Opinion ID: 779633
Heading Depth: 2
Heading Rank: 1

Heading: Separate Juridical Entity Analysis

Text: 11 In Bancec, the Supreme Court clearly stated that the FSIA does not govern substantive liability for foreign states or their instrumentalities. See 462 U.S. at 620, 103 S.Ct. 2591 (The language and history of the FSIA clearly establish that the Act was not intended to affect the substantive law determining the liability of a foreign state or instrumentality, or the attribution of liability among instrumentalities of a foreign state.). The enumerated exceptions to the FSIA provide the exclusive source of subject matter jurisdiction over civil actions brought against foreign states, see Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434-35, 109 S.Ct. 683, 102 L.Ed.2d 818 (1989), but the FSIA does not resolve questions of liability. Questions of liability are addressed by Bancec, which examines the circumstances under which a foreign entity can be held substantively liable for the foreign government's judgment debt. This distinction between liability and jurisdiction is crucial to our resolution of this case. 12 In Bancec, the government of Cuba expropriated property from First National City Bank (subsequently known as Citibank). Citibank asserted a set-off against the plaintiff Bancec based upon the Cuban government's seizure of Citibank's Cuban assets. 462 U.S. at 616, 103 S.Ct. 2591. The Court addressed the issue of whether the acts and liabilities of the foreign sovereign government of Cuba could be attributed to the state-owned banking entity, Bancec. 13 The Court held that Bancec was not an entity independent from the Cuban government. Id. at 633, 103 S.Ct. 2591. In making this determination, the Court noted that Bancec had been dissolved and its capital split between a Cuban national bank and the foreign trade enterprises of the Cuban Ministry of Foreign Trade. Id. at 632, 103 S.Ct. 2591. Furthermore, Bancec was empowered to act as the Cuban government's exclusive agent in foreign trade, the government supplied all of Bancec's capital and owned all of its stock, and all of Bancec's profits were deposited in the General Treasury. Bancec's Governing Board consisted of delegates from Cuban government ministries and the president of Bancec was the Minister of State. See Bancec, 462 U.S. at 614, 103 S.Ct. 2591. The Court explained, To hold otherwise would permit governments to avoid the requirements of international law simply by creating juridical entities whenever the need arises. Id. at 633, 103 S.Ct. 2591. 7 14 Nonetheless, under Bancec, even though an entity or instrumentality is wholly-owned by a foreign state, that entity is accorded the presumption of independent and separate legal status. Id. at 627-28, 103 S.Ct. 2591. Bancec outlined the features typical of a separate government instrumentality: 15 A typical government instrumentality, if one can be said to exist, is created by an enabling statute that prescribes the powers and duties of the instrumentality, and specifies that it is to be managed by a board selected by the government in a manner consistent with the enabling law. The instrumentality is typically established as a separate juridical entity, with the powers to hold and sell property and to sue and be sued. Except for appropriations to provide capital or to cover losses, the instrumentality is primarily responsible for its own finances. The instrumentality is run as a distinct economic enterprise; often it is not subject to the same budgetary and personnel requirements with which government agencies must comply. 16 Id. at 624, 103 S.Ct. 2591. 17 The Court indicated that the presumption of separate juridical status may be overcome in two ways. First, where it can be shown that the corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created, we have held that one may be held liable for the actions of the other. Id. at 629, 103 S.Ct. 2591. Second, an instrumentality should not be deemed a separate juridical entity where doing so would work fraud or injustice. Id. 8 Having laid out these two exceptions to the presumption of separate juridical status, the Court declined to provide a mechanical formula for determining the circumstances under which the normally separate juridical status of a government instrumentality is to be disregarded. Id. at 633, 103 S.Ct. 2591. 9 18 Flatow argues that the district court erred in applying Bancec and concluding that BSI is a separate juridical entity, which cannot be held liable for Flatow's judgment against Iran. 10 Flatow rests his argument almost entirely upon the contention that the Iranian Constitution, which nationalized the banking industry after the 1979 Iranian revolution, creates a principal-agent relationship between BSI and the Iranian government. 11 Flatow argues that this fact alone demonstrates the control required by Bancec to preclude an entity from separate juridical status. 12 19 The district court considered and rejected this argument in a thorough, well-reasoned opinion. Specifically, the court concluded that the facts of this case are different from those in Bancec. The court found that Flatow had not shown that BSI operates as an arm of the Iranian government or that BSI's mission is to further the policies of the Iranian government. Additionally, unlike in Bancec, BSI is not attempting to use a United States court to recover on a claim while at the same time trying to avoid being the subject of an adversary proceeding. BSI is a nonparty to the underlying case. 20 In rejecting Flatow's principal-agent argument, the district court also pointed out that BSI is an Iranian corporation, organized under the banking laws of Iran as a banking corporation, but it has its own Articles of Association. 