1 International Litigation Judgment Enforcement Against Foreign Debtors Lawrence W. Newman and David Zaslowsky, New York Law Journal January 29, 2015 | Lawrence W. Newman and David Zaslowsky In most cases, the object of the litigation exercise for plaintiffs is to obtain a judgment that can be enforced. This is usually not a problem when the debtor is operating an ongoing business, using bank accounts and engaging with customers who owe it money. When, however, the judgment debtor is foreign and has no ongoing business operations and no visible assets, the usual approach of enforcing a judgment against it by identifying the debtor's assets and levying on them becomes more challenging. Two recent, related New York decisions illustrate the difficulties in pursuing certain foreign debtors. The cases concern a lawsuit brought by Motorola in the Southern District of New York based on claims of fraud and misapplication of funds, in which it was awarded, in 2003, a substantial judgment for over $2 billion against members of the Turkish Uzan family, who failed to defend the lawsuit on the merits. In 2006, these damages were supplemented by an award of $1 billion in punitive damages. 2 Over the ensuing years, the U.S. courts have not minced words in describing the defendants and their responses to the judgments. Already under indictment in their home country of Turkey for a separate fraud, they have evaded payment, in the words of Judge Jed Rakoff, "…by utilizing an international web of proxies and stealth to hide their assets and evade payment" pursuant to "…diverse, complex, and concerted efforts to conceal their assets from their creditors…."1 Earlier, the New York Court of Appeals described the Uzan defendants as having "…gone to great lengths to avoid satisfying the judgments and [remaining] in contempt for failure to comply with the District Court's orders, subjecting them to arrest if they enter the United States."2 In the face of this conduct, Motorola turned to actions against third parties that might have assets of the defendants or have information about them. Motorola engaged in certain of these postjudgment discovery proceedings ex parte and under seal.3 Thereafter, based on the discovery obtained, the district court issued an order enjoining the defendants and anyone receiving notice of the order from transferring or dissipating any of the defendants' assets and to freeze any one of the defendants' property in their possession. Separate Entity Rule The debtors defended by invoking the "separate entity" rule, a judge-made doctrine that has been followed for almost a century, under which the bank account of a debtor may be attached only at the branch where the debtor's account is located. In this case, the deposits were located in foreign banks outside the United States. Motorola argued that a 2009 decision of the New York State Court of Appeals, Koehler v. Bank of Bermuda, 12 N.Y. 3d 538 (2009), was authority for a right to compel foreign banks to comply with the judgment-enforcement procedures under the CPLR4 by bringing into New York bank deposits held in branches outside New York. In the Koehler case, corporate securities owned by the judgment debtor were located at the Bank of Bermuda outside the United States, where they had been pledged as collateral for a loan. The New York Court of Appeals ruled that, since the Bank of Bermuda had conceded in the litigation that it was subject to the jurisdiction of the New York State courts through its New York subsidiary, it could be compelled to bring the debtor's shares ("or monies sufficient to pay the judgment") into New York, where they could be collected by "a designated sheriff"5 for the judgment creditor, Mr. Koehler. The U.S. District Court for the Southern District of New York ruled that the Koehler case was distinguishable because the Bank of Bermuda had conceded that it was subject to the jurisdiction of the New York courts, whereas, in the case of Motorola against the Uzans, none of the foreign banks had made such a concession. On appeal by Motorola, the U.S. Court of Appeals for the Second Circuit referred the question of the applicability of the separate entity rule to the New York Court of Appeals, which responded by upholding the longstanding judicially created rule. The Court of Appeals described the separate entity rule as being "a limiting principle" based on a "long-standing common-law doctrine" on the exercise of jurisdiction over garnishees under CPLR 5225(b). The "limiting principle," it said, functions "in the context of international banking, particularly in situations involving attempts to restrain assets held in garnishee bank's foreign branches." Moreover, the court declined Motorola's invitation to "cast aside" the separate 3 entity rule. It has been, the court said, part of New York common law for nearly a century and used repeatedly by New York courts to "prevent post judgment restraint of assets situated in foreign branch accounts based solely on the service of a foreign bank's New York branch." The court pointed to the possibility of garnishee banks' suffering "double liability" in separate jurisdictions in the absence of the rule, which, it said, promotes international comity.6 Regarding Motorola's contention that the court's earlier Koehler decision abrogated the separate entity rule, the court admitted that it did not discuss the separate entity rule in that case, saying that it could "discern two reasons for [its] silence on the subject." First, the foreign bank did not raise the issue, and, second, the separate entity rule would not have applied in Koehler because it did not involve bank branches or assets in New York bank accounts.7 The court stated, in the conclusion of its opinion, "…we believe that abolishing the separate entity rule would result in serious consequences in the realm of international banking to the detriment of New York's preeminence in global financial affairs."8 The Second Circuit followed up on this decision by ordering the restraining order on the defendants' assets to be vacated.9 Motorola was thus left out of luck with respect to obtaining relief through the judgment debtors' bank accounts outside the United States—at least through actions that might be taken by New York courts. But Motorola still had the extensive rights afforded to judgment creditors under the CPLR to engage in discovery concerning the nature and extent of the debtors' assets, both within and outside the United States.10 On that front, in