Peterson v. Islamic Republic of Iran

Filing 508

OPINION & ORDER re: 419 MOTION to Dismiss the Remaining Claims filed by Bank Markazi, the Central Bank of Iran, 499 LETTER MOTION for Local Rule 37.2 Conference addressed to Judge Katherine B. Forrest from David M. Lindsey dated 10/1/201 3 filed by Bank Markazi, the Central Bank of Iran. For the reasons set forth above, defendant Bank Markazi's Motion to Dismiss the Remaining Claims is DENIED. The Clerk of Court shall terminate the motions at ECF Nos. 419 and 499. (Signed by Judge Katherine B. Forrest on 10/8/2013) (mro)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
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:
DEBORAH D. PETERSON, Personal
:
Representative of the Estate of James C. Knipple :
(Dec.), et al.,
:
:
Plaintiffs,
:
:
-v:
:
ISLAMIC REPUBLIC OF IRAN, et al.,
:
:
Defendants.
:
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USDC SDNY
DOCUMENT
ELECTRONICALLY FILED
DOC #: _________________
DATE FILED:

10 Civ. 4518 (KBF)
OPINION & ORDER

KATHERINE B. FORREST, District Judge:
This Opinion & Order is another in a series of decisions rendered by this
Court in a long-running action by plaintiffs, judgment creditors of the Islamic
Republic of Iran, seeking to collect billions of dollars in unsatisfied money
judgments.1 The procedural history and facts relating to this matter are set forth in
the Court’s prior decisions; the Court recites only those facts necessary to resolution
of the instant motions.
On February 28, 2013, this Court granted summary judgment to plaintiffs for
turnover of $1.75 billion in blocked assets (the “Blocked Assets”) held in a
segregated account at Citibank N.A. (“Citibank”). (ECF No. 367.) The Court
subsequently granted a motion pursuant to Rule 54(b) of the Federal Rules of Civil
Procedure, severing those claims and allowing an immediate appeal. (ECF Nos.
462, 463.)
(See, e.g., Opinion & Order, February 28, 2013, ECF No. 340; Memorandum Decision & Order, May
20, 2013, ECF No. 405.)

1

Remaining before the Court are claims against Bank Markazi (the Central
Bank of Iran), Banca UBAE SapA, and Clearstream Banking, S.A.2 The two
remaining claims in the Second Amended Complaint (“SAC”) against Bank Markazi
(the “Remaining Claims”) are that Bank Markazi, UBAE, and Clearstream engaged
in fraudulent conveyances and transfers relating to $250 million (Second Count)
and for rescission relating to the same $250 million (Third Count).
Before this Court are three motions: Bank Markazi has moved to dismiss all
Remaining Claims based on lack of subject matter jurisdiction under the Foreign
Sovereign Immunities Act (the “FSIA”), 28 U.S.C. §§ 1602–11 (1996) (ECF No. 419),
and has opposed certain discovery on the basis that the Court lacks jurisdiction. In
particular, plaintiffs have made a letter-motion to compel dated August 15, 2013
(ECF No. 481), and Bank Markazi has opposed that motion by letter dated August
21, 2013 (ECF No. 487). Bank Markazi has itself sought a protective order as to
upcoming depositions by letter-motion dated October 1, 2013 (ECF No. 499), and
plaintiffs have opposed that motion by letter dated October 4, 2013 (ECF No. 503).
In its Opinion and Order dated February 28, 2013, this Court determined
that there was a sufficient legal and factual basis for subject matter jurisdiction
over Bank Markazi with respect to the turnover claims. Those claims related to
funds that were then held in an account at Citibank in the United States. In
contrast, there is no dispute that plaintiffs’ Remaining Claims against Bank

An order of dismissal was entered as to Citibank in August 2013. (ECF No. 485.) Clearstream and
the plaintiffs are currently involved in discussions that may result in an order of dismissal as to
Clearstream; Clearstream has withdrawn its motion to dismiss with leave to renew should those
discussions be unsuccessful. (ECF Nos. 491, 492.)
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2

Markazi derive from two bonds with face values totaling $250 million—and that
proceeds relating to the sale of these bonds are believed to be located outside the
United States. (See, e.g., SAC ¶¶ 213, 217, ECF No. 216; Pls.’ Mem. of L. in Opp. to
Mots. to Dismiss (“Pls.’ Opp.”) 3, ECF No. 469.) Bank Markazi asserts that this
Court lacks subject matter jurisdiction with respect to the Remaining Claims as to
it since they relate to funds outside of the United States.
For the reasons set forth below, the Court denies Bank Markazi’s motion to
dismiss, grants plaintiffs’ motion to compel discovery, and denies Bank Markazi’s
motion for a protective order.
I.

