The World in U.S. Courts: Spring 2017 - Alien Tort Statute (ATS)/Torture Victims Protection Act (TVPA)/Political Question Doctrine/Foreign Sovereign Immunity Act (FSIA)/ Act of State Doctrine | March.20.2017
Among other claims, the plaintiffs in this action alleged that defendants including the State Bank of India (SBI) and its New York branch (SBI-NY) defrauded them pursuant to a scheme that violated the RICO statute. In the course of entering summary judgment for the defendants, the District Court in New York agreed with SBI and SBI-NY that they were immune from suit under the FSIA.
The Court observed that the FSIA imposes on a defendant the initial burden of showing that it is subject to the FSIA, at which time the burden falls on the plaintiff to establish that suit is proper under one of the FSIA exceptions. The Court found no dispute that the first part of this test was satisfied. The FSIA applies to a “foreign state,” which the statute defines as including “a political subdivision of a foreign state or an agency or instrumentality of a foreign state.” An “agency or instrumentality of a foreign state” includes “an organ of a foreign state or political subdivision thereof.” Uncontested record evidence established that SBI was created by an act of the Indian Parliament to provide “a state-controlled and state-sponsored organ for a banking system,” and that since its inception a majority stake in SBI has been owned and controlled directly by the Indian Government.
The plaintiffs argued that their suit could nonetheless proceed under two provisions of the FSIA’s “commercial exception.” First, they argued that their claim satisfied the exception because it was “based upon” “commercial activities conducted by SBI in the US”—namely, a number of wire transfers sent by SBI in India through its New York branch to accounts in the US. The Court disagreed, noting that for a claim to be “based upon” alleged US conduct the proper focus is “the overall question where a lawsuit’s foundation is geographically based.” The present claims were founded on allegations that the plaintiffs were fraudulently induced to enter into a stock purchase agreement and to extend a loan that was never repaid. The Court found the actual wire transfers to the US to be “at most related to” the plaintiffs’ claim, and thus not actions on which the claim was “based.” Further, the Court found that SBI’s New York branch acted in the US only as a correspondent bank, and participated in only 12 of the 180 alleged fraudulent transfers.
Second, the plaintiffs argued that their claims satisfied the FSIA exception for commercial acts taken by non-US states outside the US that had a “direct effect” in this country. The Court again disagreed, noting that an effect “is direct if it follows as an immediate consequence of the defendant’s activity.” It found this test could not be satisfied because the plaintiffs were not US entities, and that the mere transfer of funds through a New York bank was not a “US effect” as a matter of law.
Finally, the Court concluded that SBI had not waived its sovereign immunity as a consequence of its having been required, in connection with operating its New York branch, to agree to be bound by a provision of the New York banking code that expressly permits any claim to be brought by a New York resident against a “foreign banking corporation.” The Court observed that waivers of sovereign immunity “must be construed narrowly,” meaning that they must be “clear and unambiguous” and “explicit.” The Court found that SBI’s general agreement to be bound by the New York Banking Code failed to satisfy this requirement.