by Grant Stanton Smith
A fundamental reason foreigners are motivated to enter the U.S. market, and domestic individuals feel secure when starting a business, is trust in the rule of law of the United States. This trust stems from the perceived notion that a person or company will be held accountable for breaching a contract or violating a law in the U.S. For these reasons, individuals are always shocked and dismayed when they are victims of fraud, subsequently sue, and cannot collect on a money judgment. When a judgment is entered, these victims perennially face defendants that appear uncollectible on paper, but actually control assets held in the name of offshore entities, frustrating collection efforts. In order to avoid this pitfall, the 21st century plaintiff must be prepared to consider a global approach to collection at the outset of litigation.
This article provides an introduction to certain tools, in Florida, as well as, abroad, that can improve a plaintiff’s chances to locate, freeze, and collect the assets of a defendant before and/or after a judgment. Collection challenges usually arise because either assets are located abroad, are held under a name different from the defendant, and/or there is a foreign defendant with the ability to liquidate their U.S. assets because they have no permanent ties to Florida, rendering any judgment worthless. Consequently, when deciding whether to pursue litigation, plaintiffs should consider not only litigating in Florida, but also in other foreign jurisdictions.
Setting the Scene
Consider two fairly common scenarios in which a company is defrauded and then faces an obstacle of collecting on a money judgment:
A) A large Florida company begins to sell wholesale electronic equipment that it purchases in bulk from a company based in Hong Kong. It enters into a new contract for television sets through the Hong Kong subsidiary company in Florida and wires payment to the subsidiary. Unfortunately, when the television sets arrive, they are either broken or missing parts, and the Florida company promptly informs the Chinese company and subsidiary of the nonconforming goods. Despite promises to the contrary, a refund is never given, and the Florida company sues the subsidiary without considering Hong Kong, as a jurisdiction, in its litigation strategy.
B) A Florida company purchases a movie script from an Argentinian producer living in Miami. Payment is made to the producer’s Florida bank account. However, soon after attempting to partner with a California studio, the Florida company learns that the producer had previously sold the rights to the same script five years ago. The producer is sued and claims to be insolvent; however, the Florida company ultimately discovers that the producer transferred the proceeds of the sale to a company incorporated in the Cayman Islands with a Cayman bank account.
The Reach of a Florida Temporary Injunction
A temporary injunction in Florida is dictated by the Fla. R. Civ. P. 1.610, and it permits an injunction to be granted without oral or written notice if certain conditions are met by the movant party. Among those conditions is the requirement that the movant file an affidavit detailing the “immediate and irreparable injury” that will be caused before the adverse party can be heard by opposition.1 The movant’s attorney, as well, must certify in writing why notice should not be required.2 Finally, a bond must be posted by the moving party to cover the costs and damages sustained by the adverse party if the adverse party is wrongfully enjoined.3 If the injunction is granted, the adverse party is notified almost immediately and is permitted to contest the injunction within five days.4
Despite these explicit rules, Florida courts have long held that the issuance of a preliminary injunction is a matter of discretion, and that such a writ is an extraordinary and drastic remedy that should be granted sparingly and with caution and only after plaintiff has proven sufficient facts entitling him to relief.5 Under Florida caselaw, an injunction cannot be entered to prevent a party from using or disposing of assets prior to the conclusion of a legal action.6 Moreover, further caselaw adds that a claim for money damages does not provide a sufficient basis for injunctive relief.7 Caselaw suggests that, although a preliminary injunction is a powerful weapon, it is not intended to freeze a defendant’s bank account and would not likely assist a plaintiff in scenarios A or B.
