Blanket Non-recognition of Chinese Judgments on Systemic Due Process Ground? No, Says New York Appellate Court

Key takeaways:

• In March 2022, the Appellate Division of the New York Supreme Court unanimously reversed the trial court ruling, rejecting the blanket non-recognition of Chinese judgments (See Shanghai Yongrun Inv. Mgmt. Co. v. Xu, et al., 203 A.D.3d 495, 160 N.Y.S.3d 874 (N.Y. App. Div. 2022)).
• The trial court initially denied recognition of the Chinese judgment on the grounds of a systemic lack of due process. If the trial court decision were to stand, Chinese money judgments could never be recognized and enforced in New York state (if not in all US states).
• The case of Shanghai Yongrun Inv. Mgmt. Co. shows that Chinese monetary judgments can be recognized in New York on a case-by-case basis.

On 10 Mar. 2022, the Appellate Division of the New York Supreme Court, First Judicial Department (the “New York Appellate Court”) unanimously reversed the trial court ruling, rejecting the blanket non-recognition of Chinese judgments (see Shanghai Yongrun Inv. Mgmt. Co. v. Xu, et al., 203 A.D.3d 495, 160 N.Y.S.3d 874 (N.Y. App. Div. 2022)).

Back in 2021, the New York Supreme Court, New York County (the “New York County Court”), as the court of the first instance, initially refused to recognize the Chinese judgment on the grounds of a systemic lack of due process in the Chinese judicial system. This court decision has sparked a heated debate among legal experts at home and abroad. If the trial court decision were to stand, Chinese money judgments could never be recognized and enforced in New York state (if not in all US states).

Fortunately, in March 2022, the New York Appellate Court issued the decisive ruling, overturning the trial court’s decision and concluding that Chinese monetary judgments would be recognized on a case-by-case basis.

I. Background Facts

1.1 In September 2016, the Investment Agreement was entered.

On 20 Sept. 2016, Shanghai Yongrun Investment Management Co., Ltd. (“Shanghai Yongrun”) and Kashi Galaxy Venture Capital (“Kashi Galaxy”) entered into an Equity Transfer Agreement wherein Shanghai Yongrun invested in Galaxy Internet Group Co., Ltd. (“the Target Company”) by purchasing from Kashi Galaxy 1.667% of the equity shares at a price of CNY 200 million.

The parties have agreed on the terms of betting and repurchase, with the betting conditions being that by 31 December 2020: (1) any listed company in the A-share market in China will purchase the equity interest of the Target Company by way of merger and acquisition, restructuring and cash acquisition; or (2) the Target Company will complete its initial public offering and listing in the A-share market in China.

In the event that the Target Company fails to fulfill the foregoing conditions, Shanghai Yongrun shall have the right to request either Kashi Galaxy or the Target Company to repurchase the target equity interests at a repurchase price of the Investment Amount plus a premium of 8% per annum.

1.2 In August 2017, the actual controller of the financier assumed the repurchase responsibility.

On 2 Aug. 2017, the parties entered into another agreement wherein, Maodong Xu, the actual controller of Kashi Galaxy, share the equity repurchase responsibility with Kashi Galaxy. Accordingly, Xu Maodong will acquire the equity interests in the Target Company held by Shanghai Yongrun by 30 Sept. 2017, and the repurchase price will be the investment amount plus an annual 12% capital usage fee.

Thereafter, Xu designated a third party to pay CNY 175 million to Shanghai Yongrun.

1.3 Arrears in payment of equity repurchase price

On 28 Feb. 2018, Shanghai Yongrun assigned its lawyers to send a demand letter to Kashi Galaxy and Xu, stating that they still owed Shanghai Yongrun the remaining equity repurchase price of CNY 30 million, capital usage fee of over CNY 25.64 million and liquidated damages of over CNY 2.8619 million.

II. Litigation in China

2.1 First Instance (Beijing First Intermediate People’s Court)

In August 2018, Shanghai Yongrun sued Kashi Galaxy, Xu and Fang Zhou (Xu’s wife) in Beijing First Intermediate People’s Court, claiming that Kashi Galaxy and Xu should pay the remaining equity repurchase amount of CNY 25 million, the capital usage fee of CNY 26,060,000, liquidated damages of CNY 3,350,000, and the attorney’s fees of CNY 3,000,000.

Shanghai Yongrun also sued Xu Maodong’s wife, Zhou, as a co-defendant, arguing that she and Xu should jointly assume the above obligations.

Beijing First Intermediate People’s Court rendered the judgment (2018) Jing 01 Min Chu No. 349 ((2018)京民初349号), ordering Kashi Galaxy and Xu to pay the equity repurchase amount, the capital usage fee, the liquidated damages, and part of the attorney’s fees, but did not uphold the claim that Zhou should undertake the obligation as Xu’s wife.

