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Part I – Overview of Litigation Process andAssets Under Litigation
“Cover Your Assets:Understanding Litigation Risk in
Structuring U.S. Operations”
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Roadmap
• Part 1 of 2 parts dealing with an overview of the litigationprocess and the disposition of assets in litigation– Common fact patterns when foreign parties are involved
– Choice of law and forum
– Assets under litigation
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Common Fact Patterns
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• Foreign Personal Assets– Wealthy individual/family looking to invest in safe assets in the U.S. for
the long term – often real estate
– Typical concerns:
• Tax
• Estate planning
• Immigration (for EB-5 investments)
• Foreign Corporate Assets– Companies engaging in business in the U.S. (sales of goods and
services, manufacturing)
– Typical concerns:
• Commercial contracts
• Intellectual property
• Regulatory (e.g., import/export, tax, corporate compliance)
Description of Fact Patterns
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• How litigation may occur - examples– Real estate – rental property (tenant dispute, torts),
construction/renovation, labor dispute
– Manufacturing and sales – product liability, vendor/customercontractual dispute, labor dispute, dispute with JV partner
– Regulatory – state and federal law compliance (e.g., antitrustlaws, environment, product safety), customs, tax, bankruptcy
Description of Fact Patterns
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• Litigation risk not usually raised as an immediateconcern, but should be taken into account as part of thestructuring prior to the investment decision– Insulating assets from liabilities arising from litigation
• Entering in to contracts– Which entity should be the contracting party?
– Governing law – which law is more convenient or favorable on thesubject matter of the contract (foreign or U.S., which U.S. state)?
– Forum selection – which court has the expertise or favorable precedents?
– Arbitration
Description of Fact Patterns
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Choice of Law/Forum
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General U.S. Court Process
• Plaintiff files a lawsuit
• Plaintiff serves the summons and complaint on thedefendant
• Defendant responds to the complaint– Motions on the pleadings (e.g., dismiss, remove to different court)
• Discovery– Gathering information and evidence from the other side
– Motions relating to discovery
• Trial
• Appeal
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• Why are some cases in federal courts and some in statecourts?− Federal government and each state have their own laws and parallel
judicial systems
• Federal subject matter jurisdiction – 2 ways− Federal question – issues arising out of federal law
− Diversity (no plaintiff can be from the same state as any defendant) andamount in controversy over $75,000
• States generally have plenary jurisdiction
• Federal pre-emption over state laws when there isoverlap or conflict
Structure of U.S. Judicial System
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Examples of General State Considerations
• Delaware− Well developed laws and court precedents on corporate law issues – favorable to
companies
− Very lenient on non-compete agreements
• California– Strict regulations on environmental issues
– Labor laws considered to be most favorable to employees in the U.S.
• New York– Well developed laws and court precedents on international trade issues
• Federal issues– Different federal court and circuits (appeals court) have different reputations
which may need to be taken into consideration when filing as plaintiff or seekingremoval as defendant in federal district courts
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• Personal jurisdiction determines whether a court hasjurisdiction over the company or person being sued
• Minimum Contacts – must have minimum contacts withforum state so that personal jurisdiction by court wouldbe fair and reasonable– Purposeful availment – looks at whether defendant availed himself to
the privileges of conducting activities within the state
• Ex. Internet website – an interactive website (get quotes, makereservations, get driving directions can be considered purposeful availment
• Stream of commerce – placing products in stream of commerce evenwithout knowing exact destination can be purposeful availment (mayrequire advertising or providing regular service to customers)
– Foreseeability – Contacts with forum state make it foreseeable thatDefendant can be subjected to court processes there
Personal Jurisdiction
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• Relatedness– General jurisdiction - court has jurisdiction in that state regardless of the
nature of the claim
• “Continuous and systematic” contact so “essentially at home” in forum state
• A business is essentially at home where it is incorporated and where itsprincipal place of business is
– Specific jurisdiction - Claim arises out of Defendant’s contact with theforum (related to nature of the claim)
• Ex. Calder v. Jones – “Effects Test” – Defendant knew her action’s effectswould be felt in California – therefore subject to jurisdiction
Personal Jurisdiction
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• How to get case transferred from one U.S. court to another orto a Foreign Tribunal
– A U.S. court can dismiss to another court when a different courtis far more sensible to hear the case, or stay the case whentransfer is impossible because the more convenient court is in adifferent judicial system
• Public Factors – What law applies, what community should beburdened with jury service, keeping local controversy in thelocal court
• Private factors – Convenience, where the witnesses arelocated, where the evidence is located “U.S. law appearsremote and has little effect on my work”– Requires a very strong showing since it results in dismissal or stay
Forum Non-Conveniens
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Enforceability of Forum Selection Clauses
• Parties often put in their contracts a provision stating thatif a dispute arises out of the contract, the dispute wouldbe heard in a particular court – forum selection clause
• Enforcement of forum selection clauses varies by state– For example, a federal district court in California recently held that forum
selection clauses are unenforceable only if: 1) the clause resulted fromfraud, undue influence or unfair bargaining power; 2) the forum selectedis so inconvenient and difficult that it amounts to a denial of appearancein court; and 3) enforcement of the clause is against a strong publicpolicy. Estep, et al. v. Yung, et al. (2015).