The Florida Uniform Fraudulent Transfer Act
Depending on the facts, a plaintiff seeking money damages against a defendant in the previously mentioned scenarios should also consider the Florida Uniform Fraudulent Transfer Act (FUFTA). The basic premise behind FUFTA is to provide creditors with the right to set aside any transaction by the debtor that would reduce the creditor’s chances of collecting and enforcing a judgment.8 According to FUFTA, a transaction could be set aside by the court if it is determined that the transaction was made in anticipation of or has the present purpose of evading collection.9
Before a party can consider utilizing the tools in Ch. 726, it must show that it has a “claim”10 in order to qualify as a “creditor”11 under FUFTA. The broad definition of “claim” gives the plaintiff considerable leeway to argue that the transaction in question falls within the authority of FUFTA. Once it qualifies as a creditor, the plaintiff must demonstrate intent to defraud a creditor by demonstrating the existence of “badges of fraud” in court.12 The existence of badges of fraud creates a prima facie case that a fraudulent conveyance is void.13 While a single badge of fraud associated with an allegedly fraudulent conveyance may amount only to a suspicious circumstance, a combination of badges will justify a finding of fraud.14
The classic example of a fraudulent transfer is scenario B, when an individual is faced with the threat of an upcoming lawsuit or garnishment and transfers money or other assets to an offshore entity. A prejudgment attachment is available against assets fraudulently transferred from a debtor and held in the name of another.15 If the Cayman entity in scenario B has accounts in Florida, they would be subject to being enjoined by a court. Similarly, in scenario A, if the subsidiary transferred funds paid by the Florida company to the Hong Kong company after demands by the Florida company, it could be considered a fraudulent transfer. The corporate structures of the subsidiary would also factor into a badge of fraud analysis in order to determine if the shareholders are the same or if the subsidiary is merely a shell company.
When a plaintiff has an unsatisfied judgment, proceedings supplementary offer plaintiffs a second chance to collect against nonparties in possession of assets that are allegedly owned by the defendant. Proceedings supplementary are ancillary, post judgment proceedings conducted in the same action in which the judgment was obtained, and the statute governing proceedings supplementary is typically regarded as a procedural mechanism for reaching assets to which the judgment creditor is legally entitled rather than as an independent font of substantive rights and obligations.16
In March 2016, Gov. Scott signed a bill into law that revised proceedings supplementary in F.S. Ch. 56 and streamlined the process for Florida plaintiffs. In interpreting this revised statute, courts require that when third parties are impleaded in proceedings supplementary, the same procedures requiring an affidavit averring specific information about the judgment or judgment lien and the existence of an unsatisfied execution apply, and, additionally, the affidavit should also list the parties to be impleaded.17 Upon filing of the motion and affidavits that list the property of the judgment debtor, or any debt, or other obligation due to the judgment debtor in the custody or control of any other person may be applied to satisfy the judgment, then the court shall issue a notice to appear.18 The third party has seven days to reply to the notice.19
Both scenarios A and B contain factual scenarios in which a plaintiff could apply proceedings supplementary to enforce its judgment against nonparties that possess assets belonging to defendants. Since the plaintiff will have a judgment, it will be in a more powerful position to assert its rights. However, proceedings supplementary is a remedy after the fact. In certain situations, a plaintiff may elect to resort to legal remedies available only in foreign jurisdictions.
An Introduction to Mareva Injunctions and Norwich Pharmacal Orders
The same offshore jurisdictions that perpetrators rely on to conceal their identities and hinder collection also provide some of the strongest remedies to freeze and disclose assets. For the most part, offshore jurisdictions are used for legitimate estate planning purposes, but they can also be used to facilitate money laundering, fraud, and concealing funds from potential creditors.
