Obenchain Corp. v. Corp. Nacionale de Inversiones

• Decision Date: 18 March 1987
• Docket Number: Civ. A. No. 86-846.
• Citation: 656 F. Supp. 435
• Parties: OBENCHAIN CORPORATION, Plaintiff, v. CORPORATION NACIONALE de INVERSIONES, a/k/a Conadi, Fundiciones-Centroamericanas S.A., Republic of Honduras, Angel Eduardo Ramos, Roberto Ramon Castillo, Augusto C. Coello, Carlos A. Mendoza, Juan C. Marinakys, Norman Garcia, Hector Cordova, Roberto Galvez Barnes, and Justo Pastor Calderon, Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

656 F. Supp. 435

OBENCHAIN CORPORATION, Plaintiff, v. CORPORATION NACIONALE de INVERSIONES, a/k/a Conadi, Fundiciones-Centroamericanas S.A., Republic of Honduras, Angel Eduardo Ramos, Roberto Ramon Castillo, Augusto C. Coello, Carlos A. Mendoza, Juan C. Marinakys, Norman Garcia, Hector Cordova, Roberto Galvez Barnes, and Justo Pastor Calderon, Defendants.

Civ. A. No. 86-846.

United States District Court, W.D. Pennsylvania.

March 18, 1987.

Kathleen S. McAllister, Jones Gregg Creehan & Gerace, Pittsburgh, Pa., for plaintiff.

David G. Ries, Thorp Reed & Armstrong, Pittsburgh, Pa., for defendants.

OPINION

GERALD J. WEBER, District Judge.

In this age of multinational corporations, with investment opportunities in every corner of the globe, plaintiff picked Honduras. Plaintiff sorrowfully rues that decision and turns its frustrated energies to litigation in an effort to recoup at least some of its losses.

Defendants on the other hand are understandably reluctant to air their failed business ventures in a United States Federal Court. Like a Honduran "Dorothy" they wanted the wizard to send them home. By motion to dismiss, defendants have challenged both personal and subject matter jurisdiction in this forum.

FACTS

A detailed history of the parties' relationship and experiences is not necessary at this time, but a review of the salient facts is in order.

In 1974, the Republic of Honduras by statute created the Corporation Nacionale de Inversiones, better known by the acronym, CONADI. The purpose of CONADI was to promote economic development in Honduras, and while CONADI claims to be a separate corporate entity, the Honduran Republic has retained at least general supervisory control.

In 1976, plaintiff, a Pennsylvania corporation, or its Panamanian subsidiary, came to Honduras in search of a way to improve its corporate profit and loss statement. To this end, plaintiff (or its subsidiary) negotiated an agreement with CONADI to design, construct and operate an iron and steel foundry in San Pedro Sula, Honduras. The principals agreed to create a separate Honduran corporation, Funduciones-Centroamericanas, S.A., to serve as the operating company. In the course of the project, some or all of the parties renegotiated certain aspects of the agreement and it is these several contracts which form the basis of plaintiff's claim.

We will not now go into the disagreeable details of the project's demise. Though there appears to be much dispute about the course of events, all parties agree that the experience was not a happy one. Suffice it to say that the fledgling Honduran steel industry died an inglorious and premature death.

In this action, plaintiff alleges that CONADI and Fundiciones breached the contracts in several respects. Plaintiff also contends that CONADI guaranteed the obligations of Fundiciones, and Honduras in turn guaranteed the obligations of CONADI. The various individual defendants are identified as directors or officers of CONADI, or Fundiciones or both, and plaintiff alleges that they fraudulently misrepresented material facts concerning the project and its financing.

DISCUSSION

I. Service of Process

First the technical argument. Defendants contend that plaintiff failed to make service of process in compliance with the strictures of the Foreign Sovereign Immunities Act, 28 U.S.C. § 1602 et seq. Section 1608 provides specific and detailed procedures for service. Plaintiff admits that it failed to comply with the Act in two respects. Plaintiff served the complaint rather than having the Clerk of Courts perform that function as required by the Act, and plaintiff did not include the required notice of suit.

Defendants argue that the FSIA requirements are strict and failure to follow them, even if only a technical violation, deprives the court of jurisdiction. Several courts have agreed. Gray v. Permanent Mission of the People's Republic of the Congo to the United Nations, 443 F.Supp. 816 (S.D. N.Y.), aff'd 580 F.2d 1044 (2nd Cir.1978); Magnus Electronics, Inc. v. Royal Bank of Canada, 620 F.Supp. 387 (N.D.Ill.1985); Unidyne Corp. v. Aerolineas Argentinas, 590 F.Supp. 398 (S.D.Va.1984).