2.2 Appeal/Second Instance (Beijing High People’s Court)

In February 2019, Kashi Galaxy filed an appeal with Beijing High People’s Court.

On 20 May 2019, Beijing High People’s Court issued the second instance judgment (2019) Jing Min Zhong No. 115 ((2019)京民终115) (hereinafter the ‘Chinese Judgment’), largely affirming the trial court’s findings and rulings, ordering the payment of the equity repurchase amount of CNY 25 million and the capital usage fee (as at 12 April 2018, the capital usage fee was CNY 25,704,328.77).

III. Litigation in the US

3.1 First Instance (New York County Court)

As Kashi Galaxy and Xu failed to comply with the Chinese Judgment and no valuable assets can be found in China, Shanghai Yongrun attempted to enforce the judgment in New York. On 13 Aug. 2020, Shanghai Yongrun filed an application with the New York County Court for the recognition and enforcement of the Chinese Judgement.

During the trial, Xu moved, pursuant to New York’s Civil Practice Law and Rules(CPLR) 321 l(a)(l) and (7), to dismiss the complaint. The basis for the motion is that the PRC judgment “was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law,” as CPLR 5304(a)(l) requires. Xu argued that documentary evidence in the form of the United States State Department Annual Country Reports for 2018 and 2019 conclusively establish, as a matter of law, that the PRC judgment should not be recognized because “the judgment was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law.” Xu cited Second Circuit Court of Appeals case law to support his position.

In the view of the trial court, the United States State Department Annual Country Reports for 2018 and 2019 conclusively establish that the Chinese Judgment “was rendered under a system which does not provide impartial tribunals or procedures compatible with the requirements of due process of law”.

As to whether the reports can be considered documentary evidence, New York County Court found that they can, and should, be considered as such.

On 30 Apr. 2021, New York County Supreme Court issued the ruling in Shanghai Yongrun Inv. Mgt. Co., Ltd. v Kashi Galaxy Venture Capital Co., Ltd. 2021 NY Slip Op 31459(U), denied the recognition and enforcement of the Chinese Judgement on the systemic due process ground.

3.2 Appeal/Second Instance (New York Appellate Court)

On 10 March 2022, New York Appellate Court overturned the trial court decision.

The Appellate Court heldthat the trial court should not have dismissed the action on the ground that the US State Department’s 2018 and 2019 Country Reports on Human Rights Practices (Country Reports) conclusively refuted plaintiff’s allegation that the PRC judgment was rendered under a system that comported with the requirements of due process. The Country Reports do not constitute “documentary evidence” under CPLR 3211(a)(1).

In any event, the Appellate Court opined that, “the reports, which primarily discuss the lack of judicial independence in proceedings involving politically sensitive matters, do not utterly refute plaintiff’s allegation that the civil law system governing this breach of contract business dispute was fair”.

IV. Comments

As Professor William S. Dodge and Professor Wenliang Zhang pointed out, “the implications of this ruling by New York County Supreme Court are broad. If the Chinese judicial system suffers from a systemic lack of due process, then no Chinese court judgments may ever be recognized and enforced under New York law. What is more, ten other states have adopted the 1962 Uniform Act, and an additional twenty-six states have adopted the updated 2005 Uniform Foreign-Country Money Judgments Recognition Act (2005 Uniform Act), which contains the same systemic due process ground for non-recognition. If followed in other jurisdictions, the New York court’s reasoning would make Chinese judgments unenforceable throughout much of the United States” (see
William S. Dodge, Wenliang Zhang, New York Court Denies Enforcement of Chinese Judgment on Systemic Due Process Grounds, Conflictoflaws.net, 10 June 2021).

Similarly, Ms.Katie Burghardt Kramer from DGW Kramer LLP, New York, representing Shanghai Yongrun in this case, also indicated that “[T]he potential ramifications from the lower court’s decision were serious and would have had a negative effect on U.S. relations with China, and also with other nations. A significant principle of international law is comity, and the Yongrun decision by the lower court failed to recognize this” (see Katie Burghardt Kramer, New York Appellate Court Rejects Mandatory Nonrecognition Of Chinese Civil Judgments In Significant Victory For International Comity, China Law Reporter, Volume III, Issue 2).

Thanks to the New York Appellate Court’s decisive ruling, we can be reassured that Chinese monetary judgments can be recognized in New York on a case-by-case basis. Just as Professor William S. Dodge puts foward, ‘[S]uch a case-specific approach avoids the overinclusiveness of denying recognition on systemic grounds when there are no defects in hte judgment before teh court”.

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