Court Opinion

ID: 4101423
Source: CourtListenerOpinion
Date Created: 2016-11-23 01:01:05.266467+00
Date Added: 2024-06-11T13:28:03.391679
License: Public Domain

Case: 15-10717   Document: 00513770910       Page: 1   Date Filed: 11/22/2016

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT     United States Court of Appeals
                                                                           Fifth Circuit

                                                                          FILED
                                   No. 15-10717                      November 22, 2016
                                                                       Lyle W. Cayce
                                                                            Clerk
JOAN GALE FRANK; JON A. BELL; DOCTOR SAMUEL BUKRINSKY;
JAIME ALEXIS ARROYO BORNSTEIN; PEGGY ROIF ROTSTAIN; JUAN
C. OLANO; JOHN WADE, in his capacity as trustee of the Microchip ID
Systems, Inc. Retirement Plan, on behalf of themselves and all others
similarly situated,

             Plaintiffs–Appellees,

v.

THE COMMONWEALTH OF ANTIGUA AND BARBUDA,

             Defendant–Appellant.

__________________________

Cons. w/ No. 15-10788

THE OFFICIAL STANFORD INVESTORS COMMITTEE,

             Plaintiff–Appellee,

v.

ANTIGUA AND BARBUDA,

             Defendant–Appellant.

                Appeals from the United States District Court
                     for the Northern District of Texas

Before WIENER, PRADO, and OWEN, Circuit Judges.
     Case: 15-10717       Document: 00513770910           Page: 2    Date Filed: 11/22/2016

                          No. 15-10717 cons. w/ No. 15-10788
EDWARD C. PRADO, Circuit Judge:
       These      consolidated       cases      involve     Defendant–Appellant,           the
Commonwealth of Antigua and Barbuda (“Antigua”), and its alleged
involvement with the Stanford Ponzi scheme. As a foreign nation, Antigua
challenged the district court’s jurisdiction in each suit under the Foreign
Sovereign Immunities Act (“FSIA”). The district court determined that it had
jurisdiction over the suits under both the commercial activity and waiver
exceptions of the FSIA. Antigua appeals these rulings. We REVERSE in part
and REMAND.
             I. FACTUAL AND PROCEDURAL BACKGROUND
       The consolidated cases involved in this appeal are: (1) No. 15-10717,
Frank et al. v. Commonwealth of Antigua & Barbuda and (2) No. 15-10788,
Official Stanford Investors Committee v. Antigua & Barbuda. Plaintiffs in the
first suit, the “Frank suit,” are individual customers 1 of Stanford International
Bank, Ltd. (“SIBL”) that “had money on deposit at SIBL, and held [certificates
of deposit (“CDs”)] issued by SIBL.” Plaintiff in the second suit, the Official
Stanford Investors Committee (“OSIC”), the “OSIC suit,” is a court-appointed
committee representing the interests of SIBL depositors and the court-
appointed receiver and receivership estates. Defendant–Appellant Antigua is
an island nation located in the Caribbean. Both the Frank and OSIC suits were
filed over Antigua’s alleged involvement with the Stanford Ponzi scheme and
were consolidated on appeal solely to address whether the district court has
jurisdiction over Antigua under the FSIA.

