Scottish Court of Session Decisions

Pursuers: Davies, Advocate; Harper MacLeod

Defenders: Reid QC; McClure Naismith, Solicitors

17 May 2007

Introduction

[1] The defenders have enrolled a motion for recall of warrants for arrestment and inhibition on the dependence of an action for decree conform. The action is in respect of an order of the United States District Court for the Central District of California finding the defenders liable to the pursuers in the sum of $3,771,5545.25. The defenders are a Scottish company and two individuals who are domiciled in Scotland. The warrants for arrestment and inhibition on the dependence of this action in respect of which recall is sought were granted in favour of the pursuers on 20 March 2007. The inhibition was registered on 18 April 2007. The pursuers are a US corporation.

[2] The first defenders are a holding company. They were incorporated on 4 May 2000. Their business includes the manufacture of cleaning machines for various processes including the electronic components involved. The process of forming the group of companies of which the first defenders are the holding company began in 1999. Since the first defenders were formed, a number of companies have become their wholly owned subsidiaries. Two such companies are Teknek Electronics Limited and Teknek LLC. As is averred by the pursuers and was not, in the course of submissions before me, denied, after becoming wholly owned subsidiaries of the first defenders both companies made substantial transfers of assets to it. Teknek Electronics Ltd has since gone into liquidation (in 2005) and Teknek LLC has filed bankruptcy proceedings in the US. The original liquidator of Teknek Electronics was replaced by a different liquidator, at the behest of the pursuers, in 2006.

[3] In 2000, the pursuers commenced a litigation in California in which they alleged patent infringement by Teknek Electronics Ltd and Teknek LLC. That action was dismissed by a judge in California in October 2000. That action was, in effect re‑raised, again alleging patent infringement by the same two companies, in California, in 2003. That case went to trial and resulted in a jury award against both companies in the sum of $3,000,000. The jury verdict was dated 14 July 2004, the ensuing court judgment was dated 17 August 2004 and certification of the judgment was dated 13 December 2004. Interest was subsequently fixed, in terms of an order dated 5 November 2004 and certified on 17 January 2005.

[4] In 2006, the pursuers applied by motion to the District Court in California to "add" the defenders in the present action to the judgments which had previously been certified. By Order dated 2 January 2007, the court granted the pursuers' motion. A certified copy of the order granting the pursuers' motion to add the defenders to the judgment was lodged in process (6/4). The order contains a 23 page judgment from which it is apparent that, put shortly, the court determined that it had jurisdiction over the defenders because they had intentionally and fraudulently transferred the assets of Teknek Electronics and Teknek LLC to the first defenders knowing that they would thereby be depriving the Californian pursuers of the benefit of the judgment they had secured in California. It decided that the defenders should be added to the judgment because, in its view, the second and third defenders had directed and controlled the litigation and the first defenders were a mere extension of Teknek Electronics Ltd.

[5] The Californian District Court's decision to add the defenders to the original judgment was taken after a short oral hearing that took place in November 2006. The motion had been intimated to the defenders and documents and written submissions had been lodged in advance of that hearing. They were represented at the hearing. Their attorney, at that hearing, denied the allegations of fraud that were made and requested that the defenders be afforded the opportunity to show that their denial was well founded, by way of oral evidence. That request was refused.

[6] The present summons was signetted on 20 March 2007. The above narrative of events is covered in the averments. It is averred that the liquidator of Teknek Electronics Ltd:

[7] There is, however, no averment that the liquidator has raised any action to seek reduction of that transfer of assets or otherwise challenge it.

[8] There are no averments that any of the defenders were resident in California, present there or carried on business there at the time the patent infringement litigation was raised or at the time of intimation of the motion to add them as defenders. Reliance appears to be placed solely on the order of the US District Court for the Central District of California of 2 January 2007 adding the defenders as defendants in the judgments following the jury award.

[9] As justification for the warrants for arrestment and inhibition, the pursuers refer to the addresses of various heritable subjects in Scotland owned by the first, second and third defenders. They then aver that they are apprehensive that the defenders will remove their assets from the jurisdiction of this court under reference to the transfers of assets from Teknek Electronics Ltd and Teknek LLC to the first defenders, as founded on for the purposes of the motion heard before the court in California in November 2006, those transfers having been, it is averred, in bad faith.

