Plaintiff's financial loss considered sufficient nexus for commercial activity exception of the Foreign Sovereign Immunities Act.

AuthorEckstein, Laura

Universal Trading & Inv. Co. v. Bureau for Representing Ukrainian Interests in Int'l & Foreign Courts, 727 F.3d 10 (1st Cir. 2013).

The Foreign Sovereign Immunities Act (FSIA), which precludes the United States from obtaining jurisdiction over a foreign state, dictates that a foreign state participating in certain commercial activity in connection with the United States is an exception to their presumed immunity. (1) When determining whether or not the commercial activity exception applies to a foreign state's immunity, a court will consider the nature of the conduct the action is based upon without taking into consideration the purpose of the activity. (2) If the commercial activity exception is applicable, a nexus must be established between the foreign state's activity and the United States in order to assert jurisdiction. (3) In Universal Trading & Investment Co. v. Bureau for Representing Ukrainian Interests in International & Foreign Courts, (4) the United States Court of Appeals for the First Circuit considered whether a foreign state sued for breach of contract by a private asset recovery company can claim sovereign immunity under the commercial activity exception of the FSIA. (5) The court found a unilateral contract existed and because of the company's full performance of asset recovery services, a sufficient nexus was present and therefore the commercial activity exception did apply, allowing the United States jurisdiction over the foreign state. (6)

In 1998 the Ukrainian Prosecutor General's Office (UPGO) expressed interest in contracting with Universal Trading & Investment Co. (UTICo) to recover assets expatriated from Ukraine because of the misconduct of United Energy Systems of Ukraine (UESU), Pavlo Lazarenko (Lazarenko), Petro Kiritchenko (Kiritchenko), and United Energy International, Ltd. (UEI). (7) Through Lazarenko, UESU had been awarded a government contract to handle the importation, distribution, and delivery of natural gas in Ukraine, and the proceeds for resale of natural gas collected by UESU, totaling over USD2 billion, were converted through UESU's parent company accounts and then hidden in UESU's principals' secret accounts. (8) After UTICo's representatives discussed the terms of UTICo's services with the Ukrainian Deputy Prosecutor, Nikolai Obikhod, UTICo and UPGO reached their first agreement on May 15, 1998 (May Agreement), in which provided UTICo would receive a 12% commission on all assets returned to Ukraine. (9) On October 2, 1998, the new Prosecutor General, Mikhailo Potebenko, confirmed the terms of the May Agreement (October Agreement). (10) Additionally, UPGO granted UTICo and its staff powers of attorney to investigate and bring legal actions in order to reveal and secure the freezing of assets on UPGO's behalf outside of Ukraine, which UTICo used to accomplish its asset recovery work by freezing hundreds of millions of U.S. dollars for Ukraine by uncovering UESU principals engaging in fraud and providing vital evidence for the prosecution of Lazarenko, Kiritchenko, and others. (11) UPGO acknowledged UTICo's performance in a letter sent on September 15, 2003, to the President of Ukraine by the Prosecutor General that recognized UTICo had located and blocked assets in the banks of Guernsey, Antigua, and other countries. (12)

On November 26, 2010 UTICo filed a complaint in the United States District Court for the District of Massachusetts suing UPGO and the Bureau for Representing Ukrainian Interests in International and Foreign Courts (the Bureau) for breach of contract for rendering services to UPGO without any compensation. (13) UPGO and the Bureau accepted UTICo's allegations as true and only filed a motion to dismiss the complaint on the grounds that they were entitled to immunity under FSIA. (14) The district court denied the motion to dismiss in part, and held that jurisdiction could be asserted over UTICo's breach of contract claim related to the May Agreement and October Agreement under the commercial activity exception to FSIA even though the language was ambiguous and required extrinsic evidence to determine the parties' intent. (15) In applying the commercial activity exception to the breach of contract claim, the court determined that the asset recovery itself is not at issue, but found the underlying activity of UPGO hiring an outside agent to engage in asset recovery on its behalf is. (16) The court relied on the notion that the exchange of money for assistance in recovering misappropriated assets is the type of activity negotiated among private parties. (17) UPGO and the Bureau appealed the district court's immunity determination and on April 4, 2013, the district court stayed proceedings pending appeal. (18)

The FSIA codified the doctrine of restrictive foreign sovereign immunity into domestic law, where the public acts of a foreign state are entitled to immunity, while the private acts are not. (19) Under the FSIA, if a defendant qualifies as a foreign state, they are presumptively immune from the jurisdiction of U.S. courts, unless an exception to immunity applies. (20) The burden of proof rests initially on the defendant to establish that it is a foreign state in the context of the FSIA and thus entitled to sovereign immunity. (21) After it is established that the defendant is a foreign state, the plaintiff has the burden of production to show that under one of the enumerated exceptions, sovereign immunity should not be awarded to the defendant. (22) However, the defendant has the burden of persuasion to show that none of the exceptions apply. (23)

With respect to the commercial activity exception, a plaintiff can sue a foreign state if the actions are based on a commercial activity that was carried on, in connection with, or causes a direct effect in the United States by the foreign state. (24) The FISA defines a commercial activity as "either a regular course of commercial conduct or a particular commercial transaction or act" and that the "commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose." (25) A court determines the nature of a foreign state's activity by examining whether an individual has the ability to engage in similar conduct as the foreign state and if they do there is a finding of commercial activity. (26) Conversely, if an individual could not have engaged in the same type of activity as the foreign state the act is deemed sovereign and thus immune from U.S. jurisdiction. (27) Looking only at the nature of the commercial activity, goods or services that are acquired through a contract by a foreign state for public purpose has no impact on the determination of whether the activity is commercial under the FSIA. (28) Following this rationale, a foreign state's political acts do not constitute commercial activity. (29)

For a court to exercise jurisdiction over a foreign state under the commercial activity exception, the FSIA requires the plaintiff to establish a nexus between the foreign state's activity and the United States. (30) The nexus can be established by evidence of on-going commercial activities in the United States or substantial contact with the United States, or continuous and systematic commercial activities outside the United States, that directly affect the public interest of the United States. (31) Due process must be satisfied to obtain jurisdiction and, therefore, requires a foreign state to have "certain minimum contacts with [the forum state] such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice." (32) Courts disagree on whether the effect needs to be both substantial and foreseeable, or must be sufficiently in the United States to be considered direct in order for U.S. courts to exercise jurisdiction over a foreign state. (33) A specific example of the contention is whether a plaintiff suffering a financial loss due to the actions of a foreign state is a sufficient direct effect in the United States to fall within the commercial activity exception of the FSIA. (34)

In Universal Trading & Inv. Co. v. Bureau for Representing Ukrainian Interests in Int'l & Foreign Courts, the First Circuit disallowed UPGO from claiming sovereign immunity based on the commercial activity exception of the FSIA. (35) The court decided UTICo's complaint sufficiently alleged UPGO's entry into a contract by examining the terms of the May Agreement and October Agreement to determine what act or acts would constitute acceptance based on the terms of UPGO's offer. (36) The court concluded that a unilateral contract was formed based on UPGO's acknowledgement of UTICo's full performance under the May Agreement, October Agreement, and powers of attorney; thus, UPGO breached the contract by refusing to compensate UTICo. (37) Regarding whether or not UPGO's underlying activity was commercial, the court observed that the nature of UTICo's contracted-for services included meeting with various government officials concerning the fraud allegations against Lazarenko and Kiritchenko, securing discovery orders and...

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