MMA Consultants 1, Inc. v. Republic of Peru

Citation245 F.Supp.3d 486
Decision Date24 March 2017
Docket Number15 Civ. 5551 (DAB)
Parties MMA CONSULTANTS 1, INC., Plaintiff, v. REPUBLIC OF PERU, Defendant.
CourtU.S. District Court — Southern District of New York

Patrick Ahern, Ahern and Associates, P.C., Chicago, IL, for Plaintiff.

Owen C. Pell, White & Case LLP, New York, NY, for Defendant.

MEMORANDUM & ORDER

DEBORAH A. BATTS, United States District Judge

Plaintiff MMA Consultants 1, Inc. ("MMA" or "Plaintiff") brings this action against the Republic of Peru ("Peru" or "Defendant") alleging breach of contract based on Defendant's alleged failure to remit payment on certain bearer bonds held by Plaintiff. Defendant moves to dismiss the action for failure to state a claim under Fed. R. Civ. P. 12(b)(6) and for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1). For the reasons discussed herein, Defendant's Motion to Dismiss is GRANTED.

I. Background
a. The Bonds in this Case

The bonds at issue in this case (the "Bonds") arose from a period in Peru's history when it was involved in the exploitation and sale of guano.1 In 1865, the Consignee Company for the Guano in the United States of America ("CCG") was formed for the purpose of operating an export network for the sale of guano in the United States. (Guano Case (Chile, France) Arbitral Award ("Award") at 150–51, Soderberg Decl. Ex. A; see also Ahern Decl. Exs. 1–3.2 ) Upon CCG's formation, Peru granted it the exclusive right to export and sell guano in the United States as Peru's consignee. (Award at 150, 336.) CCG was incorporated and headquartered in Peru. (Id. at 150.)

In 1875, Peru passed a law authorizing the free sale of guano in the United States, in contravention of Peru's consignment contract with CCG. (Id. at 155.) In order to terminate CCG's exclusive sales rights, Peru and CCG negotiated and entered into a new contract in Lima, Peru, in 1875. (Id. ) Under the 1875 contract, CCG abandoned its exclusive right to sell guano in the United States and waived its right to be reimbursed by Peru on its existing debt to CCG. (Peru & CCG Contract of 1875 ("1875 Contract") Art. 1, Soderberg Decl. Ex. B; see also Award at 155.) In return, Peru recognized a total indebtedness to CCG of four million Soles.3 (1875 Contract Art. 4; Award at 156.) Pursuant to the 1875 Contract, Peru also "undert[ook] to issue and to deliver to the Company,"4 at a rate of 90%, 3,600 Bonds representing $1,000 each. (Award at 156.)

The 1875 Contract provided that the Bonds "shall be issued, and their servicing shall be filed in New York City." (1875 Contract Art. 5.) CCG's financial agents in New York were to be the agents of Peru "for the purposes of the issue and servicing" of the Bonds. (Id. Art. 6.) These agents would bear the costs of printing, issuing, and servicing the Bonds; as compensation, the agents would receive commission, at Peru's expense, on a percentage of the quantity of Bonds issued, the interest paid on the Bonds, and the value of the Bonds once fully amortized. (Id . ) CCG would be responsible for servicing Bonds, which it would accomplish by applying the proceeds from the guano sales that would have otherwise gone to Peru as profit. (Id. Art. 2; see also Award at 169.)

The terms of repayment appear on the face of the Bonds. (Bonds, Compl. Ex. A, Soderberg Decl. Ex. C.) First, the Bonds provide that the government of Peru "acknowledges itself indebted into the Guano Consignment Company ... or Bearer," and "promises to pay ... in the manner here-in-after to be stated." (Id. ) Interest was to accrue on the Bonds at a rate of 7% per annum, and could be redeemed semiannually "from and after the first day of May 1875 on surrender of the annexed coupons as they may severally become due." ( Id. ) Interest was to cease accruing "from and after the day on which the principal shall become payable." (Id. ) Principal was to be paid in the following manner:

On the 1st March 1876 out of the entire number of Certificates issued Three hundred and sixty Certificates shall be drawn by lot being 10% of the total amount issued; on the 1st March 1877 out of the Certificates remaining after the first drawing takes place. Five hundred and forty Certificates shall be drawn by lot, being 15% of the total amount issued on the 1st March 1878 out of the Certificates remaining after the two previous drawings have taken place. Seven hundred and twenty Certificates shall be drawn by lot being 20% of the total amount issued; on the 1st March 1879, out of the Certificates remaining after the three previous drawings have taken place, Nine hundred Certificates shall be drawn by lot being 25% of the total amount issued on the 1st March 1880 there will be One thousand and eighty Certificates remaining not drawn, and these shall be considered and deal (sic ) with ... as if they had been drawn by lot on the said 1st March 1880.

