DC Circuit expands class of assets that can be seized by holders of judgments against state sponsors of terrorism


Foreign sovereigns are presumed immune from prosecution in the United States. The Foreign Sovereign Immunities Act (“FSIA”) codifies this immunity and its exceptions, and since 2008 has contained an exception allowing prosecution of certain states for acts of terrorism, including torture, hostage taking, or extrajudicial execution. . This “terrorism exception” can be used to bring cases against states that the Secretary of State designates as “state sponsors of terrorism,” a short list that includes Iran, Syria, Cuba, and North Korea. However, successful plaintiffs often face significant hurdles in enforcing their judgments. State sponsors of terrorism often have few assets in the United States, and the assets they do have are often frozen by sanctions.

Two federal statutes offer plaintiffs some hope of relief: FSIA § 1610(g) and Terrorism Risk Insurance Act (“TRIA”) § 201(a) both provide that assets of a terrorist state that are frozen ( or “blocked”) by US sanctions can be used to satisfy a judgment under the terrorism exception. Plaintiffs often seek to seize assets frozen under these laws, and a common question in these cases is whether the frozen assets (usually bank accounts or transfers) are “from” a terrorist state, that is- that is, whether they are sufficiently connected to the terrorist state to be seizable by a plaintiff.

The United States Court of Appeals for the DC Circuit recently considered this issue and interpreted these laws in an expansive way that could allow for the seizure of more terrorism-related assets than previously thought. In Estate of Levin c. Wells Fargo Bank, N / A, 45 F.4th 416 (DC Cir. 2022), the court ruled that wire transfers that can be “traceable” to terrorist states – using general principles of asset tracing – can be seized by a plaintiff . This decision contrasts with the more restrictive Second Circuit jurisprudence, according to which a plaintiff can only seize the funds if the terrorist entity or its bank directly transferred the funds to the blocked account. The DC Circuit’s decision could provide creative plaintiffs with new options to seize assets to satisfy judgments against terrorist states.

Background

The FSIA’s Terrorism Exception, 28 USC § 1605A, abrogates the sovereign immunity of a foreign state designated as a “state sponsor of terrorism” by the Secretary of State when a plaintiff brings an action against that state for injury bodily injury or death resulting from terrorist acts. Activities. Once a plaintiff obtains a judgment against a foreign state under § 1605A, two statutes allow the plaintiff to seize the assets of the foreign state to satisfy the judgment. First, FSIA § 1610(g) “subject[s] seizure” “the property of a foreigner [terrorist] State . . . and ownership of an agency or instrument of such a state. Second, TRIA § 201(a) “subject[s] for execution or seizure” “the frozen assets of [a] terrorist party (including blocked assets of any agency or instrument of that terrorist party). »

In 2019, an Omani company, Taif Mining Services, tried to buy a tanker from a Liberian company, Crystal Holdings Limited. As part of the transaction, Taif deposited $10 million with his escrow agent in London, and that escrow agent then attempted to transfer the money from Lloyds Bank in London to Crystal’s Swiss bank account. New York-based Wells Fargo served as the intermediary bank. When Wells Fargo received the transfer, however, it immediately froze the money instead of transferring it, acknowledging that Taif Mining was formed by two members of Iran’s Islamic Revolutionary Guard Corps – a sanctioned entity – in an attempt seeming to buy the tanker. on behalf of Iran.

Two groups of plaintiffs said the frozen funds offered an opportunity to satisfy FSIA § 1605A judgments against Iran. One group had won nearly $1 billion in judgments against Iran in connection with the 1998 al-Qaeda bombing of US embassies in Kenya and Tanzania. The other set of plaintiffs had won $30 million in judgments for the 1984 kidnapping and torture of Jeremy Levin by Hezbollah, an Iranian-backed organization. Both sets of plaintiffs filed suit to seize the frozen funds under FSIA § 1610(g) and TRIA § 201(a). The United States stepped in and decided to reverse the seizure, hoping to preserve the frozen funds for disbursement through a federal program, the United States Victims of State Sponsored Terrorism Fund.

