Schlumberger Tech. Corp. v. U.S.

• Decision Date: 05 November 1999
• Docket Number: No. 98-20810,98-20810
• Citation: 195 F.3d 216
• Parties: (5th Cir. 1999) SCHLUMBERGER TECHNOLOGY CORPORATION, also known as Sedco, Inc. Plaintiff-Appellee, v. UNITED STATES OF AMERICA, Defendant-Appellant
• Court: U.S. Court of Appeals — Fifth Circuit

Page 216

195 F.3d 216 (5th Cir. 1999)

SCHLUMBERGER TECHNOLOGY CORPORATION, also known as Sedco, Inc. Plaintiff-Appellee, v. UNITED STATES OF AMERICA, Defendant-Appellant.

No. 98-20810 IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT

November 5, 1999

Appeal from the United States District Court for the Southern District of Texas

Before REAVLEY, HIGGINBOTHAM, and DENNIS, Circuit Judges.

HIGGINBOTHAM, Circuit Judge:

This case concerns the time at which a taxpayer must accrue a foreign arbitral award as income. The district court held that an arbitral award need not be accrued until the time to appeal judicial confirmation of the award expires in the jurisdiction in which enforcement is sought. We AFFIRM.

I.

Sedco, Inc., now part of Schlumberger Technology Corp. (STC), entered a joint venture in 1966 with a company owned by the Algerian government, known as Sonatrach. Sedco and Sonatrach owned 49% and 51%, respectively, of the joint venture, which engaged in oil and gas exploration. An agreement required binding arbitration before a Swiss tribunal for any dispute between the parties. In February of 1981, Sedco claimed Sonatrach was using its majority interest in the venture to deprive Sedco of its stock value. By 1983, Sonatrach had liquidated the venture and informed Sedco that Sedco's portion of the proceeds was $2.6 million. Sedco disputed this, claiming Sonatrach sold assets below market value to entities Sonatrach owned or controlled.

Based on this dispute, a Swiss arbitration tribunal awarded Sedco nearly $26 million in February of 1984. In April of 1984 a Swiss appeals court temporarily stayed the arbitral award. In May, the Swiss court revoked the stay, and in July of 1984 the Swiss court rejected Sonatrach's application for nullification of the award.

Sedco then began enforcement proceedings. The recognition and enforcement of foreign arbitral awards is governed by the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958 (New York Convention). See 9 U.S.C. 201. In 1984, every major Western European Country except Portugal was party to the New York Convention.

Article III of the New York Convention requires signatories to recognize arbitral awards as binding and enforce them just as easily as domestic arbitral awards, subject only to a few defenses: incapacity of a party, illegality of agreement, lack of due process in arbitration, award outside scope of arbitration, improper arbitration panel, and vacated or not-yet-binding award. See New York Convention, Arts. III, V.

Furthermore, if the subject matter of the dispute is not capable of settlement by arbitration under the law of the enforcing state or if enforcement of the award by the enforcing state would be contrary to the public policy of the enforcing state, then the enforcing state can also refuse to enforce the award. See id. Thus, recognition of an arbitral award is not automatic and can be refused by the enforcing state if the losing party proves one of these defenses.

On September 7, 1984, Sedco demanded payment from Sonatrach because the time for appealing the award in Switzerland had expired. No response came. On September 17, 1984, Sedco filed in France for enforcement because Sonatrach had no assets in Switzerland that could be attached.

In the French court, Sedco obtained an "exequatur" or enforcement order that issued on September 19, 1984. This order granted provisional recognition of the award in France subject only to appeal on grounds similar to the New York Convention defenses above. The time for appeal by non-residents such as Sonatrach was three months from the date of official notification of the order.

Because Sedco received notification of the order on September 26, 1984, the time for Sonatrach's appeal would not have expired until at least sometime after December 24, 1984, even if Sedco had notified Sonatrach immediately.

