Opinion ID: 625173
Heading Depth: 3
Heading Rank: 4

Heading: Clause Three

Text: Clause three of the commercial activities exception strips a foreign sovereign of its immunity when a court determines that a plaintiff's action is based . . . upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States. 28 U.S.C. § 1605(a)(2) (2006) (emphasis supplied). The Supreme Court has held that an effect is direct if it follows as an immediate consequence of the defendant's. . . activity. Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 618, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992) (internal quotation marks and alteration omitted); accord Martin v. Republic of S. Africa, 836 F.2d 91, 95 (2d Cir.1987) (The common sense interpretation of a `direct effect' within the meaning of § 1605(a)(2) is one which has no intervening element, but, rather, flows in a straight line without deviation or interruption.). In cases involving the default by a foreign state or its instrumentality on its commercial obligations, an act has a direct effect in the United States if the defaulting party is contractually obligated to pay in this country. Weltover, 504 U.S. at 611, 618-19, 112 S.Ct. 2160; see also Comm. Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 241 (2d Cir.1994); Texas Trading & Mill. Corp. v. Fed. Republic of Nigeria, 647 F.2d 300, 312 (2d Cir.1981), overruled on other grounds by Frontera Resources Azerbaijan Corp. v. State Oil Co. of Azerbaijan Republic, 582 F.3d 393 (2d Cir. 2009) (finding a direct effect where New York corporations sought unsuccessfully to enforce a contract in New York City, such that the financial loss and breach both occurred in the United States). In Weltover, the Republic of Argentina issued bonds with an explicit provision that permitted the holder to designate either London, Frankfurt, Zurich, or New York as the place for the payment of principal and interest. Id. at 609-10, 112 S.Ct. 2160. The Weltover plaintiffs so designated New York. Id. at 619, 112 S.Ct. 2160. At the time when the plaintiffs' principal and interest payments became due, Argentina instead rescheduled them. Id. Several bondholders rejected the rescheduled payments and instead demanded full payment in New York. Id. On these fact, the Supreme Court held that, because the plaintiffs designated their accounts in New York as the place of payment, . . . New York was thus the place of performance for Argentina's ultimate contractual obligations, [and] the rescheduling of those obligations necessarily had a `direct effect' in the United States. Id. Beyond this scenario, we have found the direct effect requirement satisfied where a defaulting party agreed in advance, pursuant to the terms of a letter of credit, to make payments according to [a payee's] instruction, and the payee selected a New York bank. Hanil Bank v. PT. Bank Negara Indonesia (Persero), 148 F.3d 127, 132 (2d Cir.1998). On the other hand, we have held, in the RICO context, that there was no direct effect in the United States where (i) certain prepayment agreements were negotiated in France and governed by French law, (ii) did not require performance in the United States, and (iii) the plaintiff was a foreign corporation that did not suffer any demonstrable harm in the United States. Kensington, 505 F.3d at 158; see also Int'l Hous. Ltd. v. Rafidain Bank Iraq, 893 F.2d 8, 12 (2d Cir.1989) (finding no direct effect in the United States even though a payment had in fact been made to Rafidain's U.S. correspondent bank account because, inter alia, the [p]ayment in New York City was not a contractual requirement under the guaranty bonds); Filetech S.A. v. France Telecom, S.A., 212 F.Supp.2d 183, 197 (S.D.N.Y.2001) aff'd and opinion adopted and incorporated as the law of the Circuit by, 304 F.3d 180, 182 (2d Cir.2002) (In [ Weltover ] and its progeny, the ultimate object of the contractthe contract's raison d'etre was the payment of funds in the United States. In the case at bar, there is no evidence that [the defendant's] activities in France intended or contemplated a specific effect in the United States. (citation omitted)). Here, as in Kensington, Rafidain Bank, and Filetech, there was no requirement that payment be made in the United States nor any provision permitting the holder to designate a place of performance. And contrary to the District Court's finding, there is nothing in the language of the Bonds that suggests a reasonable understanding that the United States could be a possible place of performance. The Bonds were issued in the Portuguese language as evidence of payment of the Brazilian compulsory motor vehicle fee. See Kensington, 505 F.3d at 157 (holding that prepayment agreements had no connection to the United States where they were negotiated in France, written in French, apply to foreign entities, and specify France as the exclusive jurisdiction to resolve disputes). [8] Thus the court's reliance on United States Fid. & Guar. Co. v. Braspetro Oil Servs. Co., No. 97 Civ. 6124(JGK), 1999 WL 307666 (S.D.N.Y. May 13, 1999), denial of motion to dismiss for lack of subject matter jurisdiction aff'd substantially for the reasons stated in the district court opinion, 199 F.3d 94, 97 (2d Cir. 1999), was misplaced because in that case, the court found a direct effect to exist where, inter alia, the bonds at issue were understood to be (although not contractually obliged to be) payable in New York. Id. at . Moreover, the plaintiffs in Braspetro, as a result of their default, were required to pay substantial damages in United States dollars from United States bank accounts, and the court found that [t]he payment of such a large sum of money from United States accounts, certainly causes a direct effect. Id. at . No such specific effect in the United States was intended or contemplated by the parties here. Filetech, 212 F.Supp.2d at 197; Filetech, 304 F.3d at 182. Finally, we note that the plaintiffs' status as United States citizens does not sufficiently outweigh the fact that payment was not contemplated in the United States so as to afford the District Court jurisdiction. See Virtual Countries, Inc. v. Republic of S. Africa, 300 F.3d 230, 240 (2d Cir.2002) (holding that the theory that any U.S. corporation's financial loss constitutes a direct effect in the United States [to be] plainly flawed and observing that its reasoning was equally applicable to a natural person); Antares Aircraft, L.P. v. Fed. Republic of Nigeria, 999 F.2d 33, 36 (2d Cir.1993).