Opinion ID: 151499
Heading Depth: 2
Heading Rank: 1

Heading: Subject Matter Jurisdiction Pursuant to the FSIA

Text: The FSIA, which is the sole source for subject matter jurisdiction over any action against a foreign state, Cabiri v. Republic of Ghana, 165 F.3d 193, 196 (2d Cir.1999), provides that a foreign sovereign shall be immune from the jurisdiction of the courts of the United States, 28 U.S.C. § 1604, unless one of the FSIA's exceptions applies, 28 U.S.C. §§ 1605-07. In deciding subject matter jurisdiction pursuant to the FSIA, we review district court factual findings for clear error and legal conclusions de novo. Karaha Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 313 F.3d 70, 80 (2d Cir. 2002). The burden is on the defendant seeking sovereign immunity to show it is a foreign sovereign. Matar v. Dichter, 563 F.3d 9, 12 (2d Cir.2009). If the defendant makes this showing, the burden then shifts to the plaintiff to show that a FSIA-enumerated exception to sovereign immunity applies. Id. Under the FSIA, in the context of a Rule 12(b)(1) motion based on factual insufficiency, a court may look beyond the pleadings, to the evidence properly before it, and assess the substance of the allegations to determine whether one of the exceptions to the FSIA's general exclusion of jurisdiction over foreign sovereigns applies. Robinson v. Government of Malaysia, 269 F.3d 133, 140 & n. 6 (2d Cir.2001) (citations omitted). The district court should make this determination recognizing that a motion to dismiss based on an assertion of sovereign immunity has particular significance because. . . [s]overeign immunity under the FSIA is immunity from suit, not just from liability. Robinson, 269 F.3d at 141 (internal quotation omitted). The question we must answer in this case is whether the commercial activity exception to foreign sovereign immunity provided by section 1605(a)(2) of the FSIA applies. Section 1605(a)(2) states, in relevant part, that a foreign state is not immune where the action is based [i] upon a commercial activity carried on in the United States by the foreign state; or [ii] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [iii] 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). Mortimer relies upon the third clause of section 1605(a)(2) to establish jurisdiction; thus, we need consider only whether this lawsuit is (1) `based . . . upon an act outside the territory of the United States'; (2) that was taken `in connection with a commercial activity' of [the foreign state] outside this country; and (3) that `cause[d] a direct effect in the United States.' Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 611, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992) (quoting 28 U.S.C. § 1605(a)(2)). The parties agree that the alleged acts at issue took place outside of the United States and caused direct effects in the United States. Mortimer, 2007 WL 2822214, at . Accordingly, our concern is whether, upon the complaint, an alleged act occurred and, if so, whether it occurred in connection with a commercial activity of the foreign state. 28 U.S.C. § 1605(a)(2). If either of these did not occur then the foreign state enjoys sovereign immunity under the FSIA and the claim against the state must be dismissed for lack of subject matter jurisdiction. We begin our analysis by identifying the particular conduct on which [Mortimer's] action is `based' for purposes of the Act. Saudi Arabia v. Nelson, 507 U.S. 349, 356-57, 113 S.Ct. 1471, 123 L.Ed.2d 47 (1993) (internal citation omitted). The act is defined by the elements of a claim that, if proven, would entitle [Mortimer] to relief under [its] theory of the case. Id. The alleged conduct that forms the basis of Mortimer's action is the assumption of liability by the FRG, and earlier by West Germany and East Germany, for the Bonds issued by banks in the territory that became West Germany and East Germany. The next step in our analysis is to determine (a) whether the foreign state (in this case, the FRG, West Germany, or East Germany) actually assumed liability for the Bonds, (b) whether the state committed an action in doing so, and (c) whether the assumption of liability was an action in connection with a commercial activity of the state that assumed liability. Mortimer seeks to recover bonds issued by banks in the territory that became both West Germany and East Germany, and we address each in turn.
