Protecting Creditors' Rights: Best Practices in Cross-Border Debt Recovery

In today's globalized economy, businesses often find themselves engaged in transactions with entities across borders. While international trade and commerce bring numerous opportunities, they also entail risks, particularly when it comes to debt recovery. When a debtor defaults on payment, especially in a cross-border context, creditors face significant challenges in enforcing their rights and recovering what is owed to them. In this blog post, we'll delve into the best practices for protecting creditors' rights in cross-border debt recovery scenarios.

Understanding Cross-Border Debt Recovery

Cross-border debt recovery involves the pursuit of outstanding debts from debtors located in different countries. Unlike domestic debt recovery, which operates within a single legal jurisdiction, cross-border debt recovery is complicated by diverse legal systems, cultural differences, language barriers, and varying enforcement mechanisms. These complexities often make the process time-consuming, costly, and uncertain.

Best Practices for Cross-Border Debt Recovery

1. Conduct Thorough Due Diligence

Before engaging in any cross-border transaction, it's crucial for creditors to conduct thorough due diligence on potential debtors. This includes assessing their creditworthiness, financial stability, legal status, and reputation. Additionally, verifying the debtor's assets and liabilities across jurisdictions can provide valuable insights into their ability to satisfy their obligations.

2. Draft Comprehensive Contracts

Clear and comprehensive contracts are essential for minimizing disputes and facilitating debt recovery in cross-border transactions. Contracts should clearly outline the terms of payment, dispute resolution mechanisms, choice of law, and jurisdiction clauses. Including provisions for the recognition and enforcement of judgments in multiple jurisdictions can strengthen creditors' position in the event of default.

3. Seek Legal Advice

Given the complexities of cross-border debt recovery, seeking legal advice from experienced professionals is imperative. Lawyers with expertise in international law and debt recovery can provide invaluable guidance on the applicable legal frameworks, enforcement procedures, and potential challenges. Early involvement of legal counsel can help creditors navigate the complexities and maximize their chances of success.

4. Explore Alternative Dispute Resolution (ADR)

In many cross-border disputes, resorting to litigation can be time-consuming, expensive, and unpredictable. Alternative dispute resolution mechanisms such as arbitration or mediation offer more efficient and flexible means of resolving disputes. By including ADR clauses in contracts, creditors can expedite the resolution process and avoid the pitfalls of lengthy court proceedings.

5. Leverage International Treaties and Conventions

International treaties and conventions play a crucial role in facilitating cross-border debt recovery. The Hague Convention on the Recognition and Enforcement of Foreign Judgments provides a framework for the recognition and enforcement of judgments in civil and commercial matters across participating countries. By leveraging such instruments, creditors can streamline the enforcement process and enhance their prospects of recovery.

6. Pursue Asset Tracing and Recovery

In cases of default, creditors may need to resort to asset tracing and recovery strategies to satisfy their claims. This involves identifying and locating the debtor's assets, which may be dispersed across multiple jurisdictions. Engaging forensic accountants, private investigators, and asset recovery specialists can help creditors uncover hidden assets and initiate recovery proceedings through legal channels.

7. Maintain Communication and Persistence

Effective communication and persistence are key attributes in cross-border debt recovery efforts. Maintaining open lines of communication with debtors, legal representatives, and enforcement authorities can facilitate negotiations and expedite the resolution process. Persistence in pursuing debt recovery, even in the face of obstacles and setbacks, is essential for achieving favorable outcomes.

Cross-border debt recovery presents unique challenges for creditors, requiring careful planning, strategic foresight, and decisive action. By adhering to best practices such as conducting due diligence, drafting comprehensive contracts, seeking legal advice, exploring alternative dispute resolution, leveraging international treaties, pursuing asset tracing and recovery, and maintaining communication and persistence, creditors can protect their rights and enhance their prospects of successful debt recovery in cross-border transactions. While the process may be complex and arduous, diligent execution of these best practices can yield favorable outcomes and safeguard creditors' interests in the global marketplace.

