Opinion ID: 767723
Heading Depth: 2
Heading Rank: 1

Heading: The FSIA and the Commercial Activity Exception

Text: 10 In suits against foreign sovereigns, it is well settled that the FSIA provides the only basis for the subject-matter jurisdiction of U.S. courts. See Saudi Arabia v. Nelson, 507 U.S. 349, 355 (1993). Thus, a foreign state, including its agencies and instrumentalities, is presumptively immune from suit in U.S. courts unless a specific FSIA exception to such immunity applies. See 28 U.S.C. 1603(a)-(b); Nelson, 507 U.S. at 355. TASK invoked two FSIA exceptions to immunity in the district court. The first was 1605(a)(2), which creates what is known as the commercial activity exception to foreign sovereign immunity. The second was 1605(a)(1), which permits suits when the foreign state has waived its immunity either explicitly or by implication.
11 Section 1605(a) states that [a] foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case . . . (2) in which the 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). This exception contains two requirements: (1) there must be an act outside the United States in connection with a commercial activity of the foreign state that causes a direct effect in the United States and (2) the plaintiff's suit must be based upon that act. 12 i. An Act Outside the United States Having a Direct Effect In the United States 13 The act that TASK claims caused a direct effect within the United States in this case is the failure of VSL to deposit funds into a New York bank account as specified in the charter contracts. SFTC argues, however, that, on the facts of this case, such a failure to deposit could not have given rise to the requisite effect. It further asserts that, even if the failure to pay the money into the New York account were conceded to have caused an effect in the United States, that effect was not the direct result of any act undertaken by SFTC. That is, SFTC contends that the contracts at issue in this case were between VSL and TASK, that SFTC was not a party to them and that it therefore had no obligation to make any payments into any New York account. At most, according to SFTC, SFTC breached a duty to indemnify VSL, which as a result failed to pay TASK in New York. SFTC claims, therefore, that its connection to the New York payment was mediated by VSL and that the effect in New York was, if anything, only indirectly related to any acts attributable to it. 14 TASK replies by arguing that, under Supreme Court precedent, the failure to pay money into the New York account gave rise to a sufficient effect within the States. See Republic of Argentina v. Weltover, 504 U.S. 607, 619 (1992) (finding a direct effect where Argentina failed to make a deposit into a New York bank account). TASK also argues that, because SFTC and VSL had a principal-agent relationship, the actions of VSL were, for the purposes of FSIA analysis, attributable to SFTC. It would follow that VSL's failure to pay into the New York account were as much actions of SFTC as if VSL had never even been involved. The effect in New York would, as a result, qualify as a direct effect of SFTC's acts. 15 Both the questions of whether the effect is enough to meet the statutory requirements and whether the necessary principal-agent relationship exists are complex. But we need not decide them. We will instead assume, for purposes of this opinion, that TASK has raised sufficient issues of fact as to each so that at this stage of the proceedings it is appropriate to act as if an effect in the United States exists and as if there were the kind of principal-agent relationship between SFTC and VSL that would make that effect directly attributable to SFTC. 16 ii. Based Upon 17 But, in order to find jurisdiction under the third clause of 1605(a)(2) of the FSIA, it is not enough to find that the defendant committed some act in connection with a commercial activity of the foreign state elsewhere and that act cause[d] a direct effect in the United States. We must also find that the plaintiff's suit in U.S. courts is based upon that act. 18 SFTC argues that because this suit is to enforce Hong Kong judgments, it is based upon those judgments rather than on the acts that underlie them. In support of this contention, it cites language in Nelson indicating that an action is based upon those elements of a claim that, if proven, would entitle a plaintiff to relief under his theory of the case. 507 U.S. at 357. And it asserts that the elements of a claim on a foreign judgment -- what, in other words, must be shown in order to enforce such a judgment in a U.S. court -- are simply that the foreign judgment be final, conclusive, and enforceable where rendered. See Seetransport Wiking Trader Schiffarhtsgesellschaft mbH & Co. v. Navimpex Centrala Navala, 989 F.2d 572, 583 (2d Cir. 1993). None of these elements, SFTC points out, has anything to do with the acts that TASK has identified as having caused a direct effect within the United States. 3 19 SFTC's contention, however, seems to be inconsistent with our prior case law. See International Housing Ltd. v. Rafidain Bank Iraq, 893 F.2d 8, 11-12 (2d Cir. 1989) (examining the conduct -- i.e., the breach of contract -- underlying a foreign judgment to determine whether jurisdiction existed in a suit to enforce a default judgment entered in the Bahamas). 4 Moreover, SFTC's position would, in practice, preclude plaintiffs from enforcing any foreign judgments against foreign sovereigns in U.S. courts under 1605(a)(2). For the elements of such an enforcement action would never have anything to do with the underlying commercial activity. 20 How we resolve the tension between International Housing and SFTC's position would have a significant impact on U.S. foreign relations. This is especially so, given that the United States is currently involved in negotiations concerning a proposed Hague Convention on the Recognition and Enforcement of Foreign Judgments. See Arthur T. Von Mehren, Enforcing Judgments Abroad: Reflections on the Design of Recognition Conventions, 24 Brooklyn J. Int'l L. 17, 18 (1998). Fortunately, we need not decide this sensitive question either. For, even assuming that -- contrary to SFTC's contention -- we are permitted to look at the conduct underlying the Hong Kong judgments, we nevertheless conclude that TASK has failed to create an issue of fact as to whether its suit in the district court was based upon an act that causes a direct effect in the United States. 28 U.S.C. 1605(a)(2) (emphasis added). 