No. 04 Civ. 1550 (DLC).
June 23, 2004
Robert Lewin, Esq., Stroock Stroock Lavan LLP, New York, New York. Anthony I. Pye, Esq., Law Offices of Anthony I. Pye, South Orange, New Jersey Attorney for the Plaintiff.
James M. Altman, Esq., Robert R. Reed, Esq., Bryan Cave LLP, New York, New York, Attorney for the Defendant.
OPINION AND ORDER
This action concerns a plaintiff's attempt to collect from a parent corporation a judgment entered against the parent's former subsidiary. It is undisputed that the parent corporation is a "foreign sovereign" pursuant to the Foreign Sovereign Immunities Act, 28 U.S.C. § 1610(c) ("FSIA").
On February 10, 2004, the Allstate Insurance Company ("Allstate"), a corporation organized under the laws of the State of Illinois with its principal place of business in Northbrook, Illinois, filed a state court action against Banco Do Estado do Rio Grande do Sul, S.A. ("Banrisul"), a state-owned corporation organized under the laws of the Federal Republic of Brazil ("Brazil") with its principal place of business in the Brazilian State of Rio Grande do Sul. Allstate sought to enforce five default judgments totaling approximately $1,100,000 obtained against one of Banrisul's former subsidiaries, União Novo Hamburgo Seguros, S.A. ("União").
The Court takes judicial notice of the fact that Rio Grande do Sul is one of 26 Brazilian states. Courts may take judicial notice of facts outside the trial record that are "not subject to reasonable dispute." Rule 201(b), Fed.R.Evid. Such facts must either be "(1) generally known within the territorial jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned." Id.
On February 23, Banrisul removed this action to federal court. Banrisul now moves to dismiss the action on the ground that this Court lacks subject matter jurisdiction. For the reasons stated below, the motion is granted.
The following facts are taken from the pleadings and evidence submitted by both parties in connection with this motion. See Cargill Intern. S.A. v. M/T Pavel Dybenko, 991 F.2d 1012, 1019 (2d Cir. 1993) (in resolving a jurisdictional dispute, court must not only review the pleadings but also evidence submitted by the parties). At all times relevant to this lawsuit, the state of Rio Grande do Sul owned approximately 99.40% of the total shares of Banrisul's stock. From September 1968 until late 1997, Banrisul owned over 88% of União's stock.
During the period from 1976 to 1981, União was a member of Grupo de Empresas Seguradora Brasileiras ("GESB"), a pool of Brazilian insurance companies that entered into a series of reinsurance contracts, including five such contracts with Allstate (the "GESB Contracts"). Each of the GESB Contracts contained an arbitration clause whereby the parties agreed to resolve any disputes by arbitration in Illinois. For example, the Casualty Excess Agreement provided, in relevant part:
Reinsurance limits an insurance company's risk with respect to its policies by transferring to other companies a portion of the risk that the company has assumed. "Simply put, reinsurance is a contract by which one insurer insures the risks of another insurer." North River Ins. Co. v. Ace American Reinsurance Co., 361 F.3d 134, 137 (2d Cir. 2004) (citation omitted).
The five GESB Contracts at issue in this lawsuit are: (1) Casualty Excess of Loss Retrocession Agreement 539G, effective January 1, 1981 ("Casualty Excess Agreement"); (2) Casualty Facultative/Obligatory Retrocession Agreement 505G, effective August 1, 1976; (3) Quota Share Reinsurance Agreement 32573G, effective July 1, 1981; (4) Commercial Ocean Marine Quota Share Contract of Reinsurance 52977S, effective January 1, 1980; and (5) Domestic Treaty Casualty Retrocessional Quota Share Agreement 102301G, effective July 1, 1979.
If any dispute arises between the Reinsurer and the Retrocessionaires with reference to the interpretation, performance or breach of this Agreement . . . such dispute . . . will be submitted to three arbitrators. . . . The arbitration hearings will be held in Northbrook, Illinois.
