Opinion ID: 3012842
Heading Depth: 3
Heading Rank: 2

Heading: Analysis Under the Organ Prong

Text: The FSIA does not define the term “organ” as used in section 1603(b)(2) and we have not had occasion to consider the meaning or application of that term under the statute. Other courts have developed a flexible approach to determine whether an entity qualifies as an organ of a foreign state under the FSIA and thus is its agency or instrumentality. The Court of Appeals for the Ninth Circuit asks whether the entity “ ‘engages in a public activity on behalf of the foreign government.’ ” EOTT Energy Operating Ltd. P’Ship v. Winterthur Swiss Ins. Co., 257 F.3d 992, 997 (9th Cir. 2001) (quoting Patrickson v. Dole Food Co., 251 F.3d 795, 807 (9th Cir. 2001), aff ’d in part, dismissed in part, 123 S.Ct. 1655 (2003)). In doing so, that court considers factors including “ ‘the circumstances surrounding the entity’s creation, the purpose of its activities, its independence from the government, the level of government financial support, its employment policies, and its obligations and privileges under state law.’ ” Id. (quoting Patrickson, 251 F.3d at 807). The court also has stated that “[t]he Act’s legislative history suggests that Congress intended the terms ‘organ’ and ‘agency or instrumentality’ to be read broadly.” Gates v. Victor Fine Foods, 54 F.3d 1457, 1460 (9th Cir. 1995). The Court of Appeals for the Fifth Circuit looks to similar factors: “ ‘(1) whether the foreign state created the entity for a national purpose; (2) whether the foreign state actively supervises the entity; (3) whether the foreign state requires the hiring of public employees and pays their salaries; (4) whether the entity holds exclusive rights to some right in the [foreign] country; and (5) how the entity is treated under foreign state law.’ ” Kelly v. Syria Shell Petroleum Dev. B.V., 213 14. Certain insurers contend that USX has waived the waiver issue by not discussing the fact that the district court deemed the notice amended under section 1653 and not arguing that it abused its discretion in doing so. Supp. Br. at 30 & n.8. Inasmuch as USX’s brief does discuss section 1653, albeit briefly, USX Br. at 29, it did not waive this issue. 30 F.3d 841, 846-47 (5th Cir. 2000) (quoting Supra Med. Corp. v. McGonigle, 955 F. Supp. 374, 379 (E.D. Pa. 1997)). That court, however, does not apply those factors mechanically and does not require that all five support a determination that an entity is an organ. Id. These two courts of appeals appear to be the only ones to have considered directly the factors leading to a conclusion that an entity is an organ of a foreign state. A primary purpose of the FSIA is to make it difficult for private litigants to bring foreign governments into court, thereby avoiding affronting them. Patrickson, 251 F.3d at 806 (citing First Nat’l City Bank v. Banco Nacional de Cuba, 406 U.S. 759, 762, 92 S.Ct. 1808, 1810-11 (1972)). In passing the FSIA, Congress adopted the so-called restrictive theory of sovereign immunity, whereby a foreign state (including its agencies and instrumentalities) is immune from suit for its public or sovereign activities, but not for its commercial or private activities. H.R. Rep. No. 94-1487, at 7 (1976), reprinted in 1976 U.S.C.C.A.N. 6604, 6605. Even when a case involves a foreign state’s private activities, however, the FSIA provides the state with particularized procedural treatment in some circumstances, for example, regarding venue, 28 U.S.C. § 1391(f), rule of decision, id. § 1606, and execution, id. § 1610. Furthermore, as is evident from this case, a foreign state defendant, when named as a third-party defendant may remove the entire case to a district court, even where it is merely one among almost 50 otherwise non-foreign state defendants. The court then must try the case without a jury. 28 U.S.C. § 1441(d). The FSIA therefore provides for suit in federal court in a potentially broad array of cases, with significant procedural consequences, some of which a plaintiff likely will not welcome. With respect to the jurisdictional provisions of the FSIA, the legislative history states: “Such broad jurisdiction in the Federal courts should be conducive to uniformity in decision, which is desirable since a disparate treatment of cases involving foreign governments may have adverse foreign relations consequences.” H.R. Rep. No. 94-1487, at 13, 1976 U.S.C.C.A.N. at 6611. Thus, in considering the scope of the FSIA the point has not been lost on us that the 31 presence of a foreign state third-party defendant has resulted in the disposition in a district court of a case even though it had been brought in a state court and overwhelmingly involves domestic parties and state law issues and, in the absence of the foreign state party, would have remained in the state court.15 In deciding whether to adopt the Court of Appeals for the Ninth Circuit’s standard for determining whether an entity constitutes an organ of a foreign state, we therefore should be mindful of the congressional goals of promoting uniformity of decision and avoiding impairing foreign relations because the consequences of the presence of FSIA-predicated jurisdiction are so significant. Surely, a bright-line rule of the sort the Supreme Court adopted with respect to the majority ownership in Dole provides for the greatest uniformity of decision. Nevertheless