The opinion of the court was delivered by: CONSTANCE BAKER MOTLEY
Defendants The Emirate of Dubai ("Dubai") and The Committee of Receivers for A.W. Galadari, et al ("the Committee") separately move to dismiss the amended and supplemental complaints of the plaintiffs The Drexel Burnham Lambert Group Inc. ("Drexel") and Refco, Inc. ("Refco"). Both motions, of Dubai and of the Committee, are denied.
Plaintiffs Drexel and Refco move jointly for security against Dubai and the Committee for costs, judgment, and potential sanction. Drexel's motion, as to costs not including attorneys fees, is granted. Refco's motion, as to costs including attorneys fees, is granted. Security covering the judgment and possible sanctions is denied as to both Drexel and Refco.
Plaintiffs in these consolidated actions seek damages from the government of Dubai, a sovereign government which is a political subdivision of the United Arab Emirates ("U.A.E."), and the Committee, an agency or instrumentality of the government of Dubai. Plaintiffs base their claims on (a) governmental acts performed by the government of Dubai in Dubai and (b) acts of the Committee on the purported grounds that the government of Dubai was the "alter ego" of the Committee.
The activities undertaken directly by the government of Dubai were the issuance of official Decrees in 1983 and 1984 by the then Deputy Ruler and the initiation of its purchase of what ultimately proved to be approximately 80% of the outstanding shares of the Union Bank of the Middle East ("UBME") in connection therewith. The Decrees were promulgated in response to the severe financial and economic problems which had arisen in Dubai as a result of the insolvency of defendant Galadari, a resident of Dubai, and companies owned or controlled by Galadari.
In February 1983, Galadari and Galadari Commodities ("Galadari") opened a number of trading accounts with Refco, an Illinois corporation. As of November 1983, Refco alleges that Galadari owed a debt of $ 4,609,664.20. Drexel originally brought an action for breach of contract in connection with a promissory note ("Note"). The Note was made in favor of Drexel Burnham Lambert International N.V. ("Drexel International") which was organized in the Netherlands Antilles and has its administrative offices in London, England. The Note, in the amount of $ 19,465,000.00, was executed on September 14, 1982, by defendant A.W. Galadari, both personally and on behalf of defendant A.W. Galadari Commodities, which was described as a partnership that Mr. Galadari managed. The Note was assigned to Drexel by Drexel International on October 28, 1982, the principal having been reduced by payment to $ 12,465,000.00, was secured by 6,068,640 shares of the UBME, a bank which Galadari controlled.
Meanwhile in Dubai, Galadari was having severe financial problems stemming from the mismanagement of the UBME. On November 12, 1983, pursuant to a decree from the sovereign of Dubai (Decree No. 5), a Provisional Board of Directors of the UBME was created to manage the UBME. See The Drexel Burnham Lambert Group, Inc. v. Galadari, 84 Civ. 2602, 1987 U.S. Dist. Lexis 5030 (S.D.N.Y. Jan. 29, 1987) ("Galadari II") at P 18. Decree No. 5 provided for the vesting of the assets of Galadari and his companies in the provisional Board, imposed a moratorium freezing all liabilities and began the liquidation of Galadari's assets.
On April 17, 1984, Dubai issued Decree No. 3
Decree No. 3 provided for insolvency proceedings in Dubai against Galadari and his companies by creating a Committee of Receivers to continue the work of the Provisional Board in managing and liquidating the non-banking businesses of Galadari, empowering it to marshal and liquidate the assets of Galadari and his companies, to adjudicate claims against the debtor estates and to pay out valid claims from those assets. See Galadari II, at P 26. The Committee established a set of procedures which would allow for the submission of creditor's claims.
The Committee consists of Mr. Rostamani, a member of the business community of Dubai, Mr. Abdulla Lootah who is in charge of the purchasing section of the Federal Ministry of Finance, Mr. Hassnan Ibn al Shiekh, vice-chairperson of the Chamber of Commerce of Dubai and Mr. Nabil Aref, director of the marine and road section of the Federal Ministry of Public Works. Galadari II, at P 67-71.
Since the Committee's inception it has marshalled and liquidated the assets of the estate and processed creditors claims. Galadari II, at P 72. Since the Committee's inception over 700 claims have been submitted in the aggregate amount of $ 770,000,000. See Declaration of Nabil Aref, dated Sept. 6, 1990, Exh. 12 to Reinthaler Aff at P 6. Both Drexel and Refco have participated in the proceedings before the Committee in Dubai seeking recovery of debts owed by Galadari.
