Opinion ID: 795095
Heading Depth: 2
Heading Rank: 3

Heading: FG Hemisphere II: SNPC's Working Interest

Text: 63 In FG Hemisphere II, the Congo Defendants argue that the district court erred in determining that the Garnishees' obligation to pay SNPC's working interest is a debt obligation. They contend that SNPC and the Garnishees were co-owners of working interests under the JOA and that SNPC owns a working interest to take oil produced in the Congo—not oil owed by the Garnishees to SNPC. 64 The Congo Defendants assert that the district court mischaracterized SNPC's property as obligations owed to SNPC. They further argue that the agreements for SNPC to take liftings do not convert the under-lifted positions of SNPC into an obligation on the part of the Garnishees. Just as in FG Hemisphere I, the Congo Defendants contend that the district court erred in applying the § 1610(a) exception to immunity to the Congo's property because the Garnishees did not possess obligations due to SNPC that were in the United States or used for commercial activity in the United States. 65 FG Hemisphere counters that the JOA parties agreed not to distribute, pro rata by working interest share, the oil or proceeds from each lifting directly to each working interest holder; instead they entered into agreements that create legal obligations in the Garnishees toward SNPC. FG Hemisphere contends that the December 2004 garnishment writs were properly issued because SNPC's working interest was property of the Congo, in the United States, that was used for commercial activity in the United States. 66 Among their various arguments, the Congo Defendants raise the jurisdictional defense that SNPC's property—property of the Congo, as stipulated by the parties—is immune from execution pursuant to the FSIA. FG Hemisphere argues, inter alia, that this property satisfies the § 1610(a) exception to immunity. As the threshold determination, we first address the sovereign immunity claim. We do not reach the parties' other arguments about SNPC's property because there was error as a matter of law in the analysis of the immunity claim and the interpretation of § 1610(a). See discussion infra Part III. C.3. 67 To apply the § 1610(a) exception to executional immunity, there must be a finding that the property is located in the United States and used for commercial activity in the United States. The absence of either prong is fatal to the § 1610(a) executional immunity exception. In addition, there must be a waiver of immunity by the foreign sovereign. Therefore, the district court could have jurisdiction over FG Hemisphere's action to garnish SNPC's working interest share only if the Congo has waived its immunity from execution against this working interest, and (1) the working interest share is property of the Congo that was in the United States when the district court authorized execution against it, and (2) the working interest share has been used for commercial activity in the United States. The discussion in part III.A and our conclusion that, to satisfy the § 1610(a) situs requirement, the property must be in the United States when the district court authorizes execution, also apply to the immunity determination about SNPC's working interest. As we explained in Part III.B., this determination must be made prior to authorization of execution. 68 In the December 2004 order authorizing execution against the obligations owed by the Garnishees to SNPC that SNPC owes to the Congo, the district court found that the Garnishees owe intangible obligations to SNPC and in turn to the Congo under the terms of the JOA. The district court made a number of additional findings of fact and conclusions of law, including the following: 69 (1) the Garnishees advance to SNPC the JOA expenses via a transaction that functions like a revolving loan, therefore these obligations are not immune under the FSIA; 70 (2) the Congo's waiver of immunity on sovereign immunity grounds was not the only waiver; there were others that effectively waived any FSIA defense, including the defense that the property was not used for commercial activity in the United States; 71 (3) the Congo has authorized seizure of its property in the United States; 72 (4) the intangible property at issue is simply a species of the previous determination made in this proceeding that the property was used for commercial purposes; and 73 (5) when this proceeding was instituted, the Garnishees held assets for the Congo in the United States. 74 The district court concluded that [b]ased on the application for writs of garnishment and the response in opposition thereto, these obligations are property of the Congo, SNPC has assets located in the United States that have been used for commercial activity in the United States and, therefore, FG Hemisphere may execute on said property. 75 We have reviewed the writ application and response thereto and find the factual basis used to support the district court's conclusion is, at best, inconclusive—and, at worst, insufficient — as to that part of SNPC's working interest (if any) that is intangible property. Moreover, the district court's findings of fact and conclusions of law reveal an erroneous interpretation and application of § 1610(a). Some of the factual findings are clearly erroneous. Others, though not clearly erroneous, were used in the district court's misinterpretation and/or misapplication of law. 76 The district court's ultimate conclusion was that FG Hemisphere may execute on SNPC's working interest share because it is an asset located in the United States and used for commercial activity in the United States. As explained below, this conclusion is erroneous. See discussion infra Part III.C.3. We discuss, but do not decide, whether the factual basis for this conclusion was sufficient. 77