However, the better rule permits the assertion of personal jurisdiction where substantial compliance has effected actual notice. Velidor v. L/P/G Benghazi, 653 F.2d 812 (3d Cir.1981); Harris Corp. v. National Iranian Radio & Television, 691 F.2d 1344, 1352, n. 16 (11th Cir.1982); Banco Metropolitano v. Desarrollo de Autopistas, 616 F.Supp. 301, 304 (S.D.N.Y. 1985). The purpose of the Act's requirements is to ensure actual notice to foreign states of the fact and substance of pending litigation. Where a party has received such notice, despite technical omissions in the manner of service, the purpose of the Act if not its letter has been satisfied. Velidor, 653 F.2d at 821.

We are also cognizant of the fact that any flaws in service may be corrected, but we will not require the plaintiff, his counsel and the Clerk of Court to go through an empty ritual to serve parties who have received actual notice. While we do not condone the omissions of plaintiff's counsel, nothing of substance will be accomplished by ordering a meaningless act.

Unfortunately for plaintiff, not all parties have been served. The docket reflects no proof of service on Fundiciones, and no one has entered an appearance for that entity. Therefore, unless plaintiff now establishes service in the manner required by the FSIA, Fundiciones will be dismissed.

II. Sovereign Immunity

Defendants seek to wrap themselves in the once magical cloak of sovereign immunity. However, as a reflection of an interdependent world economy and the expanding role of governments, the Foreign Sovereign Immunities Act has broadly defined areas of accountability for modern sovereigns.

We may begin with the premise embodied in the FSIA that foreign states, their agencies and instrumentalities are immune from suit in the state and federal courts of the United States, with certain defined exceptions. 28 U.S.C. §§ 1604, 1605. In the absence of an international agreement to the contrary, jurisdiction may be exercised only on occasion of an exception delineated in the Act.

Plaintiff seeks to defeat the sovereign immunity bar with the exceptions listed in § 1605(a)(2):

(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case — ...

(2) in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States; ...

These provisions have been the subject of much learned discussion, particularly since the legislature has left the interpretation of these broad brush phrases to the courts.

The most cogent statement of a framework for analysis of issues arising under the FSIA is the decision in Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300 (2d Cir.1981). The court identified 5 pertinent questions:

1) Does the conduct the action is based upon or related to qualify as "commercial activity"?

2) Does that commercial activity bear the relation to the cause of action and to the United States described by one of the three phrases of § 1605(a)(2), warranting the Court's exercise of subject matter jurisdiction under § 1330(a)?

3) Does the exercise of this congressional subject matter jurisdiction lie within the permissible limits of the "judicial power" set forth in Article III?

4) Do subject matter jurisdiction under § 1330(a) and service under § 1608 exist, thereby making personal jurisdiction proper under § 1330(b)?

5) Does the exercise of personal jurisdiction under § 1330(b) comply with the due process clause, thus making personal jurisdiction proper?

This framework has been adopted by the Third Circuit. Velidor v. L/P/G Benghazi, 653 F.2d 812 (3d Cir.1981). We now apply it here.

A) Commercial Activity

"Commercial activity" is defined by the FSIA at 28 U.S.C. § 1603(d):

(d) A "commercial activity" means either a regular course of commercial conduct or a particular commercial transaction or act. The commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.

The provision is circular because it fails to define "commercial", leaving the courts to wrestle with the traditional distinction between "commercial" and "governmental".

Defendants have argued that their activity has been wholly governmental in character, designed and intended not for profit, the alleged sine qua non of "commercial" conduct, but for the goal of spurring economic development in an underdeveloped country. Defendants purpose then was the advancement of the common weal.

By making the argument, defendants ignore the one clear thing that § 1603(d) does tell us — that the purpose of the activity is irrelevant. Rather, heeding the distinction imposed by the Act, we must look to the "nature" of the activity apart from its purpose.

In this sense then the purchase of goods and services, regardless of their ultimate purpose, is commercial in nature. In Texas Trading, the court reviewed legislative history, pre-FSIA decisions and international law to adopt the following:

If a government department goes into the market places of the world and buys boots or cement — as a commercial transaction — that government department should be subject to all the rules of the marketplace.

647 F.2d at 310, quoting Trendtex Trading Corp. v. Central Bank of Nigeria, 2 W.L.R. 356, 369, 1 All E.R. 881 (1977).

In Texas Trading the court concluded that Nigeria's purchases of huge...