Source: https://law.justia.com/cases/federal/appellate-courts/F3/15/238/536634/
Timestamp: 2020-07-07 20:10:59
Document Index: 243767025

Matched Legal Cases: ['§ 1330', '§ 1603', '§ 1608', '§ 1604', '§ 1605', '§ 1603']

The Commercial Bank of Kuwait, Plaintiff-appellee, v. Rafidain Bank and Central Bank of Iraq, Defendants-appellants, 15 F.3d 238 (2d Cir. 1994) :: Justia
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The Commercial Bank of Kuwait, Plaintiff-appellee, v. Rafidain Bank and Central Bank of Iraq, Defendants-appellants, 15 F.3d 238 (2d Cir. 1994)
U.S. Court of Appeals for the Second Circuit - 15 F.3d 238 (2d Cir. 1994) Argued Nov. 19, 1993. Decided Jan. 19, 1994
Defendants Rafidain Bank and Central Bank of Iraq (respectively, Rafidain and CBI; collectively the Iraqi Banks or appellants) appeal from a judgment dated May 5, 1993 in the United States District Court for the Southern District of New York, Leonard B. Sand, J., granting the motion of plaintiff-appellee Commercial Bank of Kuwait (Commercial) for a default judgment. Commercial seeks recovery on certain "garden-variety" commercial obligations owed to it by the Iraqi Banks. This appeal requires us to examine the "commercial activity" exception to sovereign immunity contained in the Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1330, 1602-1611 (FSIA); the requirements for obtaining a default judgment under the FSIA; and the application of the "good cause shown" standard of Fed. R. Civ. P. 55(c) to a foreign sovereign's opposition to entry of a default judgment. For the reasons given below, we affirm the judgment of the district court.
Rafidain is a commercial bank wholly owned by the Republic of Iraq. CBI is the central banking authority in Iraq, analogous to the Federal Reserve in the United States. Both entities are therefore "agenc [ies] or instrumentalit [ies] of a foreign state" under the FSIA, 28 U.S.C. § 1603. In the 1980s, Rafidain entered into numerous loan and letter of credit transactions involving international banks. CBI guaranteed some of Rafidain's payment obligations to facilitate Rafidain's access to loans.
In January 1992, Commercial advised the district court that it had achieved service. Pursuant to 28 U.S.C. § 1608(d),1 appellants had 60 days to file their responses. Appellants failed to comply with this requirement. In May 1992, Commercial moved for default judgment on the eight counts of the complaint then remaining.2 The Iraqi Banks first appeared after the motion was filed. The district court granted appellants' counsel an extension of time to file papers in opposition to Commercial's motion. Appellants' counsel filed a memorandum in opposition to the motion on July 22, 1992, one day before a scheduled hearing in the district court.
On August 31, 1992 Magistrate Judge James C. Francis IV issued his Report, finding that (1) the Iraqi Banks' default was willful; (2) denial of Commercial's motion would prejudice Commercial; and (3) the Iraqi Banks presented no meritorious defenses. Accordingly, the magistrate judge concluded that the Iraqi Banks had failed to show good cause under Fed. R. Civ. P. 55(c) why the court should deny the motion for default judgment. On September 18, 1992, over the Iraqi Banks' objections, the district court adopted the magistrate's Report. In May 1993, the district court entered final judgment for Commercial on its motion for default judgment. The Iraqi Banks timely filed their joint notice of appeal in June 1993.
On appeal, the Iraqi Banks argue: (1) the district court lacked jurisdiction to hear several of the counts in the complaint because the Iraqi Banks enjoyed sovereign immunity; (2) Commercial did not satisfy the requirement of Sec. 1608(e) of the FSIA that a party seeking a default judgment present "evidence satisfactory to the court"; and (3) the district court abused its discretion in finding that the Iraqi Banks failed to show good cause why the motion for default judgment should be denied under Fed. R. Civ. P. 55(c). We consider these arguments mindful that "default judgments are disfavored, especially those against foreign sovereigns." First Fidelity Bank, N.A. v. Government of Antigua & Barbuda, 877 F.2d 189, 196 (2d Cir. 1989).
The FSIA provides the "sole basis" for obtaining jurisdiction over a foreign sovereign in the United States. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 439, 109 S. Ct. 683, 690, 102 L. Ed. 2d 818 (1989). Under the FSIA, a "foreign state shall be immune from the jurisdiction of the courts of the United States and of the states" unless one of several statutory exceptions applies. 28 U.S.C. § 1604. We review de novo the district court's conclusions of law regarding jurisdiction under the FSIA. Shapiro v. Republic of Bolivia, 930 F.2d 1013, 1016-17 (2d Cir. 1991).
28 U.S.C. § 1605(a) (2). See also 28 U.S.C. § 1603(d) (defining "commercial activity" as "either a regular course of commercial conduct or a particular commercial transaction or act"); Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 307-08 (2d Cir. 1981), cert. denied, 454 U.S. 1148, 102 S. Ct. 1012, 71 L. Ed. 2d 301 (1982).
