Judgment enforcement: can pay, won’t pay

Securing a successful litigation or arbitral judgment should be a time for celebration. After investing potentially years of effort and millions in legal fees, victory has been secured – and the damages awarded means it was all worth it. Right?

For some, it will be only a matter of time before a judgment is paid in full to the claimant as reputable public corporations will not hesitate to pay their judgment debts.

But this is not always the case. Our 2016 Judgment Enforcement Survey, undertaken by Burford Capital in collaboration with The Lawyer Research Service, reveals that in too many instances a judgment is merely a piece of legal paper until enforced.

             Contrary to popular belief, the full value of litigation judgments and arbitration awards is rarely paid out in full to claimants. Some 58 per cent of surveyed corporates have not secured the full face value of a judgment or arbitration award in the past five years. Meanwhile, 86 per cent of surveyed lawyers have had at least one client that was not paid the full face value of a judgment or award during the same period.

How much money are successful claimants missing out on? Most surveyed law firms (62 per cent) said their clients are typically able to recover over 70 per cent of a judgment or award, likely after a lengthy and expensive asset recovery process. But a notable number (19 per cent) reported that their clients typically recover under 50 per cent of the value of a judgment or award.

Simply put, the quantum of damages that are not paid out is staggering. A third of surveyed law firms stated that the combined potential value of their clients’ unenforced judgments in the past five years exceeds $10m (£7.6m). Some 14 per cent said this figure exceeds $50m.

Assessing collection risk at the outset

The potential difficulty of enforcing judgments means it is imperative to assess collection risk before commencing proceedings.

An overwhelming majority report that enforcement is part of their decision-making process. Some 96 per cent of in-house counsel that commenced proceedings in the past five years rated enforcement factors as very important in determining whether litigation and arbitration are pursued. Similarly, 94 per cent of surveyed law firms said they discuss enforcement and recovery with clients at the outset of all or most litigation and arbitration.

That said, interviews conducted in conjunction with the research suggest that many clients nonetheless decide to enter proceedings based on the likelihood of securing a judgment, rather than whether that judgment can actually be enforced.

“Most of the time law firms and their clients don’t really think about enforcement at the outset of litigation,” says Michele Caratsch, partner at Baldi & Caratsch. “If we start a fraud litigation our main task is obviously to obtain a judgment in the first place, but rather than just have a framed judgment on the wall we need to also recover assets for our clients.”

“Most of the time law firms and their clients don’t really think about enforcement at the outset of litigation” Michele Caratsch

The best practice is to consider enforcement challenges at the outset, and potentially allocate resources to determining just how significant that challenge might be. For cases where the defendant’s assets are not primarily in the jurisdiction where proceedings are taking place, or proceedings involving fraud, it is absolutely essential to evaluate the potential likelihood and expense of enforcement should a judgment be secured.

“Enforceability must be the first question when thinking about whether to pursue a fraud case,” confirms Bernard O’Sullivan, partner at Olswang. “Clients always have to remember that a judgment is just a piece of paper, and paper doesn’t put bread on the table, cash does. I often tell clients to go to a corporate intelligence company first and work out if there are any assets that can actually be recovered.”

Where is enforcement challenging?

Some of the most complex enforcement challenges come in cases where a judgment debtor, be that an individual, corporation or even government, has taken significant steps to conceal assets by moving them into offshore jurisdictions where they are hard to identify, let alone recover.

Made infamous most recently by the revelations contained in the ‘Panama Papers’, this happens far more frequently than the headlines report. Indeed, over 60 per cent of surveyed lawyers have had clients whose judgments or awards could not be satisfied because assets were hidden in offshore jurisdictions.

“Offshore trusts are frequently used,” says Tim Penny QC, of  Wilberforce Chambers. “In a commercial fraud case worth more than £10m you would often expect the defendant to claim they have no assets at all and that everything is held in offshore structures.

“They will often engage bona fide trustees, a bona fide offshore structure with a bona fide trust and arrange matters so that they have the power to tell the trustees what to do. You need to track down what the structure is, obtain documentation and put together an argument that the fraudster still has control of the assets.”

Even if assets are not deliberately concealed in offshore jurisdictions, enforcement is still challenging if the defendant’s assets are not located in the jurisdiction in which litigation or arbitration proceedings were undertaken. According to survey respondents, the most problematic jurisdictions for enforcement are Russia and the former Soviet Union, Caribbean offshore jurisdictions and Asia.

Even in the US there are often unforeseen costs and time demands associated with domesticating judgments under state law where the defendant’s assets are located.

“Some people get their judgment and then think they can go to a judgment ATM to collect their money – this is not the reality” Edward Davis

“Domestic judgments can be just as hard and sometimes harder to enforce than judgments across country borders,” says Edward Davis, founder of Astigarraga Davis. “In the US every state is a sovereign, so a Florida judgment has to be domesticated in Georgia or Delaware or wherever you are trying to enforce. States like Florida and Texas are very debtor-friendly, and that makes it very difficult to collect. Some people get their judgment and then think they can go to a judgment ATM to collect their money. This is not the reality.”

Essentials of enforcement

Which is the most effective enforcement strategy will depend on numerous factors such as how and where the assets were concealed, who the defendant is and the quantum of damages. But whatever the circumstances enforcement nearly always involves a combination of legal proceedings conducted in the jurisdiction where the assets are hidden in tandem with sophisticated investigative work often conducted by specialist agencies. Some common enforcement strategies are outlined below:

Freezing orders – freezing orders are commonly used pre-judgment and post-judgment for enforcement. In some cases, such as complex international fraud, obtaining a freezing order is a prerequisite to commencing proceedings because enforcement risk is deemed so high. Some jurisdictions have lowered the threshold for securing freezing orders and widened their scope to counter the increasingly complex ways some defendants conceal their assets.

