Harvardsky Prumyslovy Holding v. Kozeny

• Decision Date: 01 April 2014
• Citation: 2014 N.Y. Slip Op. 02250,117 A.D.3d 77,983 N.Y.S.2d 240
• Parties: HARVARDSKY PRUMYSLOVY HOLDING, A.S.,-V LIKVIDACI, Plaintiff–Appellant, v. Viktor KOZENY, Defendant, Landlocked Shipping Company, Defendant–Respondent.
• Court: New York Supreme Court — Appellate Division

117 A.D.3d 77

983 N.Y.S.2d 240

2014 N.Y. Slip Op. 02250

HARVARDSKY PRUMYSLOVY HOLDING, A.S.,-V LIKVIDACI, Plaintiff–Appellant,

v.Viktor KOZENY, Defendant,Landlocked Shipping Company, Defendant–Respondent.

Supreme Court, Appellate Division, First Department, New York.

April 1, 2014.

Milbank, Tweed, Hadley & McCloy LLP, New York (Edward G. Baldwin, Michael D. Nolan and Sander Bak of counsel), for appellant.

Shoemaker Ghiselli + Schwartz LLC, Boulder, CO (Paul Schwartz of the bar of the State of Colorado, admitted pro hac vice, of counsel), Carter Ledyard & Milburn LLP, New York (Judith A Lockhart of counsel), and James Nesland, New York, for respondent.

LUIS A. GONZALEZ, P.J., PETER TOM, DIANNE T. RENWICK, HELEN E. FREEDMAN, DARCEL D. CLARK, JJ.

TOM, J.

We are called upon to decide whether the courts of this state must recognize a foreign country judgment issued by a criminal court awarding a sum of money as compensation for damages sustained by the victim of a fraudulent scheme ( seeCPLR 5303). Defendant Landlocked Shipping Company argues, inter alia, that because the judgment was rendered by a Czech criminal court, it is not civil in nature and, thus, unenforceable as “a fine or other penalty” (CPLR 5301[b] ). No support for this interpretation is to be found, either in the statutory language or case law, and the issue appears to be one of first impression.

This controversy has its origins in the privatization of formerly state-owned companies in the Czech Republic. In the early 1990s, Czech citizens were issued voucher points that could be used to purchase shares in designated firms or assigned to one of many investment privatization funds (IPFs) that would purchase and manage a portfolio of shares on their behalf. The judgment of the Municipal Court in Prague, rendered July 9, 2010, states that defendant Viktor Kozeny utilized Harvard Capital and Consulting to solicit investors through its six Harvard investment funds, one of which ultimately became plaintiff Harvardsky Prumyslovy Holding, A.S,-V Likvidaci (Harvardsky). As the authorized representative of Harvard Capital, Kozeny then looted the IPFs, diverting the funds of many Czech investors to a series of shell companies in Cyprus. Kozeny, who had relocated to the Bahamas, was prosecuted in absentia after the Bahamian government refused extradition. He was found guilty of gross fraud and sentenced to a term of 10 years. Harvardsky, with approximately 250,000 shareholders, joined in the action as the injured party, and Kozeny was directed to pay compensation in the sum of CZK 8,289,933,074.05 (approximately USD $410 million) to the company as “compensation for damage to the victim” under section 228(1) of the Czech Code of Criminal Procedure in accordance with the relief sought.

Harvardsky subsequently commenced this action under CPLR article 53 seeking recognition of the Czech judgment to render it enforceable in New York. Harvardsky also seeks the attachment of funds held in a Wells Fargo bank account in the name of Landlocked Shipping Company. The complaint alleges that Landlocked is a shell corporation organized under the laws of the Turks and Caicos Islands and is Kozeny's alter ego. In 1997, at Kozeny's direction and to prevent the seizure of assets by creditors, Landlocked acquired a house in Aspen, Colorado. Landlocked paid the purchase price of $19.75 million in cash and expended “millions of dollars” for renovation and furnishings, using funds that Kozeny had embezzled from plaintiff's shareholders, among others. Landlocked sold the house for $22 million in November 2001 and deposited the proceeds into its account at Wells Fargo Bank. It is asserted that Kozeny is the sole beneficial owner of the funds.

Landlocked subsequently moved to dismiss the complaint as asserted against it on grounds, inter alia, that New York courts may not recognize judgments that are penal in nature. Supreme Court granted Landlocked's motion to dismiss insofar as dismissing the complaint asserted against it, and otherwise denied the motion. It also vacated a temporary restraining order, and denied Harvardsky's motion to attach the bank funds.

