Cayman Islands: In What Circumstances Can U.S. And Other Foreign Judgments Be Enforced Against

Parties considering bringing proceedings against Cayman Islands hedge funds in other jurisdictions should ensure that any judgment that might be obtained in a foreign jurisdiction will be recognized and enforced by the Cayman courts. On the flip side, Cayman-domiciled hedge funds facing claims in foreign jurisdictions will need to consider the safety of ignoring and not participating in those proceedings, on the assumption that any judgment obtained will not be recognized and enforced by the Cayman courts. This article surveys the landscape that informs whether Cayman courts will enforce such judgments.

These issues arise in particular in the context of enforceability of judgments obtained by default where the Cayman fund does not participate in the foreign proceedings, and in particular in the context of judgments and orders obtained in insolvency proceedings in light of the increasing trend towards universality of insolvency proceedings as demonstrated in the decision in Rubin v Eurofinance¹ which is the subject of a recent appeal to the Supreme Court of England and Wales.

Enforcement of Judgments Under the Law of the Cayman Islands – A Common Law Approach

While a Cayman statutory regime exists for the enforcement of foreign judgments under the Foreign Judgments Reciprocal Enforcement Law (1996 Revision), current reciprocity extends only between the Cayman Islands and judgments from Supreme Courts in various Australian States and Territories, and the Australian Federal and High Courts. Accordingly, in practice, the statutory regime is of little significance, and recourse to the common law principles of enforcement of foreign judgments is necessary. Extension of statutory reciprocal enforcement of judgments to other jurisdictions is currently under consideration in Cayman, but this is unlikely to include extension to the U.S., and accordingly, whatever the outcome, common law enforcement is likely to remain applicable to U.S. judgments for the foreseeable future.

The ordinary procedure for enforcement of a foreign judgment is by commencing an action in the Cayman Court, with the foreign judgment being the basis for the cause of action, traditionally founding the basis for a debt claim, and then applying for summary judgment in that action. The Cayman Court will not itself inquire into the issues underlying the foreign judgment or common law as the foreign judgment creates a debt enforceable in Cayman in certain circumstances.

The enforcement process retains a discretionary element and is subject to certain specific limitations,² relevant in the present context, namely:

International Jurisdictional Competence over the Defendant

The foreign court must be recognized as having international jurisdictional competence over the defendant. The question is whether the foreign court had international jurisdiction according to the private international law of the Cayman Islands,³ not whether the foreign court had, or did not have, jurisdiction according to its own laws.

Final and Conclusive on the Merits

The judgment must be final and conclusive on the merits of the action of the Court which pronounced it.

The foreign judgment must not be interim or provisional in nature. A judgment will be final and conclusive if the foreign court would treat the matter as having been determined so that it was res judicata and could not be re litigated by the parties in the foreign court other than by an appeal. We understand that this is the case in proceedings, such as Adversary Proceedings, issued in U.S. Bankruptcy Courts.

The fact that a judgment obtained by default may be later set aside in the court which entered it cannot in principle deprive the judgment of finality; however, if there is a specified period for applying to set aside a default judgment, and this period has not yet expired, the judgment may not yet be seen as final. Once any such period has expired, the judgment is likely to be regarded as final. A foreign judgment may be deemed to be final and conclusive even though it is subject to an appeal in the foreign court,⁴ although the Cayman court may grant a stay of execution pending the appeal.⁵ A default judgment may be regarded as final and conclusive on the merits.

Other than a default judgment, a judgment will generally be regarded as "on the merits" if it: (1) is a decision which establishes certain facts proved or not in dispute; (2) states what are the relevant principles of law applicable to such facts; and (3) expresses a conclusion with regard to the effect of applying those principles to the factual situation concerned. The requirement of personal jurisdiction is satisfied if the judgment debtor: (1) was present in the jurisdiction of the foreign court when the foreign proceedings were commenced; (2) submitted to the jurisdiction of the foreign court; and (3) agreed by contract to submit to the jurisdiction of the foreign court.

