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Choice of Law: Always a Thorny Issue

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  • Posted on: Jun 15 2020

What law should apply? In most cases, answering the question is more art than science. 

In contract cases, especially in complex commercial matters, the agreement at issue often (though not always) contains a choice of law provision. In that circumstance, the agreement will provide that any disputes related to the contract and/or its performance will be litigated under the laws of the jurisdiction identified in the contract. When there is no choice of law provision, a more complicated analysis is employed by the court – one that is beyond the scope of this article.

In tort cases, such as the one examined below, the choice of law requires a complex analysis that, under New York law, focuses on the interests of the competing jurisdictions in the outcome of the litigation.  Padula v. Lilarn Props. Corp., 84 N.Y.2d 519, 521 (1994). The jurisdiction with the greater interest “is determined by an evaluation of the ‘facts or contacts which … relate to the purpose of the particular law in conflict.’” Id. (quoting Schultz v. Boy Scouts, 65 N.Y.2d 189, 197 (1985)). “Two separate inquiries are thereby required to determine the greater interest: (1) what are the significant contacts and in which jurisdiction are they located; and, (2) whether the purpose of the law is to regulate conduct or allocate loss.” Id. (citing Schultz, 84 N.Y.2d at 198). In considering these inquiries, the New York Court of Appeals explained:

[W]hen the conflicting rules involve the appropriate standards of conduct, rules of the road, for example, the law of the place of the tort “will usually have a predominant, if not exclusive, concern” … because the locus jurisdiction’s interests in protecting the reasonable expectations of the parties who relied on it to govern their primary conduct and in the admonitory effect that applying its law will have on similar conduct in the future assume critical importance and outweigh any interests of the common-domicile jurisdiction. 

Id. (citing Schultz, 65 N.Y.2d at 198; see also Cooney v Osgood Mach., 81 N.Y.2d 66, 72).

Therefore, “[i]f conflicting conduct-regulating laws are at issue, the law of the jurisdiction where the tort occurred will generally apply because that jurisdiction has the greatest interest in regulating behavior within its borders.” Id. at 522 (citing Cooney, 81 N.Y.2d at 72).

When the jurisdictions’ conflicting rules relate to allocating losses that result from tortious conduct, “rules such as those limiting damages in wrongful death actions, vicarious liability rules, or immunities from suit, considerations of the State’s admonitory interest and party reliance are less important.” Schultz, 65 N.Y.2d at 198.  “Under those circumstances, the locus jurisdiction has at best a minimal interest in determining the right of recovery or the extent of the remedy in an action by a foreign domiciliary for injuries resulting from the conduct of a codomiciliary that was tortious under the laws of both jurisdictions.” Id. (citations omitted).

Fraudulent conveyance laws are conduct regulating. Atsco Ltd. v. Swanson, 29 A.D.3d 465, 466 (1st Dept. 2006). See also GFL Advantage Fund, Ltd. v. Colkitt, 2003 WL 21459716, at *3 (S.D.N.Y. 2003). As such, “the law of the jurisdiction where the tort occurred will generally apply.…” Padula, 84 N.Y.2d at 522. See also Schultz, 65 N.Y.2d at 198 (citations omitted). 

Moreover, since “the purpose of fraudulent conveyance laws is to aid creditors who have been defrauded by the transfer of property,” consideration of the residency of the parties, particularly the creditors, is also required to determine their reasonable expectations. Atsco, 29 A.D.3d at 466; see also Padula, 84 N.Y.2d at 521.

Recently, the Appellate Division, First Department considered the foregoing principles in Matter of Wimbledon Fund, SPC (Class TT) v. Weston Capital Partners Master Fund II, Ltd., 2020 N.Y. Slip Op. 03279 (1st Dept. June 11, 2020) (here).

Wimbledon Fund, SPC (Class TT) v. Weston Capital Partners Master Fund II, Ltd.

Background

[Ed. Note: The facts below are taken from the motion court’s decision.]

Petitioner, The Wimbledon Fund, SPC (“Class TT”), sought an order, pursuant to CPLR § 5225 and § 5227, directing Weston Capital Partners Master Fund II, Ltd. (“Weston”) and Wimbledon Financing Master Fund, Ltd. (“WFMF”) (together, “Respondents”) to turn over property and money equal to $3,525,675, plus applicable interest, in partial satisfaction of a $23,051,971.31 judgment petitioner obtained against Swartz IP Services Group Inc. a/k/a Advisory IP Services Inc. (“SIP”).

Petitioner, a segregated portfolio in The Wimbledon Fund, SPC, alleged that it was the victim of a fraudulent scheme that caused its investors to lose more than $17 million. Albert Hallac (“Hallac”), Jeffrey Hallac (“Jeffrey”), and Keith Wellner (“Wellner”) managed Class TT through Weston Capital Asset Management, LLC and its related affiliate Weston Capital Management LLC.