In conclusion, safeguarding creditors' rights in cross-border debt recovery necessitates a multifaceted approach encompassing legal, financial, and strategic considerations. By adopting best practices and leveraging available resources, creditors can navigate the complexities of cross-border transactions and mitigate the risks associated with debt default. Ultimately, effective debt recovery requires diligence, perseverance, and a proactive approach to protecting creditors' interests in the international arena.

Turnover Orders -- an Underutilized (but Effective) Enforcement Tool

Recently, several U.S. jurisdictions have addressed the application and use of turnover statutes in enforcement proceedings. These cases, generally confirming that turnover statutes may be used to force debtors to satisfy judgments using property from outside of the court’s jurisdiction, are cementing the role of turnover statutes in enforcement proceedings. I expect to see more of this underutilized enforcement tool and even a preference for pursuing enforcement in jurisdictions with turnover statutes as U.S. courts push the boundaries (literally and figuratively) of international judgment enforcement.

Before delving deeper into the most important cases from 2022 involving turnover statutes, we should clarify what they are: Turnover statutes generally allow trial courts to request that debtors over whom they have personal jurisdiction use certain assets to satisfy a judgment entered by the court. These statutes do not attach or freeze the assets and do not place a lien on the asset; however, they give the courts the power to sanction the debtor for failing to comply with an order to turn over such assets, potentially increasing the debtor’s liability or even subjecting the debtor to criminal contempt sanctions.

In May 2022, the Florida Supreme Court ruled in Shim et al. v. Buechel et al., No. SC21-249, that Florida’s turnover statute (Fla. Stat. 56.29(6)) gives trial courts the authority to compel the production of foreign assets to satisfy judgments as long as the trial court has personal jurisdiction over the judgment debtor. The case concerned an order compelling the debtor to deliver to the creditor or place in escrow in the Florida court a negotiable instrument located in the Republic of Korea toward satisfying their judgments. The trial court refused to issue such an order because it lacked in rem jurisdiction over the instrument, but was reversed by the intermediate appellate court, which held that, under Section 56.29(6), it needed only in personam jurisdiction over the debtor to issue a turnover order. The debtor challenged the decision, arguing that it conflicted with another intermediate appellate court opinion applying the turnover statute, Sargeant v. AlSaleh, 137 So. 3d 432 (Fla. 4th DCA 2014), which refused–citing public policy grounds–to issue a turnover order related to foreign assets outside of its jurisdiction.

The Florida Supreme Court affirmed the intermediate court’s decision, explaining that the turnover statute "unambiguously provides a trial court broad authority to 'order any property of the judgment debtor ... to be levied upon and applied toward the satisfaction of the judgment debt,'" although limited by the requirement that the trial court have personal jurisdiction over the debtor or a third party in possession of the debtor’s property. The Court explained that these “penalties are imposed against the defendants — not the property” and thus “serve to hold the defendant accountable and prevent the defendant from relocating assets to avoid execution of a judgment." The Court found that the Sargeant court should have not considered public policy in making its decision because the language of the turnover statute was clear and unambiguous.

The Court recognized, however, during oral argument that Florida trial courts cannot do anything directly to the property, but that Section 56.29(6) authorizes them to impose penalties on the debtors should they fail to comply with the turnover order. The Florida Supreme Court further supported their view of the role of contempt sanctions as an enforcement mechanism by pointing to U.S. Supreme Court precedents dating as early as the 1870s. The Buechel opinion explained that the U.S. Supreme Court established in these cases that “a court may ‘decree a conveyance of land situated in another jurisdiction, and even in a foreign country, and enforce the execution of the decree by process against the defendant.’ While a trial court has ‘no inherent power . . . to annul a deed or to establish a title’ for property outside its jurisdiction, the trial court may indirectly do so by compelling the defendant to act on such property pursuant to its in personam jurisdiction.”

The creditors in this case were represented by Vello Veski and Edmond E. Koester from Coleman, Yovanovich & Koester, P.A.; the judgment debtor was represented by John Bogdanoff and Christopher Carlyle from the Carlyle Appellate Law Firm.