Present in the Jurisdiction of the Foreign Court When the Foreign Proceedings Were Commenced

The phrase "present" in relation to a person generally means physically present, and in relation to a corporation generally refers to carrying on business from a fixed place of business.⁶ In the case of corporations, the law, at least in its current state, is that a corporation must be "present" in the jurisdiction of the foreign court rather than "resident." In the case of a trading corporation, including an investment fund, the test is "(a) it has established and maintained a fixed place of business and for more than a minimal time has carried on its own business there, or (b) its representative [or employees or servants] has for more than a minimum period of time been carrying on the corporation's business in that country at or from some fixed place of business."⁷

It is this second category which can cause difficulty in practice; the representative must carry on the business of the corporation, as distinct from its own, but it does not matter that it does both. Of particular significance will be the power of the representative to make contracts on behalf of the corporation without the need to submit them to the corporation before approval, which is considered to be a "powerful indicator that the corporation is present." ⁸ Conversely, if the representative does not have this power, this fact "points powerfully in the opposite direction." In the particular context of hedge funds, if the investment manager is present in the jurisdiction of the foreign court and has power to enter into transactions on behalf of the fund without referral to the fund's directors for approval, then the fund is almost certain to be regarded as present in the foreign jurisdiction. In the case of U.S. proceedings it is presence in the U.S., rather than in any particular state, that is material.

Submitted to the Jurisdiction of the Foreign Court

If the defendant appears before the foreign court and defends the claim on its merits, it will be held to have submitted to the jurisdiction of the foreign court. However, if a defendant merely appears to contest the jurisdiction of the foreign court, this is unlikely to constitute a submission to jurisdiction.

Every case must be carefully analyzed having regard to the laws of the foreign jurisdiction governing submission to the jurisdiction of its courts. In addition, if the defendant was the plaintiff or counter-claimant in the proceedings in the foreign court, the defendant will be taken to have submitted to the jurisdiction of the foreign court.

Agreed by Contract to Submit to the Jurisdiction of the Foreign Court

If a contract provides that a foreign court is to have jurisdiction to determine a dispute, that court is likely to be recognized as jurisdictionally competent under Cayman Islands law.

Defenses or Bars to Recognition

There are certain defenses or bars to recognition, namely that the judgment was (1) obtained by fraud; (2) contrary to public policy; or (3) obtained in proceedings contrary to natural justice. Whether a foreign judgment will be recognized will also depend on the nature of the judgment, for example judgments for tax, fines and penalties will not be recognized.⁹ See "How Safe Is It to Ignore Foreign Tax Claims or Judgments Against Cayman Islands Hedge Funds in the Context of a Winding Up of the Fund?," The Hedge Fund Law Report, Vol. 5, No. 5 (Feb. 2, 2012).

Until relatively recently, the received view was that at common law it was only possible to enforce foreign judgments for a debt or definite sum of money. This is no longer correct. In Bandone & Ors v Sol Properties Incorporated & Ors,¹⁰ it was noted that:

The Court in Bandone approved the opinion of the Privy Council in Pattni v Ali & Anor,¹¹ in which the argument before the Judicial Committee focused on historical significant distinctions between in rem and in personam

judgments. However, the Court stated that in relation to the determination under a contract of the parties' rights and obligations, the characterization of the judgment as either in personam or in rem was "probably quite irrelevant" as what was of greater importance was that the parties had submitted to the foreign jurisdiction and were bound in the local court by the foreign court's determination of these rights and obligations. Accordingly, although the foreign judgment was held to be an in personam judgment other than for a fixed sum of money, as the requirements for personal jurisdiction had been satisfied the foreign judgment could be relied upon in support of the relief sought in the Isle of Man.

