With Respect to the Agency Issue in OBB v. Sachs, the Supreme Court Should Stick with Bancec

While the commercial activity issue in OBB v. Sachs is a cinch (as I discussed here and here), the agency issue is more complicated – and could have far-reaching consequences for FSIA jurisprudence.  However, at the end of the day, the Court should reject the parties’ arguments and simply stick with Bancec.  That is the wisest and safest choice.

Until the Ninth Circuit’s panel and en banc decisions in Sachs v. OBB, FSIA case law was relatively clear with regard to the appropriate agency analysis in cases involving separate juridical entities.  When a plaintiff sought to establish jurisdiction over a foreign state based upon the conduct of a separate juridical entity, courts applied the standard set forth in the Supreme Court’s seminal decision in First Nat. City Bank v. Banco Para el Comercio Exterior de Cuba (“Bancec ”), 462 U.S. 611 (1983).  Under Bancec, there is a presumption that the conduct of a separate juridical entity cannot be imputed to the foreign state.  See Bancec, 462 U.S. at 626-27 (stating that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such”); id. at 627 (discussing the “presumption of independent status”); see also, e.g., Doe v. Holy See, 557 F.3d 1066, 1077-80 (9th Cir. 2009); Transamerica Leasing v. La Republica de Venezuela, 200 F.3d 843, 848 (D.C. Cir. 2000).  In cases not involving fraud or injustice through the use of the corporate form, the presumption of separateness means that a plaintiff must allege facts (and later prove) that the foreign state exercises day-to-day control over the separate corporation.  See, e.g., Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006); see also Walter Fuller Aircraft Sales, Inc. v. Republic of Philippines, 965 F.2d 1375, 1381 (5th Cir. 1992).  Only in these circumstances will the conduct of the separate juridical entity be imputed to the foreign state.  See, e.g., Transamerica Leasing, 200 F.3d at 850-53.

There are at least two reasons to apply the Bancec standard to the FSIA jurisdictional inquiry.  First, Bancec’s presumption of separateness serves the principle of comity.  “’If U.S. law did not respect the separate juridical identities of different agencies or instrumentalities, it might encourage foreign jurisdictions to disregard the juridical divisions between different U.S. corporations or between a U.S. corporation and its independent subsidiary.’”  Bancec, 462 U.S. at 628, quoting H.R. Rep. No. 94-1487, at 29-30 (1976).  At the jurisdictional stage, that could result in the United States being pulled into foreign court based upon conclusory allegations that a separate corporation is its “agent,” even though the corporate form was respected and even though the United States did not dominate the corporation’s day-to-day operations.

Second, the presumption of separateness provides a critical check against plaintiffs’ attempts to pierce the corporate veil at the jurisdictional stage.  If the actions of separate corporations acting in the United States could be freely imputed to foreign states, foreign sovereigns would be much more frequently drawn into highly burdensome litigation in United States courts based upon a mere allegation of agency.  Plaintiffs’ attorneys are often looking for the deepest pockets, and there would be no presumption of separateness to prevent counsel from alleging that a corporation in the United States is an “agent” of the foreign state.  By drawing the foreign state into litigation, plaintiffs’ counsel would profoundly undermine the benefits of the corporate form, drive up the settlement values of cases, and get their foot in the door to obtain intrusive discovery from foreign sovereigns – which would vitiate a core protection afforded by foreign sovereign immunity, increase litigation costs and cause significant tensions with foreign states.

Even though Bancec has repeatedly proved to be a workable standard over the past thirty years, the parties and the United States government in OBB v. Sachs have urged the Court to effectively abandon Bancec’s presumption of separateness at the jurisdictional stage.  While OBB raises the Bancec issue, its chief argument is that the Court should use 28 U.S.C. section 1603 to determine whether the acts of an entity can be imputed to a foreign state – a meritless argument that I have addressed before

Sachs and the government, in turn, argue that the Court should apply the standards set forth in the Restatement of Agency (Third).  The basic argument of Sachs and the government is that Bancec is an alter ego case, and that it did not supplant the traditional common law agency principles set forth in the Restatement.   See, e.g., Brief of the United States as Amicus Curiae 17-18.  That contention does not withstand scrutiny.

Let’s start with some basic principles – which are not mentioned in the briefs of the parties and amici in OBB v. Sachs.  Under traditional rules governing corporations, corporate entities are presumed to be separate and distinct from their creators or owners.  1 William Meade Fletcher et al., Cyclopedia of the law of private corporations § 25 (rev. ed. 1999).  Corporate acts “are the acts of the . . . corporation, and are not the acts of the shareholders composing it, and their powers and duties pertain to them respectively and not to each other[.]”  Id. at § 28. 