inasmuch as the statute and legislative history are silent as to a definition of the term “organ,” and that term inherently is vague and does not have a well-established common law meaning, Congress’s inclusion of the term within the definition of “agency or instrumentality” of a foreign state suggests the need for a more flexible approach under the organ prong of section 1603(b)(2) than the Court adopted in Dole with respect to the ownership prong of that section. A flexible approach is particularly appropriate after Dole, inasmuch as courts likely now will be asked to evaluate the possible organ status of a wide variety of entities controlled by foreign states through tiering arrangements and because of the widely differing forms of ownership or control foreign states may exert over entities. See Joseph W. Hardy, Jr., Note, Wipe Away the Tiers: Determining Agency or Instrumentality Status Under the Foreign Sovereign Immunities Act, 31 Ga. L. Rev. 1121, 1161, 1164-66, 117273 (1997). Nonetheless, we must be vigilant to protect the goal of uniformity and therefore in determining whether an entity is an organ should consider factors similar, if not identical, to those considered by the Courts of Appeals of the Ninth and Fifth Circuits. 15. Of course, the same thing can happen when there is diversity of citizenship even though, as here, the plaintiff initiated the action in a state court. 32 We agree with the Court of Appeals for the Ninth Circuit that for an entity to be an organ of a foreign state it must engage in a public activity on behalf of the foreign government. Requiring less would open the door to situations in which a party only tangentially related to a foreign state could claim foreign state status and avail itself (and, incidentally, any other defendants in the case) of the FSIA’s procedural provisions which, as we have indicated, plaintiffs are not likely to welcome. This result would be unfair to plaintiffs, who in some such cases might not have reason to know of the slight relationship of their dealings with the foreign states, and who, therefore, likely would not have had the opportunity to consider this important fact when negotiating contracts by, for example, negotiating for waiver clauses, or when initiating suit by following the special procedures required by the FSIA.16 Joseph W. Dellapenna, Refining the Foreign Sovereign Immunities Act, 9 Willamette J. Int’l L. & Disp. Resol. 57, 93 (2001). Requiring less would not further the goal of avoiding adverse foreign relations. On the other hand, requiring more would pose potential foreign relations problems. One district court, taking a narrow view of the term “organ,” cited a Supreme Court case interpreting the term “agency or instrumentality” of the Federal government for purposes of the Federal Tort Claims Act to support its conclusion that organ status under the FSIA turns not on “the degree to which an entity is subject to government regulation aimed at assuring compliance with government goals,” but on “the ‘power of the Federal Government to control the detailed physical performance of the contractor.’ ” See Edlow Int’l Co. v. Nuklearna Elektrarna Krsko, 441 F. Supp. 827, 832 (D.D.C. 1977) (quoting United States v. Orleans, 425 U.S. 807, 814, 96 S.Ct. 1971, 1976 (1976)). The court therefore concluded that the entity 16. Indeed, as this case demonstrates, a party might be dealing with an entity that was not an organ of a foreign state at the time of its dealings. Here USX obtained its insurance coverage for periods before Ireland became involved in ICI and thus it was not dealing with an organ of Ireland at that time. But we are holding that ICAROM was an organ when USX sued it and it removed the case and its status at that time is what matters. See Dole, 123 S.Ct. at 1662. 33 involved in that case, a “worker’s organization” founded under the constitution and laws of the Socialist Federal Republic of Yugoslavia (“SFRY”), was not an organ of the SFRY despite the extent to which the state exercised ultimate control over its policies and operations because its “daily operations [were] virtually free of direct government control.” Id. This narrow a construction of the term “organ” could have potentially adverse effects on foreign relations insofar as foreign states may place significant national value in an entity yet not directly control its daily operations. The Court of Appeals for the Ninth Circuit’s definition finds a happy medium whereby an entity that engages in activity serving a national interest and does so on behalf of its national government qualifies for the protections of the FSIA, including a federal forum. In making this assessment, factors employed by both the Courts of Appeals for the Ninth and Fifth Circuits are relevant, although no one is determinative: (1) the circumstances surrounding the entity’s creation; (2) the purpose of its activities; (3) the degree of supervision by the government; (4) the level of government financial support; (5) the entity’s employment policies, particularly regarding whether the foreign state requires the hiring of public employees and pays their salaries; and (6) the entity’s obligations and privileges under the foreign state’s laws.17 To this list, we should add an additional factor: (7) the ownership structure of the entity. Under the organ prong, as opposed to the majority ownership prong of section 