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HIGH COURT OF JUSTICE OF THE ISLE OF MAN
CHANCERY DIVISION
GLADSTONE v BRUNNING
07 March 2006
His Honour The Deemster Doyle
IN THE MATTER of proceedings before the United States Bankruptcy Court, Southern District of California (case no. 02-08176-PB Chapter 7 with Terry Linn Brunning and Susan Jennifer Brunning as Debtors) and IN THE MATTER of the Petition dated the 29 th October 2004 of Leslie Gladstone Chapter 7 Trustee
1. The hearing of the petition in this matter took place on the 21 st , 22 nd and 23 rd February 2006. I reserved judgment. I now deliver that judgment.
2. In this case a foreign trustee in bankruptcy, appointed in the United States of America in August 2002 in respect of two debtors, seeks recognition in the Isle of Man and assistance from this court in vesting in the trustee movable assets of the bankrupts within the Isle of Man.
3. The creditors in the bankruptcy still await payment. The financial institution in the Isle of Man who presently holds funds approaching US$1 million on behalf of the debtors takes a neutral stance. The funds in the Isle of Man are presently frozen pursuant to a restraint order made by the common law division of the High Court of Justice of the Isle of Man in February 2003.
4. The bankruptcy court in the United States of America made orders in July 2003 and November 2005 in an endeavour to vest in the trustee the monies in the Isle of Man. In April 2003 the common law division of the High Court of Justice of the Isle of Man made an order permitting one of the bankrupts to transfer an amount not exceeding US$15,000 to her American lawyer. The lawyer acting for the trustee required that money to be paid over to the trustee. The bankrupts say that the trustee acted in breach of the order made in April 2003 and is in contempt of court. In such circumstances the bankrupts say that this court should not recognise the foreign trustee and should not grant assistance to the trustee in respect of the monies in the Isle of Man.
5. In October 2004 the trustee presented a petition to this court for recognition and assistance. The bankrupts having been arrested on the 11 th July 2003 were in a prison in Mexico and difficulties were experienced in service of the documentation upon them which led to delays. There were further delays while expert evidence was filed.
6. On the 29 th November 2005 the bankrupts were extradited from Mexico to the United States of America and are presently detained in a prison in the United States of America awaiting their criminal trial in that jurisdiction. The indictment contains charges relating to dishonesty and fraud within the bankruptcy proceedings and to money laundering. One of the bankrupts unsuccessfully applied before a court in the United States of America for a stay of the bankruptcy proceedings pending the determination of the American criminal proceedings.
7. The bankrupts submit that whilst there are still issues outstanding in respect of the validity of the appointment of the trustee and the consequent bankruptcy proceedings this court should not recognise the trustee and should not grant assistance to the trustee.
8. The bankrupts have for some time disputed the validity of the appointment of the trustee but have taken no civil action in the United States of America challenging the appointment. They say that these matters will be dealt with in the criminal proceedings pending against them in the criminal courts in the United States of America. They do not want to take action in the civil courts in the United States of America as they fear it may prejudice their position in the criminal proceedings.
9. The bankrupts say that they are without effective remedies in the United States of America and that their human rights have been breached and certain aspects of the bankruptcy proceedings have been contrary to basic principles of natural justice. The bankrupts in effect say that they cannot get justice in the United States of America.
10. I have reached the conclusion, applying well established principles of private international law, that it is appropriate to recognise the foreign trustee in bankruptcy and to provide assistance to the trustee in the circumstances of this case. There are no strong and compelling reasons to justify this court in refusing such recognition and assistance. I have also reached the conclusion that the bankrupts will receive justice in the United States of America.
The Restraint Proceedings
11. On the 21 st day of February 2003 His Honour Deemster Kerruish sitting in the common law division of the High Court of Justice of the Isle of Man (CLA 2003/26) granted an order upon the application of Her Majesty's Attorney General for the Isle of Man on behalf of the Attorney General of the United States of America (the Restraint Order). The Restraint Order restrained Terry Linn Brunning (Mr Brunning ) and Susan Jennifer Brunning (Mrs Brunning ) (Mr and Mrs Brunning together referred to as the Brunnings ) from removing from the jurisdiction of this court or from otherwise disposing of, diminishing or otherwise in any way dealing with their assets and without prejudice to the generality of the foregoing two accounts numbered 600108277 – DEF1 – USD - 0002 and 600108277 – HICA – USD -0001 in the names of the Brunnings held at Abbey National International Limited in the Isle of Man (the Accounts). It was also ordered that notice of the making of the Restraint Order be given to the Brunnings . As at the 22 nd February 2006 there was US$ 14,624.30 in account numbered 600108277 and the sum of US$ 903,523.85 in account numbered 600108277.
12. In an affidavit sworn on the 20 th February 2003 in support of the application for the Restraint Order there was reference to a letter of request from the United States Department of Justice. There was reference to the Brunnings filing a voluntary petition for bankruptcy in the United States Bankruptcy Court for the Southern District of California (the US Bankruptcy Court). I refer to the proceedings before the US Bankruptcy Court as the US Bankruptcy Proceedings. There were allegations of failure to declare assets. It was said that in reliance of declarations by the Brunnings the US Bankruptcy Court granted the Brunnings a discharge of their debts and the Trustee had no assets to pay the Brunnings' creditors. The affidavit referred to Mr Brunning making urgent requests to Abbey National Treasury International Limited in the Isle of Man to close a fixed deposit account and transfer the funds to a bank account in Mexico and an early closure penalty of around US $1,600. It was believed that the purpose of the transfer was to defeat any restraint or forfeiture order that may be issued by the courts of the United States of America. It was stated that the prosecutor in the United States Attorney's Office for the Southern District of California anticipated filing criminal charges against the Brunnings for bankruptcy fraud and money laundering.
13. A copy of the indictment before the United States District Court Southern District of California (unsealed 30 th November 2005) has now been filed with the court. It is fair to say that the vast majority of the counts in such indictment relate to the bankruptcy proceedings. Count 1 is an allegation of conspiracy in respect of the bankruptcy, counts 2- 9 bankruptcy fraud – concealment of assets, count 10 bankruptcy fraud - false declaration, count 11 bankruptcy fraud – false declaration, count 12 bankruptcy fraud – false declaration, count 13 bankruptcy fraud – false claim, count 14 bankruptcy fraud – false account and count 15 money laundering. There is also an application for forfeiture of certain funds including the funds in the accounts in the Isle of Man. I refer to these proceedings as the US Criminal Proceedings.
14. On the 10 th April 2003 an order was made by the common law division of the High Court of Justice of the Isle of Man permitting Mrs Brunning to transfer a sum not exceeding £5,000 from an account at Abbey National Treasury International Limited to the client account at Quinn Kneale advocates. The order permitted Mrs Brunning to transfer an amount not exceeding the sum of US$15,000 to the account of Robert D Carrow (Mr Carrow ) in respect of legal fees in defending or taking legal action in the United States of America related to the investigation and proposed criminal proceedings of the United States Attorney for the Southern District of California in San Diego (the US Legal Expenses Order). The order also permitted Mrs Brunning to transfer an amount not exceeding US $1,500 each month to be used for her ordinary living expenses.
15. The Attorney General made an application for an order disallowing Mrs Brunning to transfer an amount not exceeding US$1,500 each month for living expenses. On the 28 th July 2003, that application was adjourned indefinitely. No application was made in respect of Mr Carrow's US$15,000.
16. On the 10 th November 2003 an order was made to the effect that Leslie Gladstone (Chapter 7 Trustee in Bankruptcy of the Brunnings ) (the Trustee) became a noticed party to the restraint proceedings.
17. On the 4 th February 2004 the Attorney withdrew his application for an order disallowing Mrs Brunning to transfer an amount not exceeding US$1,500 each month for ordinary living expenses.
18. On the 4 th February 2004 an order was also made permitting Mrs Brunning to transfer an amount not exceeding £5,000 from Lloyds TSB Bank plc in London to Quinn Kneale advocates.
19. On the 7 th February 2006 an order was made requiring Abbey National International Limited to transfer the sum of £37,000 to Simcocks Advocates Limited on account of legal fees and disbursements incurred and to be incurred on behalf of the Brunnings in respect of proceedings in CLA 2003/26 and in Chancery proceedings CP 2004/146.
The Recognition Proceedings
20. By petition dated the 29 th October 2004 the Trustee applied to the court for an order recognising her appointment in the United States as trustee in bankruptcy of the Brunnings who she says presented a voluntary filing before the US Bankruptcy Court. The Trustee also requested an order directing that Abbey National Offshore Limited (Abbey)do recognise the Trustee's appointment and a declaration that the monies held in the Accounts vest in the Trustee.
21. The Trustee says that she appreciates that she is subject to the terms of the Restraint Order and confirms that the same will be complied with and that, if an order is made recognising her in this jurisdiction, before any assets are removed from the jurisdiction a separate application will be made to discharge the Restraint Order. The Trustee says that she will comply with any further directions the Court may be pleased to make.
22. The Trustee says that she was appointed trustee in bankruptcy of the estates of the Brunnings "on or about 20 th August 2002" by the US Bankruptcy Court (the Appointment of the Trustee).
23. On the 24 th July 2003 the US Bankruptcy Court made an order that the title to accounts held at Abbey "are hereby transferred from Debtors Terry Linn Brunning and/or Susan Jennifer Brunning to Chapter 7 Trustee Leslie Gladstone" (the US Transfer Order).
24. On the 29 th November 2005 the US Bankruptcy Court made an order (the Turnover Order). It was ordered that the Brunnings do within 7 days of service of the Turnover Order relinquish and turnover various documents and monies to Bryan D Sampson (Mr Sampson). The Turnover Order referred to "All proceeds of the Debtors Brunning held in the following financial institutions : a. Abbey National Offshore, Isle of Man" . It was indicated that if the Brunnings or their attorneys with notice of the order failed to comply with the orders that such party would be held in contempt of court.
25. On the 5 th December 2005 Mr Brunning applied to the U.S. Bankruptcy Court referring to the US Criminal Proceedings and the bankruptcy petition and invoking his right to remain silent in respect of all items listed in the Turnover Order. Mr Brunning requested that the Turnover Order be "stayed pending resolution of the criminal case" . On the 7 th December 2005 the US Bankruptcy Court ordered that "Debtor TERRY LINN BRUNNING's Ex Parte Motion for a Stay of Turnover Order Pending Resolution of Criminal Proceedings is denied in its entirety. IT IS SO ORDERED" (the US Stay Dismissal Order). No reasons for the US Stay Dismissal Order have been made available to this court. This court has no information as to whether there was any appeal lodged against the US Stay Dismissal Order.
The Evidence
26. I have considered all the relevant evidence before the court. 27. Mr Brunning in his affidavit sworn on the 27 th June 2005 stated that he was born in the United States of America on the 31 st January 1961. He said he had been domiciled in Mexico since 2002. Mr Brunning alleged that:
(1) he did not sign a bankruptcy petition;
(2) he did not submit a bankruptcy petition to the court; and
(3) he did not authorise the signing or submission of a bankruptcy petition on his behalf.
28. Mr Brunning referred to a "stop order" (the Mexican Stop Order) which he says his Mexican lawyer obtained to stop the disposal of "our assets bythe U.S.Authorities" .The court has not been provided with a copy of the Mexican Stop Order.
29. Mr Brunning made various complaints in respect of the Appointment of the Trustee and the US Bankruptcy Proceedings. He also alleged violations of his human rights.
30. Mrs Brunning in her affidavit sworn on the 27 th January 2005 made similar allegations and complaints. Mrs Brunning said that she was born in the United Kingdom on 12 th February 1951 and that she has been domiciled in Mexico since 2002. Mrs Brunning denied signing the bankruptcy petition and denied that any such petition had been filed on her behalf.
31. The Brunnings complained in respect of the Trustee's interference with the US$ 15,000 which should have been retained by Mr Carrow in respect of legal fees. The Brunnings say that despite the US Legal Expenses Order Mr Carrow was "later contacted by US authorities and Manx petitioner Trustee Gladstone advised him he had to forfeit and turn over funds he received from the Manx Court order to the Trustee Gladstone. He advised them he was acting under a Manx court order to receive those funds and represent Susan. The US authorities and the Manx petitioner Trustee Gladstone advised him a Manx Court order was not recognised, nor respected in the U.S. allowing no mutual co-operation and jurisdiction respected."
32. I do not set out in detail the allegations and complaints of the Brunnings but I have full regard to them. I also record that Mr Arrowsmith was unfortunately unable to file the exhibits to the affidavits of the Brunnings with the court.
33. The Trustee in her affidavit of the 7 th September 2005 confirmed that she is the Chapter 7 Trustee assigned to administer the bankruptcy estate in the In re Terry Linn Brunning and Susan Jennifer Brunning bankruptcy case number 02-08176 filed by the Brunnings in the US Bankruptcy Court on 20 th August 2002. The Trustee exhibited the signature pages of the petition filed by the Brunnings which the Trustee says show that both Mr and Mrs Brunning's signatures appear. Moreover the Trustee says that Mr Brunning appeared before the Trustee at a scheduled debtor examination and showed the Trustee his Californian driver's licence and social security card to satisfy the Trustee as to his identification. The Trustee stated that "the Brunnings have, in the course of the bankruptcy proceeding, done everything possible to conceal their assets from [the Trustee] thereby preventing [the Trustee] from paying their creditors" .
34. Mary Fickel (Ms Fickel ), an associate with Sampson & Associates, in her declaration in the US Bankruptcy Court declared on the 29 th November 2005 said that the Brunnings were arrested on the 11 th July 2003 by the Mexican authorities pursuant to an arrest warrant issued by the United States Attorney for the Southern District of California. Ms Fickel confirmed that the Brunnings were extradited from Mexico to the United States on 29 th November 2005. Ms Fickel stated that the Trustee applied to the US Bankruptcy Court for an order compelling turnover of monies held in offshore accounts. She stated that the court granted the Trustee's ex parte application and entered the order compelling turnover of estate property on the 29 th November 2005.
35. In paragraph 14 of her declaration Ms Fickel stated that the Trustee requested "that the Isle of Man court allow this court [US Bankruptcy Court] to determine the merit of Debtors' allegation. However, the Isle of Man court determined it would independently decide if the Brunnings filed for Chapter 7 bankruptcy" . For the record that statement is wrong and Mr Murphy the advocate acting for the Trustee accepted that such statement was wrong. It is unfortunate that the position of this court has been misrepresented to the US Bankruptcy Court. No doubt the Trustee will take steps to correct that misrepresentation.
36. Ms Fickel in a document headed "Third Affidavit of Mary L Fickel" and dated 16 th February 2006 referred to the US Legal Expenses Order made on the 10 th April 2003 and stated it was not disputed that her firm Sampson & Associates on behalf of and upon the instructions of the Trustee did on the 14 th August 2003 write to Mr Carrow requesting that he remit to the Trustee the sum of US$ 15,000. Ms Fickel stated that at the time of the 14 th August 2003 letter neither her firm nor the Trustee had been provided with a copy of the US Legal Expenses Order by Mr Carrow . She did not say when the Trustee was provided with a copy of the US Legal Expenses Order or what action the Trustee took on receipt of such order. The Trustee has not offered to return the US$15,000 to Mr Carrow or to release such monies for the legal fees of the Brunnings .
