© 2017 Sherby & Co., Advs.
This is our third (and presumably final) post regarding the Israeli Supreme Court’s decision in JSC VTB Bank v. Margolis (Civil Appeal 1948/15, March 6, 2017). Our first post dealt primarily with the Russia-related issues from the JSC case, and our second post dealt with the Court’s express holding that, for purposes of determining whether a non-Israeli court properly exercised jurisdiction over a judgment-debtor, consent to the jurisdiction of that court may include implied consent.
This post discusses the availability of the defense, under Israel’s Enforcement of Foreign Judgments Law (1958), that the respondent (defendant before the foreign court) did not receive a “reasonable opportunity” to present his defense in the proceedings before the foreign court (the “Lack of Reasonable Opportunity Defense”).
Summary of Facts:
The JSC case arose from multiple guaranties executed by Yevgeny Margolis, a dual Russian-Israeli citizen, in favor of Russian banks that had given loans to corporations that he controlled.
In each of the guaranties that Margolis signed, he (a) listed an address in Moscow as his address for purposes of receiving notices concerning the guaranties (the “Contractual Address”), and (b) committed to notify the bank in the event of a change of his address.
However, at the time of execution of those guaranties, Margolis in fact was not residing at the Contractual Address (even though his daughter and ex-wife were living there). It was also undisputed that, although the notice provision did not accurately set forth Margolis’s address, he never notified JSC of any change of address.
In October 2008, Margolis left Russia for Israel, and a mere two months later (December 2008), liquidation proceedings against his companies began.
Because the corporate borrowers (as noted, entities under the control of Margolis) defaulted on the loans, JSC sued Margolis – in Moscow, based on the guaranty agreements.
As noted above, even though Margolis was not residing at the Contractual Address, his former wife and his daughter were living there. (Para. 15)
JSC served court papers at that address and then filed, with the Moscow court, documents purporting to be confirmations of service. JSC subsequently obtained default judgments against Margolis in the total amount of approximately US$14 million.
When JSC commenced proceedings in Israel to enforce the Russian judgments, Margolis asserted that (a) he was never served with court papers concerning the Russian proceedings against him, (b) he did not know of those proceedings, and (c) he could not have known of them. (Para. 10) Margolis argued that, on these grounds, he proved the Lack of Reasonable Opportunity Defense and that, therefore, the Russian judgments should not be enforced in Israel.
Israeli Supreme Court’s Analysis:
The Israeli Supreme Court largely sidestepped the question of whether service of papers at the Contractual Address complied entirely with Russian procedure. The Court concluded that the answer to that question was not dispositive on the issue of proof of the Lack of Reasonable Opportunity Defense – for more than one reason, as described below.
First, the Supreme Court observed that the Moscow court apparently was convinced that the evidence of service of process upon Margolis, consistent with Russian law, was sufficient. Therefore, as far as Israeli law is concerned, any contention by Margolis that service under Russian law was inadequate should have been raised in an appeal in the Russian court system. (Para. 15)
Second, the Israeli Supreme Court appeared to be convinced that some documentation related to the lawsuit(s) brought by JSC was in fact served at the Contractual Address, noting in particular that Margolis’s daughter and his former wife resided at that address at the relevant time. (Paras. 15-16) The Supreme Court went so far as to conclude that it is “logical” that the signatures on the confirmations of service were affixed by someone who lives at that address – namely, either Margolis’s daughter or his ex-wife. (Para. 16). The Court further observed that Margolis could have presented testimony from his ex-wife or from his daughter on this issue and that his failure to present such evidence should be held against him. (Id.)
In so holding, the Supreme Court in JSC essentially ruled that, once the judgment-creditor presents at least some evidence that service of process was carried out at an address reasonably associated with the defendant (judgment-creditor), the burden is upon that defendant to present evidence that such service was insufficient to put him on notice of the proceedings.
As for the default nature of the Russian judgments, the Supreme Court did not consider that to be a grounds for holding that Margolis met his burden of proof as to the Lack of Reasonable Opportunity Defense:
… more than once it has been held that the fact that the foreign judgment was given by default, ex parte, does not in and of itself constitute the defense under section 6(a)(2) of the [Enforcement of Foreign Judgments] Law. . ., and this is (among other things) because of the concern that defendants will refrain from participating in the foreign proceedings for the very reason that they wish to prevent the enforcement of the judgment in another country. . . . For a similar reason, it has been held that the test is not whether the defendant knew of the proceedings, but whether service of process was reasonable in the eyes of the court. . . . The emphasis is on the question of whether the defendant had a reasonable opportunity to bring his matter before the foreign court prior to judgment being rendered against him, and the answer to this question will not necessarily be negative if the service was not 100% consistent with the procedural rules practiced before the foreign court, or if the hearing in the case was not the pursuant to these rules. The issue [of reasonable opportunity] is determined through Israeli eyes, based upon the view of an Israeli court as to whether there was a fair hearing.
(Para. 14)
The Supreme Court concluded that, under these circumstances – in particular, where (a) (some form of) service was carried out at the Contractual Address, and (b) the defendant failed to comply with his contractual obligation to notify the lender of his actual/updated address – if an Israeli court were to accept the Lack of Reasonable Opportunity Defense, doing so would encourage similar attempts (by debtors) to evade their legal obligations. (Para. 15)
The Supreme Court largely saw the case against Margolis as one of estoppel:
- Because the court papers were sent to the address that the defendant provided to the bank as his address for receiving notices, the defendant is estopped from asserting that he did not know about the proceedings;
- In order to determine whether the Lack of Reasonable Opportunity Defense could apply, the “procedural fairness” of the foreign proceeding must be examined;
- There is no defect in a legal proceeding that is commenced by sending court documents to the address that the defendant himself provided in his contract with the bank; and
- It is not for the Israeli court to engage in a meticulous and detailed examination as to whether each and every confirmation of service complied with the law of the country in which the judgment was rendered.
(Para. 18)
Take-Aways from JSC v. Margolis:
JSC was not the first case in which Israel’s Supreme Court gave its blessing to enforcing a foreign default judgment. But in JSC, the Court expressed a relatively low level of interest (for the reasons described above) as to whether the Russian procedures for carrying out service of process were fully complied with. In this respect, JSC is one of the most pro-enforcement decisions ever rendered by Israel’s Supreme Court.
The JSC decision is good news for banks and other entities that place importance in “boilerplate” clauses such as “notice” provisions. No lender would agree to make a loan when the primary obligor is a flight-risk, and a notice provision – coupled with the obligation to update – is routinely relied upon by lenders to minimize such risk. In JSC v. Margolis, the Supreme Court essentially told lenders that Israeli law respects their need to rely upon such contractual provisions and that, in the event that a default judgment were to be rendered in favor of the lender, the default nature of the judgment (in and of itself) would not be an obstacle to enforcement.