       1 The Frank suit was filed by several individuals as a class action, but, for clarity, we
will refer solely to the first named individual, Joan Gale Frank, on behalf of the potential
class.
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                        No. 15-10717 cons. w/ No. 15-10788
A.    Stanford Ponzi Scheme
      To understand the underlying allegations in both suits, a brief
explanation of the Stanford Ponzi scheme is required. 2 Allen Stanford owned
and operated multiple financial entities, including the SIBL, which was an
offshore bank located in Antigua. Janvey v. Democratic Senatorial Campaign
Comm., Inc., 712 F.3d 185, 188 (5th Cir. 2013). Through these entities,
Stanford sold CDs to investors, promising exceptionally high rates of return.
Id. Most of the funds raised from the sale of these CDs were never invested, as
promised, but were used to pay back other investors in the scheme. Id. When
the scheme collapsed in 2009, Stanford had sold over $7 billion in fraudulent
CDs. Id. at 188–89. Stanford was subsequently convicted of multiple federal
crimes and was sentenced to 110 years’ imprisonment. United States v. Kuhrt,
788 F.3d 403, 412 (5th Cir. 2015); Janvey, 712 F.3d at 189.
B.    Antigua’s Alleged Involvement in the Scheme
      The primary allegation in both the Frank and OSIC suits is that Antigua
acted as an active and willing participant in Stanford’s scheme and knowingly
provided Stanford and his businesses a safe harbor from regulatory scrutiny.
Plaintiffs in both suits allege that Stanford and Antigua engaged in a quid pro
quo relationship in which Stanford provided Antigua financial incentives to
encourage and ensure its involvement in his scheme by bribing public officials
and providing loans to Antigua, which were never repaid. Specifically,
Plaintiffs allege that the “loans were merely a way to transfer the proceeds of
the Ponzi scheme to Antigua.” In exchange for the loans, they allege that
“Antigua assisted Stanford by conferring legitimacy on the fraudulent
enterprise and on Stanford himself, providing assurance to investors that the

      2 For more information on the Stanford Ponzi scheme, see United States v. Stanford,
805 F.3d 557 (5th Cir. 2015), and Janvey v. Democratic Senatorial Campaign Comm., Inc.,
712 F.3d 185 (5th Cir. 2013).
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activities of SIBL and Stanford were legitimate and subject to regulatory
authority.”
      Plaintiffs contend that as part of its involvement in the Ponzi scheme,
Antigua allowed Stanford undue influence over the regulations his
organizations would be subject to. They also allege that Stanford exerted
undue influence over the individuals charged with ensuring that he and his
organizations were in compliance with the relevant regulations. Crucial to
Antigua’s alleged involvement with Stanford’s scheme was the Financial
Services Regulatory Commission of Antigua (“FSRC”) and Leroy King, the
FSRC’s Administrator and Chief Executive Officer, who were tasked with
regulating the SIBL. Plaintiffs allege that Stanford bribed King in order to
allow the SIBL to escape regulatory scrutiny from the FSRC.
C.    Frank Suit
      In July 2009, Frank filed a complaint on behalf of himself and similarly
situated individuals alleging various claims under the Racketeer Influenced
and Corrupt Organizations Act (“RICO”), a claim for aiding and abetting fraud,
and a claim to recover fraudulent transfers under the Texas Uniform
Fraudulent Transfer Act (“TUFTA”). Antigua filed a motion to dismiss in
December 2010, alleging that the district court lacked jurisdiction under the
FSIA and that Frank failed to state a claim upon which relief could be granted.
Frank subsequently abandoned the RICO claims. In June 2015, the district
court granted Antigua’s motion in part and denied it in part. Specifically, the
district court dismissed Frank’s TUFTA claim for lack of standing and held
that it had jurisdiction under the FSIA over the aiding and abetting fraud
claim, which is the only remaining claim on appeal.
D.    OSIC Suit
      In February 2013, OSIC filed a complaint alleging two breach of contract
claims, a claim for avoidance and recovery of fraudulent transfers under

