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DREXEL BURNHAM LAMBERT GROUP v. GALADARI

May 20, 1985

THE DREXEL BURNHAM LAMBERT GROUP INC., Plaintiff, against A. W. GALADARI and A. W. GALADARI COMMMODITIES, (sic) Defendants


The opinion of the court was delivered by: MOTLEY

Motley, Ch. J.

OPINION$

 In this diversity action, plaintiff Drexel Burnham Lambert Group, Inc. (Drexel) sues to collect for default on a Note for approximately $19 million of which approximately $12 million remains unpaid. Defendants, a major Middle Eastern banker and businessman and his company, executed the Note to cover loses on their commodities account with Drexel. This matter is before the court on plaintiff's motion for summary judgment and defendants' motion to dismiss on three different grounds. For the reasons set forth below, plaintiff's motion is denied and defendants' motion is granted.

 FACTS:

 The following facts appear to be uncontested. Defendant Galadari is a citizen and resident of Dubai, United Arab Emirates, where he is a major invester (sic) and businessman. Among his other activities, defendant has engaged in the buying and selling of commodities on United States exchanges. In connection with these commodities trading activities, Galadari and co-defendant A. W. Galadari Commodities maintained an account with Drexel Burnham Lambert International, N.V. (Drexel International). When defendants' accounts had accumulated approximately $19,465,00.00 (sic) in losses, Drexel International sought security for the debt, and on or about September 14, 1982 defendants negotiated, executed, and delivered in New York a secured promissory note in the principal amount. Defendants consented, through the Note, to have the Note's terms construed under New York law under the jurisdiction of this court. As collateral, defendants pledged, inter alia, 6,068,640 shares of stock in the Union Bank of the Middle East Ltd. (UBME).

 Drexel International assigned the Note to Drexel on or about October 28, 1982, six weeks after the Note was executed and 17 months before the commencement of the present action. The terms of the Note required monthly payments in London or at another location specified by Drexel of $3 million with the final payment including accrued interest due on May 2, 1983. Defendants made partial payments totally (sic) approximately $7 million but have paid no principal since July, 1983 and no interest since March, 1984. This action was commenced on April 12, 1984 through service on defendants' designated agents in New York, and defendant Galadari has also been personally served in Dubai.

 On or about April 17, 1984, H.E. Sheikh Maktoum Bin Rashid Al Maktoum, Crown Prince and Deputy Ruler of Dubai, issued Decree No. 3 of 1984. The Decree establishes a Committee of Receivers to manage defendants' assets and effect an orderly liquidation and winding down of his affairs. Although plaintiff asserts that this bankruptcy-like process was instituted in direct response to this action in an attempt fraudulently to erase Drexel's debt, defendant asserts that the appointment of the Committee was simply the latest in a series of actions taken by the government of Dubai to head off economic disaster threatened by the collapse of defendant Galadari's financial empire, and to ensure the fair settlement of claims against defendants' assets. In order to stave off a collapse of UMBE, the government purchased defendants' holdings and took over the bank.

 Defendant moves to dismiss this action on three separate grounds: 1) The plaintiff had the Note assigned to it by its subsidiary in a collusive attempt to confer jurisdiction on this court in violation of 28 U.S.C. section 1359; 2) that the act of state doctrine prevents and American court from challenging a decree issued by a foreign sovereign; and 3) that principles of international comity require American courts to defer to the comprehensive liquidation procedure already underway in Dubai.

 Plaintiff argues that defendants merely seek to obfuscate a simple case of default on a debt. Plaintiff maintains that the Decree violates American public policy and constitutes a fraudulent attempt to exclude Drexel's debt in two specific ways: First, by redefining a security interest so as to remove Drexel's preference, and second, by removing the UBME shares from defendants' assets and thereby alienating plaintiff's collateral. Therefore, plaintiff argues that international comity and the act of state doctrine should not be invoked to shield defendants from a legitimate creditor.

 As to jurisdiction, plaintiff alleges two valid business purposes for the assignment of the debt by Drexel International, a Netherlands Antilles corporation, to its American parent company. First, plaintiff asserts that given Drexel International's modest capitalization, carrying such a large Note would hurt the company's credibility with potential customers. Second, in the event that the debt wasn't paid, Drexel says that it wanted the parent company to have the American tax advantages of the bad debt.

 DISCUSSION:

 Jurisdiction

 Before addressing any other grounds for dismissal, this court must determine that it has jurisdiction over the subject matter of the instant action. Jurisdiction is here alleged on the basis of diversity, with plaintiff, a Delaware corporation with offices in New York, suing two foreign defendants. However, prior to the assignment of the debt by Drexel International to Drexel, this suit would have been one between two foreign parties, and therefore not within the diversity jurisdiction of this court.

 Plaintiff has the burden of asserting complete diversity. However, defendants argue that plaintiff must also bear the burden of rebutting a presumption of collusiveness arising because the debt was assigned by a completely controlled subsidiary to its parent. This presumption has been recognized where a debt is assigned to a subsidiary whole only business is to obtain jurisdiction and sue on the debt. Prudential Oil Corp. v. Phillips Petroleum Co., 546 F.2d 469 (2d Cir. 1976). Here, however, the debt was assigned by a legitimate, functioning subsidiary company to its parent for what seem at least facially to be valid business purposes. In light of these purposes, and in the absence of more particularized allegations of improper motive, this court concludes that plaintiff has carried its burden of demonstrating diversity. The assertion that the assignment was made in a collusive attempt to confer jurisdiction ...


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