Second Circuit Rejects Chevron’s Efforts to Preempt Enforcement of a Foreign Judgment in New York

06-Feb-2012

As our increasingly globalized world continues to grow smaller and smaller, the rule of law, and the ability of different legal systems to play well in the global sandbox, take on heightened importance – a need that is routinely and acutely felt by multinational companies.  Recently, the federal appellate court in New York drew a line in the sandbox.

In Chevron Corp. v. Naranjo, 2012 WL 232965 (2d Cir. Jan. 26, 2012), the Second Circuit reversed a lower-court ruling, granting a global injunction that prevented certain Ecuadorian litigants from enforcing a multi-billion judgment awarded against Chevron in Ecuador.  The principal factors that affected the Court’s reasoning were that:  (i) prior to the commencement of Chevron’s declaratory-judgment action and application for injunctive relief, the putative judgment-creditors had not sought to enforce the Ecuadorian judgment, whether in New York or anywhere else in the world; and (ii) the injunction purported to have global application and effect.

Identifying and closely analyzing a number of international comity concerns, the Court concluded that “the district court erred in construing [New York’s Uniform Foreign Country Money-Judgments Recognition Act (the “Recognition Act”), N.Y. C.P.L.R. §§ 5301-5309] to grant putative judgment-debtors a cause of action to challenge foreign judgments before enforcement of those judgments is sought.  Judgment-debtors can challenge a foreign judgment’s validity under the Recognition Act only defensively, in response to an attempted enforcement – an effort that the defendant-appellees have not yet undertaken anywhere, and might never undertake in New York.”  Id. at *1.

The procedural and substantive history of Chevron’s Ecuadorian legal battle spanned a period of nearly 20 years and involved numerous applications for judicial relief and assistance.  Despite this complexity, however, the salient facts can be boiled down succinctly:  In February 2011, an Ecuadorian court found Chevron liable for certain environmental and health claims related to oil extraction activities in the Lago Agrio region of the Ecuadorian Amazon and awarded the plaintiffs damages, including punitive damages, totaling $17.2 billion.  In response, Chevron filed an action in the federal district court in New York, seeking a permanent injunction under the Declaratory Judgment Act [28 U.S.C. §§  2201-2202 (the “DJA”)] and the Recognition Act to bar enforcement, anywhere in the world outside of Ecuador, of any judgment rendered against it by the Ecuadorian courts.  2012 WL 232965 at *1-4.

In granting a preliminary injunction, the district court concluded that, in addition to the observation that “there was ample evidence of fraud in the Ecuadorian proceedings,” “Chevron was likely to show that the Ecuadorian court system is incapable of producing a judgment that New York courts can respect, under the Recognition Act, as the Ecuadorian judicial system no longer acts impartially, with integrity and firmness in applying the law and administering justice [and] the system has been plagued by corruption and political interference for decades. . . .”  Id. at *5 (citations and quotations omitted).

Noting that “[t]he Recognition Act nowhere authorizes a court to declare a foreign judgment unenforceable on the preemptive suite of a putative judgment-debtor,” the Second Circuit held that there could be no legal basis for the injunction Chevron sought “until judgment-creditors affirmatively seek to enforce their judgment in a court governed by New York or similar law.”  Id. at *6-7.  In reaching this conclusion, the Court observed that “[t]he Recognition Act and the common-law principles it encapsulates are motivated by an interest to provide for the enforcement of foreign judgments, not to prevent them.”  Id. at *7 (emphasis in original).

The Recognition Act was enacted “to provide a ready means for foreign judgment-creditors to secure routine enforcement of their rights in the New York courts, while reserving New York’s right to decline to participate in the enforcement of fraudulent ‘judgments’ obtain in corrupt legal systems whose courts failed to provide the basic rudiments of fair adjudication.”  Id. at *7.  Accordingly, the Recognition Act includes certain exceptions that enable New York courts “to decline efforts to take advantage of New York’s policy of liberally enforcing [foreign] judgments.”  Id.  But the Act was not designed to “set up [New York’s] courts as a transnational arbiter to dictate to the entire world which judgments are entitled to respect and which countries’ courts are to be treated as international pariahs.”  Id.

Against this backdrop, the Second Circuit distinguished the comity concerns at issue in China Trade & Dev. Corp. v. M.V. Choong Yong, 837 F.2d 33 (2d Cir. 1987) and its progeny (setting forth the requirements for an anti-suit injunction where the same parties attempt to litigate the same underlying dispute in multiple fora), recognizing that the injunction Chevron sought was “in reality, an anti-enforcement injunction.”  Id. at *8 (emphasis in original).  Where such is the case, “the comity concerns become far graver” because “the court risks disrespecting the legal system not only of the country in which the judgment was issued, but also those of other countries, who are inherently assumed insufficiently trustworthy to recognize what is asserted to be the extreme incapacity of the legal system form which the judgment emanates.”  Id. at *9.

Finally, the Court held that application of the DJA does not alter the analysis.  In fact, although the DJA provides a district court with discretion to “declare the legal rights and other legal relations of any interested party seeking such declaration,” 28 U.S.C. § 2201(a), “that discretion does not extend to the declaration of rights that do not exist under law,” 2012 WL 232965 at *10.  The Second Circuit therefore held that Chevron was not entitled to the declaratory relief it sought because “the Recognition Act does not authorize a court to declare a foreign judgment null and void for all purposes in all countries, or to issue injunctions preventing parties to foreign litigation from acting abroad to present issues to foreign courts.”  Id. at *11.

In the final analysis, it appears that the Second Circuit came to the correct result – almost.  Certainly, the Recognition Act nowhere empowers a court sitting in New York to purport to prevent a judgment-creditor from seeking to enforce a foreign judgment in some jurisdiction in the world other than New York.  At least to such an extent, therefore, the Second Circuit’s ruling draws an appropriate line in the sand.  To the extent, however, that the Second Circuit’s analysis under the DJA dictates that, prior to an affirmative act of enforcement on the part of a judgment-creditor in New York, a judgment-debtor remains powerless to have the enforceability of a foreign judgment adjudicated, the Court may have missed the mark.  Regardless, of course, at least for the time being, under Chevron Corp. v. Naranjo, before a judgment-debtor can assert one or more of the defenses to enforcement provided by the exceptions enumerated in the Recognition Act, it must first wait for the judgment-creditor to act to enforce the foreign judgment in New York.

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