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Manuel Kevork Terenkian v. the Republic of Iraq; the

July 16, 2012

MANUEL KEVORK TERENKIAN; PENTONVILLE DEVELOPERS, LTD.; MARBLEARCH TRADING, LTD., PLAINTIFFS-APPELLEES,
v.
THE REPUBLIC OF IRAQ; THE REPUBLIC OF IRAQ, BY AND THROUGH STATE OIL MARKETING ORGANIZATION, DEFENDANTS-APPELLANTS.



Appeal from the United States District Court for the Central District of California Consuelo B. Marshall, Senior District Judge, Presiding D.C. No. 2:03-cv-05485- CBM-SH

The opinion of the court was delivered by: Ikuta, Circuit Judge:

FOR PUBLICATION

OPINION

Argued and Submitted December 6, 2011-Pasadena, California

Before: John T. Noonan, Ronald M. Gould, and Sandra S. Ikuta, Circuit Judges.

Opinion by Judge Ikuta; Dissent by Judge Noonan

OPINION

Pentonville Developers, Ltd., and Marblearch Trading, Ltd., two Cyprus oil brokerage companies, sued the Republic of Iraq for unilaterally terminating two contracts for the purchase and sale of Iraqi oil. The district court held it had subject matter jurisdiction to hear this action notwithstanding Iraq's assertion of sovereign immunity under the Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. § 1602 et seq., because the lawsuit fell within the "commercial exception" to that immunity. Because the lawsuit is not based upon commercial activity by Iraq in the United States nor upon an act in connection with such commercial activity having a direct effect in the United States, see 28 U.S.C. § 1605(a)(2), we hold that the district court erred in denying Iraq's motion to dismiss for lack of subject matter jurisdiction.

I

Pentonville Developers, Ltd., and Marblearch Trading, Ltd., are oil brokerage companies that are headquartered in and formed under the laws of Cyprus. Manuel Terenkian is the president and sole shareholder of both companies. Beginning in 2000, Pentonville and Marblearch commenced negotiations with Iraq under the auspices of the United Nations Oil for Food Program to enter into transactions for the purchase and sale of Iraqi oil.*fn1

In November 2000, pursuant to the Oil for Food Program requirements, Pentonville entered into a contract to purchase oil from the State Oil Marketing Organization (SOMO), a company formed under the laws of and wholly owned by the Republic of Iraq. A few months later, Marblearch also entered a contract to purchase oil from SOMO. As specified in the contracts, Pentonville agreed to purchase one million barrels of Kirkuk crude oil for the "Europe" market and two million barrels of Basrah light crude oil for the "USA/Far East" market. Marblearch agreed to purchase two million barrels of Kirkuk crude oil for "Europe and/or U.S.A." The contracts were to be performed in Iraq or Turkey, where title to the crude oil would pass to the purchaser. Pentonville and Marblearch agreed that payment for each cargo of crude oil would be made from the proceeds of an irrevocable documentary letter of credit directly into a United Nations escrow account. The contracts additionally specified that Pentonville and Marble-arch would process the oil in their own refineries; the companies could use the refineries of third parties only with SOMO's prior approval. Moreover, any breach of this obligation would constitute a default for which SOMO could terminate the contracts. Finally, the contracts provided for arbitration in accordance with the rules of the International Chamber of Commerce to settle any disputes arising from the contracts, and designated the place of arbitration as Baghdad "or any other place mutually agreed upon." These contracts were duly approved by the United Nations committee supervising the Oil for Food Program.

In July 2003, Pentonville, Marblearch, and Terenkian (collectively referred to here as the plaintiffs) filed a complaint against the Republic of Iraq by and through SOMO. As amended in May 2007, the complaint alleged that after the Pentonville contract had been executed at the Permanent Mission of Cyprus to the United Nations in New York, Iraqi officials demanded that Pentonville pay SOMO additional fees that were not required by the contract. When Pentonville refused to make these payments, SOMO unilaterally canceled the contract. After Marblearch subsequently entered into a substantially similar contract, also executed at the Cyprus Mission in New York, the same scenario played out: Iraqi officials demanded additional payments, which Marblearch refused, and SOMO again canceled the contract.*fn2

Based on these allegations, the plaintiffs filed a complaint claiming that Iraq and SOMO breached their contracts with Pentonville and Marblearch, causing Pentonville to lose no less than $3,750,000 in brokerage fees and Marblearch to lose no less than $2.5 million in brokerage fees.

The complaint also sets forth the alleged basis of the district court's subject matter jurisdiction over the Republic of Iraq, which plaintiffs alleged was the actual defendant in the suit. The "sole basis" for United States federal courts to obtain jurisdiction over a foreign state is the FSIA. Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434 (1989). The FSIA "establishes a comprehensive framework for determining whether a court in this country, state or federal, may exercise jurisdiction over a foreign state." Republic of Arg. v. Weltover, Inc., 504 U.S. 607, 610 (1992). Under § 1604 of the FSIA, "a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided" in various exceptions.