Current Uncertainty Caused by Rubin v. Eurofinance

The recent decision by the English Court of Appeal in Rubin v. Eurofinance¹² has substantially complicated the law of theenforcement of foreign judgments in bankruptcy proceedings.This is a controversial judgment and marks a considerabledeparture from longstanding and established principles ofcommon law as to jurisdiction under private internationallaw. An appeal to the Supreme Court has now been heard,beginning on May 21, 2012. It is not known when judgmentwill be given – it could be a number of months.

In Rubin, the Court of Appeal recognized a New York default judgment which would not have been recognized under the traditional common law approach. The Court of Appeal considered this dramatic shift in the law to be a desirable development based on the principles of modified universalism of insolvency proceedings. That is, there should be a unitary bankruptcy proceeding in the court of the bankrupt's domicile which receives worldwide recognition and it should apply universally to all the bankrupt's assets.

A trust filed for relief under Chapter 11 of the Bankruptcy Code, and a plan of reorganization was confirmed by the New York Court. The applicants in the case had been appointed by the New York Court, and authorized under the plan to bring adversary proceedings in the U.S. for the purpose of recovering monies for the bankrupt estate. These claims included claims against the respondents for the Cayman (and English) equivalents of voidable transactions, claims for breach of fiduciary duty, claims for unjust enrichment and restitution. The respondents in Rubin did not participate in the adversary proceedings, and default judgment was duly entered against them. The applicants sought to enforce the default judgment in England, notwithstanding the fact that the usual requirements for personal jurisdiction necessary for enforcement of a foreign judgment had not been satisfied.

It was common ground that the respondents were not resident in New York when the proceedings were instituted, nor did they submit to the jurisdiction of the New York court by voluntarily appearing in the proceedings. Although, at first glance, the respondents appeared to have "an impregnable defense" ¹³ the Court of Appeal held that the New York court's judgment would be recognized and could be enforced. While the decision refers to both the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (the Model Law) and European Council Regulation 44/2001, neither of which apply in Cayman, the decision turned to principles of common law, and in particular, the reasoning relies heavily upon the distinction between bankruptcy and non-bankruptcy proceedings from the earlier Cambridge Gas¹⁴ and Re HIH¹⁵ cases. The decision appears, on its face, to identify a significant new category of judgment that will be recognized by English Courts, namely judgments entered in insolvency proceedings.

In Cambridge Gas, judgments obtained in an insolvency proceeding were held to be neither judgments in personam (requiring submission to the jurisdiction of the Court by the respondent to the judgment) nor judgments in rem (territorially limited). Instead, the Privy Council held that because bankruptcy proceedings were sui generis (a collective process to enforce rights, not to establish them) they were not subject to the ordinary private international law rules. Cambridge Gas held that in such a collective process, there should be a unitary bankruptcy proceeding in the court of the bankrupt's domicile which receives worldwide recognition and it should apply universally to all of the bankrupt party's assets.

The innominate classification of bankruptcy proceedings in Cambridge Gas has come under significant criticism by commentators¹⁶ and rides rough-shod over the orthodox view of bankruptcy proceedings,¹⁷ namely that:

• Bankruptcy proceedings are in rem. A bankruptcy court possesses in rem jurisdiction over all estate property, regardless of its actual location, effectively treating all such property as if it is legally located within the jurisdictional boundaries of the district in which the court sits. The jurisdiction in bankruptcy is jurisdictional to deal only with what is the bankrupt's estate but not a power to determine what is the bankrupt's estate; and
• Although a proceeding in bankruptcy is not an action against an individual but a part of a collective proceeding, recovery actions in bankruptcy proceedings are in personam and are therefore subject to the same private international rules as other foreign judgments.