[10] The test that must be met before a pursuer will be found entitled to retain the benefit of warrants for arrestment and inhibition on the dependence of an action has been discussed in a number of recent cases. The leading decision is that of the Extra Division in the case of Advocate General for Scotland v Taylor 2004 SC 339 where, at paragraph 34, it said:

[11] Subsequently, in Gillespie v Toondale Limited 2005 CSIH 92, another Extra Division discussed the test that the pursuer requires to satisfy. It did so under reference to certain observations by Lord Drummond Young in the case of Barry D Trentham Ltd v Lawfield Investments Ltd 2002 SC401 and said, at paragraph 13:

".....it is in our opinion necessary for the court at the stage of a motion for recall to consider the pleadings as a whole, both the pursuer's averments and the defence stated and the submissions made by both counsel to determine whether, in all the circumstances, inhibition is appropriate on the basis of the existence of a prima facie case. We also agree that the prima facie test is a substantial hurdle for the pursuer to surmount. It is not sufficient for him to advance a colourable case. Grant of judicial security and the serious interference with the defenders' properly warrants the application of a higher test. Where, as in the present case, the defence amounts to a denial of the existence of an oral contract of the nature averred by the pursuers, the court ought only to grant diligence if the pursuer's averments are both cogent and convincing. Our law now recognises the potential for harm through unwarranted diligence and for abuse based on a pretended or imagined debt. The ease with which a superficially valid summons can be presented is self‑evident. The safeguard now imposed is the requirement of judicial assessment of the validity or otherwise of the pursuer's claim. It is for the pursuer to demonstrate good cause for the remedy he seeks".

[12] In the case of Trentham, Lord Drummond Young's observations had included:

[13] More recently again, in the case of F G Hawkes (Western) Ltd v Szipt Limited (Jiangsu Metals and Minerals Import and Export Group) 2007 CSOH 57 Lord Emslie made observations, with which I would respectfully agree, to the effect that in Gillespie the Extra Division was not departing from Taylor but was explaining it and emphasising the need for there to be a "good arguable case" before the test could be satisfied. At paragraph 25 Lord Emslie added:

"On no view of these observations can the court in my opinion be understood as laying down any supposed principle that the existence of some positive defence necessarily precludes the granting of diligence. Clearly the greater the apparent strength of a defence, and the more it appears to be vouched or supported by documentary or other evidence, the more difficult it may be to hold that the claimant nevertheless has an arguable prima facie case. But the assessment will always be one of fact and degree and in my view senior counsel for the petitioners was well founded in submitting that, in a given case, the contentions of the parties may be evenly matched, with prima facie arguability being established on either side. The pursuer's position must no doubt be scrutinised with extra care where a positive defence is advanced, but in the end the question for the court remains whether a good arguable case has been made out. I am inclined to think that in his remarks in the Trentham case about the effect of "...an apparently substantial defence", Lord Drummond Young may have had in mind the sort of defence which, on an assessment of all of the information available to the court, seemed likely to prevail".

[14] I hesitate to add further observations to this subject lest they be seen as being intended as variations where no variation from the principles that have already been expressed by the Inner House, is meant. To borrow from the words of Mummery LJ: "Repetition is superfluous, qualification is unnecessary and contradiction is confusing". (Madarassy v Nomura International Plc [2007] EWCA Civ 33, at paragraph 11). What I would, however, venture to comment is firstly, that it is self evident that the decision in any case is bound to be fact sensitive and secondly, that if a defender puts a matter or matters in issue in such a way as to lead the court to conclude that the pursuer's case cannot be categorised as being a good arguable case, then there can be no prima facie case for the purposes of diligence on the dependence and any warrants already granted will fall to be recalled. That could be because the defence is soundly vouched such as, for instance, by the production of a receipt from the pursuers for the sum sued for in an action for payment or in other types of action by the defender pointing to the pursuer having failed to satisfy a fundamental requirement of the type of action which he seeks to pursue. In the latter event, the defender, by raising the issue, will have "put the ball back in the pursuer's court" and it is for the pursuer, in the face of that, to satisfy the court that he has, nonetheless, a good arguable case.

