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Enforcement: a case development update from across the Atlantic

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HFW-400x90Enforcement: a case development update from across the Atlantic

In the current financial climate, enforcement of judgments or arbitration awards is an ongoing concern for claimants. Since the collapse of Lehman Brothers in the last quarter of 2008, we have seen a rise in the number of London Arbitration proceedings and elsewhere, with the London Maritime Arbitrators Association reporting 4445 appointments in 2009, an increase of approximately 800 from the previous year, and last year an increase of 300 appointments from 2011.

However, in circumstances that defendant companies hold assets (if at all) in jurisdictions where it is hard to enforce, litigation can be a costly exercise followed by a bitter experience of fruitless enforcement.

Claimants are encouraged at an early stage to consider options for security for both their costs and the sums claimed. For those claimants not so fortunate to have obtained security before reaching the stage of a court judgment or arbitration award, then the options for enforcement are often limited and include the unattractive prospect of seeking to enforce the judgment or arbitration award in the defendants’ home courts, or as a last resort, to apply to wind the defendant company up.

It is with interest, therefore, that the international litigant has been following developments in the New York courts, no doubt roused by the success of the short-lived ‘Rule B’ phenomenon, which until March 2010, presented maritime claimants the possibility of attaching electronic funds transfers passing through New York clearing houses as security for their claims.

This more or less coincided in time with the possibility raised in Koehler v Bank of Bermuda Ltd (12 NY3d 533 [2009]) which appeared to announce the lengthening of the long arm of the New York court judges.

In Koehler the United States Court of Appeal for the Second Circuit held that it had jurisdiction to order the Bank of Bermuda, which had a branch in New York, to turnover stock certificates held in its Bermuda branch belonging to the judgment debtor, despite the fact that the certificates themselves were located outside of the United States.

This potentially significant decision gave judgment creditors the hope that, armed with a judgment against a defendant, the defendant’s foreign bank could be forced to turn over property held in the name of the defendant debtor, even in circumstances where both the defendant and their bank account are located outside the jurisdiction, as long as the bank held a branch in New York (i.e. both branches being part of the same legal entity). Clearly, if this were so, it would be a powerful weapon in the arsenal of a judgment creditor otherwise struggling to enforce their judgment; the theory being that a London or foreign arbitration award or judgment could be registered in New York and enforced in this manner.

However, it appears that despite the initial buzz and possibilities raised by Koehler, the decision has been of limited practical impact for the international litigant.

The optimism in the wake of the Koehler decision was short-lived and as far as the writers are aware the theory not successfully put into practice. Strenuous objections from banks including Commerzbank, State Bank of India and Bank of China, and an apparent caution on the part of New York courts not to allow the opening of the floodgates have seemingly contributed to the fact that ‘Koehler Orders’ have not become as widely used as one might have expected amidst the arbitration awards and judgments obtained in the years after the collapse of Lehman Brothers.

Notably, in one case, the Clearing House Association and the Institute of International Bankers presented policy arguments in favour of Bank of China’s motion to dismiss an attempt by claimants to extend the principles in Koehler to attach “any property” which may be in the banks’ possession located outside of New York. They argued that banks would “bear the administrative burden and cost of searching for information responsive to broad, invasive discovery requests for confidential banking information, and […] also would potentially violate local laws”. This argument appears to have been accepted by the New York courts.

In an apparent effort to gain clarity on the availability of ‘Koehler Orders’ the court was asked in the recent case of Commonwealth of the Northern Mariana Islands v Millard [2013] whether, if the debtor’s property is in the possession of a subsidiary of the bank (i.e. a separate legal entity within the same corporate group) which has a branch in New York, a turnover order can be made.

The case involved substantial claims for unpaid taxes against a couple, the Millards, brought by the Commonwealth of the Northern Mariana Islands, a US territory of volcanic islands in the north-western Pacific Ocean. Judgments were obtained against the Millards, registered in New York and proceedings commenced for a turnover order. The proceedings were brought by the Commonwealth against Canadian Imperial Bank of Commerce (CIBC), a Canadian bank headquartered in Toronto with a branch in New York, on the basis that the Millards maintained bank accounts in subsidiaries of the Canadian bank and its affiliates in the Cayman Islands. The Commonwealth alleged that CIBC had the “control, power, authority and practical ability to order [its subsidiary] to turn over funds on deposit in the name of the Millards.”

The court was asked to determine whether a turnover order could be made where the defendant’s assets are held by the bank’s subsidiary company, rather than by another branch of the bank, on the basis that the assets are still arguably in the bank’s ‘control’.

It was held that the legislative provisions for turnover orders neither used the word ‘control’ nor intended for ‘control’ of assets, rather than possession, to be sufficient grounds for an order. It therefore seems that assets in the possession of a bank’s subsidiary cannot ordinarily be the subject of a turnover order.

Whilst this decision, as it notes itself, does not change the Koehler decision, in which the bank had actual possession of the assets and so no consideration of subsidiaries was required, it does offer some further guidance as to the restricted availability of turnover orders.

It seems that on this occasion, the New York courts have not offered the elixir hoped for by the judgment creditor and in turn the Banks as well as judgment debtors may breathe a sigh of relief.

As such, the international litigant must continue to watch for the development of opportunities in the New York courts and elsewhere, to try and add to the limited number of enforcement options available for consideration on a case-by-case basis.

In the meantime, the message remains the same for any claimant: to try and obtain security for both its claims and legal costs from the outset.

Readers are asked to note that this article is not intended to give advice on US law, and for a definitive position US lawyers must be consulted.

For more information, please contact Rory Grout, Associate, on +44 (0)20 7264 8198 or rory.grout@hfw.com, or Laura Wright, Senior Associate, on +44 (0)20 7264 8791, or laura.wright@hfw.com, or your usual contact at HFW. Research by Max Thompson.

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