MCI Telecommunications Corp. v. Alhadhood, 95-50161

• Decision Date: 13 May 1996
• Docket Number: No. 95-50161,95-50161
• Citation: 82 F.3d 658
• Parties: MCI TELECOMMUNICATIONS CORPORATION, Plaintiff-Appellee, v. Subhi ALHADHOOD, Captain, et al., Defendants. The Ministry of Defense of the United Arab Emirates and State of the United Arab Emirates, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 658

82 F.3d 658

64 USLW 2729

MCI TELECOMMUNICATIONS CORPORATION, Plaintiff-Appellee, v. Subhi ALHADHOOD, Captain, et al., Defendants The Ministry of Defense of the United Arab Emirates and State of the United Arab Emirates, Defendants-Appellants.

No. 95-50161.

United States Court of Appeals Fifth Circuit.

May 13, 1996.

John P. Wintrol, Melvin White, Amy E. Hancock, McDermott, Will & Emery, Washington, DC, Stuart R. Schwartz, El Paso, TX, for plaintiff-appellee.

Victor F. Poulos, Richard B. Perrenot, Mayfield and Perrenot, El Paso, TX, for defendants-appellants.

John T. Szymkowicz, Szymkowicz and Buffington, Washington, DC, for State of the United Arab Emirates, defendant-appellant.

Appeal from the United States District Court for the Western District of Texas.

Before HIGGINBOTHAM, EMILIO M. GARZA and BENAVIDES, Circuit Judges.

BENAVIDES, Circuit Judge:

Defendants-Appellants appeal the district court's order denying their motion to vacate default judgment on the basis of their sovereign immunity under the Foreign Sovereign Immunities Act ("FSIA"). The district court found that Defendants-Appellants made promises to Plaintiff-Appellee MCI Telecommunications Corporation ("MCI") that qualified as commercial activity under the commercial activity exception of the FSIA, 28 U.S.C. § 1605(a)(2) because private parties would normally make such promises while participating in the market. We reverse based on our finding that the actions of Defendants-Appellants did not constitute commercial activity under the FSIA.

I. BACKGROUND

On September 26, 1986, Defendant-Appellant United Arab Emirates ("UAE") entered into an agreement/contract with the United States Department of Defense for the training of UAE military personnel ("Student Battalion") under the sponsorship of the U.S. Army at Fort Bliss, Texas. Note 5 of the agreement addressed the expenses covered by the Student Battalion:

Students will be responsible for payment of charges for transportation, meals, laundry service, and any other services or personal living expenses they incur. Purchaser agrees to ensure prompt payment for such expenses.

In August 1987, MCI instituted an investigation of unauthorized and unbillable calling activity reported by MCI's Richardson, Texas office. Through its investigation, MCI established that, beginning approximately October 1986, in excess of $1 million in telephone calls using unauthorized codes and dial-up numbers were placed by members of the Student Battalion to the UAE and other overseas locations.

MCI contends that it first attempted to recover its damages through diplomatic channels by meeting with UAE Ambassador Ahmed Salim Al Mokarrab and UAE Military Attache Colonel Mubarak Rashid Al Ghafli at the UAE Embassy in Washington, D.C. on January 6, 1988. MCI asserts that at that meeting Ambassador Mokarrab explicitly told representatives of MCI that if the unauthorized calls were attributable to the Student Battalion the UAE would assume responsibility and pay MCI their damages. MCI contends that the Ambassador requested that MCI take no further legal action, but instead forward information to him on MCI's investigation.

MCI contends that it took no further legal action in reliance on the Ambassador's statements at the January 6, 1988 meeting. ¹ Throughout the early part of 1988, MCI forwarded detailed information regarding the members of the Student Battalion allegedly involved in the unauthorized telephone activity. MCI claims that Ambassador Mokarrab repeatedly delayed any further meetings until July 6, 1988, when Colonel Mubarak stated that he would not assist MCI because MCI failed to prove that any individual Student Battalion member made any of the unauthorized calls. MCI also contends that at that same meeting Ambassador Mokarrab stated that he had never promised MCI compensation. Then in August 1988, the UAE officially informed MCI that it would not compensate MCI for any of the telephone calls.

On May 11, 1989, MCI filed a complaint against the UAE, the UAE Ministry of Defense ("Ministry") and the individual members of the Student Battalion identified as having made the unauthorized calls. Service was obtained upon the UAE and the Ministry only. ² One of the individual members of the Student Battalion filed an answer, but neither the UAE or the Ministry filed an answer. Because neither the UAE nor the Ministry answered or responded within the required time, default judgments were entered against the Ministry on November 8, 1989 and against the UAE on January 8, 1990. ³

On May 21, 1993, the UAE and the Ministry moved to vacate the default judgments on the ground that they are immune from suit under the FSIA. The district court entered an order on February 10, 1995 denying the motion, finding that the UAE and the Ministry were not able to assert sovereign immunity for the unauthorized calls because the promises made by Ambassador Mokarrab and Colonel Mubarak to MCI to pay for the calls qualified as "commercial activity" under that exception to the FSIA. Both the UAE and the Ministry now appeal.