37. By letter dated the 14 th August 2003 Mr Sampson wrote to Mr Carrow the attorney acting for Mr and Mrs Brunning requiring Mr Carrow to return to the Trustee the US$15,000 received pursuant to the US Legal Expenses Order. Mr Sampson stated:
"I further understand that the Isle of Man authorised release of these funds. However, the Isle of Man does not recognize American law and therefore the United States is not required to recognise their laws" .
38. One is reminded of the comments of Thurlow LC in Re Blakes (1787) 1 Cox Eq Cas 398 a case conducted in Lincolns Inn Hall on the 5 th November 1787. In that case the American courts had denied recognition to English assignees. Thurlow LC stated: "I had no idea of any country refusing to take notice of the rights of assignees under our laws, and I believe every country on earth would do it besides" . The report of that case indicates that "the American Government will not take notice of the rights of the assignees under the bankrupt (sic) laws of this country" . The case and the comments of the Lord Chancellor must be taken in the correct historical context. It was decided in the aftermath of the American War of Independence. It may be fair to assume that the relationship between England and America in the 1770's and 1780's was not the same as the relationship between England and the United States of America in the 2000's.
39. I note from the evidence of Ms Fickel that the position in respect of reciprocity and bankruptcy orders between the United States of America and other jurisdictions such as England and Wales and the Isle of Man has changed since 1787 and Mr Sampson does not accurately portray the position in his unfortunate letter of the 14 th August 2003. In 2006 the American courts would, subject to certain requirements, recognise Isle of Man trustees in bankruptcy. It is also plain that, subject to certain requirements, Manx courts will recognise American trustees in bankruptcy.
40. It may be that during the time of Blakes case the Isle of Man would not have assisted England in respect of bankruptcy matters. In Johnson's Jurisprudence (1811) at page 58 Mr Johnson states "With regard to bankruptcy, as recognised by the English laws, with all its train of legal consequences, it is entirely unknown to the Manks law" . Johnson does however refer to debtors being "confined in the prison of Castle Rushen till the plaintiff is satisfied the amount" . There does not appear to be any reference to bankruptcy laws in Parr's Abstract of Manx Laws (c1690). The Foreign Debts Acts 1814 provided "further to facilitate the Recovery of Foreign Debts, if the Orders, Judgments, and Decrees of the Courts of Great Britain and Ireland were to be recognised in the Courts of the Isle of Man" . The Insolvent Debtors Act 1814 endeavoured to give some relief to those in prison for debt. It was not however until 1892 that the Island passed a comprehensive bankruptcy code which remains in force in 2006 as amended. Certainly this jurisdiction has recognised for many years bankruptcy proceedings similar to the proceedings in the US Bankruptcy Proceedings. As Mr Murphy quite rightly said the US Bankruptcy Proceedings are not alien to our laws and procedures here on the Isle of Man.
41. The Trustee was stated to be copied in with Mr Sampson's unfortunate letter of the 14 th August 2003. I am sure that Mr Sampson deeply regrets making the erroneous statements which were contained in that letter. I note that his associate Ms Fickel takes a different view as to the legal position in the United States. Mr Carrow wrote back to Mr Sampson on the 16 th September 2003 referring to the US Legal Expenses Order but indicating that to avoid the expense of civil litigation and the threat of criminal action he intended, under protest, to pay the US$ 15,000 over to the Trustee. I have to say that this correspondence with Mr Carrow does not show the Trustee or her legal advisers in a favourable light. Indeed Mr Murphy, who appeared for the Trustee acknowledged this issue as an "open wound" of the Trustee. Mr Arrowsmith who appeared for the Brunnings did his best to pour salt into that open wound.
42. Ms Fickel appears to have been sent in to bat on behalf of the Trustee and Mr Sampson on this contempt point. Ms Fickel said that in making demand of Mr Carrow the Trustee was motivated not by any desire to ignore or contravene the US Legal Expenses Order but merely to act in the manner which was required of her under the applicable law. It is unfortunate that the Trustee did not file an affidavit explaining her position on this point. I also note the silence of Mr Sampson. He does not try to explain his letter of the 14 th August 2003. He leaves that to Ms Fickel .
43. Ms Fickel also dealt with the identification issue. Ms Fickel said that through her conversations with the Trustee she was informed and believed that Mr Brunning provided the Trustee via mail with photocopied bank statements, a photocopy of his identification and a photocopy of his social security card shortly after the 16 th October 2002 meeting of creditors. Ms Fickel said that if Mrs Brunning is correct in her assertion that her signature on the bankruptcy documents is forged "then the forgery had to be committed by Terry Linn Brunning because he is the individual who indisputedly provided the documents to Trustee Gladstone" . 44. In his letter of the 15 th October 2003 exhibited to Mr Murray's affidavit of the 27 th October 2003 Mr Sampson gave his opinion that :
"The United States District Court in which a bankruptcy proceeding (under title 11) is located has exclusive jurisdiction over all of the debtor's property at the commencement of a bankruptcy case, wherever that property is located. The leading treatise on U.S. bankruptcy law explains that the court's jurisdiction applies to debtor's property located, not only in the United States, but also in other countries. The rationale for the breadth of the court's jurisdiction is the debtor's voluntary filing of bankruptcy under U.S. law, which in effect subjects the debtor to broader jurisdiction than under other court actions.
In addition, the trustee appointed to the case is obliged to collect and liquidate the debtor's assets for the benefit of all creditors as well as the debtor. In fact, all legal and equitable interests of the debtor vest in the trustee from the time bankruptcy is filed, and only the trustee has the power to recover the debtor's assets after that time" .
45. Ms Fickel in her first affidavit sworn on the 15 th November 2004 confirmed these principles at paragraphs 7, 8 and 9 as follows:
" Jurisdiction of United States Bankruptcy Court
7. The United States Bankruptcy Court in which bankruptcy proceedings under United States bankruptcy law is located has exclusive jurisdiction over all of the debtor's property at the commencement of a bankruptcy case, wherever that property is located. The court's jurisdiction applies to debtor's property located not only in the United States but also to property located in other countries.
8. One rationale for the breadth of the bankruptcy court's jurisdiction is the debtor's voluntary filing for bankruptcy protection, which in effect subjects the debtor to broader jurisdiction than under other court actions. However, and most importantly, the bankruptcy court's broad powers exist to protect property of the bankruptcy estate from the piecemeal reach of creditors. It is this central aggregation of property that promotes the effectuation of the fundamental purpose of the bankruptcy code; the ability for a debtor to make a fresh start and the equality of distribution of assets among situated creditors.
9. The trustee appointed to the case is obliged to collect and liquidate the debtor's assets for the benefits of all creditors as well as for the debtors. In fact, all legal and equitable interests of the debtor vested in the trustee from the time bankruptcy is filed and only the trustee has power to recover the debtor's assets after that time. Accordingly, the trustee has proprietary rights over the debtor's assets worldwide following the filing of a voluntary Chapter 7 petition."
46. I note what Ms Fickel had to say on the community property point. I also note the references to the remedies that would be available to the Brunnings if they wished to challenge the U.S. Bankruptcy Proceedings. Ms Fickel said that the bankruptcy courts of the United States of America would recognise foreign bankruptcy proceedings provided foreign law conformed with due process and treated claims of creditors fairly. Ms Fickel stated that the courts of the United States would recognise the appointment of an Isle of Man trustee and upon application would transfer property located in the United States to such foreign trustee. Ms Fickel's opinion is that it would be open to the Brunnings to petition the U.S. Bankruptcy Court and the court would allow payment of reasonable legal expenses pending the final determination of the various disputes connected with this case. Furthermore Ms Fickel stated that the U.S. Bankruptcy Court would not require a debtor to turn over monies required for reasonable living expenses.
47. I note the contents of the letter of Ms Fickel dated the 21 st February 2006 and the various avenues of recourse available to the Brunnings in the United States if they felt that any bankruptcy claim was improper or if they believed that the Trustee had acted improperly. I also note the following comments of Ms Fickel :
"Should the funds be repatriated to the United States, the Brunnings are well within their rights to move the bankruptcy court for an order freezing distribution of estate assets pending the outcome of their criminal proceeding. It is my belief that the bankruptcy court should be inclined to approve such a request" .
48. I accept that on the face of it that comment does not sit easily with the US Stay Dismissal Order. A stay of bankruptcy proceedings is however a little different from the freezing of the distribution of estate assets.
49. Thomas B Gorrill (Mr Gorrill ), an American attorney instructed by the Brunnings , in his affidavit sworn on the 12 th February 2006 referred to the Appointment of the Trustee as the "permanent trustee of the case" . He also made reference to what he described as the "Trustee's lack of identification from Mr Brunning" and the "Trustee's failure to comply with the EOUST Handbook regarding Susan Brunning ." Mr Gorrill (at paragraph 21) made reference to the Trustee's emergency without notice application which he said "was a denial of the Brunning's due process of law" .
50. I note what Mr Gorrill has to say under the headings "California community property analysis" and "Trustee Gladstone's disregard for the order as to Mr Carrow ."
51. Mr Gorrill said that on the 5 th December 2005 Mr Brunning filed a motion asking the US Bankruptcy Court to stay any further action in the bankruptcy case pending the outcome of the US Criminal Proceedings. Mr Gorrill said that the US Bankruptcy Court denied "the Brunnings' request for a stay on December 7, 2005 without oral argument or an evidentiary hearing" . There is no reference as to whether an appeal has been lodged against such decision. I note Mr Gorrill's comment that an adjudication of the legitimacy of the bankruptcy petition will "undoubtedly play a key role in the Brunnings' defense to the criminal allegation now pending in the United States District Court for the Southern District of California. If the bankruptcy petition is found to be a forgery, then the bankruptcy case would have to be dismissed as a nullity." Mr Gorrill made the following points in paragraph 26 of his affidavit:
"26. However, until there is an adjudication of the issue whether the bankruptcy petition was a forgery as to one or both of the Brunnings , everything the Trustee has done to seize and liquidate assets up to now has the appearance of propriety. If it should be determined by a court of competent jurisdiction that the bankruptcy petition was a forgery, there will be no way to return the assets after Trustee Gladstone has liquidated to Terry and Susan Brunning . If the Trustee is vested with title to the account before a proper evidentiary hearing is conducted, and if she is then able to transfer those funds from the Isle of Man as she did with the 54-foot vessel in Mexico, she would undoubted do so and then distribute all the funds pursuant to Section 504 of the U.S. bankruptcy laws" . 52. In a document entitled "Supplemanal (sic) affidavit of Thomas B Gorrill" sworn on the 13 th February 2006 Mr Gorrill exhibits certain documentation and authorities the contents of which I note.
53. I should record that in response to a request from the court as to whether the Trustee would be willing to undertake to hold on to any funds received from the Isle of Man until the determination of the US Criminal Proceedings and the finalisation of any issues in respect of the validity of the Appointment of the Trustee and the US Bankruptcy Proceedings Mr Murphy produced a communication from Ms Fickel in the following terms:
"Trustee Gladstone believes it would be fair and is willing to stipulate not to take any action to disburse any funds returned to the United States from the Isle of Man for sixty (60) days in order to give the Brunnings ample opportunity to move the bankruptcy court for an order freezing distribution pending the outcome of the criminal proceedings.
I would also like to point out that Trustee Gladstone does not have unfettered discretion to pay creditor claims. Any such disbursement must be approved by the bankruptcy court after notice and an opportunity for hearing. We would further agree not to move the court for an order authorizing distribution for at least (60) days.
Mr Brunning applied ex parte for a stay of the November 29, 2005 Turnover Order pending outcome of the criminal proceedings. In the Southern District of California, federal courts rule upon ex parte applications "on the papers" . In other words, federal courts in this district do not hold a hearing on an ex parte application absent extraordinary circumstances. Mr Brunning was well within his rights to move the court to reconsider the issue by noticed motion. A noticed motion for reconsideration would have resulted in a hearing on the matter. Mr Brunning opted not to do so. I have enclosed a copy of Mr Brunning's application, Trustee Gladstone's opposition thereto and a copy of the order denying the requested stay" .
54. I permitted Mr Arrowsmith to file a response from Mr Gorrill to the communications from Ms Fickel . I have considered Mr Gorrill's responses in his two communications dated the 22 nd February 2006. I have also considered submissions from counsel on the points raised. In very short summary Mr Gorrill raised issues to the effect that if the Brunnings challenged issues in the US Bankruptcy Court "They would be placed in a position of having to admit the bankruptcy petition is/was legitimate" . Mr Gorrill says he is advised that the Brunnings' assertion that the bankruptcy petition is a forgery is "the lynchpin to the defense against the criminal charges now pending against them. The issue of whether the bankruptcy petition is a forgery is the key, threshold issue that must be adjudicated before other procedural challenges to the Trustee or the tax claim, proposed in Ms Fickel's letter, would be ripe for judicial consideration" .
55. As regards "suing to hold a bankruptcy liable" Mr Gorrill holds out little hope in this respect. The point in effect is made that the Brunnings are without effective remedies in the United States. Mr Gorrill referred to form CSD 2068 "Notice of Intent to Distribute Estate" . It is clear that the Brunnings would have an opportunity to oppose the distribution. Mr Gorrill said that failing an objection "the court will issue an order approving the distribution, and Trustee Gladstone will then be immune from any claims that she acted improperly" . Mr Gorrill stated that as "long as the matter is status quo ante pending the outcome of the criminal proceeding that will necessarily decide the issue as to whether the bankruptcy petition is a forgery, there would be no harm or prejudice to any party" . Mr Gorrill described the Trustee's offer of a 60 day "stand still" as an "empty proposal" . In somewhat colourful language Mr Gorrill referred to the offer of the Trustee as follows:
"This offer by the Trustee calls to mind the nursery rhyme that begins, "Come into my parlor , said the spider to the fly" . Once inside the parlor , the fly, was rendered powerless, and that would be the Brunnings' fate if they accepted the Trustee's hollow offer" ( the Spiderand the Fly by Mary Howitt 1799-1888).
Mr Gorrill continued:
"Just yesterday attorney Fickel stated in her letter to Mr Christopher Murphy, 'It is my belief that the bankruptcy court would be inclined to approve such a request [by the Brunnings to freeze the estate assets]'. If this is correct, the Trustee can solve the entire problem now by simply entering a written stipulation agreeing to freeze the bankruptcy assets and file the stipulation with the bankruptcy court, rather than require the Brunnings to file a 'noticed motion' .
Contrary to Ms Fickel's assertion in her most recent letter, a noticed motion does not ensure the bankruptcy court will necessarily conduct an evidentiary hearing on the merits. The movant must first make an adequate showing in the pleadings that there is a dispute as to the material facts of the case to warrant the formality and procedure of an evidentiary hearing. In order to make the initial showing to the court in proper written form, including declarations and admissible evidence, the Brunnings would require the assistance of legal counsel. In order to retain such counsel, the Brunnings would need to advance a fee retainer, but as we know, the Trustee has laid claim to all of the Brunnings' assets and funds and would thereby prevent the Brunnings from obtaining bankruptcy counsel… . The U.S. Supreme Court recently held that a debtor may not apply for compensation to pay for his services from bankruptcy estate assets unless the attorney was employed by the case trustee with approval of the bankruptcy court. Lamie v U.S. Trustee , 540 U.S. 526, 124 S.Ct. 1023 (2004). This is a conundrum. The Brunnings need legal counsel to present an effective motion that the bankruptcy assets should frozen, but in order to pay for counsel, the readily available funds are on deposit in the Isle of Man. Pursuant the Lamie decision, these estate assets can not be used to pay for counsel to represent the debtor.