(Id. )

After each drawing, the serial numbers of the Bonds drawn were to be "inserted immediately ... in two morning daily papers of the City of New York, for two consecutive days," along with an announcement that the corresponding Bonds would "be redeemed on the 1st day of May then next ensuing." (Bonds.) The Bonds were to be paid "on and after said 1st of May in the respective years ... upon presentation and surrender." (Id. ) Payment of both principal and interest was to occur "at the Office of Mess Hobson, Hurtado and Company, Financial Agents of Peru in New York." (Id. )

The Bonds were signed by the "Financial Agents of Peru," as well as the "Envoy Extraordinary and Minister Plenipotentiary of Peru in Washington," who affixed a "seal of office and signature on behalf of the Government of Peru in the City of New York, on this first day of May 1875." (Id. )

b. Historical Context and International Arbitration

The guano that was the subject of Peru and CCG's consignment relationship was also the cause of a war between Chile and Peru, beginning in 1879 and culminating in a Peace Treaty dated October 20, 1883. (Award at 126, 128.) By the end of this war, Chile had conquered all of Peru's then-known guano deposits. (Id. at 126.)

Before the war, however, Peru had mortgaged the guano deposits to secure its debts to various creditors, many of whom were foreign nationals. (Award at 126.) In consideration of these claims, the 1883 Peace Treaty required Chile to allocate the proceeds from the conquered guano equally between itself and the Peruvian creditors with debts secured by the guano. (Id. at 127.) To accomplish this, Chile agreed to deposit the creditors' portion of the proceeds in an account in the Bank of England. (Id. ) The Treaty then called for the constitution of an arbitration tribunal to resolve the creditors' competing claims to the proceeds, including "the legitimacy or the validity of their debt securities as well as the priority in the reimbursement of their respective claims." (Id. )

CCG's operations ended in 1881, and the final settlement of its accounts concluded in 1893. (Award at 158.) The final accounting showed a remaining debt of $7,026,653.38 owed by Peru to CCG. (Id. at 160.) This sum reflected Peru's total debt minus the face value of the Bonds, which CCG still held in its possession. (Id. )

The Arbitration mandated by the 1883 Treaty was held in 1901. (Award at 79–80, 125.) CCG appeared in the Arbitration, claiming a total debt of $7,026,653. (Id. at 160.) In order to determine the validity of CCG's claim and the mortgage purportedly underlying it, the Arbitration Tribunal examined the long history of Peru–CCG debt, including the series of Bonds at issue in this case. (See generally id. at 149–70, 332–38.) The Tribunal recounted the somewhat unusual trajectory of these Bonds between the time of their issuance and the Arbitration:

The 3,600 debt certificates ... were actually issued by the Government to the Company. The latter paid its agents the commission of 2 ½% provided for by Art. 6 of the Contract of April 24/May 7, 1875, but kept the certificates for itself. The Company credited the Government first for the total amount, and then debited it successively, at each due date, the amount of the depreciation that should have taken place, and the interest.

(Id. at 158.)

Simply put, despite the instructions set forth in the Bonds, the Arbitrational Tribunal found that, "[f]or one reason or another, the certificates5 were not issued to the public." (Award at 168.) Instead, CCG kept the Bonds and credited Peru for their total value, at a 90% rate, thereby reducing Peru's debt by the corresponding amount on its books. (Id. at 158, 337.) Then, between 1876 and 1880, CCG debited Peru's account on each due date for the interest and principal that should have been due. (Id. at 158.) CCG also debited Peru for the stipulated issuance commission, which it disbursed to the Office of Mess Hobson, Hurtado and Company ("Hobson Hurtado"), the parties' joint financial agent, and credited to its own account. (Id. at 168, 337.) In this way, by 1880, "the transaction was completed"—not by issuance, payment and redemption, but "by amortization of the still outstanding certificates" in the hands of CCG. (Id. at 168.)

In essence, through successively crediting and debiting Peru's account but never publicly issuing the bonds, CCG and Peru engaged in a "purely fictitious loan transaction" created "by a simple set of documents." (Award at 169.) Specifically, the Tribunal found that: (1) "the certificates were undoubtedly issued by the Government of Peru to the Company"; (2) CCG, "which did not even try to establish that it had sought to put the certificates into circulation, underwrote [the certificates] on its own behalf"; (3) CCG "placed [the certificates] in current account credited to [Peru] ... when it received them"; (4) CCG "debited Peru in its current account, at each maturity, the amount of interest and depreciation"; and (5) CCG still "own[ed] [the certificates]" at the time of the Arbitration. (Id. at 337.)

Unusual as this transaction may seem, the Tribunal found it "cl...

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