The Mareva injunction is an interlocutory order that is generally solicited and granted ex parte at a special hearing and before a lawsuit is filed.20 The effect of a Mareva injunction is that assets of a defendant, including bank accounts, will be frozen by the court without notifying said defendant. Originating in England, a Mareva injunction or Mareva order can also be obtained in virtually all other ex-colonial, common law jurisdictions, with the exception of the United States. For example, some of the jurisdictions where Mareva orders are available include the Bahamas, Canada, India, Hong Kong, Nigeria, British Virgin Islands, and Cayman Islands. With respect to the British Virgin Islands and Cayman Islands, due to their stability, territorial tax systems, and protectionist laws, they are popular jurisdictions for asset protection. However, both jurisdictions permit Mareva orders with similar effects to those issued in England.21 They both may be obtained ex parte and require the applicant (or plaintiff) to demonstrate that he or she has a good arguable case and that the subject matter of the claim is in danger if left in possession or control of the respondent (or defendant).22 Furthermore, Mareva injunctions can also be sought in a jurisdiction by relying on pending litigation in a different foreign jurisdiction. As an example, a Mareva injunction in the Cayman Islands to freeze Cayman bank accounts or other assets could be ordered based on a Florida lawsuit. 23
Interestingly, as an ex-British colony, the U.S. has been reluctant in its application of an ex parte injunction similar to a Mareva order. The U.S. Supreme Court analyzed this issue in Grupo Mexicano de Desarrollo S.A. v. All. Bond Fund, Inc., 527 U.S. 308 (1999), when a district court granted a preliminary injunction preventing a Mexican toll road operator from dissipating or transferring unsecured notes when plaintiff alleged that the operator was in default.24 The Supreme Court held that the district court lacked the authority to issue a preliminary injunction preventing petitioners from disposing of their assets pending adjudication of respondents’ contract claim for money damages because such a remedy was historically unavailable from a court of equity.25 Justice Scalia drafted the opinion of the Court and stated that Congress, not the Supreme Court, was in a better position to design an appropriate remedy similar to the Mareva injunction.26
On the other hand, the genesis of the Mareva injunction in England lies in caselaw.27 A Mareva injunction is usually sought because the applicant fears the consequences of not restraining a rogue party from disposing of or dissipating assets.28 For that reason, the encompassing scope of a Mareva injunction is very appealing and useful to the U.S.-based applicant and serves as an excellent tool to gain leverage before a Florida lawsuit has been filed.
To protect against abuse, the applicant must provide certain information and guarantees as part of making an ex parte application, which include the following: 1) full and frank disclosure of any points that the defendant might raise if he or she were present to oppose the application; 2) indemnification of the defendant in compensation for damages if the order later proves to be without merit; and 3) serving the evidence on the defendant as soon as practicable and notifying the defendant of the right to apply to have the order discharged.29 Although moving parties also have the discretion to obtain a Mareva injunction at any point in legal proceedings, its effect is obviously strongest when obtained ex parte.30 The scope of a Mareva injunction is any asset — tangible or intangible and personal or realty — in legal or beneficial ownership of the adverse party.31
Once a bank account is frozen by a Mareva order, it is important to additionally receive the bank statements and any other relevant documentation in order to learn if there were subsequent transfers to other banks, as well as “know your customer” information on the account holder. Norwich Pharmacal relief primarily allows claimants to compel disclosure and the production of information they otherwise may not be able to obtain, such as bank statements and corporate records.32 It is essentially ex parte discovery for an applicant and provides valuable information that can be used to initiate subsequent legal proceedings in Florida or elsewhere.
In both scenarios A and B, and under the advice of competent counsel, the applicant could apply for both, a Mareva and Norwich Pharmacal order, in Hong Kong and the Cayman Islands before or during Florida litigation. However, the timing and sequence of these different legal maneuvers is extremely crucial and could have a significant impact on the likelihood of collection by plaintiff. Federal laws provide an additional option for a plaintiff to consider when seeking to discover information located in the U.S.
Combining the Powers of 28 U.S.C. §1782 to Stay Hot on the Defendant’s Trail
Section 28 U.S.C. §1782 provides courts with ample discretion to allow the taking of discovery consonant with the Federal Rules of Civil Procedure to assist a foreign tribunal in its proceedings. In practical terms, a §1782 application is applied for ex parte because it is an application for assistance and there is no opposing party. Section 1782 provides in part: “The district court of the district in which a person resides or is found may order him to give his testimony or statement or to produce a document or other thing for use in a proceeding in a foreign or international tribunal….The order may be made…upon the application of any interested person and may direct that the testimony or statement be given, or the document or other thing be produced, before a person appointed by the court.”