FACTS RELEVANT TO THE REMAINING CLAIMS

As stated above, each of the Remaining Claims is based on defendant Bank
Markazi’s3 alleged acts with respect to two U.S.-dollar denominated bonds with a
face value of $250 million. (See, e.g., SAC ¶ 167.) According to plaintiffs, after they
obtained judgments and it became clear that various sanctions and statutory
provisions might allow for collection efforts of Bank Markazi’s assets located in the
United States, Bank Markazi transferred two bonds as to which a restraining order
had been lifted (the “Transferred Assets”) to an account at Clearstream in the name
of UBAE (the “UBAE/Markazi Account”). (SAC ¶¶ 146–67.) Plaintiffs allege that
this transfer was made without consideration (id. ¶¶ 154–55), and was made in
order to conceal the identity of Iran as the beneficial owner of the two bonds (id. ¶¶
142–43, 148–51). UBAE then sold the Transferred Assets to third parties; the

UBAE and Clearstream are alleged to have participated in these acts, but they are not the subject
of the motion or part of this Court’s decision herein.
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proceeds from these sales have been maintained at Clearstream as credits, with
Bank Markazi denominated as beneficiary. (Id. ¶¶ 167–68, 173, 262.)
II.

LEGAL STANDARD FOR MOTION TO DISMISS

Plaintiffs have asserted that this Court has subject matter jurisdiction over
their actions, inter alia, by virtue of the FSIA. (See SAC ¶ 19.)
“A case is properly dismissed for lack of subject matter jurisdiction
under Rule 12(b)(1) when the district court lacks the statutory or constitutional
power to adjudicate it.” Makarova v. United States, 201 F.3d 110, 113 (2d Cir.
2000). To survive a Rule 12(b)(1) challenge to the Court’s subject matter
jurisdiction, the plaintiff must “allege facts that affirmatively and plausibly”
suggest that jurisdiction exists. Amidax Trading Grp. v. S.W.I.F.T. SCRL, 671 F.3d
140, 145 (2d Cir.2011); see also GMA Accessories, Inc. v. Dorfman-Pacific Co., No.
11 Civ. 3731, 2012 WL 899385, at *3 (S.D.N.Y. Mar. 16, 2012) (holding that
dismissal is proper “when the complaint fails to allege sufficient allegations to
support subject matter jurisdiction”).
As with motions brought pursuant to Rule 12(b)(6), in the context of
a motion to dismiss for lack of subject matter jurisdiction, the Court draws “all
facts—which we assume to be true unless contradicted by more specific allegations
or documentary evidence—from the complaint.” Amidax, 671 F.3d at 145. The
Court also construes “reasonable inferences to be drawn from those factual
allegations” in the plaintiff’s favor. Id.

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III.

THE FSIA

Bank Markazi’s motion to dismiss is premised on a lack of subject matter
jurisdiction pursuant to the FSIA, 28 U.S.C. §§ 1605–1611.4 (Def. Bank Markazi’s
Mem. of L. in Supp. of Mot. to Dismiss (Def.’s Mot.) 2–4, ECF No. 419.)
It is certainly true that the FSIA provides that foreign sovereigns are
generally immune from suit in the United States. See generally 28 U.S.C. § 1605–
1611. The statutory scheme codifies “[a] restrictive theory of sovereign immunity,”
Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 488 (1983), and is intended
to ensure that “duly created instrumentalities of a foreign state are accorded a
presumption of independent status,” First Nat’l City Bank v. Banco Para El
Comercio Exterior de Cuba (“Bancec”), 462 U.S. 611, 627 (1983).
Bank Markazi does not dispute that it is an instrumentality of Iran. (See
Def.’s Mot. 3.) Indeed, its acknowledgement of that fact forms the premise of its
motion that it is entitled to FSIA immunity. See 28 U.S.C. § 1603(b). The hook for
its motion is the legal principle that this Court lacks the power under any exception
of the FSIA to attach property located outside of the United States, and the
Transferred Assets (or proceeds relating thereto) are alleged now to be outside of
the United States. See EM Ltd. v. Republic of Argentina, 695 F.3d 201, 208 (2d Cir.
2012); see also Bank of Tokyo-Mitsubishi, UFJ, Ltd. N.Y. Branch v. Peterson, No.
12 Civ. 4038 (BSJ), 2012 WL 1963382, at *2 n.3 (S.D.N.Y. May 29, 2012); Elliott

