JPMorgan Caught Up in U.S. Sanctions Against Russia

Top of JP Morgan Chase Tower, by Joe Mabel licensed under CC BY-SA 3.0

A recent dispute in U.S. federal court shows that efforts to isolate Russia through sanctions are seeping into the courts of both countries. As the economic and legal regimes of Russia and the United States drift further apart, both Russian and U.S. courts have become increasingly bold in flouting the orders of the other. This makes life difficult for companies like JPMorgan that are caught in the middle.

Background

In February 2022, the US Treasury Department expanded sanctions against Russia to include several of Russia’s largest financial institutions. This included freezing the U.S.-based assets of the majority Russian state-owned VTB Bank (VTB), $439.5 million of which is held in a JPMorgan account in New York. In April 2024, Congress passed the REPO Act, which provides legal grounds for the United States to confiscate frozen Russian assets. Although the United States has not yet exercised this power, the act’s passage signals that Russian state assets are no longer secure in the United States.

Dueling Court Orders

On the heels of the REPO Act’s passage, VTB filed suit in Russian courts against JPMorgan to recover the $439.5 million in frozen assets held in New York.

The next day, April 18, JPMorgan brought a breach of contract claim in the district court of the Southern District of New York. The complaint alleges that VTB violated the forum selection clause in the contract governing their JPMorgan account and that any claim by VTB with respect to the assets held in New York must be filed in New York—not Russia. JPMorgan sought an anti-suit injunction to prevent the suit in Russia from going forward and a declaratory judgment that VTB breached the contract. That same day, JPMorgan moved ex parte for a temporary restraining order to enjoin VTB from continuing its lawsuit against JPMorgan in Russia while the district court in New York heard the case. The court (Judge Schofield) granted the TRO.

On April 24, the Russian courts froze $439.5 million of JPMorgan’s assets held in Russia as security while they heard the suit against JPMorgan.

On April 25, the district court in New York granted a preliminary injunction against VTB, who had been served but did not appear in the action. The injunction ordered VTB to:

1. Dismiss and discontinue the Russian Action against JPMorgan and its affiliates;
2. Cease all efforts to enforce the Freeze Order against any assets of JPMorgan and its affiliates;
3. Seek to vacate the freeze order issued by the Russian court;
4. Refrain from filing any further claims or seeking any other relief against JPMorgan or its affiliates that arises or is connected [with VTB’s assets in New York] in any jurisdiction other than in the federal or state courts of New York.

Because anti-suit injunctions interfere with litigation in foreign courts, they are generally disfavored based on comity concerns, although standards for granting them vary among the courts of appeal. The Second Circuit takes a restrictive approach to anti-suit injunctions and grants them only if the foreign litigation threatens the jurisdiction of the U.S. court or undermines important public policy. The district court cited both grounds:

The Russian Action threatens the exclusive jurisdiction of this forum, which VTB agreed to in the parties’ contract, and threatens the strong public policies of the United States. Both the United States and New York strongly favor enforcement of forum selection clauses. [citations omitted]. In addition, permitting VTB’s Russian Action to continue could result in a judgment that is inconsistent with a statute of this forum that effectuates an important U.S. public policy, specifically the U.S. sanctions issued against VTB here.

Although it does not seem entirely clear that a disagreement about a forum selection clause should constitute a threat to the court’s jurisdiction, apparently courts in the Second Circuit do grant anti-suit injunctions to give effect to forum selection clauses as a matter of policy. In addition, the policies behind U.S. sanctions are undoubtably important, as the district court reasoned, but many kinds of suits abroad might undermine them. Perhaps of more significance in this case is the unfortunate position of JP Morgan, whose Russian assets are jeopardized apparently through no fault of its own and as a result of conflict between the United States and Russia.

Sanctions

VTB ignored the injunction and continued to pursue litigation in Russia. In June, 2024, VTB obtained its own anti-suit injunction in the Russian court which required JPMorgan discontinue the action in New York.

VTB’s lawyers had entered an appearance in the New York case in May. At the end of July, the district court sua sponte sanctioned VTB $500,000 in fines to the court and ordered VTB to pay JPMorgan an additional fine “equal to any payment [JPMorgan] makes directly or indirectly to or for the benefit of [VTB] as a consequence of the Russian action.” During the sanction hearings, VTB argued that it did not have to comply with the injunction ordered by the district court in New York because the court lacked personal jurisdiction. The court disagreed, reasoning that even if the forum selection clause did not confer personal jurisdiction, New York state law did, which satisfies Federal Rule of Civil Procedure 4(k)(1)(A). The requirements of New York Civil Practice Law and Rules § 302 were met, the court reasoned, because VTB “transacted business in New York” through the use of a New York bank account, and the “lawsuit and related sanction arise out of that business.”

Despite this apparent win, JPMorgan moved for voluntary dismissal. It did so “against its will” saying it was “coerced” because it faced uncertain financial consequences in Russia if it violated the Russian court’s anti-suit injunction. Despite earlier plans to “unwind business” in Russia announced back in 2022, as of 2024, JPMorgan still had about $2.46 billion of assets in Russia, $2.19 billion of which sits in “type C” accounts for foreign investors. Pursuant to a Russian law passed early in the war against Ukraine, assets in “type C” accounts cannot be transferred out of Russia without permission from Russian authorities. This law has been an impediment to JPMorgan exiting the Russian market. Accordingly, the consequences JPMorgan faces in Russia for violating the injunction—exacerbated by a May decree allowing Russia to seize assets from “type C” accounts—could be substantial.

When it dismissed the action, the district court ordered that the preliminary injunction, the $500,000 fine to the court, and the fine to JPMorgan were to remain in place unless and until modified by court order. VTB filed an appeal with the Second Circuit on August 29.

Conclusion

As of now, the United States has not confiscated any frozen Russian assets pursuant to REPO, nor has Russia confiscated the frozen JPMorgan assets, leaving the situation at an uneasy stalemate. It is hard not to see JPMorgan as the loser in the broader conflict between Russia and United States (as well as Europe and the G-7). JPMorgan’s assets are effectively being used by Russia as security against the possibility that the United States will confiscate the frozen Russian assets pursuant to the REPO Act. The litigation illustrates the difficulty of participating (or even winding down participation) in both Russian and U.S. markets and complying with both Russian and U.S. law—an issue which is only likely to become more pronounced.

Thanks to Gregg Cashmark for research and drafting contributions to this post.