Did Pennsylvania Just Endorse “Judgment Arbitrage”?

The process of recognizing and enforcing foreign-country judgments has emerged as a critical issue in international business. Human rights groups see foreign and domestic courts as playing an indispensable role in holding multinational corporations accountable when they operate in developing countries, while those businesses worry that vulnerable foreign legal systems are being exploited to shake them down for political purposes. Somewhat more prosaically (but in my view more significantly on a day-to-day basis), the cross-border share of global capital flows has become enormous and with it has grown the need to more clearly define the standards that determine whether a judgment rendered in one country can be enforced against assets located in another. Judgment enforcement tends to be dictated by sources of domestic law and in the US is normally governed by state law.

In a recent decision in a judgment enforcement case, Standard Chartered Bank v. Ahmad Hamad Al-Gosaibi & Bros. Co., the Pennsylvania intermediate state appellate court held that a New York judgment recognizing a foreign money judgment was enforceable in Pennsylvania. This is significant in part because of the scope of the ruling: the court held that a foreign-country money judgment, once recognized by a single US court, is – poof! – rendered enforceable by a court in any other. The force of this holding is all the more potent considering that New York lacked personal jurisdiction over the judgment debtor. So a court can render a judgment compelling a party over which it lacks jurisdiction to pay a bunch of money, and then another court – in this case, one that appears to have jurisdiction – must enforce it.

This is a strong endorsement of the possibility of what I have called “judgment arbitrage.” In “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States” (which the court cited), I explain the implications of the fact that the law governing the process of collecting on a foreign judgment in the United States formally consists of two stages – recognition and enforcement – that do not need to occur in a single forum or under a single forum’s law. I posit judgment arbitrage as a natural, rational exploitation of that system: a judgment creditor can be expected to seek recognition in one US state and enforcement in a second where doing so serves its interests. (While creditors normally bring recognition and enforcement actions in a single proceeding, they are not obligated to.) Where, for example, the bulk of the debtor’s assets are located in a state where the recognition law is less creditor-friendly, the creditor may choose to bring a recognition action in a pro-creditor jurisdiction and then an enforcement action where those assets lie. That does not appear to be what happened here – New York and Pennsylvania use the same recognition statute, the 1962 Uniform Foreign Money-Judgments Recognition Act – but while the court notes this fact it does not condition its holding on the identity of the two states’ recognition laws.

When I developed the theory of judgment arbitrage, some questioned whether it really exists. My intuition, informed by my experience practicing transnational litigation, was that judgment creditors litigating enormous judgments are very sophisticated actors who would probably consider the option where it’s available, and so I set out to try and see if I could find a case where it had been used successfully. (I did not encounter sister-state judgment arbitrage while in practice.) The article cites (at p. 478) a practice manual that endorses its use, but I couldn’t find a reported case where it had actually been approved. I had noted in the article (e.g., at p. 478-80) that by definition judgment arbitrage is the kind of phenomenon for which it is hard to find traditional legal sources, because it will tend to result in confidential settlements rather than reported decisions, and further explained this challenge in a symposium the journal later held on the article. Although I was confident in my analysis of the relevant legal sources, it would have been nice to be able to point to something more concrete to demonstrate the availability of judgment arbitrage.

The Standard Chartered decision is a pretty solid data point in favor of judgment arbitrage. The opinion does a few things I had said courts might do when confronted with an enforcement action implicating three forums: a foreign merits forum (F1, here Bahrain), a US state recognition forum (F2, here New York), and a US state enforcement forum (F3, here Pennsylvania). Specifically, it endorses the enforcement by F3 of an F2 judgment recognizing the original F1 foreign judgment. And in so doing, the decision offers an energetic and thorough defense of the duty states possess to enforce one another’s judgments under the Full Faith & Credit Clause, both as a matter of constitutional law and public policy. It even says that Pennsylvania will enforce a sister-state recognition judgment where doing so would contradict Pennsylvania public policy, in the name of national unity. It emphasizes that this includes cases when the merits are litigated abroad, in F1. This is consistent with my argument in “Ending Judgment Arbitrage” (see, e.g,. pp. 488-91) that while the judicial duty to enforce sister-state judgments is far from absolute as a matter of constitutional law (the Supreme Court said in Pink v. AAA Highway that it is “not an inexorable and unqualified command”), courts often construe it to be very robust. This court not only doesn’t push back on the scope of that obligation, it offers a powerful and clear endorsement of it – and specifically of the duty to enforce sister-state judgments where the underlying judgment originates in a foreign country.

Here are some passages that support judgment arbitrage (all pages cite to the slip opinion):

  • Sister-state judgments must be enforced, and foreign-origin recognition judgments are no exception:
    • “Standard Chartered’s New York judgment is, as a matter of law, entitled to full faith and credit in Pennsylvania as with any other judgment issued by a New York court. That the New York judgment recognized a foreign nation judgment is of no moment.” (p. 14)
      • Some have assumed that a court, if faced with judgment arbitrage, would simply reject the sister-state judgment on the grounds that the underlying judgment is foreign. This opinion says the court is barred from drawing that distinction.
    • “Simply stated, in Pennsylvania, judgments recognized as valid after a full hearing in a sister-state are res judicata.” (p. 18). This embodies a very strong view of the duty to enforce sister-state judgments.
  • The opinion explains that this rule is deeply rooted, since it stands on larger principles of public policy: “States must give full faith and credit to sister-state judgments ‘even where the judgment violates the policy or law of the forum where enforcement is sought,’” (p. 18) for example because F2’s recognition law is different from F3’s or the foreign judgment is otherwise objectionable from a public policy standpoint. The opinion further justifies ignoring any distinction between F2 and F3 law on the ground that doing so serves the “public policy” of full faith and credit (see, e.g., FN 21).
    • This strikes me as a very strong conception of FF&C in the context of a foreign-origin judgment, but of course the opinion had already rejected any distinction there.
  • Crucially, the opinion does not condition its holding on the fact that New York and Pennsylvania follow the same recognition law: it distinguishes at p. 17 a case where the creditor appears to have acted with an “improper purpose” in pursuing recognition and enforcement actions strategically, but on its face the court’s discussion of its Full Faith & Credit and public policy obligations does not hinge on this distinction.
    • In other words, the opinion’s discussion of “improper purpose[s]” is probably dicta.
    • One is left with the impression that the court will enforce the recognition judgments of other states, even where F2’s law is different from Pennsylvania’s – i.e., that it will allow judgment arbitrage.

Although judgment arbitrage was not directly presented in this case, the decision is a powerful weapon in the hands of a creditor in a judgment arbitrage suit. It suggests a need to either eliminate the practice (e.g., via my proposal or that of Linda Silberman and the American Law Institute) or begin building a better theoretical foundation for it. Right now, judgment arbitrage has a pretty limited theoretical basis, for the simple reason that conflicts scholarship has traditionally focused on the international-level dimension of foreign judgment enforcement to the exclusion of the sister-state dimension. This case is another sign that that framework is showing its age.

My thanks to friends of the blog Kevin Clermont, Ted Folkman, and Chris Whytock for their thoughts on this case (some of which Ted shared recently at Letters Blogatory).

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3 thoughts on “Did Pennsylvania Just Endorse “Judgment Arbitrage”?

  1. Pingback: Standard Charter v. Ahmad Hamad Al Gosaibi

  2. Pingback: Delaware Endorses “Judgment Arbitrage” | Just Shilling

  3. Pingback: More on the Delaware Judgment Arbitrage Case (Alberta Securities Comm’n v. Ryckman) | Just Shilling

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