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                          No. 15-10717 cons. w/ No. 15-10788
TUFTA, a claim for aiding and abetting fraud, a claim for aiding and abetting
a breach of fiduciary duty, civil conspiracy, and a claim for aiding and abetting
violations of the Texas Securities Act. Antigua moved to dismiss in January
2014, arguing that the district court lacked jurisdiction under the FSIA and
that OSIC failed to state a claim upon which relief could be granted. The
district court granted Antigua’s motion in part and denied it in part.
Specifically, the district court dismissed OSIC’s TUFTA claims for constructive
fraudulent transfers occurring prior to February 15, 2009, but held that it had
jurisdiction over all of OSIC’s remaining claims, including its TUFTA claims
for actual fraudulent transfers.
              II. JURISDICTION AND STANDARD OF REVIEW
       Under the collateral order doctrine, 3 this Court has interlocutory
appellate jurisdiction over a motion to dismiss on the basis of sovereign
immunity. Rodriguez v. Transnave Inc., 8 F.3d 284, 286 n.4 (5th Cir. 1993).
       Our review of a district court’s sovereign immunity ruling under the
FSIA is de novo. Id. at 287. This Court may “decide only legal issues when [it]
review[s] an appeal from a collateral order.” United States v. Moats, 961 F.2d
1198, 1202 (5th Cir. 1992). “This rule carries even more weight here because
the district court resolved FSIA immunity . . . on the basis of the complaint,”
id. (citation omitted), 4 and, as such, we must assume the truth of the facts
asserted, see Saudi Arabia v. Nelson, 507 U.S. 349, 351 (1993).

       3   “[T]he collateral order doctrine accommodates a ‘small class’ of rulings, not
concluding the litigation, but conclusively resolving ‘claims of right separable from, and
collateral to, rights asserted in the action.’” Will v. Hallock, 546 U.S. 345, 349 (2006) (quoting
Behrens v. Pelletier, 516 U.S. 299, 305 (1996)). These claims are “too important to be denied
review and too independent of the cause itself to require that appellate consideration be
deferred until the whole case is adjudicated.” Id. (quoting Cohen v. Beneficial Indus. Loan
Corp., 337 U.S. 541, 546 (1949)).
        4 In FSIA cases, jurisdictional discovery may be permitted to resolve factual disputes

crucial to determining whether a foreign state is immune from suit. Arriba Ltd. v. Petroleos
Mexicanos, 962 F.2d 528, 534 (5th Cir. 1992). No such discovery was conducted in this case.
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                               III. DISCUSSION
A.    The FSIA
      A suit is properly dismissed when a court lacks subject matter
jurisdiction over the case. Home Builders Ass’n of Miss., Inc. v. City of Madison,
143 F.3d 1006, 1010 (5th Cir. 1998). The FSIA “provides the sole source of
subject matter jurisdiction in suits against a foreign state.” Dale v.
Colagiovanni, 443 F.3d 425, 427–28 (5th Cir. 2006); see also 28 U.S.C. § 1604.
“The general rule under the FSIA is that foreign states are immune from the
jurisdiction of the United States Courts.” Dale, 443 F.3d at 428 (quoting Byrd
v. Corporacion Forestal y Industrial de Olancho S.A., 182 F.3d 380, 388 (5th
Cir. 1999), abrogated on other grounds by Samantar v. Yousuf, 560 U.S. 305
(2010)).
      “However, a district court can exercise subject matter jurisdiction over a
foreign state if one of the statute’s exceptions apply.” Id. at 428 (quoting Byrd,
182 F.3d at 388). A foreign state “need only present a prima facie case that it
is a foreign state; and, if it does, the burden shifts to the party opposing
immunity to present evidence that one of the exceptions to immunity applies.”
Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 847 (5th Cir. 2000).
Once the party seeking the exception has “assert[ed] at least some facts that
would establish the exception,” “the party seeking immunity bears the
ultimate burden of proving the nonapplicability of the exception[] raised by its
opponent.” Stena Rederi AB v. Comision de Contratos del Comite Ejecutivo
General del Sindicato Revolucionario de Trabajadores Petroleros de la
Republica Mexicana, S.C., 923 F.2d 380, 390 n.14 (5th Cir. 1991).
      This appeal involves two exceptions to sovereign immunity under the
FSIA—the commercial activity exception and the waiver exception. We will
address each in turn.

