Over at Letters Blogatory, friend of the blog Ted Folkman has published his take on Alberta Securities Commission v. Ryckman, the recent Delaware decision that (as I wrote last week) provides a good example of judgment arbitrage. Thank you again, Ted, for bringing the case to my attention.
Judgment arbitrage is a term I coined for a particular strategy for enforcing unenforceable judgments. It is a method of forum-shopping that allows creditors to exploit a quirk in American law that allows them to enforce foreign-country judgments in a forum where they would not otherwise be able to. There’s more discussion of the strategy in my Ryckman post, this symposium piece, and the original article where I lay out the theory.
In Ryckman, the creditor sought to collect Delaware assets in satisfaction of a Canadian judgment. The twist here was that the creditor first got its Canadian judgment recognized in Arizona, hopped a plane east, and then sought to use what was at that point technically an Arizona judgment to collect assets in Delaware. It was undisputed that the underlying Canadian judgment—a fine imposed by a Canadian agency—was not enforceable in Delaware, yet the Delaware court ordered enforcement anyway, because it was enforcing the Arizona judgment. It did so in the name of Full Faith and Credit, falling back on an articulation of that principle that I believe to be an incomplete. (There is a growing consensus, which I discuss at pp. 487-91 of the article, that FF&C does not compel states to grant full credit categorically to sister-state judgments.)
Ryckman is a good example of arbitrage. The creditor was able, with minimal friction, to profit from a major difference between Arizona and Delaware law governing the recognition of foreign judgments. Merriam-Webster defines arbitrage as “the practice of buying something (such as foreign money, gold, etc.) in one place and selling it almost immediately in another place where it is worth more.” The Canadian judgment wasn’t simply more valuable in Delaware for having transited Arizona first; it would have been completely worthless under Delaware law otherwise. The cost of unlocking additional assets for the creditor via the Arizona judgment was a little legal complexity and paperwork. It’s the essence of arbitrage.
Ted’s post disputes that the case is really arbitrage because the debtor, not the creditor, was the one to choose Arizona as the recognition forum—after all, he moved his domicile there. I find this point logically appealing, but my read of the law is that many courts wouldn’t place much stock in it…
The objection has semantic and substantive components. I’ll begin with the semantic point, which I once heard voiced in similar fashion by a colleague who, like Ted, is an expert on international litigation. The idea seems to be that arbitrage requires a strategy for optimizing ROI from the get-go. Merely buying an ounce of gold in Namibia for $900, for example, and discovering upon your return to New York that market conditions there permit you to sell it for $1200 is not enough; both the purchase and the sale must be planned in advance for that same objective or it cannot be arbitrage. To my mind this distinction is academic: the opportunity exists for all regardless of the motivations of the seller, and over time, if there is the potential for real money to be made it seems likely that the Namibia-to-New York gold trade will consist increasingly of intentional arbitrageurs rather than happy amateurs. Something similar could be said for judgments.
Onto the substantive objection: the Delaware court noted in a paragraph of dicta that “there is no evidence that the [creditor] engaged in any improper forum-shopping”; couldn’t the court reach a different result in a future case where there was evidence of forum-shopping? In principle yes, but under the cases the court cited, I think it’s tougher than meets the eye.
“Improper forum-shopping” is difficult to establish. The foreign-judgment case the court relies on for its disapproving discussion of that practice, Reading & Bates Construction Co. v. Baker Energy Resources Corp., 976 S.W.2d 702 (Tex. Ct. App. 1998), involved a naked attempt at forum-shopping. The creditor tried to get a single Canadian judgment into Texas through two procedural mechanisms at the same time, both straight from Canada and via Louisiana (which had a more favorable regime than Texas for the creditor). This meant the creditor was seeking two simultaneous bites at the apple under different legal standards – something the court did not appreciate.
In a more typical case of arbitrage, it will be harder to figure out if the creditor’s strategic decisions rise to the level of “improper”: often debtors to large judgments have assets in multiple states, and rational creditors, over time, can be expected to choose the jurisdiction where they can plausibly claim that they are simply pursuing assets. That seems less likely to raise a court’s ire than the procedure in Reading & Bates.
In addition, some courts have already held that they do not require jurisdiction over assets (nevermind in personam jurisdiction) to order recognition of a foreign judgment. At least in those courts, this undermines the value of looking at whether the debtor has assets in the recognition forum to determine if the creditor’s purpose is improper; the court has already said it doesn’t require a link between the debtor and the forum to enter judgment. Where there is no jurisdictional element, it’s hard to see how forum-shopping could even present itself in the abstract.
In short, the bar for “improper” forum-shopping seems pretty high. Based on existing precedent, I am skeptical that this short piece of dicta furnishes much of a basis to narrow the holding in the future.
Finally, Ted’s post expresses concern that “if we make innocent judgment creditors who are just ‘following the asset trail of a nonpaying debtor’ bring new recognition actions everywhere the trail takes them, the cure is worse than the disease!” Perhaps. But the solution I have proposed is far simpler: it asks creditors, could you enforce this foreign judgment here? If yes, then go ahead and enforce; if not, then not. The creditor will only need to bring a new recognition action where recognition law is materially different (most states* follow one of two uniform acts, the 1962 or 2005 version, and many of their provisions overlap). In most cases, I believe the rule I propose would greatly simplify matters ex ante, for everyone, rather than require further proceedings.
My thanks to Ted once again for his very interesting post on judgment arbitrage and Ryckman. Do give it a read.
Further judgment arbitrage reading: interested readers may wish to see my post last week on Ryckman; Ted Folkman’s post on Ryckman (along with some thoughts on my post); my post on a Pennsylvania decision, Standard Chartered Bank v. AHAB, that offered support for judgment arbitrage (disclosure: it cites my article); Ted’s posts on that case (here) and a related DC case, AHAB v. Standard Chartered Bank (post here), that would bar judgment arbitrage (which is the result I favor); two symposium pieces on judgment arbitrage (a critique of the theory by Chris Whytock of UC Irvine, my response); a response to the symposium by Ted; and my original judgment arbitrage article.
*For a complete survey of the varying recognition and enforcement law of U.S. states, see pp. 491-99 of the article.