In the past, foreign courts have refused to enforce or have been wary about enforcing American punitive damages awards because the large awards offend the foreign court’s notion of public policy. One reasoning being that punishments should come from the criminal court system which has more elaborate due process protections. However, several recent articles have indicated that this past wariness may be changing; see John Gotanda, Charting Developments Concerning Punitive Damages: Is The Tide Changing, 45 Colum. J. Transnat'l L. 507 (2007) and Adam Liptak’s March 26, 2008 New York Times article “Foreign Courts Wary of U.S. Punitive Damages.”

Both Gotanda and Liptak note that recent decisions and developments in Spain, Canada, Germany indicate a willingness to enforce American punitive damages awards. However, on the other hand, some foreign courts are still just as eager to strike down awards of punitive damages. Liptak’s article reports that recently the Italian Supreme Court refused to enforce an American award that lumped together compensatory damages with punitive damages. Since the American court did not designate how much was for the compensatory damages, the Italian Supreme Court refused to enforce the entire award.

Thus, while there may be a shifting trend enforcing punitive damages, some foreign courts are still hesitant. Given this resistance, a practical suggestion would be to request or petition the American court to designate the amount awarded as compensatory damages and the amount awarded as punitive damages. This practice would help ensure that at least the compensatory damage award was enforced even if the court refused to enforce the punitive amount.

Despite the impact of money laundering laws and the focus recently on pressuring tax havens to loosen their laws to reach violators, countries are still enacting legislation to encourage the use of their jurisdictions to transfer wealth into trusts as a means of protection.

In Mauritius, trust legislation was unified under the Trust Act 2001. The act provides for a single law for trusts for non-residents and incorporates the latest trends in international trust legislation. The advantage of setting up an offshore trust for non-residents in Mauritius is the following:

1. exemption from taxes where the settlor and all beneficiaries are non-residents
2. the settlor can be a beneficiary, but not the sole beneficiary
3. the settlor can also be a trustee, but there must be one trustee that is a resident of Mauritius
4. the trust can do business in the name(s) of the trustee(s) or in the name of a Category 2 Business License Mauritius company, which is simple to create
5. the trust property can be shares of stock, bank accounts, insurance policies or most other assets protector is authorized
6. protectors are authorized to cater to clients in Civil law countries who want to protect against "giving away" ownership rights over property; and
7. the trust can exist for at least 99 years

In Gibraltar, the Asset Protection and Probate Avoidance (APPA) plan is designed to attract people who want to transfer wealth, maintain financial privacy and be able to get the wealth back. Instead of utilizing a trust, the wealth is put in the name of a company and one retains the same rights over the wealth as if it was in their name. The advantages of using the APPA is:

1. a Gibraltar Investment company that is cheap and simple to create
2. one nominee shareholder is required such that the identity of the true owner is not publicized
3. shares are held in trust in the form of a nominee shareholders agreement or trust deed that  serves to protect the identity of the beneficial owner(s); and
4. one corporate director is required who is not the corporate secretary and only the name of the corporate director is public. It is common that an undated letter of resignation signed by the director(s) is provided to the true owner so that the nominee can be replaced whenever it is in the true owner's interests to do so

In a follow up to the most recent blog entry by B.Wayne Creel on February 25th entitled "Germany Vows To Investigate European Tax Havens," it now appears that individuals throughout the world who were "hiding" assets at Lichtenstein's LGT Bank are now at risk of civil and criminal penalties as a result of a risk that they probably never thought about- information breach.  As more fully described in an article in the Wall Street Journal on Wednesday, February 27, 2008 entitled "U.S., Others Join Tax Probe" A4, several countries including the United States, Canada, Sweden, Australia, Italy and France are currently investigating dozens of their citizens who were allegedly "hiding" assets at LGT Bank. 

This situation began to unfold after the theft of data describing roughly 1,400 "client relationships" by a data thief who allegedly sold the information to the German government.

Per the article, the fallout so far is as follows:

1. The IRS is looking into about 100 Americans who allegedly kept funds at LGT Bank.  In fact, the article reports that the US has already taken civil action against some taxpayers.  As the article points out, under U.S. law, the U.S. can also bring criminal cases because the failure to disclose a foreign bank account can be a felony offense. 

2. The German government has already announced that tens of millions of dollars have been stashed in Liechtenstein by hundreds of wealthy Germans.  German prosecutors have alleged that 163 suspects have admitted they failed to declare income from Liechtenstein trust assets and 27.8 million Euros in back taxes have already been paid back to the German government and the investigation appears to be expanding.  Klaus Zumwinkel, Chief Executive of Deutsche Post AG, has already resigned his position with Deutsche Post AG and has been detained by German police on suspicion of tax evasion.

3.The French government has received a list of a few hundred names of LGT clients which they are apparently looking into.

