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International Housing Limited v. Rafidain Bank Iraq

decided: December 22, 1989.

INTERNATIONAL HOUSING LIMITED, PLAINTIFF-APPELLANT-CROSS-APPELLEE,
v.
RAFIDAIN BANK IRAQ, DEFENDANT-APPELLEE-CROSS-APPELLANT



Plaintiff appeals from the decision of the United States District Court for the Southern District of New York (Robert J. Ward, District Judge) finding subject matter jurisdiction under the Foreign Sovereign Immunities Act but dismissing the action for lack of personal jurisdiction. Defendant cross-appeals, arguing that the district court lacked subject matter jurisdiction. We conclude that the district court did not have subject matter jurisdiction because defendant's activities did not cause a "direct effect in the United States." We reverse on the cross-appeal and dismiss the appeal as moot. Judge Kaufman dissents in a separate opinion.

Kaufman, Meskill and Winter, Circuit Judges. Kaufman, Circuit Judge (dissenting).

Author: Winter

WINTER, Circuit Judge:

Plaintiff-appellant International Housing Limited ("IHL") commenced this action to enforce a default judgment entered against defendant-appellee Rafidain Bank Iraq ("Rafidain") in the Commonwealth of the Bahamas. IHL is a corporation organized in the Cayman Islands and has its principal place of business in Nassau, the Bahamas. Rafidain is a banking corporation wholly owned by the government of Iraq. Rafidain does not maintain a branch or office of any sort in the United States, has no employees or real property in the United States, does not advertise in the United States, and is not licensed to do business in the United States. Rafidain does, however, maintain a "correspondent" bank account with the Irving Trust Company in New York City. This account is similar to a personal checking account used for deposits, payments and transfers of funds.

IHL appeals from Judge Ward's decision dismissing this action for lack of personal jurisdiction. See International Housing, Ltd. v. Rafidain Bank Iraq, 712 F. Supp. 1112 (S.D.N.Y. 1989). Defendant Rafidain cross-appeals from the portion of the decision concluding that the district court had subject matter jurisdiction under the commercial activity exception in the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. § 1605(a)(2). We agree with Rafidain that the district court lacked subject matter jurisdiction and reverse on the cross-appeal. The appeal is dismissed as moot.

BACKGROUND

In 1975, IHL, through its wholly-owned subsidiary International Housing (Bahamas) Ltd., contracted with the Governorate of Diyala Province, Iraq, a division of the Iraqi government, to construct 740 housing units in Iraq. The contract fixed a price in Iraqi dinars that exceeded $5 million. The IHL officer who signed the contract was a United States citizen who worked in an IHL office in Connecticut, and IHL apparently used some American-made materials and American personnel on the project. However, the contract between IHL and the Governorate did not provide for payment or any other activity in the United States.

For this contract, the Iraqi Governorate used Rafidain as its commercial bank, while IHL used the Royal Bank of Canada. Rafidain secured an advance payment to IHL and issued a guarantee for IHL's performance. IHL obtained corresponding counter-guarantees from Royal Bank and agreed to indemnify Royal Bank for any payments it might have to make on these counter-guarantees. In addition, during the construction project, Rafidain issued to IHL "overdraft facility" credit -- credit over and above the original guarantee -- and IHL again guaranteed any resulting indebtedness to Rafidain through Royal Bank. In 1976 and 1977, IHL, Rafidain and Royal Bank entered into and issued six overdraft facilities with corresponding guarantees totalling more than $1 million.

IHL claims that in the course of the construction project the Governorate breached numerous material contract terms and that IHL was forced to utilize Rafidain's overdraft credit because of those breaches. According to IHL, the construction was finished in 1978, but the Governorate refused to pay IHL in accordance with the contract. Political upheaval in Iraq and the Iraq-Iran war then intervened, and the Governorate's successor ultimately repudiated any obligation to IHL. Whatever the reasons for IHL's need to borrow money to complete the project, the parties do not dispute that IHL did use the overdraft credit from Rafidain that IHL had guaranteed through Royal Bank of Canada. In 1980, Rafidain requested that Royal Bank honor its guarantees on those overdraft facilities and deposit the funds in Rafidain's correspondent account at Irving Trust Company in New York City.*fn1 Royal Bank did honor the first two of Rafidain's requests and made payments to Rafidain totalling over $200,000, debiting the amounts to IHL's accounts with Royal Bank.

In 1981, IHL brought suit against Rafidain and Royal Bank in the New York Supreme Court seeking, inter alia, to enjoin further payment by Royal Bank on the remaining guarantees. The New York action was dismissed on forum non conveniens grounds, and IHL then sued Royal Bank and Rafidain in the Bahamas alleging that Rafidain's demands upon Royal Bank for payment were fraudulent and untimely under the guarantees. The Bahamian court initially enjoined Royal Bank from making further payments on the overdraft guarantees. That injunction eventually was dissolved because an adequate remedy at law existed, and Royal Bank paid Rafidain on the remaining overdraft guarantees. IHL eventually paid Royal Bank $850,000 in settlement of the bank's demand for indemnification. Rafidain never appeared in the Bahamian action, and IHL obtained a default judgment against Rafidain for $850,000.

In 1987, IHL commenced this action to enforce the Bahamian judgment against Rafidain. Rafidain failed to appear, and the district court entered a default judgment against Rafidain and ordered recovery of the judgment via garnishment of Rafidain's account at Irving Trust. Rafidain then moved to vacate the default judgment on the grounds that the judgment was void because the district court lacked subject matter jurisdiction and personal jurisdiction over Rafidain. The district court found subject matter jurisdiction but concluded that Rafidain did not have sufficient contacts with the United States to support a constitutional exercise of personal jurisdiction. The court vacated the default judgment and dismissed the action for lack of personal jurisdiction. We reverse on the cross-appeal on the ground that subject matter jurisdiction is lacking. IHL's appeal then becomes moot.

Discussion

The FSIA, 28 U.S.C. § 1330 et seq., governs both subject matter and personal jurisdiction over foreign states. The FSIA provides that foreign states are immune from suit in federal courts unless the dispute falls within specified exceptions to immunity. 28 U.S.C. §§ 1604-1607. The parties do not dispute that Rafidain is an "agency or instrumentality of the foreign state" as defined in 28 U.S.C. § 1603 and, as such, is entitled to immunity unless one of the statutory exceptions is applicable. The question presented is whether the instant dispute falls within the "commercial activities" exception to immunity found in 28 U.S.C. § 1605(a)(2).

Section 1605(a)(2) provides that a foreign state shall not be immune from jurisdiction in any case "in which the action is based . . . upon an act outside the territory of the United States in connection with a commercial activity of a foreign state elsewhere and that act causes a direct effect in the United States." Because Rafidain's activities were quintessentially "commercial," see 28 U.S.C. § 1603(d); Texas Trading & Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300, 308-10 (2d Cir. 1981), cert. denied, 454 U.S. 1148, 71 L. Ed. 2d 301, 102 S. Ct. 1012 (1982), and took place outside the United States, the issue with regard to subject matter jurisdiction is whether Rafidain's activities "had a direct effect in the United ...


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