Mortimer's original complaint contended that West Germany, and subsequently the FRG, assumed liability for the Bonds, 35.5% of which were issued in what later became West Germany. It alleged that West Germany obligated itself to honor the terms of these bonds by enacting the Validation Law, see Validation Law, BGBl.II at 306, Arts. 1-3; id. at 327, Schedule C.IV, and by adopting the 1953 Treaty; it further alleged that upon reunification the FRG agreed to honor West Germany's laws and treaties, resulting in the FRG's assumption of West Germany's obligation for its share of the Bonds. See Unification Treaty, 30 I.L.M. at 471, Art. 11. The FRG disagrees, contending that it did not assume liability for any bonds that were issued in what later became West Germany and that, pursuant to the London Debt Accord, its responsibility in relation to properly validated West German Bonds was only that of a transfer agent. We need not determine the FRG's obligations respecting properly validated West German Bonds to resolve this appeal because the FRG waived its transfer agent argument by failing to present it to the district court. See Paese v. Hartford Life & Accidents Inc. Co., 449 F.3d 435, 446 (2d Cir.2006) (failure to raise an argument below generally bars appellate consideration of it); Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87, 104 (2d Cir.2001). Before the district court, the FRG neither contended that it was not liable for properly validated West German Bonds, nor contested Mortimer's allegations that the FRG assumed liability for payment of the relevant bond obligations under the Validation Law and the 1953 Treaty. In its motion to dismiss for lack of subject matter jurisdiction, the FRG agreed that it had assumed liability for properly validated West German Bonds but asserted that this assumption of liability was sovereign in character and therefore entitled to immunity pursuant to the FSIA. Likewise, in its motion to dismiss for failure to state a claim, the FRG did not dispute Mortimer's allegation that the FRG had assumed liability for properly validated West German Bonds. The FRG argued instead that Mortimer had not, and could not, state a claim because Mortimer had failed to comply with the requirements of the Validation Law. Because the FRG presented no argument to the district court disputing its liability for properly validated West German Bonds, the district court's order simply set forth a then-undisputed proposition: West Germany assumed liability for certain bonds issued prior to the end of World War II, and by operation of the [1953] Treaty, its liability was extended to bonds offered in the United States. Mortimer, 2007 WL 2822214, at . The statement was a summary of facts assumed as true by both parties. As a consequence of the FRG's failure to dispute its assumption of liability over properly validated West German Bonds to the district court, it may not raise that argument on appeal. Starting from the premise that West Germany and the FRG assumed liability for properly validated West German Bonds, we conclude that this affirmative assumption of liability plainly constitutes an action under section 1605(a)(2) of the FSIA. The FSIA defines commercial activity as a regular course of commercial conduct or a particular commercial transaction or act whose character . . . shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose. 28 U.S.C. § 1603(d). In Weltover, the Supreme Court held that Argentina's issuance of garden-variety bonds as an emergency measure[] to refinance the country's debt constituted commercial activity for FSIA purposes. 504 U.S. at 609, 615, 112 S.Ct. 2160. The Supreme Court clarified that the nature and not the purpose of a transaction control[s] in determining commerciality under section 1605(a)(2). Id. at 615, 112 S.Ct. 2160. Applying this principle, the Weltover Court determined that when a foreign government acts, not as regulator of a market, but in the manner of a private player within it, the foreign sovereign's actions are `commercial' within the meaning of the FSIA. Id. at 614, 112 S.Ct. 2160 (emphasis omitted). Private parties can and often do assume liability for bonds in trade or commerce. This would occur, for example, when, after issuing bonds, Company A is acquired by and merged into Company B, which then assumes