A Delaware court has just issued a clear endorsement of the controversial enforcement strategy I call “judgment arbitrage.” I commend the slip opinion (here) to anyone interested in the enforcement of judgments across state or national borders. The case is Alberta Securities Commission v. Ryckman, 2015 WL 2265473.
As I argued in a 2013 article in the Harvard International Law Journal, “Ending Judgment Arbitrage: Jurisdictional Competition and the Enforcement of Foreign Money Judgments in the United States,” judgment arbitrage is a three-step enforcement strategy that allows a party to enforce a foreign judgment in a U.S. jurisdiction where it would otherwise have been barred from doing so.
It’s uncontested that this is exactly what has just happened in Delaware. Here are the facts:
- Ryckman, who lived in Alberta, was fined about $500,000 Canadian by the Alberta Securities Commission (ASC) for violating Alberta securities laws. The ASC obtained a judgment (the “Canadian Judgment”) in this amount against Ryckman, who then moved his residence to Arizona.
- The ASC sought recognition and enforcement of the Canadian Judgment in Arizona.
- The Arizona state trial court ordered recognition and enforcement of the Canadian Judgment (now the “Arizona Judgment”). Ryckman appealed, and the Arizona appellate court affirmed. The Arizona Judgment simply embodies the Canadian Judgment, but is domestic rather than foreign.
- The ASC later sought enforcement of the Arizona Judgment in Delaware, where Ryckman is believed to have assets.
- Delaware recognition law is so different from Arizona’s that the Delaware court would have rejected the Canadian Judgment had it been presented with it. This is undisputed; the ASC concedes that the Canadian Judgment would not be enforceable in Delaware for two independent reasons:
- The Canadian Judgment constitutes a fine or penalty, and
- The applicable Delaware statute of limitations has run.
And here is the holding:
- The Delaware court orders enforcement of the Arizona Judgment. Now that the ASC has domesticated the Canadian Judgment in Arizona, its foreignness is irrelevant. It’s just an Arizona judgment. The court ignores the Canadian Judgment.
- The court holds that this result is compelled by (1) the Full Faith and Credit Clause of the U.S. Constitution and (2) the Delaware out-of-state judgment registration statute (the Uniform Enforcement of Foreign Judgments Act).
This is a major decision in the law of recognition and enforcement, and a clear example of judgment arbitrage. The court here reached a conclusion that, to my mind, deepens the already considerable doctrinal and theoretical confusion around the issue. I suggested legislation was desirable to address the possibility of judgment arbitrage, but many doubted the phenomenon even existed. In fairness, who could blame them? At that time I was unable to “identify a single real-world example of judgment arbitrage“—that is, a creditor receiving a judgment in a foreign country and then enforcing it in a U.S. state where it would otherwise have been barred from enforcing. An online symposium was held on the article, and the title of the critique summed up this good-natured skepticism well: Is There Really Judgment Arbitrage? (Yes, I replied.)
The linchpin of the strategy, I argued, was to insert a third jurisdiction between the foreign court (where the merits judgment is rendered) and the enforcement court (where it’s ultimately collected). The purpose of this middle jurisdiction is to recognize—and thereby domesticate—the foreign judgment, stripping it of its foreign character and transforming it into a U.S. judgment that other American courts will treat as an ordinary sister-state judgment. This step is key, because many scholars and courts believe that American courts are obligated to enforce sister-state judgments—including recognition judgments—under the Full Faith and Credit Clause and state and federal registration statutes. No such requirement exists for foreign-country judgments.
Judgment arbitrage is best represented graphically (these charts appear at p. 477 of “Ending Judgment Arbitrage”). Here is a typical cross-border judgment enforcement lawsuit, in simplified form—it occurs in two jurisdictions:
And here is judgment arbitrage—note the addition of a third jurisdiction:
I refer to this three-stage dance as “judgment arbitrage,” because of the relative frictionlessness of sidestepping a hostile U.S. recognition law in favor of a more lenient recognition forum. (Some cases have suggested there isn’t even a jurisdictional nexus required to choose this middle forum.) And once the foreign judgment has been domesticated—here, once the Canadian Judgment was rechristened the Arizona Judgment—the process of enforcing it is essentially mechanical.
As I discussed in an October 2014 post, a Pennsylvania court decision (citing “Ending Judgment Arbitrage”) endorsed the possibility of judgment arbitrage. The circumstances of that case left the court’s holding open to future narrowing. After all, the “arbitrage” element was not directly teed up: the two states involved (NY & PA) used the same recognition statute.
But that is not the case here. Arbitrage was directly presented in the Delaware case, where Delaware recognition law would have rejected the Canadian Judgment. Yet the court squarely held that Delaware was obligated to enforce, because the Canadian Judgment was recognized in Arizona before the creditor came to Delaware. That the Alberta Securities Commission probably did not diabolically plot its litigation strategy in a smoke-filled room but instead simply followed the asset trail of a nonpaying debtor is irrelevant to the holding. The court noted the ASC’s lack of an “improper purpose” in pursuing this strategy, but the cases it cited on that subject establish a very high standard for such a purpose. The arbitrage may have been unintended here, but it was real and it was effective—outcome-determinative, in fact.
Alberta Securities Commission v. Ryckman is now the leading example of judgment arbitrage on the books. As the court notes, this means there is now a split among states. Delaware and Pennsylvania now hold that Full Faith and Credit and mechanical registration statutes compel the enforcement of sister-state recognition judgments, and the District of Columbia holds that they do not. It will be very interesting to see how other states proceed.
h/t Ted Folkman, who brought this decision to my attention.