By the GESB Contracts, União agreed to designate a United States law firm and the Illinois Superintendent of Insurance as the agents for service of process in any proceeding arising from the contracts. Banrisul was not a party to any of the GESB Contracts.
For example, the Casualty Excess Agreement provides, in part:
Any Retrocessionaire [i.e., União] who fails to pay any amount claimed due hereunder will submit, at the request of the Reinsurer [i.e., Allstate], to any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction. The law and practice of such court will prevail in any suit against any Retrocessionaire upon this Agreement. . . .
John G. Smith, Attorney-In-Fact [Illinois address], . . . or another party specifically designated . . . [is] authorized and directed to accept service of process on behalf of the Retrocessionaires in any such suit. . . .
Further, . . . the Retrocessionaires hereby designate the Superintendent, Commissioner, or Director of Insurance . . . as their true and lawful attorney upon whom may be served any lawful process in any action, suit, or proceeding arising out of this Agreement. . . .
Virtually identical "Service of Suit" clauses appear in each of the GESB Contracts.
In 1997, as part of the financial reforms enacted by the State of Rio Grande do Sul, Banrisul held a public auction for all of its shares in União. On November 25, Bradesco Seguros, S.A. ("Bradesco"), a non-state owned Brazilian corporation, emerged as the successful bidder at the auction. The terms and conditions of the auction were published in an official document of the government of Rio Grande do Sul (the "Conditions of Sale"). Attached to the Conditions of Sale was a Share Purchase and Sale Agreement (the "Purchase Agreement") to be entered into by Banrisul and the eventual purchaser. In addition, Banrisul and União executed an "Agreement of Commitment for the Assumption of Obligations and Other Covenants" (the "Commitment"). Allstate was not a party to any of the agreements.
All three documents are in Portuguese. The Court here relies on the translations provided by Allstate for the Conditions of Sale and the Purchase Agreement. Because Allstate did not provide a translation for the Commitment, the Court relies on Banrisul's translation of that document.
The documents governing the auction of Banrisul's shares in União provided that Brazilian law would govern any disputes, and that Brazilian courts retained jurisdiction over the parties to the agreements. Specifically, the Conditions of Sale provided that disputes arising under it would be "governed by Brazilian law" and the parties would be "subject to the jurisdiction of the Courts of Porto Alegre, Rio Grande do Sul State, which are competent to hear any legal action that may arise from it." The Purchase Agreement established exclusive jurisdiction for any disputes between Banrisul and União's new owner in a particular court in Rio Grande do Sul.
The Ninth Clause of the Purchase Agreement reads: "The parties elect Foro Central da Comarca de Porto Alegre, capital of state of Rio Grande do Sul, to solve any doubts or disputes originating in this agreement, expressly resigning any other, however much privileged it is or would be."
The documents also defined Banrisul's obligations with respect to União's potential liabilities as a member of GESB. The Commitment provided that Banrisul would reimburse União's purchaser for any liabilities arising from União's participation in GESB. The Commitment stated:
Should Companhia União come [sic] be required to make payments as a result of a final judicial decision, Banrisul undertakes to reimburse the entirety of the amounts paid within a period of ten (10) days commencing from the submittal of the formal document by Companhia União, under penalty of incurring a contractual penalty of ten percent (10%) of the amount paid, the interest, and the other legal charges.
The Purchase Agreement reiterated Banrisul's obligation to União's new purchaser,
[Banrisul] is expressly responsible, before the New Control Group [i.e., Bradesco] for remaining obligations assumed by União as [a] member of [GESB] . . . according to item 4.4 [of the Conditions of Sale].
Section 4.4 of the Conditions of Sale similarly stated Banrisul's obligation to União's new owner for the "remaining obligations assumed by União" as a member of GESB.
On August 2, 2000, after União allegedly failed to pay the amounts it owed under the GESB Contracts, Allstate commenced five separate arbitrations against União in Illinois. União did not participate in the arbitrations, and five separate arbitration awards were entered in Allstate's favor. On May 8, 2001, Allstate moved to confirm each award in separate proceedings in the Northern District of Illinois. União again failed to appear, and on August 30, the court entered five separate Orders and Judgments (the "Judgments") confirming the arbitration awards against União. On June 12, 2002, Allstate registered the Judgments in this District, pursuant to 28 U.S.C. § 1963.
