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Croesus Emtr Master Fund L.P. v. Federative Republic of Brazil

July 30, 2002


The opinion of the court was delivered by: John D. Bates United States District Judge


Three hedge funds bring this case against the Federative Republic of Brazil ("Brazil") for failure to pay the principal and interest on Brazilian bonds they currently hold. Presently before the Court is Brazil's motion to dismiss. For the reasons stated below, the motion is granted.


Plaintiffs Croesus EMTR Master Fund L.P. ("Croesus"), Polaris Prime Emerging Values Fund L.P. ("Polaris"), and Select Capital Limited ("Select Capital") (collectively, "plaintiffs") are hedge funds holding bonds issued by Brazil in 1902 and 1911 (the "1902 and 1911 Bonds" or the "Bonds"). According to the complaint, Croesus, a Delaware limited partnership with its principal place of business in New York, acquired six hundred twenty-six 1902 Bonds in 1997. Compl. ¶¶ 1, 14. Polaris, a Delaware limited partnership with its principal place of business in South Carolina, acquired one hundred twenty 1902 Bonds between 1996 and 1998. Id. ¶¶ 2, 16. Select Capital, a Cayman Islands corporation with its principal place of business in the Cayman Islands, acquired one hundred fourteen 1902 Bonds and eight 1911 Bonds in 1998. Id. ¶¶ 3, 19-20. Each plaintiff alleges that its fund managers and most of its member partners or shareholders are U.S. citizens and that it maintains an account for cash and securities in New York. Id. ¶¶ 1-3. Plaintiffs also assert that many of their 1902 and 1911 Bonds were purchased in secondary markets in the United States. See id. ¶¶ 14, 19.

Plaintiffs allege that "[d]uring the last few years, many 1902 and 1911 bondholders have presented their Bonds to Brazil and demanded payment." Id. ¶ 24. Nevertheless, "Brazil refused to pay the bondholders after presentment and has publicly stated that it will not pay the 1902 Bonds or the 1911 Bonds." Id. Accordingly, plaintiffs allege, "[p]resentment and demand by the Plaintiffs . . . would be futile, and they have not taken these steps." Id.

Brazil has not made interest payments or repayments of principal to the plaintiffs on the Bonds. Id. ¶ 25. According to plaintiffs, the amounts owing to them on the Bonds is over one hundred forty million dollars. See id. ¶¶ 15, 18, 22. Plaintiffs seek money damages equal to the full current value of the principal and interest owing on the bonds. See id. at p. 8.

Brazil moves to dismiss the complaint for lack of subject matter jurisdiction, lack of personal jurisdiction, under the principles of forum non conveniens, and under the act of state doctrine. In support of its motion, Brazil submits a declaration from Fabio Barbosa, the Secretary of Brazil's National Treasury Secretariat, Ministry of Finance. See Declaration of Fabio Barbosa ¶ 1. Mr. Barbosa notes that the Bonds are registered bonds stated in Brazilian currency, that transfers of ownership of the Bonds could be effected only in Brazil where the records of ownership are maintained, and that payment of interest could be accomplished in person only at Brazil's Public Debt Office. Id. ¶¶ 4-14, 27. Mr. Barbosa explains that, in an effort to retire Brazil's outstanding internal debt obligations, Brazil in 1962 allowed for a five-year period during which the 1902 and 1911 Bonds could be exchanged for different securities, and at the end of which the Bonds were to become valueless. Id. ¶¶ 18-20. In 1967, Brazil also issued a decree redeeming a certain category of bonds, including the 1902 and 1911 Bonds. Id. ¶ 21. Pursuant to this and other decrees, any Bonds that had not been presented for redemption by July 1, 1969, were deemed invalid by Brazil. Id. ¶ 22. Accordingly, Mr. Barbosa asserts, not only were the payment obligations at issue extinguished, but also plaintiffs could not be proper owners of the Bonds, because Brazil stopped accepting transfers of ownership once the Bonds were redeemed and the transfer books were closed in 1969. Id. ¶ 26-27. Mr. Barbosa denies that Brazil had any role in facilitating plaintiffs' purchase of the Bonds, and notes that speculators in recent years "have purportedly 'acquired' bonds at minimal values, hoping through litigation or otherwise to increase the value of those bonds and profit thereby." Id. ¶¶ 24, 31.

Plaintiffs, in response, challenge Brazil's legal arguments in favor of dismissal. They also move to begin discovery, arguing that the Court "should not rule in Brazil's favor on any argument until it provides the Plaintiffs a reasonable opportunity for appropriate discovery to challenge the factual assertions Brazil advanced to justify its Motion." Pls.' Opp. at 1.