1603(b)(2), a foreign state might own only 10% of an entity; it might own directly 50% of the entity; or it might own 17. It is important to note with respect to the sixth factor that characteristics such as the entity’s ability to sue and be sued in its own name, to contract in its own name, and to own property in its own name are not particularly significant with respect to a finding of organ status, given that all entities claiming agency or instrumentality status must, under 28 U.S.C. § 1603(b)(1), be a “separate legal person.” Congress intended this term to encompass “a corporation, association, foundation, or any other entity which, under the law of the foreign state where it was created, can sue or be sued in its own name, contract in its own name or hold property in its own name.” H.R. Rep. 94-1487, at 15, 1976 U.S.C.C.A.N. at 6614. 34 even 100% of a holding company that owns 100% of the entity. On the other hand it is possible that a foreign state might not own any portion of any entity that nevertheless is its organ as section 1603(b)(2) does not require a foreign state to have any ownership interest in an entity for it to be its organ. Courts should consider how these different ownership structures might influence the degree to which an entity is performing a function “on behalf of the foreign government.”18 Before applying these factors to this case, we reiterate that USX “does not dispute the District Court’s factual findings relating to ICI/Icarom’s alleged organ status.” USX Supp. Reply Br. at 9. USX contends only that the district court misapplied the relevant legal factors in considering those facts. a. The Circumstances Surrounding ICAROM’s Creation It is undisputed that ICI was created as a purely commercial, private company in 1935 for the for-profit business purpose of selling insurance policies. USX relies heavily on this fact, and on the fact that since being placed in administration ICAROM has continued as a commercial venture by selling off the Irish Business and by running off liabilities. We believe, however, that USX misunderstands the nature of this factor. First, while this factor certainly would weigh more heavily in favor of organ status where the entity originally was created for a government purpose, see, e.g., Kelly, 213 F.3d at 848 (noting that the entity in question was created by government decree to develop and explore the government’s mineral resources); Corporacion Mexicana de Servicios Maritimos, S.A. de C.V. v. M/T Respect, 89 F.3d 650, 654-55 (9th Cir. 1996) (noting that the entity in question was created by Mexican law to refine 18. Given this analysis, it is clear that the factual allegations of ICAROM’s notice of removal, which include the assertion that Ireland owns a majority of ICAROM’s shares, are relevant to the organ analysis as well as to the majority ownership analysis on which ICAROM originally focused. Even if we did not add “ownership structure” as a seventh factor to consider in the organ analysis the allegation likely would be relevant to the third factor, namely, the degree of supervision by the government. 35 and distribute property of the Mexican government), it should not be applied so mechanically as to ignore the possibility that a foreign state later may acquire an initially private company and use it for government purposes. Furthermore, that ICAROM’s activities may have been predominantly (or entirely) commercial has little bearing on this factor (although it is relevant to the second factor). In any event, a foreign state receives the benefit of the FSIA’s procedural provisions in actions arising out of its commercial activities, so that too heavy a focus on the commercial nature of an entity’s activities would tend to confuse the question of the level of protection provided by the FSIA (full immunity or not) with the antecedent question we face here, namely, whether the entity comes within the purview of the FSIA at all. As the district court found, the Irish government indirectly acquired ICI to serve the important national interest of protecting the Irish insurance and banking industries from financial disaster, which in turn helped to maintain stability in the Irish economy. Juris. J.A. at 4142. The government did not seek any profit-making opportunity, but rather acquired ICI to further this important governmental interest. To advance this purpose, the Minister acted in accordance with special legislation adopted by the Irish Parliament. That legislation further provided that the Minister may hold the shares of SAT as he or she sees fit; SAT’s shareholders must hold the shares in trust for the Minister and are bound to pay all dividends or other monies received to the Minister for the benefit of the Exchequer; the Minister may require the shareholders to transfer their shares back to the Minister or to his or her designee; upon the death of a shareholder, the shares automatically vest in the Minister without the need for any transfer of shares; the Minister appoints the directors of SAT after consultation with the Minister of Finance; and the directors hold office on terms and conditions determined by the Minister who may remove them at any time. Moreover, the legislation authorized the Minister to guarantee payment by ICI itself under certain insurance policies. USX argues that the 1985 Act is irrelevant to ICAROM’s status as an organ because the Act authorized