78 In accord with the statute, Af-Cap II does not permit a § 1610(a) exception to immunity for obligations that were not used for commercial purposes in the United States. Af-Cap II, 389 F.3d at 504. The fact that property was generated by commercial activity, namely, oil exploration, is irrelevant; what matters under § 1610(a) is what the property is used for. Walker Int'l I, 395 F.3d at 235-36; see also Af-Cap I, 309 F.3d at 251 (What matters under [§ 1610(a)] is what the property is `used for,' not how it was generated or produced.). [E]ven if a foreign state's property [was] generated by commercial activity in the United States, that property is not thereby subject to execution or attachment if it is not used for a commercial activity within our borders. Af-Cap I, 309 F.3d at 251 (internal quotation marks omitted). 79 In its December 2004 order, the district court stated that the Garnishees . . . owe to SNPC certain intangible obligations under agreements relating to [the 1979] Convention. This order does not otherwise mention the Convention, JOA, or Amendment to Lifting except in reference to the Congo's waiver of immunity and the Garnishees' royalty obligations. The district court concluded that the Garnishees' payments of SNPC's share of operation expenses, and recoupment of their payments from SNPC's share of oil, is a transaction that functions like a revolving loan—and is therefore not immune under the FSIA — but did not determine whether this transaction is a loan or other intangible obligation. Similarly, the district court made no factual findings that support its determination that the Garnishees' obligation to pay SNPC's working interest share is property that satisfies the § 1610(a) requirements. There is no factual basis in the district court's analysis to support its conclusion that the Garnishees owe intangible obligations to SNPC that are not immune from execution. 80 FG Hemisphere argues that the working interest share has been used for commercial activity in the United States to finance the lifting and production of oil, and/or to finance the costs of such production. According to FG Hemisphere, the Garnishees' obligation to pay SNPC its working interest share has been used to finance the production and lifting of oil in Congolese waters. FG Hemisphere characterizes the reimbursement to the Garnishees as a use of the Garnishees' obligation to give SNPC its working share. FG Hemisphere asserts that this use of SNPC's working interest share to reimburse the Garnishees is payment of a commercial debt to the Garnishees. FG Hemisphere further asserts that the Garnishees are deemed to be in the United States for purposes of the FSIA, and were undisputedly based in the United States when this action commenced in federal court. Therefore, FG Hemisphere contends, this reimbursement use of the working interest share is commercial activity in the United States under the FSIA, just as in Af-Cap II the Congo's use of royalties to pay a commercial debt to a United States-based creditor was commercial activity in the United States. See Af-Cap II, 383 F.3d at 368, 370-71 and 389 F.3d at 504. 81 FG Hemisphere's argument is creative but it does not accurately describe the sequence of these transactions. Pursuant to the JOA, the Garnishees advance SNPC's share of the operating expenses. SNPC is then obligated to reimburse the Garnishees; it is SNPC's debt obligation. After an oil lifting, SNPC takes less than its working interest share of the production with the remaining part of its share used to reimburse the Garnishees. Just over one third of the total production is retained by the Garnishees to reimburse themselves. It is not clear how the repayment of SNPC's debt to the Garnishees becomes SNPC property in the hands of the Garnishees solely because the Garnishees and SNPC agreed that SNPC may reimburse the Garnishees by letting them keep part of an oil lifting that otherwise would be paid to SNPC. 82 Neither the district court's factual findings nor FG Hemisphere's argument in this interlocutory appeal indicates that SNPC's working interest was used for commercial activity within the United States. The district court's conclusion that this property was located in the United States was based on a previous, unrelated situs determination and on a situs snapshot taken at commencement of the federal garnishment proceedings. The district court's factual findings do not support its conclusions of law. The district court misapprehended § 1610(a) in making the immunity determination and authorized execution against SNPC's property because it incorrectly applied the law to the facts. 83