21 What does based upon mean? At a minimum, that language implies a causal relationship. Thus, at the least, the act that caused a direct effect in the United States (the Act) must be a but for cause of the judgments that are the ground of this suit. That is, it must be true that without the Act, there would be no judgments on which to sue. But this is not enough. Where a causal relationship is required, we must also always ask how close that relationship must be to suffice. When the causal requirement is imposed by the common law, that closeness is usually expressed in terms of proximate cause and of causal link or tendency. See Moore v. Painewebber, Inc., 189 F.3d 165, 174 (2d Cir. 1999) (Calabresi, J., concurring). Where, instead, the requirement is statutory, it is the statute itself that establishes how near or how distant the but for cause must be if it is to meet the statutory test. See Abrahams v. Young & Rubicam Inc., 79 F.3d 234, 237 (2d Cir. 1996); Moore, 189 F.3d at 178 (Calabresi, J., concurring) (It should not be forgotten, however, that the pertinent requirements of proximate cause in a RICO case are those intended by the legislature that passed the statute, and not those of the common law.). In the case before us, it is therefore the FSIA that determines the proximity -- between the Act and the suit -- that must be present in order for the suit to be based upon that Act. 22 We know from Nelson that based upon requires a degree of closeness between the acts giving rise to the cause of action and those needed to establish jurisdiction that is considerably greater than common law causation requirements. See Nelson, 507 U.S. at 357. We decline to decide today, as SFTC would have us do, that any suit brought on a foreign judgment -- rather than on the conduct that underlies that judgment -- is too distant (though we do not exclude that possibility). But we conclude that nothing that TASK has alleged would permit us to find that the relationship required by the statutory language exists, in this case. 23 The legal proceedings against SFTC that resulted in the three default judgments that TASK now seeks to enforce were brought by VSL's Hong Kong liquidators against SFTC on behalf of VSL. 5 TASK now has a claim against SFTC only because the VSL liquidators chose to assign to TASK these judgments rather than some other assets that would have satisfied TASK's claims in the amount of HK$ 12,512,940.36 against VSL. 6 But how VSL's liquidators chose to pay TASK was not in any way dependent on the New York contract or on any acts in breach of that contract that had a direct effect in New York. And TASK was, presumably, indifferent to how this payment was to be accomplished. 24 Thus, VSL's obligations to TASK might have been satisfied with cash, with a pot of gold, or with HK$ 12,512,940.36 worth of bananas. Similarly, VSL might have assigned to TASK foreign court judgments that VSL obtained against SFTC for SFTC's breach of a contract whose entire locus and place of performance had nothing to do with the United States or with TASK. Had VSL done this, it clearly could not be argued that these judgments were based upon acts having a direct effect in the United States. For even assuming that foreign judgments, or the assignment of them, can ever satisfy the based upon requirement, if the acts upon which the assigned judgments are themselves grounded do not meet the based upon requirement of 1605(a)(2) of the FSIA -- i.e., where they are not acts taken in connection with a commercial activity that caused a direct effect in the United States -- an action to enforce the foreign judgments in U.S. courts must fail for lack of subject matter jurisdiction. 25 One could argue more broadly that any judgment that was purchased by, or assigned to, the plaintiff, is ipso facto too distant, even if that same judgment -- had it been won directly by the plaintiff -- would be proximate enough to qualify. Nevertheless, just as we declined to decide whether suits on any foreign judgments are automatically too distant to be based upon the requisite Act, so we need not determine today whether every assigned, or purchased, judgment fails to meet the statutory requirement. It is enough for us to say that any assigned or purchased judgment is unlikely to qualify as based upon the requisite U.S. Act of the assignor, and that further analysis in the context of this case would be unhelpful and speculative because nothing in the record indicates the legal basis of SFTC's obligation to pay VSL. (The Hong Kong court's determination that SFTC was bound to indemnify VSL for its liabilities to TASK does not tell us how or why this obligation arose.) Thus, even if we assume that this failure to pay had the requisite direct effect in the United States, we are bound, under the circumstances, to hold that TASK has not made allegations sufficient for us to find that its action against SFTC is in fact based upon VSL's assumedly U.S. Acts.
26 Before the trial court, TASK also argued that China (and therefore SFTC) had implicitly waived its sovereign immunity because China was a signatory to the Convention on the Recognition and Enforcement of Arbitral Awards (the Convention). The district court properly rejected the argument. 27 In Seetransport, we held that Romania, by becoming a signatory to the Convention and entering into a contract with an arbitration clause and participating in arbitration proceedings, had waived its sovereign immunity for the purposes of challenging U.S. jurisdiction over a suit to enforce the arbitral awards resulting from that contract. See 989 F.2d at 578-79. Moreover, after dismissing the claim for enforcement of the arbitration awards as time-barred, we found that a separate claim to convert a Paris Court of Appeals judgment, which dismissed the Romanian company's direct appeal of the arbitration awards, into a U.S. judgment had to be allowed under the same exception because the cause of action is so closely related to the claim for enforcement of the arbitral award. Id. at 583. 28 Although one of the judgments in this case orders SFTC to pay VSL the amount awarded TASK in an arbitral award against VSL, there are differences between this case and Seetransport that preclude any direct application of our holding in that case to these facts. The judgment before us did not result from a direct appeal of the arbitral award, as in Seetransport, but rather from a suit by VSL against SFTC for indemnification. The judgment ordering indemnification -- and not a judgment reviewing (and confirming) the arbitral award itself -- is what TASK seeks to enforce in our courts. Because the implied waiver exception is to be construed narrowly, see Drexel Burnham Lambert Group, Inc., 12 F.3d at 325, and because it is hard to view this suit as being in essence a suit designed to enforce an arbitral award, we believe that the exception is inapplicable to this case.