SI Group Consort Ltd. v. Ukraine et al

Filing 53

MEMORANDUM OPINION AND ORDER: re: 28 MOTION to Dismiss for Lack of Jurisdiction and Failure to State a Claim Upon Which Relief Can be Granted. filed by Ivano-Frankivisk Regional State Administration, Ukraine, Department for Const ruction, Housing, Urban Development and Architecture of the Ivano-Farnkivisk Regional State Administration. For the foregoing reasons, no statutory exception to Defendants' sovereign immunity is applicable, and the Court accordingly lacks subjec t matter and personal jurisdiction in this case. Defendants' motions to dismiss the Complaint is therefore granted, pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(2). This Memorandum Opinion and Order resolves docket entry no. 28. The Clerk of Court is respectfully requested to enter judgment dismissing the Complaint for lack of jurisdiction, and close this case. SO ORDERED. (Signed by Judge Laura Taylor Swain on 1/30/2017) (ama)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------x
SI GROUP CONSORT LTD.,
Plaintiff,
-v-

No. 15 CV 3047-LTS

UKRAINE, IVANO-FRANKIVSK STATE
ADMINISTRATION, and DEPARTMENT
FOR CONSTRUCTION, HOUSING, URBAN
DEVELOPMENT AND ARCHITECTURE OF
THE IVANO-FRANKIVSK REGIONAL
STATE ADMINISTRATION,
Defendants.
-------------------------------------------------------x
MEMORANDUM OPINION AND ORDER
Plaintiff SI Group Consort Ltd. (“SI Group”) brought this action against
Defendants Ukraine; the Ivano-Frankivsk Regional State Administration (the “State”); and the
Department for Construction, Housing, Urban Development, and Architecture of the IvanoFrankivsk Regional State Administration (“DCIF” and, with Ukraine and the State,
“Defendants”), seeking to enforce a roughly $35.7 million judgment rendered by the courts of
Ukraine in favor of Plaintiff. (Docket entry no. 1, Complaint (“Compl.”), at ¶ 1.) Both subjectmatter jurisdiction and personal jurisdiction are contested. Defendants have moved under
Federal Rules of Civil Procedure 12(b)(1), 12(b)(2), and 12(b)(6) to dismiss the Complaint. The
Court has reviewed the parties’ submissions carefully and, for the following reasons, grants
Defendants’ motion.

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BACKGROUND
The facts recited below, which are limited to those relevant to the Court’s
decision, are drawn from the Complaint and are taken as true for purposes of this motion
practice.
SI Group is an Israeli company that specializes in waste management. (Compl.
¶¶ 6, 11.) In 2013, SI Group entered into a series of waste disposal contracts with DCIF.
(Compl. ¶¶ 22-23.) The principal contract between the parties provided that disputes would be
resolved “in court under the laws of Ukraine.” (Compl. ¶ 28.) The contract, which was
submitted by Plaintiff in connection with the instant motion and is appropriately considered on
this motion to dismiss because it is integral to the allegations in the Complaint, also specifies
that “[a]ll disputes meant to be settled in court shall be settled at the location of the Client,”
namely, the Ivano-Frankivsk State in Ukraine. (Docket entry no. 33, Ex. 46, Art. 11.11 (ECF
page 81).)
A dispute arose over payments SI Group claimed were owed, and in 2014, SI
Group brought suit in Ukrainian court against DCIF. (Compl. ¶¶ 39, 41.) DCIF largely admitted
the allegations, and the Ukrainian court entered a monetary judgment in SI Group’s favor.
(Compl. ¶ 43.) The judgment was affirmed on appeal and is a final judgment for purposes of
enforcement. (Compl. ¶¶ 44, 49.) The judgment was not paid; SI Group brought this action
seeking to collect its judgment out of Defendants’ assets in the United States. (Compl. ¶¶ 50,
112.)

