Jurisdictional Land Mines Facing Receivers in Pursuing Claims in Foreign Jurisdictions
The information below is an excerpt from the June 2016 edition of “The Receiver,” a newsletter created and distributed by the National Association of Federal Equity Receivers (“NAFER”). Learn more about this organization at www.nafer.org.
The first and essential question to be answered is: does the US appointed receiver have standing in the particular foreign jurisdiction where assets are located? Indeed, it is an obvious and seemingly simple inquiry. However, the correct answer can be extremely complex–fraught with potentially paradoxical and unintended results, especially since it is coupled with the reality that the receiver is not the victim. Frankly, many “experts” fail to address this fundamental and case altering query. This article summarily reviews some of the considerations to evaluate standing issues facing US appointed receivers.
The offshore world has seen an increase in cross-border liquidations. Often times, the tax havens in the Caribbean Islands are fertile ground for those who move assets to financial institutions there due to strict confidentiality laws and tax incentives. English law has significant influence in the various islands located in the Caribbean, and Europe and Asia in countries where the British Commonwealth was at one time in control, which have enacted laws which allow these jurisdictions to recognize receivers appointed by a foreign court and to enforce the orders of the foreign court. Addressing in part, the legal “standing” issue for US appointed receivers. However, these laws have very strict limitations.
These limitations include the following tests: (1) has defendant subjected him/itself to the foreign courts’ jurisdiction; (2) was defendant entity formed in foreign jurisdiction; (3) did defendant entity engage in business activities in foreign jurisdiction; and (4) will the court where defendant entity is formed recognize a receiver appointed by a foreign jurisdiction. Applying the above limitations, the defendant involved in the action must have sufficient connections with the jurisdiction in which the receiver was appointed.
Schemmer v. Property Resources Ltd., which involved the Bahama Islands, is instructive. There, an SEC receiver sought to be recognized in order to take possession of the shares and assets of a Bahamian company and its subsidiaries. The court defined the above four tests to determine whether there are sufficient connections between the defendant and the jurisdiction appointing the receiver. The court determined the defendant did not submit to the federal jurisdiction where the SEC receiver was appointed, the foreign company involved was not incorporated in the United States, the company did not carry on business in the United States, and there was no evidence that the Bahamian Islands would recognize the United States order as affecting the assets located in the Bahama Islands. Therefore, the court decided that there were not sufficient connections to recognize the SEC receiver, meaning the SEC receiver did not have standing to pursue those claims in the Bahamas.
Certainly, each matter and the particular appointment are unique. Once offshore assets have been identified, early evaluation of the receiver’s standing and potential alternatives will place the receiver in an advantageous position for ultimate success.
Hence, as outlined above, the recognition and assistance in the offshore country must be preeminent in deciding how to pursue offshore claims and assets by a federal equity receiver. If there is a possibility of the lack of recognition, the receiver could consider having a liquidator appointed in the foreign country where the claims and distributions could be handled in a coordinated fashion. The offshore appointed liquidator would be recognized by the foreign jurisdiction and in some instances may be the same party as the US based receiver. This potential “problem-solving” alternative has been recognized in various foreign jurisdictions.
Another limitation is that the English courts will not recognize a foreign-appointed receiver if recognition of the receiver would result in the enforcement of foreign penal laws. Foreign courts have opined that this limitation arises where the laws of the United States are invoked. In other words, for federal equity receivers, it occurs when the receiver is appointed by a governmental agency, not by common law or under the bankruptcy code. For instance, in Stutts v. Premier Benefit Capital Trust, the Grand Court of the Cayman Islands considered whether the recognition of the SEC receiver would be enforcement of a foreign penal law. The Grand Court examined the SEC Act of 1933 and 1934 and decided that the discouragement proceedings pursuant to the provisions of those Acts were penal in nature and, therefore, the receiver cannot be recognized by the Cayman Islands.
On the other hand, the Grand Court of the Cayman Islands in Canadian Arab Fincorp and Kilderkin Inv. Ltd. v. Player, considered the four tests in Schemmer and determined the defendant in the Canadian proceedings in Ontario, where the receiver had been appointed, had submitted to the jurisdiction of the Supreme Court of Ontario, the defendant was incorporated in Canada, the defendant carried on business in Canada, and the Ontario courts could recognize the appointment of a foreign receiver. The Cayman court decided it could recognize a foreign receiver.
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