Funk v. Belneftekhim, Docket No. 15-3372-cv

• Decision Date: 29 June 2017
• Docket Number: Docket No. 15-3372-cv,August Term, 2016
• Citation: 861 F.3d 354
• Parties: Vladlena FUNK, Emanuel Zeltser, Plaintiffs–Appellees, v. BELNEFTEKHIM, aka Concern Belneftekhim, Belneftekhim USA, Inc., Defendants–Appellants.
• Court: U.S. Court of Appeals — Second Circuit

861 F.3d 354

Vladlena FUNK, Emanuel Zeltser, Plaintiffs–Appellees,

v.BELNEFTEKHIM, aka Concern Belneftekhim, Belneftekhim USA, Inc., Defendants–Appellants.

Docket No. 15-3372-cv

August Term, 2016

United States Court of Appeals, Second Circuit.

Argued: December 9, 2016

Decided: June 29, 2017

Kenneth A. Caruso (Christopher D. Volpe, on the brief), White & Case, LLP, New York, New York, for Defendants–Appellants.

Emanuel Zeltser , Sternik & Zeltser, New York, New York, for Plaintiffs–Appellees.

Before: Calabresi, Raggi, Lynch, Circuit Judges.

Reena Raggi, Circuit Judge:

In this action, originally filed in New York State court, plaintiffs Emanuel Zeltser and Vladlena Funk sue defendants Concern Belneftekhim ("BNTK") and Belneftekhim USA, Inc. ("BUSA") for their alleged roles in plaintiffs' 2008 abduction from London and their prolonged detention in Belarus by authorities of that country. After defendants removed the case to the United States District Court for the Eastern District of New York (Brian M. Cogan, Judge ), they moved to dismiss based in part on foreign sovereign immunity. See Foreign Sovereign Immunities Act of 1976 ("FSIA"), Pub. L. No. 94–583, 90 Stat. 2891 (codified at 28 U.S.C. §§ 1330, 1332(a)(2) –(a)(4), 1391(f), 1441(d), and 1602 –1611 ). Defendants here appeal from the October 20, 2015 order requiring defendants to pay earlier monetary sanctions that had accrued and striking their foreign sovereign immunity defense as a sanction pursuant to Fed. R. Civ. P. 37(b) for their persistent failure to provide jurisdictional discovery. Defendants argue that the challenged order exceeded the district court's discretion, particularly because their submissions of Belarusian law established their sovereign immunity defense as a matter of law.

Plaintiffs respond that we lack jurisdiction to consider this interlocutory appeal. In any event, they maintain that the challenged sanction order was within the district court's discretion because defendants' claim of sovereign immunity raises unresolved questions of fact on which they were entitled to jurisdictional discovery.

We have jurisdiction to review this appeal pursuant to the collateral order doctrine. On such review, we conclude that the district court acted within its discretion in ordering limited jurisdictional discovery and in sanctioning defendants for failing to comply with that order. At the same time, however, we conclude that, to the extent the challenged October 20, 2015 order not only required defendants to pay an earlier accrued monetary sanction but also struck their sovereign immunity claim in its entirety, it exceeded the district court's discretion. The latter sanction risked the district court's assumption of jurisdiction where it may, in fact, have been lacking, something the court was not empowered to do, particularly where, as here, alternative sanctions are available. Accordingly, we affirm the challenged order generally, vacating only that part striking defendants' foreign sovereign immunity claim, and we remand the case to the district court for further proceedings consistent with this opinion.

I. Background

A. The Abduction Giving Rise to this Action

The following facts are drawn from plaintiffs' first amended complaint, which was operative at the time of the challenged rulings.

Plaintiff Zeltser, a United States citizen, represented a group of investors who, in the late 1990s and early 2000s, purchased a block of stock in BNTK, a Belarusian petrochemical cooperative, and secured an option to acquire a controlling interest in that concern. BUSA is a Massachusetts corporation, which acts as BNTK's representative in the United States.

In 2006 and 2007, the United States imposed sanctions on members of the Belarusian government, including head of state Alexander Lukashenko, and on certain Belarusian entities, including defendants.¹ Soon thereafter, defendants abrogated their agreement with Zeltser's clients and refused to compensate them for the breach. Plaintiffs threatened legal action, and a series of meetings ensued as the parties attempted to resolve their dispute.

In March 2008, defendants' representatives met twice with Zeltser and his assistant Funk in New York City to explore settlement. After Zeltser and Funk declined to travel to Belarus for a further meeting, the parties convened in London on March 11, 2008. There, plaintiffs assert that they were drugged, kidnapped, and, ultimately, flown to Belarus under the alleged supervision of defendants' representatives.

