Sui generis maximus: Power over UK persons for “special” US bankruptcy claims

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Lawyers often seem too clever in arguing legal niceties to help clients avoid responsibility. Sometimes, though, a lawyer is hoisted with his own petard as a court fashions new super-niceties to reflect modern developments and undercut long-established rules. A vivid illustration of this occurred in a recent ruling of the UK Court of Appeals that confirmed the British dedication to ‘universalism’ in cross-border bankruptcy cases, even at the expense of one of the most bedrock rules of legal procedure and due process.

First, the old rule: From time immemorial, it has been established that a court can make orders only relating to persons sufficiently connected to the limited geographical area where the court has the power to “say what the law is” or, derived from the Latin for this phrase, “jurisdiction”. That is, a US court should have no power to tell a UK citizen, with no direct connection to the US, that he is obliged to pay money to someone else. Thus, any attempt by a US court to exceed its “personal jurisdiction” and direct orders to such a UK citizen could be safely ignored . . .

or so British lawyers advised a Mr Roman and his sons when they received a summons to New York Bankruptcy Court demanding their disgorgement of over $160 million.

When the New York court entered a default judgment ordering Mr Roman and his sons to pay the $160 million, the Romans remained confident that such an order could never be enforced against them or their assets in the UK in light of the “personal jurisdiction” axiom just mentioned. While the first instance of the UK High Court of Justice agreed, the Court of Appeal on 30 July 2010 fashioned an exception to the centuries-old rule, scandalising traditionalists and delighting the proponents of ‘universalism’ in cross-border bankruptcy administration.

The Romans had been called to account for money that they had received from the British managers of a British entity that had become bankrupt after its fraudulent business scheme collapsed.

Because the overwhelming bulk of the entity’s business, assets, and creditors were in the US, however, its “center of main interests” and the proper forum for insolvency proceedings was therefore in the US. After initiating a bankruptcy case in New York, the receivers asserted that large sums of money that had been paid to the Romans should be returned to the estate for equal distribution among all creditors. Like most other insolvency laws, US bankruptcy law allows for payments to be forcibly retrieved from third-party recipients like the Romans regardless of their fault, good faith, or other state of mind (though the Romans may well have been directly involved in the fraud in this case). Such laws simply seek to prevent dissipation of the debtor’s assets in the suspect period before bankruptcy in order to maximise the value of the debtor’s assets to be divided among the collective creditors.

If the receivers had demanded return of a specific asset, the old rules on “in rem” jurisdiction might have sufficed. But here, the Romans bore personal liability to pay money from their own assets unrelated to the case, incidentally, under circumstances where the British insolvency law would not have allowed a claim. How could a far-away court with no ‘personal jurisdiction’ over the Romans so deeply affect their personal lives and fortunes in England?

After an impressively thoughtful and thorough analysis of the new cross-border insolvency regulations adopted in the UK in 2006, the UK Court of Appeal answered that “[t]he ordinary rules for enforcing . . . foreign judgments in personam [as described above] do not apply to bankruptcy proceedings.” Instead, judgments of foreign bankruptcy courts are “governed by the sui generis private international law rules relating to bankruptcy”; ie, any order entered pursuant to, and that could arise only in, a recognised foreign insolvency proceeding is directly enforceable in the UK regardless of the personal connection – or lack thereof – of the defendant to that foreign court. As for the Romans and their hapless lawyer who relied on centuries of legal precedent, the court glibly concluded: “I have no sympathy for them when it transpires that they were wrong.”

Actions that could have been brought outside bankruptcy proceedings remain restricted by the ‘old’ rules on personal jurisdiction, but foreign bankruptcy courts have a new, extraordinary jurisdiction over UK persons with respect to any “special bankruptcy claims maintainable only at suit of the office-holder ie, the administrator or liquidator4.” A ‘public policy’ escape-hatch might still allow UK courts to reject enforcement of judgments that grossly offend British notions of fairness and order, but this exception will rarely if ever apply to claims to recover assets for an insolvency estate, which “are invariably features of any developed system of bankruptcy5.”

The Romans sought permission from the UK Supreme Court for an ultimate appeal, though as of this writing, that permission has not been granted. The Court of Appeal acknowledged that the exceptional bankruptcy jurisdiction rule is a “novel development of the common law”, but it speculated that, after a pair of relatively recent decisions upholding universal bankruptcy jurisdiction, “their Lordships may not wish to be bothered again.”

The next advance in the expansion of US bankruptcy jurisdiction into the UK is already underway. On 17 August 2010, the New York Bankruptcy Court asked the UK courts to order HSBC Holdings plc and HSBC Bank plc to produce records relating to services they provided to feeder funds involved with Bernie Madoff’s spectacular investment fund fraud. Many of the innocent US ‘winners’ of Madoff’s Ponzi scheme have groused at the liquidator’s demand that they turn over their net profits to be redistributed among the victims of Madoff’s fraud. Their good faith ignorance of the source and nature of their profits is irrelevant under the applicable law, as are the hardships which some of them will endure if forced to disgorge their investment returns.

Will the US liquidator’s net now expand to good faith ‘winners’ in the UK, who may have been entirely unaware their funds had been funnelled to the US, let alone into a fraudulent scheme7? The barbarians have breached the ‘personal jurisdiction’ gates that long protected the Romans – who’s next?

Endnotes

  1.  The case, Rubin & Lan v. Eurofinance SA, Adrian Roman, Justin Roman & Nicholas Roman [2010] EXCA Civ 895 (30 July 2010), is available online at http://www.bailii.org/ew/cases/EWCA/Civ/2010/895.html.
  2.  Id. 61(1).
  3.  Id   64. Luckily for the Romans, the US receivers were still pursuing only about $10 million of their $160 million claim by the time the appeal was decided. See id. ¶ 12.
  4.  Id.  49.
  5.  Id.  50. The Court clarified that public policy is not offended by foreign recovery (“avoidance”) powers that “differ very considerably from those in the English statutory scheme.” Id. ¶ 61(3).
  6. Id., Approved judgment on permission to appeal and a stay of execution, ¶ 1.
  7. This is unlikely, but not inconceivable. See 11 USC ss. 548, 550 (potentially allowing recovery of transfers to investors from funds that had received transfers from Madoff, subject to a “value in good faith” defense).

 

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Jason Kilborn

Professor Jason Kilborn teaches business and commercial law at John Marshall Law School in Chicago.  His primary focus is on the comparative analysis of insolvency systems for individuals, though his interest extends to international bankruptcy as well. He recently co-authored a book on international co-operation in cross-border insolvency cases, published by Oxford University Press.

Jason Kilborn
Professor of Law
John Marshall Law School, Chicago
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Chicago, IL 60604
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