After years of hard-fought litigation, most claimants are thrilled to obtain a final and enforceable judgment or arbitration award. However, more often than one thinks, this excitement is followed by the disappointing realization that the defendant has little interest in voluntarily satisfying the award.
This article explores how a judgment creditor might consider creating an enforcement strategy by leveraging an asset trace report. While the research focuses on identifying assets, the ultimate strategy requires a thoughtful engagement between asset tracers and counsel—often across multiple jurisdictions—to achieve success.
Benefiting from an Asset Trace Report
Third-party researchers are often terrific at mapping out assets of the defendant in the hopes of identifying a path to recovery, it is however critical to integrate an experienced asset tracing team and dedicated enforcement lawyers to leverage the findings and develop a strategy to execute the campaign.
Upon obtaining an asset report, the first task is to ensure that the judgment debtor is able to pay, the so-called payment capacity analysis. This question ideally would have been asked at the outset of the case, however asset positions and ownerships structures can evolve over time. So even performed at the outset, it will still likely need to be confirmed given the increasing length of litigation proceedings and the ease of manipulating ownership interests. And while the case is pending, it is important to monitor the payment capacity throughout the life of the case. If the defendant's position deteriorates or the defendant is seen trying to restructure holding structures or insulate assets, a claimant needs to be attentive and consider pre-judgment attachment remedies or applying for other security. Diligent enforcement lawyers not only thrive post judgment, but also in seeking interim relief and looking-around-corners for future risks.
Once the payment capacity concerns are alleviated, it is necessary to analyze the identified assets of the defendant to see where they are and of what they consist of. This may seem obvious, but that is not always the case. A good asset trace report requires significant research and starts with an analysis of the income flows and current asset positions of the defendant. One must verify that the defendant—the actual defendant, not a subsidiary or related entity—is indeed the legal owner of any assets. This is rarely simple given the ease with which structures can be created and manipulated. For instance, sovereign assets are rarely held directly by the state but often by state-owned entities. In addition, many large corporations have paymaster entities responsible for paying day to day bills and overhead, and while those entities hold significant cash sums, they are rarely counterparties in contracts.
Next, a good asset tracing report will not only identify the direct assets of the defendant but also include an overview of any payment obligations third parties may have towards the defendant which can also be attached. For example, if you know who a judgment debtor's leading customers are and can attach upcoming payments or gum up the cash flow, this could be a pressure point that brings the defendant to the negotiating table. A good report should identify any pressure points like this that may incentivize the defendant to resolve the dispute. Those are not going to be hard assets but leverage points that can enhance and expedite an enforcement campaign. Informing third parties such as banks or rating agencies about the unpaid judgment obligation, or even the threat of such, can pay off. An alternative can also be to seek publicity to pressure the defendant to come to the negotiating table.
A worthwhile asset tracing report will also endeavor to list other creditors pursuing the defendant—especially secured creditors that could seek a foreclosure sale or place the defendant into bankruptcy. Ultimately, however, the asset trace report is a starting point to the enforcement campaign. But with a worthwhile report, a judgment creditor can properly engage with enforcement counsel to piece together the strategy in earnest.
Researchers and Counsel – a Necessary Combination for Success
A first step in leveraging an asset report in conjunction with enforcement counsel should include gaining an understanding of whether or not the judgment or award can be recognized in the jurisdictions where assets have been identified. Is there a treaty—like in many European jurisdictions—that allows for a streamlined recognition process? There can be quirky and antiquated rules that need to be minded in this stage.
Another important issue to research are the time limitations for recognition. Certain jurisdictions only allow a limited time for recognition of arbitral awards, sometimes only two or three years. Indeed, it is not uncommon to seek to convert an award to a judgment and recognize that judgment in a third jurisdiction if the award recognition limitations period has run in that third jurisdiction.
In addition, and specifically for enforcement against sovereigns and many state-owned enterprises, most assets are considered to be immune for enforcement, and this immunity can only be lifted in narrow circumstances.
The specifics of the judgment are equally important, default judgments are usually more difficult to recognize than those where the defendant appeared and participated. The same applies for judgments with a punitive damages, as not every jurisdiction recognizes them.
If multiple claimants have a judgment against the same party, it is useful to check what the distribution regime is for assets between creditors and determine whether it takes place on a pro-rata basis or on a first come, first served basis. If the latter, it is obvious to file any enforcement application sooner rather than later. In addition, it is beneficial to be aware of liquidation regimes, as well as whether judgment creditors can apply to have defendants placed into receivership or bankruptcy.
Where judgment debtor assets are held in the name of related entities or individuals, it is critical to know about veil piercing and alter ego rules in appropriate jurisdictions. Generally, veil piercing has greater acceptance in common law jurisdictions than in civil law jurisdictions. The criteria differ per jurisdiction, hence appropriate legal advice is required in each jurisdiction where this may be a consideration.
In the event the asset report failed to identify any concrete assets, but only some leads, it may make sense to start post-judgment discovery proceedings, especially in the US. Issuing subpoenas to third parties, including banks, can yield significant and favorable information.
The last thing to consider in defining the enforcement strategy are the costs involved. Seeking to attach a low value asset where the costs of the attachment outweigh the asset value, usually makes no sense, unless it puts specific pressure on the defendant or is part of a broader strategy. In addition, the risk of an adverse costs order needs to be taken in consideration. These are all considerations that need to be discussed and decided in close liaison with experienced enforcement counsel.
Conclusion
In sum, the value of an asset trace report is not in only uncovering cash flows and assets, but rather what you can do with the information to bring the matter to a successful resolution. This requires close cooperation with counsel, and often requires third party funding. This is why within Omni Bridgeway, the Asset tracing team liaises and cooperates with the Enforcement team to seek the best outcomes. Ultimately, this is why claimants to go to an established funder with enforcement and asset tracing expertise.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.