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B.     Commercial Activity Exception
       On appeal, Antigua contests the district court’s application of the
commercial activity exception in both suits. It does not contest the application
of this exception to the breach of contract claims in the OSIC suit “to the extent
that they are . . . limited to the contracts alleged in the OSIC Complaint.”
Therefore, regardless of our resolution of this appeal, the OSIC suit will
proceed on the breach of contract claims. 5 Therefore, we address only the
district court’s holding on the commercial activity exception as it applies to
OSIC’s tort and TUFTA claims, as well as Frank’s aiding and abetting claim.
       The commercial activity exception contains three clauses, 6 each
describing different circumstances in which the exception applies. See 28
U.S.C. § 1605(a)(2). This appeal involves the third clause of the exception,
which provides that a foreign state is not immune from suit in the United
States when “[1] the action is based . . . upon an act outside the territory of the
United States [2] in connection with a commercial activity of the foreign state

       5 Determining if subject matter jurisdiction exists under the FSIA requires a court to
answer two questions—first, whether a party is a “foreign state” to which the Act applies,
and second, whether any exception to the presumption of foreign sovereign immunity applies
under the circumstances. See Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 488–89
(1983). Although these together determine subject matter jurisdiction, it appears that the
second part of the inquiry—regarding exceptions to foreign sovereign immunity—may be
waived per the wording of the statute itself. See 28 U.S.C. § 1605(a)(1) (providing that a party
can expressly or implicitly waive its immunity from the jurisdiction of the United States
courts). As such, we see no reason why a party should not be permitted to waive the
application of foreign sovereign immunity by failing to dispute the application of a particular
exception under the Act.
       6 In full, the commercial activity exception provides that:

       (a) “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 a commercial activity carried on
               in the United States by the foreign state; or upon an act performed in
               the United States in connection with a commercial activity of the
               foreign state elsewhere; or 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).
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elsewhere and [3] that act causes a direct effect in the United States.” Id. “The
first two elements ensure that ‘there must be a connection between the
plaintiff’s cause of action and the commercial acts of the foreign sovereign.’”
Aldy ex rel. Aldy v. Valmet Paper Mach., 74 F.3d 72, 75 (5th Cir. 1996)
(emphasis omitted) (quoting Stena Rederi, 923 F.2d at 386). The third element
ensures there is a jurisdictional nexus with the United States. Arriba, 962 F.2d
at 533. Our analysis focuses on the “direct effect” requirement.
       The “direct effect” requirement involves a determination of whether the
acts the suits are “based upon” had “a direct effect in the United States.” 28
U.S.C. § 1605(a)(2). “[A]n effect is ‘direct’ if it follows ‘as an immediate
consequence of the defendant’s . . . activity,’” Republic of Arg. v. Weltover, Inc.,
504 U.S. 607, 618 (1992) (second alteration in original) (quoting Weltover, Inc.
v. Republic of Arg., 941 F.2d 145, 152 (2d Cir. 1991)), and “is one which has no
intervening element, but, rather, flows in a straight line without deviation or
interruption,” Princz v. Fed. Republic of Ger., 26 F.3d 1166, 1172 (D.C. Cir.
1994) (quoting Upton v. Empire of Iran, 459 F. Supp. 264, 266 (D.D.C. 1978)).
There is no requirement that the effect be “‘substantial’ or ‘foreseeable,’” but it
cannot be “purely trivial.” Id. (quoting Weltover, 504 U.S. at 618). 7
       In determining whether an act had a direct effect in the United States,
“[t]he question is, was the effect sufficiently ‘direct’ and sufficiently ‘in the
United States’ that Congress would have wanted an American court to hear
the case?” Callejo v. Bancomer, S.A., 764 F.2d 1101, 1111 (5th Cir. 1985)
(quoting Tex. Trading & Milling Corp. v. Fed. Republic of Nigeria, 647 F.2d
300, 313 (2d Cir. 1981)).

