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Ninth Circuit Court of Appeals Narrows Application of the Foreign Sovereign Immunities Act

Businesses hoping to take advantage of provisions of the Sovereign Immunities Act need to appreciate a recent ruling of the Ninth Circuit Court of Appeals deemed to limit the extent and application of that Act.  A garnishment action that has been lodged against the Republic of Congo has been dismissed by the U.S. Court of Appeals in Af-Cap, Inc., v. Chevron, 475 F.3d 1080 (9th Cir. 2007); 2007 U.S. App. LEXIS 1638.  In so ruling, the Court concluded that the so-called intangible obligations that were at the heart of the cause of action were not utilized for commercial activities within the United States and thus were protected from execution or collection pursuant to the terms of Section 1610(a) of the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. § 1610(a).

The case arose from Congo's default on a loan agreement for $6.5 million that included a waiver of the sovereign immunity defense.  The agreement also contained a consent to execution against “any property whatsoever.” Af-Cap, which is the the judgment creditor, attemtped to execute on funds held by Chevron on the theory that those funds were owed to the Congo under various other and unrelated agreements between Chevron and the Congo.

The Ninth Circuit Court of Appeals held that the waiver of immunity by the Congo within the loan agreement did not effectively waive the protections against execution found that are duly enumerated in FSIA.  Rather, the clauses in the agreement were deemed to serve as a starting point for the analysis.

The court examined whether the property at issue was “used for a commercial activity in the United States.” The court went on to interpret “used for” and concluded it was intended to create a specific exception to the general immunity from attachment for property that is employed for a commercial activity in the U.S..  However, this immunity was determined not to extend to property merely connected with a commercial activity in the U.S, which determined was the situation in the case at hand.

The court dismissed Af-Cap’s contention that the obligations from Chevron to the Congo were pledged as security. The Court made this determination because the obligations were not actually in existence at the time the Congo signed the loan agreement in the first instance.  Therefore, they assets simply could not have been pledged as security.

Af-Cap argued that it was entitled to garnish funds because of Chevron’s obligations to pay bonuses to the Congo under a “Participation Agreement” between the oil giant and the African nation.  Af-Cap went on to argue that these obligations were utilized  as security for a purported “loan” from Chevron in the form of a $25 Million Prepaid Crude Oil Sales Contract.  Af-Cap went on to argue that this constituted commercial activity in the U.S. as contemplated by the statutory scheme in question.

Nonetheless, the Court ultimately held that the agreements included set-off provisions such that the obligation was Chevron’s property alone and not that of the Congo.  The property in question could not be garnished as a result.

Af-Cap argued further that Chevron’s obligations to pay over $7 million to the Congo in order for that company to participate in a Congolese joint venture was formed as a result of what Af-Cap called “substantial activities” in the U.S. As referenced earlier, the court held that the property was not “used for” commercial activity in the U.S. as contemplated by the governing statutes.  Therefore, the property was immune from execution under FSIA. The court additionally concluded that Chevron’s obligations under its agreement with the Congo to fund social programs in the Congo also were not used for commercial activity in the U.S.

Finally, Af-Cap sought to attach property of SNPC, which is an instrumentality of the Congo. In this instance, Af-Cap argued that FSIA Section 1610(b) provided an exception from immunity for property of an “instrumentality of a foreign state engaged in a commercial activity” in the U.S., rather than property “used for” commercial activity, as required by Section 1610(a). As to this contention, the Court held that the parties had stipulated that SNPC was the Congo’s alter ego, rather than a separate legal entity, so the more restrictive “used for” standard necessarily had to be applied by the Court.  The Court concluded that initial dismissal of the case by the lower court had to be upheld.

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