Bank Markazi also argues that section 201 of the Terrorism Risk Insurance Act of 2002 (“TRIA”)
and 22 U.S.C. § 8772 only apply to “blocked assets” – and therefore those provisions cannot
separately be used as support for execution on any assets. Plaintiffs do not pursue a TRIA or § 8772
argument in opposition to this motion.
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Assocs., L.P. v. Banco De La Nacion, No. 96 Civ. 7916 (RWS), 2000 WL 1449862, at
*3 (S.D.N.Y. Sept. 29, 2000).
Resolution of Bank Markazi’s motion requires this Court to distinguish
between immunity from a liability determination with respect to a cause of action,
and immunity from an action for execution in satisfaction of a judgment.
In terms of seeking a liability determination, a foreign sovereign—or here its
agency, Bank Markazi—may not be immune from suit if 28 U.S.C. § 1605(a)(2) or
(a)(5) applies.5 (See Pls.’ Opp. at 5–6.) Section 1605(a)(2) provides an exception
where:
. . . the action is premised upon a commercial activity carried on in the
United States by a 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.
28 U.S.C. § 1605(a)(2) (emphasis added).
Section 1605(a)(5) provides that a foreign sovereign is not entitled to
immunity from suit where “money damages are sought against a foreign state for . .

5

Section 1610 states:
(b) In addition to subsection (a), any property in the United States of an agency or
instrumentality of a foreign state engaged in commercial activity in the United States shall
not be immune from attachment in aid of execution, or from execution, upon a judgment
entered by a court of the United States . . . if—
(2) the judgment relates to a claim for which the agency or instrumentality is not
immune by virtue of section 1605(a)(2), (3) or (5) or 1605(b), or 1605A of this chapter .
...

28 U.S.C. § 1610.

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. damage to or loss of property, occurring in the United States and caused by the
tortious act or omission of that foreign state.” 28 U.S.C. § 1605(a)(5).
The facts alleged in the SAC are sufficient to support subject matter
jurisdiction as against Bank Markazi pursuant to both of these provisions. Bank
Markazi is alleged to have engaged in conduct in the United States, at the alleged
behest of Iran, with respect to property as to which plaintiffs asserted an
entitlement at that time. (See, e.g., SAC ¶¶ 83–125.) (Indeed, at the time of the
conveyance of the Transferred Assets, some plaintiffs were lienholders in the
property.) Within the rubric of Section 1605(a)(2), Bank Markazi is alleged to have
engaged in conduct in the United States effecting a transfer within the United
States of the two bonds. It is true that the two bonds end up outside of the United
States, but there is ample and necessary initial conduct in the United States to
effect that transfer. Those acts are alleged to have been “in connection with a
commercial activity” (that is, raising cash) “of a foreign state,” namely Iran. See 28
U.S.C. § 1605(a)(2). Plaintiffs’ claims also support subject matter jurisdiction
pursuant to Section 1605(a)(5), because their claim for fraudulent conveyance is a
claim for “money damages” (rescissionary damages) being “sought against a foreign
state,” Iran, for the “tortious act” of fraudulent conveyance. See 28 U.S.C. §
1605(a)(5).
Bank Markazi argues that 28 U.S.C. § 1611(b)(1) provides an additional basis
for immunity, because it is a central bank. This provision relates not to immunity

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from suit, however, but to immunity from attachment of assets in aid of execution of
a judgment. It provides:
(b) Notwithstanding the provisions of section 1610 of this chapter, the
property of a foreign state shall be immune from attachment and from
execution, if—
(1) the property is that of a foreign central bank or monetary authority,
held for its own account . . . .
28 U.S.C. § 1611 (emphasis added). See NML Capital, Ltd. v. Banco Central de la
Republica Argentina, 652 F.3d 172, 194 (2d Cir. 2011).
Thus, because the Remaining Counts seek to establish liability, not to attach
assets in execution of a judgment, and because, in any event, there are sufficient
allegations at this stage of the case to fall within the exceptions of § 1610, this
Court has subject matter jurisdiction over the Remaining Claims as to Bank
Markazi. In addition, the SAC contains sufficient allegations that Bank Markazi
engages in non-central bank activities such that it is plausible that if plaintiffs did
obtain a money judgment, and Bank Markazi has property within the United
States, the immunity in Section 1611 would not apply.6
Another cornerstone of Bank Markazi’s argument is that, even if those claims
were properly brought under an exception to the FSIA, this Court cannot have
subject matter jurisdiction because plaintiffs seek rescission as the remedy for their
claims, and Bank Markazi’s assets are located outside of the United States. This

