Theodore W. Kassinger
On January 28, 2008, the President signed into law the National Defense Authorization Act of 2008 (the "NDAA"), creating potentially serious issues for companies investing in or doing business with Libya (or other countries that were or are on the State Department's list of state sponsors of terrorism[1]). By making it significantly easier for plaintiffs to attach assets held by instrumentalities of the Libyan government, the Act exposes payments and assets of U.S. companies doing business with those instrumentalities to possible attachment in connection with lawsuits seeking damages from Libya.
Prior to enactment of the NDAA, the Foreign Sovereign Immunities Act (the "FSIA") drew a sharp distinction between assets held by instrumentalities of foreign sovereigns and assets held by the sovereign itself. Assets held by a sovereign were subject to attachment to help satisfy a judgment against the sovereign if they were "used for a commercial activity in the United States" and certain other conditions were met.[2] In contrast, assets held by an
instrumentality of a sovereign that was not itself a party to the judgment were subject to attachment to satisfy a judgment against the sovereign
only if the instrumentality was "so extensively controlled by [the sovereign] that a relationship of principal and agent [was] created," or if applying the presumption of separate status "would work fraud or injustice or defeat overriding public policies."[3]
Section 1083 of the NDAA eviscerates this distinction. It permits plaintiffs to seek to attach assets of foreign instrumentalities to help satisfy judgments against the sovereign itself even if the instrumentalities are "separate juridical entities," and regardless of the "level of economic control over the property by the government of the foreign state." The NDAA also exposes certain sovereign instrumentalities' property to pre-judgment liens upon the filing of a notice of a pending action. Thus, for U.S. companies doing business with or investing in instrumentalities of Libya or current terrorism-list countries, the fact that these instrumentalities are operated as independent entities will no longer protect from attachment payment streams traveling between U.S. investors and these instrumentalities. Foreign assets being delivered to U.S. investors from these instrumentalities are likewise at risk. (Investments related to Iraq, however, will not be subject to Section 1083: in response to President Bush's veto, Congress authorized the President to waive the application of Section 1083 to Iraq, and he has exercised that waiver.)
To be sure, the NDAA preserves courts' discretion to prevent "appropriately the impairment" of interests held by third parties not involved in the underlying conduct giving rise to a judgment against a foreign sovereign. However, this section provides incomplete protection to companies investing abroad. It is wholly discretionary and thus does not guarantee any particular level of protection to third-party assets. The governing standard—"appropriate[ness]"—provides little guidance to courts in exercising their discretion. And the judgments of district courts exercising such discretion would likely be subject to review only under a highly deferential abuse-of-discretion standard.
Over the past 15 years, victims of state-sponsored terrorism—such as the families of those who died in the bombing of Pan Am flight 103 over Lockerbie, Scotland—have obtained billions of dollars in judgments (often default judgments) against the governments of Libya, Iran, Cuba, and other countries that are or were (in the cases of Libya and Iraq) on the State Department's list of state sponsors of terrorism. In enacting Section 1083 over the Administration's objections, Congress responded to plaintiffs' complaints that sovereign-held assets were insufficient to satisfy these judgments, and that such assets were protected by blocking orders issued to enforce economic sanctions. The NDAA opens the door for these plaintiffs to pursue assets of commercial instrumentalities owned or controlled by the defendant governments without regard to those instrumentalities' responsibility for the underlying terrorist acts, or, subject to a court's discretion, the rights of third parties. Indeed, plaintiffs' counsel have made clear their intention to seek to attach third-party payments destined for foreign sovereign instrumentalities, diverting those payments to satisfy their judgments.
Subsequent to President Bush's termination of sanctions against Libya in 2004 and the State Department's removal of Libya from the terrorism list in 2006, trade and investment with Libya has grown rapidly. And despite continuing economic sanctions that limit commercial relations with the current terrorism-list countries, U.S. companies have continued to engage in a limited amount of lawful commerce (such as exportation of humanitarian goods) with those countries. Foreign companies, which generally face far fewer sanctions-related limitations than their U.S. counterparts, have also continued to trade with and invest in these states. With the passage of the NDAA, both U.S. and foreign companies doing business with Libya should be alert that claimants holding judgments against Libya may attempt to attach any assets in the United States held by Libya's wholly-owned or majority-owned instrumentalities, including payment streams entering, emanating from, or passing through U.S. territory. The same threat applies to business with countries, such as Syria, that remain on the State Department's list of state sponsors of terrorism.
O'Melveny & Myers LLP counsels clients on the FSIA, the NDAA, economic sanctions regulations, and their implications for cross-border trade and investments. Should you have any questions, please contact Ted Kassinger at (202) 383-5170 or tkassinger@omm.com or Karl Thompson at (202) 383-5260 or kthompson@omm.com.
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Footnotes:
1. The countries currently on the list are Cuba, Iran, North Korea, Sudan, and Syria.
2. 28 U.S.C. § 1610.
3.
Alejandre v. Telefonica Larga Distancia de P.R., Inc., 183 F.3d 1277, 1284 (11th Cir. 1999); see also
First National City Bank v. Banco Para el Comercio Exterior de Cuba, 462 U.S. 611 (1983).
This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Ted Kassinger, an O'Melveny partner licensed to practice law in the District of Columbia and Georgia, and Karl Thompson, an O'Melveny counsel licensed to practice law in the District of Columbia and New York, have contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.
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