13 BSI was founded in 1952 and until 1979, 14 BSI was a privately owned bank. BSI consists of more than 3000 branch offices throughout the Middle East, London, Paris, Hamburg, and New York. The New York office is the only office BSI has in the United States. 15 21 BSI has continued to operate under its own charter as a separate banking entity, and is supervised by a Board of Directors. The Board of Directors consists of a Managing Director, one person from among the BSI staff, and five other recommended individuals. The members of the Board of Directors are elected for three-year terms and may be reelected. The Managing Director holds the highest administrative and executive position and has authority to determine bank policies. 16 The Board of Directors is responsible for, and presides over, the daily activities of BSI. 22 According to the district court, two governmental entities regulate BSI: the General Assembly of Banks and the High Council of Banks. The General Assembly consists of Iranian government officials 17 and it meets yearly to review the status of banks in Iran. It reviews BSI's annual report, balance sheet, and profit and loss statements. The High Council of Banks 18 has an advisory role to the General Assembly of Banks and meets weekly. The High Council proposes candidates for Iranian banks' boards of directors, including BSI's Board of Directors, and assists in the preparation of regulations, budgets, and reports on banking operations in Iran. The High Council does not involve itself in the day-to-day operations of BSI. The district court credited BSI's assertion that the General Assembly of Banks and the High Council of Banks perform broad policymaking functions like those of the United States Federal Reserve. 23 Finally, the district court noted the affidavit of Mohammedreza Moghadasi, the Managing Director of BSI, in which Moghadasi asserts that members of the BSI Board of Directors are all career bankers with extensive experience in finance and banking. He also states that the Board of Directors appoints officers of the bank and oversees the bank's affairs, which include accepting deposits, loan and investment activities, letters of credit, credit collections, and payment order transactions. 24 Flatow argues that Iran's ownership of BSI's capital precludes BSI from being considered a separate juridical entity under Bancec. However, Flatow is incorrect in his belief that this fact alone is determinative. As the Supreme Court recognized in Bancec, an entity fully owned by a foreign state is still accorded the presumption that it is a separate juridical entity. See Bancec, 462 U.S. at 624, 103 S.Ct. 2591 (recognizing that government appropriations to provide capital or to cover losses do not prevent a typical government instrumentality from being considered a separate juridical entity); see also Banco Nacional de Cuba v. Chemical Bank New York Trust Co., 782 F.2d 377, 380 (2d Cir.1986) (concluding that although Banco Nacional was entirely owned by Cuba it was a separate entity from Cuba); Pravin Banker Assoc. v. Banco Popular del Peru, 9 F.Supp.2d 300, 306 (S.D.N.Y. 1998) (analogizing Peru's full ownership of the bank to the conduct of a majority shareholder and concluding that state ownership cannot be the sole basis for ignoring the corporate form, especially where the entity was not established in an attempt to shield the assets of Peru). We reject Flatow's argument that the Iranian Constitution and the nationalization of Iranian banks are sufficient to overcome the Bancec presumption, and accordingly, we affirm the decision of the district court. 25 We also affirm the district court's determination that Iran's limited supervision, through the role of the General Assembly of Banks and the High Council, does not constitute day-to-day control sufficient to overcome the separate juridical entity presumption. The government involvement must rise to a higher level. See, e.g., McKesson Corp. v. Islamic Republic of Iran, 52 F.3d 346, 351-52 (D.C.Cir.1995) (concluding that the separate juridical entity presumption was overcome where Iran controlled routine business decisions, such as declaring and paying dividends and honoring contracts); Kalamazoo Spice Extraction Co. v. Provisional Military Gov't of Socialist Ethiopia, 616 F.Supp. 660, 666 (W.D.Mich.1985) (finding day-to-day control where the government required that all checks above a certain amount be signed by a government official, governmental agency was required to approve all invoices for shipment, and the government generally exercised direct control over the instrumentality's operations). The daily affairs of BSI and its 3000 branch offices are overseen by the Board of Directors, consisting of career bankers, the Managing Director, and other bank officers. On this record, the level of economic control exercised by the Iranian government over BSI appears quite limited, and we agree with the district court that Flatow has not shown that the Iranian government is the real beneficiary of BSI's banking operations.