Recognizing Foreign Judgments: Of Personal Jurisdiction, Collateral Estoppel, and Judicial Discretion

 

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In the United States, the recognition and enforcement of foreign judgments is generally governed by state law. State law is largely uniform throughout the United States because most states have adopted one of two Uniform Acts. The acts raise fascinating questions of interpretation, and Judge Margaret M. Garnett (Southern District of New York) faced several such questions in Malherbe v. Oscar Gruss & Son, Inc.

The judgment debtor asked the court to deny recognition of a German default judgment on the grounds that the German court lacked personal jurisdiction and that the parties had agreed to arbitrate their disputes rather than resolve them in court. Judge Garnett rejected both arguments and recognized the judgment. Along the way, she faced three critical issues: (1) by what standard should a U.S. court decide whether a foreign court had personal jurisdiction; (2) how does collateral estoppel fit into the recognition of foreign judgments; and (3) when should a U.S. court exercise discretion to recognize a foreign judgment even when a ground for nonrecognition exists?

The German Judgment

A German court found Oscar Gruss & Son, Inc., a New York broker-dealer, liable for failing to warn customers that the arrangement it had with Gluch & Partner GmbH, a German firm, left them vulnerable to churning that depleted the customers’ accounts. Gruss had retained Gluch as an agent to solicit customers outside the United States. Potential customers became Gruss clients by signing a series of agreements, some of which had arbitration clauses.

One of these agreements also gave Gluch power of attorney to execute trades on behalf of customers it solicited. This created an incentive for Gluch to make excessive trades in order to generate commissions, which it did, emptying the customers’ accounts. Some customers sued Gruss in Germany for failing to warn them of this risk. (Gluch was insolvent by then.) Gruss did not appear to defend the suit, and the German court entered default judgments for the plaintiffs.

Gruss did, however, defend a similar action brought by one Frank Miller in German court. There, Gruss argued that the arbitration agreement barred Miller from bringing his claims to court, but the German court rejected that argument, finding that the arbitration agreement was invalid for various reasons.

With their default judgments in hand, the present plaintiffs sought recognition in the SDNY under the New York Uniform Foreign Country Money Judgments Act (CPLR 5300-5308). This statute is New York’s version of a Uniform Act that has been adopted in 29 states and the District of Columbia. New York passed the 2005 Uniform Act in 2021 to replace its predecessor, the largely similar 1962 Uniform Act, which remains in force in nine additional states. With respect to the issues discussed below, the 1962 Uniform Act, the 2005 Uniform Act, and New York’s version of the 2005 Uniform Act are substantively identical, so my analysis is relevant not just to New York but also to the 37 other states that have adopted one of the Uniform Acts.

CPLR 5303 provides that a court “shall recognize” a foreign judgment unless one of the grounds for nonrecognition in CPLR 5304 applies. Section 5304 sets forth twelve grounds for nonrecognition, three of which are mandatory and nine of which are discretionary. One of the mandatory grounds is that “the foreign court did not have personal jurisdiction over the defendant.” One of the discretionary grounds is that “the proceeding in the foreign court was contrary to an agreement between the parties under which the dispute in question was to be determined otherwise than by a proceeding in that court,” for example because it was contrary to a clause choosing another court or arbitration for the resolution of disputes. Gruss argued that the German court did not have personal jurisdiction over it and that the German proceeding was contrary to the arbitration clauses.

Personal Jurisdiction

Under § 5304(a)(2), a court in New York “may not” recognize a foreign judgment if “the foreign court did not have personal jurisdiction over the defendant.” Judge Garnett correctly noted that this means whether the “exercise of jurisdiction by the foreign court comports with New York’s concept of personal jurisdiction” (quoting John Galliano, S.A. v. Stallion Inc. (2010)). New York courts apply New York law, not foreign law, to decide whether a foreign court had personal jurisdiction over a defendant.

It would make little sense for courts in the United States to apply foreign law to assess the personal jurisdiction of the rendering state. Foreign courts are the best judges of their own laws on personal jurisdiction. And, whether the foreign court directly addressed the question or not, the mere existence of a judgment is evidence that the foreign court thought it had jurisdiction. Perhaps, a different rule should apply to default judgments, where the question of jurisdiction was not litigated. But my understanding is that German law requires a German court to determine for itself that it has personal jurisdiction before entering a default judgment.

In applying New York law on personal jurisdiction, Judge Garnett looked first to see if German courts would have had personal jurisdiction under New York’s longarm statute and then to see whether the Fourteenth Amendment’s due process clause would have been satisfied. That is right approach for applying New York law to determine if the district court itself has personal jurisdiction. But it is not the right approach for applying New York law to determine if a foreign court had personal jurisdiction.

For judgment recognition purposes, New York law on the personal jurisdiction of foreign courts is found in CPLR 5305 (which is Uniform Act § 5). Subsection (a) says: “A foreign country judgment may not be refused recognition for lack of personal jurisdiction” (emphasis added) if any of six listed bases for personal jurisdiction are present. These bases reflect the due process requirements that the Supreme Court had articulated when the 1962 Uniform Act was promulgated. Subsection (b) goes on to say: “The courts of this state may recognize bases of personal jurisdiction other than those listed in subdivision (a) of this section as sufficient to support a foreign country judgment.”

