A New York court can recognize a judgment from a Czech criminal court against a notorious financier who cheated Czech investors out of about $410 million because the judgment is civil in nature, a unanimous state appeals court has ruled, reversing a lower court judge.
The unanimous Appellate Division, First Department panel ruled Tuesday in Harvardsky Prumyslovy Holding v. Landlocked Shipping Co., 651826/12, that Acting Supreme Court Justice Ellen Coin (See Profile) was wrong to dismiss the case on the grounds that it sought enforcement of a foreign criminal judgment.
The case arose from a judgment against Viktor Kozeny, popularly known as the “pirate of Prague” for the massive fraud he committed against Czech investors in the 1990s.
During that time, the Czech government sought to privatize companies that had been state-owned under the country’s previous Communist government. Citizens were issued voucher points that they could use to buy shares in the companies. They also could entrust their points to investment funds.
Kozeny ran a group of funds through a company called Harvard Capital and Consulting. Through one of those funds, now called Harvardsky Prumyslovy Holding, he solicited voucher points from about 250,000 Czech citizens, promising them large returns. He used the points to buy shares in companies and then loot them, transferring the money out of the country through shell companies in Cyprus.
Kozeny fled to the Bahamas, where he still lives. The Bahamian government refused to extradite him, and he was prosecuted in absentia in municipal court in Prague. In 2010, he was found guilty of gross fraud and sentenced to 10 years in prison.
Harvardsky joined the criminal action to seek compensation for its investors, which is allowed by Czech criminal law. The court ordered Kozeny to pay the investors almost 8.3 billion Czech crowns, or about $410 million.
Harvardsky then filed an action in Manhattan Supreme Court seeking recognition of the judgment in New York. It also sought to attach more than $20 million held in a Wells Fargo bank account in the name of Landlocked Shipping Co., which it said was a shell company controlled by Kozeny.
Landlocked moved to dismiss the case on the grounds that New York courts cannot recognize foreign judgments that are penal in nature. Coin granted that motion, and Harvardsky appealed.
Tom, reversing, said the issue of whether New York courts were barred from recognizing any judgment from a foreign criminal court was one of first impression. He concluded that the relevant question was the nature of the judgment— civil or criminal—not what court issued it.
“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,” he wrote. “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.”
Distinguishing between judgments based on what court issued them, rather than their substance, would be “artificial,” Tom wrote.
Furthermore, he said, adopting Landlocked’s argument would frustrate the intent of CPLR Article 53, New York’s version of the Uniform Foreign Country Money-Judgments Recognition Act, a law adopted by most states in order to promote uniform enforcement of international judgments.
“The salutary purpose of the statute is not promoted by the refusal to recognize a foreign judgment based on some contrived criterion, which may then prompt foreign courts to deny enforcement to similar New York judgments,” he wrote.
Tom also rejected Landlocked’s argument that it could not be held liable for the judgment against Kozeny, finding that Harvardsky “has amassed sufficient evidence to demonstrate that Kozeny and Landlocked are alter egos of each other.”
“We’re very pleased with the decision,” said Edward Baldwin, a senior associate at Milbank, Tweed, Hadley & McCloy, who argued the appeal for Harvardsky. “We’re still reviewing it, but we look forward to justice being served.”
Michael Nolan, a partner at Milbank who also represents Harvardsky, said the ruling was an important step in getting restitution for Kozeny’s victims.
“Viktor Kozeny stole an enormous amount of money, and he’s used it to generate a thick cloud of smoke for many years,” Nolan said. “I think the First Department saw through a lot of that.”
Harvardsky is also represented by Sander Bak, another Milbank partner.
Landlocked is represented by Paul Schwartz of Shoemaker Ghiselli + Schwartz, a Colorado firm; Judith Lockhart, a partner at Carter Ledyard & Milburn; and James Nesland, a Colorado solo attorney who is admitted in New York.