The parties disagreed on whether the frozen funds belonged to Iran. The disagreement centered on the wording of FSIA § 1610(g) and TRIA § 201(a), both of which allow seizure of property “of” a foreign state. This wording requires the terrorist state to have ownership of the frozen funds, but does not provide guidance on how to assess ownership in a multi-step wire transfer.

The District Court held that the matter was controlled by the DC Circuit’s decision in Heiser c. Islamic Republic of Iran, 735 F.3d 934, 936 (DC Cir. 2013). There, the DC Circuit ruled that UCC Section 4A – which deals with ownership interests in the context of an interrupted wire transfer – should provide the decision rule for determining whether a terrorist state owns the frozen transfer. . Under UCC Section 4A-402, the only party with a proprietary interest in an uncompleted Intermediate Electronic Transfer is the party immediately upstream of the bank holding the frozen funds. The district court thus quashed the plaintiffs’ seizure of the frozen funds, ruling that only the party immediately upstream of Wells Fargo, Lloyds Bank, had title to the funds. In other words, because the funds belonged only to Lloyds, they did not belong to Iran and could not be seized by the plaintiffs. The District Court’s application of UCC Section 4A as a ruling rule in this circumstance mirrored a similar rule adopted by the Second Circuit.

The decision of the DC circuit

The DC circuit reversed in an opinion written by Judge Randolph.

The court focused on whether the frozen transfers belonged to Iran, but dismissed HeiserUCC’s application to this issue. Rather, the court distinguished Heiserpointing out that the sanctioned entity in this case was the Beneficiarynot the author (as in this case), from the frozen transfer. The incorporation of Article 4A of the UCC was appropriate when the initiator of the transfer is not a sanctioned entity. But when the funds involved arise from with the sanctioned entity, the court wrote, it is inappropriate to incorporate UCC Section 4A, which is inconsistent with the objective of blocking terrorist assets: the point of Section 4A is to sort out uncompleted fund transfers and return the funds to the initiator. As the court observed, this is prohibited when the initiator is a sanctioned entity. This rejection of UCC Section 4A as a ruling rule has created a split with the Second Circuit, which applies Section 4A even when a terrorist initiates an electronic funds transfer.

Having ruled that UCC Section 4A does not apply where the originator of a transfer is a sanctioned entity, the DC Circuit has sought to clarify which rule applies in this circumstance. In a single short paragraph, the court recalled the tracing rules used by federal courts in cases involving, for example, fraud and bankruptcy. The court did not explain how tracing principles should be applied to determine whether a transfer is owned by a terrorist owner, other than to note that in this case the frozen funds were traceable back to Taif. , as well as “blocked assets of a terrorist owner”. terrorist party” under TRIA § 201(a). The clear conclusion, however, is that unlike the Second Circuit, a claimant can seize frozen assets from a terrorist state that have been transferred multiple times before being frozen.

Judge Pillard subscribed to a separate opinion. She noted that the principles of traceability do not provide a method to determine ownership. Instead, they are used to trace funds that belong to an original owner. Accordingly, the tracing “does not identify any legal rules for establishing ownership” and “does not specify any ruling rules to supersede UCC Section 4A in providing the proof of ownership required by law.” Justice Pillard therefore suggested that in addition to search, courts should apply common law principles of ownership and agency to reduce uncertainty for innocent subsequent assignees.

Conclusion

The court’s decision expands the pool of potential assets that may be available to satisfy a judgment under TRIA § 201(a). Although the CC Circuit’s prior use of UCC Article 4A in Heiser would prohibit the seizure of frozen funds unless they were transferred directly from a sanctioned entity, the new rule allows creditors to seize any funds “traceable” to the sanctioned entity. The court did not impose a limit on this tracing, citing the possibility that plaintiffs could search for assets far from a terrorist state to seize. Judge Pillard’s agreement suggested principles to limit this broad reference to tracing, but it remains to be seen whether they will be adopted in a majority opinion.

The move also creates a split with the Second Circuit, which applies UCC Section 4A to wire transfers from sanctioned entities. This split means that claimants seeking to enter frozen transfers of a sanctioned entity will fare much better in the DC Circuit and may increasingly be able to bring their seizure actions there to profit from this split, at least until it is resolved, whether by review in bench or by the Supreme Court.

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