To determine whether property is held for the account of a central bank, the Second Circuit has
adopted a functional test that asks whether the central bank uses the property for central bank
functions as normally understood, irrespective of their commercial nature. See NML Capital, 652
F.3d at 194. Thus, to execute against the property of a central bank, a plaintiff must demonstrate
“with specificity that the funds are not being used for central banking functions as such functions are
normally understood.” Id. at 194.
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proposition incorrectly assumes that a claim for rescission can only be satisfied by
the specific assets as to which rescission is sought, or where fraudulent conveyance
is alleged. That is not so.
There can be no serious doubt that the SAC clearly refers to rescission and
disregarding the fraudulent conveyances as the remedy sought. (SAC ¶¶ 226–27.)
This proposed remedy is not, however, fatal to subject matter jurisdiction.
Rescissory damages are “an established remedy where rescission, the voiding of a
contract, may not be a valid form of relief.” See Syncora Guarantee Inc. v.
Countrywide Home Loans, 935 N.Y.S.2d 858, 869 (Sup. Ct. 2012) (collecting cases).
Moreover, under New York law, a claim for fraudulent conveyance may be satisfied
with a judgment for money damages. See In re Adelphia Recovery Trust v. HSBC
Bank USA, 634 F.3d 678, 692 (2d Cir. 2011) (holding that New York law permits an
award of money damages when the traditional fraudulent conveyance remedy of
rescission is no longer practicable) (citing Neshewat v. Salem, 365 F. Supp. 2d 508,
521 (S.D.N.Y. 2005); RTC Mortg. Trust 1995-S/n1 v. Sopher, 171 F. Supp. 2d 192,
201 (S.D.N.Y. 2001)).
Thus, should plaintiffs succeed in obtaining a liability determination
pursuant to one of the exemptions discussed above, they could obtain a judgment for
money damages; that judgment could only be executed upon property of a foreign
sovereign located in the United States. The question of liability is, however,
separate from whether this Court is able to exercise jurisdiction over the assets of a

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foreign sovereign to fulfill a money judgment. The former is currently before this
Court, and the latter is premature.7
IV.

DISCOVERY MOTIONS 1 AND 2

Plaintiffs seek to compel discovery relating to Bank Markazi’s assets
wherever located and to take depositions of Bank Markazi personnel. The Court
will allow both categories of discovery, as set forth below.
As discussed in this Opinion & Order, this Court has determined that it has
subject matter jurisdiction over the claims as to Bank Markazi. Bank Markazi has
resisted the discovery sought in the motion to compel brought by plaintiffs first and
foremost based on its pending motion to dismiss. (See Aug. 21, 2013 Letter 1, ECF
No. 487; Oct. 1, 2013 Letter 1, ECF No. 499.) Having resolved that motion, the
Court has eliminated that basis for resisting discovery.
The discovery sought is relevant to plaintiffs’ claims: as discussed above, any
judgment plaintiffs might obtain could be executed only against those assets located
in the United States.
For that reason, however, the Court finds that discovery regarding Bank
Markazi’s assets should only proceed as to those in the United States. The Court
includes within this category any accounts at financial institutions at which credits
for the benefit of Bank Markazi are maintained, or upon which Bank Markazi could
draw if it chose to do so.

Plaintiffs do not in fact rely upon TRIA or § 8772 to establish subject matter jurisdiction; the Court
therefore does not address defendant’s arguments in that regard.
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For the same reasons, the Court allows depositions of Bank Markazi
personnel located in the United States or obtainable via foreign discovery methods.
Such personnel may well have knowledge of facts relevant to the liability claims
and damages sought.
V.

CONCLUSION

For the reasons set forth above, defendant Bank Markazi’s Motion to Dismiss
the Remaining Claims is DENIED.
The Clerk of Court shall terminate the motions at ECF Nos. 419 and 499.
Dated:

New York, New York
October 8, 2013

KATHERINE B. FORREST
United States District Judge

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