Upon consideration of the parties' submissions, and the hearing on May 30, 2002, the Court concludes that the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. §§ 1602, et seq., is a bar to jurisdiction here. Plaintiffs have failed to identify factual issues requiring discovery at this time, and even if they did, the Court would dismiss this case under the principles of forum non conveniens rather than subject Brazil to intrusions upon its apparent immunity.*fn1


I. Lack of Subject Matter Jurisdiction Under the FSIA

Section 1604 of the FSIA provides that "a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter." Section 1605(a)(2), in turn, specifies that immunity does not apply in any case: in which the action is based upon [1] a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] upon 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.

Brazil moves to dismiss the complaint on the basis that Brazil is immune from suit and that none of the "commercial activity" exceptions in §1605(a)(2), or any other exceptions to immunity, apply to plaintiffs' action.*fn2 Plaintiffs, in turn, contend that both the first and third clauses of §1605(a)(2) are implicated by the complaint.

A. The First Clause of §1605(a)(2)

Under the first clause of §1605(a)(2), a sovereign is not entitled to immunity when the "action is based upon a commercial activity carried on in the United States by the foreign state." Plaintiffs offer a rather complex theory for why this exception applies here. As a starting point, they argue that Brazil currently offers and sells "Global bonds" through primary markets in the United States. In addition, they argue, there are secondary markets for various Brazilian securities, including the 1902 and 1911 Bonds, in the United States. According to plaintiffs, the "secondary markets and the primary markets are linked as one commercial activity" because "[s]econdary markets are essential to the proper functioning of the primary markets for foreign sovereign debtors." Pls.' Opp. at 17. The existence of a smoothly functioning secondary market for one security, plaintiffs argue, leads to better primary and secondary markets for a sovereign's other securities, with higher trading prices, because investors have confidence that they will be able to resell any securities that they purchase. Based on this logic, plaintiffs speculate that, in an effort to promote sales of its "Global bonds" and other securities, Brazil fostered the secondary markets for the 1902 and 1911 Bonds in the United States (where the plaintiffs allegedly purchased some of their Bonds). Accordingly, plaintiffs argue, Brazil engaged in the "commercial activity of issuing securities and promoting secondary markets for its securities to and by persons in the United States." Id. at 19-20.

Plaintiffs' theory, although creative, is ultimately unpersuasive. Even if Brazil knew that there was a secondary market for the Bonds in the United States, and even if Brazil fostered that market, plaintiffs' action is not "based upon" that conduct, as required by the language of the first clause of § 1605(a)(2). The Supreme Court explained in Saudi Arabia v. Nelson, 507 U.S. 349, 357 (1993), that the phrase "based upon" in §1605(a)(2) means "those elements of a claim that, if proven, would entitle a plaintiff to relief under his theory of the case." "Based upon" thus "calls for something more than a mere connection with, or relation to, commercial activity." Id. at 358 (emphasis omitted).

The claim stated in plaintiffs' complaint is a straight-forward breach of contract claim for non-payment. It is "based upon" Brazil's failure to pay the principal and interest on the Bonds. Although plaintiffs allege in their complaint that Brazil knows of U.S. secondary markets for the Bonds, the complaint is certainly not "based upon" Brazil's purported promotion of these markets. Even if proven, then, the allegation that Brazil fostered secondary markets would not "entitle . . . plaintiff[s] to relief under [their] theory of the case." Id. at 357. To the contrary, the secondary market allegations "are legally irrelevant to [plaintiffs'] right of recovery." Goodman Holdings v. Rafidain Bank, 26 F.3d 1143, 1146 (D.C. Cir. 1994

Plaintiffs attempt to bolster their position by alleging that "Brazil had a contractual duty under Brazilian law to make reasonable efforts to inform traders in the United States that Brazil's position was that it viewed the Bonds as redeemed and invalid and that it had no intention of making further payments under the Bonds." Pls.' Opp. at 20. In support of this allegation, plaintiffs submit a declaration from a Brazilian law professor who opines that, under Brazilian law, Brazil has a duty when it issues securities to inform the financial markets of any relevant fact which could reasonably affect the investors' decision to sell or buy the securities. Declaration of Hermes Marcelo Huck ¶ 9. This duty, as well as the "duty to make only truthful representations to other parties," are related to the general duty of "'good faith' . . . applicable to all legal obligations [under Brazilian law], including contracts between . . . the Government and its citizens and companies." Id. ¶¶ 5, 7, 10. According to plaintiffs' legal expert, then, ...

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