In Sung Hwan Co. v. Rite Aid Corp. (2006), the New York Court of Appeals looked to New York’s longarm statute to assess the jurisdiction of a foreign court. But it did so only because none of the bases for personal jurisdiction in CPLR 5305(a) was present. “[A]bsent a finding of personal jurisdiction under CPLR 5305(a),” the court wrote (emphasis added), “our courts have typically looked to the framework of CPLR 302, New York’s long-arm statute, using it as a parallel to assess the propriety of the foreign court’s exercise of jurisdiction over a judgment debtor.” When one of § 5305(a)’s bases has been present, the New York Court of Appeals has routinely rejected lack of personal jurisdiction as a ground for nonrecognition without considering New York’s longarm statute.

Thus, the proper approach under New York law is to look first to see if one of the bases for personal jurisdiction in CPLR 5305(a) (Uniform Act § 5) is present. If so, the analysis ends, and the foreign judgment “may not be refused recognition for lack of personal jurisdiction.” If not, the court must determine whether some other basis for personal jurisdiction is sufficient to support the foreign judgment under CPLR 5305(b). It is only under § 5305(b) that New York’s longarm statute becomes relevant.

To be fair, it is not clear that any of § 5305(a)’s bases for personal jurisdiction was present in the German proceeding. Gruss had not agreed to submit to the jurisdiction of German courts and did not voluntarily appear. Gruss was not domiciled in Germany and did not have an office there out of which the claims arose. Judge Garnett might well have had to perform exactly the analysis she did to reject lack of personal jurisdiction as a ground for nonrecognition. My point is simply that her analysis ignored CPLR 5305 and thus skipped a critical first step that will resolve many challenges to personal jurisdiction in the judgment-enforcement context.

Collateral Estoppel

Gruss also argued that the German judgments should not be enforced because the proceeding was contrary to the arbitration clauses in some of the agreements that the plaintiffs signed. Here, Judge Garnett faced an initial question of collateral estoppel—issue preclusion—whether Gruss should be barred from raising the arbitration clauses as a ground for nonrecognition of the German judgments because Gruss raised and lost that issue in separate litigation brought by Miller in German court.

Applying federal decisions on collateral estoppel, Judge Garnett concluded that the German judgment in Miller’s case precluded Gruss from raising the arbitration clauses here. First, I note that state law governs the preclusive effect of foreign judgments with respect to state-law claims, and an action to recognize a foreign judgment is a state-law claim. More fundamentally, it is well established that, as § 487 of the Restatement (Fourth) of Foreign Relations Law puts it, “[a] foreign country judgment will not be given greater preclusive effect in the United States than the judgment would be accorded in the state of origin.” Some states occasionally deviate from this rule. But New York does not. In Watts v. Swiss Bank Corp. (1970), the New York Court of Appeals held that “the law of the rendering jurisdiction, insofar as it limits the effect of its own judgments, would also limit elsewhere the preclusive effect of the judgment and the definition of the parties bound.”

The proper question, then, is whether German law permits collateral estoppel, and the answer seems to be no. Section 322(1) of the ZPO says: “Judgments are capable of acquiring res judicata effect only insofar as a decision has been rendered concerning the claim asserted by the complaint or counterclaim.” As a recent decision states, “the force of res judicata does not extend to individual elements of the judgment, factual findings, or legal conclusions upon which the decision is based.” If Germany would not give the decision in Miller’s case issue preclusive effect, then a U.S. court should not either.

Discretion

But that does not mean that Judge Garnett was wrong to recognize the plaintiffs’ default judgments against Gruss. The defense that a foreign proceeding was contrary to an agreement between the parties is classed as a discretionary ground for nonrecognition of foreign judgments. In the words of CPLR 5304(b)—and the Uniform Acts—“a court of this state need not recognize a foreign country judgment” if such a ground is present (emphasis added). Even if the German proceedings did conflict with valid arbitration clauses, Judge Garnett concluded, she would exercise her discretion to recognize the judgments.

Generally, courts in the United States will not recognize a foreign judgment when one of the discretionary grounds for nonrecognition is established. It is hard to imagine a court recognizing a foreign judgment that violates U.S. public policy, for example, even though that ground is also “discretionary.” But court will exercise its discretion to reject a ground for nonrecognition if the party opposing recognition could have raised the issue in the foreign proceeding and failed to do so (see Restatement (Fourth) § 484, Reporters’ Note 1, collecting cases).

That is what happened here. Gruss could have raised the arbitration clauses as a defense to the plaintiffs’ claims in Germany. Indeed, Gruss did raise the arbitration clauses as a defense to the case brought by Miller. But Gruss instead chose not to appear and to take default judgments. This seems to me like the kind of case in which discretion to recognize a foreign judgment is proper, even if the foreign proceeding conflicted with arbitration clauses.

Conclusion

Reading the decision in Malherbe gives one an appreciation for the complexities that the recognition and enforcement of foreign judgments can raise. Each of the issues addressed—personal jurisdiction, issue preclusion, and judicial discretion—has nuances that can easily be missed.

In the end, I think, Judge Garnett reached the right result. The German court had personal jurisdiction over Gruss, and Gruss should have raised any conflict with the arbitration clauses in the German proceeding. One hopes that the defrauded investors will now be able to get their money back.