The Supreme Court has recently clarified the "direct effect" language of Sec. 1605(a) (2). Republic of Argentina v. Weltover, --- U.S. ----, ---- - ----, 112 S. Ct. 2160, 2168-69, 119 L. Ed. 2d 394 (1992). Weltover held that Argentina's unilateral rescheduling of bond payments had a "direct effect" within the meaning of Sec. 1605(a) (2) because New York was the place of payment. Id.
Similarly, the agreements at issue in Counts V-VII require the Iraqi Banks to make payments in U.S. dollars into accounts in New York City. The Iraqi Banks concede that these transactions constitute "commercial activity" under Sec. 1603(d). Nevertheless, they argue that the "commercial activity" exception does not apply because the payments were to be made not directly to Commercial but to New York bank accounts held by the lead banks of the various lending syndicates. The Iraqi Banks thus contend that, because the United States is not the place of performance of any contractual obligations owed to this plaintiff, there is no "direct effect in the United States" within the meaning of Sec. 1605(a) (2).
We reject appellants' attempt to limit the Court's opinion in Weltover. The "commercial activity" exception of the FSIA withdraws immunity in cases involving essentially private commercial activities of foreign sovereigns that have an impact within the United States. This reflects the "restrictive" theory of sovereign immunity that underlies the FSIA. See Jackson v. People's Republic of China, 794 F.2d 1490, 1493 (11th Cir. 1986), cert. denied, 480 U.S. 917, 107 S. Ct. 1371, 94 L. Ed. 2d 687 (1987); H.R.Rep. No. 1487, 94th Cong., 2nd Sess. 7 (1976), reprinted in 1976 U.S.C.C.A.N. 6604, 6605; Joseph W. Dellapenna, Suing Foreign Governments and Their Corporations Sec. 1.2, at 3-8 (1988). The focus of Sec. 1605(a) (2) is the activity of the sovereign. If the sovereign's activity is commercial in nature and has a direct effect in the United States, then the jurisdictional nexus is met, no immunity attaches, and a district court has the authority to adjudicate disputes based on that activity.
The failure of the Iraqi Banks to remit funds in New York, as they were contractually bound to do, had a direct effect in the United States under Weltover. Furthermore, the requisite "material connection" between Commercial's cause of action and the "commercial activity" that is the jurisdictional basis is met despite Commercial's reliance on an agent to collect the sums due. Cf. Arriba Ltd. v. Petroleos Mexicanos, 962 F.2d 528, 533 (5th Cir.), cert. denied, --- U.S. ----, 113 S. Ct. 413, 121 L. Ed. 2d 337 (1992). Thus, the district court had jurisdiction to hear Commercial's claims. The Iraqi Banks may still argue, as they do, that Commercial does not have standing to complain of that breach of duty. That contention is discussed below.
The Iraqi Banks argue that Commercial failed to satisfy the requirements of the FSIA for obtaining a default judgment. The FSIA provides:No judgment by default shall be entered by a court of the United States or of a State against a foreign state, a political subdivision thereof, or an agency or instrumentality of a foreign state, unless the claimant establishes his claim or right to relief by evidence satisfactory to the court....
Congress promulgated Sec. 1608(e) to provide foreign sovereigns with the same protections from default judgments that the federal government enjoys under Fed. R. Civ. P. 55(e).3 House Report 1487 at 26, 1976 U.S.C.C.A.N. at 6625; Amernational Indus., Inc. v. Action-Tungsram, Inc., 925 F.2d 970, 975-76 (6th Cir.), cert. denied, --- U.S. ----, 111 S. Ct. 2857, 115 L. Ed. 2d 1024 (1991) (noting the "identical wording" of Sec. 1608(e) and Rule 55(e)). Rule 55(e) reflects Congress' recognition "that the government is sometimes slow to respond and that the public fisc should be protected from claims that are unfounded but would be granted solely because the government failed to make a timely response." Marziliano v. Heckler, 728 F.2d 151, 157-58 (2d Cir. 1984). However, neither Rule 55(e) nor Sec. 1608(e) relieves the sovereign from the duty to defend cases and to obey court orders. Amernational Indus., 925 F.2d at 975-76 (citing Alameda v. Secretary of Health, Educ. & Welfare, 622 F.2d 1044, 1047-48 (1st Cir. 1980)).
Thus, when the United States or a foreign sovereign defaults, the district court must determine whether the plaintiff's allegations are supported by evidence. While in some cases this will require a hearing, we have held that Rule 55(e) does not "require an evidentiary hearing if one would ordinarily not have been held, nor [does the Rule] require the court to demand more or different evidence than it would ordinarily receive in order to make its decision." Marziliano, 728 F.2d at 158. Further, we have said that Rule 55(e) does not require explicit findings, and that the district court's decision should be affirmed so long as "there is an adequate basis in the record for inferring that the district court ... was satisfied with the evidence submitted" in support of the plaintiff's claims. Id. Likewise, we do not believe that Sec. 1608(e) requires evidentiary hearings or explicit findings where the record shows that the plaintiff provided sufficient evidence in support of its claims.