The current version of §1782 was amended in 1964 “to facilitate the conduct of litigation in foreign tribunals, improve international cooperation in litigation, and put the United States into the leadership position among world nations in this respect.”33
A Mareva injunction and Norwich Pharmacal order would fall within the scope of §1782 and permit a movant party also to pursue a 1782 application based on those foreign legal proceedings. If approved, the movant party could issue subpoenas to compel production of documents and depositions from U.S. nonparties, such as banks, to determine whether money that it attempted to freeze via a Mareva order, and traced to the U.S. by a Norwich Pharmacal order, is being held by a U.S. bank or if it was subsequently transferred to another jurisdiction. Plaintiffs in scenarios A and B could benefit from pursuing a §1782 application because of the information it could reveal that may or may not justify filing a Florida lawsuit.
In tracing the general contours of congressional intent, the court in In re Request for Assistance from Ministry of Legal Affairs of Trinidad and Tobago, 848 F.2d 1151 (11th Cir. 1988), enunciated that Congress deliberately broadened the scope of §1782 to 1) include not only depositions and testimony, but also obtaining documents and other tangible evidence; 2) permit U.S. district courts to assist proceedings in “foreign tribunals” not just “courts”; 3) allow an “interested person” (not just a foreign tribunal) to request judicial assistance; and 4) eliminate the requirement that discovery be used in a pending foreign proceeding, and only require that it be used in a foreign proceeding or tribunal.34
Three statutory requirements must be met for a grant of assistance under §1782: 1) that the person from whom discovery is sought resides or is found in the district; 2) the discovery is for use in a proceeding before a foreign tribunal; and 3) the application is made by a foreign or international tribunal or “any interested person.”35 Furthermore, individuals found temporarily in the district are also subject to discovery under §1782.36 For example, a foreign national who is simply visiting the U.S. can be ordered to produce discovery pursuant to §1782.37
There is an overlooked benefit toward considering a multi-jurisdictional strategy in order to collect against a defendant with assets held outside of the U.S. In fact, it may be more effective to commence litigation in an offshore jurisdiction, where a plaintiff has the ability to freeze assets and gain information through ex parte legal actions, before filing a lawsuit in Florida. Certain defendants will attempt to take advantage of offshore jurisdictions in order to conceal funds, under the impression that they are uncollectible, which is incorrect. Similarly, defendants conducting business in the U.S. from foreign countries may believe they are outside the reach of Florida courts; however, Mareva injunctions and Norwich Pharmacal orders may compel a defendant to litigate in Florida.
When a plaintiff’s litigation strategy begins at the global level, there will be fewer surprises and more opportunities to apply pressure to a defendant with the intention to ultimately collect on a money judgment. The scenarios provided in this article are simplified, yet possess hallmark elements of fraud that can occur in everyday business dealings. Competent legal counsel that can balance and direct a multi-jurisdictional legal action is paramount to achieve success and protect the client’s interest.
