SDNY Dismisses Petition against Republic of Congo for Turnover of Property

On May 23, 2023, the Southern District of New York dismissed a petition against the Republic of Congo and Ecree LLC seeking turnover of a New York condo allegedly bought using funds embezzled from the Republic.

The action seeks enforcement of two arbitration awards against the Republic of Congo, which were confirmed and reduced to judgment in the District of Columbia, and then registered in the Southern District of New York.

The Court held that while the Petitioner alleged a theory within the Court's ancillary jurisdiction (as it involved a fraudulent conveyance of the property of Petitioner's debtor), the Petition had to be dismissed as it failed to make any allegations regarding the Republic itself.

The Court's discussion of ancillary jurisdiction related to fraudulent conveyance is notable. The Court explained:

The Second Circuit has held that an action to collect a judgment does not require an independent jurisdictional basis even where parties are nondiverse. See Epperson, 242 F.3d at 104. As Epperson explains, a fraudulent conveyance claim is a quintessential example of a follow-on action to collect a judgment that does not require an independent jurisdictional basis, inasmuch as failing to allow ancillary jurisdiction over such actions “would encourage judgment debtors to engage in such conduct, not only to avoid payment of the judgment but also to force the winning plaintiff to pursue him to another jurisdiction.” Id. at 107 n.10. Since Epperson, courts within the Second Circuit have routinely found that ancillary jurisdiction exists where the plaintiff or petitioner adequately pleads that the judgment debtor’s assets have been fraudulently conveyed in order to avoid payment of the subject judgment. See, e.g., Nat’l Council on Comp. Ins., Inc. v. Caro & Graifman, P.C., 259 F. Supp. 2d 172, 177 (D. Conn. 2003) (finding, in context of plaintiffs’ action seeking declaration that granting of mortgage was fraudulent and designed to avoid restitution order, that “action is within the ancillary jurisdiction of [the] court” and declining to dismiss due to non-diverse parties).

The Court explained that, however, the ancillary jurisdiction is not without limits. It does not, for example, extend beyond attempts to execute, or to guarantee eventual executability of, a federal judgment. This means, the Court continued, that a "federal court does not have ancillary jurisdiction over a 'new theor[y] of liability,' such as a veil-piercing claim that seeks to hold a third party independently liable for a judgment." The Second Circuit and courts within it have thus "draw[n] a distinction between post-judgment proceedings to collect an existing judgment and proceedings, such as claims of alter ego liability and veilpiercing, that raise an independent controversy with a new party in an effort to shift liability.”

The Court however held that the Petition failed to allege that the Republic has fraudulently conveyed the funds. The Court reviewed the state of the law and recognized "the well-accepted principle that 'not every action that happens to be taken by officials of a foreign state is properly attributable to that state.'” The Court explained that "[u]nder the act-of-state doctrine, courts distinguish between public acts taken by individual government actors that are attributable to the state and protected, and private acts that are not attributable to the state and not protected." Therefore, the question here was whether "Petitioner has alleged facts supporting a conclusion that the President (or any member of his family) was acting as an agent of the Republic when they allegedly fraudulently transferred the funds."

The Southern District found that "Petitioner has not asserted any non-conclusory allegations suggesting that the President was acting as an agent of the Republic when he allegedly misappropriated the funds at issue." It noted that the "Petitioner has not alleged that the President was acting within the scope of his employment, or that he acted with actual or apparent authority to bind the Congo when making the transfers. Embezzling funds for private use is undoubtedly a 'private' act — a 'useful [determination of] whether a foreign official’s conduct is attributable to his government or sovereign state[.]'”

The Court also dismissed the Petition on the grounds that Petitioner has not sufficiently pleaded that the condo is not immune from execution under the Foreign Sovereign Immunity Act (FSIA). The Court sided with Petitioner in finding that the alleged holding of the condo by a sovereign as a real estate investment constituted "commercial activity" under the FSIA. Nevertheless, the Court found that Petitioner failed to allege that it was the Republic's commercial activity. Thus, the use of the condo appeared to be a “private” act and not one that may be “attributable to [the] government.”

The case is Commissions Import Export S.A. v. Republic of the Congo et al., No. 1:19-mc-00195 (S.D.N.Y.).

Read the entire opinion here:

Commissions Import Export S.A. v. Republic of the Congo et al, 1_19-mc-00195, No. 127 (S.D

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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.”)).