A turnover statute has been at the center of a heated enforcement dispute before the District of Colorado and the Tenth Circuit. The case (Nos. 21-1196 and 21-1324 before the Tenth Circuit) involved the confirmation and enforcement of a now-annulled Bolivian arbitration award. Despite the annulment, the District of Colorado confirmed the award and allowed the creditor to proceed with enforcement of the judgment. The creditor filed a turnover motion, asking that the debtors use Mexican assets (including corporate shares and cash in the debtor’s Mexican bank accounts) to satisfy the judgment that was entered. The District of Colorado granted the motion.

In January 2023, the Tenth Circuit affirmed the District of Colorado’s decision. The Tenth Circuit rejected the debtors’ argument that “possession” of the assets (required by the turnover statute) requires actual possession. The Court further cemented its holding in United Int’l Holdings, Inc. v. Wharf (Holdings) Ltd., 210 F.3d 1207, 1237 (10th Cir. 2000), aff’d, 532 U.S. 588 (2001), that when the district court had personal jurisdiction over the judgment debtor, the location of the debtor’s assets was irrelevant. The Tenth Circuit further rejected the debtors’ argument that the turnover order violates the presumption against extraterritoriality, holding that the turnover of assets does not involve regulating conduct that takes place abroad. Finally, the Tenth Circuit rejected the debtors’ argument that the turnover order violates international comity, finding no true conflict between the turnover order and Mexican law, including an ex parte injunction by a Mexican court barring the debtors from turning over the assets targeted by the turnover order. The parties have recently settled.

Although not addressed by the parties or the court, a very interesting fact about this case is that the Colorado court obtained personal jurisdiction over the debtors solely by serving the summons under Federal Rule of Civil Procedure 4(k)(2). This means that the creditor–and the Court–have recognized that Colorado courts lacked personal jurisdiction over the debtors. Nevertheless the Court found sufficient contacts throughout the United States to support the federal claim for confirmation of the Bolivian award. Through Federal Rule of Civil Proceeding 69, which allows the application of state law for the execution of judgments, the foreign debtors–and their foreign assets–became subject to Colorado’s turnover statute.

Although courts often make clear that the turnover statutes do not attach assets, but order the debtor within the court’s personal jurisdiction to provide them, this case highlights the need for additional discussion regarding the way these statutes interact with the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. If the Mexican courts would refuse to confirm the annulled Bolivian arbitration award (and even if they would have confirmed the award–they would presumably refuse to allow execution on the specific assets sought by the creditor here), is the use of turnover orders to reach the debtors’ Mexican assets in the spirit of the Convention?

The creditor in this case is represented by Christopher T. Groen with Fox Rotschild, Gabriel Hertzberg and Eliot Lauer with Katten Muchin Rosenman, and Juan Otoniel Perla and Sylvi Sareva with Curtis Mallet; the debtors in this case are represented by David Cooper, Alexander Loomis, and Juan Morillo of Quinn Emanuel Urquhart & Sullivan LLP and Daniel Pulecio Boek of Greenberg Traurig LLP.

Several other states have turnover statutes, including Texas (Texas Civil Practice and Remedies Code section 31.002; see DiAthegen, LLC v. Phyton Biotech, Inc., No. A-12-CV-1146-LY, 2013 WL 12116146, at *2 (W.D. Tex. Sept. 11, 2013) (“Assets of a judgment debtor that are located in whole or in part outside of the state of Texas, including property in foreign countries, are properly subject to turnover.”)) and New York (CPLR 5225; see Gryphon Domestic VI, LLC v. APP Int'l Fin. Co., B.V., 41 A.D.3d 25, 31, 836 N.Y.S.2d 4, 9 (2007) (“Clearly, it would violate the sovereignty of another state if a New York sheriff tried to attach property in another state. However, a turnover order merely directs a defendant, over whom the New York court has jurisdiction, to bring its own property into New York.”)).