On May 23, 2023, the Southern District of New York dismissed a petition against the Republic of Congo and Ecree LLC seeking turnover of a New York condo allegedly bought using funds embezzled from the Republic.
The action seeks enforcement of two arbitration awards against the Republic of Congo, which were confirmed and reduced to judgment in the District of Columbia, and then registered in the Southern District of New York.
The Court held that while the Petitioner alleged a theory within the Court's ancillary jurisdiction (as it involved a fraudulent conveyance of the property of Petitioner's debtor), the Petition had to be dismissed as it failed to make any allegations regarding the Republic itself.
The Court's discussion of ancillary jurisdiction related to fraudulent conveyance is notable. The Court explained:
The Second Circuit has held that an action to collect a judgment does not require an independent jurisdictional basis even where parties are nondiverse. See Epperson, 242 F.3d at 104. As Epperson explains, a fraudulent conveyance claim is a quintessential example of a follow-on action to collect a judgment that does not require an independent jurisdictional basis, inasmuch as failing to allow ancillary jurisdiction over such actions “would encourage judgment debtors to engage in such conduct, not only to avoid payment of the judgment but also to force the winning plaintiff to pursue him to another jurisdiction.” Id. at 107 n.10. Since Epperson, courts within the Second Circuit have routinely found that ancillary jurisdiction exists where the plaintiff or petitioner adequately pleads that the judgment debtor’s assets have been fraudulently conveyed in order to avoid payment of the subject judgment. See, e.g., Nat’l Council on Comp. Ins., Inc. v. Caro & Graifman, P.C., 259 F. Supp. 2d 172, 177 (D. Conn. 2003) (finding, in context of plaintiffs’ action seeking declaration that granting of mortgage was fraudulent and designed to avoid restitution order, that “action is within the ancillary jurisdiction of [the] court” and declining to dismiss due to non-diverse parties).The Court explained that, however, the ancillary jurisdiction is not without limits. It does not, for example, extend beyond attempts to execute, or to guarantee eventual executability of, a federal judgment. This means, the Court continued, that a "federal court does not have ancillary jurisdiction over a 'new theor[y] of liability,' such as a veil-piercing claim that seeks to hold a third party independently liable for a judgment." The Second Circuit and courts within it have thus "draw[n] a distinction between post-judgment proceedings to collect an existing judgment and proceedings, such as claims of alter ego liability and veilpiercing, that raise an independent controversy with a new party in an effort to shift liability.”
The Court however held that the Petition failed to allege that the Republic has fraudulently conveyed the funds. The Court reviewed the state of the law and recognized "the well-accepted principle that 'not every action that happens to be taken by officials of a foreign state is properly attributable to that state.'” The Court explained that "[u]nder the act-of-state doctrine, courts distinguish between public acts taken by individual government actors that are attributable to the state and protected, and private acts that are not attributable to the state and not protected." Therefore, the question here was whether "Petitioner has alleged facts supporting a conclusion that the President (or any member of his family) was acting as an agent of the Republic when they allegedly fraudulently transferred the funds."
The Southern District found that "Petitioner has not asserted any non-conclusory allegations suggesting that the President was acting as an agent of the Republic when he allegedly misappropriated the funds at issue." It noted that the "Petitioner has not alleged that the President was acting within the scope of his employment, or that he acted with actual or apparent authority to bind the Congo when making the transfers. Embezzling funds for private use is undoubtedly a 'private' act — a 'useful [determination of] whether a foreign official’s conduct is attributable to his government or sovereign state[.]'”
The Court also dismissed the Petition on the grounds that Petitioner has not sufficiently pleaded that the condo is not immune from execution under the Foreign Sovereign Immunity Act (FSIA). The Court sided with Petitioner in finding that the alleged holding of the condo by a sovereign as a real estate investment constituted "commercial activity" under the FSIA. Nevertheless, the Court found that Petitioner failed to allege that it was the Republic's commercial activity. Thus, the use of the condo appeared to be a “private” act and not one that may be “attributable to [the] government.”
The case is Commissions Import Export S.A. v. Republic of the Congo et al., No. 1:19-mc-00195 (S.D.N.Y.).
Read the entire opinion here:
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