In dispute over enforcement of Swedish arbitral award
against Respondent Azerbaijan oil company, Second Circuit overrules Texas
Trading case and remands to district court to determine whether Respondent is
agent of foreign state and whether it is entitled to Due Process protections
Frontera Resources Azerbaijan Corporation (Frontera) is a
Cayman Islands company. The Republic of Azerbaijan is the situs of and owns the
State Oil Corporation of the Azerbaijan Republic (SOCAR). In November 1998, the
companies agreed to allow Frontera to develop and manage Azerbaijan oil
deposits and to deliver oil to SOCAR. In 2000, disputes developed over oil
payments. Not only did SOCAR seize the oil, but also the bank that had financed
Frontera in this venture foreclosed on the loan and settled with SOCAR.
Frontera continued to press for payment, while SOCAR denied liability based on its
settlement with the bank. The matter went to arbitration before a Swedish
tribunal which awarded Frontera about $1.24 million plus interest.
Frontera petitioned a New York federal court to enforce the
Swedish award against SOCAR. It relied on Article II(2)of the Convention on the
Recognition and Enforcement of Foreign Arbitral Awards (New York Convention)
[June 10, 1958, 21 U.S.T. 2517, 330 U.N.T.S. 38,] as implemented at 9 U.S.C. §
207.
The district court, however, dismissed the petition for lack
of personal jurisdiction. It found that SOCAR lacked enough contacts with the
U.S. to meet the Due Process Clause criteria. Frontera appealed. The U.S. Court
of Appeals for the Second Circuit finds that the district court had properly
acquired jurisdiction over either SOCAR or SOCAR’s property. It had erred,
however, in holding that the foreign states and their agents enjoy rights under
the Due Process Clause. The Court overrules its prior holding in Texas Trading
& Milling Corp. v. Federal Republic of Nigeria, 647 F.2d 300 (2d Cir.
1981), and remands for a jurisdictional analysis.
The Court first addresses the issue of jurisdiction over
SOCAR. “We have previously avoided deciding whether personal or quasi in rem
jurisdiction is required to confirm foreign arbitral awards pursuant to the New
York Convention. ... However, the numerous other courts to have addressed the
issue have each required personal or quasi in rem jurisdiction. ...”
“Unlike ‘state courts[,] [which] are courts of general
jurisdiction[,]... federal courts are courts of limited jurisdiction which thus
require a specific grant.’ ... ‘The validity of an order of a federal court
depends upon that court’s having jurisdiction over both the subject matter and
the parties.’”
“Because of the primacy of jurisdiction, ‘jurisdictional
questions ordinarily must precede merits determinations in dispositional
order.’ We therefore hold that the district court did not err by treating
jurisdiction over either SOCAR or SOCAR’s property as a prerequisite to the enforcement
of Frontera’s petition. The district court may, however, have given the
Constitution’s Due Process Clause an unwarranted place in its analysis ....’”
[Slip op. 7‑10]
“The Due Process Clause famously states that ‘no person
shall be... deprived of life, liberty or property without due process of law.’
U.S. Const. amend. V ... In Texas Trading, we held that a foreign state was a
‘person’ within the meaning of the Due Process Clause, and that a court
asserting personal jurisdiction over a foreign state must – in addition to
complying with the Foreign Sovereign Immunities Act (FSIA) [28 U.S.C. § 1602] –
therefore engage in ‘a due process scrutiny of the court’s power to exercise
its authority’ over the state. ....”
“Texas Trading reached this conclusion without much
analysis, while also noting that cases on point were ‘rare.’ Id. at 313. The
FSIA had been enacted only five years earlier, and pre‑FSIA suits against
foreign states were generally supported by quasi in rem jurisdiction. Id.
Subsequently, we applied Texas Trading not only to foreign states but also to
their agencies and instrumentalities. ...”
“Since Texas Trading, however, the case law has marched in a
different direction. In Republic of Argentina v. Weltover, Inc., the Supreme
Court ‘assum[ed], without deciding, that a foreign state is a ‘person’ for
purposes of the Due Process Clause,’ 504 U.S. 607, 619 (1992), but then cited
South Carolina v. Katzenbach, 383 U.S. 301, 323‑24 (1966), which held that
‘States of the Union are not `persons’ for purposes of the Due Process Clause,’
504 U.S. at 619. Weltover did not require deciding the issue because
Argentina’s contacts satisfied the due process requirements, see id. at 619
& n.2, but the Court’s implication was plain: If the ‘States of the Union’
have no rights under the Due Process Clause, why should foreign states?”
“In Price v. Socialist People’s Libyan Arab Jamahiriya, 294
F.3d 82 (D.C. Cir. 2002), the D.C. Circuit reasoned that, because ‘the word
‘person’ in the context of the Due Process Clause of the Fifth Amendment
cannot, by any reasonable mode of interpretation, be expanded to encompass the
States of the Union,’ Katzenbach, supra at 323, ‘absent some compelling reason
to treat foreign sovereigns more favorably than ‘States of the Union,’ it would
make no sense to view foreign states as ‘persons’ under the Due Process
Clause,’ Price, supra at 96.”
“The Price court found no such reason, see id. at 95‑100,
and we find that case’s analysis persuasive. As the Price court noted, the
States of the Union ‘both derive important benefits [from the Constitution] and
must abide by significant limitations as a consequence of their participation
[in the Union],’ id. at 96, yet a ‘foreign State lies outside the structure of
the Union,’ ...”
“If the States, as sovereigns that are part of the Union,
cannot ‘avail themselves of the fundamental safeguards of the Due Process
Clause,’ Price, supra at 97, we do not see why foreign states, as sovereigns
wholly outside the Union, should be in a more favored position. This is
particularly so when the Supreme Court has ‘[n]ever... suggested that foreign
nations enjoy rights derived from the Constitution,’ and when courts have
instead ‘relied on principles of comity and international law to protect
foreign governments in the American legal system.’ Id. ... Thus, we hold that
the district court erred, ... by holding that foreign states and their
instrumentalities are entitled to the jurisdictional protections of the Due
Process Clause.” [Slip op. 11‑14]
The precise issue in this case is whether SOCAR, as an
instrumentality or agency of a foreign state, enjoys Due Process
protections.“The district court did not decide whether SOCAR is an agent of the
state because Texas Trading rendered the question unnecessary and,
unsurprisingly, there was scant briefing on the issue. ...”
“ ... The Supreme Court has gone so far as to accord due
process protections to privately owned foreign corporations. See Helicopteros
Nacionales de Colombia, S.A. v. Hall, 466 U.S. 408, 418‑19 (1984) ...
Accordingly, we choose to remand so that in the first instance the district
court can determine, in light of Texas Trading’s demise and [First Nat’l City
Bank v. Banco Para El Comercio Exterior de Cuba (Bancec), 462 U.S. 611, 626‑27,
629, 632 (1983)]’s new relevance to this context, (1) whether SOCAR is an agent
of Azerbaijan, and if not, (2) whether SOCAR is entitled to the protections of
the Due Process Clause.” [Slip op. 17‑19]
Citation: Frontera Resources Azerbaijan Corp. v.
State Oil Co. Of the Azerbaijan Republic, No.07‑1815‑cv (2d Cir. September 28,
2009).
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
