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WMW MACH. v. WERKZEUGMASCHINENHANDEL GMBH

March 27, 1997

WMW MACHINERY, INC. and GENERAL BEARING CORPORATION, Plaintiffs, against WERKZEUGMASCHINENHANDEL GmbH IM AUFBAU, WERNER P. MUENDER, TREUHANDANSTALT, and BUNDESANSTALT FUER VEREINIGUNGSBEDINGTE SONDERAUFGABEN, Defendants, -against- SEYMOUR GUSSACK and WMW MACHINERY COMPANY, INC., Additional Counterclaim Defendants.


The opinion of the court was delivered by: PARKER

 BARRINGTON D. PARKER, JR., U.S.D.J.

 WMW Machinery, Inc. ("WMW") and General Bearing Corporation ("GBC") commenced this action against Werkzeugmaschinenhandel GmbH IM Aufbau ("WEMEX"), Werner P. Muender, the Treuhandanstalt ("Treuhand"), and the Bundesanstalt Fuer Vereiningungsbedingte Sonderaufgaben ("BVS") for breach of contract, breach of fiduciary duties, conversion, and tortious interference with contract. Defendants now move for summary judgment pursuant to Fed. R. Civ. P. 56. For the reasons set forth below, defendants' motion is granted in part and denied in part.

 BACKGROUND

 This action arises out of damages allegedly sustained by plaintiffs WMW and GBC following the collapse of the former German Democratic Republic ("GDR" or "East Germany") and its reunification with the Federal Republic of Germany ("FRG"). Reunification altered not only the political face of the GDR, but also the economic and legal structure of the once communist state. The controversy in this case arises from the privatization of formerly state-owned enterprises in the aftermath of German reunification. Prior to reunification, in 1986 and 1987, WEMEX, one such enterprise, entered into contracts with WMW and GBC. *fn1" Disputes over the post-privatization status of those contracts, and the duties and rights flowing from them, form the basis of plaintiffs' complaint.

 Before reunification, the GDR exercised monopoly control over the country's international commercial transactions. Thus, under GDR law, "Export Trade Management Entities" or Aussenhandelsbetriebs ("AHB"), were the only entities in the GDR authorized to conduct export or import transactions. WEMEX was the AHB responsible for all export and import transactions for the GDR's machine tool industry and the "statutory commission agent" *fn2" of machine tool manufacturers in the GDR. Those manufacturers, in turn, were required to export their goods through WEMEX.

 On January 1, 1986, WEMEX entered into a Joint Venture Agreement with GBC, pursuant to which both parties became equal owners of Alurop, S.A., a Panamanian company. Alurop's sole asset was its 100% ownership of plaintiff WMW, a New Jersey corporation. *fn3" The Joint Venture Agreement, in essence, prescribed the terms under which WEMEX would provide machinery to WMW for resale in the United States.

 On December 8, 1987, WEMEX entered into a Commercial Agency Contract with WMW, which gave WMW the exclusive right to distribute in the United States and Canada machine tools manufactured in, and exported from, the GDR. The Commercial Agency Contract was structured so that the machine tool manufacturers themselves incurred no legal or contractual liability. In December 1989, WEMEX and WMW agreed to extend the term of the Contract through December 31, 1995.

 The historic fall of the Berlin Wall on November 9, 1989 and the ensuing dismantling of the communist state brought about the dissolution of the government's monopoly power over the import and export of the country's goods and services. On June 17, 1990, prior to reunification, GDR's first freely elected government adopted the Treuhandgesetz ("Trusteeship Statute"), pursuant to which all former GDR enterprises, including WEMEX, were to be privatized. The Treuhand was the state agency created under the Trusteeship Statute to oversee the conversion of thousands of formerly state-owned entities into free-market enterprises. The Treuhand became the sole shareholder of WEMEX. The Treuhand's name was later changed to Bundesanstalt fuer Vereinigungsbedingte Sonderaufgaben ("BVS"). *fn4" On October 3, 1990, Germany was reunified.