       7 In its brief, Antigua argues that “a specific act causing the direct effect must be
legally significant to the cause of action.” While many other circuits have adopted this
requirement, the Fifth Circuit has expressly rejected it. See Voest-Alpine Trading USA Corp.
v. Bank of China, 142 F.3d 887, 894 (5th Cir. 1998).
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       Although place of payment is not a decisive factor on its own, id. at 1112,
this Court has previously held “that a financial loss incurred in the United
States by an American plaintiff, if it is an immediate consequence of the
defendant’s activity, constitutes a direct effect sufficient to support jurisdiction
under the third clause of the commercial activity exception to the FSIA,” Voest-
Alpine Trading USA Corp. v. Bank of China, 142 F.3d 887, 897 (5th Cir. 1998). 8
In Voest-Alpine the Bank of China refused to pay on a letter of credit owed to
the plaintiff, and the plaintiff sued for breach. Id. at 890–91. This Court held
that the plaintiff, which was an American company, “suffered a nontrivial
financial loss in the United States in the form of funds not remitted to its
account at a Texas bank” and that failure to be paid was an “‘immediate
consequence’ of the Bank of China’s actions.” Id. at 896. Therefore, the “direct
effect” requirement was met. Id. at 897.
       A “direct effect” may also exist when a contract with a foreign nation was
to be performed and payment was to be made in the United States. See UNC
Lear Servs., Inc. v. Kingdom of Saudi Arabia, 581 F.3d 210, 218–19 (5th Cir.
2009). In Weltover, the Supreme Court held that Argentina’s rescheduling of
bond maturity dates had a “direct effect” in the United States. 504 U.S. at 618–
19. Explaining its conclusion, the Court noted that “[b]ecause New York was
thus the place of performance for Argentina’s ultimate contractual obligations,
the rescheduling of those obligations necessarily had a ‘direct effect’ in the
United States.” Id. at 619.

       8 In its brief, Antigua urges that Voest-Alpine is distinguishable because “the alleged
commercial activities of Antigua are quite removed from (and unrelated to) the Appellees’
financial losses.” This argument rests on a misunderstanding of the third clause of the
commercial activity exception. Antigua appears to believe the “direct effect” element must
relate to the “commercial activity.” Rather, the “direct effect” element requires that the
conduct the suit is “based upon” have a direct effect in the United States. See 28 U.S.C.
§ 1605(a)(2).

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       On appeal, Frank and OSIC argue that two different financial losses had
a “direct effect” on investors in the United States: (1) Stanford’s Ponzi scheme
itself and (2) Antigua’s failure to repay the loans it received from Stanford. In
regard to the argument that Antigua’s actions had a “direct effect” on American
investors who bought Stanford’s fraudulent CDs, unlike Weltover and Voest-
Alpine, the financial loss to American investors involved in Stanford’s Ponzi
scheme is not an “immediate consequence” of Antigua’s actions. “Defining
‘direct effect’ to permit jurisdiction when a foreign state’s actions precipitate
reactions by third parties, which reactions then have an impact on a plaintiff,
would foster uncertainty in both foreign states and private counter-parties.”
Virtual Countries, Inc. v. Republic of S. Afr., 300 F.3d 230, 238 (2d Cir. 2002).
While Antigua may have helped facilitate Stanford’s sale of the fraudulent
CDs, Stanford’s criminal activity served as an intervening act interrupting the
causal chain between Antigua’s actions and any effect on investors. See, e.g.,
Guirlando v. T.C. Ziraat Bankasi A.S., 602 F.3d 69, 79–80 (2d Cir. 2010);
Zedan v. Kingdom of Saudi Arabia, 849 F.2d 1511, 1515 (D.C. Cir. 1988).
Therefore, Plaintiffs’ first theory fails to satisfy the “direct effect” requirement.
       Plaintiffs’ second theory—that Antigua’s failure to repay Stanford’s
loans resulted in financial loss in the United States—similarly fails. Plaintiffs
have offered some evidence indicating that at least two of the loans identified
in the complaint may require payment in the United States. Additionally, at
least one of the loan agreements indicates that the lender, Stanford, was
located in the United States. But, the relationship between Antigua and
Plaintiffs is too indirect to satisfy the “direct effect” requirement.                 9   Unlike