1 Fla. R. Civ. P. 1.610(a)(1)(A).
2 Fla. R. Civ. P. 1.610(a)(1)(B).
3 Fla. R. Civ. P. 1.610(b).
4 Fla. R. Civ. P. 1.610(d).
5 Miller v. MacGill, 297 So. 2d 573, 576 (Fla. 1st DCA 1974).
6 Briceño v. Bryden Investments, Ltd., 973 So. 2d 614, 616 (Fla. 3d DCA 2008).
7 Weinstein v. Aisenberg, 758 So. 2d 705, 706 (Fla. 4th DCA 2000), dismissed, 767 So. 2d 453 (Fla. 2000).
8 Fraudulent Transfers, CD FL-CLE 7-1.
9 Fla. Stat. Ann. §726.105.
10 FUFTA defines “claim” as a “right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured.” Fla. Stat. §726.102(4).
11 Friedman v. Heart Inst. of Port St. Lucie, Inc., 863 So. 2d 189, 192 (Fla. 2003); see Fla. Stat. §726.102(4).
12 Fla. Stat. §726.105(2).
13 Mejia v. Ruiz, 985 So. 2d 1109, 1113 (Fla. 3d DCA 2008).
15 Gen. Elec. Co. v. Chuly Intern., LLC, 118 So. 3d 325, 327 (Fla. 3d DCA 2013).
16 Nat’l Auto Serv. Centers, Inc. v. F/R 550, LLC, 192 So. 3d 498, 502 (Fla. 2d DCA 2016), reh’g den. May 25, 2016).
17 Deluca v. King, 197 So. 3d 74, 76 (Fla. 2d DCA 2016), reh’g den. (July 21, 2016); see Fla. Stat. Ann. §56.29(1).
18 Fla. Stat. Ann. §56.29(2).
20 Carlos Fabano, Maximizing Plaintiff Protection in the World of Asset Freezing and Bypassing the Due Process Requirement of Notice: The Mareva Injunction As an Alternative to the American Legal Remedies, 9 ILSA J. Int’l & Comp. L. 131, 137 (2002).
21 Timothy S. Pfeifer, Denise D. Vasel, & Ralph A. Siciliano, Offshore Asset Recovery: Investigations and Legal Proceedings, Int’l L. Practicum 56, 62-3 (Spring 2012).
23 The Cayman Islands enacted new legislation in 2008, Interim Relief in the Absence of Substantive Proceedings in the Islands, and permits the Grand Court to enter a Mareva order even if the legal proceedings in question will not take place in the Cayman Islands.
24 Grupo Mexicano de Desarrollo S.A. v. All. Bond Fund, Inc., 527 U.S. 308 (1999).
26 Id. at 322.
27 Mareva Compania Naviera S.A. v. International Bulkcarriers S.A., 2 Lloyd’s Rep. 509 (C.A. 23 June 1975), set the standard by which an English court of law could grant an interlocutory injunction in order to prevent a debtor from disposing of its assets. The Mareva order is now confirmed by statute in England.
28 Kern Alexander, The Mareva Injunction Andanton Piller Order: The Nuclear Weapons of English Commercial Litigation, 11 Fla. J. Int’l L. 487, 494 (1997).
30 Fabano, Maximizing Plaintiff Protection in the World of Asset Freezing and Bypassing the Due Process Requirement of Notice: The Mareva Injunction As an Alternative to the American Legal Remedies, 9 ILSA J. Int’l & Comp. L. at 139.
32 Pfeifer, et al., Offshore Asset Recovery: Investigations and Legal Proceedings, Int’l L. Practicum at 61.
33 In re Bayer AG, 146 F.3d 188, 191-92 (3d Cir. 1998).
34 In re Request for Assistance from Ministry of Legal Affairs of Trinidad and Tobago, 848 F.2d 1151, 1154 (11th Cir. 1988) (citing In re Letters Rogatory from the Tokyo District, Tokyo, Japan, 539 F.2d 1216, 1218 (9th Cir. 1976)).
35 Schmitz v. Bernstein, Liebhard & Lifshitz, LLP, 376 F.3d 79, 83 (2d Cir. 2004).
36 Anand Suryakant Patel, International Judicial Assistance: An Analysis of Intel v. Amd and Its Affect on S 1782 Discovery Assistance, 18 Fla. J. Int’l L. 301, 304 (2006); see In re Edelman, 295 F.3d 171, 177 (2d Cir. 2002).
Grant Stanton Smith is an associate at Aballi Milne Kalil, P.A., an international boutique law firm in Miami. He works in the firm’s litigation department and represents clients in a wide range of matters. Smith received his J.D. from Nova Southeastern University and his B.A. from DePauw University.
This column is submitted on behalf of the Business Law Section, Jon Polenberg, chair, and Stephanie C. Lieb, editor.