Rather than require the Brunnings to hire counsel and spend money to bring a motion before the bankruptcy court, and in keeping with the general spirit of the Trustee's latest proposal, the Trustee should stipulate to freezing the bankruptcy assets pending an adjudication of the criminal case. That is where the forgery of the bankruptcy petition will be tested as a key element of the Brunnings' defense . If that defense is successful, there would be no legitimate bankruptcy petition and no bankruptcy estate in existence. If no bankruptcy estate, then there would be no assets to pay the administrative fees of the Trustee and her counsel. The Trustee's motive is thus revealed – do not allow the bankruptcy case to be stayed if the delay could result in a lawful determination by a court that the petition was a sham.
The Trustee has insisted the Brunnings file a motion before the bankruptcy court to freeze the assets, but this would prejudice the Brunnings and the procedural protections afforded them in the criminal prosecution. The Brunnings would be forced to put on the defense of their criminal case, a sort of "dress rehearsal" in open court, presumably with the prosecution in attendance. There is also the issue of whether the Brunnings would be required to waive their privilege against self-incrimination guaranteed by the Fifth Amendment to the U.S. Constitution. The procedural nightmares and legal expense would unfairly burden the Brunnings .
Rather than file a motion to suspend the bankruptcy case, and in order to save legal resources and estate assets, the Trustee should simply stipulate the assets may be frozen, including a provision that funds will remain in the Isle of Man there until the issue of the bankruptcy petition's legitimacy is determined in the criminal proceedings. Trial should occur within a year or sooner. The Brunnings' defense is being provided by the U.S. government, and the High Court can insure in the meantime that the funds on the Isle of Man will not be squandered.
If the Trustee stipulates in writing to do what her counsel has suggested would be acceptable with the U.S. bankruptcy court [i.e. freeze the assets], the bankruptcy court would not reject the stipulation unless the judge felt the Trustee had not exercised sound judgment. However, a bankruptcy court will presume, unless there is evidence to the contrary, that a trustee has acted within the scope of his authority. "Ordinarily , the position of the trustee is afforded deference, particularly where business judgment is entailed …" In reLahijani , 325 B.R. 282, (9 th Cir . BAP 2005).
This simple solution will maintain the status quo ante and conserve assets and prevent the Trustee from expending further resources to litigate this issue before the High Court" .
Submissions
Submissions on behalf of the Trustee
56. Mr Murphy who appeared for the Trustee referred to Rules 165(2), 167 and 169 of Dicey and Morris the Conflict ofLaws (13 th Edition) and to the case of Regatta TradingLimited (CLA 1994/140 unreported judgment 21 st July 1998) ( Regatta ) and submitted that this court should recognise the Trustee in this jurisdiction. It was submitted that under United States bankruptcy law provision had been made for the extra territorial affect of the bankruptcy and the vesting of the worldwide assets of the debtors in the trustee. Mr Murphy added that the bankrupts were domiciled in the United States at the time of the bankruptcy order and had also submitted to the jurisdiction of the US Bankruptcy Court following their filing of a Chapter 7 bankruptcy petition.
57. Mr Murphy submitted that the US Bankruptcy Proceedings are valid and that any issues as to their validity should be determined by the courts of the United States of America which is the most appropriate and convenient forum in respect of such matters.
58. The Trustee referred to the allegations from the Brunnings that they did not sign the voluntary bankruptcy papers. The Trustee referred to the meeting on the 16 th October 2002 during which, the Trustee says, Mr Brunning appeared in person and stated that both he and his wife had signed the bankruptcy papers. The Trustee referred to her positive identification of Mr Brunning and submitted that whether Mrs Brunning signed the bankruptcy papers or not is of no practical significance in any event by reason that all matrimonial property is considered community property and would therefore be subject to the bankruptcy proceedings by reason of Mr Brunning's interest therein.
59. The Trustee submitted that Mr Brunning had US domicile at the time that the bankruptcy proceedings were initiated and was otherwise subject to the jurisdiction of the US Bankruptcy Court. The Trustee submitted that Mrs Brunning's marriage to Mr Brunning coupled with permanent residence in the US were "strongly indicative" of Mrs Brunning having US domicile at the time of the initiation of the US Bankruptcy Proceedings. Even if Mrs Brunning were found not to have submitted to the jurisdiction of the US Bankruptcy Court no practical significance would flow from this, submitted Mr Murphy, by reason of the principles of community property.
60. Mr Murphy referred to Impex Services Worldwide 2003-05 MLR 115 ( Impex ) and also to the Bankruptcy Act 1988 which requires the Manx courts to assist courts having bankruptcy jurisdiction in any 'relevant country or territory' . A request made to the High Court by a court in any relevant country or territory is authority for the High Court to apply, in relation to any matters specified in the request, the bankruptcy law which is applicable by either court in relation to comparable matters falling within its jurisdiction and in exercising its discretion the High Court is directed by statute to have regard in particular to the rules of private international law. The United States of America is not a relevant country or territory under the Bankruptcy Act 1988. Mr Murphy submitted that the court therefore was not bound by a statutory mandatory duty in the present case. Instead however, submitted Mr Murphy the issue in the present case is whether the court should provide assistance pursuant to the court's discretion in the exercise of its common law jurisdiction. Mr Murphy referred to Regatta where Acting Deemster Corrin recognised the appointment of a Finnish trustee in bankruptcy.
61. Mr Murphy submitted that there were no good reasons for the court declining to provide assistance to the Trustee in this case. Mr Murphy said that the Brunnings were facing serious criminal charges in the United States. The charges relate to dishonesty and fraud within the bankruptcy proceedings and to money laundering. Mr Murphy submitted that these were the type of offences where it was vital that friendly states provide appropriate assistance to each other. Mr Murphy submitted that the Brunnings , who have been extradited, have full and unrestricted access to legal representation in the United States. He says it is open to them to defend the criminal charges against them and to challenge the legitimacy of the bankruptcy proceedings in the courts of the United States. Mr Murphy submitted that it was open to the Brunnings to make application to the courts in the United States to have monies released to meet the costs of their reasonable living and legal expenses.
62. Mr Murphy submitted that the potential for prejudice that may be caused to the defrauded parties by declining to assist the Trustee far outweighed any possible prejudice that may arise to the Brunnings .
63. Mr Murphy submitted that this was a proper and appropriate case for the court to exercise its discretion to provide recognition and assistance to the Trustee.
Submissions on behalf of the Brunnings
64. Mr Arrowsmith , in forceful and well focused submissions, endeavoured to persuade the court that, despite well established principles of private international law, it would not be appropriate at this stage to recognise the Appointment of the Trustee or to assist in the enforcement of any orders made in the US Bankruptcy Proceedings as there were a number of relevant issues still outstanding relating to the validity of the Appointment of the Trustees and that such issues should be determined by the courts in the United States. Mr Arrowsmith submitted that these issues would be dealt with in the US Criminal Proceedings. His clients did not want to prejudice their position in the US Criminal Proceedings by making applications in the civil courts for relief in respect of the US Bankruptcy Proceedings.
65. Mr Arrowsmith did not invite this court to determine the validity of the Appointment of the Trustee. Plainly the most convenient forum for that determination is the United States of America.
66. Mr Arrowsmith submitted that six matters remained outstanding and upon which final determinations have yet to take place under American law. Mr Arrowsmith submitted that some of these issues went directly to the validity or otherwise of the Appointment of the Trustee. Mr Arrowsmith listed those issues as follows:
(1) the authenticity of the signature of Mr. Brunning on the bankruptcy petition;
(2) whether Mr. Brunning attended the Section 341 creditors meeting;
(3) a final determination of the US Criminal Proceedings;
(4) the authenticity of the Separation Agreement, its timing and relevance;
(5) the community of property issues as against, all other matters aside, whether the entirety of the funds held in the Isle of Man would properly vest in the Trustee, in any event, should the relief sought be granted;
(6) the full extent of the debts of the estate.
67. Mr Arrowsmith stated that the Trustee's conduct in respect of Mr Carrow is relevant to the exercise of the court's discretion in respect of recognition and active enforcement and assistance.
68. Mr Arrowsmith could not refer to any legal proceedings commenced by the Brunnings before the US Bankruptcy Court or any other civil court in the United States as to the validity of the Appointment of the Trustee. Mr Arrowsmith did however refer to the US Criminal Proceedings against the Brunnings and submitted that relevant issues going to the validity of the Appointment of the Trustee would be focused on and determined in the context of the criminal hearing.
69. Mr Arrowsmith accepted that the court had jurisdiction to deal with the Trustee's application for recognition and assistance but submitted that the position in the case presently before the court was very different from the position in the established legal authorities in that in the case presently before the court the challenge to the locus of the Trustee is a live issue albeit before a criminal rather than a civil court. The validity of the appointment of the foreign trustee was not in issue in the legal authorities put before the court.
70. Mr Arrowsmith submitted that in exercising a discretion or using an analysis of proportionality, or prejudice, where the main "suffering" party would be the tax collectors of the Government of the United States of America, the status quo should be maintained and the funds should remain on the Isle of Man pending determination in America of the identified outstanding issues. 71. Mr Arrowsmith submitted that the voluntary bankruptcy is inherently flawed and that it and all proceedings or orders that seek to rely upon it as their founding jurisdiction are equally tainted by that flaw.
72. Mr Arrowsmith referred to the US Transfer Order and noted that it purported:
(1) to operate as an extra territorial order having effect outside the US;
(2) to operate as an effective order within this jurisdiction; and
(3) to automatically to vest assets held in this jurisdiction without the need for further steps.
73. It was submitted that the Brunnings did not sign the voluntary bankruptcy materials.
74. Mr Arrowsmith submitted that the Trustee was in contempt of the US Legal Expenses Order. Mr Arrowsmith alleged that the Trustee caused the said order to be frustrated by demanding and obtaining payment of the US$15,000 ordered to be released. Mr Arrowsmith submitted that the Trustee should not be permitted to seek the favour of this court in the manner specified in the petition or otherwise until she had purged her contempt. Mr Arrowsmith submitted that the Trustee had failed to give notice of this material interference with the US Legal Expenses Order. Mr Arrowsmith submitted that the Trustee had not come to equity with clean hands and must be denied the relief sought by virtue of this alone.
75. Mr Arrowsmith submitted that the orders made in the US Bankruptcy Proceedings were in direct contravention of the rule of natural justice – the right to be heard.
76. Mr Arrowsmith submitted that in exercising a judicial discretion in determining whether to assist the Trustee the court should have regard to the European Convention for the Protection of Human Rights and Fundamental Freedoms in particular the right conferred by Article 1 of the First Protocol – protection of property and Article 6 of the Convention – the right to a fair trial. Mr Arrowsmith referred to what he alleged were breaches of such rights in the circumstances of this case.
77. Mr Arrowsmith submitted that in exercising a judicial discretion the court can take into account human rights principles. Mr Arrowsmith referred to Article 6 and submitted that the court may have regard to what he described as the Trustee's contempt which effectively denied Mrs Brunning legal representation to defend the US Criminal Proceedings. Mr Arrowsmith also submitted that the court in considering the granting of a vesting order should have regard to Article 1 of the First Protocol of the Convention.
78. Mr Arrowsmith referred to Impex and submitted that the issue before the court must be confined to recognition and not substantive enforcement of the US Transfer Order. Mr Arrowsmith stressed that Impex was fundamentally different in its nature to the present matter and facts. Mr Arrowsmith said it reflected a rather more commonplace occurrence of one court requesting the assistance of another in relation to the collection of evidence. Mr Arrowsmith submitted that it was not concerned with the recognition or enforcement of foreign orders or judgments. Mr Arrowsmith submitted that recognition and assistance in this case would not be proper. Mr Arrowsmith referred to T & M [2004] EWHC 2361 and HIH Casualty and General InsuranceLimited [2005] EWHC 2125 and submitted that "comity" must only take place in accordance with the provisions of relevant law and does not create a jurisdiction to assist where such jurisdiction does not otherwise exist.
79. Mr Arrowsmith submitted that the Recognition of Trustee Act 1988 does not assist the Trustee in the circumstances of this case.
80. In short summary Mr Arrowsmith submitted that:
(1) the Brunnings did not instigate the US Bankruptcy Proceedings;
(2) the US Bankruptcy Court did not have jurisdiction;
(3) the Brunnings are limited in financial means to defend the legal proceedings;
(4) the Trustee is in contempt of the US Legal Expenses Order and ought not be permitted to bring the petition or seek any relief from the court without first purging her contempt;
(5) the Trustee is not coming to the court with clean hands and the relief should therefore be denied;
(6) there have been violations of the human rights of the Brunnings ;
(7) the Trustee, as per the correspondence with Mr Carrow , appears to show a blatant disregard for the jurisdiction of this court when it suits her purposes and, as per paragraph 16 of her petition, the utmost respect when she seeks or requires assistance;
(8) the vesting order as sought by the Trustee is a breach of the human rights of the Brunnings and ought not to be granted;
(9) the manner in which the US Bankruptcy Court determined to make its orders was contrary to the rules of natural justice such that this court ought to impeach the US Transfer Order and all further orders relied on and dismiss the petition;
(10) this court at this stage should exercise its discretion against granting recognition, enforcement and assistance in respect of the Appointment of the Trustee and the US Bankruptcy Proceedings in view of the many outstanding issues which need to be determined in the United States.
81. Mr Arrowsmith distinguished this case from other cases in which recognition and assistance had been granted by stressing that in the case presently before the court the very validity of the Appointment of the Trustee and the US Bankruptcy Proceedings was in issue. Mr Arrowsmith stressed that the locus of the Trustee has not yet been finally determined but he accepted that there was no application pending in the civil courts of the United States in that respect. It was however, said Mr Arrowsmith , a live issue in the US Criminal Proceedings. Mr Arrowsmith accepted that at present the Appointment of the Trustee and the US Transfer Order is an extant appointment and an extant order but submitted that there was good reason why the Brunnings had not challenged such matters in the civil courts in the United States. Those issues were live issues in the US Criminal Proceedings and the Brunnings did not wish to prejudice their position in the US Criminal Proceedings. Mr Arrowsmith in effect submitted that no real prejudice would accrue to the Trustee or any creditors if the Trustee's petition was adjourned to a date after the determination of the US Criminal Proceedings. The main creditor at the moment (and this may be the subject of a challenge at a later date) was the tax authorities of the United States and they could wait for any money due to them without severe prejudice accruing to them. Mr Arrowsmith submitted that if however the money in the accounts in the Isle of Man was vested in the Trustee and subsequently transferred to her that may be the last the Brunnings would see of their money even if at a later date they were acquitted of the criminal charges and successfully challenged the Appointment of the Trustee, the US Transfer Order and the Turnover Order. Mr Arrowsmith referred to serious recoverability concerns.
82. Mr Arrowsmith submitted that the Brunnings were without effective remedies in the United States. Moreover in reality there was no real hope of successfully obtaining from the US Bankruptcy Court permission to use further funds on lawyers or an order restraining any distribution of assets by the Trustee until the determination of the US Criminal Proceedings. An application for a stay had been attempted but was summarily dismissed submitted Mr Arrowsmith .
83. The whole thrust of Mr Arrowsmith's submissions was that the Brunnings could not obtain justice in the United States of America.