In Belarus, plaintiffs were placed in a government detention facility where they were tortured and denied adequate food, water, and medicine. Defendants' representatives allegedly observed and directed this mistreatment in an effort to coerce Zeltser to surrender documents relating to his clients' BNTK investments and to convince those clients to renounce their stake in BNTK. Funk was also pressured to sign a confession implicating Zeltser in economic espionage. At some point during plaintiffs' captivity, Belarusian authorities issued a statement declaring that plaintiffs had been convicted of attempted economic espionage.

Meanwhile, a week after plaintiffs' abduction, New York's U.S. Senator Charles Schumer alerted the State Department to the abduction and requested aid in procuring plaintiffs' release. Over the next year, plaintiffs' situation attracted the attention of several private organizations as well as the national media. Funk was released on March 20, 2009, approximately one year after her abduction. Only after a United States congressional delegation traveled to Belarus to demand Zeltser's release was he too freed from captivity on June 30, 2009.

B. The Instant Lawsuit

1. The Initial Pleadings and Motion To Dismiss

Plaintiffs initially filed this action on July 12, 2012, in New York State Supreme Court, demanding $140 million in damages for alleged assault and battery, intentional infliction of emotional distress, false imprisonment, interference with a contractual relationship and prospective economic advantage, conversion, and prima facie tort. On December 8, 2013, with defendants having failed to answer, plaintiffs moved for a default judgment. Before any action was taken on the motion, defendants appeared and, on January 16, 2014, removed the case to federal court and there moved for dismissal on the grounds that both subject-matter and personal jurisdiction were lacking.

Defendants invoked the FSIA to challenge subject–matter jurisdiction. See 28 U.S.C. § 1604 (providing that foreign state shall be immune from jurisdiction in federal and state courts in United States except as provided in 28 U.S.C. §§ 1605 –1607 ). To support their immunity claim, defendants relied on plaintiffs' own initial complaint, which alleged that defendants were "the Belarusian petrochemical monopoly owned by and controlled by the government of Belarus, Lukashenk[o], and other members of the Belarusian government." J.A. 21.

In opposition, plaintiffs argued that defendants had failed to carry their burden to make a prima facie showing that BNTK was indeed an agency or instrumentality of a foreign state within the meaning of 28 U.S.C. § 1603(b). Plaintiffs also renewed their motion for default judgment or, in the alternative, urged that the foreign sovereign immunity issue be deferred to trial because defendants' claim of foreign state status presented disputes of fact.

2. First Discovery Order

On December 31, 2014, the district court ruled both that defendants' motion to dismiss and plaintiffs' motion for default judgment were premature in light of factual questions on the threshold jurisdictional issue of whether BNTK qualifies as an agency or instrumentality of a foreign state. The court ordered limited jurisdictional discovery to allow the parties "to obtain the information necessary to supplement their motions or proceed to a hearing." J.A. 124.²

3. Discovery and Further Motion Practice

On the January 30, 2015 deadline set by the district court, plaintiffs submitted a proposed discovery plan. Rather than submitting a discovery plan, however, Defendants requested leave to renew and supplement their dismissal motion with the results of further investigation in Belarus. Given the parties' disagreement over the path forward, the district court itself set a discovery schedule, which provided for the parties to supplement their motions after the ordered discovery.

Instead, on March 23, 2015, defendants supplemented their motion to dismiss by filing a translated declaration from Dmitry Gvozdev ("Gvozdev Declaration"), an employee in BNTK's legal department, to which were attached purported provisions of Belarusian law. Defendants argued that these provisions convincingly established BNTK's status as an agency or instrumentality of Belarus under either the organ or ownership prongs of 28 U.S.C. § 1603(b)(2). The Gvozdev Declaration pointed, inter alia , to BNTK's charter declaring that its assets were the property of Belarus, to various resolutions of Belarus's Council of Ministers stating that BNTK was involved in the administrative management of Belarus's petrochemical industry, and to a presidential decree declaring that "concerns" such as BNTK were part of the "system of Government" in Belarus. J.A. 152–53. The Declaration also stated that BNTK's chairperson is appointed by the Belarusian government and that the number of its employees, their salaries, and its budget are all set by that government. Defendants further submitted a United States Congressional Research Service report on Belarus that referred to BNTK as "state-owned." Id. at 145.

On April 28, 2015, plaintiffs filed an affidavit of Alexander Fishkin ("Fishkin Affidavit"), an attorney admitted to practice law in Belarus with avowed experience in translation. That affidavit states that defendants' production of Belarusian laws is "incomplete" and cannot be deemed controlling because unpublished decrees known as "Closed Circulars" can "super[...