many of the countries in which Motorola sought discovery of information concerning the debtors' bank accounts, there were laws that blocked or otherwise prevented the disclosure of such information. France, Jordan, Switzerland and the United Arab Emirates, among other nations, had laws invoked by the banks that purported to prevent disclosure of information of the kind sought by Motorola. Discovery Judge Rakoff first ruled that the discovery could be obtained pursuant to orders of the court, rather than exclusively under the Hague Convention on the Taking of Evidence in Civil or Commercial Matters (the Hague Convention),11 inasmuch as both are permitted under the Supreme Court's decision in the Aerospatiale case.12 In Aerospatiale, the Supreme Court rejected the argument that the Hague Convention is either the exclusive means of obtaining evidence abroad or the "first resort" for such discovery, holding that "direct use of the Federal Rules" of discovery may be ordered by a district court providing that it protects against discovery abuse and demonstrates "due respect for any special problem confronted by the foreign litigant on account of its nationality or the location of its operations, and for any sovereign interest expressed by the foreign state."13 Rakoff then undertook a country-by-country analysis of these foreign laws, applying the test of "consideration of international comity" of the Restatement (Third) of the Foreign Relations Law of the United States as applied by the Supreme Court in the Aerospatiale case. This five-part test essentially involves a balancing exercise with respect to comity—concerning the depth and the seriousness of the concerns of the foreign countries in question in comparison with the concerns 4 of the party seeking relief in the U.S. courts. Rakoff determined, with the assistance of expert witnesses presented by the parties, that France, although it had its blocking law on its books since 1980, had not undertaken any serious enforcement of it. Consequently, the judge ruled, the balance tipped in favor of granting the discovery requested with respect to information from France.14 With respect to Jordan and the UAE, Rakoff stated that the policy of bank secrecy is "…not merely protective of private interests but expressive of a public interest" that is enforced through criminal prosecutions, but noted that there was nonetheless a "total paucity of published prosecutions of banks in Jordan and the UAE for complying with discovery ordered by a foreign court." On this basis, he ordered compliance with the requests for "bank information located in Jordan and the UAE."15 As for the discovery that Motorola sought in Switzerland, Judge Rakoff reached a different conclusion. This country, he found, has been serious in enforcing the laws under its bank secrecy regime, which, he observed, is "…almost an element of that nation's national identity" and its interests should be deferred to as a matter of comity. He therefore quashed the subpoenas seeking bank documents in Switzerland.16 Struggle to Obtain Payment As can be seen from the time that has passed since the delivery of the judgment against the Uzans in 2003, actually obtaining payment by a judgment debtor can be a protracted struggle. It has been reported that Motorola has obtained some satisfaction of its judgment,17 but only a fraction of the amount owed. If the judgment debtors operated an ongoing business with funds flowing into it, obtaining satisfaction of the judgment would have been easier, the principal challenges being bankruptcy of the debtor, having to pierce the corporate veil and fraudulent conveyances. But when the judgment debtors are individuals whose principal occupation may be the hiding of their assets, the enforcement challenges can become huge. Evasive electronic transfers can be made swiftly from bank to bank and, perhaps more important, nominees or, in a word used in this case, "proxies," in the form of trusts, foundations, corporations and individuals, can be utilized for holding and secreting funds. It has been said that the most difficult type of assignment for private (and perhaps also public) investigators is asset tracing, and it has also been said by investigators that it is often more fruitful to obtain information about and pursue individuals rather than bank accounts and other assets. Individuals such as discontented or former employees, divorced spouses or even the subjects themselves may reveal far more than documents so arduously pursued. Therefore, the struggles engaged in by Motorola and by other judgment creditors in similar situations can be hard and frustrating, with time and effort expended in obtaining information that may be stale and useless by the time it is obtained. Court proceedings are an important part of judgment enforcement, but so are inside information and luck. Endnotes: 5 1. Motorola Credit Corporation v. Uzan, SDNY Case 1:02-cv-00666-JSR-FM, pp. 2 and 9 (December 22, 2014) ("Rakoff Dec. 22, 2014 opinion"). 2. Motorola Credit Corporation v. Standard Chartered Bank, 2014 NY Slip Op 07199, p. 1 (Oct. 23, 2014). 3. Id. 4. CPLR, Article 52. 5. CPLR 5225(b). 6. Motorola Credit Corporation v. Standard Chartered Bank, 2014 NY Slip Op 07199, p. 3 of 9 (Oct. 23, 2014). 7. Id., p. 3 of 9. 8. Id., p. 4 of 9. 9. Motorola Credit Corporation v. Standard Chartered Bank, Case 1:02-cv-00666-JSR-FM (2d Cir., Dec. 5, 2014). 10. CPLR Article 52. 11. 23 U.S.T. 2555, T.I.A.S. 7444, 847 U.N.T.S. 231, reprinted in 8 I.L.M. 37 (1969); U.S. Code Annotated (West), following 28 U.S.C.A. 1781. 12. Rakoff Opinion and Order of Dec. 22, 2014, p. 9, referring to Societe Industrielle Aerospatiale v. the United States District for the Southern District of Iowa, 482 U.S. at 543-44 (1987). 13. Id. at 546. 14. Rakoff Opinion and Order of Dec. 22, 2014, pp. 13-15. 15. Id. 16. Id. at p. 17. 17. "[Motorola and Nokia] say they have searched and seized Uzan assets in 11 countries, including homes in New York and London, bank accounts, two airplanes and a yacht worth about $125 million. They also collected $1.25 billion in a settlement with Turkey following the government's seizure of Telsim assets." http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aF5rnkaWy27I. 6 Lawrence W. Newman is of counsel and David Zaslowsky is a partner in the New York office of Baker & McKenzie. They are authors of "Litigating International Commercial Disputes" (West) and can be reached at lawrence.newman@ bakermckenzie.com and email@example.com.