The arbitration awards directed União to pay Allstate a total of $882,636.02 in unpaid losses, accrued interest and arbitration costs. In addition, União was ordered to pay interest on any unpaid arbitration award at the rate of 8%, compounded, commencing 30 days after the date of the awards, and also required União to deliver to Allstate the amount of $214,210.62 to be held in a Funds Held Account to secure any payments under the respective reinsurance treaties that may become due after January 20, 2001.
In a letter dated January 21, 2003, in response to Allstate's effort to collect on the Judgments, União informed Allstate that Banrisul, not União, was responsible for payment of the Judgments. União directed Allstate to the Conditions of Sale and the Purchase Agreement. On September 3, Allstate filed a petition against Banrisul in this Court seeking to enforce the União Judgments against Banrisul. On February 10, 2004, Allstate voluntarily dismissed the original federal proceeding, and on the same day commenced a new proceeding against Banrisul in state court pursuant to CPLR § 5227. On February 23, Banrisul removed the state court petition, and now moves to dismiss Allstate's complaint for lack of subject matter jurisdiction.
CPLR § 5227 allows a judgment creditor to recover against the debtor of a judgment debtor. The statute provides, in pertinent part:
Upon a special proceeding commenced by the judgment creditor, against any person who it is shown is or will become indebted to the judgment debtor, the court may require such person to pay to the judgment creditor the debt upon maturity, or so much of it as is sufficient to satisfy the judgment, and to execute and deliver any document necessary to effect payment; or it may direct that a judgment be entered against such person in favor of the judgment creditor.
Banrisul argues that it is immune from suit in the United States because it is a "foreign state" under the FSIA. According to Banrisul, its only obligation with respect to União's participation in the GESB Contracts is to indemnify its new owner, Bradesco, for any liabilities arising out of União's former participation in GESB.
In support of its motion, Banrisul submits a declaration by Paulo Roberto Lontra, General Counsel to Banrisul and its employee since 1975, and a 14-page affidavit by Marcelo Mansur Haddad, a partner at the Brazilian law firm of Mattos Filho, Veiga Filho, Marrey Jr. Quiroga, and an expert in Brazilian insurance and contract law.
Allstate's complaint does not mention the FSIA, but in its opposition to this motion, Allstate concedes that Banrisul is a foreign state under the FSIA, and does not dispute Banrisul's claim that the "commercial activity" exception to sovereign immunity is inapplicable to this case. Allstate argues, however, that União acted as an agent of Banrisul in entering into the GESB Contracts, and that União's waiver of sovereign immunity under the arbitration and service of suit clauses of the GESB Contracts therefore should be imputed to Banrisul. Allstate also argues that, as a signatory to the Inter-American Convention on International Commercial Arbitration, codified at 9 U.S.C. § 301et seq. (the "Panama Convention"), Brazil has waived its foreign immunity with respect to proceedings under New York law against Banrisul to enforce the União judgments.
The FSIA "provides the sole basis for obtaining jurisdiction over a foreign state in federal court." Reiss v. Société Centrale du Groupe des Assurances Nationales, 235 F.3d 738, 746 (2d Cir. 2000) (citation omitted). Allstate does not dispute that Banrisul is a "foreign state" under the FSIA. Although the FSIA provides that "a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States," 28 U.S.C. § 1604, it "allow[s] for the exercise of such jurisdiction in cases that fall within several statutorily defined exceptions," Reiss, 235 F.3d at 747. "Once the defendant has made a prima facie showing that it is a foreign sovereign, the plaintiff has the burden of going forward with evidence showing that, under exceptions to the FSIA, immunity should not be granted, although the ultimate burden of persuasion remains with the alleged foreign sovereign." Cabiri v. Government of Republic of Ghana, 165 F.3d 193, 196 (2d Cir. 1999) (citation omitted).