the creation 36 and acquisition of SAT, not ICI, and the organ status of SAT is not at issue here. We do not believe, however, that the Supreme Court’s holding in Dole requires us to blind ourselves to the true nature of the 1985 Act, thus effectively extending Dole’s antitiering holding to the organ prong of section 1603(b)(2). When the Irish Parliament passed the 1985 Act, SAT was a holding company with no purpose other than holding all but six shares of ICI. The shares were held in trust for the Minister, who could hold or dispose of them as he or she saw fit. Thus, although the legislation nominally authorized only the acquisition of SAT, in substance the transaction authorized the acquisition of ICI, albeit indirectly. In USX’s view, ICAROM is attempting to circumvent Dole by relying on the 1985 Act under the organ prong. See USX Reply Br. at 12. The Court’s decision in Dole, however, turned on a discrete question of statutory interpretation. The Court noted that the majority ownership prong of section 1603(b)(2) “speaks of ownership,” and that the prong’s insistence on ownership of “shares” demonstrated “that Congress intended statutory coverage to turn on formal corporate ownership.” Dole, 123 S.Ct. at 1660. Because, under basic tenets of corporate law, a parent corporation does not “own,” i.e., have legal title to, the assets of its subsidiary, a parent company does not own shares of a company held by its subsidiary. Id. at 1660-61. As the Court noted, however, “[c]ontrol and ownership . . . are distinct concepts.” Id. at 1661. The Court rejected a control test under the majority ownership prong because the statutory language of the majority ownership prong of section 1603(b)(2) makes clear that ownership, not control, is required. Id. at 1661-62. On the other hand, the organ prong does not speak of ownership. We find that, although Congress favored ownership over control in the majority ownership prong, its use of the word “organ” suggests an emphasis on control under the organ prong. Thus, although the 1985 Act in terms authorized the acquisition of SAT, not ICI, by that time SAT owned ICI and Dole does not prohibit us from examining the substance of the transaction, whereby full control of ICI effectively was transferred to the government, even if legal title to the 37 shares of ICI was not.19 Because an act of Parliament authorized the government’s assumption of control over ICI and because of the extent of the government’s involvement and authority in facilitating the transaction, this factor weighs in favor of a finding of organ status. b. The Purpose of ICAROM’s Activities As just discussed, the acquisition of ICI served an important governmental interest, namely protecting the Irish insurance and banking industries from financial disaster and maintaining stability in the Irish economy. To be sure, as USX points out, at least since 1990 ICAROM’s purpose has been solely to run off claims arising under old policies, as would a private insolvent insurance company engaged in winding down its business. This observation, however, does not take into account the fact that the government played an integral role in the 1990 transaction that has led ICAROM to operate in this way. In 1990, the administrator consulted with and obtained approval from the government, which played an active role in the bidding process, before disposing of the Irish Business and positioning ICAROM to operate as a runoff company. Furthermore, the administrator still consults with the Minister regarding major decisions and gives regular, detailed reports on the status of ICAROM. Thus, although ICAROM is operating solely as a runoff company, it does so only because the government positioned it to do so and only under the supervision of the government, as the district court found. See Juris. J.A. at 42, 44. Moreover, in doing this it is carrying out the undertaking of the government when it intervened in the first instance so that a public financial crisis would be avoided. This factor therefore also favors a finding of organ status. c. The Degree of Supervision by the Government As suggested by the above discussion, the government has played and continues to play an active role in 19. For the same reason, we are able to consider ownership structure as a factor unto itself under the organ prong without running afoul of Dole even where that structure involves tiering. 38 supervising ICAROM’s operations though, as the district court found, the government does not control them on a day-to-day basis. Id. at 42. Rather, those responsibilities lie with the administrator, subject only to approval of the High Court, as would be the case for any private insurer in administration under the 1983 Act. Nonetheless, the record supports the district court’s finding that the government exercises “a substantial level of oversight and control over all major decisionmaking affecting Icarom’s ongoing financial affairs.” Id. at 44. In addition to the reports and consultation already discussed, the government was involved heavily in the 1990 transaction, which positioned ICAROM as a runoff company. ICAROM’s current administrator testified that “in all aspects of dealing with the government . . . they are very much the boss.” Id. at 1456. A representative of the Minister testified that the Minister requires frequent consultation so that he or she may “answer in Parliament as