Submissions on behalf of Abbey
84. Ms Hyde appeared for Abbey and adopted a neutral position. Ms Hyde submitted that it was common ground that this court had jurisdiction to recognise a foreign trustee in bankruptcy and the court also had a discretion to decline to recognise and assist. In its neutrality Abbey left it to the court to determine what relief, if any, the court should grant in the circumstances of this case.
85. Having briefly outlined some of the main submissions of the parties I now turn to the relevant law.
The Law
Recognition
86. Dicey & Morris The Conflict of Laws (13 th Edition) (Dicey & Morris) under the heading "Foreign Bankruptcies" rule 165(2) states:
"English courts will recognise that the courts of any other foreign country have jurisdiction over a debtor if –
(a) he was domiciled in that country at the time of the presentation of the petition; or
(b) he submitted to the jurisdiction of its courts, whether by himself presenting the petition or by appearing in the proceedings."
87. Professor Campbell McLachlan in International Litigation and the Reworking of the Conflict of Laws (2004) 120 L.Q.R. 580 at 608 states that: "The English courts' approach to cross-border problems has been unduly influenced by the notion that the English courts' intervention is justified internationally if the court has personal jurisdiction over the defendant" .
88. Smart in Cross Border Insolvency (Smart) Chapter 5 deals with "Foreign Bankruptcies : Bases of Recognition." Smart refers to domicile, submission and carrying on business. Smart at page 161 states that foreign bankruptcies will be recognised as follows:
"(i) where the bankruptcy has been pronounced under, or is recognised by, the law of the debtor's domicile;
(ii) where the debtor participated in the foreign proceedings;
(iii) where the debtor carried on business, or (semble ) was resident, in the foreign jurisdiction."
89. In Didisheim v London and Westminster Bank [1900] 2 Ch 15 an "administrateur provisoire" was appointed by a Belgian court over an individual domiciled and resident in Belguim and endeavoured to obtain access to assets in England. It was held by the English Court of Appeal on the 2 nd April 1900 that, in the absence of lunacy proceedings in England, the court was bound, on general principles of private international law, to recognise the order of the Belgian court. Lindley M.R. at page 51 stated:
"On general principles of private international law, the Courts of this country are bound to recognise the authority conferred on him by the Belgian Courts, unless lunacy proceedings in this country prevent them from doing so" .
90. 98 years later on the 3 rd June 1998 Deemster Cain in Re IOM Bank 1996-98 MLR 493 had to deal with the question as to whom monies in a joint account in the Isle of Man should be paid. A controller had been appointed in Northern Ireland for one of the account holders on the basis that she had been certified mentally incapable of managing her own affairs.
The headnote to the report reads as follows:
"The petitioner ("the bank" ) sought the direction of the court as to whom moneys in a joint account should be paid.
The joint account had been held by two brothers and their sister, who were resident in Northern Ireland. The two brothers had died early in 1997. In October of that year the Northern Ireland Office of Care & Protection notified the bank that the sister had been certified mentally incapable of managing her own affairs and asked that the assets in the account be frozen until an official controller was appointed. The bank, acting on the belief that the Northern Ireland order should be sealed by a Manx court, instituted the present proceedings by way of interpleader .
Shortly before the hearing, the Official Solicitor to the Supreme Court in Northern Ireland was appointed controller for the patient.
Held, ordering that the funds in the account be held to the order of the controller: Once the controller in the present case had been appointed, the bank could have recognized his authority without an order from the Manx court. Since the property in the Isle of Man was movable, no Manx proceedings were proposed for the appointment of a receiver, the patient was not domiciled here, her title to the property was clear and a controller had been appointed in Northern Ireland who had full title and authority under its laws to deal with the property in the Island, his authority should be recognised as of right and he should not be refused payment or delivery. As a general rule, if a bank had any doubt as to the title and authority of a foreign curator, it could make an application to the court, but that should not normally be necessary. It was to be expected, however, that in future no application for the transfer of a patient's funds would be made to a bank in the Isle of Man until after the appointment of a curator by the foreign court (page 497, lines 3- 14; page 499, line 39 – page 500, line 350".
Deemster Cain reviewed the relevant rules in Dicey & Morris and concluded:
"I am not aware of any reason why these rules should not be part of the private international law of the Isle of Man. It follows, therefore, that where a bank in the Isle of Man is holding funds for a person who is domiciled in a jurisdiction outside the Isle of Man and who is suffering from mental disorder, and an order has been made by the courts of that jurisdiction appointing a curator of that person, and it is clear from that order that the curator has full title and authority, according to the law of that other jurisdiction, to sue for and get in movable property in the Isle of Man, then the curator's authority to deal with the funds in the Isle of Man should be recognized as of right, without being confirmed by an order of this court. If a bank has any doubt as to the title and authority of the curator, then it is always open to the bank to make an application to this court. That should not generally be necessary."
91. I appreciate that the IOM Bank case involved the appointment of a controller or curator over a mentally incapable person. The learned Deemster had little difficulty in following the relevant rules in Dicey & Morris and recognising the appointment of the foreign entity and noting that the title to the funds vested in the foreign entity without more except in cases where there is doubt as to the title and authority of the foreign entity.
92. In the case In Re McCoy 1996-98 MLR 327 Deemster Corrin recognised a Northern Irish trustee in bankruptcy. I accept that the application by the trustee in that case was pursuant to section 1(1) of the Bankruptcy Act 1988. There are many other examples where the Manx and English courts have recognised the appointment of foreign insolvency officers and granted assistance. In Kooperman (1928) W.N. 101 Asbury J appointed a curateur in a Belgian bankruptcy to be receiver of the bankrupt's immovable property in England so that it might be sold in obedience to an order of the Belgian court. The bankrupt had been trading in Belguim and had appeared in the bankruptcy proceedings there, though resident in France at the time of the English court's order.
93. In Regatta Acting Deemster Corrin recognised Finnish trustees in bankruptcy. Counsel had referred the court to rules 169 and 167(2) of Dicey & Morris (12 th Edition). The court recognised the appointment of the trustees in bankruptcy by the Finnish Bankruptcy Court pursuant to which the bankrupt's interest in the shares in Regatta Trading was assigned to the trustees. Counsel for the bankrupt had sought to attack an agreement and reference was made to the bankrupt's complaints to the Chief Inspector of Bankruptcy in Finland. The learned Deemster stated: "… this Court will not be concerned with the supervisory procedures under Finnish Bankruptcy Law of Trustees in bankruptcy. Any complaint that [the bankrupt] has regarding the conduct of the Trustees in bankruptcy should be directed either to those Trustees or the Finnish Court" .
94. The Appeal Division in Regatta (2DS 1998/32) dismissed an appeal against Acting Deemster Corrin's judgment recognising the Finnish trustee in bankruptcy. Both advocates in that case accepted that the Acting Deemster had a discretion as to whether to recognise the Finnish bankruptcy (see page 8 of the judgment). Reference was also made on page 8 of the judgment to rule 169 as set out in Dicey & Morris (12 th Edition) and the Appeal Division did not state that courts at first instance should not have regard to such principles. It was accepted that Manx courts had a discretion to refuse to recognise a foreign trustee in bankruptcy.
95. In Schemmer v Property Resources Ltd [1975] 1 Ch 273 proceedings were brought in a district court of the United States and the judge appointed a receiver to take possession of certain assets of a company incorporated in the Bahamas. The receiver acting on the directions of the district court issued proceedings in England seeking to have himself appointed receiver of assets of the company located in the United Kingdom. It was held that before the English courts would recognise the title of a foreign receiver to assets located in the United Kingdom or direct the setting up of an auxillary receivership, the court had to be satisfied of a sufficient connection between the defendant and the jurisdiction in which the foreign receiver was appointed to justify recognition of the foreign court's order as having effect outside the foreign jurisdiction. Goulding J at page 287 stated:
"I shall not attempt to define the cases where an English court will either recognise directly the title of a foreign receiver to assets located here or, by its own order, will set up an auxiliary receivership in England. To do either of those things the court must previously, in my judgment, be satisfied of a sufficient connection between the defendant and the jurisdiction in which the foreign receiver was appointed to justify recognition of the foreign court's order, on English conflict principles, as having effect outside such jurisdiction. Here I can find no sufficient connection" .
96. In Impex I dealt with an application by the provisional liquidator of an English company. The provisional liquidator was seeking an order requiring certain Manx entities to produce documents relevant to her investigation. I dealt with what I perceived to be the position under Manx common law as follows:
"81. In my judgment, the position in Manx common law is as follows:
(a) This court should recognize the appointment by the English High Court of the petitioner as provisional liquidator of the company, a company incorporated under the laws of England. Indeed this court has already done so without any opposition from Aidre and no appeal was lodged against the September 16 th , 2003 Manx Order.
(b) The judicial recognition is not simply a bare acknowledgement that the petitioner has been appointed provisional liquidator of the company. With that recognition comes a discretion to provide active assistance and this court should, in principle, always wish to co-operate in every proper way with an order or a letter of request from the English High Court in relation to corporate insolvency matters. (c) The jurisdiction at Manx common law permits this court to co-operate with and assist other courts including the English High Court in relation to insolvency matters. The jurisdiction is a wide and discretionary jurisdiction. It will be for the court to decide whether in any given set of circumstances the jurisdiction should be exercised and if so what safeguards or protections need to be put in place in respect of orders which are made when giving such co-operation and assistance to the foreign court.
(d) The jurisdiction at Manx common law enables this court to co-operate with and to assist courts of other jurisdictions in respect of insolvency matters. In exercising its discretion the court would have regard to various matters and in particular to the rules of private international law. The court should also endeavour to ensure that its orders do not operate oppressively or unfairly upon the examinee . The court needs to balance the petitioner's reasonable requirement to obtain the information and the importance of that information against the possible oppression and unfairness to the proposed examinee .
(e) In dealing with applications for examination and production of information the courts will have to balance the need of those seeking such information and the importance of the information on the one hand and any issues of confidentiality and the private affairs of third parties on the other. For my part I have to say that in cases of prima facie wrongdoing issues of confidentiality and privacy will frequently take second place to the public interest in obtaining the information and documentation to enable a liquidator to get a full picture of the company's affairs and in order that wrongdoers are brought to justice.
(f) The courts' discretion to co-operate and assist be exercised cautiously and judicially taking into account all relevant factors and concerns. Suitable safeguards and protections may also have to be imposed in appropriate cases. If there are particular questions or areas of inquiry to which it is felt objection could be taken these matters can be raised and debated at the examination itself or if more convenient at a preliminary hearing (see Jeeves v . Official Receiver (28), an English Court of Appeal decision on a public examination under s.133 of the Insolvency Act 1986).
(g) The way in which the court chooses to co-operate with and assist foreign courts, including the English High Court, on matters of insolvency will depend on the facts and circumstances of each individual case and each individual request for co-operation and assistance.
(h) The jurisdiction at Manx common law enables this court to assist the petitioner, if it thinks fit, by making an order summoning before it any person whom the court deems capable of giving information concerning the promotion, formation, trade, dealings and affairs or property of the company.
(i) The jurisdiction at Manx common law also enables this court to assist the petitioner, if it thinks fit, by examining such witnesses on oath and requiring such witnesses to produce any books and papers in their custody or power relating to the company and to sign and approve a transcript of such examination.
82. Friendly and sophisticated jurisdictions, which respect the rule of law and human rights, need to be aware that if things go wrong in their jurisdiction, and persons in the Isle of Man have information that would assist them, then the Manx courts, in a proper case and, if necessary, subject to suitable safeguards will offer judicial co-operation and assistance when that is reasonably requested by the judicial authority in that friendly jurisdiction. When the call for help comes, the Manx courts will, in proper cases, answer the call positively and provide the necessary co-operation and assistance.
83. It is important that foreign courts and foreign insolvency officers are aware that the Manx courts will offer co-operation and assistance in appropriate cases. It is also important that those who invest in the Island are aware that we offer appropriate remedies by way of assistance. I endeavoured to make this point in In re Oxley (4)) when I said (2003-05 MLR 57, at para. 18):
"The Isle of Man is an international finance centre with an excellent reputation. Investors choose to invest in the Island and conduct commercial and corporate business with and in the Island for a number of reasons. Those reasons include the fact that the Island is a sophisticated common law jurisdiction, governed by the rule of law and a sound legal system. It is a good place to set up corporate and commercial structures and if disputes arise it has a fair, efficient and effective legal mechanism for determining those disputes. It is a jurisdiction that offers the full range of legal remedies for the protection of investors. An important part of those remedies is provided in s.7, which in appropriate cases can provide genuinely oppressed shareholders with appropriate statutory relief. The courts' powers of intervention in cases of oppression are very wide. Investor protection is high on the Island's agenda and the courts will not hesitate to play their role in protecting those who choose to invest in the Island" .
84. The Island is indeed a sophisticated common law jurisdiction, governed by the rule of law and a sound legal system. Part of that system enables this court under the common law of the Island to assist foreign courts in insolvency matters" .
97. The Appeal Division in Navigator Gas Transport PLC 2003-05 MLR 459 ( Navigator Gas ) accepted the wide and discretionary jurisdiction referred to in Impex and extended it to foreign reorganisations.
98. In Al Sabah v Grupo Torras SA [2005] 2 WLR 904 the question arose as to whether the Grand Court of the Cayman Islands had jurisdiction to act in aid of a trustee in bankruptcy of a debtor in the Bahamas. It was held by the Privy Council that the Grand Court had jurisdiction under certain statutory provisions to act in aid of the Bahamian bankruptcy. Lord Walker, who delivered the judgment of their Lordships, dealt with an alternative submission in respect of the inherent jurisdiction of the Grand Court. Lord Walker at paragraph 35 stated:-
"This point was not much developed in argument and their Lordships can deal with it quite shortly. If the Grand Court had no statutory jurisdiction to act in aid of a foreign bankruptcy it might have had some limited inherent power to do so. But it cannot have had inherent jurisdiction to exercise the extraordinary powers conferred by section 107 of its Bankruptcy Law in circumstances not falling within the terms of that section. The non-statutory principles on which British courts have recognised foreign bankruptcy jurisdiction are more limited in their scope (see Dicey & Morris, The Conflict of Laws , 13 th ed (2000), vol 2, pp 1181-2, 1186-3) and the inherent jurisdiction of the Grand Court cannot be wider" .
99. The Isle of Man is not alone in recognising and giving assistance to foreign trustees in bankruptcy. 100. In Re F & O Finance AG (Jersey Royal Court : Hamon , Deputy Bailiff and Jurats Rumfitt and Allo , January 17 th 2000) a trustee in bankruptcy of a Swiss firm requested access to an account held by the firm with a bank in Jersey. The Jersey bank refused to comply with the trustee's request stating that it was not subject to the jurisdiction of Swiss courts. The trustee therefore sought an order recognizing his appointment as a foreign insolvency officer. It was held that while Switzerland was not a country prescribed under the Bankruptcy (Desastre )(Jersey) Rules 1991, r.11(4) as qualifying for assistance in Jersey in relation to its domestic insolvency matters, it could still receive assistance from the Royal Court as the court had an inherent jurisdiction enabling it to assist in foreign insolvencies . The Royal Court was likely to recognize the appointment of a foreign insolvency office-holder who was administering a bankruptcy which had arisen in a foreign jurisdiction when there was a valid connection between the debtor and the law under which the insolvency occurred (Dessain & Wilkins , Jersey Insolvency Law in Practice, para. 6.1, at 103-104 (1999), considered). In that case the validity of the trustee's appointment had been confirmed by a Swiss court and an affidavit had also been provided stating that a Swiss court would recognize a similar request for assistance from a Jersey court. The court could see no reason why the application should not be granted and, in exercising its discretion, granted the relief sought.
