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Stati v. Republic of Kazakhstan

United States District Court, District of Columbia

August 5, 2016

ANATOLIE STATI; GABRIEL STATI; ASCOM GROUP, S.A.; TERRA RAF TRANS TRAIDING LTD., Petitioners,
v.
REPUBLIC OF KAZAKHSTAN, Respondent.

          MEMORANDUM OPINION & ORDER

          AMY BERMAN JACKSON JUDGE

         The petitioners in this action are Anatolie Stati and Gabriel Stati ("Stati"); Ascom Group, SA. ("Ascom"), a company incorporated in Moldova and owned by Anatolie Stati; and Terra Raf Trans Traiding Ltd. ("Terra Raf), a company incorporated in Gibraltar, and owned in equal shares by Anatolie and Gabriel Stati. They have filed a petition to confirm a December 19, 2013 arbitration award against respondent, the Republic of Kazakhstan ("Kazakhstan"), related to Kazakhstan's alleged violation of the Energy Charter Treaty, an international agreement signed by the respondent. Pet. to Confirm Arbitral Award ("Pet.") [Dkt. # 1] ¶¶ 11, 34, 36. Petitioner seeks to confirm the award pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. § 201 et seq., which codifies the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards[1], June 10, 1958, 330 U.N.T.S. 38. Pet. ¶ 1. The Court finds as a preliminary matter that it has jurisdiction under both the FAA and the Foreign Sovereign Immunities Act. But given the pendency of a proceeding to set aside the arbitral award and the status of that proceeding, the Court believes that it is prudent to stay the instant action pending resolution of that challenge. Therefore, this matter will be stayed, and the parties will be ordered to file a status report advising the Court of the status of the currently pending petition in the Svea Court of Appeal within seven days of any decision by that court.

         FACTUAL BACKGROUND[2]

         Petitioners have been engaged in the oil and gas business in Kazakhstan for approximately 17 years. In 1999, petitioner Ascom, Anatolie Stall's company, purchased a 62% share in KPM, a company that owned the subsoil use rights to the Borankol oil field in Kazakhstan. Pet. ¶ 29. In 2000, petitioners acquired a 75% interest in TNG, a company that owned the subsoil use rights to the Tolkyn gas field and the Tabyl exploration block ("Tabyl Block"). Id. ¶ 30. Ascom ultimately acquired 100% of KPM, and Terra Raf allegedly came to own 100% of TNG.[3] Id. ¶ 31. In 2000, KPM and TNG obtained approval from Kazakhstan to explore and develop various oil and gas fields located in Kazakhstan. Arb. Award [Dkt. # 2-1, 2-2, 2-3, 2-4] ("Award") ¶ 229. A year later, in 2001, petitioners, through KPM and TNG, invested more than one billion dollars in the development of the Borankol and Tolkyn fields, and the Tabyl Block. Pet. ¶ 32.

         In 2008, the President of Moldova contacted the President of Kazakhstan and accused Anatolie Stati of illegally concealing profits in offshore territories and illegally using the proceeds from his Kazakhstan operations to invest in states subject to sanctions by the United Nations. Award ¶ 291. Kazakhstan subsequently began a government investigation of Stati and his companies. Id.296, 301. Petitioners and respondent disagree on what followed. Accordingto petitioners, the government of Kazakhstan began to intimidate and harass petitioners into selling their investments to the state-owned KazMunaiGas at a substantial discount. Pet. ¶ 33. Specifically, petitioners claim that Kazakhstan "baselessly" accused petitioners of fraud and forgery, levied more than $70 million dollars in back taxes, arrested KPM's general manager for "illegal entrepreneurial activity, " and ultimately seized all of KPM and TNG's assets. Id. And, in July of 2010, Kazakhstan terminated petitioners' subsoil use contracts. Award ¶ 611.

