U.S. Receivership Court Had No Jurisdiction over Foreign Liquidators
District judge decides that he lacked jurisdiction to enforce a cross-border protocol against foreign liquidators.
Analysis:
After panel rehearing, the Fifth Circuit ruled 2/1 in late December that a federal receivership court has the power to bar creditors from suing when their “claims are derivative of and dependent on the receiver’s claims, and their suits directly affect the receiver’s assets.” Zacarias v. Stanford International Bank Ltd., 945 F.3d 883, 2019 WL 6907576 at 12, 2019 BL 486611 at 11 (5th Cir. Dec. 19, 2019).
In the same receivership, District Judge David C. Godbey of Dallas ruled on January 24 that similar power and jurisdiction do not extend to foreign liquidators and foreign courts, even when a foreign liquidator is prosecuting the same claim that belongs to the receiver.
The Stanford Receivership and the Antiguan Liquidation
Both rulings emanated from the R. Allen Stanford Ponzi scheme. The Securities and Exchange Commission put Stanford International Bank into federal receivership in Dallas after discovering that the business, in reality, was a Ponzi scheme where hundreds of defrauded investors lost some $5 billion. Stanford himself is serving a 110-year prison sentence.
Around the same time, the court in Antigua put the Stanford bank into insolvency proceedings and appointed joint liquidators. Subsequently, the U.S. court recognized the proceedings in Antigua as a foreign nonmain proceeding.
The Antiguan liquidators and the U.S. receiver entered into a court-approved protocol dealing with the pursuit of litigation and the distribution of recoveries. It allowed the liquidators and the receiver to pursue claims in jurisdictions where they were “recognized.” However, the protocol specifically provided that appearances by the liquidators and the receiver in the other’s court would not be, “in and of itself,” a submission to that court’s general jurisdiction.
The U.S. receiver brought lawsuits, including one against a large U.S. law firm. The result was a settlement that included a bar order that purported to enjoin “entities anywhere in the world” from suing the law firm that settled.
The liquidators were not parties in the lawsuit, nor were they included in the settlement.
Around the same time as the receiver’s suit, the liquidators had sued the law firm in Antigua. The Antiguan court declared in an interlocutory judgment that the law firm was not subject to suit in Antigua. The liquidators appealed, and the law firm cross-appealed.
The law firm then moved in the receivership court, asking Judge Godbey to enforce the bar order and require the liquidators to show cause why they should not be held in contempt for violating the bar order.
In a nine-page opinion, Judge Godbey denied the motion to show cause, ruling that he lacked jurisdiction over the liquidators and deciding that he “must defer to the Antiguan Court.”
Citing Fifth Circuit authority, Judge Godbey conceded that he would not have power over assets belonging to third parties over which the receiver had no claim. The liquidators’ claims did not fall within that category, however.
Judge Godbey held that the liquidators’ claims fell within the scope of the bar order because they were the same claims being asserted by a different “receivership entity.”
But that wasn’t the end of the story. Judge Godbey decided he lacked both general and specific personal jurisdiction to enforce the bar order against the liquidators.
The U.S. court lacked general personal jurisdiction over the liquidators because they were not parties to the suit, was not included in the settlement, and were protected by a protocol that insulated them from the U.S. court’s “general jurisdiction.”
Similarly, the U.S. court lacked specific personal jurisdiction because the liquidators had not appeared in any other cases, “established other contacts with the forum,” or “purposefully availed themselves in any other way that would establish personal jurisdiction.”
In short, Judge Godbey found that the “Liquidators do not have minimum contacts in order to subject themselves to the jurisdiction of this Court.” Absent personal jurisdiction, he could not enforce the bar order against the liquidators.
With regard to the court in Antigua, Judge Godbey said he “certainly lacks jurisdiction to instruct the Antiguan Court. It is up to the Antiguan Court to decide whether it will exercise comity and consider the judgment of the Texas case.”
Judge Godbey refused to enforce the bar order against the liquidators and declined to require the liquidators to show cause why they should not be held in contempt.
An Alternative Suggested by Prof. Westbrook
Prof. Jay L. Westbrook of the University of Texas School of Law told ABI that the “comity side of the decision is admirable.” However, the professor suggested an alternative, based on an article he authored several years ago about courts that have engaged in what he called “international judicial negotiation.”
Those courts, Prof. Westbrook told ABI, “had deferred to the foreign court, but used a stay to signal that they might be open to taking a stronger position if the foreign court did not act in a cooperative way in return. The result can be to increase the chances of court cooperation in international cases, especially if the courts then engage in court-to-court communication (with disclosure all around) as recommended in the ALA’s Principals of International Cooperation in NAFTA. Here there may be a strong reason to do that, given the court’s clear finding that conformity with the agreed bar order would be the best result.”
See Jay L. Westbrook, “Symposium: Judicialization and Globalization of the Judiciary,” Texas International Law Journal (2003). Prof. Westbrook is the Benno C. Schmidt Chair of Business Law at the University of Texas School of Law. He wishes to disclose that several years ago, in the early days of the Stanford case, he had worked with lawyers for the receiver.
To read ABI’s report on Zararias, click here.