101. The courts on the Isle of Man have followed the well established principles of private international law as outlined in Dicey & Morris for many years. One only needs to pick up a copy of Ramsey B Moore's The Isle of Man andInternationalLaw (1926) to appreciate that. The first reference to Dicey appears on the third line of Chapter 1.
102. In Buckmaster & Moore v Fado Investments Limited 1984-86 MLR 252 the Appeal Division, applying well established principles of private international law, recognised a foreign partnership as a properly constituted partnership under English law. Rule 136 of Dicey & Morris was accepted as good law.
103. More recently in World Duty Free Company Limited 2003-05 MLR 184 ( World Duty Free ) the Appeal Division in ruling that a judgment from the High Court of Kenya (which it construed as being an in rem judgment in respect of shares in a company incorporated in the Isle of Man) should not be enforced was plainly influenced by well established principles of private international law as outlined in Dicey & Morris (Rules 40(1) and (111)). Navigator Gas also referred to principles in Dicey & Morris relevant to the recognition and enforcement of foreign insolvencies .
104. In Navigator Gas at first instance Deemster Kerruish (judgment delivered 14 th October 2004 in CP 2004/29) at paragraph 132 stated:
"In general terms, there is no statutory, or other provision preventing or restricting the courts from recognising and, if appropriate, acting upon a request for recognition, and/or assistance from a foreign court…" and at paragraph 133 :
"The starting basis will be that the courts in this jurisdiction will seek to assist foreign courts. Whether, and on what terms the courts should recognise and/or provide assistance requires the requested court to exercise properly its discretion, taking into account all relevant matters" . and at paragraph 136:
"The courts have a wide discretionary jurisdiction to assist foreign courts, and, as stated, will start from the premise that they will seek to recognise and/or assist if it is proper and appropriate to do so" . and at paragraph 138:
"The courts in this jurisdiction will do so subject to the circumstances, justice of the case, and application of relevant principles, including fundamental principles of private international law" .
105. In NavigatorGas Mr Corlett appeared for Cambridge along with Mr Arrowsmith and submitted that the development of the approach of international assistance to letters of request could not ignore fundamental principles of private international law such as where, contrary to the lex situs principle, a foreign court purportedly sought to determine issues as to the legal and beneficial ownership of shares in a company incorporated in another jurisdiction. Mr Corlett also referred to principles of comity and agreed that the starting point was that the Isle of Man courts would assist a foreign court out of comity . However to determine whether and if so on what terms a court should provide assistance required the court to exercise its discretion : the court should render all assistance unless there is good reason for not doing so.
106. On the facts of Navigator Gas the learned Deemster concluded that Cambridge Gas Transport Corporation had not submitted to the jurisdiction of the United States Bankruptcy Court for the Southern District of New York. The learned Deemster also came to the conclusion that the Bankruptcy Court did not have jurisdiction to make its judgment in rem relevant to Cambridge's shares in Navigator Holdings plc (Holdings). Holdings was a company incorporated in the Isle of Man. Applying well established principles of private international law the Deemster held that the applicable law with respect to the legal and equitable titles to Cambridge's shares in Holdings was at all times the Isle of Man, being both the lex situs and the jurisdiction of incorporation of Holdings.
107. The Deemster however being mindful of "the interests of justice, the unchallenged evidence as to the insolvency of the Debtor Companies, comity and all other circumstances" gave a preliminary view that there would be some difficulty in challenging an application to place one or more of the Debtor Companies into liquidation in the Isle of Man.
108. I appreciate that a lot of the judgments on recognition and enforcement of foreign insolvency orders are at first instance. There are however judgments in the Appeal Division that support the principle of international judicial co-operation and assistance. For example in Navigator Gas where the appellantsought recognition in the Isle of Man of a bankruptcy confirmation order made by Judge Blackshear in the United States Bankruptcy Court for the Southern District of New York. Certain debtor companies had commenced voluntary proceedings under Chapter 11 of the United States Bankruptcy Code. At first instance Deemster Kerruish held that the Bankruptcy Court's order could not be recognised by the Manx court. It was an order in rem , which purported to transfer the respondent's shares to the interim shareholders and since this could only be done in the lex situs, it had acted outside its jurisdiction. Further the respondent had not submitted to the jurisdiction of the Bankruptcy Court. The Appeal Division held that the confirmation was not one in rem .
109. The headnote to the report records that the Manx court had jurisdiction to assist the Bankruptcy Court in order to allow the orderly reconstruction of Navigator. This would not breach the principles of private international law, because first, the confirmation order did not attempt to transfer the shares without the necessary assistance of the Manx court in the lex situs. Even had this been the case it would still have been within the Manx jurisdiction to provide assistance, as it was being asked to recognise and assist a foreign reorganisation, rather than to recognise and enforce a judgment in rem . Secondly, the court had previously recognised the substantial transferral of property rights, at the request of the foreign court. Thirdly, it did not matter that the respondent had not expressly submitted to the Bankruptcy Court's jurisdiction, since it had chosen not to appear in the proceedings; the parent company of Navigator, in which it was the majority shareholder, had itself submitted to its jurisdiction, it shared common directors with the debtor companies, who knew of the proceedings and it had chosen not to participate in the later hearing arranged in order for it to voice its objections. Nor did the Bankruptcy Court breach natural justice by ruling in the respondent's absence since foreign insolvency proceedings by their nature affect those who are not party to the proceedings and Navigator's insolvency meant that the respondent's shares were no longer of any value. It was appropriate therefore for the court to exercise its jurisdiction under section 101(1) and (3) of the Companies Act 1931 to assist the Bankruptcy Court in rectifying the register of members by substituting the names of the interim shareholders for that of the respondent. It would allow the timely execution of the committee's plan, which had been endorsed by the debtor companies, and would assist the Bankruptcy Court, which was in a better position to consider the US creditors' interests. The debtor companies, although registered in the Isle of Man, had raised money from US creditors under contracts governed by New York law.
110. The Appeal Division referred to the "wide and discretionary" jurisdiction outlined in Impex and at paragraph 47 of the judgment stated that they could see no reason why such wide and discretionary jurisdiction should not apply as much to foreign reorganisations as it did to foreign liquidations.
111. At paragraph 70 of the Appeal Division's judgment the following is stated:
"70 In the interests of the orderly administration of the debtor companies' assets and business, it is appropriate that the Manx High Court should grant the assistance which is sought by the Bankruptcy Court to implement the committee's plan. Indeed, save for the matters already mentioned, Cambridge did not identify any reason why, in the exercise of the court's discretion, the requested assistance ought not to be granted. Were any such reason to be advanced by a shareholder of an insolvent company it would have to be a very powerful reason to overcome the obvious sense in granting such assistance as is necessary to implement the committee's plan. As we have said, however, no such reason was advanced" .
112. In the case presently before the court Mr Arrowsmith has valiantly sought to persuade the court that there are good reasons why, in the exercise of the court's discretion, the requested recognition and assistance should not be given. The principal reason being that there are live issues pending in the US Criminal Proceedings in respect of the validity of the Appointment of the Trustee and the consequent orders made in the US Bankruptcy Proceedings.
113. I note that appeals are pending in Navigator Gas and World Duty Free . It may be that such appeals will focus on in rem judgments and judicial recognition and assistance to judgments and orders from other jurisdictions. I appreciate that the legal landscape in this area of the law may be significantly affected by the Privy Council in those pending appeals but I am duty bound to apply the law as it presently stands and that is what I do in this case. I await however with keen interest the determination of the pending appeals in the Privy Council. It is going to be an interesting legal year for the Isle of Man. We should all know a little more about in rem judgments and comity by the end of the year.
Consequences of Recognition
114. The Appeal Division in Navigator which dealt with foreign insolvent corporate reorganisations accepted the principles outlined in Dicey & Morris in respect of the consequences of recognition and stated:
"Where the court recognises a foreign bankruptcy, it may recognise the assignment of the debtor's property to the trustee : see 2 Dicey & Morris, op cit ., para. 31R -063 at 1184. Whilst such recognition is not precisely analogous to the transfer of property at the request of a foreign court, it nevertheless serves to illustrate that in the closely related field of bankruptcy, recognition extends to the disposition of property. Moreover, the distinction between procedural and substantive questions in this area is blurred. Recognition of an assignment of a debtor's property to his trustee is in a sense procedural but in another sense it reflects a change of substance" .
115. Rule 167 of Dicey & Morris provides as follows:
"RULE 167 – An assignment of a bankrupt's property to the representative of his creditors under the bankruptcy law of any other foreign country whose courts have jurisdiction over him in accordance with Rule 165(2) is, or operates as, an assignment of the movables of the bankrupt situate in England.
COMMENT
The general principle of English law is that bankruptcy, or any proceeding in the nature of bankruptcy, in a foreign country whose courts have jurisdiction over a debtor operates as an assignment to the trustee, assignees, curators, syndics or others, who under the law of that country are entitled to administer his property, of all his movables in England, if that is its effect under the foreign law.
The effect in England of the assignment of a debtor's property under the bankruptcy law of a foreign country is subject to certain limitations.
(1) The assignment only takes place if under the law of the foreign bankruptcy provision is made for the extraterritorial effect of the bankruptcy.
(2) The property in England passes subject to any existing charges upon it recognised by the law of England, even if these charges would be postponed under the law of the place of bankruptcy to the claim of the creditors, and even if under the English bankruptcy the charges would be defeated by the title of the trustee in bankruptcy."
116. In Pelegrin v Coutts & Co [1915] 1 Ch 696 at 701-702 Sargant J suggested that where a debtor's movables vest in the foreign assignee persons in England with custody of such property must give it up to the foreign assignee and will be penalised in costs should they insist upon the assignee first bringing an action in the English courts. In Pelegrin a domiciled Frenchman resident in Paris deposited securities for safe custody with the defendants in London. He afterwards became "a person of unsound mind not so found" and a provisional administrator of his property was appointed by the French court with express power to receive the securities in question. The defendants refused to act without an English court order. It was held having regard to the decision of the English Court of Appeal in Didisheim v London and Westminster Bank [1900] 2 Ch 15 the defendants, in refusing to act on the order of the French court, had shown an undue and unreasonable excess of caution and ought to bear their own costs of the action.
Sargant J at page 701 stated:
"… the defendants in my opinion showed an undue and unreasonable excess of caution in requiring an action to be brought against them in an English Court and in refusing to transfer the securities without an order of the English Court. The law on the subject has been fully recognised ever since the well-known case of Didisheim v Londonand Westminster Bank [1900] 2 Ch 15".
Sargant J added:
"if the Frenchman, instead of being a lunatic, had been adjudicated a bankrupt abroad, it would be absurd to suggest that it would be necessary or proper for bailees of his property in this country to insist on an action being brought before they transferred the property to the person appointed by the foreign Court to deal with and administer the property of the bankrupt" .
117. These well established principles of private international law have been followed on the Island for many years. In Green 1952-60 MLR 254 a travelling circus proprietor had been adjudicated bankrupt in Denmark and a trustee in bankruptcy was appointed. A number of the debtor's creditors on the Island obtained an arrest of the debtor's assets on the Island including a circus tent. In the proceedings in Denmark the court held that the property in the tent passed to the trustee in bankruptcy. In the Isle of Man legal proceedings the trustee submitted that, under the doctrine of universality, the bankrupt's movable property in the Island vested in him. The headnote to the report indicates that it was held that although the bankruptcy was in Denmark and not in the Island, the court accepted in principle that, under the doctrine of universality, the assignment of property to the trustee in Denmark applied to all the bankrupt's movable property, including that in the Island.
118. Deemster Cowley reviewed the relevant authorities and at page 264 stated:
"In the present case there has been no adjudication in the Isle of Man, and it would appear on the general principle of universality that, so far as movables are concerned, the trustee in Denmark is entitled to the assets, whatever they are, in the Isle of Man. Although it might appear from that case [ In Re Osborn [1931-2] B & C.R. 189] that some action is necessary in the Manx courts to vest the Manx movables in the Danish trustee, there seems to be some doubt as to whether the appointment of a receiver in the Manx court is really essential" .
119. The learned Deemster considered expert evidence on Danish law and felt that it was not necessary either to appoint a receiver or to make an order vesting the proceeds in the trustee in bankruptcy and simply therefore instructed an officer of the court to deal with the assets in the manner indicated in the judgment.
120. The vesting of movables in the foreign trustee is a well established principle of private international law. At page 141 Smart states:
"..it has been settled for more than two centuries that, in appropriate circumstances, a foreign bankruptcy will at once vest the debtor's movable property in England in the foreign assignee" .
121. Smart refers to the consequences of recognition and at page 221 states that the authority of the foreign trustee must be satisfactorily proved. Smart says that this will involve establishing by expert evidence that the foreign law is extra territorial : that is the foreign law applies to property in England and permits the representative to take action outside the country of appointment. At page 222 Smart states:
"Provided it is established that the foreign law extends to movables in England, the English court will consider title thereto vested in the foreign assignee. As vesting is 'consequential and instantaneous' upon the making of the foreign order, no confirmation or execution by the English court is required. (Although if there is real difficulty as to the validity of foreign proceedings it may be appropriate to seek a declaration in England)".
Comity
122. Comity does not warrant a separate rule in Dicey & Morris. It is dealt with in a section on the nature and scope of the conflict of laws at paragraph 1-010 as follows:
"Comity . It was at one time supposed that the doctrine of comity was a sufficient basis for the conflict of laws. Comity is a term of very elastic content. Sometimes it connotes courtesy or the need for reciprocity; at other times it is used as a synonym for the rules of public international law. Story used it to mean more than mere courtesy, but something rather less than equivalent to international law. Dicey was highly critical of the use of comity to explain the conflict of laws ("a singular specimen of confusion of thought produced by laxity of language" ). English courts apply, e.g . French law in order to do justice between the parties, and not from any desire to show courtesy to the French Republic, nor even in the hope that if English courts apply French law in appropriate cases, French courts will be encouraged in appropriate cases to apply English law. In the United States recognition of foreign judgments has been said to rest on considerations of comity and reciprocity, but comity has been rejected as the basis for the recognition of foreign judgments in England.
The concept of comity is increasingly used in common law countries, not as an explanation for the system of the conflict of laws, but as a tool for applying or re-shaping the rules of the conflict of laws. In particular, it is used in a sense which owes much to the rules of public international law, namely respect for the territorial jurisdiction of other states. The English courts have long emphasised that in the application of the rules for service out of the jurisdiction special care is needed to avoid conflict with international comity , i.e . with the jurisdiction of the state in which service is to be effected. More recently, comity has been invoked to justify the caution which is required in the exercise of the power to grant injunctions to restrain proceedings in foreign courts. Comity requires that the English forum should have a sufficient interest in, or connection with, the matter in question to justify the indirect interference with the foreign court which such an injunction entails. So also, in the exercise of the jurisdiction to grant extra-territorial provisional remedies such as Mareva injunctions, "it is becoming widely accepted that comity between the courts of different counties requires mutual respect for the territorial integrity of each other's jurisdiction" . Similarly, the Court of Appeal held that the Charities Act 1993 did not apply to a charity established under Indian law, because as a matter of comity the jurisdiction of the court to control charities could only be exercised in relation to English charities, and any attempt to control foreign charities would be akin to an encroachment upon the sovereignty of a foreign state."
