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Osqugama F. Swezey v. Merrill Lynch

June 26, 2012


The opinion of the court was delivered by: Graffeo, J.:

This opinion is uncorrected and subject to revision before publication in the New York Reports.

We are asked in this case whether the invocation of sovereign immunity by the Republic of the Philippines in this turnover proceeding requires dismissal of the action under CPLR 1001.


Ferdinand E. Marcos was elected President of the Philippine Republic in 1965 and 1969. The constitution of that country, similar to the United States Constitution, limited the chief executive to a maximum of two four-year terms. Under that term limit, Marcos should have left office in 1973.

Rather than relinquishing power, President Marcos imposed martial law on the nation in September 1972, suspended the constitution and seized control of the entire government. He amended the constitution the following year, cementing his status as dictator of the Philippines. In that role, Marcos initiated a campaign of human rights violations against Philippine dissidents that included arrests, torture, summary executions and other actions.

President Marcos also systematically transferred public assets and property to his personal control through various schemes. Over time, he amassed a fortune that was estimated to be worth billions of dollars. Marcos was eventually deposed from power in 1986 and fled to Hawaii.

Almost immediately after President Marcos departed from his country, the Republic of the Philippines organized the Presidential Commission on Good Government (PCGG) for the purpose of identifying, locating and retrieving national assets stolen by Marcos and his administration. The PCGG relied on a 1955 Philippine law, which declared that any property derived from misfeasance in public office was deemed forfeited to the Republic when the misappropriation occurred.*fn1 In addition to the efforts undertaken by the PCGG, Marcos was sued in a U.S. federal court in Hawaii by approximately 10,000 Philippine victims of his human rights abuses or their survivors, a group that is collectively known as the "Pimentel class". After Marcos died, the class obtained a judgment against his estate for almost $2 billion (see In re Estate of Marcos Human Rights Litigation, 910 F Supp 1460, 1464 [D Haw 1995], affd sub nom. Hilao v Estate of Marcos, 103 F3d 767 [9th Cir 1996]).

Enforcing the judgment proved to be a difficult task, however, because the Pimentel class was seeking to obtain monies and assets also sought by the Republic and PCGG.*fn2 One such dispute involved the assets of Arelma, S.A., a Panamanian corporation. Marcos had transferred $2 million to the company for deposit in a brokerage account at the New York office of Merrill Lynch, Pierce, Fenner & Smith, Inc. The Republic subsequently discovered that the bearer shares pertaining to the ownership of Arelma (along with funds controlled by several other entities connected to Marcos) were located in Switzerland. At the PCGG's urging, Swiss authorities froze those assets and the seizure was upheld by Switzerland's Federal Supreme Court. Those assets, including the Arelma shares, were deposited in an escrow account established by the PCGG at the Philippine National Bank (PNB), pending a determination by a special Philippine anti-corruption court -- the Sandiganbayan -- as to whether the assets were owned by the Marcos estate or were forfeited to the people of the Republic.*fn3

The Republic and PCGG also requested that Merrill Lynch transfer the Arelma brokerage account (valued at approximately $35 million in 2000) to the PNB escrow account. Merrill Lynch declined to do so because of competing claims to the property, including that of the Pimentel class. The brokerage firm then commenced an interpleader action in federal court in Hawaii against a number of parties, among them the Republic, PCGG, Arelma, PNB and the Pimentel class, and deposited the Arelma assets with the court clerk.*fn4 Invoking sovereign immunity, the Republic and PCGG moved to dismiss the interpleader action pursuant to Rule 19 (b) of the Federal Rules of Civil Procedure for failure to join a required party. The motion was denied and the district court awarded ownership of the Arelma assets to the Pimentel claimants. The United States Court of Appeals for the Ninth Circuit affirmed (see Merrill Lynch, Pierce, Fenner & Smith, Inc. v ENC Corp., 464 F3d 885 [9th Cir 2006]).

In 2008, the United States Supreme Court reversed that determination and held that the assertion of sovereign immunity by the Republic and PCGG required dismissal for lack of a required party under Rule 19 (b) (see Republic of the Philippines v Pimentel, 553 US 851 [2008]). The Supreme Court explained that "where sovereign immunity is asserted, and the claims of the sovereign are not frivolous, dismissal of the action must be ordered where there is a potential for injury to the interests of the absent sovereign" (id. at 867). Observing that the "Republic and the [PCGG] have a unique interest in resolving the ownership of or claims to the Arelma assets," the Court noted that there was "a comity interest in allowing a foreign state to use its own courts for a dispute if it has a right to do so" (id. at 866). In this regard, the Court explained that the "dignity of a foreign state is not enhanced if other nations bypass its courts without right or good cause" (id.).

Yet, the Supreme Court recognized the interests of the Pimentel class, stating that the passage of time or the occurrence of specific events could alter the balance of the equities under a Rule 19 (b) analysis. In particular, a relevant consideration would be "if it appears that the Sandiganbayan cannot or will not issue its ruling within a reasonable period of time" (id. at 873). Similarly, a decision by the Sandiganbayan that the Arelma assets do not belong to the Republic would cause its claim in the interpleader case to be "less substantial" (id.). But if the Sandiganbayan were to rule in favor of the Republic and PCGG, the Republic could waive sovereign immunity and seek enforcement of its judgment in American courts or consent to join an interpleader action (see id.).

As a result of the Pimentel decision in 2008, the federal district court in Hawaii returned the Arelma assets to Merrill Lynch in early 2009. Two events occurred shortly afterward. First, petitioner Osqugama Swezey -- a member of the Pimentel class -- commenced this CPLR 5225 turnover proceeding in New York Supreme Court against Merrill Lynch seeking to execute the Pimentel $2 billion judgment against the Arelma brokerage account. Second, the Sandiganbayan ruled that the funds Marcos used to establish the Arelma account had been stolen from the Republic and that the company's assets had therefore been forfeited to the Republic.*fn5

In the New York Supreme Court turnover proceeding, PNB and Arelma moved to intervene and requested dismissal of the action under CPLR 1001, asserting that the Republic and PCGG were necessary parties but could not be subject to joinder in light of the assertion of sovereign immunity. Supreme Court denied the motion to dismiss, finding that a balancing of the interests allowed the matter to go forward without the Philippine government as a party.*fn6 The Appellate Division reversed, concluding that the invocation of sovereign immunity mandated dismissal ...

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