Peterson v. Islamic Republic of Iran

• Decision Date: 21 November 2017
• Docket Number: August Term, 2015,Docket No. 15-0690
• Citation: 876 F.3d 63
• Parties: Deborah D. PETERSON, et al., Plaintiffs–Appellants, v. ISLAMIC REPUBLIC OF IRAN, Bank Markazi, AKA Central Bank of Iran, Banca UBAE, S.p.A., Clearstream Banking, S.A., JPMorgan Chase Bank, N.A., Defendants–Appellees.
• Court: U.S. Court of Appeals — Second Circuit

876 F.3d 63

Deborah D. PETERSON, et al., Plaintiffs–Appellants,
v.
ISLAMIC REPUBLIC OF IRAN, Bank Markazi, AKA Central Bank of Iran, Banca UBAE, S.p.A., Clearstream Banking, S.A., JPMorgan Chase Bank, N.A., Defendants–Appellees.^*

Docket No. 15-0690
August Term, 2015

United States Court of Appeals, Second Circuit.

Argued: June 8, 2016
Decided: November 21, 2017^**

876 F.3d 69

Liviu Vogel (James P. Bonner, Patrick L. Rocco, and Susan M. Davies, Stone Bonner & Rocco LLP, on the brief), Salon Marrow Dyckman Newman & Broudy LLP, New York, New York, for Plaintiffs–Appellants.

Donald F. Luke (Bension D. De Funis, on the brief), Jaffe & Asher LLP, New York, New York, for Defendant–Appellee Bank Markazi, AKA Central Bank of Iran.

Ugo Colella (John J. Zefutie, Jr., on the brief), Thompson Hine LLP, New York, New York, for Defendant–Appellee Banca UBAE, S.p.A.

Benjamin S. Kaminetzky (Gerald M. Moody, Jr., on the brief), Davis Polk & Wardwell LLP, New York, New York, for Defendant–Appellee Clearstream Banking, S.A.

Steven B. Feigenbaum , Levi Lubarsky Feigenbaum & Weiss LLP, New York, New York, for Defendant–Appellee JPMorgan Chase Bank, N.A.

Before: Pooler, Sack, and Lohier, Circuit Judges.

Sack, Circuit Judge:

In this litigation, judgment creditors of the Islamic Republic of Iran ("Iran") attempt to execute on $1.68 billion in bond proceeds allegedly owned by Iran's central bank. The Supreme Court has instructed that in an execution proceeding concerning a foreign sovereign's assets, any defense predicated on foreign sovereign immunity must rise or fall on the text of the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. §§ 1330, 1602 et seq. See Republic of Argentina v. NML Capital, Ltd. , ––– U.S. ––––, 134 S.Ct. 2250, 2256, 189 L.Ed.2d 234 (2014). In the same decision, the Court explicitly abrogated decades of pre-existing sovereign immunity common law in light of its background understanding that most courts lack jurisdiction to reach extraterritorial assets in any event. See id. at 2257. But that is not so in New York.

The plaintiffs-appellants, judgment creditors of Iran and Iran's Ministry of Intelligence and Security ("MOIS"), obtained federal-court judgments against Iran and MOIS awarding the plaintiffs billions of dollars in compensatory damages. They now seek to enforce their judgments in part by executing on $1.68 billion in bond proceeds allegedly owned by Bank Markazi ("Markazi"), Iran's central bank. The plaintiffs allege that those bond proceeds were processed by and through a global chain of banks, specifically by Clearstream Banking, S.A. ("Clearstream") through JPMorgan Chase Bank, N.A. ("JPMorgan"), in the name of Banca UBAE, S.p.A. ("UBAE"), on behalf of Markazi (collectively, "the defendants" or "the defendant banks"). The plaintiffs further allege that the bond proceeds are denominated as United States dollars ("USD") and held in cash in Clearstream's account at JPMorgan in New York City, rendering the assets subject to this Court's jurisdiction and a turnover order.¹ The plaintiffs also asserted several related non-turnover claims against the defendant banks, alleging primarily

876 F.3d 70

that the defendants effected the foregoing transactions by means of fraudulent conveyances in violation of state law.

The defendant banks respond that there is no cash to turn over: The bond proceeds are in fact recorded as book entries made in Clearstream's Luxembourg offices and reflected as a positive account balance showing a right to payment owed by Clearstream to Markazi through UBAE. The defendants argue that this fact is fatal to the plaintiffs' turnover claims because federal courts lack jurisdiction to order the turnover of a foreign sovereign's extraterritorial assets. Lastly, the defendants posit that the plaintiffs released their non-turnover claims in separate settlement agreements reached between several of the plaintiffs, on the one hand, and Clearstream or UBAE, on the other.