Asset tracing – the legal process of obtaining a freezing order must be paired with investigative work to identify and locate the assets that can be frozen.

Because defendants are adopting increasingly complex ways of concealing their assets, claimants and their legal advisers may wish to appoint a specialised investigative agency to assist in the identification and location of assets in particularly complex enforcement scenarios.

“A freezing order doesn’t give you security and often isn’t enough by itself to guarantee enforcement,” explains Ben Davies, partner at Byrne and Partners. “It identifies assets, preserves them and retains the status quo, but in many cases it’s just the first step. You still need to recover the frozen assets by whatever means are available. This may include an application under the Insolvency Act to set aside a transfer of assets, proceedings to unwind a sham trust or the appointment of an equitable receiver, all of which can involve complex issues and be both time-consuming and expensive. In many cases a freezing order will only tell you whether you have a shot at enforcement if you succeed in obtaining a judgment.”

Although the precise methods used for asset recovery depend on how the assets are concealed, where they reside and who the defendant is, one option gaining traction is the use of intermediary bank discovery. This identifies bank transfers in US dollars even if the bank of origination or beneficiary are not located in the US. It works by accessing the records of the intermediary banks that facilitate international money transfer in US dollars. Undertaking intermediary bank discovery can be authorised as part of US bankruptcy or litigation proceedings or for disputes outside the US through the 1782 provision.

“I often tell clients to go to a corporate intelligence company first and work out if there are any assets that can actually be recovered” Bernard O’Sullivan

“In a lot of fraud cases the debtor and its affiliates were doing business in US dollars,” explains Warren Gluck, attorney at Holland & Knight. “All US dollar transfers from anyone in the world to anyone in the word, even if they don’t nominally touch US bank accounts, are still processed in New York. So it is possible to recreate the financial history of virtually any person or entity in the world using that tactic.”

Despite familiarity with specialist asset tracing services, the survey data indicates these solutions are underutilised by claimants. Just over half (52 per cent) of surveyed law firms have had a client that has used asset recovery services in the past five years. This is significantly less than the 86 per cent of firms whose clients have not been able to enforce judgments in full during the same period.

Act early

Whatever asset recovery methods are deployed, to make enforcement as easy as possible it is advisable to act early, in some cases even before a judgment is reached. In certain jurisdictions, demonstrating that the defendant is dissipating assets during proceedings is crucial to securing freezing orders and this can only be demonstrated by monitoring assets during proceedings. Demonstrating asset dissipation in court also aids the claimant’s case.

“Intermediary bank discovery makes it possible to recreate the financial history of virtually any person or entity in the world” Warren Gluck

A few simple steps taken during proceedings will make enforcement easier. For example, tracing assets might result in the discovery of new corporations or individuals to include in proceedings that can be enforced against. It also might uncover banking and commercial relationships that can be used in the case. Being mindful of enforcement challenges helps ensure that claimants and counsel don’t take steps that assist in getting a judgment but later make enforcement harder.

Using litigation funding for enforcement

Enforcing judgments can be expensive. The majority of those surveyed (79 per cent) estimated the total cost of enforcement at less than 50 per cent of trial expenses. Some 20 per cent said enforcement costs more than 50 per cent of trial expenses, and 1 per cent said enforcement costs more than the full price of the trial.

Anecdotal evidence indicates that enforcement typically costs more than securing the judgment or award itself in complex cases of international fraud.

“The cost of enforcement can easily be more than the cost of obtaining the judgment, partly because you often have to enforce in many jurisdictions,” explains O’Sullivan. “It also depends on how determined your opponent is. We are currently working on a complex case in Russia and have budgeted high single-digit millions to get the judgment but triple that to enforce.”

Given the high cost of enforcement, clients may seek funding specifically to fund enforcement and collection of judgment debts. The survey suggests that this is an untapped resource for clients and counsel. Only 11 per cent of surveyed law firms have clients that have secured funding specifically for enforcement in the past five years.

How does it work?

The litigation finance provider will cover the costs of enforcement, including legal and other costs, in return for a proportion of the damages recovered. Importantly, the claimant does not pay any fees until cash proceeds are realised. The proportion of proceeds that must be allocated to the finance provider depends on the individual details of the case.

Some funders are also willing to acquire judgments outright. In this scenario the finance provider covers the entire cost of enforcement and retains any assets recovered. Claimants might prefer to sell a judgment rather than finance enforcement if it enables them to maintain a relationship with the defendant.

Given the sometimes substantial and unanticipated cost of enforcement once a judgment is obtained, not to mention the very real risk that only a fraction of the face value of a judgment might be secured, financing specifically for enforcement will almost certainly become more widespread in the years to come.

“Many of my clients have used funding for enforcement, either because they don’t have the money or because they want to spread the risk,” says Gluck. “Once you reach the level of the defendant being unwilling or unable to pay you have entered into a whole different ball game. Frankly, it’s very hard for corporate management without significant asset recovery experience to take a view on this, but funders that specialise in the area can.”

Conclusion

After securing justice in court, often at a cost of millions in legal fees and years of effort, companies can be left hanging if defendants simply refuse to pay what they owe. Our research indicates this problem is more widespread that many might guess. Almost 40 per cent of surveyed firms said their clients typically recover less than 70 per cent of the value of a judgment or award.

From tracing assets to obtaining freezing orders, many strategies can be employed to maximise the proportion of a judgment or award that is secured. Litigation funding can also be used to finance these expenses.

Whatever tactics are used it is vital to act early and evaluate enforcement challenges as soon as possible.