The central claims in the amended and supplemental complaint against Dubai and the Committee are that through the issuance of Decree No. 3 (and the creation of the Committee to assume control of and to marshal, liquidate and distribute the assets of Mr. Galadari and his various businesses), Dubai and the Committee confiscated the security interest and claims of Drexel and Refco.
This court has rendered several prior opinions which give more detailed background as to these proceedings.
Familiarity with these opinion is assumed for the purposes of this opinion. This matter is currently before the court on the motions of Dubai and the Committee to dismiss the amended and supplemental complaint of Drexel and Refco and on the motion of Drexel and Refco for a security against Dubai and the Committee to secure costs, judgment, and possible sanctions. These motions follow this court's June 1991 lifting of a stay that it had entered on January 29, 1987 and January 4, 1991 pending proceedings in Dubai.
II. SUBJECT MATTER JURISDICTION
A. FOREIGN SOVEREIGN IMMUNITIES ACT
1. Background/History of FSIA
The Foreign Sovereign Immunities Act ("the FSIA") was passed by Congress in 1976 to codify standards for the judicial treatment of foreign sovereigns and their agencies and instrumentalities.
For more than a century and a half prior to the enactment of the FSIA, courts in this country had generally granted complete immunity to foreign sovereigns or deferred to the decisions of the Executive Branch. See Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 486-87, 103 S. Ct. 1962, 76 L. Ed. 2d 81 (1983) (FSIA not unconstitutional in authorizing foreign plaintiff to sue foreign state in federal court on nonfederal claim).
In 1952, the State Department adopted the Tate Letter,
calling for the application of a "restrictive" theory of foreign sovereign immunity. The restrictive theory of sovereign immunity allows immunity for the public acts of a foreign sovereign while the commercial acts or private acts of a foreign sovereign are not immune. Verlinden, 461 U.S. at 487; See also Jet Line Services, Inc. v. M/V Marsa El Hariga, 462 F. Supp. 1165, 1169 (D.Md 1978). Because the restrictive theory was not initially codified, court decisions regarding immunity were made upon recommendations from the State Department that were often shaped by diplomatic pressures from foreign nations. As a result, the case-by-case application of the restrictive theory in matters involving foreign sovereign immunity lacked uniformity and equity. See Verlinden, 461 U.S. at 487-88. Congress, therefore, passed the FSIA in order to free the Government from the case-by-case diplomatic pressures of Executive Branch directed determinations, to clarify the applicable standards, and to ensure due process in matters involving foreign sovereigns. Verlinden, 461 U.S. at 488; See also Jet Line Services, 462 F. Supp. at 1170.
The FSIA codifies as federal law the restrictive theory of sovereign immunity. Verlinden, 461 U.S. at 488. In most instances, foreign states are immune from the jurisdiction of the United States courts. Exceptions to that general rule include cases in which the foreign state has explicitly or implicitly waived its immunity or in which the foreign state has engaged in commercial activity or when one of the other specified exceptions of the FSIA applies. Verlinden, 461 U.S. at 488. In such exceptional cases, the foreign state is "liable in the same manner and to the same extent as a private individual under like circumstances." Verlinden, 461 U.S. at 488-89 (quoting FSIA 28 U.S.C. § 1606).
2. FSIA Is Sole Source of Jurisdiction--Dubai Law Does Not Apply
The FSIA provides the sole basis for jurisdiction in matters involving a foreign sovereign or its agent or instrumentality. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 109 S. Ct 683, 102 L. Ed. 2d 818 (1989). In Argentine Republic, which involved a suit for damage done to a Liberian oil tanker that was attacked by Argentine miliary aircraft during the war between Great Britain and the Argentine Republic over the Falkland Islands, the Supreme Court ruled that "the text and structure of the FSIA demonstrate Congress' intention that the FSIA be the sole basis for obtaining jurisdiction over a foreign state in our courts." Argentine Republic, 488 U.S. at 434; Republic of Argentina and Banco Central de la Republica Argentina v. Weltover, Inc., U.S. , 112 S. Ct. 2160, 119 L. Ed. 2d 394, 403 (1992) ("The FSIA provides the "sole basis" for obtaining jurisdiction over a foreign sovereign in the United States"). In determining that the FSIA provides the sole basis for jurisdiction, the Court ruled out the applicability of other statutes to cases involving a foreign sovereign or its instrumentality. For example, the Court ruled that neither the Alien Tort Statute
nor general admiralty and maritime law could be applied to determine jurisdiction in such cases. Argentine Republic, 488 U.S. at 439.
