Court of Appeals Finds Indirect Ownership and Activities of Related National Entities do not Satisfy “Commercial Activity” Exception to FSIA

The World in U.S. Courts: Winter 2016 - Alien Tort Statute (ATS)/Political Question Doctrine/Foreign Sovereign Immunity Act (FSIA)/ Act of State Doctrine | October.26.2016

Janvey v. Libyan Investment Authority, U.S. Court of Appeals for the Fifth Circuit, October 26, 2016

Ralph Janvey, the court-appointed receiver for the assets remaining in a US-based Ponzi scheme, brought claims against the Libyan Investment Authority (LIA) and the Libyan Foreign Investment Company (LFICO) to recover proceeds of certificates of deposit they received as early investors in the scheme.  These defendants moved to dismiss the suit, arguing that the FSIA prevented the district court from exercising jurisdiction over them.  LFICO’s only shareholder is LIA, and LIA’s only shareholder is Libya.  Janvey opposed the dismissal on the ground that the “commercial activity” exception to FSIA immunity applied.

The FSIA provides “the sole basis for obtaining jurisdiction over a foreign state” in federal and State courts.  It provides both the underlying immunity, which applies to any “foreign state,” and the only exceptions thereto.  Where an exception applies, the FSIA specifies the only basis for personal and subject matter jurisdiction.  A defendant has the initial burden of showing the applicability of the FSIA; the burden then shifts to the plaintiff to prove that the claim falls within one of the enumerated exceptions.

The Court of Appeals observed that the FSIA only applies to “foreign states” and their “agencies or instrumentalities,” and explained that an “agency or instrumentality” of a foreign state is any separate entity, “corporate or otherwise,” that is either (i) majority owned by a foreign state, or (ii) an “organ” of a foreign state.  Notably, as to the first prong, ownership, not control, is the relevant inquiry.  LIA, which is majority owned by Libya, is thus an agency or instrumentality of that country for purposes of the FSIA.  LFICO, which is owned by LIA, is not, as only direct ownership by a foreign state satisfies the statutory requirement.  But LFICO would still be within the scope of the FSIA if it were an “organ” of Libya, and the Court of Appeals said that term does not have a bright-line definition.  Rather, it requires consideration of several factors: “(1) whether the foreign state created the entity for a national purpose; (2) whether the foreign state actively supervises the entity; (3) whether the foreign state requires the hiring of public employees and pays their salaries; (4) whether the entity holds exclusive rights to some right in the [foreign] country; and (5) how the entity is treated under foreign state law.”  Like corporate subsidiaries, duly created agencies or instrumentalities of a foreign state are presumed to have independent status and not be “organs” of the state.  To overcome that presumption, Janvey had to prove that the entities were “alter egos” of one another.  However, because both parties had (incorrectly) agreed that LFICO was a foreign state under FSIA due to its ownership, neither party developed a record on whether it was an “organ” of Libya.  The Court of Appeals therefore sent the case back to the District Court for further findings on that issue.

The Court of Appeals then turned to the “commercial activity” exception to FSIA, which applies “in any case in which the action is based upon a commercial activity that has a jurisdictional nexus with the United States.”  In order to satisfy that jurisdictional nexus, the Court of Appeals observed that one of the following conditions must be present: (i) “a commercial activity carried on in the United States by the foreign state”; (ii) “an act performed in the United States in connection with a commercial activity of the foreign state elsewhere”; or (iii) “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.”

The Court of Appeals found that none of the three clauses of the commercial activity exception applied to LFICO (which the Fifth Circuit assumed for purposes of the discussion was a foreign state).  It found that LFICO acted only pursuant to its obligations under the CDs, which were agreements between LFICO and a private bank that did not require any action to be taken within the US and did not have a direct effect in the US.

Finally, the Court of Appeals held that LIA, which took no specific actions related to the scheme, was not an agent or “alter ego” of LFICO, as to which jurisdiction might exist.  Determining whether one entity is the agent of another depends upon "whether the [parent] exercises day-to-day control over the [subsidiary].”  Meanwhile, in order to establish one entity as the “alter ego” of another, a party must show that “(1) the [parent] exercised complete control over the [subsidiary] with respect to the [acts] at issue and (2) such control was used to commit a fraud or wrong that injured the party seeking to pierce the [corporate] veil.”  The Court of Appeals found no evidence that LIA exercised any significant control over LFICO, and therefore preserved the separate status of LIA and LFICO and found the commercial activity exception inapplicable to LIA.

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