liability for Company A's bonds. By allegedly assuming obligations under the Bonds, the FRG, like Argentina in Weltover, engaged in activity routinely undertaken by private parties. There is nothing distinctive about [the FRG]'s assumption of debt (other than perhaps its purpose) that would cause it . . . to be classified as non-commercial activity. Id. at 615, 112 S.Ct. 2160; see also Jackson v. People's Republic of China, 550 F.Supp. 869, 873 (D.Ala.1982) (applying the commercial activity exception to bonds issued by China on the basis that [i]t is clear that the sale, issuance of sale and authorization of issuance for sale in the United States constitutes a `commercial activity'); cf. In re Terrorist Attacks on Sept. 11, 2001, 538 F.3d 71, 92 (2d Cir.2008) (finding no commercial activity where defendants allegedly made donations to charity that were not part of the trade and commerce engaged in by a merchant in the marketplace (internal quotation marks omitted)). The commercial nature of the act of assuming the West German Bonds is confirmed by the fact that [the Bonds] are in almost all respects garden-variety debt instruments: They may be held by private parties; they are negotiable and may be traded on the international market . . .; and they promise a future stream of cash income. Weltover, 504 U.S. at 615, 112 S.Ct. 2160. The FRG does not challenge the conclusion that assumption of liability of the Agricultural Bonds would be an act in connection with a commercial activity under the FSIA; rather, it argues, as it did below, that even if it has assumed liability for properly validated West German Bonds, the commercial activity exception would not apply to Mortimer's West German Bonds because Mortimer failed to satisfy the settlement conditions set forth in the London Debt Agreement by not complying with the validation procedures. We are unpersuaded that non-compliance with the validation procedures undermines the applicability of the commercial activity exception to the FSIA. The issue of whether Mortimer complied with the validation procedures does not touch upon any of the requirements of the commercial activity exception, which is concerned with the conduct of the foreign state and not the allegedly aggrieved party. Mortimer's alleged lack of compliance does not implicate whether the challenged conduct occurred outside of the United States, was based upon an act in connection with the commercial activity of the foreign state, or caused a direct effect in the United States. 28 U.S.C. § 1605(a)(2). Taking up the validation issue at the jurisdictional stage would thus be premature. See Ex parte McCardle, 74 U.S. (7 Wall.) 506, 514, 19 L.Ed. 264 (1868) (Jurisdiction is power to declare the law, and when it ceases to exist, the only function remaining to the court is that of announcing the fact and dismissing the cause.); Robinson, 269 F.3d at 141 (`[J]urisdiction is not defeated by the possibility that the averments might fail to state a cause of action.' (quoting Bell v. Hood, 327 U.S. 678, 682, 66 S.Ct. 773, 90 L.Ed. 939 (1946))). Finally, even if we were to accept the FRG's contention that it did not assume liability and merely acted as a transfer agent, this court would still have jurisdiction over Mortimer's action pursuant to the FSIA's commercial activity exception. In Transamerican Steamship Corp. v. Somali Democratic Republic, 767 F.2d 998, 1002-03 (D.C.Cir.1985), the only case upon which the FRG relies for its transfer agent theory, the D.C. Circuit rejected a similar argument and found that the Somali embassy exceeded the bounds of ordinary diplomatic behavior by collecting and holding funds and advising a principal as to their receipt. As the D.C. Circuit stated, [t]he proper inquiry is whether [the state] acted in a sovereign or essentially private capacity. Id. at 1002. Because private parties frequently take on similar transfer agent obligations, this court would have jurisdiction even if the court were to accept the FRG's argument that it merely acted as a transfer agent. Accordingly, we agree with the district court that the FSIA's commercial activity exception applies to the West German Bonds and affirm the district court's denial of the FRG's motion to dismiss Mortimer's claims on the West German Bonds for lack of subject matter jurisdiction.