         Petitioners assert that in 2009 they contacted respondent in response to the alleged harassment. On March 18, 2009, Stati wrote to Kazakhstan's Ministry of Energy and Mineral Resources, and requested an amicable resolution to the Ministry's rescission of its prior approval of TerraRafs acquisition of its Kazakh subsidiary. Award¶412. The next day, March 19, 2009, the executives from Terra Raf and Ascom met with the Ministry's executive secretary to discuss resolution of that issue and other alleged harassment. Id. ¶ 414. Just under two months later, on May 7, 2009, Stati wrote a letter to the president of Kazakhstan that set forth petitioners' intention to bring arbitration claims against Kazakhstan for the diminution of the value of their investments. Award ¶ 444.

         Kazakhstan's version of events is that the Kazakh Tax and Customs Committee properly assessed $62 million dollars in taxes to petitioners, and that a lawful criminal investigation by the Kazakh authorities led to in the arrest and imprisonment of KPM's General Director. Award ¶¶ 394, 430, 440, 492. Respondent maintains that it was the investigation that led to the termination of KPM and TNG's subsoil use contracts on July 21, 2010, and it disputes the claim that Kazakhstan expropriated petitioners' assets. Id. ¶¶ 591-611. Instead, respondent takes the position that the Kazakh state oil company and its subsidiary placed petitioners' oil and gas fields into trust management on a temporary basis only. Id. ¶611.

         On July 26, 2010, petitioners filed a request for arbitration. Req. for Arb., Ex. C. to Decl. of Charlene C. Sun [Dkt. # 2-6] ("Req. for Arb."). The request states:

Over the past two years, Kazakhstan has engaged in a campaign of harassment and illegal acts against [petitioners] that culminated on July 21, 2010 with the State's notice of unilateral termination of the companies' Subsoil Use Contracts, the illegal expropriation of [petitioners'] Kazakh investments, and the subsequent commandeering of [petitioners'] offices by personnel of State-owned KazMunaiGas and the Kazakh Ministry of Oil and Gas.

Id. ¶ 4. The request invoked the Energy Charter Treaty and asserted that Kazakhstan's harassment "clearly had expropriation as its ultimate goal, and it had the effect in the process of destroying both the market value and alienability of [petitioners'] investments." Id. ¶¶ 4, 8.

         The parties arbitrated the dispute before the Arbitration Institute of the Stockholm Chamber of Commerce ("SCC"). On December 19, 2013 the Tribunal determined that Kazakhstan breached its obligation to provide fair and equitable treatment under article 10(1) of the ECT. Award ¶¶ 1085-95. The Tribunal awarded petitioners $497, 685, 101. This total included $277.8 million for the Borankol and Tolkyn oil and gas fields, $31.3 million for the subsoil use contracts, $199 million for an unfinished plant, and $8, 975, 496.40 in legal costs. Id. ¶¶ 1085-95, 1856-61, 1885.

         On September 30, 2014, petitioners commenced this proceeding to confirm the arbitration award under the New York Convention and the FAA. Pet. Respondent opposed the motion, Resp't's Opp., petitioners filed a reply, Pet'rs' Reply, and the Court granted respondent leave to file a sur-reply, Resp't's Sur-Reply in Supp. of Resp't's Opp. [Dkt. # 28] ("Resp't's Sur-Reply"). On October 21, 2015, the Court ordered the parties to brief the question of subject matter jurisdiction under both the FAA and the Foreign Sovereign Immunities Act. Min. Order (Oct. 21, 2015). Both parties responded to the Court's Order. See Pet'rs' Mem. of Law re Court's Order [Dkt. # 30] ("Pet'rs' Juris. Mem."); Resp't's Mem. on Subject Matter Jurisdiction [Dkt. # 31] ("Resp't's Juris. Mem.").

         LEGAL BACKGROUND

         Before the Court may turn to the merits of petitioners' argument that the arbitral award in this case should not be confirmed in the United States under the New York Convention, it must first ensure that it has jurisdiction to hear this case.