 As a result of reunification, former East German manufacturers and producers were no longer required to deal through AHBs in order to sell their goods abroad. Thus, the East German machine tool manufacturers that had previously exported through WEMEX were free to establish new channels of distribution. Plaintiffs contend that the Treuhand, nonetheless, assured WMW that the Commercial Agency Contract was still valid, and that the Treuhand could take steps to require the manufacturers to continue to honor WMW's exclusive distribution rights.

 Despite those assurances, many former East German manufacturers refused to distribute through WMW. According to plaintiffs, some manufacturers were closed down by the Treuhand, or ordered to change their product lines. Others were sold by the Treuhand to other companies, who used their own machine tool distributors. Others agreed to sell machine tools to WMW, but only on terms less favorable than those prescribed by the Commercial Agency Contract.

 No longer the exclusive distributor of East German machine tools, WMW could not ensure its customers that service and parts could be supplied, or that the terms of its warranties to purchasers could be met. As a result, WMW's business decreased dramatically, which, in turn, caused the rapid devaluation of its inventory. By 1991, WMW ceased making payments to WEMEX under the Commercial Agency Contract on the ground that WEMEX had refused to acknowledge the devaluation of WMW's inventory, WMW's growing losses, or the validity of the offsets and claims of WMW and GBC. In an attempt to resolve the problems surrounding its indebtedness to WEMEX, WMW reached two agreements with WEMEX. Because of the Treuhand's inaction, however, neither agreement was approved by the FRG's Ministry of Finance as was required for the agreements to be binding.

 Meanwhile, WEMEX continued to export machine tools from a number of German manufacturers that had opted to continue to do business with WEMEX and WMW. On March 1991, WMW and WEMEX entered into an agreement ("the Heckert Agreement") to distribute goods manufactured by Heckert-Chemnitzer Werkzeugmaschinen ("Heckert"), a machine tool manufacturer of the former GDR. The agreement conferred upon WMW exclusive distribution rights in the United States and Canada for a large inventory of Heckert machinery. Disputes arising under the agreement were to be brought in the court "located at the principal place of business of the defendant." Heckert Agreement, Article 23.

 Pursuant to the terms of the agreement, WMW purchased large quantities of machine tools from Heckert. Heckert, in turn, stored the machines for WMW in Germany until they could be shipped pursuant to WMW's instructions. Meanwhile, by June 1991, WMW owed WEMEX over $ 10 million for amounts due under the Commercial Agency Contract.

 In January 1993, WEMEX was placed in liquidation and Werner P. Muender was its appointed liquidator and sole legal representative. In the fall of 1993, Werner P. Muender learned that machine tools that had been ordered by WMW, and had yet to be paid for, were being stored in a Heckert warehouse in Germany. Thus, in November 1993, Muender, in his capacity as liquidator of WEMEX's remaining assets, secured an ex parte order from a German court attaching the Heckert machines and preventing their shipment from Germany. *fn5" WEMEX sold the attached machine tools to WMW, as well as other distributors. WMW paid WEMEX the full purchase price for the machines in order to obtain their release.

 Plaintiffs subsequently brought this action against WEMEX for breach of contract, breach of fiduciary duties, and for declaratory judgment extinguishing or diminishing WMW's indebtedness to WEMEX. Plaintiff also sued Muender for wrongful conversion and breach of fiduciary duties and sued Treuhand for tortious interference with the Joint Venture Agreement and Commercial Agency Contract. Plaintiffs allege that since unification, defendants have acted to undermine the objectives of the Joint Venture Agreement and Commercial Agency Contract. Specifically, plaintiffs claim that defendants have failed to take measures to require the former East German machine tool manufacturers to comply with the Commercial Agency Contract; made statements disparaging WMW' s management and marketing competence; and changed the names and missions of various machine tool factories, thereby diminishing the value of products WMW had in its inventory.

