Arch Trading Corp. v. The Republic of Ecuador, No. 13-4445-cv (S.D.N.Y. May 28, 2015) [click for opinion]

Plaintiffs sued Defendants, The Republic of Ecuador, the Fideicomiso AGD-CFN No Mas Impunidad, and Corporacion Financiera Nacional, for damages arising from Defendants’ alleged expropriation of Plaintiffs’ property located in Ecuador, and pursuant to international law. Defendants moved to dismiss the complaint arguing that, as a State and State agencies, they were immune from suit in U.S. court.

The Foreign Sovereign Immunities Act (the “FSIA”), 28 U.S.C. §§ 1330,1391(f)1441(d), and 1602-11 (2000) provides that foreign governments and their agencies and instrumentalities are generally entitled to sovereign immunity unless an exception applies.  “In determining whether an exception applies, the Court should be most hesitant to find jurisdiction where the foreign entities have no connection with the United States.”

As pleaded by Plaintiffs, all of the relevant acts took place in Ecuador. Plaintiffs are companies incorporated in the British Virgin Islands, and owned by Ecuadorian citizens. Each Plaintiff owned a certain quantity of subsidiary companies in Ecuador (133 all together), all of which were expropriated without compensation by a State agency. Plaintiffs brought suit in the U.S. alleging violations of the American Convention on Human Rights, customary international law and the international law on diplomatic protection.  Defendants moved to dismiss for lack of subject-matter jurisdiction, lack of personal jurisdiction, improper venue, res judicata, expiry of the statute of limitation, the Act of State doctrine, and failure to state a claim upon which relief can be granted.  The court considered only the first three as these are jurisdictional defenses, threshold issues to be addressed in the first instance.

The court began its analysis by citing a recent Eleventh Circuit decision which noted a trend in Supreme Court jurisprudence of the “Court’s reluctance to allow international law claims based on occurrences between foreign citizens on foreign soil to proceed in U.S. courts.” It summarized the decision as: what happens in Ecuador should stay in Ecuador.

It was undisputed that all three Defendants were foreign sovereigns, subject to the FSIA. Plaintiffs were thus required to sufficiently allege an FSIA exception, and if Plaintiffs satisfied this burden, Defendants would have to show by a preponderance of the evidence that the FSIA exception does not apply.

The FSIA contains several exceptions to immunity, and Plaintiffs relied on the “takings” exception, § 1605(3), which provides subject-matter jurisdiction over the sovereign when property rights are taken in violation of international law, and these rights have some nexus to the U.S.

Invoking the international law standard of expropriation, and citing Second Circuit precedent, the court explained that “the phrase ‘taken in violation of international law’ refers to the nationalization or expropriation of property without payment of the prompt adequate and effective compensation . . ., including takings which are arbitrary or discriminatory in nature.” But this case, the court noted, presented a “single-nation problem”; the claim involves property located in Ecuador, expropriated by Ecuador, and from Ecuadorians. The court brushed aside corporate formalities and stated that “Plaintiffs’ attempt at implicating international law by relying on its incorporation in the British Virgin Islands does not change the outcome because Plaintiffs are owned by the Isaías, an Ecuadorian family.” As a result, the court found that Plaintiffs failed to provide evidence to show that this was anything beyond a purely Ecuadorian dispute.

The court went on to explain that, even if Plaintiffs could establish the “taken in violation of international law” exception applied, they still could not demonstrate a sufficient nexus with the U.S. as required by the FSIA. Plaintiffs argued Defendants were engaged in commercial activity in the U.S. through their subsidiaries. However, the court applied the Bancecpresumption of separateness, which states that “agencies and instrumentalities of foreign states are presumed to be separate from their subsidiaries.” Because Plaintiffs failed to demonstrate an exception to sovereign immunity, the court granted Defendants’ motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1).

The court went on to say that, even if it had subject-matter jurisdiction, venue in the Southern District would be improper. Plaintiffs did not show that venue was proper under 28 U.S.C. 1391(f), which provides rules for venue for civil actions against a foreign sovereign.  For cases in which the foreign state is neither licensed to do business in or is not doing business in a particular jurisdiction of the U.S., venue is proper in the U.S. District Court for the District of Columbia.

Defendants’ motion to dismiss was granted and the court did not need to discuss the substantive objections.

Andrew Riccio of the New York office contributed this summary.