In “no particular is the distinction between the corporation and its members more marked and important than in suing and being sued.”  Id. at § 36.  Indeed, “limited liability is one of the principal purposes for which the law has created the corporation.”  Id. at § 41.20.  The rule of limited liability protects the owner or parent of a corporation from being sued for the corporation’s acts.  See, e.g., United States v. Bestfoods, 524 U.S. 51, 61 (1998) (“It is a general principle of corporate law deeply ingrained in our economic and legal systems that a parent corporation . . . is not liable for the acts of its subsidiaries.”).  The presumption of separateness requires courts to “start from the general rule that the corporate entity should be recognized and upheld, unless specific, unusual circumstances call for an exception.  Care should be taken on all occasions to avoid making the entire theory of the corporate entity . . . useless.”  Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir. 1967).

There are two exceptions to the general rule of limited corporate liability.  The first is alter ego, which requires a plaintiff to “show that the corporate form has been abused to the injury of a third person.”  1 Fletcher, supra, § 41.10.  Alter ego is employed “where the corporate entity has been used as a subterfuge and to observe it would work an injustice.”  Id. at § 41.10; see also, e.g., Black’s Law Dictionary (10th ed. 2014) (defining the alter-ego rule as the “doctrine that shareholders will be treated as the owners of a corporation’s property, or as the real parties in interest, whenever it is necessary to do so to prevent fraud, illegality, or injustice”).  The “rationale behind the theory is that, if the shareholders or the corporations themselves disregard the proper formalities of a corporation, then the law will do likewise as necessary to protect individual and corporate creditors.”  1 Fletcher, supra, § 41.10.

The second exception is the existence of a principal-agent relationship.  As the Supreme Court has stated, “'[d]ominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent.’”  NLRB v. Deena Artware, Inc., 361 U.S. 398, 403 (1960), quoting Berkey v. Third Ave. Ry. Co., 244 N.Y. 84, 95 (1926) (Justice Cardozo).

It is wrong to state that Bancec is only an alter ego case.  Instead, the Supreme Court in Bancec set forth both exceptions to the rule of limited corporate liability:

In discussing the legal status of private corporations, courts in the United States and abroad have recognized that an incorporated entity . . . is not to be regarded as legally separate from its owners in all circumstances.  Thus, where a 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.  In addition, our cases have long recognized the broader equitable principle that the doctrine of corporate entity, recognized generally and for most purposes, will not be regarded when to do so would work fraud or injustice.

Bancec, 462 U.S. at 628-29 (citations and quotations omitted) (emphasis added).  The first exception identified by Bancec is explicitly an agency relationship.  Bancec, 462 U.S. at 629, citing Deena Artware, Inc., 361 U.S. at 402-04 (“a relationship of principal and agent”).  The second Bancec exception is alter egoId. (“work fraud or injustice”); see also 1 Fletcher, supra, § 41.10; Berkey, 244 N.Y. at 95.  In other words, contrary to the argument advanced by Sachs and the government, Bancec is not simply an alter ego case.  Bancec set forth the standard for both agency and alter ego in cases involving separate corporate entities and foreign sovereigns.

The real question, then, is whether it makes sense to apply Bancec at the jurisdictional stage under the FSIA.  As stated above, courts have done so for many years, and Bancec provides a workable standard through which to resolve the imputation issue.  Moreover, absent Bancec’s presumption of separateness applied to the jurisdictional inquiry, the floodgates would open to lawsuits against foreign states based upon conclusory allegations of “agency” and “authorization.”  As someone who has litigated Bancec at the jurisdictional stage in five separate FSIA cases, I know that Bancec affords a critical protection for foreign sovereigns from frivolous lawsuits and burdensome discovery (a point not mentioned in the briefs of the parties and amici).  If the Bancec jurisdictional protection is taken away by the Court, the result will be a major increase in (meritless) lawsuits against foreign sovereigns.  There is no reason to go down that path. 

In sum, OBB v. Sachs is a piece of cake – if the Court applies its own precedent.  The Court should apply Nelson with respect to the commercial activity inquiry, and should apply Bancec with regard to the agency issue.  If the Court takes that approach, it would avert a major upheaval in this sensitive area of the law – since Nelson and Bancec have been bulwarks of FSIA jurisprudence for decades.  The Court would also be avoiding a host of unintended consequences, including increased jurisdiction over foreign torts (in contravention to international law), disregard for the corporate form (with potentially serious comity and foreign relations consequences), and vitiation of several of the core protections afforded by the doctrine of foreign sovereign immunity.  The Court got these issues right before in Nelson and Bancec, and the Court could get them right again – simply by following the principle of stare decisis.

