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Mortimer Off Shore Services, Ltd. v. Federal Republic of Germany

September 27, 2007

MORTIMER OFF SHORE SERVICES, LTD., PLAINTIFF,
v.
FEDERAL REPUBLIC OF GERMANY, DEFENDANT.



The opinion of the court was delivered by: Gerard E. Lynch, District Judge

OPINION AND ORDER

Plaintiff Mortimer Off Shore Services, Ltd., brings this action to recover from defendant Federal Republic of Germany ("Germany") the principal and interest on 351 bearer bonds ("the Bonds") in its possession. Germany moves to dismiss the action, arguing that the Court lacks subject matter jurisdiction over plaintiff's claim pursuant to the Foreign Sovereign Immunities Act, 28 U.S.C. §§ 1602-1611 ("FSIA"). Alternatively, Germany argues that, because plaintiff has not complied with the bond validation process established by treaty and German law as a prerequisite to suit on the Bonds, the Bonds are unenforceable, and therefore plaintiff has failed to state a claim upon which relief can be granted. The motion will be granted.

BACKGROUND

The Treaty and Validation Law*fn1

In 1953, the United States entered into a treaty with the Federal Republic of Germany, which then encompassed only West Germany, for "the orderly settlement of the obligations arising from German dollar bonds" in order to satisfy the "[e]xternal [d]ebt" West Germany incurred during World War II.*fn2 To facilitate this "settlement," the Treaty incorporated by reference legislation enacted by West Germany in 1952, pursuant to which West Germany assumed liability for certain "foreign currency bonds" that had been issued by German banks prior to the end of World War II ("the Validation Law").*fn3 Thus, by operation of the Validation Law, West Germany assumed liability for certain bonds issued prior to the end of World War II, and by operation of the Treaty, its liability was extended to bonds offered in the United States. See Validation Law, BGBl. I at 327, Schedule C.IV (listing the bonds offered in the United States and covered by the Validation Law).

However, West Germany did not assume liability for the bonds without qualification. Instead, before the bonds can be enforced, the Validation Law requires bondholders to register their bonds with either the German Examining Agency or a Validation Board in the country of offering. See id. at 306, Art. 3; id. at 307, Art. 8; id. at 310-11, Art. 23.*fn4 If the bonds are not registered and examined by the appropriate agency, they are deemed invalid and unenforceable. See id. at 306, Art. 2, 3; id. at 317, Art. 50. Accordingly, because the Treaty incorporated the Validation Law by reference, any bonds subject to the Treaty are "[un]enforceable unless and until [they are] validated by" the appropriate agency.*fn5 Treaty of 1953, 4 U.S.T. 885, at Art. II. However, a bondholder has the right to appeal the agency's determination, either to an arbitration board, a German court, or an appropriate court in the country of offering. Validation Law, BGBl.

I at 312-13, Arts. 31, 33.

Plaintiff's Claim

In 2005, plaintiff brought suit in this Court seeking payment on 351 bearer bonds in its possession. (Comp. ¶ 1.) The Bonds, entitled "German Provincial & Communal Bank Consolidated Agricultural Loan Secured Sinking Fund Gold Bonds Series A," were issued on or about June 1, 1928, as part of a German national program for improving agricultural conditions in Germany, and were offered in the United States. (Id. ¶¶ 6, 7; see BGBl. I at 327, Schedule C.IV(19) (listing the same bonds as "[o]ffer[ed] [in the] United States").) The Bonds were issued by a consortium of fourteen banks ("obligor banks") located both within and outside of the territory constituting West Germany between the end of the war and the reunification of Germany in 1990. (Comp. ¶¶ 7, 9.) The obligor banks financed the Bonds by contracting for loans and distributing the proceeds to German farmers. (Id. ¶ 7.) Each obligor bank was severally liable for a certain portion of the value of each of the Bonds, proportionate to its share of the underlying loans. (Id. ¶ 9.) According to plaintiff, obligor banks located outside of the territory constituting West Germany after reunification are liable for 64.5% of the Bonds' debt. (Lang. Decl. ¶ 4(a).)

The Bonds had a 30-year term, and were listed on the New York Stock Exchange, marketed in the Southern District of New York, and made payable in the Borough of Manhattan, New York City. (Comp. ¶¶ 6, 8.) The value of the Bonds (assuming their validity) is currently estimated to exceed $400,000,000 in unpaid principal and interest. (Id. ¶ 16.) In responding to the motion to dismiss, plaintiff makes clear that it has not submitted the Bonds for validation and that it contends it need not do so. (Pl. Mem. 9-12.)

According to plaintiff, Germany "is liable for the outstanding and unpaid principal and interest under the Bonds." (Comp. ¶ 11.) Germany, however, has refused to pay on the Bonds. (Id. ¶ 18.) Thus, plaintiff demands judgment against Germany for the full amount owing on the Bonds.

DISCUSSION

I. Rule 12(b)(1) Motion

Germany moves to dismiss plaintiff's claim for lack of subject matter jurisdiction, Fed. R. Civ. P. 12(b)(1), arguing that as a sovereign nation, it is immune from suit under the FSIA. Plaintiff argues that Germany's assumption of liability for bonds fits within the FSIA's exception for commercial activity, and thus that sovereign immunity is inapplicable. Germany argues that the commercial activity exception does not apply because the Treaty, the vehicle by which West Germany assumed liability over bonds offered in the United States, was the political act of a sovereign, and therefore non-commercial in nature. Pursuant to controlling Supreme Court precedent, Germany's assumption of liability for the Bonds constitutes commercial activity under the FSIA, and therefore the Court has subject matter jurisdiction over plaintiff's claim.

In determining the existence of subject matter jurisdiction, a court may consider evidence contained in affidavits or public documents as well as facts alleged in the pleadings. See Kamen v. American Tel. & Tel. Co., 791 F.2d 1006, 1011 (2d Cir. 1986). The Court must draw all material factual inferences in the plaintiff's favor, see Hason v. Office of Prof'l Med. Conduct, 314 F. Supp. 2d 241, 246 (S.D.N.Y. 2004); however, "argumentative inferences favorable to the party asserting jurisdiction should not be drawn." Atlantic Mut. Ins. Co. v. Balfour Maclaine Int'l Ltd., 968 F.2d 196, 198 (2d Cir. 1992) (citation omitted).

When a defendant moves to dismiss a complaint on the basis of foreign sovereign immunity, that defendant "must present a prima facie case that it is a foreign sovereign." See Virtual Countries, Inc. v. Republic of South Africa, 300 F.3d 230, 241 (2d Cir. 2002) (citation and internal quotation marks omitted). Once that initial burden is met, "the plaintiff has the burden of going forward with evidence showing that, under exceptions to the FSIA, immunity should not be granted." Id. (citation and internal quotation marks omitted). Only if the plaintiff discharges this burden of production does the "ultimate burden of persuasion" pass back to the "alleged foreign sovereign" defendant. Id. ...


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