I recently did an interview with Russia’s top news agency, RIA Novosti on Worldwide Freezing Orders (WFO). The interview was conducted by RIA correspondent Carl Shecker.
The interview was for the article In Global Tussle, Russia and Émigré US Socialite Battle for Fortune. As Carl puts it, the story centers on “a byzantine Russian corruption scandal intertwined with the opaque world of offshore finance.”
Yachts, Alpine Chalets and 19th Century Art.
Briefly, the case involves a New York real estate mogul and socialite Janna Bullock. The couple fled Russia five years ago amid allegations of stealing from the Russian government to support a jet-set lifestyle.
Proceeds from the ill-gotten gains were used to purchase a $20 million yacht, a posh London apartment and luxury hotels in Courchevel, France, a posh ski resort frequented by wealthy Russians.
A WFO was issued in Cyprus to freeze $26 million in Bullock’s assets located throughout the world. The WFO also ordered them to disclose all of their assets in excess of $13.2 million.
As I noted in the article, the WFO is designed to maintain the status quo of assets pending or in support of any judgment in favor of the plaintiff.
The Cyprus WFO has been followed by similar orders in France and the British Virgin Islands against assets Bullock is believed to control
What’s a WFO?
Before I get into the issue of extraterritorial application, let me back up a bit. It’s important that one understands the nuts and bolts of a WFO.
In general terms, a WFO (also known as a freezing or Mareva injunction) is an interim order which restrains a party from disposing or dealing with his international assets. It can be sought before proceedings have been issued, or after trial, to preserve the defendant’s assets until judgment can be enforced. A WFO will usually include exceptions for living expenses, legal costs and payment of bona ﬁde creditors.
Significantly, a WFO does not give the applicant any proprietary rights over the defendant’s assets
A party that violates a WFO can be held in contempt of court. Potential consequences for doing so include imprisonment, ﬁne or asset seizure. Given the iron-fisted impact of a WFO, it’s easy to see why they are taken very seriously by even the most evasive of defendants.
The problem that arises with WFOs is the perceived extraterritorial effect of such orders. One can correctly conclude that other countries will take offense to such an assertion of extraterritorial jurisdiction by the state issuing the WFO. While the issuing state does have jurisdiction over the person, it does not have jurisdiction over foreign assets.
I’ll now address the latter point by posing the question:
Is a WFO Enforceable Outside of the Country Where it was Issued?
The short answer is no. The WFO applicant must register for enforcement in the foreign country where enforcement is sought. At such time as the foreign court approves the WFO for local application, enforcement would be proper.
By way of example, a local bank would be guilty of contempt if it were to allow a defendant to remove assets in violation of a WFO.
A foreign bank, however, could not be in held in contempt for allowing a defendant access to its foreign bank account because the foreign bank is not within the jurisdiction of the local court.
The U.S. Perspective
From the U.S. perspective, courts have been hostile to the kind of relief available in foreign courts with a WFO. While U.S. courts will, as a matter of course, issue a freezing order in support of a U.S. proceeding, they have repeatedly expressed extreme reluctance to do so in support of a non-U.S. proceeding as a matter of course
There are some exceptions, however. In several recent cases U.S. courts have issued WFOs in support of foreign proceedings where the defendant had assets subject to U.S. jurisdiction. The Bullock’s case is just one example. Other very limited exceptions may apply.
While a WFO does not have international force and effect over assets located abroad, the applicant may still seek the assistance of the foreign courts where enforcement is sought.