4.  Sweden is looking into approximately 100 Swedes who were on the list.

5.  Canada is investigating about 100 Canadians.

6.  Australia has 20 cases open.

This story is continuing to develop and, given the popularity of Liechtenstein as an asset protection haven, it is likely that hundreds of additional individuals will have a lot more heartburn before this situation is resolved.  However, the lesson here is simple, those that engage in sophisticated "asset protection" or outright hiding of assets can plan for all of the risks that they know about but there are always unknown risks.  Getting around the the plans that people make to circumvent the known risks, and opportunistically taking advantage of the unknown risks are what international asset recovery experts do to recover assets which were thought to be "protected" or "hidden."

Germany’s finance minister, Peer Steinbruck, announced on Friday, February 22, 2008, that Germany would begin further investigations into European financial centers and tax havens.  The likely countries targeted by Germany are Liechtenstein, Monaco, and Andorra.  This announcement is a recent development in the tensions building between Germany and Liechtenstein regarding the use of Liechtenstein as a tax haven.  The tension has been mounting since Germany began a tax investigation into at least 750 individuals two weeks ago based in part on German accounts held at Liechtenstein’s LGT bank, which was purchased by the BND intelligence agency in 2006.  Germany has indicated that it will take further steps if Liechtenstein refuses to cooperate.  It will be interesting to watch as this situation develops as it may result in additional methods for international recovery in European countries, with or without governmental assistance.

In a recent 11th Circuit case, United States v. King, 2007 U.S. App. Lexis 28912 (11th Cir. Dec. 14, 2007), the court addressed the legitimacy of evidence seized from a computer in a dorm room in Saudi Arabia. The 4th Amendment protects against unreasonable searches where one can demonstrate a reasonable expectation of privacy. The 11th Circuit had early held that there was no reasonable expectation of privacy where: (1) records are left by tenants of a multi-unit apartment building in the common area of a building (U.S. v. Miravalles, 280 F. 3d 1328 (11th Cir. 2002), (2) a company fails to restrict public access to shredded records placed in a garbage bag in a private dumpster (US v. Hall, 47 F. 3d 1091 (11th Cir. 1995), and (3) garbage is left for collection outside adjacent to a private home and in open view to the public (US v. Segura-Baltazar, 448 F. 3d 1281 (11th Cir. 2006).

The court in King considered that the computer files could be remotely accessed over a computer network. Since everyone could "share" access, the court found that the contents of the computer's hard drive were akin to items stored in the unsecured common areas of a muti-unit apratment or put in a dumpster accessible to the public. The expectation of privacy was unreasonable and therefore no violation of 4th amendment rights occurred when the computer files were searched through the computer's connection to the base network.

Consequently, in gathering evidence in support of an international recovery, if there is public access, even though contained on private property, that evidence is available for discovery. Often, it is that evidence that the party thought was secure from discovery that leads one to recovery sources. 

The latest chapter in the saga of OAO NK Yukos Oil Company (Yukos) was written by the Honorable Colleen Kollar-Kotelly, United States District Judge in the District of Columbia, on November 26, 2007. Yukos was a company founded by the Russian government in 1993 by consolidating certain state-owed producing, refining and distribution entities. By 2003, Yukos’s combined production of natural gas and oil rivaled ChevronTexaco and Total. Its market capitalization was estimated to exceed $30 billion and it was outperforming its Russian competitors. Yukos was also paying significant dividends to its shareholders, including holders of Yukos American Depository Receipts (ADRs).

Plaintiffs in Allen, et al v. Russian Federation, et al, (Civil Action No. 05-2077) 2007 U.S. Dist. LEXIS 86164 (November 26, 2007), allege that the Russian Federation “launched its assault on Yukos and the individuals responsible for owning or running Yukos.” The Plaintiffs claim that as a result of the actions of the Russian Federation and persons and entities related to the Russian Federation, their ADRs became worthless because the Russian Federation expropriated the assets of Yukos by seizing a majority of Yukos shares, transferring Yukos’s most valuable assets to commercial activities controlled by the Russian Federation and diverting to state-controlled entities all remaining benefits of owning an interest in Yukos.

The Court specifically noted that the allegations contained throughout the Plaintiff’s 116 page Complaint tell a troubling story if proven true. However, the Court noted that United States District Courts are courts of limited jurisdiction and, therefore, concluded that it could not reach the merits of the Plaintiff’s complaint. The Court found that the Russian Federation and its wholly owned subsidiary were immune from suit under such claims under Foreign Sovereign Immunities Act, 28 U.S.C. §§1602, et seq. (FSIA). Furthermore, the Court found that the senior Russian government officials made all of their statements (and/or misstatements) in their official capacities and, thus, were also immune from suit under FSIA. Finally, the Court dismissed the claims against the two companies that are indirectly owned by the Russian Federation and the three executives of those companies based on the Court’s lack of personal jurisdiction.

