Parex Bank v. Russian Sav. Bank

• Decision Date: 20 September 2000
• Docket Number: No. 99 Civ. 8760 (RWS).,99 Civ. 8760 (RWS).
• Citation: 116 F.Supp.2d 415
• Parties: PAREX BANK, Plaintiff, v. RUSSIAN SAVINGS BANK a/k/a Savings Bank of the Russian Federation a/k/a Russian Federation Savings Bank a/k/a Commercial Savings Bank of the Russian Federation a/k/a Sberbank, Defendant.
• Court: U.S. District Court — Southern District of New York

116 F.Supp.2d 415

PAREX BANK, Plaintiff, v. RUSSIAN SAVINGS BANK a/k/a Savings Bank of the Russian Federation a/k/a Russian Federation Savings Bank a/k/a Commercial Savings Bank of the Russian Federation a/k/a Sberbank, Defendant.

No. 99 Civ. 8760 (RWS).

United States District Court, S.D. New York.

September 20, 2000.

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Verner Simon, New York City, by Paul W. Verner, of counsel, for plaintiff.

Cleary, Gottlieb, Steen & Hamilton, New York City, by Howard Zelbo, of counsel, for defendant.

OPINION

SWEET, District Judge.

Defendant Russian Savings Bank, a/k/a Savings Bank of the Russian Federation a/k/a Russian Federation Savings Bank a/k/a Commercial Savings Bank of the Russian Federation a/k/a Sberbank ("Sberbank") moves, pursuant to Rules 12(b)(2) and (6), Fed.R.Civ.P, to dismiss the complaint filed by Plaintiff Parex Bank ("Parex") on the grounds of lack of personal jurisdiction, forum non conveniens, and failure to state a claim upon which relief can be granted. For the reasons stated below, the motions are denied in part and granted in part.

The Parties

Plaintiff Parex Bank is a financial institution organized and existing under the laws of Latvia.

Defendant Sberbank is an open joint-stock company organized under the laws of the Russian Federation. Its majority shareholder is the Central Bank of the Russian Federation, and its principal place of business is Moscow.

Prior Proceedings

The prior proceedings of this action are set forth in the prior opinion of this Court, which held that Sberbank properly removed the case from state to federal court. See Parex Bank v. Russian Savings Bank, 81 F.Supp.2d 506, 508 (S.D.N.Y.2000).

Parex filed the complaint in New York Supreme Court on July 21, 1999, claiming breach of contract and deceptive business acts and practices under New York's General Business Law ("NYGBL"). Sberbank removed the action to this Court on August 9, 1999. The dispute arose out of Sberbank's alleged failure to honor a non-deliverable forward exchange contract ("NDF contract")¹ between the parties in the aftermath of Russia's 1998 financial crisis.

Facts

On March 11, 1998, a Parex trader in Riga, Latvia telephonically initiated a contract for a non-deliverable forward transaction with Sberbank in Moscow. The parties agreed to exchange rubles for dollars at the currency exchange rate as of March 9, 1999. The agreement was memorialized only by Reuters electronic records rather than in a signed, written contract. At the time the contract was entered into, the value of the Russian ruble was determined by the MICEX exchange and fluctuated based on market trading within a trading band set by the Russian government. To the extent that the exchange rate moved unfavorably for a party, the contract required that party to pay the other party the difference between the MICEX dollar-ruble exchange rate on March 9, 1999 and the agreed amount of 6.9 multiplied by 5,362,318.84. The difference was to be transferred in dollars into the other party's Bank of New York account. Upon Sberbank's request, Parex transferred a $268,116 security deposit into Sberbank's Bank of New York account, which Sberbank held from March 11, 1998 through March 10, 1999.

Five months after the NDF contract was negotiated, Russia suffered a financial crisis that fundamentally altered its financial landscape. Like other emerging world markets, Russia's financial system collapsed after violence erupted in Indonesia in May 1998. In August of 1998, Russia's Central Bank enacted emergency measures to counteract the country's serious liquidity problem. On August 17, the Russian Government announced a package of severe economic measures: First, it raised the trading band, which allowed the ruble to devalue; second, it ordered a 90-day moratorium on the repayment of foreign debt by banks; and third, it announced the restructuring of ruble-denominated debt. Russian citizens withdrew their savings from banks en masse and stores closed. In late August of 1998, the ruble-dollar trading on the MICEX exchange was temporarily suspended. From August to the beginning of September, the ruble lost a significant portion of its face value.

In early September, due to the combination of the economic crisis, the non-existence of any MICEX exchange rate on which to assess the NDF contract, and the moratorium on paying back foreign debt, Sberbank representatives contacted Parex in an attempt to settle the NDF contract. Sberbank offered to settle at a rate equivalent to the ceiling for rubles set by the Russian government in 1998, 7.15 rubles per dollar. Parex objected to what it viewed as Sberbank's altering the terms of the NDF contract. The ensuing negotiations took place either in Moscow or by telephone between Riga and Moscow through February of 1999, and failed to produce a settlement.