A different approach to that taken in Rubin and one which has found approval with commentators¹⁸ was that adopted by the Irish High court in Re Flightlease (Ireland) Ltd.¹⁹ The court in Flightlease held that a claim for a fraudulent preference was a personal claim, despite being brought in a bankruptcy proceeding. Justice Clarke stated at paragraph 3.3 of the judgment:

The Court of Appeal in Rubin focused on the nature of the avoidance claims which had been brought and held that "these are not ordinary claims which may be brought by any (interested) party. They are special bankruptcy claims maintainable only at suit of the office-holder, i.e., the administrator or liquidator."²⁰ The Court did not appear to consider that, only some of the claims were in fact bankruptcy specific, and that the claims under state law did not depend on the existence of a bankruptcy proceeding, namely "the collective proceeding to enforce rights and not to establish them."²¹ Rubin was applied in In the matter of New Cap Reinsurance Corporation Limited (In Liquidation).²² The case involved avoidable preference claim arising from liquidation proceedings in Australia. As in Rubin, the defendants to proceedings in New South Wales had not submitted to the jurisdiction of the New South Wales Court, and although they were made aware of them took no formal part in the proceedings. Judgment was entered in Australia by default, and a letter of request was issued to the English Court. The Court held that although the judgment could not be recognized under the relevant English enforcement statute (the "1933 Act"), the Court could exercise its discretion to give assistance under s.426 of the Insolvency Act 1986. In addition, it was held that in cases where s.426 does not apply, the common law subsists parallel to the statutory power (relying on Rubin). On this basis, the Court exercised its jurisdiction to recognize the order as the respondents had taken "their chance and the law has moved against them." (at [35]). The Court held that whether Rubin is incorrect "must be decided by someone above my pay grade." (at [22]).

This decision was appealed, and the Court of Appeal has recently held that the 1933 Act did apply to insolvency proceedings.²³ However, the Court of Appeal also held that s.426 could also apply concurrently, and could include a request for assistance by way of enforcement. The Court of Appeal held that s.6 of the 1933 Act, which ousts the common law in relation to a judgment to which it applies, does not preclude the use of s.426 in relation to enforcement of an order made in foreign insolvency proceedings.

In relation to Rubin, it was held that if the liquidator had obtained registration of the judgment under the 1933 Act (which had not occurred), this could not be set aside on the basis that the Australian Court did not have jurisdiction as this "is concluded against the syndicate at the level of this court by the effect of Rubin, subject to the pending appeal in that case. No more needs to be said about that." (at [77]) The Court of Appeal held that the Rubin decision was relevant in two ways ([at 84]): (1) even if registration had been effected under the 1933 Act this could not now be set aside on the basis of a lack of jurisdiction; and (2) if the position at common law was relevant, the jurisdiction of the Australian court would be recognized because of the Rubin decision. An appeal to the Supreme Court in this case was heard concurrently with the appeal in the Rubin case, beginning on May 21, 2012.

The Future of Rubin

The correctness of Rubin has been questioned by commentators, and there is considerable doubt as to whether it will survive the review of the Supreme Court in its present form, or at all.²⁴ However, there is a credible body of support for the principle laid down in Rubin, and it arguably does reflect a natural, albeit substantial, progression of recent cases which have supported an increasingly co-operative approach towards foreign bankruptcy proceedings.

As stated above, this approach is exemplified by Cambridge Gas²⁵ and Re HIH²⁶ and is consistent with the mandatoryprovisions of Articles 25 to 27 of the Model Law which hasbeen ratified by the United States and the United Kingdom,and was relied upon in Rubin in support of the interpretationof the English Court's powers. The Court in Cambridge Gas held that "the underlying principle of universality is ofequal application and this is given effect by recognising theperson who is empowered under the foreign bankruptcy law to act on behalf of the insolvent company as entitled to doin England."²⁷ Of particular importance will be whether theSupreme Court deals with the issue of equivalence, that is,equal treatment, raised in Cambridge Gas, as the breadth ofthis concept will be crucial to the exercise of discretion bycourts (including those in Cayman) seeking to give effect tothe principle.