In October of 1984, Sedco got permission from the French court to begin attachment proceedings on Sonatrach's French assets. The French court issued an order allowing attachment by means of "saisie-arret," comprising two phases. In phase one, Sedco attached assets belonging to Sonatrach which resided in the hands of a garnishee such as a bank. In phase two, Sedco applied for a validation order from the appropriate French court directing the garnishee to pay the attached assets directly to Sedco. Gaz de France (GDF), a French-owned gas company, eventually notified Sedco that GDF possessed funds of Sonatrach sufficient to pay the award. Actual execution on the assets held by GDF, however, was contingent on the expiration of the time for appeal (or an explicit denial of the appeal) coupled with an affirmation of the exequatur order.

On October 9, 1984, documents were filed with the French court requesting a hearing on the validity of the attachment served on GDF. On December 11, 1984, Sedco and Sonatrach reached a tentative settlement agreement, subject to approval by the Algerian government and Sedco's board of directors.

The current case arises because Sedco merged into STC on December 24, 1984, making Sedco's final taxable year end on December 24, 1984. Its tax return for that year did not include the arbitral award as income. The IRS audited and assessed amounts due and penalties for this omission. Sedco paid them and filed this suit for refund.

Both parties sought summary judgment using affidavits from French experts. Sedco's expert agreed that the arbitral award from Switzerland had res judicata effect and Sonatrach could not attack the merits of the award in a French court; consequently, there was nothing a French court could do to alter the award. Sedco's expert also admitted that under French law, the grounds for challenging the implementation of the award were somewhat more limited than those allowed by the New York Convention. The expert made no estimate of whether there was any chance for Sonatrach to prevail on such an appeal, and even if Sonatrach prevailed on one of the New York Convention defenses, it would not annul the award or change the amount of damages determined in Sedco's favor. It would simply mean the award could not be enforced in France.

The expert for the United States said there did not appear to be any possible legal or factual basis to prevent Sedco from obtaining a final decision from the French courts ordering GDF to hand over the attached funds to Sedco, up to the amount of the award. The United States argued that "all events" necessary to establish Sedco's right to the arbitral award had occurred prior to the close of Sedco's taxable year in 1984 and that the award had become final no later than September 1984.

According to the United States, it was irrelevant whether enforcement had been completed in France by the end of 1984, because Sedco could not show a sufficient doubt as to the ultimate enforceability of the award under French law to allow Sedco to defer the accrual of the award until 1985 when the parties executed the final agreement.

Sedco maintained that the accrual of the award in 1984 was improper because enforcement of the award was not a foregone conclusion: it could be defeated by a defense to the New York Convention. Thus accrual was not appropriate until 1985 when Sonatrach actually agreed to pay the award.

The district court granted summary judgment to Sedco, noting that the "the overarching fact [was] that until France judicially recognized the Arbitral Award, the right to income it represented was contingent." Finality did not occur until Sonatrach's time to appeal the exequatur order expired. The United States appeals the grant of summary judgment.

II.

We examine the grant of summary judgment de novo and view factual inferences in the light most favorable to the United States. See Ellisen v. Connor, 153 F.3d 247, 251 (5th Cir. 1998).

The law in this case is easy to state. An accrual basis taxpayer such as Sedco must report income in the taxable year in which the last event occurs which unconditionally fixes the right to receive the income and there is a reasonable expectancy that the right will be converted to money. See H. Liebes & Co. v. Commissioner, 90 F.2d 932, 937-38 (9th Cir. 1937). The difficulty lies in defining an unconditional, fixed right to receive.¹

The United States argues that once Sedco received a final, unappealable arbitral award in Switzerland, Sedco had an unconditional, fixed right to receive. Sedco argues that the arbitral award only gave Sedco the right to seek enforcement but not the right to enforce or receive payment. Until Sedco had a right to enforce - namely, when the time to appeal the exequatur order expired - Sedco did not have a right to receive anything.

Both the taxpayer and the government accept the proposition that a domestic judgment constitutes an unconditional, fixed right to receive-assuming the defendant has U.S. assets-despite the potential for collateral attack when enforcing the judgment in another state. Assuming but not deciding...