While the Court’s detailed analysis of the Foreign Sovereign Immunities Act and the constitutional limitations on personal jurisdiction are interesting for lawyers who practice in this field, the broader lesson for plaintiffs seeking to recover their assets from persons and entities abroad is that choosing one or more jurisdiction(s) to commence litigation to recover assets is a difficult decision that should only be made after a thorough analysis of all of the relevant facts and law.

Creditors of bankrupt foreign companies may have an alternative remedy in United States courts for recovering their debts. A recent case in the Southern District of New York, Osanitsch v. Marconi PLC, 363 B.R. 361 (S.D.N.Y. 2007), addressed the procedure for filing claims against foreign companies that have declared bankruptcy in a country other than the United States.

When a foreign company files bankruptcy in its home country, often it will file an ancillary proceeding in the U.S. under Section 304 (now Chapter 15) of the Bankruptcy Code. The purpose of such ancillary proceeding is to “facilitate centralized liquidation of the debtor’s estate according to the rules of the debtor’s home country.” Osanitsch v. Marconi PLC, 363 B.R. 361, 364 (S.D.N.Y. 2007). In an ancillary proceeding, as in Osanitsch, the foreign debtor can request and the U.S. court can grant an injunction prohibiting creditors from filing or continuing various lawsuits against the debtor.

Such an ancillary proceeding also gives the U.S. bankruptcy court jurisdiction to hear actions that preserve, protect or recover property of the foreign debtor. However, in Osanitsch, the district court found that section 304 (now chapter 15) does not necessarily give the US bankruptcy courts jurisdiction to hear actions brought by U.S. creditors that are unrelated to preservation or recovery of the debtor’s property. Osanitsch, 363 B.R. at 365. Thus, if a court has granted a broad sweeping injunction prohibiting the creditor’s claims and the bankruptcy court does not have jurisdiction to hear the claim, a US creditor then has limited means within the U.S. by which to recover its debt. However, the court in Osanitsch held that if a U.S. creditor wishes to recover a debt against a foreign bankrupt, it may be able to seek a modification of the injunction and ask the court to allow it to pursue its claim in other US courts. Osanitsch, 363 B.R. at 367-68. Consequently, requesting a modification of the injunction to allow the creditor’s claims may provide an alternative avenue for recovering debts from a foreign debtor.

For more information see Osanitsch v. Marconi PLC, 363 B.R. 361 (S.D.N.Y. 2007).

The Privy Council of the Cayman Islands recently ruled that courts of one British territory may be required to provide assistance to other British territories in bankruptcy proceedings.  In Re Al Sabah, [2004-2005] CILR 373.  In Re Al Sabah, Sheik Al Sabah, a resident of the Bahamas, defrauded Grupo Torras SA of approximately $800 million (US).  Grupo Torras SA obtained a default judgment in England and attempted to collect the judgment.  However, Al Sabah, in June of 2001, was declared bankrupt and the Bahamian court appointed a trustee in bankruptcy.  Prior to filing bankruptcy, Al Sabah had settled two trusts under Cayman law.  The Bahamian court requested that the Cayman Islands recognize the appointed trustee and grant the trustee the powers of a trustee in bankruptcy under Cayman law.

In its ruling, the Privy Council upheld the Court Of Appeals decision granting power and relied on sections 122 and 107 of the Imperial Bankruptcy Act of 1914.  The Privy Council noted that the application of section 122 allowed the Bahamian trustee to grant the authority to employ the avoidance provision of section 107, which would allow the trustee the power to reach the trusts.  The court provided several factors which it might consider in such an action, including the specific facts of the case, the validity of the foreign bankruptcy order, reasons for having the trust governed by Cayman law, and the court’s role in seeking justice.

More than 8,500 hedge funds are registered in the Cayman Islands. Some estimate that three out of every four hedge funds are incorporated in the Western Caribbean Islands. As the following two articles indicate, Bear Stearns' decision to file for bankruptcy protection on behalf of its two bankrupt hedge funds (Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd. & Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage Master Fund Ltd.) in the courts in the Cayman Islands, where the hedge funds are incorporated and where the legal system if disposed to favoring management over creditors, will be an early test of how creditors and investors fare in recovering assets when hedge funds go bankrupt in offshore jurisdictions. It will also be an early test of the provisions in Chapter 15 of the Bankruptcy Code which the funds are relying on to stop creditors and investors from suing the funds and Bear Stearns in U.S. courts while the bankruptcy cases are administered in the Cayman Islands.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aX9aWxCf9y3o&refer=home

http://www.portfolio.com/views/blogs/daily-brief/2007/08/07/new-frontiers-in-bankruptcy

Our colleagues Robert Groholski and Bethany Schols just wrote an interesting article, published by Financial Services Law 360 and Bankruptcy Law 360, regarding the recovery of documents and assets from foreign banks.  Click here to view the article.