Defendant Committee of Receivers argues in this case that Dubai law should apply for jurisdictional purposes. The Committee asserts that Article 9 of Decree No. 3
immunizes the Committee from liability in this court. Dubai law and Decree No. 3, however, do not apply here and are not relevant to this issue. In addition to the Supreme Court's decision in Argentine Republic, holding that the FSIA is the sole basis for jurisdiction, the Second Circuit held in Letelier v. Republic of Chile, 748 F.2d 790 (2d Cir. 1984) that the FSIA is "the exclusive source of subject matter jurisdiction over all suits involving foreign states or their instrumentalies." Letelier, 748 F.2d at 793 (involving suit against the Republic of Chile and Chilean nationals that Chilean government refused to extradite who had been indicted for the assassination of the former Chilean Ambassador to the United States and his wife) (citing Rex v. CIA Pervana de Vapores S.A., 660 F.2d 61, 62 (3d Cir. 1981), cert. denied 456 U.S. 926, 102 S. Ct. 1971, 72 L. Ed. 2d 441 (1982)). It is therefore clear from the decisions in Argentine Republic and Letelier that Dubai law cannot be applied to the question of jurisdiction. Subject matter jurisdiction in this case is governed by the FSIA and its specific exceptions to immunity.
B. COMMITTEE AND DUBAI HAVE BURDEN OF PROVING ENTITLEMENT TO IMMUNITY
In asserting that this court lacks subject matter jurisdiction, defendants' have the burden of proving that the exceptions posed by plaintiffs do not apply. See e.g., Siderman de Blake v. Republic of Argentina, 965 F.2d 699, 707-08 (9th Cir. 1992); See also L'Europeene de Banque v. La Republica de Venezuela, 700 F. Supp. 114, 119 (S.D.N.Y. 1988) ("Under the FSIA, defendants bear the evidentiary burden of demonstrating that the exceptions are not applicable"). Siderman involved a suit against the Republic of Argentina and the Argentine Province of Tucuman for the torture and expropriation of property of one of its citizens. The Ninth Circuit noted that when the allegations in the complaint bring claims within an FSIA exception, the burden shifts to the foreign state or instrumentality to prove that any relevant exceptions do not apply. Siderman, 965 F.2d at 707-08. "'Once the plaintiff offers evidence that an FSIA exception to immunity applies, the party claiming immunity bears the burden of proving by a preponderance of the evidence that the exception does not apply.'" Siderman, 965 F.2d at 708 (quoting Schoenberg v. Exportadora de Sal, S.A. de C.V., 930 F.2d 777 (9th Cir.1991) (quoting Joseph v. Office of the Consulate Gen'l of Nigeria, 830 F.2d 1018, 1021 (9th Cir. 1987) cert. denied, 485 U.S. 905, 108 S. Ct. 1077, 99 L. Ed. 2d 236 (1988))).
Plaintiffs, however, are not wholly without responsibility in resolving the issue of subject matter jurisdiction. The burden of proof is a shifting burden which ultimately falls upon the party claiming immunity.
Once a party has established that it is a foreign state within the meaning of the FSIA and potentially entitled to immunity, the burden shifts to the opposing party to raise the applicable exceptions to sovereign immunity and supporting facts. Stena Rederi AB v. Comision de Contratos del Comite Elecutivo General del Sindicato Revolucionari de Trabaiadores Petroleros de la Republica Mexicana, 923 F.2d 380, 390 n. 14 (5th Cir. 1991) (In suit for breach of contract and negligent misrepresentation against nationalized Mexican petroleum company and business entity, plaintiff must raise applicable exception to immunity). Upon a demonstration of the applicable exceptions, the ultimate burden shifts back to the foreign state to prove that the exceptions raised do not apply. Stena Rederi, 923 F.2d at 390 n. 14; See also Forsythe v. Saudi Arabian Airlines Corp., 885 F.2d 285, 289 n. 6 (5th Cir. 1989) (While plaintiffs had burden of production subsequent to foreign state's prima facie immunity, "the ultimate burden of persuasion remained at all times on [the foreign state]"); Vencedora Oceanica Navigacion v. Compagnie Nationale Algerienne de Navigation, 730 F.2d 195, 199 (5th Cir. 1984) (party claiming FSIA immunity has burden of proving nonapplicability of exceptions). See e.g., Transamerican Steamship Corp. v. Somoai Democratic Republic, 247 U.S. App. D.C. 208, 767 F.2d 998, 1003 (D.C. Cir. 1985) (where foreign state failed to sustain burden of proving inapplicability of exception, district court had jurisdiction); Alberti v. Empresa Nicaraguense de la Carne, 705 F.2d 250, 253 (7th Cir. 1983) ("It is uncontested that defendants bear the burden of establishing their immunity from suit").