Turning to the East German Bonds, our jurisdictional determination is different. Looking to the allegations in the complaint and the proposed amended complaint, as well as the evidence properly before us, we hold that Mortimer failed to meet its jurisdictional burden with respect to enforcing the East German Bonds against the FRG. Mortimer seeks to enforce the 64.5% of the Bonds issued by Prussian banks located in territory that became East Germany. Mortimer argues that jurisdiction is appropriate under two theories. Its first theory, predicated on successor state liability, alleges that liability exists on the basis of the FRG's formal takeover of the territory covering the East German provincial and communal debt . . . represented by the Bonds. (Proposed Am. Compl. ¶ 15.) Its second theory, predicated on affirmative assumption of liability, alleges that the FRG entered into an agreement. . . in which it assumed liability for the pre-war external debt of the German Reich, and acknowledg[ed] and confirm[ed] [its] payment obligations under the Bonds (Compl. ¶¶ 11, 20); however, the complaint neither specified nor provided copies of treaties or other legislative documents as sources of that alleged liability. In contrast, Mortimer's proposed amended complaint identified various acts of recognition by which the FRG allegedly recognized its obligation for the pre-war external debt of the German Reich[,] the [s]tate of Prussia, and East Germany, but it proffered no evidence of an explicit assumption of liability. (Proposed Am. Compl. ¶ 15.) We hold that automatic assumption of liability by a successor state, even if established, would not meet the requirements of the FSIA's commercial activity exception. We further find that there is no evidence presented that East Germany and the FRG explicitly assumed liability for any East German Agricultural Bonds, unlike West Germany, which affirmatively and unequivocally assumed liability for valid West German Agricultural Bonds by enacting the Validation Law and subsequent treaties, see, e.g., Validation Law, BGBl.II, at 327, Schedule C.IV(19). Accordingly, we find that subject matter jurisdiction is lacking over Mortimer's cause of action against East Germany.
State succession occurs when one State is replaced by another in its responsibility for the international relations of territory. Paul Williams & Jennifer Harris, State Succession to Debts and Assets: The Modern Law and Policy, 42 Harv. Int'l L.J. 355, 362 & n. 21 (2001) (internal quotation marks and citations omitted). The Third Restatement of Foreign Relations Law provides that where part of the territory of a state becomes territory of another state, local public debt [is] transferred to the successor state; [and] where a state is absorbed by another state, the public debt. . . pass[es] to the absorbing state. Restatement (Third) of Foreign Relations Law § 209(2)(a)-(b) (1987). Mortimer alleges that East Germany and the FRG automatically acceded to liability for the East German Bonds as successor states of Prussia and that this assumption of liability constitutes an action. . . based upon a commercial activity 28 U.S.C. § 1605(a)(2). While we have our misgivings as to whether successor state liability is even applicable in this case, [12] we need not reach that question. Even if we were to find successor state liability, Mortimer's cause of action would nevertheless not lie because it would fail to allege an action . . . based upon a commercial activity. § 1605(a)(2). Accession to liability by the rules of customary international law entails no action by the successor state with respect to the commercial activity at issuethe assumption of liability. The state performs no action when it automatically assumes liability. This stands in sharp contrast to a country's assumption of liability through an explicit act, such as West Germany did here. E.g., Weltover, 504 U.S. at 609, 615, 112 S.Ct. 2160 (holding that Argentina's issuance of bonds was an action that satisfied the FSIA's commercial activity exception). Because no action within the meaning of § 1605(a)(2) occurs when a successor state accedes to liability, the requirements of FSIA's commercial activity exception are not met in that context and jurisdiction under the FSIA based on such an accession will not lie.