There is no safe indication of how the Supreme Court will resolve the appeal. It may uphold or reverse the decision, or produce a variation of it. The distinction between claims made by the insolvency representative in relation to pure insolvency claims (e.g., setting aside fraudulent preference claims or transactions at an undervalue), and more general claims (e.g., contract claims or claims against service providers) is likely to feature in the decision.

Cayman Law after Rubin

As English law is uncertain pending the definitive determination of Rubin by the Supreme Court, Cayman law is also in a state of uncertainty. It is not clear what the final result of Rubin will be, and, regardless of that result, it is not clear whether the Cayman Courts will adopt the Rubin approach in any event, in whatever form it may survive the appeal.

The Chief Justice of the Cayman Court has released a paper citing Rubin in which he comments that "a foreign insolvency or bankruptcy proceeding may be granted recognition as a collective regime for the enforcement of rights, though particular stake-holders may seek to assert different rights and may not have submitted to the jurisdiction of the foreign courts, provided that their interests (as shareholder or creditor) are to be properly regarded as subsumed within the collective enforcement regime of the foreign proceedings"²⁸ but what this means, and what limits it has, remain to be seen.

Cayman law has, for some time, been willing to offer co-operation and assistance to foreign insolvent estate representatives. Rather than adopting the Model Law, a statutory regime for international co-operation in insolvency matters was introduced into the Companies Law (2011 Revision), which became effective on March 1, 2009.

The Cayman Court may, pursuant to s.241 of the Companies Law, make specific orders ancillary to a "foreign bankruptcy proceeding" for specified purposes on the application of a foreign representative of a debtor. Upon recognition, the Court will have various powers, including the discretion to make such orders for various specified purposes listed in s.241(1) of the Companies Law.

Prior to the introduction of this statutory regime, the Cayman Court had approved the new approach of the Privy Council in Cambridge Gas,²⁹ and since the introduction of the statutory provisions the Cayman Court has considered that the statute reflects the previous practice of the Court.³⁰

A significant difference between the English Cross Border Insolvency Regulations and Cayman law is the discretion which exists under the regime for co-operation. Under English law, the Courts are obliged to (shall) assist a foreign court, whereas the Cayman Court retains discretion whether to assist under either the Companies Law (may) if the assistance sought falls within the categories in s.241 of the Companies Law, or generally under principles of comity. This will be an argument which will be available to parties resisting enforcement in Cayman, regardless of the outcome of the Supreme Court ruling in Rubin.

Given the uncertainty over the current law in Cayman, and pending the outcome of the Rubin appeal, no defendant can safely assume that a judgment entered in default would not be enforced by the Cayman Court. If it is clear that any defense to the foreign proceedings is hopeless, then there may be sense in allowing judgment to be entered by default and then, again assuming that the foreign court did not have personal jurisdiction over the defendant, disputing that the default judgment ought to be enforced in Cayman on the basis that Rubin should not be followed – but to do so it would have to be clear that any defense would have no prospects of success as there are significant risks in allowing a default judgment to be entered. These risks would be too high if there is any prospect of successfully defending the claim.

The decisions in Bandone and Miller confirmed the Cayman Court's willingness to expand Cayman recognition principles by following Pattni v. Ali. A similar reception of Rubin would be consistent with this trend, particularly if the approach is affirmed on appeal.

Such is that uncertainty that the expressing of a specific opinion as to the likely approach of the Cayman Courts would be highly speculative. At the very least there is a material and significant risk that the Cayman Court would exercise its discretion to permit the enforcement of judgments which are similar to the judgment recognized by the English Court of Appeal in Rubin.

As mentioned above, the Rubin appeal was heard earlier this month; time of delivery of judgment cannot be predicted. Clearly, there is an advantage in seeking to delay the foreign proceedings for as long as possible in the hope that judgment will be delivered before any final decision has to be taken.

Statutory Reform

The Cayman Islands' Law Reform Commission (Commission) recently indicated a proposed agenda for future work. This agenda identified the enforcement of foreign judgments as a specific issue which would be considered by the Commission. While it is clear that any statutory reform will not take place for some time, if at all, there is a prospect in the coming years that a statutory codification of the enforcement of foreign judgments may impact upon the scope of the law in the jurisdiction and vary the common law approach.