Federal courts are courts of limited jurisdiction. They possess only that power authorized by Constitution and statute, which is not to be expanded by judicial decree. It is to be presumed that a cause lies outside this limited jurisdiction, and the burden of establishing the contrary rests upon the party asserting jurisdiction.

Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377 (1994) (internal citations omitted). In addition, '"[i]t is axiomatic that subject matter jurisdiction may not be waived, and that courts may raise the issue sua sponte.- NetworkIP, LLC v. FCC, 548 F.3d 116, 120 (D.C. Cir. 2008), quoting Athens Cmty. Hosp., Inc. v. Schweiker, 686 F.2d 989, 992 (D.C. Cir. 1982). Indeed, a federal court must raise the issue because it is "forbidden - as a court of limited jurisdiction - from acting beyond [its] authority." Id., citing Akinseye v. District of Columbia, 339 F.3d 970, 971 (D.C. Cir. 2003).

         Under Federal Rule of Civil Procedure 12(b)(1), petitioner bears the burden of establishing jurisdiction by a preponderance of the evidence. See Lujan v. Defs. of Wildlife, 504 U.S. 555, 561 (1992); Shekoyan v. Sibley Int’l Corp., 217 F.Supp.2d 59, 63 (D.D.C. 2002). Because "subject-matter jurisdiction is an ' Art[icle] III as well as a statutory requirement... no action of the parties can confer subject-matter jurisdiction upon a federal court.'" Akinseye, 339 F.3d at 971, quoting Ins. Corp. of Ir., Ltd. v. Compagnie des Bauxites de Guinee, 456 U.S. 694, 702 (1982).

         To determine whether a district court has subject matter jurisdiction over the type of case presented here - an action to enforce a foreign arbitral award against a foreign sovereign - two requirements must be satisfied. "First, there must be a basis upon which a court in the United States may enforce a foreign arbitral award; and second, [the foreign state] must not enjoy sovereign immunity from such an enforcement action." Creighton Ltd. v. Gov’t of Qatar, 181 F.3d 118, 121 (D.C. Cir. 1999). For the reasons that follow, the Court finds that the New York Convention provides a basis for the Court to enforce the award, and that Kazakhstan does not enj oy sovereign immunity in this instance.

         ANALYSIS

         I. The Court has subject matter jurisdiction under the Federal Arbitration Act.

         The Federal Arbitration Act is the statute that codifies the New York Convention into U.S. law. 9 U.S.C. §201et seq. Section 202 of the FAA specifies that: "[a]n arbitration agreement or arbitral award arising out of a legal relationship, whether contractual or not, which is considered as commercial . . . falls under the [New York] Convention." 9 U.S.C. § 202. The "district courts of the United States . . . shall have original jurisdiction over [an action or proceeding falling under the Convention], regardless of the amount in controversy." 9 U.S.C. § 203.

         As the Second Circuit has explained, a court will have subject matter jurisdiction under the FAA when: "(1) there is a written agreement; (2) the writing provides for arbitration in the territory of a signatory of the convention; (3) the subject matter is commercial; and (4) the subject matter is not entirely domestic in scope." U.S. Titan, Inc. v. Guangzhou Zhen Hua Shipping Co., 241 F.3d 135, 146 (2d Cir. 2001).

         A. Kazakhstan agreed to arbitrate for purposes of the FAA.

         Kazakhstan argues that it did not consent to the arbitration, and thus no agreement to arbitrate exists under the FAA. Resp't's Opp. at 29-30. The arbitration award in this case arises out of the Energy Charter Treaty. See Pet. ¶ 27. Kazakhstan's argument is based on Article 26 of that treaty, which outlines how disputes that arise under the treaty will be handled:

(1) Disputes between a Contracting Party and an Investor of another Contracting Party[4] . . . shall, if possible, be settled amicably.
(2) If such disputes can not be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution:
(a) to the courts or administrative tribunals of the Contracting Party party to the dispute;
(b) in accordance with any applicable, previously agreed dispute ...

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