United States v. Federative Republic Brazil

• Decision Date: 24 March 2014
• Docket Number: Docket No. 12–4601–CV.
• Citation: 748 F.3d 86
• Parties: UNITED STATES of America, Interpleader Plaintiff, v. The FEDERATIVE REPUBLIC OF BRAZIL, Interpleader Defendant–Appellee, and Tammy Fu and Eleanor Fisher, as Liquidators of Trade and Commerce Bank, Interpleader Defendants–Appellants.
• Court: U.S. Court of Appeals — Second Circuit

748 F.3d 86

UNITED STATES of America, Interpleader Plaintiff,

v. The FEDERATIVE REPUBLIC OF BRAZIL, Interpleader Defendant–Appellee,andTammy Fu and Eleanor Fisher, as Liquidators of Trade and Commerce Bank, Interpleader Defendants–Appellants.^*

Docket No. 12–4601–CV.

United States Court of Appeals, Second Circuit.

Argued: Sept. 26, 2013.

Decided: March 24, 2014.

William T. Reid, IV (Rachel S. Fleishman, Craig A. Boneau, Reid Collins & Tsai LLP, New York, NY; Chun T. Wright, Esq., Washington, D.C., on the brief), Reid Collins & Tsai LLP, New York, NY, for Interpleader Defendants–Appellants.

John W. Moscow, Baker & Hostetler LLP, New York, NY, for Interpleader Defendant–Appellee.

Before: RAGGI and DRONEY, Circuit Judges, KEENAN, District Judge. ^**

REENA RAGGI, Circuit Judge:

The United States filed this interpleader action to resolve competing claims to more than $6.8 million seized from a bank account held by Kesten Development Corporation (“Kesten”), an entity incorporated in the British Virgin Islands. On this appeal, Tammy Fu and Eleanor Fisher, as Liquidators of Trade and Commerce Bank (“Liquidators”), a Cayman Islands bank, challenge the award of summary judgment entered on October 24, 2012, in the United States District Court for the Southern District of New York (Thomas P. Griesa, Judge ), in favor of the Federative Republic of Brazil (“Brazil”). See United States v. Barry Fischer Law Firm, LLC, No. 10–Civ–7997, 2012 WL 5259214 (S.D.N.Y. Oct. 24, 2012). The district court concluded that a forfeiture judgment entered by a Brazilian court pursuant to Brazil's successful criminal prosecution of Kesten's former principals and owners took precedence over the Liquidators' Cayman Islands civil default judgment against Kesten. In so holding, the court rejected the Liquidators' invocation of the “penal law rule,” a common law principle whereby a sovereign—in this case, the United States—generally declines to enforce the criminal laws of another nation.

For the reasons explained in this opinion, we conclude that the penal law rule precludes awarding summary judgment in favor of Brazil based on a forfeiture judgment of that sovereign grounded in a violation of Brazil's penal laws. At the same time, however, we recognize that 28 U.S.C. § 2467—which permits the United States Attorney General, upon request of a foreign nation pursuant to a mutual forfeiture assistance treaty, to petition a United States court to enforce a foreign forfeiture judgment—is a statutory exception to the penal law rule. While no § 2467 request from Brazil is presently before the Attorney General, that nation's counsel advised this court at oral argument that, if the challenged summary judgment decision were vacated based on the penal law rule, Brazil would promptly file a § 2467 petition pursuant to the nations' mutual legal assistance treaty.

Accordingly, while we conclude that the penal law rule requires vacatur of summary judgment in favor of Brazil, we remand this case to the district court with instructions that it afford Brazil and the Attorney General a reasonable period of time to satisfy § 2467's exception to that rule before reaching a final decision in this interpleader action.

I. Background

The background to this appeal is complex, involving criminal and civil litigation over 15 years in the courts of four countries: the United States, Brazil, the Cayman Islands, and the British Virgin Islands.

A. The United States' Seizure of the Funds at Issue and Its Own Unsuccessful Forfeiture Litigation

In January 1999, federal agents, acting pursuant to a warrant, seized approximately$6.8 million in purported drug proceeds from a bank account in Kesten's name at the New York branch of MTB Bank (“Venus Account”). In June 2000, the United States commenced a civil forfeiture action in the District of New Jersey pursuant to 18 U.S.C. §§ 981, 984, maintaining that the seized funds were proceeds of violations of United States money laundering laws.¹ While the district court initially granted forfeiture, the Third Circuit vacated judgment and remanded, whereupon the district court granted Kesten's motion to dismiss, holding that the government had failed to demonstrate probable cause to think that the funds in the Venus Account were proceeds of unlawful conduct and ordered return of the monies to Kesten. See United States v. $8,221,877.16 in U.S. Currency, 148 F.Supp.2d 427, 434 (D.N.J.2001), vacated and remanded,330 F.3d 141 (3d Cir.2003); see id. Civ. No. 00–2667(JWB), 2004 U.S. Dist. LEXIS 31706, at *18–*19 (D.N.J. July 7, 2004) (granting dismissal).²

