Fifth Circuit reverses turnover order issued against Republic of Congo holding that Congo did not implicitly waive FSIA immunity and did not fall under "commercial activity" exception
In 1984, Af-Cap Inc.'s [Plaintiff's] predecessor-in-interest, Equator Bank, granted a construction loan to the Republic of Congo [Defendant] on which Defendant later defaulted. In 2000, an assignee of Equator Bank, Connecticut Bank of Commerce (CBC), obtained a money judgment in New York state court against Defendant for $13,628,340. To satisfy this judgment the court permitted attachment and execution against the Defendant's assets.
In 2001, CBC registered their New York judgment in a Texas state court followed up by a garnishment action against Defendant's debtors. The Texas court issued writs of garnishment against royalty obligation and taxes which CMS Nomeco Congo, Inc., The Nuevo Congo Company, and Nuevo Congo Ltd. (CMS Companies) owed the Defendant. The CMS Companies held interests in oil production in Defendant's waters and paid royalties for oil taken. The agreement governing the oil production provided for royalty payments in cash or "in kind" that is, in oil. [Defendant ] has opted to receive 100% of its payments in kind.
The Defendant removed the action to a federal court in Texas; in an order dated March 16, 2001, the court "held that the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. Section 1602 (2000), prohibited garnishment of the in-kind royalties and tax obligations." [Slip op. 14]. On appeal, the U.S. Court of Appeals for the Fifth Circuit vacated the decision. It ruled that the Defendant may fall within an exception to FSIA by engaging in "commercial activity" in the United States.
On remand, the district court dissolved the writs of garnishment, and found that the Defendant did not engage in commercial activity in the United States. The Fifth Circuit again vacated the decision, holding that the Defendant's use of the obligations received from the CMS Companies to settle a lawsuit in the United States, amounted to "commercial activity."
On remand the court decided that "the non-monetary obligations owed by the CMS Companies were not proper subjects of garnishment under Texas law." [Slip op. 16]. Instead, the district court applied a Texas "turnover" law, providing for an alternative type of attachment.
The turnover order of February 2005, purported to: "(1) take "possession and control of all future royalty obligations owed to the [Defendant]; (2) "order[ed] the [Defendant] to turn over such royalty payments into the registry of the Court,' and (3) order[ed] the [Defendant] "to execute in three originals within three days the attached letter of instructionfrom the [Defendant] to the parties who pay royalties to the [Defendant]." [Slip op. 16].
In response, the Defendant's Ministry of Foreign Affairs wrote to the court stating their intent to disobey the order, believing it violated the Defendant's sovereignty. Disagreeing, the district court found the Defendant in contempt for failure to comply. The parties timely appealed (1) the order dissolving the writs of garnishment, (2) the turnover order, and (3) the contempt order. The Circuit Court consolidated the three appeals for oral argument and for disposition, and vacates the orders below.
First, the Fifth Circuit examines the dissolution of the writs of garnishment. It decides that Texas Rule of Civil Procedure 668 does not allow garnishment of non-monetary obligations and that Texas case law requires strict construction of Texas garnishment statutes.
Next the court discussed the turnover order. Since the district court did not have in personam jurisdiction over the [Defendant] under FSIA, which ""provides the sole basis for obtaining in personam jurisdiction over a foreign state'," the turnover order is invalid. [Slip op. 38]. In personam jurisdiction under FSIA over a foreign state can exist only where the state has waived its immunity, explicitly or implicitly, Section 1605(a)(1), or where that foreign state engaged in commercial activity in the United States, Section 1605(a)(2).
The Court then disposes of the Section 1605(a)(2) commercial activity argument. It rules that the [Defendant's] only commercial activities related to the CMS Companies; without writs of attachment, however, the CMS Companies' location in the United States becomes irrelevant and the commercial activities exception does not apply.
The Court then addresses Section 1605(a)(1) on waiver. The Court finds that the loan agreement does not explicitly waive immunity to suit in Texas. To find whether the Congo implicitly waived immunity the Court applies Rodriguez v. Transnave Inc., 8 F.3d 284, 287 (5th Cir. 1993). It "identified three circumstances in which a waiver is ordinarily implied: "(1) a foreign state agrees to arbitration in another country; (2) the foreign state agrees that a contract is governed by the laws of a particular country; (3) the state files a responsive pleading without raising the immunity defenses.'" [Slip op. 40].
None of the above circumstances exist in the instant case. The Defendant never entered into an arbitration agreement, the loan agreement states that English law governs it, and Af-Con has consistently raised an immunity defense in its pleadings.
Since the commercial activity exception under Section 1605(a)(2) does not apply and since the Congo never waived immunity under Section 1605(a)(1), the district court did not have the requisite in personam jurisdiction to enter a turnover order.
The Fifth Circuit also refuses to apply the "Fugitive Disentitlement Doctrine" to dismiss the appeal on grounds that the Defendant disrespected the United States legal process by refusing to obey the district court's orders. The [Defendant] did not show disrespect for the court order but raised sovereignty concerns and "correctly believed that under the FSIA the district court lacked in personam jurisdiction." [Slip op. 44]. Furthermore, [Plaintiff] points to no precedent in which an American court has applied the doctrine against a foreign state.
Finally, the Fifth Circuit finds that FSIA bars contempt orders: "The legislative history surrounding the FSIA specifically discusses contempt orders and states that they "may be unenforceable if immunity exists.'" [Slip op. 53]. In issuing the contempt order, the district court abused its discretion, requiring the Circuit court to vacate the order.
Citation: Af-Cap, Inc. v. Republic of Congo, 2006 WL 2424778 (5th Cir. 2006).
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