According to the petition, Class TT’s investment managers, including Hallac and Wellner, caused Class TT to transfer $17.7 million to SIP pursuant to a Note Purchase Agreement (the “NPA”), dated November 14, 2011, “which ostensibly allowed Class TT to purchase so-called ‘reference notes’ issued by SIP.” However, Class TT’s monies were not invested in accordance with the NPA. Once Class TT’s funds were received, Hallac, Wellner and David Bergstein (“Bergstein”) (SIP’s president, secretary and 25-50% shareholder) authorized a series of transfers to third parties, allegedly without any consideration to SIP or Class TT. These transfers resulted in the depletion of SIP’s bank accounts shortly after it received Class TT’s funds, rendering it either insolvent or with an unreasonably minimal amount of capital.

Petitioner alleged that this scheme benefitted Partners II, WFMF’s predecessor in interest and a fund managed by Hallac, because it received $3,525,675 of Class TT’s funds through three fraudulent transfers from SIP. Bank records showed that the money was wired to Partners II. SIP did not owe any debts to Partners II and no consideration was received in exchange for the funds. Instead, the funds were transferred to Partners II to repay a loan that Partners II had made to Arius Libra with SIP acting as the conduit for the effectuation of the alleged fraudulent transfers. Arius Libra was allegedly a sham entity in which SIP had no interest. Hallac, Jeffrey, and Wellner served as directors of Arius Libra, along with Bergstein and Kia Jam.

Based on this scheme, the Securities and Exchange Commission (“SEC”) filed complaints against Bergstein, Hallac, and Wellner and the United Stated Attorney for the Southern District of New York brought criminal charges against them. Bergstein was found guilty after a jury trial and was sentenced to 8 years. Hallac and Wellner both pleaded guilty to criminal fraud.

During his plea allocution, Hallac admitted to participating in “a scheme to defraud Weston investors” by, among other things, failing to disclose to investors the transfer of moneys from one investment fund to benefit the investors of another fund. Moreover, Hallac specifically admitted to using Class TT’s $17.7 million investment to repay part of the Partners II loan.

Weston moved, pursuant to CPLR §§ 3211 (a)(1), (2), (3), (5) and (7), to dismiss the petition. The Court denied the motion in its entirety. The First Department reversed.

The Court’s Decision

Below, we examine a portion of the motion court’s decision (i.e., the portions of the decision addressing champerty, unclean hands and choice of law) and the First Department’s consideration and review of the decision.

Champerty

Weston argued that the settlement agreement in a related action rendered Bergstein an “undisclosed petitioner” in the action due to his contribution of settlement proceeds to be used to finance actions such as the one before the motion court and, therefore, the action must be dismissed based on champerty. 

In opposition, Class TT contended that it is the only petitioner in the action; Bergstein was not a party to the action nor did he have any control over the litigation.

Judiciary Law § 489, New York’s champerty statute, provides, in relevant part:

No person … shall solicit, buy or take assignment of, or be in any manner interested in buying or taking an assignment of bond, promissory note, bill of exchange, book debt, or other thing in action, or any claim or demand, with the intent and for the purpose of bringing an action or proceeding thereon …

The purpose of the champerty doctrine is “to prevent or curtail the commercialization of or trading in litigation.” Trust for Certificate Holders of Merrill Lynch Mtge. Invs., Inc. v. Love Funding Corp., 13 N.Y.3d 190, 198 (2009) (quotation marks and citation omitted). “[W]hile [the New York Court of Appeals] has been willing to find that an action is not champertous as a matter of law … it has been hesitant to find that an action is champertous as a matter of law.” Bluebird Partners, L.P. v. First Fidelity Bank, N.A., 94 N.Y.2d 726, 734-35 (2000) (emphasis in original) (internal citations omitted). 

To establish champerty, the plaintiff must demonstrate “that the acquisition [was] made with the intent and for the purpose (as contrasted to a purpose) of bringing an action or proceeding.” Id. at 736.

The motion court held that Bergstein was not an undisclosed petitioner and, therefore, the proceeding was not champertous. The motion court observed that “[i]f Bergstein was assigned the claim and commenced th[e] action in his own name, then dismissal for champerty would have been appropriate.” However, concluded the motion court, Class TT was the petitioner, not Bergstein. See Gowen v. Helly Nahmad Gallery, Inc., 60 Misc. 3d 963, 996-998 (Sup. Ct., N.Y. County 2018). 

The First Department agreed with the motion court. Slip Op. at *1.