B. Brazil's Initial Effort To Restrain the Venus Account Funds

Meanwhile, Brazilian authorities were investigating Kesten principal Pires and his associates for money laundering, tax evasion, fraud, and other financial crimes violative of Brazilian penal law. In December 2004, on the basis of prosecutors' representations that Pires and his confederates used Kesten and other entities as shell companies to launder illicit proceeds, a Brazilian court issued a seizure warrant for the Venus Account. Soon thereafter, Brazil requested assistance from the United States in executing its warrants pursuant to the nations' mutual legal assistance treaty. See Treaty Between the Government of the United States of America and the Government of the Federative Republic of Brazil on Mutual Legal Assistance in Criminal Matters, U.S.-Braz., Oct. 14, 1997, S. Treaty Doc. No. 105–42 (1998).

Upon receipt of Brazil's request, the Attorney General moved in the District of Columbia, pursuant to 28 U.S.C. § 2467, for a temporary restraining order on the funds in the Venus Account.³ On January 26, 2005, the district court granted the motion, finding that the United States had demonstrated a substantial probability that Brazil would succeed in its forfeiture action against Pires.

The restraining order apparently remained in effect until September 22, 2010, when the United States moved for, and the district court ordered, vacatur in light of In re: Any and All Funds or Other Assets in Brown Bros. Harriman & Co. Account # 8870792 in the Name of Tiger Eye Invs. Ltd. ( “Tiger Eye ”), 613 F.3d 1122 (D.C.Cir.2010). In that unrelated case, the Court of Appeals interpreted § 2467, as then in effect, to permit the issuance of temporary restraining orders “only after a foreign court has entered a forfeiture judgment.” Id. at 1124 (emphasis in original). Because the Venus Account was restrained on the basis of a Brazilian warrant issued prior to the entry of any forfeiture judgment, the restraining order on the Venus Account could no longer stand consistent with Tiger Eye.⁴

C. Liquidators' Litigation

Separate from the described proceedings, in 2006, the Liquidators commenced a Cayman Islands action against Arthur Anderson LLP, the former auditor of Trade and Commerce Bank (“TCB”), to recover funds purportedly misappropriated by TCB directors as part of a laundering scheme. In October 2008, the Grand Court of the Cayman Islands dismissed the suit based on the doctrine of unclean hands, concluding that TCB had actively participated in its directors' fraud.

In August 2010, the Liquidators sued Kesten in the British Virgin Islands, alleging that TCB's directors had funneled over $15 million from the bank through Kesten in an attempt to launder the allegedly misappropriated funds. When Kesten failed to appear in that action, the British Virgin Islands court entered a default judgment in the amount of $15,936,369 in favor of the Liquidators.

The Liquidators sought to domesticate that default judgment in the United States by filing suit against Kesten in the bankruptcy court for the Southern District of New York. Once again, Kesten failed to appear, and on October 26, 2010, the bankruptcy court entered judgment in the full amount in favor of the Liquidators.

D. Interpleader Action

On October 20, 2010—approximately one month after vacatur of the District of Columbia restraining order on the Venus Account, and approximately one week before the Liquidators domesticated their default judgment against Kesten—the United States filed the instant interpleader action pursuant to 28 U.S.C. § 1335. Acknowledging various parties' competing claims to the Venus Account funds seized more than a decade earlier, the United States asked the district court to determine to whom the money should be paid. With respect to claims by Brazil, the United States alleged that the criminal actions against Pires and his associates in that country were “near completion,” and that once the Brazilian court “enters a forfeiture judgment against the funds, Brazil would [again] ask the United States, pursuant to its treaty obligations, to enforce the forfeiture judgment.” Interpleader Compl. ¶ 23, J.A. 64.

E. Brazilian Judgment

On February 17, 2012, the Sixth Specialized Federal Court of São Paulo (“São Paulo Court”) entered a single judgment (1) convicting Pires of fraudulent mismanagement of a financial institution, (2) finding the funds in the Venus Account to represent the proceeds of Pires's scheme, and (3) ordering the Venus Account funds forfeited (“Brazilian Judgment”). On February 2, 2013, after both sides appealed, Pires died, prompting the Brazilian appellatecourt to extinguish his personal criminal liability.⁵

F. The Challenged Summary Judgment Award

In the interpleader action, Brazil and the Liquidators filed cross-motions for summary judgment. Brazil sought transfer of the funds in the Venus Account to the São Paulo Court for it to hold pending resolution of the appeal of the Brazilian Judgment. Brazil argued that its right to the Venus Account funds accrued when Pires committed his financial crime and, in any event, the Brazilian Judgment collaterally estops the Liquidators' claims. The Liquidators maintained that an award of summary judgment to Brazil would violate the penal law rule's prohibition on one sovereign enforcing another nation's criminal...