DISCUSSION
Pursuant to the Foreign Sovereign Immunities Act, 28 U.S.C. § 1604 (the
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“FSIA”), foreign states are presumptively immune from the jurisdiction of the courts of the
United States, unless a statutory exception to immunity applies. “[I]f the claim does not fall
within one of the exceptions, federal courts lack subject matter jurisdiction” of the claim, as well
as personal jurisdiction over the foreign state defendant. Verlinden B.V. v. Central Bank of
Nigeria, 461 U.S. 480, 489 & n.14 (1983); see also Transatlantic Shiffahrtskontor GMBH v.
Shanghai Foreign Trade Corp., 204 F.3d 384 (2d Cir. 2000) (applying FSIA sovereign immunity
analysis in the context of a proceeding to enforce a foreign judgment).
The parties do not dispute that Defendants are foreign sovereigns that are entitled
to the presumption of sovereign immunity under the FSIA. SI Group argues that three statutory
exceptions to sovereign immunity apply in this case: waiver, 28 U.S.C. § 1605(a)(1);
commercial activity, id. at § 1605(a)(2); and expropriation, id. at § 1605(a)(3). As explained
below, the Court concludes that none of these exceptions applies. The Court, accordingly, lacks
both subject-matter jurisdiction of Plaintiff’s claims and personal jurisdiction over the
Defendants.

Waiver
The FSIA provides that a foreign state is not immune from suit if “the foreign
state has waived its immunity either explicitly or by implication.” 28 U.S.C.S. § 1605(a)(1)
(LexisNexis 2014). Plaintiffs do not argue that Defendants have made an explicit waiver of
immunity here, but instead assert that Defendants have waived their sovereign immunity
implicitly in two ways: first, by consenting broadly to resolve disputes “in court”; and second, by
consenting to arbitration before the International Centre for Settlement of Investment Disputes
(“ICSID”).
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The Second Circuit has concluded, in light of both the text and legislative history
of Section 1605(a)(1), that “Congress primarily expected courts to hold a foreign state to an
implied waiver of sovereign immunity by the state’s actions in relation to the conduct of
litigation.” Smith v. Socialist People’s Libyan Arab Jamahiriya, 101 F.3d 239, 244 (2d Cir.
1996). Such a “waiver would not be found absent a conscious decision to take part in the
litigation and a failure to raise sovereign immunity despite the opportunity to do so.” Drexel
Burnham Lambert Grp. Inc. v. Cmte. of Receivers for Galadari, 12 F.3d 317, 327 (2d Cir. 1993).
Defendants have taken no action in connection with this litigation, either here or in Ukrainian
courts, that can be deemed failure to raise the defense of sovereign immunity to suit in United
States courts. See Shapiro v. Republic of Bolivia, 930 F.2d 1013, 1017 (2d Cir. 1991) (holding
that “the implied waiver provision of Section 1605(a)(1) must be construed narrowly,” and that
any waiver must therefore be “unmistakable” and “unambiguous”).
Defendants’ consent to resolve suits “in court under the laws of Ukraine” does not
evidence an implied intent by Defendants to waive their sovereign immunity from suit in United
States courts. While Plaintiffs correctly note that the contractual language refers generically to
resolution of disputes “in court” without a modification limiting what ‘courts’ could resolve
those disputes, and a waiver of sovereign immunity need not contain an explicit reference to the
United States to be effective under Section 1605(a)(1), there still must be evidence of “an intent
to waive sovereign immunity in United States courts.” Capital Ventures Int’l v. Argentina, 552
F.3d 289, 295 (2d Cir. 2009) (emphasis added). There is no such evidence here. The cited
contractual language, which neither references the United States nor broadly waives immunity to
suit in “any” or “all” courts (as was the case in Capital Ventures), contains no language from
which the Court could infer an unambiguous intent to waive sovereign immunity in the United
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States. Rather, the contract contains an explicit limitation that appears to exclude the United
States court system, in that it specifically requires that “[a]ll disputes meant to be settled in court
shall be settled at the location of the Client” – i.e., in the Ukraine. (Docket entry no. 33, Ex. 46,
Art. 11.11 (ECF page 81) (emphasis supplied).)
Nor does the fact that Defendants participated in the litigation of the underlying
dispute in Ukrainian courts evidence an intent to waive sovereign immunity in United States
courts. Plaintiffs rely on First City, Texas Houston, N.A. v. Rafidian Bank, 281 F.3d 48 (2d Cir.
2002), for the proposition that a waiver of sovereign immunity during principal litigation carries
over into litigation to enforce a monetary judgment. Id. at 54. In Rafidian Bank, however, the
Second Circuit was concerned with the effect of a prior waiver for purposes of litigation in
United States courts, not litigation in the courts of a foreign country. Id. (“We think that where
subject matter jurisdiction under the FSIA exists to decide a case, jurisdiction continues long
enough to allow proceedings in aid of any money judgment that is rendered in the case.”).
Defendants’ consent to the jurisdiction of Ukrainian courts for litigation does not amount to an
implied waiver of sovereign immunity in United States courts in respect of this collection action.
See Shapiro, 930 F.2d at 1017 (requiring “unambiguous” waiver). This is especially true where,
as here, the contract provisions appear to provide plainly for the exclusive jurisdiction of
Ukrainian courts.
SI Group’s reliance on a bilateral investment treaty (“BIT”) between Ukraine and
Israel, which provides in part for resolution of disputes before ICSID, is equally unavailing as
evidence of waiver. The Second Circuit has held that sovereign immunity is waived in cases
involving enforcement of ICSID awards. Blue Ridge Investments L.L.C. v. Republic of
Argentina, 735 F.3d 72, 84 (2d Cir. 2013). No such award is at issue in this case. Blue Ridge
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cannot be read to support the proposition that the waiver of sovereign immunity that may be
implied by a defendant’s consent to enforcement of ICSID awards is a waiver of sovereign
immunity in cases against that same defendant that do not involve ICSID awards. See id.
(holding that the waiver exception “must be construed narrowly”).
Accordingly, the Section 1605(a)(1) waiver exception to sovereign immunity
does not apply in this case.