In a single order, the district court (Katherine B. Forrest, Judge ) granted the defendants' motions to dismiss and for partial summary judgment in favor of the defendants on all claims in dispute. We affirm that decision in part, vacate it in part, and remand for further proceedings.

BACKGROUND

The plaintiffs-appellants are, or represent persons who have been adjudicated in a federal court to be, victims of Iranian-sponsored terrorism. They obtained judgments from the United States District Court for the District of Columbia against Iran and MOIS pursuant to §§ 1605(a)(7) and 1605A of the FSIA, and were awarded a total of approximately $3.8 billion in compensatory damages. Confidential Appendix ("C.A."² ) at 679–81. The plaintiffs have since registered their judgments with the United States District Court for the Southern District of New York, which enables them to seek partial enforcement of their judgments by obtaining an order compelling the turnover of approximately $1.68 billion in bond proceeds allegedly owned by Iran's central bank and held as cash in New York City. The plaintiffs' claims target four banks that were allegedly involved in processing those bond proceeds: JPMorgan, a financial institution organized under the laws of New York, id. at 679; Markazi, Iran's central bank, id. at 677; UBAE, an Italian bank that engaged in transactions on behalf of Iran, id. at 678; and Clearstream, a Luxembourg bank with which Markazi and UBAE opened customer accounts, id.

The plaintiffs contend that through a series of fraudulent transactions, these banks managed to process billions of dollars in bond proceeds ultimately owed to Markazi. According to the plaintiffs, the fruit of those transactions is a pool of cash traceable to the Markazi-owned bond proceeds and held by Clearstream at JPMorgan in New York City. Because much of this dispute turns on the nature and location of the bond proceeds, we review the processing of those assets, and previous attempts to obtain turnover of similar assets, in some detail.

1. Processing Markazi's Bonds

Like many large financial institutions, Markazi invests in foreign sovereign bonds. Id. at 701. Many of the bonds purchased by Markazi were issued pursuant to prospectuses that require the purchaser

876 F.3d 71

to receive interest and redemption payments in New York State. Id. at 555. Markazi has long engaged Clearstream, a Luxembourg bank that specializes in "the settlement and custody of internationally traded bonds and equities," id. at 678, to facilitate that process. Clearstream uses correspondent accounts at banks in New York State, including JPMorgan and Citibank, N.A. ("Citibank"), to receive bond proceeds on behalf of its customers, including Markazi. Id. at 690. As Clearstream receives these cash payments in New York, it credits customer accounts based in Luxembourg with an equivalent positive amount. Id. at 685.

In 1994, Markazi opened a direct account with Clearstream in Luxembourg. Id. at 117–18. Thereafter, Clearstream received bond payments into its New York–based JPMorgan correspondent account on behalf of Markazi; Clearstream then credited Markazi's account in Luxembourg with a corresponding right to payment. In 2008, apparently because of increasing scrutiny of Iranian financial transactions, Markazi stopped processing its bond proceeds through Clearstream directly and instead began doing so through an intermediary bank: UBAE. Id. at 699–700. In January 2008, UBAE opened a customer account with Clearstream in Luxembourg—account number 13061. Id. at 118–19. Shortly thereafter, Markazi arranged for Clearstream to transfer the Markazi account balance at Clearstream in Luxembourg to the UBAE account. Id. at 118, 434.

Clearstream continued to receive bond proceeds in New York on behalf of Markazi, but pursuant to the terms of the documentation directing the Markazi account transfer, Clearstream credited UBAE account number 13061 with a corresponding right to payment. Id. at 701. In June 2008, apparently due to increasing attention, Clearstream notified UBAE that it had blocked UBAE account number 13061 and transferred the balance of that account to a "sundry blocked account"—account number 13675. Id. at 683–84. That account, which remains blocked, is at the center of the present dispute.

2. Peterson I

Clearstream has previously been the focus of an attempt by judgment creditors of Iran to obtain turnover of Markazi-linked assets. See generally Peterson v. Islamic Republic of Iran , No. 10-cv-4518-KBF, 2013 WL 1155576, 2013 U.S. Dist. LEXIS 40470 (S.D.N.Y. Mar. 13, 2013) (" Peterson I "), aff'd , 758 F.3d 185 (2d Cir. 2014). Many, but not all, of the plaintiffs in the case at bar attempted in an earlier litigation to enforce part of their judgments by executing against approximately $2 billion in Markazi-owned bond proceeds allegedly held by Clearstream at Citibank in New York City. See C.A. at 671. Those plaintiffs successfully obtained a judgment from the United States District Court for the Southern District of New York (Katherine B. Forrest, Judge ) ordering the turnover of $1.75...