123. Collier, Conflict of Laws (2001) at page 379 criticises the theory of comity as being "far too vague and shifting a notion" to underpin private international law.
124. In Griggs Group Ltd v Evans [2005] Ch 153 the question arose as to whether the English court had jurisdiction to order the assignment of foreign copyrights. Peter Prescott QC sitting as a deputy High Court judge held that it would not be a breach of comity to adjudicate in personam on rights to foreign intellectual property arising out of a contract especially where the original contract was governed by English law. Peter Prescott QC had some interesting comments to make in respect of comity . At pages 158-160 the learned judge stated:
"Now , 'comity is a term of very elastic content' : see Dicey & Morris , The Conflict of Laws , 13 th ed (2000), vol 1, para 1-010, p.5. In general, however, when our courts say that they intend to refrain from making a particular order because it would be a breach of international comity , they mean that, in their judgment, a foreign court would reasonably construe it as an invasion of the sovereignty of its country, and to resent it accordingly. We do not mean to offend foreign courts, as by seeming to undermine their jurisdiction and authority, and expect a similar degree of self-imposed judicial restraint on their side. But how do we know where to draw the line? At times the line is tolerably clear, because it had been drawn in our own case law, or because it is demarcated by established concepts of international law. At other times the line is less clear" .
125. Denning L.J. in Regazzoni v K.C. Sethia (1944) Ltd [1956] 2 QB (a case on contractual illegality which every university law student should remember) stated:
"…if two persons agree together on a transaction which to their knowledge is intended to be carried out by means of one or other of them breaking the laws of a friendly country, or procuring or assisting another person in the breach of such laws, then the courts of this country will not lend their aid to the enforcement of the transaction. The reason is because it would be a breach of the comity which should exist between countries, and especially between countries of the British Commonwealth. The courts of one country should not help to break the laws of another" .
126. Hoffmann J in Mackinnon v Donaldson, Luftkin and Jenrette Corporation [1986] 1 Ch 482 respected the sovereignty of the United States of America and discharged an English order which required an American bank which was not a party to the action to produce documentation held at its head office in New York.
127. More recently, the Privy Council in The President of the State of Equatorial Guinea v The RoyalBank of Scotland International and others (Privy Council Appeal No 59 of 2005, judgment delivered 27 th February 2006) referred to the Lieutenant Bailiff of Guernsey being mindful (3 rd November judgment para 87) of "respect due to a sovereign state" . At paragraph 20 of the judgment of the Lords of the Judicial Committee of the Privy Council (delivered by Lord Bingham and Lord Hoffmann) it is stated that:
"It is a serious thing to impugn the good faith of a friendly foreign sovereign" .
128. In Re Mid East Trading Ltd [1997] 3 All ER 481 Evans-Lombe J distinguished Mackinnon and assisted liquidators in obtaining documents in New York. Evans-Lombe J did not feel that such assistance would infringe the principle of comity . Comity is indeed a term of very elastic content.
129. In Secilpar 2003-05 MLR 352 I made an order requiring the disclosure of the beneficial ownership of certain Manx companies. A similar order issued by the courts in Gibraltar had been set aside. The Manx companies applied for the discharge of the Manx order on the basis of the more recent ruling from the courts in Gibraltar. The substantive proceedings were in Portugal. I dismissed the application to set aside the Manx order. I stated:
"46. In my judgment, the making of the order would not interfere with the management of the case in the primary court. I regard the primary court as the Portuguese court. It is not clear to me whether it is the policy in the primary jurisdiction not to grant the relief sought itself. There is evidence before me that indicates by way of general comment that the Portuguese courts and regulators would welcome the information as regards the beneficial ownerships of Medex (Mr. Cardoso's third affidavit of July 1 st , 2004). There is a danger of conflicting, inconsistent or overlapping orders in another jurisdiction, namely Gibraltar. I accept that jurisdictional issues were and are present in relation to these proceedings. The orders can be enforced against Trafalgar and Burgundy, which are companies incorporated under the laws of the Isle of Man, and the information is in an envelope held within the Isle of Man.
47. In my judgment, it was expedient to grant the orders and it is expedient for the orders to continue. In my judgment, it was not inexpedient for the court to grant the relief requested by Secilpar and it is not inexpedient for such orders to continue. I conclude that I had jurisdiction under s.56B and that it was proper to exercise it in the circumstances of this case.
48. In addition to the expediency factors as outlined in Motorola (18) there are, in my judgment, other strong public policy and public interest reasons supporting the granting and the continuance of the orders in the Isle of Man. The Isle of Man plays a small albeit important role in the international community of which it is a part. I accept that public confidence in listed companies very much depends on whether the public can be assured that groups of shareholders and other persons seeking to exercise rights as shareholders are not able to hide behind corporate vehicles to the disadvantage of shareholders and financial markets generally. In the Isle of Man, for example, we have the Companies (Register of Substantial Interests) Rules 1975. 49. Disclosure of the information in this case may provide considerable assistance to the victim of a potential wrongdoing and would enable the victim to further assert its legal rights in Portugal and would assist the administration of justice there. It is not burdensome or costly for Trafalgar or Burgundy to provide the information sought. It is already in an envelope in the Isle of Man" .
130. In the Secilpar proceedings in the Supreme Court of Gibraltar (judgment delivered on the 31 st March 2004) Schofield C. J. stated that it was not "in the interests of Gibraltar to become known as a safe haven for wrongdoers and it is the interests of the jurisdiction to apply internationally accepted standards to uncover wrongdoing" . The same applies to the Isle of Man.
131. In Alivon v Furnival (1834) 1 Cr M & R 277 Macauley vGuaranty Trust Company of New York (1927) 44 TLR 99 and Re Blithman (1866) L.R. 2 Eq . 23 references were made to the comity of nations. See also First American Corp v Sheikh Al Nahyan [1998] 4 All ER 439 and letters of request from a United States District Court for assistance following the collapse of BCCI .
132. In Obers v Paton's Trustee (1897) 24 R 719 the Lord President at page 732 stated:
"It seems difficult to the degree of impossibility for this court to decline on principle to recognise if done abroad what it is itself bound to do and daily does at home" .
133. The English Court of Appeal decision in Travers v Holley [1953] P 246 dealt with the recognition of foreign divorces on the basis of comity . An argument based upon Travers v Holley was not accepted by the English Court of Appeal in the context of a company insolvency in Re Trepca Mines Ltd [1960] 1 WLR 1273.
134. In 1792 (nine years after the American War of Independence and seven years before Mary Howitt was born and long before she was thinking about flies and spiders and buttercups and daisies) the Lord Justice-Clerk in Watson v Renton (1792) Bell SC 92 at 106 stated:
"Though much has been said about comitas , it is an improper term; there is no such thing as a decision from complaisance. Where judges determine by the law of another country, they do it ex justicia ; they are bound to do it" .
135. Smart reviews the authorities and refers to the compelling theoretical objections to a doctrine of comity . Smart deals with comity and reciprocity at pages 157-158 and concludes that:
"the judicial tide, as it were, has very much turned against comity . Comity should not be regarded as a separate basis for the recognition of foreign bankruptcies" .
136. It may be that the judicial tide in respect of such matters around the shores of the Island is still out. Perhaps on the Island we have not yet reached the high water mark in terms of comity . Perhaps there will in the future be more international judicial assistance and cooperation rather than less. I fully appreciate that such assistance must be based on a firm foundation of legal principle. Comity and judicial assistance and cooperation with other jurisdictions worldwide however has always been an important part of the Manx legal system especially in view of the important part the Island has to play on the international finance stage.
137. Courts in the Isle of Man have for many years recognised foreign court orders and assisted in their enforcement. One early reported example of this is In Re Bacon 1522- 1920 MLR 238. Deemster Sir Alured Dumbell on the 17th February 1891 referred to a foreign decree of judicial separation (issued by the High Court of Justice in England) and stated:
"as recently as November 4 th 1885, this court granted a judgment extending the operation of Sir James Hannen's decree to this Island, and making it operative within the jurisdiction of this court" .
138. Smart in Chapter 15 deals with international co-operation and assistance and at page 392 states:
"…the judges have recently made plain a willingness to provide assistance (wherever possible) to foreign insolvency representatives and foreign courts" .
139. Millett L. J. in Credit Suisse Fides Trust S.A. v Coughi [1997] 3 All ER 724 at 730 referred to cross-border insolvency issues and added:
"it is becoming widely accepted that comity between courts of different countries requires mutual respect for the territorial integrity of each other's jurisdiction, but that this should not inhibit a court in one jurisdiction from rendering whatever assistance it properly can to a court in another in respect of assets located or persons resident within the territory of the former" .
140. Hirst J in Felixstowe Dock and Rly Co v United States Linen Inc [1989] 1 QB 360 at 376 (a case which appears to have turned very much on its facts) dealt with a Delaware corporation that was under re-organisation in the United States in accordance with Chapter 11 of the US Bankruptcy Code and stated:
"I wish however to stress that the court would in principle always wish to co-operate in every proper way with an order like the present one made by a court in a friendly jurisdiction (of which the United States is a most conspicuous example). But whether this is appropriate in any given case, and if so the precise nature and extent of such co- operation, must depend upon the particular sphere of activity in question and the English law applicable thereto … together with the overall circumstances" .
141. In Poyiadjis 2003-05 MLR 198 Deemster Kerruish dealt with an application to discharge a restraint order granted pursuant to the Criminal Justice Act 1990. The primary jurisdiction in that case was the United States of America, Southern District of New York. At paragraph 49 of his judgment the learned Deemster stated:
"… .. in this case the Isle of Man is exercising an ancillary jurisdiction, and in doing so should look to provide, if it is in the interests of justice, whatever assistance it can to the courts of the substantive dispute. If it is appropriate, this jurisdiction ought to seek to assist courts in other jurisdictions, and allow the primary jurisdiction to manage its case(s)". 142. The Appeal Division dismissed an appeal against the judgment of Deemster Kerruish in Poyiadjis 2003-05 MLR N40.
143. I note, albeit in the context of confiscation orders, the approach of the English Court of Appeal in Government ofthe United States v Montgomery (No 2) [2003] 1 WLR 1916 in respect of human rights arguments and legal proceedings in the United States of America. Lord Woolf CJ at paragraph 34 stated:
"English law is sufficiently flexible to make an appropriate allowance for the different approaches to achieving justice adopted in different jurisdictions … the courts here should adopt, when assessing the practice and procedure of foreign jurisdictions, a broad non- technical approach" .
144. Lord Woolf CJ dealing with the registration of an external confiscation order stated at paragraph 32:
"The only issue that remains is whether it would be contrary to the interests of justice to enforce the order since, as was accepted before Stanley Burnton J, where the court has a discretion as to do so, the normal course is for our courts to register an external confiscation order that satisfies the conditions of section 97 [of the Criminal Justice Act 1988]. This is for reasons of comity and because the order is by definition aimed at recovering money or other property obtained as a result of or in connection with crime. It is usually in the interests of justice that the courts in different jurisdictions should assist each other in the fight against crime" .
145. Such comments were referred to at paragraph 180 of the judgment of the Appeal Division in Poyjadjis delivered on the 17 th February 2005 without dissent. I entirely accept that these comments were made in a different context to the context which confronts the court in the case presently before me but I would add that it is usually in the interests of justice that courts in different jurisdictions should assist each other in personal bankruptcy and corporate insolvency matters. I endeavoured to make a similar point in Impex .
146. In Arquebus Limited (in liquidation ) 2003-05 N44 (CPL 2001/13 judgment 11 th May 2005) I appealed on the basis of what I described as "international judicial comity" to the judicial authorities in the United States of America and elsewhere to assist the joint liquidators appointed by the court in the enforcement of an execution against an individual resident out of the jurisdiction. Using the title of a book by Michael Kirby, the influential Australian judge, I added at paragraph 61 of the judgment the following: "the courts in the Isle of Man have on numerous occasions assisted in the enforcement of judgments and orders from other jurisdictions, including the United States of America, against legal entities within the Isle of Man. We have seen such matters 'through the world's eye' . I express the wish that those jurisdictions in which the joint liquidators seek to enforce this judgment and execution against Mr Rafter see such matters 'through the world's eye' and do not permit Mr Rafter to evade justice" .
147. I accept that the established jurisprudence appears to indicate that the vague concept of comity cannot of itself found a jurisdiction that does not otherwise exist. The law needs to be based on clear principles. If justice is to be achieved however some flexibility and the ability to adapt the law to changing conditions is necessary. Deemster Kerruish in Navigator Gas (at paragraph 138) agreed with a submission from Mr Long that: "the courts are prepared to develop the common law to meet the needs of the local, and international community where such development is appropriate to meet the interests of justice, or to preserve the integrity of the rule of law" . I accept that this court cannot however assist courts or insolvency officers of other jurisdictions simply because this court thinks that it is a good idea or that it is generally in the interests of justice to do so. There must be a firm and principled jurisdictional base before this court can assist courts and insolvency officers of other jurisdictions. In this case the common law of the Island provides that firm and principled jurisdictional base. It is beyond doubt, and indeed counsel in this case accepted the position as common ground, that this court has the jurisdiction to recognise the Appointment of the Trustee and to assist the Trustee. Mr Arrowsmith for the Brunnings , argued against the court exercising such jurisdiction and granting the Trustee recognition and assistance in the circumstances of this case. Mr Murphy for the Trustee argued in favour of the court exercising such jurisdiction and granting the Trustee recognition and assistance. Ms Hyde for Abbey, although recognising the existence of the jurisdiction, left it to the court. It was also accepted by counsel that this court had a discretion to decline recognition and assistance. Let me now turn to the law which outlines such discretion.
Discretion to decline recognition and assistance
148. Smart in Chapter 7 deals with bars to recognition and refers to the discretion to refuse recognition. This discretion was touched upon by the Appeal Division in Regatta. The Appeal Division accepted that the court had a discretion to refuse to recognise a foreign trustee in bankruptcy.
149. Smart says (at page 186) that the "English court may refuse to give effect to foreign insolvency proceedings if to do so would be contrary to English public policy; if the foreign proceedings constitute a fraud or are in breach of natural justice; or, additionally, where there is an attempt to enforce a foreign penal or revenue law in England."
