Chettri v. Nepal Rastra Bank, No. 14-3724, 2016 U.S. App. LEXIS 11070 (2d Cir. June 20, 2016) [click for opinion]

Plaintiffs filed suit against Nepal's Rastra Bank (the "Bank") and Department of Revenue Investigation (the "Department"), alleging that Defendants had tortiously frozen assets which Plaintiffs held in a local Nepalese bank.

The Bank is Nepal's financial agent and the Department is the prosecutorial arm of Nepal's Ministry of Finance, with duties that include the monitoring of wire transfers for compliance with Nepalese laws. Plaintiff Tarala, a Colorado corporation, is in the business of supplying military clothing and equipment. Plaintiff Wu acted as Tarala's agent in connection with Tarala's contracts with Nepal. Between 2006 and 2008, Nepal placed several orders with Tarala to provide military equipment for the Nepalese army and police force. Nepal paid for the equipment through letters of credit issued by the Bank to a U.S. bank, naming Tarala as beneficiary.

In July 2008, the Bank was notified that a $1 million wire transfer from Tarala to Wu's personal account at Nepal Bangladesh Bank, Ltd. ("Bangladesh Bank") contained certain irregularities. Wu claimed that he intended to use the money to pay a third party to transport equipment and complete delivery of goods to Nepal. Nonetheless, the Department instructed the Bank to freeze Wu's account at Bangladesh Bank pending further investigation. Tarala provided letters from financial institutions and government agencies attesting to the legitimacy of the wire transfer, but Defendants were unconvinced and informed Tarala that the documentation was insufficient to establish the source of the funds. In November 2010, after Tarala's letters were unsuccessful in unfreezing the account, Tarala and Wu filed the underlying complaint in this action.

Defendants moved to dismiss the complaint for lack of subject matter and personal jurisdiction under the Foreign Sovereign Immunities Act (the "FSIA"). The district court agreed and dismissed the complaint. Following the dismissal, Plaintiffs appealed to the Second Circuit, arguing that the district court had both subject matter and personal jurisdiction over the action.

Under the FSIA, personal jurisdiction exists only if subject matter jurisdiction exists. Thus, the Second Circuit first turned to whether the district court had subject matter jurisdiction over the dispute. Plaintiffs did not contest that the Department is a political subdivision of a sovereign state and that the Bank is an agency of a foreign state, thereby satisfying Defendants' burden of presenting a prima facie case that they are foreign sovereigns generally entitled to immunity under the FSIA. Plaintiffs argued, however, that the FSIA's "commercial activity" or "takings" exceptions to immunity applied.

The Second Circuit first examined whether Defendants lacked immunity under the FSIA based upon the "commercial activity" exception. There are three grounds for invoking the "commercial activity" exception. The first ground requires that the action be "based upon" a commercial activity. Under the Act, for an action to be "based upon" a commercial activity there must be a degree of closeness between the commercial activity and the gravamen of the plaintiff's complaint. Plaintiffs contended their action was based upon Nepal's commercial activity of entering into a contract with Tarala. The appellate court, however, determined the action was not based upon Tarala's contracts with Nepal, but instead upon the Defendants' freezing of Wu's assets.

As such, the Second Circuit considered whether Defendants' freezing of Plaintiffs' assets was a commercial activity. A foreign sovereign engages in a commercial activity within the meaning of the FSIA only when it acts as a private player within a market and not as a regulator of the market. A state's confiscation of property within its borders is not a commercial act under the FSIA. Consequently, the court found that Defendants were acting as government regulators when they froze Plaintiffs' assets and that the first ground for invoking the "commercial activity" exception did not apply.

The second ground for invoking the "commercial activity" exception requires a plaintiff's complaint to be based upon an act performed in the U.S. in connection with a commercial activity of the foreign state elsewhere. Here, Plaintiffs' complaint was based on Defendants' freezing of Wu's account at Bangladesh Bank. The freezing took place in Nepal and Defendants, Bangladesh Bank, and Wu's account were all located in Nepal. Thus, the second ground for invoking the exception did not apply because the freezing was not performed in the U.S.

The third ground for invoking the exception requires that the action is "in connection with" a commercial activity. Under the FSIA, the term "in connection with" is interpreted narrowly, and a plaintiff must cite more than "tangential commercial activities to which the 'acts' forming the basis of the claim have only attenuated connection." Because Nepal had fulfilled its obligations under its contract with Plaintiffs by the time Defendants froze Plaintiffs' account, the court determined that any connection between the contract and the freezing was too attenuated. Accordingly, the third ground for invoking the exception did not apply.

After determining the "commercial activity" exception did not apply, the Second Circuit examined whether Defendants lacked immunity under the "takings" exception of the FSIA. A foreign state lacks immunity under the "takings" exception in any action in which rights in property were taken in violation of international law. Here, the Bank and the Department froze Plaintiffs' assets in connection with an ongoing money laundering investigation. Plaintiffs offered no authority for the proposition that a routine law enforcement action such as the one at issue constituted a taking within the meaning of the FSIA. Because Plaintiffs' could not establish that Defendants took their property in violation of international law, the "takings" exception did not apply.

As neither the "commercial activity" exception nor the "taking" exception applied to strip the Defendants of their sovereign immunity under the FSIA, the Second Circuit concluded that the district court lacked subject matter jurisdiction over Plaintiffs' dispute. Because the district court lacked subject matter jurisdiction over the dispute, it also lacked personal jurisdiction over the Defendants. Accordingly, the Second Circuit affirmed the district court's dismissal of Plaintiffs' claims.