The record shows that the loans involved in Counts I-IV were properly accelerated and that the Iraqi Banks were notified, as required by the agreements. This evidence, in the form of affidavits and exhibits, was submitted well before the district court entered the May 1993 default judgment under attack. Because the record contains sufficient evidence to support Commercial's claims as to Counts I-IV, we believe the district court correctly applied Sec. 1608(e) with respect to those counts.
The district court rejected these challenges to Commercial's standing. The magistrate's Report noted that the lead banks entered into each of these agreements as agent of the participating banks. Under English law, which governs here pursuant to express provisions of the agreements, an undisclosed principal has standing to sue on a contract. Moto Vespa S.A. v. MAT (Brittania Express) Ltd., [1979] 1 Lloyd's Rep. 175, 178-79; Teheran-Europe Co. v. S T Belton (Tractors), [1968] 2 QB 545 ("It is a well-established rule of English law that an undisclosed principal can sue and be sued on a contract, even though his name and even his existence is undisclosed, save in those cases when the terms of the contract expressly or impliedly confine it to the parties to it."); Ford v. Williams, 62 U.S. (21 How.) 287, 289, 16 L. Ed. 36 (1858).
We are satisfied that the record contains "evidence satisfactory to the court" that Commercial had standing to sue on these agreements as either a known or an undisclosed principal, and that the district court correctly applied Sec. 1608(e) to Counts V-VII as well as to Counts I-IV.
C. Opposition to Entry of Default Judgment--The Rule 55(c) Standard
The district court evaluated appellants' opposition to the motion for a default judgment under the "good cause shown" standard of Fed. R. Civ. P. 55(c).4 Meehan v. Snow, 652 F.2d 274, 276 (2d Cir. 1981). Under Rule 55(c), the factors to be considered in deciding whether to relieve a party of a default are "whether the default was willful, whether setting it aside would prejudice the adversary, and whether a meritorious defense is presented." Id. at 277. The district court must consider all of these factors. See Information Sys. & Networks Corp. v. United States, 994 F.2d 792, 796 (Fed. Cir. 1993) (noting that the majority rule is to consider all three factors). We review the district court's decision to grant the default judgment for abuse of discretion, Davis v. Musler, 713 F.2d 907, 912 (2d Cir. 1983).
By adopting the magistrate's Report, the district court accepted his findings, including the finding that the default of the Iraqi Banks was willful. The Report notes that " [t]he Iraqi Banks have never stated that they failed to receive actual notice of the claims against them, nor have they alleged facts that would prove that the war in early 1991 against Iraq prevented response in January, 1992, to Commercial Bank's summons and complaint. Therefore, an inference of willful default is justified."
We agree with the district court's finding that the Iraqi Banks' default was willful. It is true that a relatively short period passed between the time appellants' response to the complaint was due and the time Commercial moved for default judgment. However, Commercial alleged in the district court--and there was no persuasive reason for the district court to have doubted the charge--that the Iraqi Banks purposely evaded service for months before alternative service was authorized. Moreover, we see no reason to disturb the district court's finding that the Middle East hostilities did not prevent the Iraqi Banks from responding to the complaint. For example, as Rafidain itself made clear in the district court, it did not default in involuntary liquidation proceedings commenced against it in England in February 1991, when the Gulf War was on.
Finally, we do not think that a defendant's mistaken belief that it enjoys sovereign immunity automatically precludes a finding of willfulness. In support of this proposition, appellants rely on two cases: Jackson, 794 F.2d at 1496-97; and Carl Marks & Co. v. U.S.S.R., 665 F. Supp. 323 (S.D.N.Y. 1987), aff'd, 841 F.2d 26 (2d Cir.), cert. denied, 487 U.S. 1219, 108 S. Ct. 2874, 101 L. Ed. 2d 909 (1988). While the district court in Carl Marks & Co. noted that "the Soviet Union's willful default is tempered by its genuine but unfounded belief that it enjoys [ ] sovereign immunity," id. at 332, the court went on to find that the defendant had presented meritorious defenses. Id. Moreover, our affirmance in that case rested solely on lack of jurisdiction because of the non-retroactivity of the FSIA. 841 F.2d at 27. In Jackson, which of course is not binding upon us, the 11th Circuit similarly held that the FSIA did not apply retroactively. Jackson, 794 F.2d at 1497-99. It is true that the opinion there did refer to "the misconception by an ancient and proud sovereign [China]," id. at 1496, in affirming the district court's discretionary decision to set aside a default. But here the Iraqi Banks in effect ask us to hold that if there is such a misconception and the district court nevertheless refuses to set aside a default, we must reverse. We see no persuasive reason to so limit the district court's exercise of its discretion.
The Iraqi Banks raise several defenses. We have already discussed at some length the defense of sovereign immunity and other defenses in connection with consideration of Secs. 1605(a) (2) and 1608(e). None of the remaining defenses urged upon us require further discussion. The district court dealt with all of them in satisfactory fashion.
Before making this motion, Commercial had withdrawn three of the original 11 counts of the complaint