(2) Decree Conform

[15] The decree of a foreign court may be enforced at common law by means of an action for decree conform, a form of action which can only be raised in the Court of Session. The purpose of such an action is to request this court to interpone its authority to allow the enforcement in Scotland of the obligation expressed in the foreign decree. The pursuer requires to prove the foreign decree and I note that it is not disputed that the documents produced by the pursuers (6/1-6/4) in this action achieve that objective. That having been done, the foreign judgment can be taken to have been established as ex facie proper. That does not, however, necessarily mean that the pursuer has a prima facie case for diligence purposes. There are various grounds on which objection may be taken to the enforcement of a foreign judgment by decree conform two of which are relevant for the present case. I note that the nature of these objections was intimated to the pursuers' counsel by senior counsel for the defenders some ten days prior to the hearing of the motion for recall of diligence.

[16] The first relevant objection is that objection may be taken on the basis that the foreign court lacked jurisdiction as determined by the rules of Scottish private international law. In a particular case, the application of those rules may be such as to show that notwithstanding that the foreign court appeared, by its own law, to have jurisdiction, the jurisdiction required before enforcement will be ordered is lacking. There would appear to be no difference between English and Scottish rules on this matter and I would, accordingly, refer to some of the observations of the Court of Appeal in the case of Adams v Cape Industries Plc [1990] Ch 433. At p.513H - 514, Slade LJ, delivering the judgment of the court, said:

[17] It is also of note that the Court of Appeal regarded the onus of proving competence in the international private law sense as being on the plaintiff: see p.550B.

[18] The relevant international private law rules were summarised by Lord Cullen, as he then was, in the case of Wendel v Moran 1993 SLT 44 at p.48, a case in which he too was referred to Adams:

[19] As regards residence and presence in the case of a corporation, it is evident from the comments in Adams at p.529D, that the Court of Appeal had in mind that the defendant company would require to have a fixed place of business in the jurisdiction or at least a representative in the jurisdiction carrying on business on its behalf from a place within the jurisdiction. That would accord with the principle discussed by Lord Cullen in the passage from Wendel to which I have referred.

[20] Accordingly, for an ex facie valid foreign decree against a Scottish company to provide a valid foundation for the granting of decree conform, the defender company would, at the time of the commencement of the relevant foreign litigation, have to have had a fixed place of business in the foreign jurisdiction or to have been carrying on business there directly or through a representative. In the case of individuals, they would require to have been resident there. These are matters which, once raised by way of defence to an action for decree conform require to be addressed by the pursuer and made the subject of relevant and sufficient averment. It is not, in my view, sufficient for him to continue to rely solely on the ex facie valid decree, contrary to what was suggested repeatedly by the pursuers' counsel in the course of his submissions.

[21] Alternatively, the requisite jurisdiction may be established in the case of a non-resident defender who is not carrying on business in the foreign jurisdiction if he has submitted to the jurisdiction of the foreign court. Whether or not a party has submitted to the jurisdiction of a particular court is a question of fact. An example of case in which it was found that such submission to jurisdiction had occurred is the case of Marc Rich & Co AG v Societa Italiana Impianti PA ( The ' Atlantic Emperor') (no. 2) [1992] Lloyds LRep 624. There, the defendants in the foreign action had, in answer to an action which was restricted to the seeking of a declarator of non-liability, responded by not only disputing jurisdiction but advancing a separate claim for compensation and interest. The Court of Appeal, having considered the pleadings in the foreign action, concluded that it was a plain and unequivocal submission to the jurisdiction of the foreign (Italian) court. It recognised, equally, however, that if a defendant makes it clear in his first defence:

[22] It seems clear that the decision turned on a consideration of all the relevant facts including a detailed examination of the pleadings in the Italian litigation.

[23] The second relevant objection is where there has been some irregularity in the foreign proceedings. Drawing once more on the discussion in the case of Adams, the foreign decree will not be enforced if it can be impeached on grounds of fraud, breach of natural justice in the sense of there having been procedural irregularity or breach of public policy and in considering whether there have been any such failings regard will be had to the question of whether fundamental principles of justice have been adhered to. It may be possible to conclude that they have not even if the local rules of procedure have been followed to the letter (see: Adams at p.559F).

