William R. Bennett and Lauren B. Wilgus
Our clients regularly seek our assistance in recovering foreign arbitral awards and foreign judgments from debtors and/or their alleged alter egos in the United States. Each case has its unique facts that dictate the level of effort that we must make to bring about a successful outcome. For example, obtaining a recovery from an alleged alter ego may require a Rule B attachment followed by significant factual discovery, while obtaining a recovery from a debtor with assets and business connections in the United States may require less effort. Regardless of the facts that may be unique to each matter, the basic framework to seek a recovery, discussed herein below, is the same.
The United States has been a signatory of the 1958 United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) since 1970; however, it is not currently party to any international treaty for the recognition of foreign judgments. Unlike foreign arbitral awards, which are governed by the New York Convention, no treaty outlines the circumstances under which U.S. courts may recognize foreign judgments. In the United States, for instance, only the principle of comity, the common law, and individual states’ laws allow U.S. courts to recognize and enforce foreign judgments.
Is Personal Jurisdiction Required in New York?
FOREIGN JUDGMENTS
As a preliminary matter, it is important to distinguish between “recognition” and “enforcement” of foreign judgments. To “recognize” a foreign judgment is in essence to domesticate it, thus making it equal to any other U.S. court judgment. “Enforcement” of a judgment requires the aid of the courts, which, depending on the facts of the case, may or may not be afforded along with recognition of the judgment.
In the United States, a foreign judgment cannot be directly enforced without a prior court action “recognizing” that judgment as a domestic one. The procedure for gaining recognition and enforcement of a foreign judgment first requires the judgment creditor to bring an action against the debtor in a U.S. court. For maritime cases, U.S. federal courts have maritime jurisdiction over the enforcement of judgments of foreign admiralty courts. For non-maritime cases, the judgment creditor may need to proceed in state court. In either case, state law controls the question of enforceability of the foreign judgment. In New York, for example, the Uniform Foreign Money-Judgments Recognition Act applies under C.P.L.R. Article 53. As the New York Court of Appeals has explained:
Article 53 was designed to codify and clarify existing case law on the subject and, more importantly, to promote the efficient enforcement of New York judgments abroad by assuring foreign jurisdictions that their judgments would receive streamlined enforcement here.
Article 53 sets forth substantive requirements that must be met before a foreign money judgment will be recognized in New York. Those primarily concern whether the foreign country’s court had personal jurisdiction over the judgment debtor and subject matter jurisdiction over the case; whether it was an impartial tribunal utilizing procedures compatible with due process of law; and whether enforcing the foreign country money judgment would be unfair, work a fraud, or violate New York’s public policy.
Notably, in New York, “a party seeking recognition of a foreign money judgment need not establish a basis for the exercise of personal jurisdiction over the judgment debtor by the New York courts.”
FOREIGN ARBITRAL AWARDS
When a party seeks confirmation of an arbitral award under the New York Convention, “[t]he court shall confirm the award unless it finds one of the grounds for refusal or deferral of recognition or enforcement of the award specified in the said Convention.” These grounds are very narrow and go to the fairness of the proceedings rather than the correctness of the outcome, which is generally unappealable.
In contrast to enforcement of foreign judgments, most courts in the United States require personal jurisdiction over the defendant in order to enforce a foreign arbitral award. Thus, a movant must establish the requisite jurisdiction by asserting either traditional personal jurisdiction over the defendant based upon its contacts with the jurisdiction or quasi in rem jurisdiction over the defendant’s property.
To establish quasi in rem jurisdiction, a movant must: 1) identify specific property over which the court has jurisdiction; and 2) demonstrate that the exercise of jurisdiction will not offend due process. In order to adequately identify specific property, the movant must “point to [] specific assets of [defendant’s] within the jurisdiction.” In other words, “the sine qua non of basing jurisdiction on defendant’s assets in the forum is the identification of some asset.”
A movant may also establish a basis for jurisdiction over a defendant under Fed. R. Civ. P 4(k)(2), which provides:
For a claim that arises under federal law, a summons or filing a waiver of service establishes personal jurisdiction over a defendant if: (A) the defendant is not subject to jurisdiction in any state’s courts of general jurisdiction; and (B) exercising jurisdiction is consistent with the United States Constitution and laws.
Under this provision, a defendant sued under federal law may be subject to jurisdiction based on its contacts with the United States as a whole, when the defendant is not subject to personal jurisdiction in any state.
Can a Petitioner Enforce a Foreign Arbitral Award or Judgment against a Debtor’s Alter Ego in New York?
ENFORCEMENT OF A FOREIGN ARBITRAL AWARD AGAINST ALTER EGOS
In Orion Shipping & Trading Co. v. Eastern States Petroleum Corp. of Panama, S.A., 312 F.2d 299 (2d Cir. 1963), the U.S. District Court for the Second Circuit, which includes New York, indicated that a proceeding to confirm an arbitral award against a corporation is not an appropriate occasion to determine whether another party is liable under an alter ego theory. In Orion, the petitioner sought to hold a parent entity liable for an arbitration award entered against a subsidiary, claiming the parent was the alter ego of the subsidiary “shell” company. In explaining why such a determination should not be made in the context of a confirmation action, the Second Circuit explained:
This [confirmation] action is one where the judge’s powers are narrowly circumscribed and best exercised with expedition. It would unduly complicate and protract the proceeding were the court to be confronted with a potentially voluminous record setting out details of the corporate relationship between a party bound by an arbitration award and its purported ‘alter ego.’
There are two exceptions to Orion that limit its reach. The first applies where “the complaint specifies two grounds for subject matter jurisdiction,” such that the enforcement action can “be construed as a separate action [from the confirmation action] to enforce the arbitration award against nonparties to the arbitration.”
The second exception to Orion applies where “a claim of piercing the corporate veil … would not unduly complicate the action of the court with respect to the arbitration award.” The Second Circuit has approved of this exception in a limited circumstance—where the determination to be made is whether a nonparty to the arbitration is the successor to the arbitration party.
Accordingly, unless a movant can establish one of the Orion factors applies, a New York court will likely not allow a movant to confirm an arbitral award and enforce it against alleged alter egos in the same proceeding.
ENFORCEMENT OF A FOREIGN JUDGMENT AGAINST ALTER EGOS
Alternatively, in New York, parties that are alter egos of each other may be treated as one and the same for the purpose of enforcing a judgment. In New York, the law is well-established that if defendants are found to be alter egos of each other, then jurisdictional contacts of each entity will be imputed by law upon the others.
ALTER EGO JURISDICTION
New York courts will find that an alleged alter ego is doing business in New York “when the subsidiary is acting as an agent for the parent, or when the parent’s control is so complete that the subsidiary is a ‘mere department’ of the parent.” Determining whether an entity is a “mere department” requires “a fact-specific inquiry into the realities of the actual relationship between the parent and subsidiary.” In particular, a court must consider:
(1) common ownership, (2) financial dependency of the subsidiary on the parent corporation, (3) the degree to which the parent corporation interferes in the selection and assignment of the subsidiary’s executive personnel and fails to observe corporate formalities, and (4) the degree of control over the marketing and operational policies exercised by the parent.
Conclusion
The procedural steps that are required to obtain a recovery of a foreign arbitral award or foreign judgment are not overly complex. However, the efforts to make a successful recovery from a judgment debtor can be quite significant, especially if the judgment debtor has stopped doing business, is insolvent, or has no assets to attach, which is often the reason why our clients seek our services to recover on the foreign arbitral award or foreign judgment. Those matters often require patience, team work, and ingenuity to bring about a successful result.