Mortimer also alleges that the FRG acceded to obligations under the East German Bonds through various legislative documents and treaties referenced in the original and proposed amended complaints as acts of recognition. If these documents were sufficient to establish that the FRG became obligated under the East German Bonds, then FSIA jurisdiction would be present; however, they are insufficient, and jurisdiction is absent here as well. The complaint alleged that [a]fter World War II, Germany entered into an agreement with the Allied High Commission in which it assumed liability for the pre-war external debt of the German Reich. (Compl. ¶ 11.) However, the complaint provided no further specifics respecting this agreement. Thus, we understand the complaint's reference to an agreement with the Allied High Commission to refer to the London Debt Accord, which is the only possible, reasonable interpretation of Mortimer's complaint. [13] In addition, Mortimer's proposed amended complaint specified acts of recognition by which the FRG allegedly repeatedly recognized its obligation for the pre-war external debt of the German Reich and the [s]tate of Prussia: (1) the Unification Treaty, 3 I.L.M. at 379, Art. 23(6); (2) a letter dated March 6, 1951 from Konrad Adenauer, Chancellor, Federal Republic of Germany, to André François-Poncet, Chairman, Allied High Commission (Mar. 6, 1951), reprinted in 2 U.S.T. 1250, 1250, translated in 2 U.S.T. 1252, 1252 (hereinafter Adenauer Letter); and (3) a post-reunification Letter on Behalf of the Federal Republic of Germany to Office of the Chief Counsel, Securities and Exchange Commission (Feb. 18, 1994) (hereinafter SEC Filing). [14] We examine each of these documents in turn to determine whether any of them constitutes an act conferring liability for the East German Bonds upon the FRG.
The FRG's Federal Court of Justice concluded in 2005 that the London Debt Accord does not govern foreign currency bonds issued in territory that became East Germany, and that applying the Accord to such bonds would exceed the appropriate boundaries of judicial decision-making. See Bundesgerichtshof, 25 BGHZ 353/04, at 19 ¶ 41. We agree. Only two provisions of the London Debt Accord, adopted in 1960 by West Germany, address West Germany's liability for the debts of either the German Reich or East Germany. Neither obligates West Germany to assume liability for the East German Bonds. The first, Article 20, governs Reich [d]ebts and provides that West Germany will, at the request of the interested creditors, enter into direct negotiations with regard to these debts. London Debt Accord, 4 U.S.T. at 457. This provision plainly applies only to debts of the German Reich owing under [m]ultilateral [a]greements, meaning debts for which either the German Reich or West Germany had already assumed liability. Id. Even assuming arguendo that the East German Bonds constitute Reich [d]ebts for purposes of the London Debt Accord, [15] as Mortimer has maintained throughout this action, the Validation Law and 1953 Treaty, cover only foreign currency bonds issued in what later became West German territory. ( See Tr. 30:16-19 (Mortimer's counsel stated that the validation law. . . . made every effort not to cover East Germany liabilities [sic] at the time. That's confirmed.); Tr. 36:18-21(arguing that the 1953 Treaty references and is governed by the Validation Law). Thus, Article 20 does not indicate that the Accord confers East German Bond liability upon West Germany. The second provision, Article 25, specifically refers to bonds issued in territory that became East Germany, providing that the Parties . . . will review the [Accord] on the reunification of Germany to mak[e] the [Accord's] provisions . . . applicable to the debts of persons residing in East Germany. 4 U.S.T. at 459. Although anticipating West and East Germany's reunification and the need to mak[e] equitable adjustments, respecting debts incurred in the territory of East Germany, id., Article 25 and the remainder of the Accord refrained from delineating those possible adjustments, let alone imposing liability upon West Germany for any of East Germany's debts. Thus, we conclude that the London Debt Accord did not obligate the FRG to compensate holders of bonds issued in what became East Germany.
Mortimer's proposed amended complaint also alleged that upon unification, the FRG assumed liability for East Germany's debts, including the East German Bonds. Article 23 of the Unification Treaty provides that the FRG shall take over the sureties, guarantees and warranties assumed by [East Germany] and debited to its state budget prior to unification. Unification Treaty, 30 I.L.M. at 479, Art. 23(6). Article 23 is based on the recognition that [the FRG] is liable for [East Germany's] state debts. Frowein, 86 Am. J. Int'l L. at 157. But, Mortimer's argument suffers from a critical flaw: the failure to allege how East Germany assumed liability for bonds issued by private banks located in the state of Prussia. As we concluded in our discussion of automatic successor liability, supra, Mortimer has failed to allege an affirmative act by which East Germany assumed liability for debt issued within the German Reich, let alone the state of Prussia. Thus, Mortimer's allegation that the Unification Treaty alone provides no basis for liability beyond speculation that East Germany assumed liability for the bonds. A claim based on such speculation is implausible. See Iqbal, 129 S.Ct. at 1949.