150. Smart at page 186 says that there is a discretion to refuse recognition. However such discretion is not exercised capriciously upon the particular whim of an individual judge. The discretion to deny recognition to a foreign insolvency is a judicial discretion and must be founded upon specific grounds. Smart refers to the court having a discretion to refuse to give effect to foreign insolvency proceedings if to do so would be contrary to public policy; if the foreign proceedings constitute a fraud or are in breach of natural justice; or additionally there is an attempt to enforce a foreign penal or revenue law. The application of public policy cannot be exactly defined but Smart suggests that it is plain that the doctrine may only be successfully invoked in the clearest cases. Deemster Kerruish at first instance in Navigator Gas agreed that whilst public policy must always be borne in mind in commercial matters generally it will only be in the most extreme circumstances that the doctrine will apply. Smart can find not one reported case of an English court denying recognition to foreign insolvency proceedings on account of public policy. I refer to an Irish case below where the Irish Supreme Court refused to recognise an order of an Italian court in respect of a corporate insolvency matter. Such refusal was based on public policy grounds. Smart says that the foreign insolvency and its consequences must be manifestly offensive to some basic fundamental principle of morality or justice to justify non- recognition. Smart says that the English court may deny recognition to a foreign decree of insolvency obtained as a result of fraud. He adds that if proceedings in the foreign court are not yet concluded it may be more convenient to raise the issue of fraud before the foreign court with a view to obtaining the rescission of the foreign proceedings. The party opposing recognition must clearly establish the alleged fraud. Allegations are not enough. 151. In Eurofood IFSC Ltd [2004] IESC 45 the Irish Supreme Court considered whether the Irish courts should recognise an order of an Italian court in respect of corporate insolvency proceedings involving a company incorporated and registered in Ireland. Mr Farrell had been appointed provisional liquidator in respect of the company by the Irish High Court. There were arguments that the order of the Italian court had been obtained in breach of the right to a fair trial. The Irish Supreme Court had to decide whether recognition of the decision of the Italian court would be contrary to Irish public policy. Fennelly J was satisfied that it would be manifestly contrary to public policy, as a matter of Irish law, to give recognition to the decision of the Italian Court on the ground that Mr Farrell the Irish provisional liquidator was not given the protection of fundamental aspects of fair procedures by being refused a copy of the petition and other papers which were to be placed before the Italian court for the purpose of the opening of insolvency proceedings in Italy. Recognition was not therefore given in that case on the basis that recognition of the foreign order would be contrary to Irish public policy.
152. Under general principles of private international law a foreign judgment may be impeached if the proceedings in which the judgment was obtained were in breach of the rules of natural justice (Dicey & Morris rule 45). As a general proposition the debtor should receive notice and have some opportunity to take part in the foreign proceedings. Smart says that natural justice must always be assessed in the light of the particular facts of the case and having regard to the conduct of the debtor.
153. The Appeal Division in Navigator at paragraph 54 of the judgment stated:
"There can be no doubt that where there has been a failure to observe the principles of natural justice, that may be a good reason for not granting the assistance requested by a foreign court" .
154. Lord Lindley in Pemberton v Hughes [1899] 1 Ch 781, 790 (CA) (a case on the recognition of a foreign divorce decree) observed:
"If a judgment is pronounced by a foreign court over persons within its jurisdiction and in a manner with which it is competent to deal English courts never investigate the propriety of the proceedings in the foreign court, unless they offend against English views of substantial justice" ,
155. Dicey & Morris at page 528 states that a mere procedural irregularity would not offend English concepts of substantial justice ( Adams v Cape Industries plc [1990] Ch 433).
156. Smart deals with the enforcement of foreign penal and revenue laws and states (at page 195) that recognition will not be denied merely because there is a penal element involved in or relating to the foreign solvency. Smart (at page 196) states that it is clear that the rule against foreign penal laws only applies where the sole purpose of any action brought in England is to enforce that foreign penal law in England. Mr Arrowsmith accepted that we were not dealing with the enforcement of foreign penal or revenue laws. We are dealing with the enforcement of US Bankruptcy Proceedings.
157. In Canadian Arab Financial Corporation v Player 1984 CILR 63 the Court of Appeal of the Cayman Islands held that the Grand Court of the Cayman Islands had jurisdiction (derived from that exercised by the High Court in England) to recognise in the Cayman Islands the appellant who had been appointed by the Supreme Court of Ontario, receiver and manager of a company incorporated in Ontario and which had made substantial deposits in banks in the Cayman Islands. Such jurisdiction to recognise the foreign court's order arose if the court was satisfied that there was a sufficient connection between the company and the jurisdiction in which the receiver was appointed. Such a connection existed as (a) the company was a defendant in Canadian proceedings and had submitted to the jurisdiction of the Supreme Court of Canada (b) the company was incorporate in Canada (c) the company carried on business in Ontario and the management of the company was located in Canada. Another issue to determine the necessary connection was whether the courts of the jurisdiction where the defendant was incorporated would themselves recognise a foreign appointed receiver and the Ontario courts would do so. The Court of Appeal of the Cayman Islands held that the court had power to refuse to confirm or recognise the appointment of a foreign appointed receiver but should exercise it only when there were strong and compelling reasons for doing so. The Court of Appeal of the Cayman Islands held that there were no such reasons in the case before it.
158. Zacca P at page 81 of the report asked whether the court in the Cayman Islands had jurisdiction to recognise a foreign receiver. The learned judge referred to Schemmer v Property Resources Ltd [1975] Ch 273 a case involving considerations as to whether a receiver appointed in the United States would be recognised in England. Carey J.A. at page 104 stated:
"…the Grand Court has an undoubted power to make orders recognising a foreign appointed receiver and manager" .
159. Carey J.A. at page 122 added:
"I am not to be taken as suggesting for one moment that the court has not the power to refuse to confirm or recognise the appointment of a foreign receiver, but there must exist strong and compelling constraints against such recognition. None in my view has been shown" .
160. I wish to pay tribute to Alan Milner and his colleagues at Law Reports International for the excellent work they do to ensure the reporting and availability of judgments worldwide. They have significantly enhanced the availability of important judgments throughout the common law world. I note that they were responsible for the Cayman Islands Law Reports and the comprehensive and helpful report of the Player case.
161. I also wish to place on public record my thanks to Deemster Cain for his foresight, wisdom and drive in respect of the creation of the Manx Law Reports. It was in 1983 that William Cain, who was then the Island's Attorney General, arranged the first meeting of the Law Officers of Small Commonwealth Jurisdictions. At that meeting Attorney General Cain, as he then was, met with Alan Milner who had delivered a paper on "Law Reporting for a Small Market" and in subsequent discussions agreed with Alan Milner that Law Reports International should publish law reports for the Isle of Man both prospectively and retrospectively (see the foreword to 1522-1920 MLR ). Deemster Cain's and indeed Alan Milner's contributions to the jurisprudence of the Island and of the Commonwealth should not be underestimated. We owe them both our thanks and appreciation.
Present legal status of the Appointment of the Trustee 162. Until the Appointment of the Trustee is set aside or otherwise discharged it is a valid and subsisting appointment. The same applies to the U.S. Transfer Order and the Turnover Order. The Appointment of the Trustee and all other orders in the US Bankruptcy Proceedings are extant. They are valid, legal and enforceable as at today's date.
163. In El Faragy (2DS 2005/22 judgment 18 th February 2006) the Appeal Division recognised an order of the English High Court even though serious issues had been raised in respect of the jurisdiction of the English High Court to make such an order. The English order had not been set aside on appeal. An appeal on the merits had not been heard as leave to appeal had been refused. The Appeal Division regarded the English order as extant despite a substantial challenge launched against it in the Manx courts. The place for challenging an English order is through the front door in England and not through the back door in the Isle of Man. The same can be said in respect of orders from the courts of the United States of America. Such orders are presumed valid until they are set aside.
164. Phipson on Evidence (15 th Ed) at paragraphs 4-28, 25-17 and 29-15 refers to the presumption of regularity. At paragraph 4-28 Phipson states:
"On proof that a public or official act has been performed it is presumed that the act has been regularly and properly performed. So too persons acting in public capacities are presumed to have been regularly and properly appointed" .
165. At paragraph 29-15 Phipson states that acting in a public office is evidence of due appointment.
166. Halsbury's Laws of England Volume 17(1) 4 th Ed reissue at paragraph 583 refers to the presumptions of legality and regularity and states:
"In accordance with the common law maxim that everything has been done according to due form, formal requisites to judicial, official or public acts, or to titles to property which are good in substance, will be presumed. The maxim has a wide application in different areas of the law …..
The fact that a person acted in an official capacity raises a rebuttable presumption of due appointment to that office, even though the appointment is required to be by deed and is directly in issue in the proceedings, and even though it can only be shown that the person so acted on a single occasion, and the case is a criminal one" .
167. Just as the Brunnings are presumed innocent until proved guilty so the Appointment of the Trustee and the orders made in the US Bankruptcy Proceedings are presumed valid until successfully challenged.
Remedies within jurisdiction of foreign court
168. In Adams v Cape Industries plc [1990] 1 Ch 433 a default judgment was given by the United States Federal District Court at Tyler, Texas against certain English companies. There were attempts to enforce the judgment in England. At first instance it was held that the default judgment offended against English principles of natural justice, in that there had been no judicial assessment of the defendants' liability and the award of damages had been arbitrary not based on evidence and not related to the individual entitlements of the various plaintiffs. On appeal by the plaintiffs the English Court of Appeal dismissed the appeal and held that as a matter of principle the onus fell on the plaintiff, who sought to enforce a judgment of a foreign court, to demonstrate the competence of that court and that if the onus had fell on the defendants they had discharged its because they had shown that they were not present in the United States. It was also held that the method by which the Tyler court came to a decision as to the amount of the default judgment was contrary to the requirements of substantial justice contained in English law and that the failure of the defendants to apply in Texas to set aside the default judgment did not preclude them from relying on that breach of natural justice by way of defence to the action to enforce that judgment since the plaintiffs had failed to give prior notice to the defendants of the unusual course they were proposing to take, did not seek to dissuade the judge from adopting a certain method of assessment of damages and drew up and served a form of judgment which did not show the procedure adopted, and the effect on the defendants was that they remained unaware of any basis for seeking relief from the Tyler court in respect of the defect in the judgment.
169. In Adams counsel for the defendants in effect submitted that no authority established a requirement that a defendant must use an available remedy in the foreign courts. Slade L.J. giving the judgment of the court dealt with this submission on pages 568-571 as follows:
"It is at least clear that our law does not oblige a defendant who can show that a foreign judgment has been obtained by fraud to have used any available remedy in the foreign court with reference to that fraud if he is successfully to impeach that judgment in our courts: see Abouloff v Oppenheimer & Co. (1882) 10 Q.B.D. 295 and Jet Holdings Inc. v.Patel [1990] 1 Q.B. 335. The position may well be the same in cases where there has been a breach of natural justice of the two primary kinds considered by Atkin L.J. in Jacobson v Frachon , 138 L.T. 386, 392, namely, absence of notice of the proceedings or failure to afford the defendant an opportunity of substantially presenting his case.
In this judgment, however, we are dealing with a case where, although there was in our view a departure from the basic principles of natural justice in the assessment of the amount of a default judgment, nevertheless (a) the error which led to this departure was an honest error on the part of all concerned; (b) the defendants had proper notice of the proceedings and could have presented their case on its merits if they had chosen to do so, but chose not to do so; (c) the procedural rules applicable in the Tyler court were themselves fair and just; (d) the defendants had the right to apply to set aside the judgment on the grounds that the procedure for the assessment of damages was irregular under the relevant rules and such application would presumably have been allowed if made in due time.
Against this background, we are not persuaded that possession of and failure to exercise this right by the defendants can be disregarded as being wholly irrelevant in determining whether the proceedings in the Tyler court, which we think must be viewed as a whole, offend against English views of substantial justice, within the principles stated by Lindley M.R. in Pemberton v. Hughes [1899] 1 Ch . 781, 790, as the plaintiffs would submit.
It is well established that a defendant, shown to have been subject to the jurisdiction of a foreign court, cannot seek to persuade our court to examine the correctness of the judgment whether on the facts, or as to the application by the foreign court of its own law or, when relevant, of the law of this country. A foreign judgment is not impeachable merely because it is "manifestly wrong" . Goddard v. Gray , L.R. 6 Q.B. 139; Castrique v Imrie (1870) L.R. 4 H.L. 414 and Robinson v Fenner [1913] 3 K.B. 835, 842. In any such case it could be said that there has been a breach of natural justice, but it is not a type of breach which our courts will consider relevant. In effect, their attitude is that the only way in which the defendant can seek to correct an error of substance made by the foreign court is by using such means for correction of error as may be provided under the foreign system.
This being the position where there has been an error of substance, it would, in our judgment, be anomalous if our courts were obliged wholly to disregard the existence of a perfectly good remedy under a foreign system of procedure in considering whether the defective operation of that procedure has led to a breach of natural justice. And, indeed, from some of the cases on procedural defects, support can be derived from the proposition that, at least with reference to defects known to the defendant before judgment, the defendant can be required to have made use of any remedy available in the foreign court: see, for example, Reynolds v. Fenton (1846) 16 L.J.C.P. 15 and Crawley v. Isaacs (1867) 16 L.T. 529. see particularly at p. 531, where Bramwell B. said (obiter)
"If the proceedings be in accordance with the practice of the foreign court, but that practice is not in accordance with natural justice, this court will not allow itself to be concluded by them, but on the other hand, if the procedure be in accordance with natural justice, the foreign court itself will interfere to prevent the plaintiff taking advantage of the judgment irregularly and improperly obtained" .
Mr Falconer relied strongly not only on that passage but on dicta of Fry J. in Rousillon v. Rousillon , 14 Ch .D. 351, 370, and of Bray J. in Jeannot v. Fuerst (1909) L.T. 816, 818.
Since the ultimate question is whether there has been proof of substantial injustice caused by the proceedings, it would, in our opinion, be unrealistic in fact and incorrect in principle to ignore entirely the possibility of the correction of error within the procedure of a foreign court which itself provides fair procedural rules and a fair opportunity for remedy. The court must, in our judgment, have regard to the availability of a remedy in deciding whether in the circumstances of any particular case substantial injustice has been proved. However, the relevance of the existence of the remedy and the weight to be attached to it must depend upon factors which include the nature of the procedural defect itself, the point in the proceedings at which it occurred and the knowledge and means of knowledge of the defendants of the defect and the reasonableness in the circumstances of requiring or expecting that they made use of the remedy in all the particular circumstances" .
170. On the specific facts of the Adams case Slade L J concluded on this issue at page 571 as follows:-
"Giving full force to all these facts, we find it impossible to say that, because the defendants did not apply to set the default judgment aside, they could not rely upon the substantial injustice in the proceedings constituted by the failure of the court to assess the damages judicially upon the evidence" .
Determination of the Issues
Recognition and Assistance
171. This court can recognise and provide assistance to a foreign trustee appointed in the United States of America if the interests of justice require such recognition and assistance and the requirements of well established principles of private international law as applied by Manx common law are satisfied. This court also has a discretion to refuse recognition and assistance.
172. There are many grounds for the recognition of a foreign bankruptcy order including the domicile of the debtor at the relevant time, the submission of the debtor to the jurisdiction and the carrying on of business within the jurisdiction at the relevant time. The residence of the debtor at the relevant time may also be a factor to consider. The debtor's domicile at the time the foreign proceedings are commenced being the relevant time and the carrying on of business or residence prior to the commencement of the foreign proceedings being the relevant time. I do not say that these are the only possible grounds for recognition and assistance. There must however be some substantial connection between the debtor and the jurisdiction in which the bankruptcy proceedings take place.
173. I am not impressed with Mr Arrowsmith's suggestion that even if this court was minded to recognise the Appointment of the Trustee (which he argued strenuously against) this court should nevertheless decline to provide assistance until the outstanding issues are determined in the US Criminal Proceedings.
174. This court should in the circumstances of the case presently before it recognise the Appointment of the Trustee and should assist in the enforcement of the US Transfer Order and the Turnover Order and the vesting of the monies in the accounts in the Isle of Man in the Trustee. There are no strong and compelling grounds which would justify deferring such recognition and assistance.
175. In a straightforward case and in the normal course of events no vesting order should be required as the appointment of a foreign trustee in bankruptcy by a country with jurisdiction over the debtor within well established principles of private international law will automatically vest the foreign assets in the trustee without further order. If an order of the court is unreasonably required those acting unreasonably may be on the receiving end of an adverse costs order.