 Defendants now move for summary judgment pursuant to Fed. R. Civ. P. 56 on the grounds that (1) the Court lacks subject matter and personal jurisdiction over the Treuhand; (2) the act of state doctrine bars all claims against the Treuhand and WEMEX; (3) the complaint fails to state a claim for breach of fiduciary duties; (4) there is no basis for Muender's personal liability; and (5) the German law defense of "changed circumstances" bars all of the claims against WEMEX and the Treuhand. In the alternative, defendants argue that plaintiffs' complaint should be dismissed in its entirety under the doctrine of forum non conveniens.

 DISCUSSION

 I. Foreign Sovereign Immunities Act

 Defendants argue that the Treuhand is immune from suit under the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. § 1602 et seq. The FSIA provides the "sole basis for obtaining jurisdiction over a foreign state" in the courts of the United States. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434, 102 L. Ed. 2d 818, 109 S. Ct. 683 (1989); Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 240 (2d Cir. 1994). The FSIA presumes that foreign states are immune from suit and permits federal courts to exercise jurisdiction over foreign states only if one of the exceptions set forth in the statute applies. 28 U.S.C. §§ 1604, 1605; see Saudi Arabia v. Nelson, 507 U.S. 349, 354, 123 L. Ed. 2d 47, 113 S. Ct. 1471 (1993); Antares Aircraft, L.P. v. Federal Republic of Nigeria, 999 F.2d 33, 35 (2d Cir. 1993), cert. denied, 510 U.S. 1071, 127 L. Ed. 2d 74, 114 S. Ct. 878 (1994).

 The parties do not dispute, for the purposes of this motion, that the Treuhand qualifies as a "foreign state" as defined by the FSIA and is thus immune absent an applicable statutory exception. *fn6" Plaintiffs contend that subject matter jurisdiction over their claims against the Treuhand is conferred by the FSIA's "commercial activity" exception to sovereign immunity. See 28 U.S.C. § 1605(a)(2).

 The "commercial activity" exception establishes jurisdiction over foreign states in cases where "the action is based . . . 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). While the FSIA provides that "the commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose," 28 U.S.C. § 1603(d), it "leaves the critical term of 'commercial' largely undefined." Nelson, 507 U.S. at 359 (citing Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 612, 119 L. Ed. 2d 394, 112 S. Ct. 2160 (1992)).

 The Supreme Court, however, has recently interpreted "commercial" in this context, holding that its meaning for the purposes of the FSIA "must be the meaning Congress understood the restrictive theory [of sovereign immunity] required at the time it passed the statute." Nelson, 507 U.S. at 359. Under this "restrictive" theory, foreign states are granted immunity with respect to their public or governmental acts, but not with respect to those that are private or commercial in nature. See Nelson, 507 U.S. at 359-360; Weltover, 504 U.S. at 614; Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 310 (2d Cir. 1981), cert. denied, 454 U.S. 1148, 71 L. Ed. 2d 301, 102 S. Ct. 1012 (1982). Thus, "when a foreign government acts, not as a regulator of a market, but in the manner of a private player within that market," Weltover, 504 U.S. at 614, or "where it exercises 'only those powers that can also be exercised by private citizens,' as distinct from those 'powers peculiar to sovereigns,'" Nelson, 507 U.S. at 360 (quoting Weltover, 504 U.S. at 614), its actions are "commercial" within the meaning of the FSIA. See also De Letelier v. Republic of Chile, 748 F.2d 790, 797 (2d Cir. 1984), cert. denied, 471 U.S. 1125, 86 L. Ed. 2d 273, 105 S. Ct. 2656 (1985) (an activity is "commercial" if it is "of a type an individual would customarily carry on for profit"). Furthermore, because the commercial character of the act is determined by reference to its "nature" rather than its "purpose," see 28 U.S.C. § 1603(d), the Court must consider "whether the particular actions that the foreign state performs . . . are the type of actions by which a private party engages in 'trade and traffic or commerce,'" regardless of the motive behind them. Weltover, 504 U.S. at 614.