owners of . . . Icarom.” Id. at 1294. The government’s supervision of ICAROM is therefore substantial, and this factor likewise cuts in favor of a finding of organ status. d. The Level of Government Financial Support UXS argues that the government has not provided financial support to ICAROM for its funding has come from the ICF. Furthermore, the only cost to the government in supporting ICAROM, according to USX, has been the foregone interest on the 32 million loan from 1992. As the district court found, however, this understanding of the government’s financial relationship to ICAROM ignores the fact that the government, despite not directly funding ICAROM, has “arranged and provided financial support” for ICAROM and, in doing so, has subjected itself to substantial risk. Juris. J.A. at 42. USX’s observation that the government never has had to make good on its guarantees is beside the point. The government has assured ICAROM’s solvency by indirectly lending it money despite the risk of ICAROM not repaying. Furthermore, the government has guaranteed substantial loans made by private lenders to ICAROM.20 Finally, the government has 20. That the government guaranteed that the ICF would have sufficient funds to satisfy any obligations under these loans rather than 39 lost the use of approximately 32 million in foregone interest, which, as the district court noted, amounts to approximately 9% of the total funding obtained to keep ICAROM operating during the relevant time period. The risk the government assumed in arranging financing for ICAROM and its foregoing interest demonstrate that the government provided significant financial support to ICAROM. This factor therefore also weighs in favor of a finding of organ status. e. ICAROM’s Employment Policies The government does not require ICAROM to hire public employees, nor does it pay its employees’ salaries. Although tending to ICAROM has “consumed a significant amount of [the government’s] civil servants’ time and effort,” as the district court found, this observation is of little relevance, as it says nothing about the status of ICAROM’s employees. More relevant is the fact that the government approved both the current administrator before the High Court appointed him and the current general manager before the administrator appointed him. Nonetheless, Irish civil servants do not work for ICAROM. ICAROM pays three fulltime employees who participate in the company’s private pension plan, not a government plan. The employment policies factor therefore weighs against a finding of organ status. f. Other Obligations and Privileges Under Irish Law ICAROM has no special obligations or privileges under Irish law and this factor weighs against a finding of organ status as in some situations an organ would have such obligations or privileges. g. The Ownership Structure of ICAROM Although the government does not directly own ICAROM, it indirectly has complete control over ICAROM’s shares. guaranteeing the loans directly is a distinction of little difference inasmuch as in either case the government ultimately bears the risk of default. 40 Six of ICAROM’s shares are held in trust for the Minister by civil servants. SAT holds all other shares of ICAROM, and the only two shareholders of SAT are also civil servants who hold those shares in trust for the Minister.21 It is unsurprising, then, that the Irish government believes, as it apparently always has, that it is the owner of ICAROM. This position has been stated in the Certificate of Ownership, see Juris. J.A. at 1230-31 (“[O]n 15 March 1985 the Government of Ireland decided to acquire ICI . . . . This legislation . . . was enacted for the purpose of enabling Ireland to own the shares of ICI through the Minister . . . . [A]s successor to the then Minister for Industry, Trade, Commerce and Tourism, I on behalf of Ireland, acquired ownership of the company now called ICAROM PLC . . . .”), as well as in the testimony of an employee of the Minister, see id. at 1294 (“The position of Ireland is that we own Icarom.”), and of the current administrator, see id. at 1342 (“[T]he Republic of Ireland owns ICAROM through SAT . . . .”), and current general manager of ICAROM, see id. at 1327 (“Icarom is owned by the Irish government.”). USX attempts to dismiss the significance of Ireland’s indirect ownership of ICAROM by pointing out that the administrator with the approval of the High Court, not the Minister, in most respects runs ICAROM on a day-to-day basis and that the Irish government never has claimed to own PMPA/Primor, the only other insurer to be in administration. This argument is entirely off the mark. ICAROM does not argue that it is an organ because it is in administration (and therefore must report to the government through the High Court), but rather because Ireland owns it for a purpose set forth by the Irish government. Ireland never has owned or controlled PMPA/Primor, either directly or indirectly, nor has it claimed that PMPA/Primor serves any national interest. Because Ireland has complete control over all shares of ICAROM, albeit through a tiered arrangement involving civil 21. ICAROM points out that it is not uncommon for the Irish government to provide for statutory ownership of state-owned corporations in this manner. 41 servants who hold their interests in trust for the Minister, this factor weighs in favor of a finding of organ status.22