Commercial Activity
The FSIA also provides that a foreign state is not immune from suit if the claims
at issue are 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.S. § 1605(a)(2) (LexisNexis 2014). This is one of three ‘commercial
activity’ exceptions to sovereign immunity codified in Section 1605(a)(2).
Plaintiff has not alleged facts demonstrating that the acts that form the basis of
Plaintiff’s claim caused a direct effect in the United States. The dispute involves a contract
between an Israeli company and a Ukrainian state entity to perform work in the Ukraine, and a
judgment rendered by the Ukrainian courts. The Second Circuit has held that “an action to
enforce . . . foreign judgments in U.S. courts must fail for lack of subject matter jurisdiction”
where “the acts upon which the . . . judgments are themselves grounded do not meet the ‘based
upon’ requirement of Section 1605(a)(2) of the FSIA.” Transatlantic Shiffahrtskontor GmbH,
204 F.3d at 391. SI Group identifies no effect in the United States other than the non-payment of
the foreign judgment in question, and the “particular conduct” that forms the “gravamen” of this
suit – non-payment by the Ukrainian government of money owed under a contract with an Israeli
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company for waste disposal in Ukraine – has no connection with the United States, and therefore
cannot satisfy the requirements of Section 1605(a)(2). See OBB Personenverkehr AG v. Sachs,
136 S.Ct. 390, 395-96 (2015).
SI Group’s fallback argument – invoking the commercial activity exception for
actions “based upon a commercial activity carried on in the United States by the foreign state” –
is equally unavailing. SI Group characterizes Ukraine’s financial holdings as available for
application to commercial activities worldwide, including in the United States. (Docket entry
no. 34, Memorandum of Law in Opposition, at p. 25.) Such availability does not, however,
demonstrate any factual basis for a conclusion that this action to enforce a judgment rendered in
Ukraine is “based upon” Ukrainian commercial activity in the United States.
SI Group has, alternatively, requested permission to conduct limited discovery in
the hope of uncovering a direct effect or commercial activity in the United States. (Id. at p. 25.)
Jurisdictional discovery is only permitted in the context of an invocation of sovereign immunity
“to verify allegations of specific facts crucial to an immunity determination,” not to uncover
those facts in the first instance. Rafidian Bank, 150 F.3d at 176. Plaintiff has made no showing
that it seeks to “substantiate” specific claims that would demonstrate an exception to
Defendants’ sovereign immunity. Id. To the contrary, Plaintiff clearly states that such discovery
would be necessary before Plaintiff could make any “further allegations” as to Defendants’
conduct (see docket entry no. 34, Memorandum of Law in Opposition, at p. 11 & 25). Plaintiff’s
request for jurisdictional discovery is therefore denied.