176. In this case the court should grant an order recognising the Appointment of the Trustee as trustee in bankruptcy of the Brunnings and direct that Abbey do recognise the Appointment of the Trustee. The court should also grant an order declaring that the monies in the Accounts do vest in the Trustee. If the Trustee requires access to such funds she will have to apply to the court for a variation or discharge of the Restraint Order with notice to all relevant parties including the Brunnings , the Attorney General and Abbey. It should not be assumed that such application will be granted. Any such application will be dealt with on its merits after full argument.
No bars to recognition and assistance
177. In my judgment there are no bars to the recognition of the Appointment of the Trustee and the enforcement of the orders of the US Bankruptcy Court including the US Transfer Order and the Turnover Order. Such recognition and assistance is not against Manx public policy, natural justice or basic principles of fairness or human rights. Nor does it involve an established fraud or the enforcement of foreign penal or revenue laws.
178. I do not say that the grounds of refusing recognition and assistance are limited to areas of public policy, natural justice, fraud, or the enforcement of foreign penal or revenue laws. I accept that the court has a wide discretion to refuse recognition and assistance. Other matters to consider would be whether there have been breaches of human rights and whether there is a live challenge to the validity to the bankruptcy proceedings but even in a case where there is a live challenge this court must recognise that appointments of foreign trustees in bankruptcy are valid and depending on the circumstances of the case worthy of recognition and enforcement unless and until they are set aside in the home jurisdiction. It may well be that if a civil challenge had been lodged promptly in this case and such issue was to be adjudicated upon in the very near future that this court would have been persuaded to adjourn the determination of the Trustee's petition for recognition and assistance until the civil challenge was determined. If however bankrupts delay such challenges they cannot reasonably expect that this court's discretion will be exercised in their favour when private international law requires that recognition and assistance be given unless there are strong and compelling reasons to decline recognition and assistance. There are no such strong and compelling reasons to decline recognition and assistance in this case.
179. There is insufficient evidence before me to conclude that the human rights of the Brunnings have been breached or have been breached to such an extent that this court should refuse to recognise the Appointment of the Trustee and the enforcement of orders of the US Bankruptcy Court. The Appointment of the Trustee and the orders made by the US Bankruptcy Courts are not contrary to the requirements of substantial justice in Manx law.
180. I am unimpressed with the claims by the Brunnings that their human rights have been breached. If action has been taken without proper notice to them then no doubt they can raise those issues with the courts of the United States. If there have been other breaches of natural justice or a right to a fair hearing then no doubt such issues can be raised before the courts of the United States for determination. If the Brunnings wish to attack the US Bankruptcy Proceedings they should do it through the front door of the civil courts of the United States rather than endeavour to do it through the back door of the Isle of Man courts. It would be open to the Brunnings to challenge the orders of the US Bankruptcy Court through the civil courts of the United States. It is unsatisfactory to have to wait until the determination of the US Criminal Proceedings to await that determination. In any event the Appointment of the Trustee is valid until determined otherwise.
181. I am unimpressed with the allegation that there has been a breach of Article 1 of the First Protocol 1 to the European Convention for the Protection of Human Rights and Fundamental Freedoms. Mr Arrowsmith made a similar submission in the context of a corporate insolvency in Columbo Investments Limited (2DS 2005/11 judgment delivered 7th October 2005) and the Appeal Division had little hesitation in rejecting such submission. I appreciate that each case must be dealt with on its own facts and in accordance with the relevant law. It appears, in the circumstances of the case presently before this court, lawful under the relevant foreign law for a trustee in bankruptcy to be appointed. The relevant law provides a mechanism for the appointment of a trustee in bankruptcy and such mechanism was used in this case. Absent a successful challenge to the Appointment of the Trustee the assets of the bankrupts will go to their creditors and the Trustee's expenses with any surplus to the bankrupts, presumably. Such limited deprivation of assets is in the public interest and subject to conditions provided for by law. Mr Arrowsmith was unable to produce any authority which indicated that bankruptcy proceedings were in breach of Article 1 of Protocol 1. Frankly on this point I found Mr Arrowsmith's submissions wholly unconvincing. Indeed Mr Arrowsmith himself realistically recognised that these human rights points were perhaps not amongst his strongest points.
182. When considering complaints of breaches of human rights the courts should always remember that with human rights come human responsibilities. In this case the Brunnings , in the absence of a successful challenge to the Appointment of the Trustee and the orders made in the US Bankruptcy Proceedings, have responsibilities to comply with the relevant bankruptcy laws and to ensure that their creditors are paid.
183. Benjamin Cardoza (an Associate Justice of the United States Supreme Court from 14 th March 1932 to 9 th July 1938) recognised the need to balance the rights of individuals and responsibilities to society as a whole long before the signing of the European Convention for the Protection of Human Rights and Fundamental Freedom at 4 p.m. on the 4 th November 1950 in the Palazzo Barberini in Rome by a minister representing the United Kingdom government ( Human Rights and the End of Empire A.W. Brian Simpson at page 1). In Polenberg's The World of Benjamin Cardozo -Personal Values and the Judicial Process , the author (at page 207) refers to People v John Defore , 242 N.Y. 13 and Justice Cardozo's comment that:
"The question is whether protection for the individual would not be gained at a disproportionate loss of protection for society" .
Justice Cardoza was ahead of his time on this point. The principle of proportionality is now firmly rooted in European jurisprudence and indeed Manx common law. Considerations of the human rights of individuals invariably involve considerations of human responsibilities and the wider interests of society as a whole. It is a balancing exercise.
184. It may well be that the United States of America's international reputation for compliance with human rights has been adversely affected by what the Brunnings refer to as "Guantanamo" . Such criticism, if valid, would however be against the government rather than the judiciary and the legal system of the United States. I am far from persuaded (and indeed Mr Arrowsmith in fairness did not endeavour to persuade me on the point) that the United States of America could properly be regarded as an unfriendly or unsophisticated jurisdiction whose judiciary and legal systems disrespect the rule of law and human rights so that recognition and enforcement of orders of their bankruptcy courts should be declined on that basis alone.
185. The Brunnings complain of a contempt of court committed by the Trustee in respect of the US Legal Expenses Order. No contempt petition has been filed and no detailed evidence on the point has been filed. I am not presently in a position to determine this allegation. I do not belittle the importance of court orders being compiled with but I question whether, even if a deliberate and wilful contempt had been proved, it would have been a proportionate and just response for this court to refuse to recognise the Trustee and provide assistance. I do not say that Mr Sampson and the Trustee should not be criticised in relation to the pressure they brought to bear upon Mr Carrow . I regard the terms of Mr Sampson's letter of 14 th August 2003 as most unfortunate but I make no finding of contempt against the Trustee on the basis of that letter alone. There is no evidence before this court that a copy of the US Legal Expenses Order was ever personally served upon the Trustee or that she was aware of its specific terms. It appears that Mr Carrow did not provide the Trustee with a copy. It appears that Mr Carrow backed down without a fight. There may be some force in Mr Murphy's point that perhaps Mr Carrow returned the monies too readily without forwarding a copy of the US Legal Expenses Order and without applying to the US Bankruptcy Court for relief. Prima facie the Trustee's conduct in respect of the US Legal Expenses Order was however somewhat cavalier and over-zealous. Mr Murphy described this issue as an "open wound" of the Trustee. That may be the case but it is not a fatal wound which would justify this court refusing recognition and assistance. I did however take into account the allegations made in respect of this issue when considering how to exercise my discretion in this case.
186. The Trustee has not, on the evidence presently before the court, committed wrongful acts such as would prevent her recognition in this jurisdiction and the enforcement of the orders of the US Bankruptcy Court.
United Statesis the proper forum for challenges
187. If the Brunnings wish to challenge the Appointment of the Trustee and the orders made by the US Bankruptcy Court then such challenge should take place before the courts in the United States and should have taken place well before now. The correct forum for challenges to these matters is plainly the courts of the United States of America.
188. Mr Gorrill makes no reference to being instructed by the Brunnings to lodge an application in the United States to set aside the Appointment of the Trustee or the US Bankruptcy Proceedings. The courts in the United States are courts of competent jurisdiction to deal with bankruptcy orders made in the US Bankruptcy Proceedings. It seems somewhat strange that the Brunnings have not launched such proceedings if they genuinely believe that they have solid grounds for challenging the Appointment of the Trustee and the consequent US Bankruptcy Proceedings. I am not persuaded by Mr Arrowsmith's submissions that his clients have not sought to challenge the bankruptcy in the civil courts in the United States of America as they do not wish to prejudice their position in the US Criminal Proceedings or because effective remedies are not open to them in the United States of America.
189. The US Bankruptcy Court (the home and primary jurisdiction of the bankruptcy) has made its position crystal clear. It refused to stay the US Bankruptcy Proceedings pending the determination of the US Criminal Proceedings.I should respect that decision. The US Transfer Order and the Turnover Order indicate an unambiguous wish that the monies in the Isle of Man do vest in the Trustee in accordance with well established rules of private international law. I accept that it is not for this court to rubber stamp orders made by the courts of the United States of America especially if there are live challenges to such orders. There are however no grounds for refusing to recognise the Trustee and there are no grounds for refusing to enforce the orders of the US Bankruptcy Court in the circumstances of the case presently before the court.
190. The Brunnings' remedies lie on the main ground of the courts of the United States of America and not on the sidelines in the courts of the Isle of Man. Here in the Isle of Man we are acting as an ancillary court in aid of the substantive US Bankruptcy Proceedings. The only reason this court is involved is because there are some monies within the Accounts in the Isle of Man. That is the only real connection this case has with the Isle of Man. The main proceedings are in the United States of America. The courts of that jurisdiction are the primary courts in respect of the US Bankruptcy Proceedings and the US Criminal Proceedings. It is not for this court to second guess the decisions of the courts of the United States of America in the circumstances of this case. An Isle of Man court dealing with an Isle of Man bankruptcy would not expect courts of the United States to second guess its decisions. I use the term second guess in the second sense referred to by Brewer's Dictionary ofPhrase & Fable Millennium Edition at page 1057 namely "to attempt to anticipate or predict what someone will do or what may happen" . The Brunnings should concentrate their efforts in the United States of America rather than in the Isle of Man. The United States is the primary jurisdiction in the circumstances of this case. I do not second guess the decisions of the US Bankruptcy Court. I do not expect them to second guess the decisions of this court.
191. It is to the jurisdiction of the courts in the United States of America that the Brunnings should turn for any further appropriate relief in the context of the US Bankruptcy Proceedings. I doubt whether the spider or the bald eagle will eat them if they step into the parlour. If they have legitimate complaints and genuine grounds to attack the Appointment of the Trustee and the US Bankruptcy Proceedings then they should not fear the parlour of the courts of the United States of America. I can understand why a fly should fear entering the parlour of a spider. Mary Howitt was right. The fly may never come out again. Those who are not guilty of any wrongdoing should not however fear entering a court room in the Southern District of California, United States of America or in Douglas, Isle of Man. If the entrant has done nothing wrong the entrant will be allowed to leave. I am not persuaded that the Brunnings will not obtain justice in the United States of America.
Assumption of validity
192. In my judgment this court is entitled to assume the validity of the Appointment of the Trustee and the validity of orders made by the US Bankruptcy Court until such appointment and such orders are successfully challenged in the courts of the United States of America – the home and primary jurisdiction of the bankruptcy.
193. In general terms a Manx court should be entitled to assume that a bankruptcy order made in the United States of America is valid until it is successfully challenged in that jurisdiction. I can also envisage circumstances where a bankruptcy order is not successfully challenged in the home jurisdiction of the order but it is so clearly repugnant to basic principles of fairness or public policy that a Manx court would be justified in refusing to recognise and enforce it. Those cases would be exceptional. In the normal course of events the order would be regarded as valid until successfully discharged.
Stay Application/Prejudice
194. Mr Brunning's stance on his stay application before the US Bankruptcy Court and the self incrimination point has echoes of Saunders v United Kingdom (1996) 23 EHRR 313, Funke v France (1993) 16 EHRR 297, R v Herfordshire County Council Exp . Green Environmental Industries [2000] 1 All ER 733 and Brown v Stott [2001] 2 WLR 817.
195. I find it difficult to accept that a challenge to the Appointment of the Trustee in civil proceedings in courts in the United States of America would unduly prejudice the Brunnings in the US Criminal Proceedings. There is no compelling evidence of any such prejudice. 196. I note the alleged potential prejudice to the Brunnings if I recognise the Appointment of the Trustee and grant assistance. Again I am not persuaded that the Brunnings would suffer any undue prejudice if this court recognised the Appointment of the Trustee and provided assistance to the Trustee in respect of the vesting of the monies in the Accounts. I note the prejudice to the Trustee and the creditors if I do not recognise the Trustee and provide assistance. I have considered the position in respect of the outstanding creditors of the Brunnings .
197. Balancing all relevant matters I come down in favour of recognising the Trustee and providing assistance.
Transparency
198. Stephen Breyer (an Associate Justice of the Supreme Court of the United States who took his judicial oath on the 3 rd August 1994) writing extra-judicially in Active Liberty [2005] refers at page 127 to judicial transparency assisting "informed public criticism of opinions; and that criticism, in a democracy, plays an important role in checking abuse of judicial power" .
199. I confess, in the interests of transparency of the judicial thought process, that Mr Arrowsmith at one part in the proceedings came close to persuading me that it may have been appropriate to defer recognition and assistance until after the determination of the US Criminal Proceedings. The comment of Ms Fickel to the effect that if the Brunnings applied to the US Bankruptcy Court for an order freezing distribution of assets pending the determination of the US Criminal Proceedings the US Bankruptcy Court should be inclined to approve such an application added further force to Mr Arrowsmith's submissions on this point.
200. Mr Arrowsmith's strong submissions in respect of the outstanding issues going to the validity of the Appointment of the Trustee and the US Bankruptcy Proceedings and the need for these to be determined in the United States were initially superficially very attractive and prima facie persuasive. Mr Arrowsmith has that great advocate's ability of making the unattractive and unpalatable appear attractive and palatable when it suits his clients. I have had to be careful not to be unduly persuaded by the enticing eloquence of Mr Arrowsmith .
Conclusion
201. Upon full and careful consideration of the facts, the submissions, the relevant law and the issues in this case I have concluded that the court should, applying well established principles of private international law, recognise the Appointment of the Trustee and give the Trustee any necessary and appropriate assistance. There are no strong and compelling reasons to justify this court in refusing such recognition and assistance.
The Order
202. The substance of the formal order I propose to make therefore, subject to any further submissions from counsel as to the precise terms, is as follows:-
(1) this court recognises the Appointment of the Trustee within this jurisdiction; (2) this court directs Abbey to recognise the Appointment of the Trustee within this jurisdiction;
(3) this court declares that the monies held in the Accounts do vest in the Trustee;
(4) if the Trustee wishes the monies in the Accounts to be transferred to her she must make an application for the discharge or variation of the Restraint Order;
(5) if the Trustee receives the monies in the Accounts she must not distribute such funds for a period of 60 days from the date of receipt and thereafter she may only distribute such funds with the approval of the US Bankruptcy Court.
Thanks
203. I cannot leave this judgment without expressing my thanks to Mr Murphy, Mr Arrowsmith and Ms Hyde for the valuable assistance they have provided to the court in respect of this case. It is most appreciated.
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