– California law generally favors enforcing contractual forum selectionclauses, and the party opposing the enforcement of the forum selectionclause must show that enforcement would be unreasonable.
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Assets Under Litigation
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Injunction Generally
• Defendant is ordered (enjoined) to do or refrainfrom doing something
– An equitable remedy• Must first show that legal remedy (damages) is inadequate
(ex. Difficult to quantify money damages, unique item,irreparable or continuing harm, special meaning to Plaintiff,etc.)
• Courts prefer negative injunctions (preventing action) ratherthan affirmative injunctions (requiring action) because theypreserve status quo and is easier to enforce
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Preliminary Injunction
• Preliminary Injunction – issued pending a trial onthe merits
– Requirements:• Substantial likelihood of success on the merits of the case
• Substantial threat of irreparable damage or injury ifinjunction is not granted
• Balance of the hardships weighs in favor of the partyseeking preliminary injunction
• Grant of an injunction would serve the public interest
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Temporary Restraining Order
• Issued pending a hearing to determine whethera preliminary injunction should be granted– Used in more urgent or emergency situations – generally lasts
14-21 days
– Same basic elements as preliminary injunction, but must giveDefendant notice and an opportunity to appear and contest theinjunction (unless strong showing that notice should not berequired)
– TRO application may be done ex parte
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Permanent Injunction
• Issued after a full trial on the merits
• Requirements:– Inadequate legal remedy alternative
– Feasibility of enforcement (no excessive court supervision orconcern with effectively ensuring compliance)
– Balancing of hardships (Plaintiff’s benefit must be balancedwith Defendant’s hardship)
– Applicable defenses (unclean hands, laches, impossibility)
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Who is Bound by an Injunction?
• Defendants
• Employees and agents of Defendant acting withnotice
• Others acting in concert with notice
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Contempt
• A party who disobeys a court order may be held incontempt
• Civil contempt (to coerce)– Monetary Fine
– Imprisonment (can get out by complying with court order)
• Criminal contempt (to punish)– Monetary Fine
– Imprisonment (must remain for a set amount of time)
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Considerations for Disposition of AssetsDuring Litigation
• Freezing injunctions:– Court order preventing a party from disposing of or dealing with
its assets
– Can be sought at any time – at the beginning of, during, or afterlitigation
– Takes effect personally against the party subject to it, and can begranted in respect of any known assets held up to the value ofthe claim
– Can only freeze assets over which a judgment can be attached –money, land, vehicles, shares, bonds, and other financialinstruments
– Similar analysis to granting preliminary injunction
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Considerations for Disposition of AssetsDuring Litigation
• Fraudulent transfer– Creditors can reach assets through proving fraudulent
transfer
– Elements• Transferred property
• Received less than fair market value of property
• Transfer left the debtor unable to satisfy a creditor
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Take-Aways
The U.S. is a complex web of judicial systems thatrequire careful consideration as to whether the courtwhere the plaintiff has filed the case can exercisejurisdiction
Do not assume that the requirements for subject matterand personal jurisdiction have been met, especially in amultiple defendants situation (personal, domesticcompany, overseas holding company all sued)
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Questions?
Chris Dueringer
Partner
+1-310-576-2183
Jackson Pai
Associate
+1-310-576-2107
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