II. JURISDICTION

This appeal arises from a denial of a motion to vacate default judgments entered against Defendants-Appellants. Separate default judgments were entered against the Ministry on November 8, 1989 and against the UAE on January 8, 1990. Defendants-Appellants filed their motion to vacate on May 21, 1993, more than three years after the last default judgment was entered. In their motion to vacate the default judgments, Defendants-Appellants claimed immunity from suit under the FSIA, and the district court denied the motion based on its finding that their actions fell under the "commercial activity" exception to the FSIA. Immediate appeal, under the collateral order doctrine, is permitted from an order denying sovereign immunity under the FSIA because it raises the issue of the court's subject matter jurisdiction. Stena Rederi AB v. Comision de Contratos, 923 F.2d 380, 385 (5th Cir.1991). However, the question raised from the appeal in the instant case is whether entry of default judgment prior to Defendants-Appellants claim of sovereign immunity under the FSIA waives their right to claim immunity or challenge the default judgment entered by the district court on the same ground.

This Court has held in the context of the FSIA that

[w]hen a defendant foreign state has appeared and asserts legal defenses, albeit after a default judgment has been entered, it is important that those defenses be considered carefully and, if possible, that the dispute be resolved on the basis of all relevant legal argument.

Hester Intern'tl Corp. v. Federal Republic of Nigeria, 879 F.2d 170, 175 (5th Cir.1989) (quoting Practical Concepts, Inc. v. Republic of Bolivia, 811 F.2d 1543, 1552 (D.C.Cir.1987)). A claim of sovereign immunity under the FSIA is waived only when the sovereign/state fails to assert immunity in a responsive pleading. See Rodriguez v. Transnave Inc., 8 F.3d 284, 287 (5th Cir.1993); Foremost-McKesson, Inc. v. Islamic Republic of Iran, 905 F.2d 438, 443 (D.C.Cir.1990). Thus, a waiver of sovereign immunity cannot be implied from a foreign state's failure to appear. Such a waiver would be inconsistent with section 1608(e) of the FSIA, which requires the court to satisfy itself that jurisdiction exists prior to entering a default judgment. ⁴ "[E]ven if the foreign state does not enter an appearance to assert an immunity defense, a district court still must determine that immunity is unavailable under the Act." Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 493-94 n. 20, 103 S.Ct. 1962, 1971 n. 20, 76 L.Ed.2d 81 (1983).

Neither does the FSIA or its legislative history state when sovereign immunity must be raised. The D.C. Circuit has concluded that a foreign state's failure to appear, even after default judgment has been entered, does not constitute a waiver. Practical Concepts, 811 F.2d at 1547. In Practical Concepts, the Court states that a defendant sovereign state that believes the district court lacks jurisdiction may choose one of two paths: it may appear, raise the jurisdictional objection, and ultimately pursue it on direct appeal; or it may challenge the court's jurisdiction in a collateral proceeding by refraining from appearing, thereby exposing itself to the risk of a default judgment, and asserting the jurisdictional objection when enforcement of the default judgment is attempted. Id. See also Insurance Corp. of Ireland, Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 706, 102 S.Ct. 2099, 2106, 72 L.Ed.2d 492 (1982) ("A defendant is always free to ignore the judicial proceedings, risk a default judgment, and then challenge that judgment on jurisdictional grounds in a collateral proceeding."). By deferring its jurisdictional challenge, the foreign state only loses its right to defend on the merits. Id. In the instant case, Defendants-Appellants did not file a responsive pleading prior to entry of default judgment; they elected to wait and see if a default judgment would be entered against them. Defendants-Appellants then asserted their claim of sovereign immunity in a collateral proceeding through a motion to vacate the default judgments. Although their appearance might otherwise be characterized as "untimely," we cannot infer a waiver of immunity from Defendants-Appellants' much delayed appearance in this case.

III. COMMERCIAL ACTIVITY EXCEPTION TO THE FSIA

"We review the district court's conclusions about sovereign immunity de novo." Walter Fuller Aircraft Sales, Inc. v. Republic of the Philippines, 965 F.2d 1375, 1383 (5th Cir.1992) (citing Stena, 923 F.2d at 386). The FSIA provides foreign states immunity from suit in federal and state courts unless a specified exception applies. 28 U.S.C. § 1604. One such exception, "commercial activity," is defined under the Act as "either a regular course of commercial conduct or a particular transaction or act." 28 U.S.C §...