This Court granted Harvardsky's motion for a stay pending the appeal to the extent of reinstating the TRO until the determination of this appeal.

CPLR 5301(b) defines a “foreign country judgment” as “any judgment of a foreign state granting or denying recovery of a sum of money, other than a judgment for taxes, a fine or other penalty, or a judgment for support in matrimonial or family matters.” The judgment sought to be enforced in this case provides restitution to Harvardsky, directing Victor Koveny, the criminal defendant, to pay a specific sum as “compensation for damages to the victim” of his scheme to defraud. Clearly, the judgment is not one for taxes or support obligations; nor is it a fine. Thus, the question is whether a judgment providing compensation to a crime victim (here, a victim of criminal fraud) should be regarded as a “penalty” and denied enforcement.

Landlocked adopts the view that a judgment awarding damages for fraud, otherwise construed as compensatory when rendered by a civil court, must be regarded as an unenforceable penalty when issued by a criminal tribunal. The immediate problem with such a distinction is that there are any number of civil proceedings in which the compensation recoverable by the victim may constitute a penalty ( see e.g. State of N.Y. ex rel. Grupp v. DHL Express (USA), Inc., 19 N.Y.3d 278, 286–287, 947 N.Y.S.2d 368, 970 N.E.2d 391 [2012] [fraud claims brought pursuant to the FCA alleging violations of the State Finance Law]; Mohassel v. Fenwick, 5 N.Y.3d 44, 50, 799 N.Y.S.2d 758, 832 N.E.2d 1174 [2005] [rent overcharge in violation of Rent Stabilization Law]; Cox v. Microsoft Corp., 290 A.D.2d 206, 737 N.Y.S.2d 1 [2002],lv. dismissed98 N.Y.2d 728, 749 N.Y.S.2d 478, 779 N.E.2d 189 [2002] [monopoly in violation of General Business Law § 340] ). Moreover, the statutory basis for denying enforcement is predicated on the classification and purpose of the judgment, not the court that issued it, making no differentiation between foreign civil and foreign criminal judgments. Upon even a superficial examination, such a distinction is artificial.

Because the Civil Practice Law and Rules governs civil matters, it is appropriate to examine the question of whether a monetary award constitutes a penalty by reference to a civil standard, that is, whether the award at issue has been held to impose a civil penalty rather than providing compensatory damages for the actual harm inflicted. As noted by the Supreme Court in Huntington v. Attrill, 146 U.S. 657, 667, 13 S.Ct. 224, 36 L.Ed. 1123 [1892] [internal quotation marks omitted], the words “penal and penalty” are “commonly used as including any extraordinary liability to which the law subjects a wrongdoer in favor of the person wronged, not limited to the damages suffered.” So, for example, in State of N.Y. ex rel. Grupp, 19 N.Y.3d at 282, 947 N.Y.S.2d 368, 970 N.E.2d 391, the Court of Appeals stated that, “rather than redressing the harm actually suffered, the statute's imposition of civil penalties and treble damages evinces a broader punitive goal of deterring fraudulent conduct against the state.” As this Court has noted, “[t]he idea that multiple damage awards are punitive finds support in the ancestry of numerous treble damages provisions having their origins in equivalent provisions of former criminal statutes” ( Cox v. Microsoft Corp., 290 A.D.2d 206, 207, 737 N.Y.S.2d 1 [1st Dept.2002],lv. dismissed98 N.Y.2d 728, 749 N.Y.S.2d 478, 779 N.E.2d 189 [2002];but see Mohassel, 5 N.Y.3d at 50, 799 N.Y.S.2d 758, 832 N.E.2d 1174 [treble damages awarded for a rent overcharge are designed “to compensate the tenant, particularly when the violation is willful”] ). Indeed, this Court has applied this test in an action that likewise sought to recover monies obtained by fraud. We observed that even though the plaintiff was “a sovereign, its aim is merely the restoration of an outlay wrongfully obtained from it. The object of the action is not vindication of the public justice but reparation to one aggrieved” ( Regierungspraesident Land Nordrhein–Westfalen v. Rosenthal, 17 A.D.2d 145, 148, 232 N.Y.S.2d 963 [1st Dept.1962],lv. denied12 N.Y.2d 648, 239 N.Y.S.2d 1025, 190 N.E.2d 27 [1963] [internal quotation marks omitted] ). Where, as here, the purpose of a monetary judgment is to compensate the victim for actual damages, it represents “reparation to one aggrieved” ( id. [internal quotation marks omitted] ) regardless of whether or not a particular treble-damages award may be said to constitute a penalty. Section 228(1) of the Czech Code of Criminal Procedure provides for victims of crimes to file a...