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Sovereign Immunity Protects China from Paying $2.4B Debt to American Holders of Chinese Government Bonds

November 30th, 2009 — 05:37 pm

By Haggai Carmon

Gloria Bolanos Pons and Aitor Rodriguez Soria hold between them Chinese government bonds they believe to be worth almost $2.4 billion (interest plus principal upon 1960 maturation). U.S. District Judge Richard J. Howell, however, ruled that the money cannot be collected because the Foreign Sovereign Immunity Act protects China from prosecution in U.S. Courts.

The bonds were issued by the Chinese government in 1913. Under the Chinese Government Reorganization Loan Agreement, several international banks loaned the country GBP 25 million and issued bonds that amounted to the value of the loan. The bonds were secured by the tax money the Chinese government would raise from its citizens and residents.

No U.S. banks were part of the agreement because President Woodrow Wilson believed that the agreement infringed upon the sovereignty of the Chinese people. The bonds, therefore, were never payable in U.S. currency.

After the successful communist uprising in 1949, the new Chinese government – that of Mao Zedong – stopped paying interest on the bonds. The government defaulted on paying the principal as well.

The plaintiffs in the case claim to have purchased their 103 bonds from Pons’s father, though how he came to have them remains unclear. Either way though, the plaintiffs have calculated that the bonds are worth $2,392,194,873.

Among the exceptions to the immunity granted by FSIA is a commercial activity exception, and the plaintiffs argued that their case falls under the third part of this exception: “A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case in which the action is based upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act caused a direct effect in the United States.”

Plaintiffs argued that because they had purchased the bonds in the U.S. and that some interest payments had been made in New York, and that they – U.S. citizens – suffered financial loss as a result of the default, that China’s act did indeed have a direct effect in the United States and was therefore not immune to the lawsuit.

The Judge writes: “The primary issue in this case is whether there is a direct effect in the U.S. when a bond negotiated, consummated and payable outside of the U.S. by non-U.S. parties is defaulted abroad, and then that default results in financial injury to an American after-market purchaser.” Citing several preceding cases, he concludes that “the mere fact of financial injury felt by the U.S. plaintiff does not satisfy the direct effects test.” If the bonds were payable in the United States, the direct effect commercial activity exception could be relevant, but the funds were supposed to be received abroad. (As per the bond agreement, interest and principal were payable only in London, Berlin, Paris, St. Petersburg and Yokohama.) The fact that payments stopped being made abroad and affected an American is not sufficient to prove a direct effect in the U.S.

Even if the interest was paid in New York to previous bond holders, as the plaintiffs claim, these payments were made in New York voluntarily. Whatever was done voluntarily aside, the default on payments which by contractual obligation were only payable abroad does not have a direct effect in the United States. China’s immunity stands.

Not only is China protected from the lawsuit by FSIA, the expiration of the statute of limitations was also mentioned by Judge Howell in his ruling.

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U.S. Appeals Court Sides with Argentina, Pension Funds Assets in the U.S. are Immune from Attachments

October 28th, 2009 — 04:06 pm

By Haggai Carmon

In 2002, Argentina defaulted on $95 billion dollars worth of bonds. When hedge funds and other creditors sued Argentina in the United States District Court in New York, they may have won the right to recover the money they’d lost, but the difficult part is executing the judgment – that is, finding enough Argentinean funds to satisfy the judgment.

When Argentina nationalized private pension assets in December of last year, a U.S. court ruled that as the assets were now Argentinean state property, they could be seized by the creditors to execute their judgment. (Argentina has approximately $200 million in retirement assets held in investments in New York.) But the U.S. Court of Appeals for the Second Circuit has just overturned this ruling, saying that the creditors cannot, after all, look to pension assets in the U.S. to satisfy their claims.

According to the appeals court decision, the pension funds are protected by the Foreign Sovereign Immunities Act: “We understand the frustration of the plaintiffs who are attempting to recover on judgments they have secured. Nevertheless, we must respect the act’s strict limitations on attaching and executing upon assets of a foreign state.”

The retirement assets, which are owned by Argentina’s social security system, cannot be seized to benefit the defaulted bond holders because their purposes are not commercial. Judge J. Clifford Wallace wrote in the decision: “The funds at issue are expressly designated by Argentine law as social security assets, and therefore, their investment (and concomitant payment to Argentine pensioners) is a quintessentially governmental activity, and not a commercial activity.”

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DOJ moves to have former State Department employee’s suit for diplomatic immunity in CIA rendition case dismissed

September 4th, 2009 — 01:37 pm

By Haggai Carmon

When Sabrina de Sousa, a former U.S. Consular officer in the U.S. Consulate in Milan, Italy was accused, along with 25 other Americans, of being involved in a CIA rendition case in Italy, she denied having any involvement or knowledge of the kidnapping and sought to protect herself from prosecution in an Italian court by requesting the U.S. to raise diplomatic or Consular immunity.

The U.S. refused and De Sousa subsequently sued the U.S. government, alleging she cannot travel outside the U.S. for fear of being extradited. De Sousa also claimed that her record is tarnished, impeding her future in the work force after she resigned from the U.S. Foreign Service. On Monday, August 31, U.S. Department of Justice attorneys filed a motion to dismiss De Sousa’s lawsuit.

De Sousa is currently being tried in absentia in Italy for alleged participation in the 2003 alleged unlawful kidnapping of an Egyptian cleric (Osama Moustafa Hassan Nasr), who was living in Milan. Suspected of being a terrorist, he was reportedly transported to Egypt by CIA agents, where he was allegedly imprisoned, interrogated and tortured.

At the time of the kidnapping, De Sousa was employed by the State Department and stationed in Milan. She is suspected by Italian authorities of working for the CIA under diplomatic cover. De Sousa is no longer employed by the State Department.

By filing suit, De Sousa wanted to get the U.S. government to invoke diplomatic immunity on her behalf, as it had neither invoked nor waived immunity for any of the Americans being tried in absentia. The government’s motion to dismiss argues that the courts do not have the jurisdiction to rule in an issue of foreign policy, and that the decision belongs to the executive branch and is not justiciable as it is a political question.

Per the DOJ:

“[T]o assert immunity on her behalf in a foreign judicial proceeding…would require this Court to subject to judicial review the exercise of a discretionary right that has consistently been viewed under U.S. and international law as belonging to the state, and thereby strip the Executive Branch of the discretion that all governments enjoy with respect to the assertion or waiver of immunity consistent with the needs of the state.”

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