Republic of Argentina v. NML (No. 12-842) – Why Both Sides Are Wrong

NML, a Cayman Islands hedge fund, obtained numerous federal judgments against Argentina arising out of Argentina’s default on payment of its public debt. Argentina refuses to satisfy any of the judgments. Because NML has had little success in finding Argentinian assets in the United States subject to execution under the Foreign Sovereign Immunities Act (FSIA), the district court granted NML broad discovery from non-party banks relating to Argentina’s assets overseas. The discovery dispute between NML and Argentina is currently pending in the United States Supreme Court, with oral argument scheduled for April 21, 2014.

The FSIA has been called a “statutory labyrinth” with “many deliberately vague provisions.” While that characterization may hold true regarding certain sections of the FSIA, the statute is a model of clarity and simplicity with respect to the threshold issue in this case: whether foreign assets are accorded a statutory presumption of immunity from execution. Section 1609 provides that only a foreign state’s property “in the United States” is presumptively immune from execution. Nowhere does the FSIA confer presumptive immunity on a foreign state’s assets held outside the United States.

Notwithstanding section 1609’s plain language, the central contention advanced in the Supreme Court by Argentina and the United States (as amicus) is that Argentina’s assets overseas are entitled to presumptive statutory immunity and, as a result, are immune from discovery under the FSIA. Because Argentina and the United States’ argument cannot be squared with section 1609 itself, it is wrong as a matter of law.

Since the FSIA does not accord presumptive sovereign immunity upon a foreign state’s assets overseas, the discovery dispute between Argentina and NML should not be analyzed under the FSIA. Instead, the Supreme Court’s decision in Société Nationale Industrielle Aérospatiale v. USDC, 482 U.S. 522 (1987), controls. The district court and the Second Circuit should have reviewed NML’s discovery requests under the comity analysis set forth in Société Nationale, which is broad enough to accommodate all of the interests and policy considerations raised by the parties and the United States.

With regard to NML’s main argument in the Supreme Court, NML fails to recognize the protections afforded by immunity under United States law. NML contends that because the text of the FSIA does not mention “discovery,” the FSIA does not limit the discovery available to plaintiffs in post-judgment proceedings. With respect to domestic assets, NML’s contention is contrary to settled law. Under Supreme Court and circuit precedent, protection from discovery inheres in the very concept of immunity itself. Moreover, with regard to foreign assets, NML does not undertake the comity analysis required under the Supreme Court’s decision in Société Nationale.

In the end, while the discovery dispute between NML and Argentina may be of critical importance to the parties, this case does not belong in the Supreme Court. There is no circuit split with regard to the threshold issue, namely whether foreign assets are protected from execution under the FSIA. Instead, the NML case simply involves the lower courts’ erroneous failure to apply the Société Nationale comity analysis to NML’s discovery requests targeting Argentina’s assets overseas. To avoid issuing an unnecessary decision in the sensitive area of foreign sovereign immunity law, the Supreme Court should consider remanding the matter with instructions to analyze the requested discovery under Société Nationale.

Read the full article via the PDF version below:

Execution and Separate Juridical Status

The Ninth Circuit’s decision last week in FG Hemisphere Assocs., LLC v. Unocal Corp., — F. Appx. —, No. 12-56031, 2014 WL 820803 (9th Cir. Mar. 4, 2014), serves as a reminder of the importance of the presumption of separateness in FSIA litigation.  The separate juridical status of entities is a critical issue under the FSIA, from the determination of status (28 U.S.C. § 1603(b)(1)) to the jurisdictional inquiry (Doe v. Holy See, 557 F.3d 1066, 1077-79 (9th Cir. 2009)) to post-judgment proceedings (EM Ltd. v. Republic of Argentina, 473 F.3d 463, 475-80 (2d Cir. 2007)).  FG Hemisphere Assocs. is a case in point: Applying California law, the Ninth Circuit declined to disregard the separate corporate status of two entities for purposes of the applicability of an exception to immunity from execution.  FG Hemisphere Assocs., 2014 WL 820803, at *1.  As shown by the Ninth Circuit’s latest decision, unless the case falls under the terrorism exception (cf. 28 U.S.C. § 1610(g)(1)), the presumption of separate juridical status remains crucial to preserving a foreign sovereign’s immunity from execution.

The FSIA, Agency and Agents: Avoiding a Basic Pitfall

On appeal in the Ninth Circuit in Sachs v. Republic of Austria, et al., Case No. 11-15458, the Austrian instrumentality OBB Personenverkehr AG (“OBB”) argued that an entity’s conduct may be attributed to a foreign state under the FSIA only if that entity meets the “agency or instrumentality” requirements set forth in 28 U.S.C. section 1603(b).  OBB contended that because the entity in question did “not fall within the agency definition” set forth in section 1603(b), the “acts of [the entity] cannot be imputed to OBB for purposes of Section 1605(a)(2).”  OBB’s Supplemental Letter, dated Apr. 8, 2013, Docket No. 52, at 2.  Because OBB’s erroneous argument has been made by litigants in FSIA cases before (see Gates v. Victor Fine Foods, 54 F.3d 1457, 1460 n.1 (9th Cir. 1995)), this post examines the issue more closely.