       9  This Court has previously held that the “direct effect” element was met in a
transaction involving an “indirect” relationship. See Byrd, 182 F.3d at 391. In Byrd, the
indirect relationship at issue was between an assignee to a lease and one of the original
parties to the contract. Id. at 390–91. As this Court noted in Byrd, an assignee to a lease
stands in the place of the original party to the contract. Id. at 391. Therefore, the relationship
between Plaintiffs and Antigua is distinguishable, as Plaintiffs do not have the same rights
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Voest-Alpine and Weltover, the financial loss in this case was not directly felt
by Plaintiffs, who are investors and customers of Stanford and the SIBL. The
financial loss due to Antigua’s failure to repay the loans was most directly felt
by Stanford who was the actual lender in the loan transactions.
       Because we find that Antigua’s actions did not cause a “direct effect” in
the United States, we need not consider the other elements of the commercial
activity exception’s third clause. Accordingly, we reverse the district court’s
holding that the commercial activity exception applies to the Frank suit and
OSIC’s tort and TUFTA claims.
C.     Waiver Exception
       Under 28 U.S.C. § 1605(a)(1), a foreign state is not immune from suit
when the “foreign state has waived its immunity either explicitly or by
implication.” This case involves explicit waiver, which requires “an intentional
and knowing relinquishment of [a] legal right.” Walker Int’l Holdings Ltd. v.
Republic of Congo, 395 F.3d 229, 234 (5th Cir. 2004) (quoting Good v. Aramco
Servs. Co., 971 F. Supp. 254, 258 (S.D. Tex. 1997)).
       In responding to Antigua’s motion to dismiss, OSIC argued Antigua
waived sovereign immunity in two loan agreements it entered into with
Stanford. The agreement for the first of the loans, referred to as the “$40
Million Loan,” was provided to Antigua to “pay salaries and for other
discretionary purposes.” The second loan, referred to as the “$31 Million Loan,”
was provided to Antigua by Stanford to build a hospital. The district court
found that provisions of both loan agreements explicitly waived sovereign
immunity for OSIC’s contract claims based on either loan.

and remedies as Stanford to recover for Antigua’s failure to pay back the loans. As such,
because the financial loss resulting from Antigua’s failure to repay the loans was not directly
felt by Plaintiffs, the “direct effect” requirement is not met.

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       Although Antigua contests the merits of the district court’s waiver
ruling, Antigua does not contest the application of the commercial activity
exception to OSIC’s breach of contract claims. 10 As such, OSIC’s breach of
contract claims will proceed under the commercial activity exception
regardless of whether we overturn the district court’s holding on the waiver
exception.
       Antigua also contests the scope of the district court’s waiver ruling and
asks this Court to limit the district court’s ruling on the waiver exception to
apply only to $71 million ($31 Million Loan + $40 Million Loan) in breach of
contract claims. But, the district court’s order itself already provides Antigua
with the relief it seeks. While OSIC pleaded damages of “approximately $90
million” as a result of five different loans between Stanford and Antigua, the
district court’s order only addressed the $31 Million Loan and the $40 Million
loan. Therefore, the district court has already provided Antigua with the relief
it seeks on appeal. As such, we decline to further address the scope of the
district court’s waiver ruling.
                                  IV. CONCLUSION
       For the foregoing reasons, we REVERSE in part and REMAND for
further proceedings consistent with this opinion.

       10In its brief, OSIC also argues that the waiver exception applies to its TUFTA claims.
But, as OSIC makes this argument for the first time on appeal, it is waived. See Barrie v.
Intervoice-Brite, Inc., 397 F.3d 249, 263 (5th Cir. 2005).
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