Allstate argues that Banrisul waived its sovereign immunity under Section 1605(a)(1) of the FSIA. Section 1605(a)(1) provides, in relevant part, that a foreign state or instrumentality is not immune from jurisdiction in a case
in which the foreign state has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the waiver.28 U.S.C. § 1605(a)(1). FSIA's implied waiver provision must be "construed narrowly." Transatlantic Shiffahrtskontor GmbH v. Shanghai Foreign Trade Corp., 204 F.3d 384, 391 (2d Cir. 2000). Instances where courts have found an implicit waiver "involve circumstances in which the waiver was unmistakable, and courts have been reluctant to find an implied waiver where the circumstances were not similarly unambiguous." Shapiro v. Republic of Bolivia, 930 F.2d 1013, 1017 (2d Cir. 1991).
A. Waiver of FSIA Immunity: União's Participation in the GESB Contracts
Allstate contends that União operated as an agent of Banrisul under the GESB Contracts, and therefore, that Banrisul is bound by União's waiver of sovereign immunity under the arbitration and service of suit provisions of the GESB Contracts. Specifically, Allstate maintains that União was Banrisul's agent because, inter alia, Banrisul owned approximately 88% of União's voting shares, Banrisul admitted in Article 6.3.2 of the Conditions of Sale that it possessed "almost absolute power to control" União, and that Banrisul's sale of União to Bradesco itself constituted evidence of Banrisul's control over União because the sale was "part and parcel" of Brazil's efforts to end state control of financial institutions such as União.
Allstate cites to Article 6.1 of the Conditions of Sale, which does not contain the quoted language. Presumably, Allstate intended to cite to Article 6.3.2, which does contain such language.
Under the FSIA, agencies and instrumentalities of a foreign sovereign are accorded a presumption of independent status.First National City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 627 (1983) ("Bancec"); see also Compagnie Noga D'importation et D'exportation, S.A. v. The Russian Federation, 361 F.3d 676, 684-85 (2d Cir. 2004). The presumption of separateness may be defeated "where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created." Bancec, 462 U.S. at 629 (citation omitted). See also Zappia Middle East Const. Co. Ltd. v. Emirate of Abu Dhabi, 215 F.3d 247, 252 (2d Cir. 2000). Under the FSIA, stock ownership alone is insufficient to show that a subsidiary is an agent of its parent. See Transamerica Leasing, Inc. v. La Republica de Venezuela, 200 F.3d 843, 849 (D.C. Cir. 2000); De Letelier v. Republic of Chile, 748 F.2d 790, 795 (2d Cir. 1984); see also LNC Investments, Inc. v. Republic of Nicaragua, 115 F. Supp.2d 358, 365 (S.D.N.Y. 2000) (collecting cases).
The only other way to defeat the presumption of separateness under the FSIA is to show that giving effect to separate legal entities "would work fraud or injustice."Bancec, 462 F.3d 629 (citation omitted). Allstate does not claim that recognizing the juridical separateness of Banrisul and União would result in fraud or injustice.
Extensive control exists where the parent so dominates the subsidiary that "they act as one." Transamerica, 200 F.3d at 848. See also Zappia, 215 F.3d at 252. Sufficient control can also be found through normal agency principles, whether it be through the operation of actual or apparent authority for the subsidiary to act on behalf of the parent in connection with the subject matter at issue. Transamerica, 200 F.3d at 849-50. See also Merrill Lynch Interfunding, Inc. v. Argenti, 155 F.3d 113, 122 (2d Cir. 1998) (to bind a principal, "an agent must have authority, whether apparent, actual or implied"). In order to establish an agency relationship, a party must show "(1) the principal's manifestation of intent to grant authority to the agent, and (2) agreement by the agent." Commercial Union Ins. Co. v. Alitalia Airlines, S.p.A., 347 F.3d 448, 462 (2d Cir. 2003) (citation omitted).
