First City, Texas-Houston, N.A. v. Rafidain Bank

• Decision Date: 16 July 1998
• Docket Number: N,Docket No. 97-7532,TEXAS-HOUSTO
• Parties: FIRST CITY,A., Plaintiff-Appellant, v. RAFIDAIN BANK, Defendant, Central Bank of Iraq, Defendant-Appellee.
• Court: U.S. Court of Appeals — Second Circuit

Page 172

150 F.3d 172

FIRST CITY, TEXAS-HOUSTON, N.A., Plaintiff-Appellant, v. RAFIDAIN BANK, Defendant, Central Bank of Iraq, Defendant-Appellee.

Docket No. 97-7532.

United States Court of Appeals, Second Circuit.

Argued Dec. 12, 1997.

Decided July 16, 1998.

Peter V. Baugher, Schopf & Weiss, Chicago, Illinois (Todd H. Flaming, Chicago, Illinois, Charles W. Fournier and Achilles M. Perry, O'Melveny & Myers LLP, New York, New York, on the brief), for Plaintiff-Appellant.

Patricia K. Lang, Richards & O'Neil, LLP (Edward L. Powers and Jacques M. Rimokh, Richards & O'Neil, on the brief), New York, New York, for Defendant-Appellee.

Before: WALKER and CABRANES, Circuit Judges. ^*

JOHN M. WALKER, JR., Circuit Judge:

Plaintiff-appellant First City, Texas-Houston, N.A. ("First City") ¹ appeals from a judgment dated March 31, 1997, entered in the United States District Court for the Southern District of New York (Jed S. Rakoff, District Judge ), granting defendant-appellee Central Bank of Iraq's ("CBI") motion to dismiss First City's complaint. First City argues that the district court erroneously denied its request for additional discovery relating to CBI's alleged control over its co-defendant Rafidain Bank ("Rafidain"), also of Iraq, thereby preventing First City from proving that jurisdiction exists over CBI. We agree, and therefore vacate the dismissal of the complaint and remand for further proceedings.

Background

This action followed Iraq's repudiation of its foreign debts following its invasion of Kuwait in August 1990. One of the affected transactions was a February 1989 loan agreement (the "Agreement") between Rafidain and First City whereby First City purchased approximately $49.9 million worth of drafts drawn under letters of credit issued by Rafidain. Rafidain paid First City in accordance with the Agreement until Iraq repudiated its foreign debts.

Rafidain is a commercial bank wholly owned by the Republic of Iraq. CBI is the central banking authority in Iraq, and its functions are roughly analogous to those of the Federal Reserve Bank in the United States. According to First City, CBI oversees all of Rafidain's foreign transactions. It is undisputed that both Rafidain and CBI are "agenc[ies] or instrumentalit[ies] of a foreign state" under the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. § 1603. Although foreign states and their instrumentalities generally enjoy sovereign immunity from suit, no such immunity applies where these entities engage in certain commercial activities set forth in the FSIA. See 28 U.S.C. § 1605(a).

On November 15, 1990, First City filed suit in the United States District Court for the Southern District of New York (John S. Martin, District Judge ) to recover funds owed under the Agreement. It filed an amended complaint on December 18, 1990, and served a copy of the summons and the amended complaint on both Rafidain and CBI through the Iraqi Permanent Representative to the United Nations. After both defendants failed to appear or to answer the complaint, the district court entered a default judgment on April 26, 1991 in the amount of approximately $53.2 million against them.

In April 1992, Rafidain and CBI moved for relief from the default judgment. CBI asserted that it was never served with the amended complaint. By order dated September 28, 1992, the district court vacated the default judgment against CBI and granted First City a reasonable time to serve process. By the same order, the court denied Rafidain's motion to vacate the default judgment, finding that Rafidain had been properly served and fell within the FSIA's commercial activity exception. First City served CBI in early 1994.

In August 1994, CBI moved to dismiss the complaint, inter alia, for lack of subject matter jurisdiction under the FSIA. CBI argued that, as an instrumentality of Iraq, it was immune from suit in federal court, see 28 U.S.C. § 1604, and that it did not fit within any of the FSIA's exceptions to statutory immunity, see 28 U.S.C. §§ 1605-07. In particular, CBI contended that § 1605's commercial activity exception did not apply because CBI did not engage in any act or activity either in the United States or elsewhere with a direct effect in the United States.

