A New York federal district court recently dismissed an action brought by two foreign-based Funds against Anglo Irish Bank Corporation Limited (“Anglo Irish”), a private Irish bank recently nationalized by the Republic of Ireland, which sought, in part, to enjoin Anglo Irish from merging or disposing its assets in violation of the parties’ note purchase agreement (the “NPA”). Fir Tree Capital Opportunity Master Fund, LP v. Anglo Irish Bank Corp. Ltd., No. 11-955 (PGG) (S.D.N.Y. 2011). The court held that it lacked subject matter jurisdiction because Anglo Irish was a “foreign state” within the meaning of the Foreign Sovereign Immunities Act (“FSIA”), and because the Funds failed to demonstrate that Anglo Irish had either waived sovereign immunity or that any of the three categories of the FSIA’s commercial activity exception to sovereign immunity were applicable to the action.

Background

In 2005, Fir Tree Capital Opportunity Master Fund, LP and Fir Tree Value Master Fund, LP (the “Funds”), two funds headquartered in the Cayman Islands, purchased $200 million in notes issued by Anglo Irish pursuant to an NPA between the bank and the Funds. The notes were payable in New York and ranked pari passu or senior to all other subordinated debt in right of payment.  

Pursuant to the NPA’s Solvency, Assumption, and Opinion of Counsel Condition provisions (the “Asset Disposition Provisions”), Anglo Irish could “not consolidate with or merge with or into, or sell, lease or otherwise dispose of its assets as an entirety or substantially as an entirety to, any Person,” unless the surviving entity of the consolidation or the transferee of Anglo Irish’s assets (1) was solvent, (2) expressly assumed in writing all of Anglo Irish’s obligations under the NPA and the notes, and (3) provided the Funds with an opinion of independent counsel stating that the agreements or instruments effecting the assumption of assets are enforceable and comply with the terms of the NPA and the notes. Under the NPA, the Funds were entitled to seek specific performance or other equitable relief against Anglo Irish for breaches of the NPA. The NPA was governed by New York law and included a non-exclusive forum selection clause providing for jurisdiction in New York in actions relating to the NPA or the notes.  

The Republic of Ireland was neither a party to the NPA nor had a controlling interest in Anglo Irish when the Funds purchased the notes in 2005. In response to the global financial crisis in 2008, however, the Irish government took several steps to prevent the collapse of the Irish economy and to stabilize its banking system. These steps included injecting billions of dollars of capital into Anglo Irish, guaranteeing the bank’s liabilities and, in January 2009, nationalizing the bank and acquiring 100% of Anglo Irish’s shares.

Following nationalization, Anglo Irish began to liquidate billions of euros in assets at deep discounts. During 2010, the Irish government purchased €34 billion in non-performing loans from Anglo Irish in exchange for approximately €13 billion in government-backed securities. In February 2011, the High Court of Ireland ordered Anglo Irish to sell certain deposits and assets and to formulate a merger plan with the Irish National Building Society (“INBS”), another Irish bank that had been nationalized. Anglo Irish sold the €34 billion of government-guaranteed securities to Allied Irish Bank at a discount in compliance with the court’s order.  

The Declaratory Judgment Action

The Funds subsequently sought declaratory relief against Anglo Irish in the United States District Court for the Southern District of New York, asserting that Anglo Irish had breached the NPA’s Asset Disposition Provisions, and would be in further breach if the bank followed the High Court of Ireland’s order to merge with INBS and sell Anglo Irish’s assets. The Funds also moved for a preliminary injunction seeking (1) to enjoin the bank from merging or otherwise disposing of its assets “as an entirety or substantially as an entirety to any Person,” as defined in the NPA; (2) to require the bank to leave at least $200 million in the U.S. unless it demonstrates compliance with the NPA; and (3) the appointment of a receiver to oversee Anglo Irish’s U.S.-based assets. After conducting a hearing in March 2011, the court declined to rule on the Funds’ motion and ordered briefing on the applicability of the FSIA and whether subject matter jurisdiction existed.

In June 2011, Anglo Irish initiated the sale of several U.S.-based notes at discounted rates and had appointed an agent to sell its entire €10.7 billion U.S. loan portfolio. In July 2011, INBS’s assets and liabilities were transferred to Anglo Irish in compliance with the High Court of Ireland’s merger plan order, and Anglo Irish initiated its plan to wind down the two banks’ assets over the course of seven to ten years. In August 2011, the court held an additional evidentiary hearing regarding the wind-down plan and merger, and ordered supplemental briefing on the applicability of the FSIA.

Applicability of the FSIA

Under the FSIA, a “foreign state,” which includes an agency or instrumentality of a foreign state, is presumptively immune from the jurisdiction of U.S. courts. 28 U.S.C. §§ 1603, 1604. If no statutory immunity exception or treaty obligation exists to provide a basis for subject matter jurisdiction over the foreign state, the action must be dismissed. The Funds did not dispute that all of the Anglo Irish’s shares were transferred to the Irish government and that Anglo Irish is an instrumentality of Ireland under an FSIA analysis.  

Instead, the Funds argued that the court had jurisdiction pursuant to 28 U.S.C. § 1605 because (1) Ireland waived sovereign immunity under the FSIA by entering into a treaty the United states, as well as by nationalizing a private entity that had agreed to be bound by the NPA’s provisions; and (2) the “commercial activity” exception to the FSIA was applicable to Anglo Irish’s conduct. The court rejected the Funds’ jurisdictional arguments, finding that they failed to meet their burden of demonstrating that Anglo Irish had waived sovereign immunity or that any of the three categories of the commercial activity exception provided a basis for jurisdiction.