Actual authority "is created by direct manifestations from the principal to the agent." Reiss, 235 F.3d at 748 (citation omitted); see also Peltz v. SHB Commodities, Inc., 115 F.3d 1082, 1088 (2d Cir. 1997); Minskoff v. Am. Express Travel Related Serv. Co., 98 F.3d 703, 708 (2d Cir. 1996). The consent for actual authority may be either express or implied from "the parties' words and conduct as construed in light of the surrounding circumstances." Riverside Research Inst. v. KMGA, Inc., 489 N.Y.S.2d 220, 223 (1st Dep't 1985); see also Minskoff, 98 F.3d at 708. "[I]mplied actual authority . . . is dependent on verbal or other acts by a principal which reasonably give an appearance of authority" in a manner that is "brought home to the agent." Greene v. Hellman, 51 N.Y.2d 197, 204 (1980); see also Fed. Ins. Co. v. Diamond Kamvakis Co., 536 N.Y.S.2d 760, 762 (1st Dep't 1989). Whether actual authority exists "depends on the actual interaction between the putative principal and agent, not on any perception a third party may have of the relationship." Itel Containers Int'l Corp. v. Atlanttrafik Express Serv. Ltd., 909 F.2d 698, 702 (2d Cir. 1990). As with all disputes under the FSIA, the plaintiff bears the burden of proving agency. Zappia, 215 F.3d at 252.
Allstate has not shown that União was operating as an agent of Banrisul when it entered into the GESB Contracts. Allstate presents no evidence that Banrisul exercised extensive control over União's operations, that it intended União to act as its agent when entering the GESB Contracts, or that União accepted such a grant of power.
Allstate relies on Section 6.3.2's statement that Banrisul has "almost absolute power to control the company." In doing so, it takes the statement out of context. The clause, entitled "Structure of Shares," describes União's ownership structure, and delineates the percentage of stock owned by different stockholders, including Banrisul. The quoted language refers to Banrisul's power over União by virtue of its nearly complete ownership of União's stock, and is not evidence of the type of control that is necessary to rebut the presumption of corporate separateness.
In addition, the fact that Brazil (through Banrisul) sold União to Bradesco as part of its effort to encourage privatization of financial institutions is not evidence that Banrisul exercised the kind of control over União that would make Banrisul directly liable for União's debts. Oversight by a sovereign over the privatization of one of its subsidiaries "is similar to the conduct of a majority shareholder, is not unusual, and can not be the basis for ignoring the corporate form." Pravin Banker Associates, Ltd. v. Banco Popular del Peru, 9 F. Supp.2d 300, 306 (S.D.N.Y. 1998).
In sum, Allstate has not shown that União operated as Banrisul's agent such that União's purported waiver of sovereign immunity for itself in the GESB Contracts should also be imputed to Banrisul. For example, Allstate has not shown that Banrisul exercised day-to-day control over União's operations, that União was required to obtain Banrisul's prior approval before entering into the contracts with Allstate, or that Banrisul abused the corporate form.
Allstate points to Maritime Ventures Int'l, Inc. v. Caribbean Trading Fidelity, Ltd., 689 F. Supp. 1340 (S.D.N.Y. 1988), as support for its claim that Banrisul waived its immunity by virtue of acts taken by União. In Maritime Ventures, the court denied a summary judgment motion where the execution of a power of attorney raised questions of fact regarding the existence of an agency relationship. Id. at 1354. Allstate fails to point to any similar document or circumstances to raise even a question of fact that União acted as Banrisul's agent when it entered into the GESB Contracts.
B. Waiver of FSIA Immunity: The Panama Convention
Allstate argues that another, independent source of Banrisul's waiver stems from Brazil's participation in the Panama Convention, to which the United States is also a party. Allstate contends that Brazil's agreement to participate in the Panama Convention constitutes a waiver of sovereignty on behalf of all its instrumentalities, including Banrisul's immunity with respect to the Judgments entered against União. The Panama Convention provides, in relevant part, that
The United States signed the Panama Convention in 1975, and codified it into law on October 27, 1990.
