International Dispute Resolution Update: May 2011 - Part 1

In a recent StayCurrent, we wrote about two major rulings in the ongoing dispute between the Chevron Corporation, a group of plaintiffs seeking compensation for alleged environmental damage resulting from oil exploration in the Ecuadorian rain forest, and the Republic of Ecuador itself. While those decisions have generated a great deal of attention and commentary, the first five months of 2011 have seen a number of other interesting decisions in the field of international dispute resolution.

Enforcement of Judgments and the Separate Entity Rule: JW Oilfield Equipment LLC v. Commerzbank AG, ___ F. Supp. 2d ___, 2011 WL 507266 (S.D.N.Y. Jan. 14, 2011)

JW Oilfield began when the original plaintiff, JJS Oilfield Supply GmbH ("JJS"), filed suit against JW Oilfield Equipment LLC ("JW") in the U.S. District Court for the Western District of Oklahoma. JW defended the suit and ultimately was granted judgment as a matter of law following a two-day trial. The Oklahoma court also granted JW's motion for attorneys' fees, and entered judgment against JJS in the amount of $166,169.53. JJS did not satisfy the judgment, prompting JW to seek, and the Oklahoma court to grant, orders in aid of enforcement (a) enjoining JJS from disposing of any property of money pending further order of the court, and (b) directing JJS (through a corporate representative) and its principal officer to appear for deposition and to produce documents regarding JJS's corporate assets. Neither the corporate representative nor the principal officer appeared as directed; the Oklahoma court thus ordered the officer to show cause why it should not be held in civil contempt. The officer failed to respond to respond to the show cause order, and the Oklahoma court entered a civil contempt order against him.

JW registered the Oklahoma judgment in the U.S. District Court for the Southern District of New York. Following its registration of the judgment, JW commenced a special proceeding against Commerzbank, a German bank at which JJS maintained an account, in which it sought an order (a) freezing and restraining any accounts maintained by or for the benefit of JJS, and (b) ordering Commerzbank to turn over to JW the proceeds of any JJS accounts in satisfaction of the Oklahoma judgment.1 In response, JJS filed an action in Frankfurt, Germany seeking an injunction directing Commerzbank to ignore the asset freeze imposed by the Oklahoma court and pay the funds in the Commerzbank accounts to JJS. The German court denied JJS's motion.

The issue before the New York court thus involved whether Commerzbank could be ordered to turn over the proceeds of JJS's account to JW in satisfaction of the judgment. Commerzbank claimed that it could not be so ordered, because the funds at issue were on deposit in an account at a branch in Germany. Relying on the New York Court of Appeals' 2009 decision in Koehler v. Bank of Bermuda,2 the New York court ruled that because it had personal jurisdiction over Commerzbank, it could issue a turnover order directing Commerzbank to deliver the proceeds of JJS's German account (up to the amount of the judgment) to JW.

Commerzbank raised three additional arguments in opposition to JW's motion for turnover. First, Commerzbank claimed that because the New York court lacked personal jurisdiction over JJS and/or in rem jurisdiction over the funds in the account, application of Koehler would violate the due process rights of JJS. Noting the general rule that parties typically lack standing to assert the constitutional rights of third parties, the New York court analyzed Commerzbank's claim under the doctrine of jus tertii, or third party standing, and found that Commerzbank could assert JJS's due process rights only if it could demonstrate (a) a "close relationship" with JJS, and (b) that JJS was "hindered" in its ability to assert its constitutional objections directly. The court found that Commerzbank could not satisfy either element of this test. With respect to the necessary "close relationship," the court found that Commerzbank and JJS were not closely aligned in interest. Specifically, the court noted that JJS had commenced litigation against Commerzbank in an attempt to evade the Oklahoma court's freezing order, and that Commerzbank's true motivation for asserting the due process claim was that it, being potentially subject to conflicting duties under the legal systems of two sovereigns (Germany and the United States), feared that it would be forced to pay the same amount twice. The court concluded by observing that even if JJS were subject to jurisdiction in New York, Commerzbank's litigation posture would be no different. The court thus held that Commerzbank could not be an effective advocate for JJS's due process rights. It also made quick work of the "hinderance" element, noting that there was no reason that JJS could not itself have made a special appearance in the action against Commerzbank to assert its jurisdictional objections.