Expropriation
Finally, the FSIA provides an exception to foreign sovereign immunity for a case
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“in which rights in property taken in violation of international law are in issue and . . . that
property or any property exchanged for such property is owned or operated by an agency or
instrumentality of the foreign state and that agency or instrumentality is engaged in a
commercial activity in the United States.” 28 U.S.C.S. § 1605(a)(3) (LexisNexis 2014). This is
colloquially known as the ‘expropriation’ exception to sovereign immunity.
SI Group argues that its right to payment of the foreign judgment is an intangible
right that was taken by Defendants in violation of international law. Even assuming, arguendo,
that the intangible right to payment is “property” within the meaning of the expropriation
exception in the FSIA, SI Group has made no showing that its right to payment was ‘taken’ by
Defendants. In the context of this provision of the FSIA, the Second Circuit has held that ‘taken’
means “acts of a sovereign . . . that deprive a plaintiff of property without adequate
compensation.” Zappia Middle East Const. Co. Ltd. v. Emirate of Abu Dhabi, 215 F.3d 247,
251 (2d Cir. 2000). SI Group cannot demonstrate that its right to payment of the Ukrainian
judgment has been ‘taken’ by the Ukraine because the premise of SI Group’s Complaint in this
matter is that it continues to hold that right. Mere failure to pay is not a “taking” – if it were, the
Section 1605(a)(3) exception would apply in every case seeking enforcement of a judgment,
because the logical predicate to such cases is that the judgment in question is unpaid. This is a
plainly untenable result.
The arbitral awards SI Group cites in an attempt to establish its theory that nonpayment of a judgment can constitute expropriation are inapposite, as they involve cases in
which the foreign sovereign nullified or otherwise prevented collection of a valid judgment,
effectively confiscating the right to payment. See, e.g., Saipem S.p.A. v. People’s Republic of
Bangladesh, ICSID Case No. ARB/05/7, Decision on Jurisdiction and Recommendation on
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Provisional Measures, ¶¶ 130-131 (Mar. 21, 2007). SI Group alleges no such conduct here.
Accordingly, because SI Group has failed to plead facts evidencing a taking of its
property in violation of international law within the meaning of the FSIA, the Section 1605(a)(3)
exception does not apply.

CONCLUSION
For the foregoing reasons, no statutory exception to Defendants’ sovereign
immunity is applicable, and the Court accordingly lacks subject matter and personal jurisdiction
in this case. Defendants’ motions to dismiss the Complaint is therefore granted, pursuant to
Federal Rules of Civil Procedure 12(b)(1) and 12(b)(2).
This Memorandum Opinion and Order resolves docket entry no. 28. The Clerk of
Court is respectfully requested to enter judgment dismissing the Complaint for lack of
jurisdiction, and close this case.
SO ORDERED.
Dated: New York, New York
January 30, 2017
/s/ Laura Taylor Swain
LAURA TAYLOR SWAIN
United States District Judge

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