Waiver of Sovereign Immunity

The Funds first argued that the 1950 Treaty of Friendship, Commerce and Navigation (the “Friendship Treaty”) between Ireland and the U.S. served as a waiver of sovereign immunity under the FSIA and, accordingly, the court possessed subject matter jurisdiction. The Friendship Treaty provides in relevant part:

No enterprise of either Party which is publicly owned or controlled shall, if it engages in commercial, manufacturing, processing, shipping or other business activities within the territories of the other Party, claim or enjoy, either for itself or for its property, immunity therein from taxation, suit, execution of judgment or other liability to which privately owned and controlled enterprises are subject therein.

Friendship Treaty, Art. XV(3), Jan. 21, 1950, 1 U.S.T. 785. Holding that a foreign state’s waiver of sovereign immunity will only be implied if the there is “strong evidence” of the state’s intent, the court rejected this theory of waiver because the Funds were entities of the Cayman Islands — a non-party to the bilateral Friendship treaty. The court held that there was no legal authority supporting the Funds’ argument that an entity from a third country could benefit in the U.S. from a treaty entered into between the U.S. and Ireland. The court concluded that there was no evidence that Ireland intended to waive sovereign immunity to suits brought by third-party states or their nationals in U.S. courts.

The Funds further argued that, because Anglo Irish had consented to the jurisdiction of the New York court when it signed the NPA as a private entity in 2005, the Irish government had implicitly waived sovereign immunity by nationalizing Anglo Irish in 2009. The court rejected this claim as well, holding that there was no authority supporting the Funds’ theory that a foreign state waives sovereign immunity merely by nationalizing a private entity that had previously signed an agreement containing a forum selection clause. Because the Funds failed to provide strong evidence that the Irish government expressly or implicitly agreed to be bound by the 2005 NPA’s forum selection clause when it nationalized Anglo Irish, the court held that Ireland did not waive sovereign immunity.  

Commercial Activity Exception

The Funds additionally asserted that the court possessed subject matter jurisdiction because Anglo Irish’s actions were commercial in nature, not governmental, and because the FSIA’s commercial activity exception was applicable to Anglo Irish’s pre- and post-nationalization activities. Under the commercial activity exception, a foreign state is not immune from jurisdiction in U.S. courts in actions based upon (1) “a commercial activity carried on in the United States by the foreign state”; (2) “an act performed in the United States in connection with a commercial activity of the foreign state elsewhere”; or (3) “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.” 28 U.S.C. § 1605(a)(2). The court determined that, although the alleged wrongful activity was commercial in nature, pre-nationalization acts by a private bank could not serve as the basis for finding jurisdiction under the commercial activity exception in a suit against a foreign state, and all three categories of the exception were inapplicable to Anglo Irish’s post-nationalization activities.  

The Funds argued that the first category of the exception was applicable because the note payments were due and payable in New York and because the Anglo Irish engaged in the sale of U.S.-based assets as part of the liquidation process in violation of the NPA’s Asset Disposition Provisions. The court rejected these arguments. The court first found that Anglo Irish had made all payments required under the NPA, and held that the mere fact that a debt instrument is payable in the U.S., absent proof of non-payment, is insufficient commercial activity to provide a basis for the commercial activity exception. The court additionally held that Anglo Irish’s sale of U.S.-based assets was not a breach of the Asset Disposition Provisions because the U.S.-based assets represented a fraction of the bank’s total assets and the Asset Disposition Provisions were only triggered by consolidation, merger, or a transfer of the Bank’s assets “as an entirety or substantially as an entirety.” The court declined to aggregate Anglo Irish’s U.S.-based assets with the assets it intended to liquidate in the future because the Funds’ claims were not based upon the bank’s total assets. The court further noted that the NPA did not specifically address the ramifications of nationalization.  

The court declined to apply the second category of the commercial activity exception, holding that the category is generally understood to apply to non-commercial acts in the U.S. that relate to commercial acts abroad, and finding that the Funds failed to plead any facts regarding non-commercial acts performed by the bank in the U.S.  

Finally, the court rejected the Funds argument that the third category should apply on the grounds that their claims were based on acts outside the U.S. (including the INBS merger), that the bank’s merger with INBS and ongoing sale of foreign assets are commercial activities conducted elsewhere, and that the bank’s acts caused a “direct effect” in the U.S. due to an increased risk that the Funds will not receive payments in New York at some future time. The court held that the Funds had failed to demonstrate the “direct effect” prong because (1) the Funds failed to claim any non-payment from Anglo Irish in New York; (2) legal precedent indicates that the commercial activity exception does not allow for jurisdiction over a foreign state where the alleged acts only cause speculative, generalized, immeasurable, and ultimately unverifiable effects; and (3) to the extent that the Anglo Irish’s acts have increased the risk of non-payment, the effect of that risk have been felt only in the Cayman Islands and not New York.  

Conclusion

While the holding in Fir Tree Capital Opportunity Master Fund, LP is narrowly premised on the dispute’s unique facts, including the parties’ citizenships and the specific contractual provisions negotiated by the parties, the case demonstrates the environment of legal uncertainty created in the wake of the 2008 financial crisis and the litigation issues facing foreign-based entities seeking to resolve their disputes in the U.S. Although a foreign entity such as the Cayman Island-based plaintiff funds, may agree to a certain U.S. forum, unanticipated events not accounted for contractually may place the parties’ intentions at risk.