First City did not dispute that CBI is a foreign instrumentality that does not fit within an FSIA exception to sovereign immunity. Rather, First City contended that CBI was effectively Rafidain's "alter ego," which, if true, would subject CBI to jurisdiction under the FSIA's commercial activity exception to immunity to the same extent as Rafidain. Before ruling on the motion to dismiss, the district court permitted First City to pursue limited discovery from the defendants on its alter ego theory.

In October 1994, First City served its first set of interrogatories and document requests on CBI and Rafidain. First City sought various organizational documents from both parties relevant to the possible existence of an alter ego relationship. CBI responded and later supplemented its response. After Rafidain refused to respond to the initial request, First City served a subpoena and a second set of document requests on Rafidain. First City maintains that Rafidain has consistently refused to provide the bulk of the requested information. On May 11, 1996, First City filed a motion pursuant to Fed.R.Civ.P. 37 that sought an order compelling CBI and Rafidain to supplement their responses to First City's document requests and interrogatories.

Following delays while the case was reassigned, the district court scheduled briefing on CBI's motion to dismiss. After oral argument, the district court granted CBI's motion to dismiss on March 28, 1997, without directly addressing First City's unresolved motion to compel discovery from the defendants. The district court granted the motion to dismiss reluctantly in a ruling from the bench and suggested that it would have permitted additional discovery if CBI were a domestic corporation:

If this were simply a question of two domestic entities, the court would be inclined to permit further discovery because the prejudice to the defendant in such a situation ... would be modest, but in the court's view the sovereign immunity comes into play and other policies come to bear that the court thinks have to be given very substantial weight.

The district court's view of the matter was summarized as follows:

[T]he sensible way the law ought to treat an alter ego allegation in a sovereign immunity situation is to require that without having to put the sovereign to the intrusiveness of discovery, that the plaintiff come forward after an appropriate 12(b)(1) motion has been made with meaningful evidence to support the alter ego allegation.

Upon reviewing the evidence proffered by First City to support its alter ego claim against CBI, the district court, concluding that "the evidence that the plaintiffs have thus far adduced and which the record in this hearing will reflect is insufficient to support an alter ego claim," dismissed the complaint against CBI for lack of jurisdiction. First City now appeals from that dismissal.

Discussion

First City argues that the district court erred by granting CBI's motion to dismiss for lack of jurisdiction without allowing First City the opportunity to conduct additional jurisdictional discovery. Implicitly conceding that its showing of jurisdiction over CBI was wanting, First City's appeal focuses on the court's refusal to grant discovery, rather than on the merits of CBI's motion to dismiss. For the reasons set forth below, we hold that the district court abused its discretion by denying First City additional discovery.

I. Standard of Review

Although we review de novo the dismissal of a complaint for lack of subject matter jurisdiction under the FSIA, see Shapiro v. Republic of Bolivia, 930 F.2d 1013, 1016-17 (2d Cir.1991), our primary inquiry here is whether the district court erred by granting CBI's motion to dismiss before allowing First City to conduct additional jurisdictional discovery. The parties disagree over the standard this court should apply in reviewing the district court's decision to deny discovery. Defendants urge us to review the district court's ruling for an abuse of discretion. See, e.g., M.B. v. Reish, 119 F.3d 230, 232 (2d Cir.1997). In contrast, relying upon Garrett v. City of San Francisco, 818 F.2d 1515 (9th Cir.1987), First City maintains that, because the district court ignored its motion to compel, we should review the district court's decision de novo. We agree with defendants that abuse of discretion review is appropriate in this case.

First City's reliance on Garrett to support its argument for heightened review is misplaced. In Garrett, the district court failed to address the merits of the plaintiff's motion to compel before granting the defendant's motion for summary judgment. The Ninth Circuit reversed, concluding that because the district court did not exercise its discretion--by failing to consider the motion to compel discovery--"the issue of whether or not it should have [exercised its discretion] present[ed] a legal question which [was] subject to de novo review." Id. at 1518 n. 3. Unlike the district court in Garrett, the district court here did consider First City's motion for discovery and discussed at length its reasons for denying additional discovery. In evaluating the motion to dismiss, the district court weighed the benefits of additional discovery against the intrusiveness to CBI of permitting such discovery. Accordingly, the district court implicitly denied First City's motion to compel. Cf. Columbia Pictures Indus. v. Professional Real Estate Investors Inc., 944 F.2d 1525, 1532-33 (9th Cir.1991) (distinguishing Garrett because district court "implicitly ruled that the materials sought in discovery would not defeat [defendant's] motion for summary judgment"), aff'd, 508 U.S. 49, 113 S.Ct. 1920, 123 L.Ed.2d 611...