Because the plaintiffs aimed their action at Iraq, they had the preliminary burden of establishing that Iraq was not entitled to immunity. See Meadows v. Dominican Republic, 817 F.2d 517, 522 (9th Cir. 1987). In an effort to do so, the complaint alleged that the "commercial exception" to sovereign immunity, set forth in § 1605(a)(2), was applicable. Section 1605(a)(2) provides:

(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case-

(2) in which the action is based [1] upon a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States[.]

Courts have construed this commercial activity provision to have three independent clauses, and have used different criteria for each of the three separate clauses to assess a claimed exception. See, e.g., Am. W. Airlines, Inc. v. GPA Grp., 877 F.2d 793, 796-97 (9th Cir. 1989) (applying a "nexus" requirement to the first clause); Siderman de Blake v. Republic of Arg., 965 F.2d 699, 709 (9th Cir. 1992) (applying a "material connection" requirement to the second clause); Adler v. Fed. Republic of Nigeria, 107 F.3d 720, 726-27 & n.4 (9th Cir. 1997) (applying a "legally significant acts" test to the third clause). Citing only the third clause, the complaint alleged that the plaintiffs may seek monetary damages from Iraq because it conducted "an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act cause[d] a direct effect in the United States." § 1605(a)(2). In their subsequent motion for a default judgment, the plaintiffs argued that the district court had jurisdiction "because the contracts in this action contemplated the purchase of oil, some of which was intended for distribution in the United States," meaning that "Iraq's unilateral cancellation of the contracts resulted in a 'direct effect' in the United States."

After various delays,*fn3 Iraq brought a motion to dismiss for lack of subject matter jurisdiction on the ground that the "commercial activity" exception to sovereign immunity under the third clause of § 1605(a)(2) was not applicable. Iraq based this assertion on two arguments: first, that Iraq was not a party to the Pentonville and Marblearch contracts, and second, that the alleged breaches of contract did not have a "direct effect" in the United States because SOMO's place of performance under the contract was Iraq (where the oil would be delivered to the plaintiffs' ship). Furthermore, Iraq argued, there was no contractual requirement or evidence that any of the oil would be sold to customers in the United States, and indeed, Terenkian himself had acknowledged that the oil was to be delivered to an Italian refinery. In support of this motion to dismiss, Iraq submitted copies of the contracts, as well as declarations and other documentary evidence. Iraq further argued that the breach of contract actions should be dismissed because neither Pentonville nor Marblearch had arbitrated the claim as required by the contracts at issue.

In their opposition to the motion to dismiss, the plaintiffs raised two new bases for abrogating Iraq's sovereign immunity. Relying for the first time on the first clause of § 1605(a)(2), the plaintiffs argued that because both contracts at issue were executed in New York, their claims arose out of a commercial activity undertaken by the foreign state which was carried on in the United States. They also argued, again for the first time, that because payment was to be made into the United Nations escrow account at the Banque Nationale de Paris, Iraq's alleged breach of the contracts had the "direct effect" that payments were not deposited in a New York bank. With respect to Iraq's assertion of entitlement to arbitration, the plaintiffs argued that arbitration in Baghdad would be impossible and/or commercially impracticable because Terenkian was facing death threats in Iraq. They further argued that, because Iraq is not a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the district court could not compel arbitration in Iraq.

The district court denied Iraq's motion to dismiss. After concluding that Iraq was a proper defendant (an issue not on appeal), the district court ruled that Iraq was not entitled to sovereign immunity because the "commercial activity" exception applied: namely, the lawsuit was based on "an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States." § 1605(a)(2). The district court held that because the contracts required that payment be made in New York, the breach of those contracts constituted a commercial activity that had a direct effect in the United States. Concluding it had subject matter jurisdiction on this basis, the district court did not reach the plaintiff's alter- nate arguments based on execution of the contracts or the eventual delivery of some of the oil to the United States. The district court also denied Iraq's motion to dismiss for failure to arbitrate on the ground that the parties had not established that the claims were subject to arbitration at all.

Finally, the district court held that venue in the Southern District of California was not proper and transferred venue to the District of Columbia. See 28 U.S.C. § 1391(f) (providing for venue in the District of Columbia for a civil action against a foreign state when there is no judicial district in which a substantial part of the events giving rise to the claim occurred).*fn4

On appeal, Iraq argues that the district court lacked subject matter jurisdiction, or alternatively, that the case should have been dismissed for failure to arbitrate. Plaintiffs oppose Iraq's arguments on the merits, and they further argue that the appeal is time-barred because the notice of appeal was not filed until after the case was docketed in the District Court for the District of Columbia. See Wilson v. City of San Jose, 111 F.3d 688, 692 (9th ...


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