 Defendants contend that the Treuhand did not engage in commercial ac

 tivity that would subject it to this Court's jurisdiction, arguing that the Treuhand engaged in the purely sovereign function of converting former state-owned businesses into free market enterprises. Thus, according to defendants, the Treuhand acted purely as "market regulators" and not as "market participants."

 The Treuhand's role as the entity responsible for privatizing state-owned businesses, however, more aptly describes Treuhand's "purpose," i.e. the reason why the foreign state engaged in the activity. What, as the statute explicitly provides and the case law instructs, is of considerably more significance is the "nature" or the "outward form of the conduct that the foreign state performed." Nelson, 507 U.S. at 361. Its function as the former GDR's privatizing organ is, therefore, not determinative of whether the Treuhand's conduct was "commercial" under the FSIA. Rather, that determination requires the Court to look beyond generalized characterizations to the particular conduct that would entitle plaintiffs to relief under their theory of the case. See 28 U.S.C. § 1605(a)(2); Nelson, 507 U.S. at 356-57; Texas Trading, 647 F.2d at 308.

 Here, plaintiffs have alleged that the Treuhand tortiously interfered with the Joint Venture Agreement and the Commercial Agency Contract. In support of that allegation, plaintiffs claim that the Treuhand engaged in conduct that undermined both agreements. Specifically, plaintiffs allege that the Treuhand (1) required "the machine tool manufacturers that it now controls, and who are bound by the exclusive distribution rights contractually conferred upon WMW, to export and sell goods through distributors other than WMW," Complaint PP 56 and 59; (2) transferred ownership of the machine tool factories to WMW's competitors without advising those competitors of its exclusive distribution agreement with WMW, see Complaint PP 56 and 59; and (3) induced WMW to increase purchases from factories, despite Treuhand's knowledge that certain of those factories would soon be closed. See Complaint P 59.

 After reunification, the Treuhand became the "managing director of all the legally independent people's economic entities of the former GDR . . . and became the owner of the shares of the capital companies arising out of the restructuring of the people's collective combines, companies, agencies and other legally independent economic entities." Muender Reply Decl. at 6. The Treuhand's actions, taken as the entity responsible for the former state-owned machine tool manufacturers certainly do not reflect the exercise of "powers peculiar to sovereigns." See Nelson, 507 U.S. at 360. The actions that form the basis of plaintiffs' claims reflect an exercise of "powers that can also be exercised by private citizens," and are akin to those that a controlling stockholder of a corporation might take as a "player in the private market." Id. (citing Weltover, 504 U.S. at 614); Drexel Burnham Lambert Group, Inc. v. Committee of Receivers for A.W. Galadari, 12 F.3d 317, 328 (2d Cir. 1993), cert. denied, 511 U.S. 1069, 114 S. Ct. 1644, 128 L. Ed. 2d 365, 114 S. Ct. 1645 (1994). Compare Weltover, 504 U.S. 607, 119 L. Ed. 2d 394, 112 S. Ct. 2160 (issuance of freely negotiable, "garden-variety debt instruments held by private parties was "commercial activity"); Drexel Burnham, 12 F.3d 317 (marshaling, managing, and liquidating plaintiff's assets was "commercial activity"); Bryks v. Canadian Broadcasting Corp., 906 F. Supp. 204 (S.D.N.Y. 1995) (broadcasting investigative news report was "commercial activity") with Nelson, 507 U.S. 349, 123 L. Ed. 2d 47, 113 S. Ct. 1471 (exercise of police power, including unlawful detention and torture, fell within a "peculiarly sovereign" function and was not a "commercial activity" under the FSIA). See also Restatement (Third) of the Foreign Relations Law of the United States § 451 (1987) [hereinafter ...


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