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Smith Rocke Ltd. v. De Venezuela

United States District Court, Second Circuit

January 27, 2014

SMITH ROCKE LTD. Plaintiff,
v.
REPUBLICA BLIVIARIANA DE VENEZUELA, et al. Defendants.

ORDER & OPINION

LORNA G. SCHOFIELD, District Judge.

Plaintiff Smith Rocke Ltd. ("Smith Rocke") brings this action for damages arising out of the Republic of Venezuela's expropriation of a Venezuelan company and certain of its assets comprising the so-called "Lehman Notes" allegedly worth more than $410 million. The payment of the Lehman Notes is being administered by the U.S. Bankruptcy Court in the Southern District of New York. Plaintiff is the alleged successor in interest to the previous owner of the Lehman Notes and asserts claims of conversion and expropriation against the Republic of Venezuela ("Venezuela") and related defendants. Defendants move to dismiss for lack of subject matter jurisdiction, lack of personal jurisdiction, and failure to state a claim upon which relief may be granted. Defendants' motions to dismiss are granted.

I. Facts and Allegations

While typically a Court does not wade into the facts or merits on a motion to dismiss and accepts well-pleaded allegations as true, the inquiry is different in a challenge to subject matter jurisdiction and personal jurisdiction under the Foreign Sovereign Immunities Act ("FSIA"). "In the context of a Rule 12(b)(1) challenge to jurisdiction under the FSIA... the district court must look at the substance of the allegations' to determine whether one of the exceptions to the FSIA's general exclusion of jurisdiction over foreign sovereigns applies." Robinson v. Gov't of Malaysia, 269 F.3d 133, 140 (2d Cir. 2001) (quoting Cargill Int'l S.A. v. M/T Pavel Dybenko, 991 F.2d 1012, 1019 (2d Cir. 1993)). In doing so, the court "must review the pleadings and any evidence before it." Cargill Int'l, 991 F.2d at 1019. In evaluating the applicability of the FSIA, "a district court must review the allegations in the complaint, the undisputed facts, if any, placed before it by the parties, and-if the plaintiff comes forward with sufficient evidence to carry its burden of production on this issue-resolve disputed issues of fact, with the defendant foreign sovereign shouldering the burden of persuasion." Robinson, 269 F.3d at 141. "Sovereign immunity under the FSIA is immunity from suit, not just from liability." Id. (internal quotation marks omitted).

The following facts are taken from the Complaint and the parties' submissions on this motion. They are undisputed unless otherwise noted. Plaintiff Smith Rocke is a British Virgin Islands corporation whose shareholders are Venezuelan nationals. Defendant Venezuela is a foreign sovereign nation. Defendant Fondo de Garantia de Depositosy Proteccion Bancaria ("FOGADE") is the Venezuelan equivalent to the Federal Deposit Insurance Corporation. See FOGADE v. ENB Revocable Trust, 263 F.3d 1274 (11th Cir. 2001). Defendant Superintendencia de las Instituciones del Sector Bancario ("SUDEBAN") is a governmental regulatory body that supervises Venezuelan banks and other financial institutions. Defendants Rafael Jose Moreno Franco and Rosa Maria Jimenez Urrutia (the "Individual Defendants") are Venezuelan citizens appointed by SUDEBAN to act as administrators of Credican, C.A. ("Credican"), the Venezuelan company that Plaintiff alleges was wrongfully expropriated by Defendants.

Smith Rocke's claims arise out of FOGADGE's intervention of Banco Canarias and Credican, both financial institutions. In November 2009, FOGADE intervened Banco Canarias-that is, placed it into receivership-then ordered its liquidation.[1] On August 30, 2010, SUDEBAN published Resolution No. 468-10, which led to the intervention of Credican, on the basis that it was a related institution to Banco Canarias because Credican's shares allegedly were owned by the shareholders of Banco Canarias. On February 15, 2011, SUDEBAN published Resolution No. 058-11, which appointed administrators to exercise all of the powers and authority of Credican's shareholders, and to take all of Credican's property, allegedly without actually taking ownership or control of the shares.

Plaintiff claims that the intervention of Credican was without justification and authority because the basis for the intervention was factually incorrect. Plaintiff alleges that in October 2009, before the intervention of Banco Canarias or Credican, the Credican shareholders sold their interest in Banco Canarias to a commercial bank named Banpro. Therefore, Plaintiff alleges, Credican and Banco Canarias were not related at the time of the intervention of Credican, and Venezuela had no basis to expropriate Credican's assets without compensation.[2]

Smith Rocke was incorporated on March 2, 2012. Smith Rocke's shareholders are Venezuelan nationals who sold their Credican shares to Smith Rocke in exchange for Smith Rocke shares. The Complaint alleges that "Smith Rocke's shareholders also owned by assignment the beneficial interest in the Lehman Notes corresponding to the shares acquired by Smith Rocke." This is interpreted to mean that former Credican shareholders who became Smith Rocke shareholders assigned to Smith Rocke whatever interest they had in the Lehman Notes. Although Plaintiff does not say in the Complaint or elsewhere when these transfers occurred, presumably they could not have occurred, and Plaintiff does not allege they occurred, until after March 1, 2012, when Smith Rocke was created. Although it is unclear when Plaintiff acquired its alleged interest in the Lehman Notes, it is undisputed that Venezuela acquired its interest in the Notes before Plaintiff did, when it intervened either Banco Canarias or Credican in 2009 and 2010 respectively.

