Commercial Bank of Kuwait v. Rafidain Bank

Decision Date19 January 1994
Docket NumberNo. 533,D,533
Citation15 F.3d 238
PartiesThe COMMERCIAL BANK OF KUWAIT, Plaintiff-Appellee, v. RAFIDAIN BANK and Central Bank of Iraq, Defendants-Appellants. ocket 93-7552.
CourtU.S. Court of Appeals — Second Circuit

Brian T. Murnane, New York City (Richards & O'Neil, Edward L. Powers, of counsel), for defendants-appellants.

Robert Penchina, New York City (Rogers & Wells, Donald F. Luke, Dawn M. Conry, of counsel), for plaintiff-appellee.

Before: FEINBERG, PIERCE and MINER, Circuit Judges.

FEINBERG, Circuit Judge:

Defendants Rafidain Bank and Central Bank of Iraq (respectively, Rafidain and CBI; collectively the Iraqi Banks or appellants) appeal from a judgment dated May 5, 1993 in the United States District Court for the Southern District of New York, Leonard B. Sand, J., granting the motion of plaintiff-appellee Commercial Bank of Kuwait (Commercial) for a default judgment. Commercial seeks recovery on certain "garden-variety" commercial obligations owed to it by the Iraqi Banks. This appeal requires us to examine the "commercial activity" exception to sovereign immunity contained in the Foreign Sovereign Immunities Act, 28 U.S.C. Secs. 1330, 1602-1611 (FSIA); the requirements for obtaining a default judgment under the FSIA; and the application of the "good cause shown" standard of Fed.R.Civ.P. 55(c) to a foreign sovereign's opposition to entry of a default judgment. For the reasons given below, we affirm the judgment of the district court.

I. Background
A. Commercial's Allegations Against the Iraqi Banks

This controversy stems in part from the situation in the Middle East that started with Iraq's invasion of Kuwait in August 1990 and led to open hostilities between the United States and Iraq in early 1991. Iraq suspended its payments under various obligations, including those at issue in this litigation.

Rafidain is a commercial bank wholly owned by the Republic of Iraq. CBI is the central banking authority in Iraq, analogous to the Federal Reserve in the United States. Both entities are therefore "agenc[ies] or instrumentalit[ies] of a foreign state" under the FSIA, 28 U.S.C. Sec. 1603. In the 1980s, Rafidain entered into numerous loan and letter of credit transactions involving international banks. CBI guaranteed some of Rafidain's payment obligations to facilitate Rafidain's access to loans.

This litigation involves loan agreements, guarantees, supplementary agreements and letters of credit with a total value of more than $1.1 billion. Commercial participated in syndicates formed by lending banks to spread the risks of these transactions with Rafidain. As a member of the lending syndicates, Commercial's share of the outstanding payment obligations was approximately $33 million. Commercial's claims against CBI are based on CBI's guarantees of Rafidain's obligations and on a letter of credit under which Commercial paid more than $7.4 million.

B. Proceedings in the District Court

Commercial started this litigation in September 1991 by filing a complaint consisting of 11 counts. Commercial had difficulty serving the summons and complaint on the Iraqi Banks, and in December 1991 the district court directed an alternative method of service.

In January 1992, Commercial advised the district court that it had achieved service. Pursuant to 28 U.S.C. Sec. 1608(d), 1 appellants had 60 days to file their responses. Appellants failed to comply with this requirement. In May 1992, Commercial moved for default judgment on the eight counts of the complaint then remaining. 2 The Iraqi Banks first appeared after the motion was filed. The district court granted appellants' counsel an extension of time to file papers in opposition to Commercial's motion. Appellants' counsel filed a memorandum in opposition to the motion on July 22, 1992, one day before a scheduled hearing in the district court.

At the July 23 hearing, the district court indicated that it would not enter a default judgment against the Iraqi Banks if there were meritorious defenses to Commercial's claims. The district court granted appellants' counsel additional time to file papers demonstrating the existence of meritorious defenses, and referred the case to a magistrate judge for a report and recommendation on Commercial's motion for default judgment.

On August 31, 1992 Magistrate Judge James C. Francis IV issued his Report, finding that (1) the Iraqi Banks' default was willful; (2) denial of Commercial's motion would prejudice Commercial; and (3) the Iraqi Banks presented no meritorious defenses. Accordingly, the magistrate judge concluded that the Iraqi Banks had failed to show good cause under Fed.R.Civ.P. 55(c) why the court should deny the motion for default judgment. On September 18, 1992, over the Iraqi Banks' objections, the district court adopted the magistrate's Report. In May 1993, the district court entered final judgment for Commercial on its motion for default judgment. The Iraqi Banks timely filed their joint notice of appeal in June 1993.

