Pity poor Tiffany’s. Teeming with gold. Silver. Diamonds. Basking in the perpetual cinematic afterglow of a youthful Audrey Hepburn.
But there is real suffering here at 57th and 5th.
Consider: Tiffany’s remains mired in a trademark infringement debacle, in a US court in Manhattan, against online knock-off con artists who keep their accounts in Chinese banks. Legally savvy crooks, they have not bothered to defend the action on the merits, instead absorbing default judgments but wagering, wisely so far, on the ineffectiveness of US judgment enforcement methods to reach their assets in China. In the latest chapter, the federal district judge presiding over the case has vacated a pre-judgment asset freeze order against the defendants. On two grounds. First, as the case is now post-judgment, different legal standards for any asset seizure apply, i.e. state law procedures made applicable by Federal Rule of Civil Procedure 69. Second, at the stage of entering judgment on default, it had become evident that the judgment should be for money damages, and not for an equitable accounting of the ill-gotten profits of the infringers, and so Tiffany’s claim was one for money damages only, as to which, had the claim been so pleaded initially, it would not have qualified for a pre-judgment asset freeze under controlling (Grupo Mexicano) federal law. (Tiffany (NJ) LLC v. QI Andrew, 2015 WL 3701602 (S.D.N.Y. June 15, 2015)).
But this post is not really about what has happened already, but what happens next. We care, arbitration mavens, because this scenario plays out in similar fashion when an international arbitration award is presented for enforcement (and not merely recognition) in a US court, especially a partial award granting as a provisional measure the kind of asset freeze that Tiffany’s had earlier obtained.
Most of you know that in October 2014 the New York Court of Appeals handed a victory to global banks that operate New York branches, ruling that the hoary “separate entity rule” remains the law of New York, such that a judgment creditor’s state law notice to restrain assets (“restraining notice”), served on a New York branch of the bank, has no legal effect to require restraint of the judgment debtor’s assets held in an account associated with a foreign branch. (Motorola Credit Corp. v. Standard Chartered Bank, 24 N.Y.3d 149 (Oct. 23, 2014)). As a consequence, the “action” shifts to the discovery front, with judgment creditors seeking to use information subpoenas issued by the US federal court (in compliance with New York State judgment enforcement law) to the New York branches of those global banks to require disclosure of information about the accounts and assets of the judgment debtors. The “separate entity rule” as endorsed by the New York Court of Appeals in the Motorola case is not a barrier to such discovery.
The contest in legal disputes over the enforcement of such subpoenas has been, and will continue to be, over the degree of deference that US courts should give to foreign nations’ statutes and regulations imposing bank secrecy and other similar restrictions on disclosure of information for use in foreign judicial proceedings. It is an issue of “international comity,” and it may have decisive impact on whether the Court permits discovery under the Federal Rules of Civil Procedure, which it may do, or alternatively requires use of the Hague Evidence Convention, which it need not automatically do but must at least consider according to a multi-factor test formulated by the US Supreme Court in the 1980s in the Aerospatiale case. Two years ago, your author as judgment creditor’s counsel served an information subpoena on Deutsche Bank in New York for information about the judgment debtor’s accounts in Singapore. Deutsche Bank moved to quash and presented expert evidence concerning Singapore’s bank secrecy law and its exceptions allowing disclosure in aid of judgment enforcement but only upon an order permitting disclosure issued by a Singapore court. The motion to quash was granted by a US Magistrate Judge (in an unpublished order that I will share upon request), despite the absence of evidence of any actual prosecutions or a declaration of prosecutorial policy to prosecute in Singapore for violations of the bank secrecy law in similar circumstances — i.e. where the bank’s disclosure of client account information was made in compliance with an order of a court outside Singapore. The Magistrate Judge held that the judgment creditor should instead secure from the US court a Letter of Request under the Hague Evidence Convention. This was done, and thereafter the Singapore authorities engaged in a series of dilatory actions evidently calculated to cause the Letter of Request to die a bureaucratic death, which it did.
Your author made anguished cries in this space. And now (with no claim of cause and effect, as the judge in the case about to be described is not a known reader of these rants) there is better news for judgment creditors from lower Manhattan, where the most recent published decision on this same question adopts a more inquisitive and less presumptive approach to the public policy interests of foreign States that are ostensibly served by statutes or regulations blocking information disclosure by financial institutions. See Motorola Credit Corp. v. Uzan, 2014 WL 7269724 (S.D.N.Y. Dec. 22, 2014). The District Court in this case did, and said that in the further proceedings it would, insist upon evidence that the foreign State had actually prosecuted or would prosecute violators of its nondisclosure/secrecy laws, or require other comparable evidence that the laws were fundamental public policies of the foreign State and not merely solicitous gestures toward powerful international banks whose local operations breathe life into local economies. Such a more formidable showing is to be required before the Court will conclude that the foreign State’s interest in enforcement of its nondisclosure laws is a compelling reason of “international comity” to deny enforcement of the US domestic subpoena to the global bank’s New York branch and instead require the judgment creditor to try her luck domestically under the Hague Evidence Convention in the jurisdiction where the assets are believed to be on deposit.
This, I believe, is progressive thinking about “comity” given two fundamental contextual features: (1) a global economy in which foreign States sometimes seek to subsidize economic growth through legislation that makes the State a regulatory haven for particular industries, and (2) a US legal environment in which creative lawyers make “comity” arguments on behalf of their client global banks (and not directly as advocates for the foreign States in which their clients operate), framing such legislation as a broader reflection of fundamental domestic policy in the enacting foreign State than may in fact be the case. (For this reason, courts in some similar cases have considered it significant whether the foreign States themselves appears as amicus curiae to articulate for themselves their public policy perspectives)
It appears that Tiffany’s and a number of Chinese banks will shortly be entering the ring to counter-punch on these issues. The outcomes should be watched closely by all of us who calibrate the effectiveness of US courts for enforcement of awards and judgments against judgment debtors whose wealth is strategically held or concealed abroad.