The Lehman Notes represent amounts owed by various Lehman Brothers entities. Notes 1, 2, and 3 are promissory notes issued by Lehman Brothers Treasury Co. B.V., a Dutch entity. Note 4 relates to amounts due from Lehman Brothers International (Europe), a U.K. entity, under an Agreement and Credit Support Annex. Note 5 relates to monies located in an account at Lehman Brothers Inc, the insolvent broker-dealer that was placed in a SIPA liquidation in September 2008. LBHI, the holding company that filed for bankruptcy in September 2008 in the Southern District of New York, guaranteed payment of the first four Lehman Notes. The claim for Note 5 is part of the parallel SIPA liquidation of Lehman Brothers Inc.

Smith Rocke alleges that before the intervention, the Credican shareholders were the beneficial owners of Credican's rights and property. It seems to be undisputed that before it was intervened, Credican owned the right to payment on Notes 1 and 2. However, it is unclear from the record whether Credican ever had any interest in Notes 3, 4 and 5. Defendants assert that the original holder of all five Lehman Notes was Banco Canarias. In November 2009, Banco Canarias filed proofs of claim regarding Notes 1 and 2 in the LBHI Bankruptcy. In December 2008, SUDEBAN approved the assignment of Notes 1 and 2 by Banco Canarias to Credican. In January, September and November 2009, Banco Canarias filed proofs of claim on account of the Lehman Notes 3, 4 and 5. On November 19, 2009, SUDEBAN intervened Banco Canarias and Banpro. On August 27, 2010, SUDEBAN intervened Credican. On May 14, 2012, two months after Plaintiff was incorporated, someone purporting to act on behalf of Credican sought to transfer Notes 3, 4 and 5 from Banco Canarias, then in liquidation, to Credican, then in intervention. Based on this chronology, it appears that the successor to Credican has an undisputed interest in Notes 1 and 2. Plaintiff is not alleged to have any interest in Banco Canarias, even though some of the Smith Rocke shareholders apparently were Banco Canarias shareholders. Thus it is unclear what entity is entitled to payment on Notes 3, 4 and 5, and whether Plaintiff has any interest in that entity.

Smith Rocke asserts that, by purchasing Credican shares, Smith Rocke became a beneficial owner of Credican's property, including the Lehman Notes. In June 2012, Credican's administrators issued instructions in the LBHI Bankruptcy that all acts performed by Credican's shareholders should be disregarded on account of the intervention of Credican, in effect preventing Smith Rocke from obtaining payment on the Lehman notes. Smith Rocke seeks damages for the expropriation of the Lehman Notes.

II. Discussion

A. The FSIA

Congress passed the FSIA in 1976 to regulate suits against foreign states in U.S. courts "in order to free the Government from [] case-by-case diplomatic pressures, to clarify the governing standards, " and to ensure that "decisions are made on purely legal grounds and under procedures that insure due process." Verlinden B.V. v. Cent. Bank of Nigeria, 461 U.S. 480, 488 (1983). "To accomplish these objectives, the [FSIA] contains a comprehensive set of legal standards governing claims of immunity in every civil action against a foreign state or its political subdivisions, agencies or instrumentalities." Id. The FSIA "codifies, as a matter of federal law, the restrictive theory of sovereign immunity." Id. "A foreign state is normally immune from the jurisdiction of federal and state courts, " subject to the exceptions of §§ 1605 and 1607. Id. Only when an exception applies will the foreign state "be liable in the same manner and to the same extent as a private individual under like circumstances." 28 U.S.C. § 1606. Otherwise, "a foreign state is presumptively immune from the jurisdiction of United States courts." Saudi Arabia v. Nelson, 507 U.S. 349, 355, (1993).

B. Only the Expropriation Exception Applies

In this case, Plaintiff relies on two of the exceptions to immunity specified in the FSIA: the commercial activity exception in § 1605(a)(2), and the expropriation exception in § 1605(a)(3). The commercial activity exception does not apply because Venezuela's act that gives rise to the claim is the taking of the Lehman Notes through the intervention of Credican. This was a sovereign act not a commercial act, and must be analyzed under the expropriation and not the commercial exception to the FSIA.

In order to determine which, if any, exception applies, the court must look to "the act of the foreign sovereign State that serves as the basis for plaintiffs' claims." Garb v. Republic of Poland, 440 F.3d 579, 586 (2d Cir. 2006) (citing Callejo v. Bancomer, S.A., 764 F.2d 1101, 1109 (5th Cir.1985) (explaining that to determine the basis of a claim, a court should focus on the "gravamen of the complaint")). Plaintiff's claims are for expropriation and conversion. The gravamen here is that Defendants engaged in the unlawful taking of the Lehman Notes allegedly without authority and without compensation, in violation of international law. The taking occurred when Defendants intervened Credican.

The expropriation alleged by Smith Rocke is the predicate to any subsequent commercial activity by Defendants with regard to the Lehman Notes. "Had there been no expropriation, there would have been no properties to treat in a commercial manner." Id. at 587. "[S]ubsequent commercial transactions involving expropriated property do not give rise to subject matter jurisdiction over claims arising from the original expropriation, " and "Federal courts have repeatedly rejected litigants' attempts to establish subject matter jurisdiction pursuant to other FSIA exceptions when their ...


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