The court turned next to Commerzbank's argument that New York's "separate entity rule," which generally holds that "each branch of a bank be treated as a separate entity for attachment purposes," prohibited turnover of funds held in Germany. The court rejected this argument, holding that Koehler abrogated the applicability of the separate entity rule in post-judgment execution proceedings.3 Because the court had personal jurisdiction over Commerzbank by virtue of its presence in New York, the court held that it could, consistent with Koehler, order Commerzbank to pay the funds to JW in New York.

The court turned next to Commerzbank's argument that because the turnover order would conflict with German law (which it claimed permits German banks to respond only to execution orders of German courts), the court should decline to exercise jurisdiction in the interest of international comity. The court analyzed Commerzbank's comity argument under the five-point test set forth in Minpeco S.A. v. Conticommodity Services, Inc.,4 and found it unconvincing. While accepting as "undoubtedly true" Commerzbank's argument that Germany has a strong interest in bank regulation and the enforcement of foreign judgments, the court found that the German court's denial of JSS's motion for an injunction was significant, since that denial represented a statement by the German court that Germany's interests in enforcing its own banking laws did not necessarily outweigh the United States' interest in enforcing the judgments of its own courts. The court also applied the general rule that foreign court orders are not entitled to comity where the party who procures them has done so to deliberately court impediments to a federal court order, noting JSS's refusal to obey the Oklahoma court's discovery orders and its order to show cause (although curiously neglecting to note JSS's application for a German injunction). The court also found that Commerzbank's compliance with the a turnover order would not impose an impermissible hardship, as it would not require the violation of any German criminal law, pose the risk of any sanctions that could be seen as the equivalent to criminal penalties, or conflict with German public policy as expressed in legislation. To the contrary, the court found that Commerzbank's compliance with the turnover order posed only the risk of "speculative civil liability." Against this backdrop, the court concluded that the importance of vindicating the Oklahoma judgment substantially outweighed any hardship on Commerzbank, particularly where it remained uncertain how the German court would ultimately rule, and it refused to refrain from exercising jurisdiction on comity grounds.5

JW Oilfield demonstrates, with particular clarity, the jurisprudential trend in New York favoring assertive exercises of jurisdiction to ensure the swift enforcement of judgments. Most notable is the decision's conclusion – which was implicit in Koehler – that the separate entity rule no longer will no longer allow judgment debtors to avoid enforcement simply by claiming that assets otherwise subject to execution are domiciled in an account outside New York. To the contrary, New York enforcement principles now firmly rest on principles of in personam – not in rem – jurisdiction, which courts will apply to require garnishees to deliver assets into the jurisdiction for purposes of satisfying New York judgments.6 JW Oilfield also illustrates how U.S. courts recognize a vital national interest in the enforceability of their judgments, as well as a judicial willingness to exercise their jurisdiction to its outer limits in order to vindicate that vital interest, particularly in cases where the judgment debtor has demonstrated an unwillingness to honor the U.S. court's orders.

Competent Judicial Authorities/Manifest Disregard Review in International Arbitration Proceedings: International Trading and Industrial Investment Co. v. Dyncorp Aerospace Tech., ___ F. Supp. 2d ___, 2011 WL 192517 (D.D.C. Jan. 21, 2011)

Dyncorp Aerospace arose out of a dispute between an American defense contractor ("Dyncorp") and a Qatari company ("International Trading") over the termination of an agreement whereby the Qatari company was to help the contractor establish a Qatari branch office. After Dyncorp attempted to terminate the agreement, International Trading disputed its ability to do so under the parties' agreement, and commenced arbitration before the International Chamber of Commerce ("ICC"). The ICC chose Paris as the seat of the arbitration; the parties agreed that Qatari law would govern the substantive dispute, and that the ICC Rules would apply to any procedural issues. The arbitration tribunal awarded International Trading $1,107,764.95 in damages, plus costs and interest.

Dyncorp filed actions seeking to set aside the award in the courts of France and Qatar. The Qatar trial court and Court of Appeal denied Dyncorp's petition. However, the...