TRIA allows judgment creditors to seize any asset that was blocked because of a nexus with the terrorist party against which they hold a judgment. They point to the "[n]otwithstanding" clause as overriding any other law that might make a blocked asset not "subject to execution," including any property law that holds the asset not to belong to the judgment debtor.

Whether the creditors' rights depend on ownership makes a big difference for some frozen assets, especially blocked wire transfers. Treasury regulations require banks to block any wire in which a sanctioned party has any connection, whether as originator, beneficiary or in any...