The remaining documents referenced in Mortimer's amended complaint are West German Chancellor Konrad Adenauer's letter to the Allied Commission in 1951 opining that West Germany is liable for the pre-war external debt of the German Reich, 2 U.S.T. at 1252, and, the FRG's SEC filing in 1994 stating that the FRG is not only the successor to, but is identical with, the German Reich under principles of international public law, and that holders of the interest coupons or talons. . . can look only to the Federal Republic for payment, SEC Filing at 3. Neither document provides an independent legal basis for holding the FRG liable for the East German Bonds. Mortimer has identified, and we have located, no precedent holding a foreign sovereign state liable based solely on a representation by its head of state or an administrative filing made in the United States on the sovereign's behalf. Moreover, neither document expressly mentions the East German Bonds at issue; instead, each discusses West Germany's affirmative assumption of liability for the German Reich's pre-war external debts issued in what became West Germany. It is at best ambiguous whether such statements were intended to cover the East German Bonds, thereby expanding the FRG's legal obligations, as opposed to discussing then-existing debts and obligations undertaken by West Germany in pre-existing multilateral agreements such as the 1960 Treaty. Chancellor Adenauer's 1951 letter speaks only to West Germany's assumption of the German Reich's debt; it gives no indication that West Germany assumed more than the debt incurred in what became its territory or otherwise obligated itself to honor debt incurred in what became East Germany. Instead, the letter discusses West Germany's debts by reference to its obligation to resume payments on the German external debt. 2 U.S.T. at 1253. Moreover, Mortimer has never explained how West Germany might have assumed liability for the East German Bonds or would have had any motivation to do so prior to the 1951 letter, such as by way of a preexisting multilateral agreement. The SEC filing cited by Mortimer provides that the FRG is liable for  certain bonds issued between 1924 and 1930 by the German Reich and the [s]tate of Prussia, and subsequently references interest payments that the present-day FRG  obligated itself to pay . . . following the reunification of Germany under the London Debt Accord. SEC Filing at 1 (emphases added). As already explained, because the London Debt Accord does not cover foreign currency bonds issued in the territory of East Germany, the SEC filing logically refers only to bonds issued in what became West German territory, bonds for which West Germany and thus the FRG repeatedly and affirmatively assumed liability, beginning with the Validation Law and 1953 Treaty. Accordingly, we conclude that neither letter expands the FRG's liability to encompass obligations for the East German Bonds. After considering and rejecting all the documents identified by Mortimer's proposed amended complaint as potential bases for holding the present-day FRG liable for the East German Bonds as incapable of advancing Mortimer's claim for compensation, we are left with mere conclusory statements, Iqbal, 129 S.Ct. at 1949, in Mortimer's original complaint. These contentions fail to show anything more than a sheer possibility, id., that the FRG assumed liability under the East German Bonds. We thus agree with the district court that leave to amend would be futile because Mortimer's proposed amended complaint did not cure the original complaint's deficiencies. See Acito, 47 F.3d at 55. For the foregoing reasons, we affirm the judgment of the district court dismissing Mortimer's claim to enforce the East German Bonds, but we do so on the alternative ground that Mortimer has failed to make the threshold showing necessary to invoke the commercial activity exception to the FSIA, and therefore subject matter jurisdiction is lacking. Insofar as Mortimer has moved for leave to amend the judgment and to amend the complaint with respect to the East German Bonds, we affirm the district court's denial of that motion.