II. Discussion

On appeal, the Iraqi Banks argue: (1) the district court lacked jurisdiction to hear several of the counts in the complaint because the Iraqi Banks enjoyed sovereign immunity; (2) Commercial did not satisfy the requirement of Sec. 1608(e) of the FSIA that a party seeking a default judgment present "evidence satisfactory to the court"; and (3) the district court abused its discretion in finding that the Iraqi Banks failed to show good cause why the motion for default judgment should be denied under Fed.R.Civ.P. 55(c). We consider these arguments mindful that "default judgments are disfavored, especially those against foreign sovereigns." First Fidelity Bank, N.A. v. Government of Antigua & Barbuda, 877 F.2d 189, 196 (2d Cir.1989).

A. Jurisdiction Under the FSIA

The Iraqi Banks contend that the district court erred in applying the FSIA's "commercial activity" exception to sovereign immunity to Counts V-VII of the complaint, and therefore lacked jurisdiction to consider those counts.

The FSIA provides the "sole basis" for obtaining jurisdiction over a foreign sovereign in the United States. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 439, 109 S.Ct. 683, 690, 102 L.Ed.2d 818 (1989). Under the FSIA, a "foreign state shall be immune from the jurisdiction of the courts of the United States and of the states" unless one of several statutory exceptions applies. 28 U.S.C. Sec. 1604. We review de novo the district court's conclusions of law regarding jurisdiction under the FSIA. Shapiro v. Republic of Bolivia, 930 F.2d 1013, 1016-17 (2d Cir.1991).

The "commercial activity" exception to sovereign immunity provides, in relevant part, that a foreign sovereign or its agencies and instrumentalities:

shall not be immune from the jurisdiction of the courts of the United States or of the States in any case ... in which the action is based ... upon an act outside the territory of the United States in connection with a commercial activity of the foreign sovereign elsewhere and that act causes a direct effect in the United States.

28 U.S.C. Sec. 1605(a)(2). See also 28 U.S.C. Sec. 1603(d) (defining "commercial activity" as "either a regular course of commercial conduct or a particular commercial transaction or act"); Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 307-08 (2d Cir.1981), cert. denied, 454 U.S. 1148, 102 S.Ct. 1012, 71 L.Ed.2d 301 (1982).

The Supreme Court has recently clarified the "direct effect" language of Sec. 1605(a)(2). Republic of Argentina v. Weltover, --- U.S. ----, ---- - ----, 112 S.Ct. 2160, 2168-69, 119 L.Ed.2d 394 (1992). Weltover held that Argentina's unilateral rescheduling of bond payments had a "direct effect" within the meaning of Sec. 1605(a)(2) because New York was the place of payment. Id.

Similarly, the agreements at issue in Counts V-VII require the Iraqi Banks to make payments in U.S. dollars into accounts in New York City. The Iraqi Banks concede that these transactions constitute "commercial activity" under Sec. 1603(d). Nevertheless, they argue that the "commercial activity" exception does not apply because the payments were to be made not directly to Commercial but to New York bank accounts held by the lead banks of the various lending syndicates. The Iraqi Banks thus contend that, because the United States is not the place of performance of any contractual obligations owed to this plaintiff, there is no "direct effect in the United States" within the meaning of Sec. 1605(a)(2).

We reject appellants' attempt to limit the Court's opinion in Weltover. The "commercial activity" exception of the FSIA withdraws immunity in cases involving essentially private commercial activities of foreign sovereigns that have an impact within the United States. This reflects the "restrictive" theory of sovereign immunity that underlies the FSIA. See Jackson v. People's Republic of China, 794 F.2d 1490, 1493 (11th Cir.1986), cert. denied, 480 U.S. 917, 107 S.Ct. 1371, 94 L.Ed.2d 687 (1987); H.R.Rep. No. 1487, 94th Cong., 2nd Sess. 7 (1976), reprinted in 1976 U.S.C.C.A.N. 6604, 6605; Joseph W. Dellapenna, Suing Foreign Governments and Their Corporations Sec. 1.2, at 3-8 (1988). The focus of Sec. 1605(a)(2) is the activity of the sovereign. If the sovereign's activity is commercial in nature and has a direct effect in the United States, then the jurisdictional nexus is met, no immunity attaches, and a district court has the authority to adjudicate disputes based on that activity.

The failure of the Iraqi Banks to remit funds in New York, as they were contractually bound to do, had a direct effect in the United States under Weltover. Furthermore, the requisite "material connection" between Commercial's cause of action and the "commercial activity" that is the jurisdictional basis is met despite Commercial's reliance on an agent to collect the sums due. Cf. ...

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