84 The December 2004 order contains a number of findings and conclusions that reveal misinterpretation of law, factual errors, and misapplication of law to the facts. We shall discuss two examples. First is the statement that there had been a previous finding and holding that SNPC's working interest share was used for commercial purposes. Second is the holding that the Congo waived its FSIA defenses and authorized seizure of its property. 85 The district court deemed the working interest to be simply a species of the previous determination made in this proceeding that the property was used for commercial purposes. The previous determination was in the modified October 2004 order that authorized execution against the royalty obligations. The immunity determination about SNPC's working interest share is not a species of the determination about the royalty obligations. Moreover, the district court cannot rely on the October 2004 determination because it had no subject matter jurisdiction at that time. 86 Prior to issuing a garnishment order, a district court must make factual findings that support application of the § 1610(a) exception to executional immunity during the situs snapshot for each form of property. For example, a foreign sovereign's car does not become exempt from executional immunity solely because it was previously determined that the sovereign's airplane was not protected by FSIA immunity. Likewise, a previous determination that royalty obligations were used for commercial activity in the United States tends to neither prove nor disprove whether a working interest share was used for commercial purposes in the United States. 3 As a matter of law, the working interest share could only be executed against if both § 1610(a) requirements were met and the Congo's waiver of immunity applied to SNPC's property. The obligation to pay SNPC's working interest would not be exempt from executional immunity just because the § 1610(a) exception applied to the obligations to pay royalties. 87 Next, the district court's finding that the Congo waived its FSIA defenses regarding SNPC's property is clearly erroneous. The Congo stipulated that any SNPC property was also the Congo's property, but reserved its right to challenge whether such property is: (1) property in which SNPC has a right or interest; (2) sited in the United States; and (3) property used for a commercial activity in the United States within the meaning of 28 U.S.C. § 1610(a). Contrary to the district court's findings, the Congo did not waive its FSIA defenses. Moreover, the § 1610(a) defenses are jurisdictional and can only be waived by failure to raise the sovereign immunity claim.
88 The error of law critical to our disposition of FG Hemisphere II is the conclusion that a determination that the foreign sovereign's property is not immune to execution necessarily, and without more, results in an order authorizing execution. This error is also among the reversible errors in FG Hemisphere I. 89 In restating its October 2004 order, the district court concluded that the royalty obligations were property located in the United States and used for commercial activity in the United States, thus satisfying the requirements of the Foreign Sovereign Immunities Act and enabling the plaintiff to execute on said property. Therefore, it is Ordered that [FG Hemisphere]'s Application for Writs of Garnishment is Granted. This statement highlights what may be a common misapprehension of the law. The December 2004 order repeats this misinterpretation and misapplication of law: 90 [T]he Court determines that said obligations constitute property of the Congo and that SNPC has assets located in the United States, which have been used for commercial activity within the United States, therefore, satisfying the requirements of the Foreign Sovereign Immunities Act and enabling the plaintiff to execute on said property. 91 Therefore, it is Ordered that plaintiff's Application for Writs of Garnishment is Granted. 92 Thus, the district court granted FG Hemisphere's applications for writs of garnishment as the consequence of its determination that the property satisfied the requirements of an exception to the FSIA's immunity from execution. 93 A finding that an exception to executional immunity applies is a finding that the court has jurisdiction over the garnishment action. This is not the same as concluding that execution is appropriate or that writs of garnishment should issue. As actions supplemental to or in aid of execution, according to Federal Rule of Civil Procedure 69, garnishment actions are governed by state law to the extent it does not conflict with federal law. 4 Fed. R.Civ.P. 69(a); Tex. Civ. Prac. & Rem. Code §§ 63.001-63.008 (providing for garnishment actions); Tex.R. Civ. P. 657-79 (same); Grenada Bank v. Willey, 694 F.2d 85, 87 n. 2 (5th Cir.1982) (A writ of execution cannot be the exclusive means of enforcing a judgment since [the State's] practice and procedure provides for garnishment.). 94 We note that there have been no findings whether the royalty interest and working interest are real property, intangible personal property, or both. Likewise, there has been no finding that the property is garnishable under Texas law. Application of an exception to immunity is but the first step, yet a very important step, that gives the district court jurisdiction to apply state law to determine whether it should authorize execution against the foreign sovereign's property. 95 Because the district court misinterpreted and misapplied § 1610(a), we reverse its December 2004 order authorizing execution against this property. The garnishment writs issued as a direct result of legal error. Therefore we remand the matter with instructions to dissolve the writs issued pursuant to this order. 5