Unclean Hands

Weston contended that petitioner was “an association-in-fact consisting of TT and Bergstein.” As such, Bergstein could not maintain the action because he had unclean hands.

The motion court disagreed, reiterating the fact that Bergstein was not the petitioner in the action. The motion court noted that even if Bergstein were the petitioner, unclean hands did not furnish a ground for dismissal. Unclean hands is equivalent to in pari delicto and such an argument “is not a defense to a fraudulent conveyance suit.” Wimbledon Financing Master Fund, Ltd. v. Wimbledon Fund, 162 A.D.3d 433, 434 (1st Dept. 2018) (quoting FIA Leveraged Fund Ltd. v. Grant Thronton LLP, 150 A.D.3d 492, 497 (1st Dept. 2017)). 

The First Department agreed with the motion court. Slip Op. at *1.

Choice of Law-Fraudulent Conveyance

Although the First Department agreed with the motion court on the foregoing issues, it nevertheless reversed on the choice of law issue. 

Weston argued that Cayman law applied to the fraudulent conveyance claim because both Class TT and Partners II were domiciled in the Cayman Islands. Weston further argued that the claims must be dismissed because the elements of fraudulent conveyance under Cayman law cannot be satisfied. In Weston’s amended motion to dismiss, however, Weston stated that although the parties disagreed about the applicable law, New York law should apply because they were the same. 

In opposition, Class TT argued that fraudulent conveyance is a conduct-regulating tort and that for such torts, the court must apply the law of the jurisdiction where the tort occurred. Class TT also claimed that Weston’s amended motion, which relied on New York law, should be deemed a waiver of its argument that Cayman law applied.

In light of Weston’s concession that “New York and Cayman law are the same”, the motion court held that it was unnecessary to employ a choice of law analysis. 

The First Department disagreed. The Court found that “[c]ontrary to the motion court’s finding, Weston did not concede that Cayman and New York law were the same with respect to fraudulent conveyance claims.” Slip Op. at *1. “Indeed,” said the Court, “on appeal, it is not disputed that Cayman Islands and New York law differ.” Id. at *1-*2. 

The Court explained that using a traditional conflict of laws analysis (Padula, 84 N.Y.2d at 521, and Atsco Ltd. v. Swanson, 29 A.D.3d 465, 466 (1st Dept. 2006), citing Cooney v. Osgood Mach., 81 N.Y.2d 66, 72 (1993)), Cayman law applied to the fraudulent conveyance claim:

Applying these principles, the law of the Cayman Islands applies to petitioner’s fraudulent conveyance claim. Petitioner, who is the creditor allegedly injured by the fraudulent transfer of the funds at issue, is a Cayman Islands domiciliary. Moreover, petitioner is seeking the return of funds which were allegedly fraudulently transferred to Weston, also a Cayman Islands domiciliary. Additionally, the Cayman Islands has the greatest interest in protecting the reasonable expectations of its residents, both petitioner and respondent Weston, who relied on Cayman Islands law to govern their conduct. Although SIP, the transferor of the funds, is domiciled in Texas, and the bank account into which the funds were transferred is located in New York, it is the Cayman Islands that has the most significant contacts with the matter in dispute. Thus, Cayman Islands law should apply.

Slip Op. at *2.

“Upon application of Cayman Islands law,” the Court held that “petitioner’s fraudulent conveyance claim should have been dismissed on the ground that it was not sufficiently alleged in the petition.” The Court explained that “to make out a cause of action under the Cayman Islands’ Fraudulent Dispositions Law, petitioner must establish, inter alia, that SIP disposed of property with an intent to defraud and at an undervalue.” Under Cayman law, “intent to defraud means an intention of a transferor wilfully to defeat an obligation owed to a creditor.” Id.  The Court found that the “petition fail[ed] to allege that SIP transferred money to Weston with the requisite intent to defraud petitioner.” Id. 

Takeaway

In today’s global economy, litigation among its participants raises a host of complex issues. Among them, “What law should apply”? 

Every case concerns a unique set of facts and circumstances that make it difficult to answer the question. Indeed, as the title of this article indicates, deciding the law to apply can be a thorny endeavor.

In New York, litigants and the courts must examine the issue through an interest analysis test – that is, a test in which the court determines the jurisdiction with the greater interest in protecting the expectations of the parties who relied on the jurisdiction’s laws and the admonitory effect that applying such law will have on similar conduct in the future. In doing so, the court must consider: “(1) what are the significant contacts and in which jurisdiction are they located; and, (2) whether the purpose of the law is to regulate conduct or allocate loss.” Padula, 84 N.Y.2d at 521. In Wimbledon Fund, the analysis favored application of Cayman Islands law. 

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