Fidelity Partners, Inc. v. First Trust Co. of New York

• Decision Date: 27 April 1998
• Docket Number: 97-9639,Nos. 97-9589,s. 97-9589
• Citation: 142 F.3d 560
• Parties: FIDELITY PARTNERS, INC., Plaintiff-Appellant, v. FIRST TRUST COMPANY OF NEW YORK; Morgan Guaranty Trust Company of New York; Euroclear System; ING Bank of Manila; Philippine Export and Foreign Loan Guarantee Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 560

142 F.3d 560

FIDELITY PARTNERS, INC., Plaintiff-Appellant, v. FIRST TRUST COMPANY OF NEW YORK; Morgan Guaranty Trust Company of New York; Euroclear System; ING Bank of Manila; Philippine Export and Foreign Loan Guarantee Corporation Defendants-Appellees.

Nos. 97-9589, 97-9639.

United States Court of Appeals Second Circuit.

Argued March 2, 1998.

Decided April 27, 1998.

Robert L. Weigel, New York City (Sue J. Nam, Gibson, Dunn & Crutcher, New York City, on brief), for Fidelity Partners, Inc.

David C. Singer, New York City (Patrick J. McLaughlin, Moon S. Kim, Dorsey & Whitney, New York City, on brief), for First Trust Company of New York.

James L. Kerr, New York City (Lowell G. Harriss, Dennis E. Glazer, Randall D. Guynn, Davis Polk & Wardwell, New York City, on brief), for Morgan Guaranty Trust Company of New York.

Before: NEWMAN, CABRANES and MERRITT, ^* Circuit Judges.

JON O. NEWMAN, Circuit Judge:

These consolidated appeals concern garnishment in the context of a form of ownership of financial interests that is becoming widely used in today's global economy. The subject of the litigation is an interest in bonds regulated through a "multi-tiered" or "indirect" holding system. The system with which this litigation is concerned is Euroclear, a network of 2,400 participating financial institutions that engage in cross-border securities transactions. Key features of an indirect holding system are that interests in bonds are reflected on the books of various institutions, transfers are effected by electronic book-entry, and the need to transfer the instruments in which participating interests are held rarely arises.

The principal issue sought to be presented by this appeal is whether, under New York law, a judgment creditor can execute against an interest in bonds beneficially owned by a judgment debtor, where, pursuant to an indirect holding system like Euroclear, the bonds are payable in New York by the issuer's New York paying agent, but the judgment debtor's interest is recorded only on the books of a financial intermediary located abroad. Fidelity Partners, Inc. ("Fidelity") appeals from the December 10, 1997, judgment of the District Court for the Southern District of New York (Sidney H. Stein, Judge), dismissing Fidelity's petition seeking to attach an interest in bonds owned by the Philippine Export and Foreign Loan Guarantee Corporation ("Philguarantee") (Docket No. 97-9589). A related appeal by Fidelity seeks review of the District Court's order dated December 24, 1997, formally vacating a restraining order that had prohibited Philguarantee from selling its interest in the bonds. Fidelity argues that the District Court erred in concluding that New York law precludes garnishment proceedings against First Trust Company of New York ("First Trust") (Docket No. 97-9639). Before we may consider that issue, however, we encounter a circumstance that might render the litigation moot, and we are obliged to remand for a determination of the relevant facts bearing on mootness.

Background

The California lawsuit. Philguarantee is an instrumentality of the government of the Republic of the Philippines that was created in 1974 for the purpose of guaranteeing loans to foster economic growth within that country. In 1985, Philguarantee commenced an action in state court in California against Vincente Chuidian, a businessman with ties to Ferdinand Marcos (then the President of the Philippines), alleging that Chuidian had misused loan guarantees. That action was settled, with Chuidian agreeing to transfer shares of stock in three different corporations to Philguarantee in exchange for, among other things, several million dollars in cash. Pursuant to the settlement agreement, the parties signed a stipulated judgment.

In April 1986, Philguarantee moved to vacate the judgment to the extent that it required cash payments to Chuidian, on the ground that the settlement had been procured by fraud. A California trial court denied the motion, and the California Court of Appeal affirmed. See Philippine Export and Foreign Loan Guarantee Corp. v. Chuidian, 218 Cal.App.3d 1058, 267 Cal.Rptr. 457 (1990). ¹ However, the Court of Appeal ruled that because of limitations imposed by the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. § 1610, Chuidian could execute on the judgment in this country by attaching only "debts owing or to become owing to Philguarantee from individuals or entities located in the United States." Philippine Export, 267 Cal.Rptr. at 481.