Under the FSIA, the term “‘foreign state,’ except as used in section 1608 . . . , includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).”  28 U.S.C. § 1603(a) (emphasis added).  An “agency or instrumentality” is defined as any entity which (1) “is a separate legal person, corporate or other,” (2) “is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof,” and (3) “is neither a citizen of a State of the United States as defined in section 1332(c) and (e) of this title, nor created under the laws of any third country.”  28 U.S.C. § 1603(b).   The term “agency or instrumentality” was intended to include entities such as “state trading corporation, a mining enterprise, a transport organization such as a shipping line or airline, a steel company, a central bank, an export association, a governmental procurement agency or a department or ministry which acts and is suable in its own name.”  H.R. Rep. No. 94-1487, at 16 (1976).

Despite section 1603(a)’s sole reference to section 1608 – the FSIA’s service provision – the statutory scheme reflects different treatment of agencies or instrumentalities that extends well beyond service of process.  For example, it is easier to establish jurisdiction under the international takings exception over an agency or instrumentality than it is over a foreign sovereign itself.  See 28 U.S.C. § 1605(a)(3).  The FSIA precludes recovery of punitive damages against a foreign sovereign, but not against an agency or instrumentality.  28 U.S.C. § 1606.  And it is easier to attach or execute on the property of an agency or instrumentality than it is on the property of a foreign sovereign.   Compare 28 U.S.C. § 1610(a) with § 1610(b).

As a result, the determination of whether an entity qualifies as a foreign sovereign or as an agency or instrumentality is an important one.  However, contrary to OBB’s argument, the determination has nothing to do with the issue of attribution – i.e., common law “agency” – under the FSIA.   Section 1603(b) was intended to delineate the entities entitled to the protections of the FSIA, but nothing suggests that the provision was meant to address attribution for purposes of jurisdiction or liability.

In contrast to the requirements of section 1603(b), “agency” for purposes of attribution is governed by common law principles as informed by international law and articulated congressional policies.  First Nat. City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 623 (1983).  For example, with respect to separate juridical entities, courts examine whether an entity is under the “day-to-day” control of a foreign sovereign.  See, e.g., Dale v. Colagiovanni, 443 F.3d 425, 429 (5th Cir. 2006).  In addition, an actual authority agency inquiry will typically turn on foreign law, since that will dictate whether the putative agent was in fact authorized to engage in the conduct alleged.  See, e.g., Velasco v. Gov’t Of Indonesia, 370 F.3d 392, 401-02 (4th Cir. 2004); see also Fed. R. Civ. P. 44.1.  And apparent authority is not permitted as an agency theory under the FSIA, for all of the reasons I have previously discussed.  Plainly, all of these issues are far afield from the statutory inquiry set forth in section 1603(b).

OBB’s erroneous argument may have arisen from use of the term “agency” in the FSIA, which at first blush may appear to refer to common law “agency” principles.  See Hester Int’l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 n.5 (5th Cir. 1989) (“The use of the single term ‘agency’ for two purposes . . . may cause some confusion.”).    However, as the Fifth Circuit explained long ago:

The FSIA uses [the term] to determine whether an “agency” of the state may potentially qualify for foreign sovereign immunity itself under the FSIA. This is a completely different question from that which we must address here: whether or not the [entity] enjoyed an alter ego relationship with the [foreign sovereign] so that it could bind [the sovereign] to a contract. Although such an alter ego relationship may be described in terms of “agency,” it is a completely different inquiry than that which might be conducted under § 1603.

Hester Int’l Corp. v. Fed. Republic of Nigeria, 879 F.2d 170, 176 (5th Cir. 1989). 

The Ninth Circuit followed Hester in Gates, 54 F.3d at 1460 n.1.  The Ninth Circuit recently reaffirmed Gates when it strongly rejected OBB’s argument in Sachs:

The plain text of the FSIA does not support OBB’s proposed framework for determining whether [the entity in question] is an agent of OBB. Section 1603(b) defines what type of entity can be considered a foreign state for purposes of claiming sovereign immunity. If an entity cannot show that it meets that definition then it is not entitled to sovereign immunity. Whether an entity meets the definition of an “agency or instrumentality of a foreign state” to claim immunity is a completely different question from whether the acts of an agent can be imputed to a foreign state for the purpose of applying the commercial-activity exception.

Sachs v. Republic of Austria, 737 F.3d 584, 595 (9th Cir. 2013) (en banc) (citations and quotations omitted).

Because the term “agency” is used both under section 1603(b) and under the common law, the erroneous argument made by OBB in the Sachs appeal is capable of repetition.  However, FSIA practitioners should be aware of the distinction, and thereby avoid this basic pitfall in FSIA law.