[24] Mr Reid QC, appearing for the defenders, moved for recall of the warrants for arrestment and inhibition granted on the dependence of the action. They were an embarrassment and an inconvenience to the defenders. The pursuers had not demonstrated a prima facie case in respect that the decree founded on lacked jurisdiction in the international private law sense and was flawed in respect that it followed a procedure which would not have been regarded as according with Scottish views of substantial justice. It was being alleged that the defenders had been guilty of fraud so as to bring about their being liable for an award that was made in respect of patent infringements committed by other parties prior to the coming into existence of the first defender.

[25] The first defenders were a Scottish company and did not and had not carried on business in the US. In respect that it was said that they had property in Illinois, he advised that they were tenants of subjects in Grove Village Illinois but those subjects were sublet to another party ( not a subsidiary of the first defenders). They did not carry on business there, let alone carry on business in California. There was some discussion about what might be the position, in law, if it were the case that the first defenders carried on business in a state other than California (a matter referred to and discussed but not determined, in the case of Adams) but the point was that they did not carry on business in the US at all.

[26] In respect that the pursuers' counsel sought to argue, in the course of the hearing, that the defenders had submitted themselves to the jurisdiction of the court in California by appealing the decision to add them as defenders (as was confirmed) and by having appeared at the hearing in November 2006, those matters did not in any way amount to the requisite submission to jurisdiction. The reliance, for that purpose, by the pursuers on the case of Marc Rich was misconceived. The circumstances there were quite different. The defenders had made it clear that their primary position was that they did not accept that the court in California had jurisdiction over them.

[27] The arrangements whereby assets were transferred between companies in the group of which the first defender is the holding company, including the transfers by Teknek Electronics and Teknek LLC were part of a corporate strategy determined on after consultation with chartered accountants in Glasgow and implemented as part of their strategy for their worldwide business. The allegations were strongly resisted. The liquidator had raised no action of reduction nor other challenge to the transfers. In these circumstances, it was fundamentally unjust to deny the defenders the opportunity of leading evidence to rebut the allegations of fraud.

[28] Mr Reid also observed that there were no averments nor had it been suggested at any time that the first defenders were a mere façade concealing the true state of facts. That had not been the basis on which the Californian court had made its decision. This was not a case of the corporate veil having been pierced. It was not, I note, suggested in the course of submissions by Mr Davies that it was or should be so regarded.

[29] In summary, the pursuers had failed to make out the requisite prima facie case because they had not shown jurisdiction existed in the international private law sense and even if they had, the circumstances were such that the defenders had a sound challenge on grounds of fundamental injustice in the decree.

[30] For the pursuers, Mr Davies sought to resist the motion. The production by the pursuers of an ex facie valid decree had been sufficient to shift the onus to the defenders to establish grounds for refusal of the application for recognition of the decree. It was not therefore necessary for the pursuer to address the questions of jurisdiction or fundamental injustice. He relied, in support of that submission, on the case of Whitehead v Thompson 1861 23D 772.

[31] In any event, there was, he said, jurisdiction in the international private law sense in respect that the first defenders were present in the US. They had property in Illinois (there are no averments of this and the defenders' explanation that they are tenants of property there which is , in turn sublet to other parties, was not disputed). Separately, the defenders had submitted to the jurisdiction of the court in California by appealing the decision to extend the judgment to them and by seeking to resist the merits of the application for the court to do so which resulted in the judgment of 5 November 2006. He relied, in support of that submission on the case of Marc Rich. He made no submission regarding the residence of the second or third defenders.

[32] As regards the matter of fundamental justice, whilst accepting that in principle, a challenge on that ground could be a good answer to an action for decree conform, he submitted that no relevant challenge was suggested here because the defenders were heard at the hearing in November 2006 and it was not a requirement of natural justice that there always be a proof with oral evidence. The defenders were confusing substantive liability with procedural requirements. It was not unusual to make directors liable for the debts of a company and the liquidator was satisfied that the transfers to the first defender had been fraudulent.

[33] In summary, he submitted that the pursuers had demonstrated a cogent need for the diligence on the dependence. It was not disputed that assets had been transferred to the first defenders and there was real concern that the defenders may use those assets outwith the jurisdiction before the decree could be enforced.