On the value date of March 9, 1999, Parex demanded that Sberbank transfer $3,755,642.01 to Parex's Bank of New York account in satisfaction of the contract. On March 10, 1999, Parex sent Sberbank a letter again demanding immediate payment. Attached to that letter was a copy of a claim for relief Parex had filed at the Moscow City Arbitration Court, the Russian state commercial court that has jurisdiction over this dispute.

The parties met once more on March 22, 1999, but failed to reach an agreement. Parex filed this action in the New York Supreme Court three months later, and Sberbank properly removed it to this Court on August 9, 1999 pursuant to 28 U.S.C. §§ 1330(a) and 1446(d).

Sberbank filed the instant motion to dismiss on March 24, 2000. Parex filed a memorandum in response on May 22, 2000 and the motion was deemed fully submitted when Sberbank filed its reply memorandum on June 20, 2000.

Discussion

I. Legal Standard

For the purposes of this motion to dismiss, the material facts alleged in the complaint are accepted as true. See Newman & Schwartz v. Asplundh Tree Expert Co., 102 F.3d 660, 662 (2d Cir.1996); O'Brien v. Alexander, 101 F.3d 1479, 1484 (2d Cir. 1996). All reasonable inferences should be drawn in favor of the plaintiff. See Gant v. Wallingford Bd. of Educ., 69 F.3d 669, 673 (2d Cir.1995); Hoffritz for Cutlery, Inc. v. Amajac, Ltd., 763 F.2d 55, 57 (2d Cir.1985) (when deciding a motion to dismiss for lack of jurisdiction pursuant to 12(b)(2) without an evidentiary hearing, all doubts must be resolved in favor of party asserting personal jurisdiction).

II. Subject Matter Jurisdiction

Where a case is brought against a "foreign state," the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. §§ 1330, 1602 et seq., provides that personal jurisdiction exists where there is both subject matter jurisdiction and proper service. 28 U.S.C. § 1330(a), (b); see Seetransport Wiking Trader v. Navimpex Centrala Navala, 989 F.2d 572, 578 (2d Cir.1993) (citing Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 308 (2d Cir.1981), cert. denied, 454 U.S. 1148, 102 S.Ct. 1012, 71 L.Ed.2d 301 (1982)). This Court concluded in a prior opinion that Sberbank, as an instrumentality or agency of the Russian State, qualifies as a "foreign state" under the FSIA. Parex Bank v. Russian Savings Bank, 81 F.Supp.2d 506, 508 (S.D.N.Y.2000). The parties do not contest whether service was proper pursuant to 28 U.S.C. § 1608. Although the parties did not raise the issue of subject matter jurisdiction, it is a threshold question that must be addressed under the FSIA before reaching the personal jurisdiction analysis.

A. Commercial Activity Exception to Sovereign Immunity

The FSIA is the only basis for the subject-matter jurisdiction of the United States courts. See Saudi Arabia v. Nelson, 507 U.S. 349, 355, 113 S.Ct. 1471, 123 L.Ed.2d 47 (1993); Transatlantic Shiffahrtskontor v. Shanghai Foreign Trade Corp., 204 F.3d 384, 388 (2d Cir.2000). Under the FSIA, foreign states are immune from suit in the United States unless one of several exceptions applies. See 28 U.S.C. §§ 1604, 1605; Nelson, 507 U.S. at 355, 113 S.Ct. 1471; Transatlantic Shiffahrtskontor, 204 F.3d at 388.

The most relevant exception to foreign sovereign immunity is the "commercial activity" exception, which provides that a foreign state is not immune from suit in any case:

in which the action is based 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.

28 U.S.C. § 1605(a)(2). A state is involved in "commercial activity" under the FSIA when it functions like an actor in the private marketplace rather than in a governmental or public capacity. See Nelson, 507 U.S. at 360, 113 S.Ct. 1471; Hanil Bank v. PT. Bank Negara Indonesia, 148 F.3d 127, 130 (2d Cir.1998); 28 U.S.C. § 1603(d) ("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."). An act is made "in connection" with commercial activity if there is a "substantive connection" or "causal link" between the act and the commercial activity. See id.

The "act" at issue here, Sberbank's failure to deposit funds into Parex's Bank of New York account, arises out of a deal transacted outside of the United States, in Moscow and Riga. Despite the fact that one of the parties to the exchange was a foreign state, the rubles for dollars exchange at issue here was conducted as a private transaction rather than as a public service, and as such constitutes "commercial activity." See Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 616, 112 S.Ct. 2160, 119 L.Ed.2d 394 (1992) (rejecting the argument that the issuance of bonds to address a domestic debt crisis rendered the transaction public). The only issue remaining to establish whether the Court has subject matter jurisdiction over this case is whether Sberbank's...