In April 1991, Chuidian filed for bankruptcy protection, and the bankruptcy trustee assigned the California judgment to Fidelity for $100 plus a 40 percent interest in whatever Fidelity might be able to recover from Philguarantee. In December 1995, Fidelity filed an action against Philguarantee in the Philippines seeking to recover the sum owed to Chuidian; that action is still pending.

The first New York lawsuit and the restraining order. In January 1996, Fidelity filed an action against Philguarantee in the New York State Supreme Court for New York County, seeking to execute on the California judgment against any assets Philguarantee might have in New York. Fidelity also moved for, and the state court issued, a temporary restraining order "enjoining Philguarantee from making or suffering any sale, assignment, transfer or interference with any property in which it has an interest." Philguarantee removed, and the case was assigned to Judge Schwartz, No. 96 Civ. 407 (S.D.N.Y.). Judge Schwartz extended the restraining order that had been granted by the state court until such time as the parties could be heard as to whether the order should remain in effect.

After an unsuccessful effort to attach certain bank accounts of Philguarantee, ² Fidelity learned that Philguarantee owned an interest in certain Philippine Interest Reduction Bonds ("FLIRBs") that had been issued by the Republic of the Philippines in an offshore offering in 1992. ³ The FLIRBs are dollar-denominated bonds purchased and traded through "Euroclear," which is a multi-tiered indirect holding and clearance system managed by Morgan Guaranty Trust Company ("Morgan"). At least at that time, Philguarantee held a $1.75 million participation interest in the FLIRBs through ING Bank of Manila ("ING Bank"). The only entity on whose books the interest of Philguarantee was then reflected was ING Bank. ING Bank, in turn, held its interest in the FLIRBs through Euroclear, where its interest is reflected in a book-entry credit to a securities account maintained by Morgan's Brussels branch office. Finally, Morgan's London office, as sub-custodian for Morgan Brussels, is the holder of Global Bearer Certificates representing the FLIRBs, and is the only recorded owner of the FLIRBs reflected on the books of First Trust, the New York-based fiscal and paying agent, registrar, transfer agent, and authenticating agent pursuant to the terms of three fiscal agency agreements entered into by the issuer.

In May 1997, Fidelity moved for an order of execution against what it described as "the debt owed to Philguarantee by the Republic of the Philippines, the issuer and obligor of the Philippine Interest Reduction Bonds owned by Philguarantee." Because Judge Schwartz was unavailable, a hearing on the motion was held before Judge Brieant on May 6. Three weeks later, Judge Brieant signed a restraining order barring Philguarantee from disposing of its interest in the FLIRBs, but refrained from issuing a definitive ruling with respect to the propriety of the requested attachment.

The second New York lawsuit. On July 16, Fidelity commenced a separate action in the District Court, No. 97 Civ. 5184 (S.D.N.Y.), styled as a "turnover" proceeding, seeking an order directing First Trust to cause the issuance and delivery to Fidelity of a "definitive bearer bond" (i.e., a newly issued bond to be carved out of the Eurobond) in an amount equal to Philguarantee's interest in the FLIRBs. The complaint also named as respondents Morgan, Euroclear, ING Bank, and Philguarantee, but sought no specific relief against any of these parties.

Subsequent developments. Because the subsequent developments bear significantly on the mootness issue, we set them forth in detail. On July 31, First Trust filed a motion in 96 Civ. 407 seeking modification of Judge Brieant's restraining order. At a hearing on August 15, Judge Stein ruled that, pending his decision in the turnover proceeding, the restraining order issued by Judge Brieant would remain in effect, with a modification to permit payment of the interest due September 1 on a separate series of FLIRBs in which Philguarantee held no interest. Neither Philguarantee nor ING Bank appeared at the August 15 hearing, at any subsequent hearing in the District Court, or on appeal. On August 18, Judge Stein confirmed his August 15 oral ruling by a written endorsement on First Trust's July 31 motion. On September 3, First Trust, joined by Morgan, filed a motion for reconsideration of the Court's August 18 written ruling, modifying the restraining order. ⁴

In an opinion and order dated December 1, 1997, Judge Stein dismissed Fidelity's petition in 97 Civ. 5184. See Fidelity Partners, Inc. v. First Trust Co., No. 97 Civ. 5184, 1997 WL 752725 (S.D.N.Y. Dec. 5, 1997). Judge Stein determined that the FSIA prohibited execution against Philguarantee's interest in the FLIRBs, because that interest was located in the Philippines, where ING Bank was located. See id.

at * 1. He further ruled that this problem could not be rectified by an order directing First Trust to deliver a "carved out" bearer bond to Fidelity, because ING Bank was the only proper garnishee under the applicable state law. See id.

On December 4, Judge Stein denied the motion that First Trust and Morgan had filed on September 3 in 96 Civ. 407, seeking reconsideration of Judge Stein's order of August 18, modifying Judge Brieant's restraining...