Footnotes

^{1 Rubin v. Eurofinance SA & Others [2010] EWCA (Civ) 895, [2011] Ch 133.}

^{2 For general discussion, see Dicey & Morris, The Conflict of Laws (14th Ed, 2006), Rule 36.}

^{3 The laws of the Cayman Islands in this context essentially follow the position under English common law.}

^{4 Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company (Cayman) Limited and Ors [2008] CILR 267.}

^{5 Peterdy v Dennis [1998] CILR note 9.}

^{6 See Adams v Cape Industries PLC [1990] CH 433 (CA).}

^{7 Dicey & Morris, The Conflict of Laws (14th Ed, 2006),[14-059].}

^{8 Id.}

^{9 Id., Rule 3, see discussion [5R-019] to 5-054}

^{10 [2008] CILR 301 Henderson J. In the context of matrimonial proceedings, traditionally categorized as in rem proceedings, the same approach was approved by the Chief Justice in Miller v. Gianne [2007] CILR 18 Smellie C.J.}

^{11 Pattni v Ali & Anor [2007] 2 AC 85, PC (Isle of Man).}

^{12 Rubin v. Eurofinance SA & Others [2010] EWCA (Civ) 895, [2011] Ch 133.}

^{13 Id., 48.}

^{14 Cambridge Gas Transport Corp v Navigator Holdings plc Creditors' Committee [2007] 2 BCLC 141, PC (Isle of Man).}

^{15 Re HIH Casualty and General Insurance Ltd [2008] IWLR 852.}

^{16 "Astonishing," Adrian Briggs; "Startling," CH Tham; "Unnecessary and unsound," Justice Handley; "Wrong," Mowschenson QC.}

^{17 Halford v Gillow (1842) 60 Eng Rep 18, 20; Swycher v Vakil [2004] EWCA Civ 444; Pattni v Ali [2007] 2 AC 85.}

^{18 Look Chan Ho 'Recognition Born of Fiction – Rubin v Eurofinance'; Terence Mowschenson QC 'Some recent developments and issues in the law and their ramifications on matters arising out of the bankruptcy of BLMIS'.}

^{19 Re Flightlease (Ireland) Ltd [2006] IECH 193.}

^{20 Rubin v. Eurofinance SA & Others [2010] EWCA (Civ) 895, [2011] Ch 133, 154.}

^{21 Id.}

^{22 In the matter of New Cap Reinsurance Corporation Limited (In Liquidation) (Unreported, 15 March 2011, Lewison J).}

^{23 In the matter of New Cap Reinsurance Corporation Limited (In Liquidation) [2011] EWCA Civ 971 (9 August 2011).}

^{24 See, for example, Look Chan Ho, "Recognition Born of Fiction" [2010] Journal of International Banking Law andRegulation 579.}

^{25 Cambridge Gas Transport Corp v Navigator Holdings plc Creditors' Committee [2007] 2 BCLC 141, PC (Isle of Man).}

^{26 Re HIH Casualty and General Insurance Ltd and other companies; McMahon and others v McGrath and another [2008] 3 All ER 869, HL.}

^{27 Cambridge Gas Transport Corp v Navigator Holdings plc Creditors' Committee [2007] 2 BCLC 141, PC (Isle of Man),148}

^{28 Smellie CJ, "A Cayman Islands Perspective on Trans-Border Insolvencies and Bankruptcies: The Case for Judicial Cooperation"(14 March 2011).}

^{29 In the matter of Lancelot Investors Fund Limited [2009 CILR 7] Quin J.}

^{30 In the matter of Bernard L. Madoff Investment Securities LLC [2010(1) CILR 231] Jones J.}

Previously published in The Hedge Fund Law Report, May 31, 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.