4-17-14 – Florida’s 4th DCA Issues Opinion Likely to Tip the Scales in Favor Of Involuntary Bankruptcy Filings
Florida’s 4th DCA Issues Opinion
Likely to Tip the Scales in Favor
Of Involuntary Bankruptcy Filings
Last week, Florida’s 4th District Court of Appeals held that a Florida court does not have jurisdiction to require a Florida judgment debtor to turn over a stock certificate held by the debtor outside the State of Florida. This decision, Sargeant v. Al-Saleh,1 which has significant implications for enforcement of judgments against Florida debtors, will further tip the scales in favor of filing involuntary bankruptcy petitions as a method to invoke the broad powers of a bankruptcy court. This decision is likely to be reviewed by Florida’s Supreme Court.
A Florida state court jury returned a $28.8 million verdict against the debtors. The verdict related to breach of an agreement to ship oil across Jordan for use by the United States military in Iraq. Following entry of the judgment, the plaintiffs sought to enforce the judgment by filing a motion asking the trial court to compel the judgment debtors to “turn over all stock certificates and similar documents memorializing their ownership interest in any corporation.” The judgment debtors apparently never contested the state court’s jurisdiction over the debtors. Instead, the debtors responded to the motion by arguing that the stock certificates “concerned assets located abroad” (in The Bahamas, Netherlands, Jordan, Isle of Man and Dominican Republic) and that the Florida state court, therefore, lacked jurisdiction to compel the turnover. The trial court entered an order directing the judgment debtors to turn the stock certificates over to their counsel.
The 4th DCA’s Decision
The 4th District Court of Appeal reversed the trial court’s turnover order, holding that “the court lacked jurisdiction to compel the turnover of property located outside the state of Florida.” In reaching this conclusion, the 4th DCA considered Section 56.29 of the Florida Statutes, which provides broad authority to courts to direct turnover of assets in aid of judgment enforcement, but ultimately read a non-existent no-extraterritoriality provision into the statute based on “policy considerations and the lack of controlling case law.”
In reaching its decision, the 4th DCA first distinguished decisions of the 3rd DCA and the New York Court of Appeals. According to the 4th DCA, the 3rd DCA’s 1995 opinion was distinguishable because the creditor in the 3rd DCA case “had a perfected lien on the property that the trial court ordered the debtor to return to the State of Florida.” The 4th DCA then distinguished the New York Court of Appeals decision on the basis that the New York trial court “had personal jurisdiction over the bank holding the foreign assets” and went on to state that, in any event, the New York case “turned on a broad reading of the applicable New York statute and we decline to follow it here.”
The 4th DCA then articulated three “policy” reasons to support its decision, including (i) the lack of “any Florida statute or case that expressly permits the action taken by . . . the trial court in this case;” (ii) a “concern” about the practical implications of permitting trial courts to order turnover of assets located outside the state due to the possibility of competing claims to those assets which should properly be decided in the forum in which the asset is located; and (iii) “allowing trial courts to compel judgment debtors to bring out-of-state assets into Florida would effectively eviscerate the domestication of foreign judgments statute.”
Analysis and Potential Impact
If followed by other courts in Florida, the Sargeant decision is likely to have broad impact on enforcement of judgments in Florida and will further tip the scales in favor of the filing of an involuntary bankruptcy case. Although the facts in Sargeant involved the stock of foreign corporations, there is no discernible indication in the decision that would cause a Florida court to treat the stock of a US corporation (including a Florida corporation) or any other intangible asset such as a promissory note differently, if the share certificates or other assets are physically located outside of Florida. In other words, in light of this decision, there is now a question as to whether a Florida court has authority to direct a Florida judgment debtor to turn over any asset physically located outside the state, thus making it near impossible to use a Florida court to enforce a judgment against a Florida resident seeking to protect underlying assets located inside or outside of Florida. This decision also encourages Florida debtors to transfer their assets into foreign corporations content with the knowledge that their assets (even assets owned by the foreign corporation but physically located in Florida) are beyond the reach of the Florida courts (subject, of course, to the fraudulent transfer laws). This is an issue that the bankruptcy courts are expert at dealing with.
1 2014 WL 836755 (Fla.App., Mar. 5, 2014).
2Sections 56.29(5) and (9) of the Florida Statutes provide:
The judge may order any property of the judgment debtor, not exempt from execution, in the hands of any person or due to the judgment debtor to be applied toward the satisfaction of the judgment debt. . . . The court may enter any orders required to carry out the purpose of this section to subject property or property rights of any defendant to execution.
3 It is curious that the 4th DCA distinguished the New York decision on the basis of personal jurisdiction as it appears that personal jurisdiction was conceded in the case before it.
4 The 4th DCA did not discuss the applicability or inapplicability of Section 56.29 in this portion of its decision.