An arbitral decision or award that is not appealable under the applicable law or procedural rules shall have the force of a final judicial judgment. Its execution or recognition may be ordered in the same manner as that of decisions handed down by national or foreign ordinary courts. . . ."9 U.S.C. § 301, Art. 4. The Panama Convention applies when an arbitration arises from a commercial relationship between citizens of signatory nations. See id.; Productos Mercantiles E Industriales, S.A. v. Faberge USA, Inc., 23 F.3d 41, 44 (2d Cir. 1994).
Banrisul did not sign the GESB Contracts and did not participate in the arbitration proceedings against União. A suit in this Court against Banrisul is an attempt to bypass the indemnification provisions in the Conditions of Sale, Purchase Agreement, and Commitment and to create a direct obligation running from Banrisul to Allstate for União's debts under the GESB Contracts. A similar argument for waiver was recently rejected by the Second Circuit. In Transatlantic Shiffahrtskontor, the court rejected the plaintiff's argument that the defendant, an instrumentality of China, had waived its sovereign immunity by virtue of China's participation in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, codified at 9 U.S.C. § 201 et seq. (the "New York Convention"). Transatlantic Shiffahrtskontor, 204 F.3d at 391. The Second Circuit held that, since the plaintiff was not directly appealing an arbitration award against the defendant's subsidiary, but rather was seeking to enforce a judgment against the defendant whereby the defendant had been ordered to indemnify its subsidiary, "it is hard to view this suit as being in essence a suit designed to enforce an arbitral award." Id. Accordingly, the court held that the implied waiver exception was "inapplicable" to the case. Id. Cf. Seetransport Wiking Trader Schiffarhtsgesellschaft MBH Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 989 F.2d 572, 578-79 (2d Cir. 1993) (defendant waived sovereign immunity by participating in arbitration of a dispute arising under a contract to which it had been a party).
For similar reasons, the fact that this lawsuit is brought under CPLR § 5227 is of no assistance to Allstate. Section 5227 allows a judgment creditor to seek payment against the debtor of the judgment debtor, in this case Banrisul. As Transatlantic Shiffahrtskontor explains, this indirect connection between a plaintiff and defendant does not constitute an implied waiver of sovereign immunity.
Allstate's reliance on Int'l Ins. Co. v. Caja Nacional de Ahorro y Sequro, 293 F.3d 392 (7th Cir. 2002), is inapposite. InCaja, the Seventh Circuit relied on Section 1610(d) of the FSIA in holding that Argentina had waived its sovereign immunity on behalf of itself and its instrumentalities by adopting both the New York and Panama Conventions. Id. at 399. Section 1610(d) provides, in pertinent part, that the
property of a foreign state . . . used for a commercial activity in the United States, shall not be immune from attachment . . . if (1) the foreign state has explicitly waived its immunity from attachment prior to judgment . . . [or] (2) the purpose of the attachment is to secure satisfaction of a judgment that has been or may ultimately be entered against the foreign state, and not to obtain jurisdiction.28 U.S.C.A. § 1610(d)(1) and (2). Here, Allstate is not seeking to assert jurisdiction through an attachment, and makes no claim that Banrisul expressly waived its immunity under Section 1610(d). Moreover, the Caja court noted that the waiver associated with Section 1610(d) only applied to a litigant's ability to obtain security and not to obtain jurisdiction.Caja, 293 F.3d at 400.
In essence, this lawsuit is an attempt to avoid litigating the União Judgments in Brazil. Allstate seeks to create an obligation on the part of União's former parent corporation to compensate Allstate directly for its subsidiary's debts. Allstate has not shown, however, that Banrisul is liable for contracts to which it was not a party, or for the payment of an award obtained in arbitration proceedings in which it did not participate. The fact that Banrisul is a sovereign state immune to lawsuits in the United States is a final barrier that Allstate cannot surmount. Conclusion
For the reasons stated above, the defendant's motion is granted. The Clerk of Court shall enter judgment for the defendant and close the case.