[34] I have to decide whether, having taken account of all the material before me, I am satisfied that the pursuers have a prima facie case in the sense discussed above, namely whether they have a good arguable case. I have reached the view that I cannot be so satisfied.

[35] My principle reason for so concluding is that the pursuers have not set out either by way of averment or in the course of submissions a case that is even stateable as regards the fundamentally important matter of there being the requisite jurisdiction, in the international private law sense. It is not enough that they can point to an ex facie valid Californian decree. That is beside the point. The case of Whitehead is not authority for that proposition. It is readily distinguishable on its facts, concerning as it did the effect of a vague and irrelevant defence to an action for decree conform in respect of an English decree where it seemed to be being suggested that the decree was not in fact valid in England. That is not comparable to the case that is advanced by the defenders here which is clear and concise and proceeds on the basis that the decree founded on is valid in California. Rather, the defenders do not accept that there is jurisdiction in the international private law sense and the pursuers were put on notice that that was their position some ten days prior to motion roll hearing.

[36] Have the pursuers responded to the challenge raised by the defenders in such a way as to show that they nonetheless still have a prima facie case? In my view they have not. Their response to the jurisdiction point is firstly to rely on the defenders having property in Illinois. No documentary or other material was relied on in support of the assertion and the pursuers did not dispute the defenders' explanation which was that they did not own property there but the first defenders were tenants and had, further, sublet it. In these circumstances, I do not see that any inference that the first defenders carried on business in Illinois at the relevant time could be drawn. Nor was anything averred or submitted that they had any presence there. In these circumstances I do not require to consider whether having a place of business in Illinois would have been enough for international private law jurisdiction in respect of a decree of a District Court in California. I would simply conclude that the pursuers cannot point to there being any jurisdiction over the first defenders in international private law, at all. As regards the second and third defenders, nothing is averred which would support jurisdiction in the international private law sense and nothing was said about them at all in the course of submissions other than that this was a case where directors were being made liable for the debts of the company of which they were directors and that that is not unusual. But that does not begin to address the jurisdiction point.

[37] Turning to the pursuers' argument that the defenders had submitted to the jurisdiction of the Californian court, it is, I agree, without merit. The pursuers have not produced any pleadings in the Californian action which point to the defenders having done so and I do not see that an inference of submission to jurisdiction falls to be drawn from the matters founded on, particularly since no issue was taken with it being stated on behalf of the defenders that their participation in the litigation had been on the express basis that they were, nonetheless, contesting jurisdiction.

[38] The fact that the pursuers' case is so lacking as regards jurisdiction is sufficient to prevent my being able to conclude that they have a good arguable case. I should, however, also deal with the arguments regarding fundamental justice. Whilst I can accept that, as a generality, the fact that a foreign jurisdiction has not allowed a party to lead oral evidence in support of his case will not necessarily mean that he has not been afforded fundamental justice, an examination of the facts may nonetheless lead to the conclusion that that is what has happened.

[39] In the present case, the defenders were facing a serious allegation, namely that they had deliberately engaged in fraudulent activity. That allegation is referred to in the court's judgment and the inference is repeatedly drawn that that is what they did. They were facing that allegation in circumstances where they denied it and where no steps had been taken by the liquidator of Teknek Electronics to challenge the transfers, something which could reasonably have been expected if he was as confident of the assertion as the pursuers seem to suggest. They, through their attorney, asked to be allowed the opportunity to lead evidence in response to and in refutation of the allegation. That application was denied without any reasons for that denial being given in the judgment of the court (whilst the judgment refers to there being no need for proof that is a reference to proof on the merits of the patent infringement claim). As a result, the defenders have been found liable in a substantial sum in respect of claims not originally directed against them relating to patent infringements which occurred before the first defenders came into existence. This is a defence of some substance and may, of itself, have been sufficient to deprive the pursuers of a prima facie case. When added to the jurisdiction defence, it simply serves to reinforce the view that the pursuers' case cannot properly be afforded that characterisation.

[40] For the above reasons, I am persuaded that the defenders' challenge to the diligence on the dependence is well founded and I will grant the motion for recall.