In this case, both defendant Committee and defendant Dubai have met their burden of demonstrating a prima facie entitlement to immunity by establishing that they are "foreign states"
within the meaning of the FSIA. See Refco, Inc. v. Galadari, 755 F. Supp. 79, 82 (S.D.N.Y. 1991) ("This court . . . finds that the Committee is an agency or instrumentality of a foreign state"). Plaintiffs, however, have met their subsequent burden of presenting evidence indicating the applicability of an exception to immunity provided for in the FSIA.
The ultimate burden, therefore, now falls on the defendants to prove to the court the inapplicability of any of the FSIA exceptions.
C. DEFENDANT, COMMITTEE, IMPLICITLY WAIVED IMMUNITY
One of the FSIA exceptions to immunity that plaintiffs raise is the waiver exception. The FSIA § 1605(a) provides:
(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case--
With regard to this provision, the first issue to be resolved is the constitution of an implied waiver. Upon that determination, the issue turns to whether the acts of the Committee and Dubai comprise an implicit waiver.
Shapiro v. Republic of Bolivia, 930 F.2d 1013 (2d Cir. 1991) involved an appeal from a district court's dismissal of a suit brought against the Republic of Bolivia for non-payment of a note. In concurring in the district court's opinion with regard to waiver and holding that suit brought by a foreign state in a particular matter did not constitute waiver of immunity with respect to associated but distinct claims,
the Second Circuit defined the composition of an implied waiver under the FSIA. The court observed that "Federal courts have been virtually unanimous in holding that the implied waiver provision of Section 1605(a)(1) must be construed narrowly." Shapiro, 930 F.2d at 1017 (citations omitted). Referring to the legislative history of the FSIA, the court noted three specific examples of actions constituting an implied waiver. The court quoted the House Report which states:
With respect to implicit waivers, the courts have found such waivers in cases where a foreign state has agreed to arbitration in another country or where a foreign state has agreed that the law of a particular country should govern a contract. An implicit waiver would also include a situation where a foreign state has filed a responsive pleading in an action without raising the defense of sovereign immunity.
H.R.Rep. No. 1487, 94th Cong., 2d Sess. 18, reprinted in 1976 U.S.Code Cong. & Admin.News 6604, 6617 (quoted in Shapiro, 930 F.2d at 1017) (emphasis added). The court in Shapiro observed that "these examples involve circumstances in which the waiver was unmistakable, and courts have been reluctant to find an implied waiver where the circumstances were not similarly unambiguous." Shapiro, 930 F.2d at 1017. According to Shapiro, then, filing a responsive pleading without raising the defense of sovereign immunity constitutes an "unambiguous" implied waiver of immunity.
In addition to the Second Circuit's decision in Shapiro, there is other support for finding an implied waiver where a foreign state files responsive pleadings without preserving its immunity. In considering an appeal of the district court's granting a motion to dismiss on sovereign immunity grounds, the Second Circuit in Canadian Overseas Ores LTD v. Compania de Acero del Pacifico S.A., 727 F.2d 274 (2d Cir. 1984) noted that "sovereign immunity is an 'affirmative defense which must be specially pleaded' for a court to consider it." Canadian Overseas Ores, 727 F.2d at 277. Where a foreign state responds without specifically pleading the sovereign immunity defense, it implicitly waives its immunity; the filing of a pleading is the point of "no return" for asserting sovereign immunity. Canadian Overseas Ores, 727 F.2d at 277.
See also Harris v. VAO Intourist, Moscow, 481 F. Supp. 1056, 1058 (S.D.N.Y. 1979) (quoting House Report for proposition that responsive pleading without immunity defense constitutes waiver); Aboujdid v. Singapore Airlines, LTD, 67 N.Y.2d 450, 494 N.E.2d 1055, 503 N.Y.S.2d 555 (Ct.App 1986) ("An entity otherwise entitled to sovereign immunity under the FSIA which serves an answer asserting not only a number of affirmative defenses other than sovereign immunity but also a counterclaim against plaintiffs and their counsel, and in furtherance of its position utilizes a number of procedural devises before attempting some four and a half years after commencement of the litigation to amend its answer to assert the immunity defense, waives immunity. . ."); Corporacion Venezolana de Fomento v. Vintero Sales Corp., 477 F. Supp. 615, 619 n. 9 (S.D.N.Y. 1979), rev'd on other grounds, 629 F.2d 786 (2d Cir. 1980), cert. denied, 449 U.S. 1080, 66 L. Ed. 2d 804, 101 S. Ct. 863 (1981) (where defendant did not raise sovereign immunity defense in responsive pleadings, defendant implicitly waives immunity).
Having firmly established that participation in litigation without claiming sovereign immunity constitutes waiver, the next task is to determine whether or not the ...