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National Petrochemical Co. v. Sheaf

decided: October 31, 1988.


The National Petrochemical Company of Iran appeals from the October 27, 1987 order of the United States District Court for the Southern District of New York (Owen, J.), reported at 671 F. Supp. 1009 (S.D.N.Y. 1987), dismissing its complaint on the ground that plaintiff lacks standing to sue because it is an instrumentality of the Iranian government.

Cardamone, Pratt and Mahoney, Circuit Judges.

Author: Cardamone

CARDAMONE, Circuit Judge:

The sole question presented on this appeal is whether National Petrochemical Company of Iran (NPC), a foreign corporation wholly owned by the government of Iran, is entitled to bring suit as a plaintiff in a diversity action in federal court. To answer such a question in this shoalstrewn area of the law, it is wise for courts to have in mind, like doctors taking the Hippocratic oath, that they must "first, do no harm." For the reasons that follow, we hold that NPC may maintain its action in the courts of the United States.


A brief background is necessary. In November of 1979 militants loyal to the Ayatollah Khomeini seized the United States Embassy in Tehran and took 52 American diplomatic personnel hostage. With the embassy and its personnel still in the militants' hands, on April 7, 1980 President Carter severed diplomatic relations with Iran and issued Executive Order No. 12,205, 45 Fed. Reg. 24,099 (1980), barring the sale to it of American products. As a result, NPC -- which is a subsidiary of the National Iranian Oil Company that in turn is wholly owned by the government of Iran -- found itself unable to procure essential chemicals such as ethylhexanol, orthoxylene, and ethylene dichloride from its usual sources in the United States. NPC's attempts to circumvent President Carter's trade embargo resulted in the transactions that brought about the instant litigation.

In the spring of 1980, NPC agreed to buy the needed chemicals from Monnris Enterprises (Monnris) of Dubai, United Arab Emirates. Monnris arranged to purchase them from Rotexchemie Brunst & Co. of Hamburg (Rotex), which contracted with United States sellers through its Geneva affiliate, Formula, S.A. (Formula). Rotex and Formula apparently fabricated shipping documents that concealed both the origin of the chemical cargo and its destination, and by such illegal methods were able to draw on the letters of credit issued by NPC before the cargoes were even shipped.

In August, 1980 Rotex chartered the defendant M/T Stolt Sheaf from the Liberian defendant Parcel Tankers, Inc. to carry the chemicals from Houston, Texas to Iran, via Barcelona, Spain. The remaining defendants are United States and Norwegian companies affiliated with Parcel Tankers and the M/T Stolt Sheaf. Rotex planned to deliver the embargoed goods to NPC in Iran, but when war broke out between Iran and Iraq in September, 1980 the chemicals were diverted to Taiwan, where Rotex resold them.

NPC thereupon instituted civil and criminal suits against the middlemen in Hamburg and Rotterdam to recover the losses it incurred in its scheme to skirt the American trade embargo. Because these suits were unsuccessful, plaintiff filed a complaint on September 30, 1986 in the United States District Court for the Southern District of New York (Owen, J.) alleging that the above named defendants had participated with the middlemen in fraud, conversion, falsifying bills of lading, all in breach of their duties and obligations under the bills of lading and the law. In a published decision, 671 F. Supp. 1009 (S.D.N.Y. 1987), Judge Owen concluded -- based upon a United States State Department letter written in connection with an unrelated case, Iran Handicraft & Carpet Export Center v. Marjan Int'l Corp., 655 F. Supp. 1275 (S.D.N.Y. 1987) -- that the United States has not recognized the Khomeini government of Iran. The district court therefore held that because NPC is a wholly-owned entity of an unrecognized foreign government, it is not entitled to bring suit in the courts of the United States. It dismissed NPC's complaint with prejudice. 671 F. Supp. at 1010.

On NPC's appeal from dismissal of its complaint, the United States has, for the first time, entered the litigation, submitting a brief as Amicus Curiae signed by attorneys from the Justice and State Departments, urging that NPC be granted access to the courts of the United States in this case.


We turn to an analysis of the law. Article III of the United States Constitution extends the federal judicial power to "all Cases . . . between a State, or the Citizens thereof, and foreign States, Citizens or Subjects." U.S. Const., art. III, § 2, cl. 1. To effectuate this power, the United States Judicial Code provides diversity jurisdiction over any civil action arising between "a foreign state . . . as plaintiff and citizens of a State or of different States." 28 U.S.C. § 1332(a)(4) (1982).

To determine whether NPC as a wholly-owned entity of the Khomeini government of Iran should be granted access to federal court under § 1332(a)(4), it is helpful to review several well-established rules in this area of the law. In order to take advantage of diversity jurisdiction, a foreign state and the government representing it must be "recognized" by the United States. See Pfizer Inc. v. India, 434 U.S. 308, 319-20, 98 S. Ct. 584, 54 L. Ed. 2d 563 (1978); Calderone v. Naviera Vacuba S/A, 325 F.2d 76, 77 (2d Cir. 1963); Land Oberoesterreich v. Gude, 109 F.2d 635, 637 (2d Cir.), cert. denied, 311 U.S. 670, 85 L. Ed. 431, 61 S. Ct. 30 (1940). As an incident to the President's express constitutional powers to appoint, U.S. Const., art. II, § 2, and to receive ambassadors, id. § 3, and to his implied power to maintain international relations, United States v. Curtiss-Wright Export Corp., 299 U.S. 304, 318-20, 81 L. Ed. 255, 57 S. Ct. 216 (1936), the Supreme Court has acknowledged the President's exclusive authority to recognize or refuse to recognize a foreign state or government and to establish or refuse to establish diplomatic relations with it. See Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 410, 11 L. Ed. 2d 804, 84 S. Ct. 923 (1964); Guaranty Trust Co. v. United States, 304 U.S. 126, 137, 82 L. Ed. 1224, 58 S. Ct. 785 (1938); see also Restatement (Third) of the Foreign Relations Law of the United States § 204 (1987) (Restatement 3d).

For our purposes in this case, we also note that, under international law, a "state" is generally defined as "an entity that has a defined territory and a permanent population, under the control of its own government, and that engages in, or has the capacity to engage in, formal relations with other such entities." Restatement 3d § 201; see Texas v. White, 74 U.S. (7 Wall.) 700, 720, 19 L. Ed. 227 (1868). Although international law purports to require recognition of "states" that satisfy the elements of this definition, recognition of the particular government in control of another state is not mandatory. Further, a state derecognizes a governmental regime when it recognizes another regime as the legitimate government of that state. For example, when the United States recognized the ...

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